Avoiding Commoditization and the Forward Leverage of Knowledge

Author: Terry Rapoch

August 2008

“Wealth is the product of man's capacity to think.”
Ayn Rand

This is the fourth series of articles discussing a new development agenda and addresses the questions of competition, commoditization and marginalization.  As pointed out in the first article in this series, since the mid-1800s US economy has grown and prospered as a result of the introduction of new ideas, technologies and standards.  Interpreted in terms of Rand’s quote, this wealth has been the product of the ability of individuals within the US to think and outthink others around the world.  To many, it now appears that this leadership is faltering and that the US is losing its competitive edge which will erode its prosperity if we become a “commodity” economy.  As with the other articles this one outlines some specific challenges and then discusses potential opportunities and strategies for addressing them successfully.

Competitive Advantage
Competitive advantage has often accrued to countries that had unique combinations of resources or factors of production, including to Rand’s point, intellectual capital.  Some of these were the result of “good luck” in terms of having mineral, water, forests and other resources that were simply unavailable to others at the same or lower rates.  Others were the result of active programs to attract or create capabilities through investments such as is the case in Ohio with the development of suitable workforces to support both agricultural and manufacturing-based economies. However, this workforce became increasingly expensive and eventually using workers in other nations offered enough savings to economically relocate and re-create huge production facilities and to implement and operate extremely complex global supply chains.  
There has been similar erosion in the ability to create new intellectual property and in particular to define the standards within industry and market segments which are a key foundation for sustainable competitive advantage.  One example is in the area cell phones standards in which US providers set and followed standards incompatible with those used in most of the world. Such a position is not viable with the emergence of very powerful competitors India and China in this area and others, such as RF ID technology.  The inability to define standards means that we become subscribers to standards that others create and publish which means that they can define the new playing field, one that we will need to follow regardless of the potential economic impact.

This leads to a last challenge which is the loss of the ability to define and make markets.  It is clear that the United States over the past century has defined and profited from many significant new markets, including those for the automobile, radio, television, and computing and information technology. Being unable to exert this level of influence means that we become a “me too" economy, one in which most of the margin and wealth has been already captured elsewhere.

Opportunities
The response to these challenges lies being able to leverage forward existing strengths into new market opportunities. The ability to do so have been the hallmark of successful companies and societies for centuries and the US economy is uniquely positioned in a number of areas to accomplish this.

The first and clearest opportunity relates to the energy sector which will become the defining element in the success of societies and economies in the 21st century and beyond.  In fact, it can be argued that after the agricultural industrial, informational and biological revolutions that we are now on the doorstep of the energy revolution.  In this context US companies which led the rapid expansion of energy consumption throughout the late 19th and 20th centuries will be singularly well positioned in terms of assets and working relationships to provide leadership in the development of this new economic base.  While there may be a sense that the “going green” will involve consumers using less energy that is not likely to be the case.  Rather, it will be a case of where this additional energy will come from here and abroad.  The US has an opportunity to create a global market in new energy products that will transform many developing economies allowing them to take advantage of other natural resources that they have to compete and prosper in the global economy.  

Another opportunity is in the biological sciences, including human sciences, medicine, and agriculture. The broadest use of the most sophisticated technologies still occurs within the US, despite legislative restrictions in some areas.  The expanded application and use of these technologies again affords a significant opportunity for economic growth within the US that would also translate into significant improvements in the quality and living standards of people around the world.  

One last opportunity is the development of new types of materials for construction, fabrication of equipment and devices, and clothing.  Again, the US has led in these innovations for the introduction of clothing synthetics, composite materials, and most recently nano materials.  In all cases there are significant existing strengths in terms of resources both physical and human to build on and make these area drivers for a new round of economic prosperity.

Going Forward
From a strategic perspective, there are three key elements.  The first is establishing the critical areas of focus in which the economy will compete.  It is unlikely that any country can truly dominate in all sectors; rather each will find its own particular area and set of advantages to support its own growth initiatives.  This article identifies at least three such areas where the opportunity exists to maintain or achieve leadership but it will require a necessary discipline to accomplish this.  

In addition, there needs to be a consideration of a new calculus that describes relationships between leading developmental markets and supporting components related to infrastructure and core activities such as we see in the service sectors.  The strategy must identify and encourage "high yield" opportunities and align appropriate resources behind them.  This cannot be done by fiat or through central planning groups but rather the effective encouragement of individual entrepreneurs and organizations to see and exploit focused opportunities in areas that can truly be defended.  

To the quote that opened this article, it is a critically important that the current strategies relating to improving the level of science, technology, engineering, and mathematical (STEM) competencies for the next generation of workers be continued and strengthened.  The difficult aspect of this strategy is that it requires focus and long-term commitment, in fact what will be generational change, something that this economy has never had to incorporate within its guiding principles.  Traversing all these areas is the question of what incentives need to be provided to realize successful outcomes.  In an economy that is already strapped in terms of its flexibility due to rising debt and the cost of entitlement programs, there must be a willingness to set aside an appropriate portion of current output to support insecure the seed corn that will underpin the US economy in the future.