Is Innovation Good or Bad? Yes!
Posted by Tim in innovation strategy, time on 3 September 2010
An article by Pat Lencioni in Business Week called Why Companies Need Less Innovation has generated a bit of controversy, at least in the part of the internet that I live in. His basic premise is that it is a mistake to try to make an entire company innovative – instead, it is better to just let a few people in upper management innovate, while everyone else focuses on just doing their job. Here is his argument in a nutshell:
What should leaders do? Be more open to new ideas from employees? Probably not. Better yet, they should stop overhyping innovation to the masses and come to the realization that only a limited number of people in any company really needs to be innovative.
As heretical as that may seem to those who want to believe that “innovation is everyone’s business,” consider that even the most innovative and creative organizations need far more people to be dutiful, enthusiastic, and consistent in their work than innovative or creative.
Think about a movie set. For every writer or director or actor on the payroll, there are hordes of people who have to be technically proficient, consistent, patient, and disciplined in their responsibilities. If they innovate, the project turns to chaos.
I think this argument is wrong. Just watch the incredibly extensive ‘making of’ features on the Lord of the Rings dvds to see how wrong his movie-making example is. However, Lencioni’s main argument has already been effectively answered by Steve Denning (New defense of traditional management: firms need less innovation!), Ralph Ohr (Do Companies Need Less Innovation?), James Todhunter (Why Companies Need Pervasive Innovation) and Steve Denning again (More or Less Innovation? Duh!). All these are well worth reading, and I think that the title of the second Denning piece pretty well sums up my thoughts on the debate.
But there’s one point that I’d like to add – even though I spend all of my work time researching and talking about innovation, and trying to help organisations become more innovative, I don’t think that innovation is always good. Innovation is value-neutral.
What do I mean by that?
A parallel debate is going on over the impact of the internet. Some see it as an engine of pervasive positive change, while others argue that its impact is overwhelmingly negative. The arguments between technology optimists and pessimists are nicely summarised by L. Gordon Crovitz in his article Is Technology Good or Bad? Yes. The point that he makes is that technology is value-neutral – it is only our uses of it that are good or bad:
Among the schisms between these groups: that the Web promotes personalization that can become fragmentation; creates information abundance that can become information overload; allows for the creativity of amateurs while undermining the business models of professionals; and enables the wisdom of crowds that can result in the stupidity of the lowest common denominator.
This is an important point. Technology has both positive and negative impacts – and so does innovation. Innovation leads to all of the medical advances that have extended our life expectancies from 60 years in the late 19th century to 80 years now. Innovation has also led to the creation of the novel management structures that make it easier for terrorist organizations to operate.
I’m an innovation optimist. The research data overwhelmingly demonstrates that organisations that are more innovative are more profitable, and better places to work. Most of the time, the organisations that are more innovative do in fact have systems in place that help everyone innovate, not just a handful of people at the top.
However, if we are managing an innovative organisation, the question that we must consider is what goals do our innovations support? In order for innovation to be good, we need to be doing things that are worth doing.
By definition, innovations change the world. It’s up to us to make sure that our innovations change the world for the better.
Using Networks to Find Knowledge
Posted by John in innovation, networks on 1 September 2010
Last week Ralph Ohr left me with a challenge to think about how to use experts to get the best outcomes on making decisions under conditions of uncertainty. We constantly miss disruptive changes in the operating environment and I suppose if I really knew the answer, I wouldn’t be posting it on a blog.
Sometimes predictions are genuinely impossible because of true uncertainty. The future is the future and nothing in the past can help us predict some events. Rather than making predicitons, operational flexibility is probably the best response to this type of uncertaintly.
On the other hand, sometimes the emerging disruptions are right under our noses and the problem is getting over myopia. Experts can suffer from myopia as well as the rest of us so perhaps the issue is finding the right expert with the right interpretation of what is happening.
This means that an organization’s networks can be crucial in determining the successful search for the right person with the required knowledge. Tim and I have been doing some work for a large organization that is trialling new ways of doing business. It seems that one of the issues that is faced by this organization is building the expertise networks acrosss the business to find the right person to give their opinion and expertise at critical decision making points. However, in large organizations, this is difficult. A colleague from a large multinational mining company sums up the issue in the following diagram.
As you can see, effectively using the knowledge of the business means trying to get better connections to reduce the size of the “I don’t know who to ask” space.
