Is Innovation Inefficient?
Sophie-Charlotte Moatti, MBA2
Issue date: 11/12/01 Section: Technology
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Innovation is like fashion: it is nothing useful or needed, but it is as badly wanted as it quickly fades. Last year, some of my friends changed mobile phone twice within a six-month period just because they wanted to show off with the latest handset. And corporations, whether blue chip or start-up, did similar things, which they badly regret today. When investing in innovation, rapid obsolescence and unfocused capital expenditures are two sources of inefficiencies to watch out for.
In the hardware/networking space, innovation goes hand in hand with obsolescence. So, the more products R&D develops, the better Operations needs to monitor inventory closely. This is not a big deal in a healthy economy, where the critical part of inventory management is to find enough additional warehouse space.
Still it is not as simple when the environment gets nasty: with lower IT spending, inventory piles up dramatically. Cisco set the tone when its inventory recently reached $2.5 billion. At that level, it is not sure whether using a different accounting method (remember FIFO and LIFO?) would have a significant impact. Even worse, the unusually high number of bankruptcies in the past year have created opportunities for a high quality secondary market. So, inventory at tech manufacturing companies piles up even more.
One of the things companies do about this is to develop e-platforms to better control their inventory. Cisco recently rolled-out eHub while Hewlett-Packard and a number of other OEMs created Converge/eHitex, a spin-off dedicated to supply chain and inventory management. Still it is not clear how much savings will be derived from those gigantic projects.
In the wireless space, innovation means frequent upgrades, hence high capital expenditures. So the more ‘3G’ you want “to be,” the more you have to spend. Whether you will recoup your investment by increased revenue per user (ARPU) is not always clear. AT&T almost convinced investors that it had the right strategy last year, spending billions upgrading its network. And convincing investors was not a hard job, given that they were given constant EBITDA figures and focused on it more than on the rapidly declining net income.
The situation is somewhat different in today’s environment, where the bottom line enjoys a renewed focus from investors. Capital expenditure is now incurred when and where the bang for the buck is significant. Also, it looks like consolidation in the wireless industry is not far away. The recent acquisition of Telecorp by AT&T is a good illustration of AT&T’s change of focus, from innovation and network upgrades to consolidation and increased geographic coverage. It eventually makes it a more attractive target for some global
In the hardware/networking space, innovation goes hand in hand with obsolescence. So, the more products R&D develops, the better Operations needs to monitor inventory closely. This is not a big deal in a healthy economy, where the critical part of inventory management is to find enough additional warehouse space.
Still it is not as simple when the environment gets nasty: with lower IT spending, inventory piles up dramatically. Cisco set the tone when its inventory recently reached $2.5 billion. At that level, it is not sure whether using a different accounting method (remember FIFO and LIFO?) would have a significant impact. Even worse, the unusually high number of bankruptcies in the past year have created opportunities for a high quality secondary market. So, inventory at tech manufacturing companies piles up even more.
One of the things companies do about this is to develop e-platforms to better control their inventory. Cisco recently rolled-out eHub while Hewlett-Packard and a number of other OEMs created Converge/eHitex, a spin-off dedicated to supply chain and inventory management. Still it is not clear how much savings will be derived from those gigantic projects.
In the wireless space, innovation means frequent upgrades, hence high capital expenditures. So the more ‘3G’ you want “to be,” the more you have to spend. Whether you will recoup your investment by increased revenue per user (ARPU) is not always clear. AT&T almost convinced investors that it had the right strategy last year, spending billions upgrading its network. And convincing investors was not a hard job, given that they were given constant EBITDA figures and focused on it more than on the rapidly declining net income.
The situation is somewhat different in today’s environment, where the bottom line enjoys a renewed focus from investors. Capital expenditure is now incurred when and where the bang for the buck is significant. Also, it looks like consolidation in the wireless industry is not far away. The recent acquisition of Telecorp by AT&T is a good illustration of AT&T’s change of focus, from innovation and network upgrades to consolidation and increased geographic coverage. It eventually makes it a more attractive target for some global