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Ways of the World

Carol Stone, business economist & active Episcopalian, brings you "Ways of the World". Exploring business & consumers & stewardship, we'll discuss everyday issues: kids & finances, gas prices, & some larger issues: what if foreigners start dumping our debt? And so on. We can provide answers & seek out sources for others. We'll talk about current events & perhaps get different perspectives from what the media says. Write to Carol. Let her know what's important to you:

Tuesday, January 18, 2011

Videogames, Innovation and the Future

Over the Christmas holidays, two seemingly unrelated events grabbed our attention. First, Time Magazine picked Mark Zuckerberg, the founder of Facebook, as its "Person of the Year". And second, my roommate's godson visited us from the West Coast; Bill* came with his duffle bag and his smartphone. While Chris and I both have cellphones, neither of them is a souped-up model, so all of Bill's pictures and "apps" were a novelty for us. Another young cousin joined us one afternoon and the two of them talked to each other in what I decided is a new foreign language, "App-ese". They immediately began emailing each other, sharing apps and playing games.

Videogames a Source of New Technology
There are two reasons Ways of the World has some interest in this vignette, over and above relating the family events of the holiday season. First, video games are a leading-edge technology from which business and government applications are emerging. This, of course, seems backwards. Historically, as highlighted in a recent Op-Ed piece in the Wall Street Journal[1], many technological innovations have come from government, especially the military, and then moved to the private sector and finally to the toy market. Granted, many of today's games have military themes, but even so, the path for origination and adaptation is the reverse of traditional practice.

Andy Kessler, a former Wall Street hedge fund manager who now writes on these topics, points out in that Wall Street Journal article another new wrinkle in this technology: connectivity and networking. Many of the games are played in teams, in which individuals in different towns and regions collaborate on strategy, tactics and implementation. The distances and geographical separation are not barriers to the performance of the game. Later on and in different venues, players will show up for work in offices, plants and stores equipped with genuinely useful skills; they'll think nothing of conducting meetings with far-flung colleagues. Further, despite the irritations of advertising to us users, the age of mobile ads is with us and helps pay for the availability of all this on our hand-held machines.

Advancements Come Despite the Recession
The second major point about the growth of these videogames and their associated equipment and networks is that much of this development has taken place during a terrible period in the economy at large. We get so focused on what bank has failed recently and how high the unemployment rate is that we may not catch the significance of these favorable advancements. Moreover, this aspect is not distinctive to this recession. Innovation is no respecter of the business cycle. These new ideas and new "toys" can come just as well, if not more easily, when overall times are tough as when there's an expanding business environment.

People can have good ideas at any time. The sparks of innovation and entrepreneurship may even be pushed by hard times. Suppose, for instance, that we need to find ways to cut costs because we can't pass our costs through fully to our prices at those times; we'll figure out a new way to operate that we'll still be able to make good use of when fortunes improve. Or suppose we got laid off from our big corporate job. Maybe we can turn our sewing or crafts or electronics hobby into a business to boost our income. These are not trivial notions. While puzzling over this phenomenon in recent days, we've learned that a whole raft of well known companies have got started during recessions. Here are some[2]:

Proctor & Gamble: the panic of 1837
Barnes & Noble: the Depression that followed the panic of 1873
The Hoover Company and Neiman Marcus: after the panic of 1907
Macy's, Carvel, United Technologies, Global Van Lines: the Great Depression of the 1930s
Newman's Own and Sun Microsystems: the 1981-82 recession (before now, the worst since the Great Depression)

These are only a few of the multitude of firms that started during periods of drastic economic conditions over the last 200 years and have sustained themselves through to today. A study by scholars at the Ewing Kauffman Foundation[3] compiled a tally of two groups of companies, the Fortune 500 list of the largest companies and the Inc. Magazine list of the 1,000 fastest-growing companies. They find that almost half of these notable firms were founded during recessions.

Good Ideas, Easier Supply Chains Both Help
How can this happen? The numbers of recession-era firms are so large that it's clearly not accidental. Sometimes, it's just the novelty of the idea itself. In 1982, everyone knew Paul Newman, whose homemade salad dressing already had a following; both his carefully crafted products and the company's aim to serve charities with its profits were easy to market, regardless of the tenor of the times.

There's also a fundamental characteristic of recessions that we've talked about before: their cleansing and healing effect directly on business operations. In extensive polling of new business managers in the early 2000s, survey-takers for the Entrepreneurship Research Consortium[4] learned that budding companies face three major kinds of uncertainties: operational, financial and competitive. The most basic is the operational uncertainty; specifically, can the new firms obtain raw materials, attract skilled, productive employees and then get access to a distribution system? The competitive environment and the availability of financing are important, but not relevant if the firm can't first make the product and/or deliver a reliable service. During a boom, all of the operational factors are squeezed: raw materials are expensive, the employees we need are gainfully engaged elsewhere and distributors have all they can do to put out what they have already. But during a recession, all of these conditions are reversed. Prices come down, labor resources become more available and distributors are hungry for something new and different to offer to retain or regain their customer base. There's room to maneuver.

A Bottom-Up Economy
The U.S. economy is incredibly dynamic and all of this just happens, in a bottom-up process. Top-down government stimulus programs may help in some ways, but the genuine source of new growth for economies comes from these adaptations and innovations by people, like Bill Gates and Paul Allen, who formed Microsoft in April 1975, just at the bottom of the 1974-75 recession. Or Robert Wood Johnson, who, with his two brothers, started producing a bandage that would become Band-Aids in New Brunswick, New Jersey, in 1887, right in the middle of another recession.

So it's no accident at all that Facebook and Android phones and all the associated products have taken off like rockets over the past three years, and my young Christmas-tide guests are showing us the way.
*Name changed to protect the guilty!

[1] Andy Kessler, "How Videogames Are Changing the Economy", The Wall Street Journal. January 3, 2011, page A17.

[2] Thomas A. Meyer. INNOVATE! How Great Companies Get Started in Terrible Times. Hoboken, NJ: John Wiley & Sons, Inc. 2010. Chapter 1: "Recession".

[3] Dane Stangler. "The Economic Future Just Happened." Ewing Marion Kauffman Foundation. June 9, 2009. Accessed January 18, 2011.

[4] Nancy M. Carter, Paul D. Reynolds and William B. Gartner. "Perceptions of Entrepreneurial Climate" in Gartner, Shaver, Carter & Reynolds. Handbook of Entrepreneurial Dynamics. Thousand Oaks, CA: Sage Publications, Inc. 2004. Pages 412-421.

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