So how can we do this? One possibility is that we direct our questions to people in the organization that we know are very highly connected. However, one simulaiton study of search in a real organizational network has found that this might result in more steps needed to find the right person. In this simulation, a slightly more efficient search could be conducted by going to the manager who is responsible for the subject area that is being investigated or by starting the search in the right department.
The simulation study needs more investigation and we have a PhD student looking at the problems of search in large organizations. However, if formal lines of enquiry can be shown to be associated with efficient search networks then this suggests that organizations may be able to connect pockets of knowledge by identifiying subject matter experts and linking them to critical projects.
Some Thoughts on the McKinsey Global Innovation Survey
Posted by John in innovation, innovation strategy on 31 August 2010
McKinsey have just released their 2010 innovation survey. It’s a very thought-provoking read and its based on a survey of over 2000 respondents from several industries. The survey can be found on McKinseyQuarterly.com and its free to get a subscription. Many of the survey results regarding the management of innovation as a process are consistent with a lot of things that we have been writing on the blog. According to McKinsey, these same management issues come up year after year, too.
Interestingly, exhibit 4 shows that most managers think that innovation performance would improve with a better pipeline of big ideas (57%), yet only a third of these managers thought they had a good balance between idea generation and effective execution. The ideas trap is alive and well!
One of the most interesting graphics related to the effects of formalizing the innovation process. Most respondents did not have a formal innovation process and only a third were able to say that they had their innovation initiatives aligned with strategy at the business or corporate level.
However, those that reported having a very formalized innovation management process (about 20%) reported higher rates of innovation rejection within the business and slower times to market compared to firms that had more informal innovation management processes. While it would be interesting to know what these processes actually look like, it gives us some evidence that too much formality is a bad thing.
Owning the Right Risks
Posted by John in innovation on 30 August 2010
We know that the innovation process is risky. Nothing can guarantee the success of something new and failure is probably a good sign of a healthy innovation system. Without failures, no innovations. Of course, failure for its own sake is a ‘career-limiting move’ but successful innovation managers take the view that trials and rapid prototyping enable organizations to cycle through ideas to find the ones that create value. If most ideas will fail then the best outcome is that they fail quickly. They are also sufficiently disciplined to stop funding ideas that do not make sufficient progress.
Firms must have an appetite for risk if they are to engage with innovation. More risk potentially means greater returns and managers need to understand what types of returns shareholders or stakeholders (in the not-for-profit or public sector context) expect. Risk management and innovation is a very under explored area of corporate governance and it also means that boards need to understand the innovation process from a risk management perspective. Managing the innovation portfolio across the 3 horizons and being able to evaluate an organization’s innovation process as a value chain are both examples of how boards can engage with management of innovation strategy and not interfere with the processes of management.
While the magnitude of the risk is one dimension of innovation risk management, the other critical issues is that of owning the right risks. In an article from the Harvard Business Review from 2008, Buehler, Freeman and Hulme talk about a different way of thinking about competitive advantage. They invert the question of ‘what are we better at compared to our competitors’ into ‘what risks are we better able to manage compared to the competition’. It’s a subtle change, but it makes a lot of sense. For example, one firm may be better equipped to manage the risks associated with exporting to a new market than others and this is an important component of their competitive advantage.
In the context of innovation, the idea of owning the right risk bypasses the usual discussions of trying to eliminate risk. For example, is the risk of prototype development the best for us and should we own the risks associated with scaling up the prototype? Does our expertise in this area of technology mean that we have a competitive advantage in managing risk in the development of certain products? As you can see, the notion of owning the right risks has the advantage of including both risk management and strategy in the same analysis.
As another example, think about Westfield’s initiative to develop an online shopping mall, as reported in the Australian a few weeks ago.
Sources close to the virtual shopping mall project say it is one of the biggest software development projects in the southern hemisphere and is straining the supply of developers familiar with the Ruby programming language. The Australian 20/7/2010
Now, is this the right risk to own? Experimentation in online shopping is probably mandatory for Westfield but this looks like a very big bet in an area that isn’t core to their business. While Westfield is still the largest shopping mall manager in the world, the capabilities surrounding internet retailing are very different from shopping mall management. As a Westfield shareholder, it just looks like a “bridge too far” to me.
Focus on Building Things
Posted by Tim in innovation on 29 August 2010
Ryan Freitas recently wrote a post called 35 Lessons in 35 Years – there are some good tips here. One that particularly caught my eye is this one:
Debates over terminology and semantics are for archivists and academics. If you’re interested in the living heart of what you do, focus on building things rather than talking about them.
We often think that innovation is all about new stuff, but I think that Freitas’ advice is sound – our innovation will be more successful if we focus on building. That’s part of why we talk so much about the importance of having a bias towards action.
Personally, I’m trying to build a network of people that use innovation to make both work and the world a better place – my hope is that through my work I can contribute to that.
What are you building?
(the Watercube under construction – picture from flickr/xiaming under a Creative Commons License)
The Value Proposition in Business Models
Posted by Tim in aggregate, business models, connect, filter on 28 August 2010
Anders Sundelin wrote a post earlier this week about the evolution of the business model concept. He does a great job of showing the various ways in which this idea has been operationalized – it’s still surprisingly fuzzy. For the state of the art thinking on business model innovation, a special issue of Long Range Planning has twenty articles on the topic (all free to download through September).
One element that is consistent across nearly all of the different ways of thinking about business models is that of the Value Proposition. A central part of building a successful business model is creating value for your customers. Innovation plays a role here in two ways: first, innovation is the process of executing new ideas to create value, so it is a central part of any new value proposition; second, we can innovate in the way that we create value, not just in the products, services or know-how that we offer.
In order to innovate the way we create value, it makes sense to look at how we create value from information. In general, we do this by aggregating, filtering and connecting. This works for big firms like Amazon, and smaller firms like O’Reilly Publishing.
I ran across two more examples of how this can work for smaller firms this week. The first comes from Seth Godin’s description of Gerald Roush and his Ferrari Market Newsletter. Here is the description of the newsletter:
The newsletter, it appears, was not just lucrative, it was a bargain. It chronicled the pricing, whereabouts and details of just about every Ferrari ever made. If you were a buyer or a seller, you subscribed. If you wanted to run an ad, you were required to include the car’s VIN, which added to Roush’s voluminous database.
The Roush effect involves extraordinary domain knowledge, a market small enough to understand and diligently earning the role of data middleman. The players in the market want there to be one clearinghouse, one authority who can connect the data, see the trends and publish the conventional wisdom.
Often when people talk about “aggregators”, they are referring to places like Amazon or Google, who try to catalog everything (or close to it). This is a great example of how you can effectively aggregate on a much smaller scale. The Ferrari Market Newsletter isn’t trying to aggregate everything, it’s just trying to aggregate all available information on Ferraris.
In this case, the aggregating is combined with filtering to create an comprehensive aggregation of information in a specific niche. The connections are made between people that are interested in Ferraris – most importantly, between those that want to sell one and those who wish to buy one.
Note that this is not algorithmic filtering, as we see on the comprehensive sites. It is judgment-based filtering. It often sounds as though algorithms are the only way to go these days, and as this case shows, that is not at all the case. There are still opportunities to build effective business models based on personal judgment.
Here’s another example, though it is more speculative. On Techdirt, Michael Masnick talks about the idea of building affinity-based music groups. Techdirt is a consistently interesting blog, and you should definitely check it out. Here is how he describes these groups:
… Topspin’s CEO, Ian Rogers, penned an open letter to Guy Hands, the head of (struggling) EMI, suggesting that rather than think of itself as a “record label” focused on promotion and distribution (two things that are easier and cheaper than ever before), it could instead focus on being the smart filter for music listeners today, struggling to find the music they love amidst so much musical abundance in the world. The suggestion was to take some of the key, iconic, bands under the EMI roof, and put them under affinity-based “mini-labels” with other less well known bands, that would appeal to people who liked the more well known band. It seemed like a great idea, which, of course, EMI has not done.
Here again, the value is created through filtering. And as with the Ferrari Market Newsletter, this model would then try to aggregate all of the bands that relate to each other in a specific way. This is a model that has worked very effectively for many years for Dischord Records – and like Masnick I think it has great potential.
Creating a novel value proposition is an essential part of generating an effective business model. There are great opportunities to do this in creative ways. If you focus on aggregating, filtering and connecting, you can build a good information-based value proposition.
Three Ways to Fail at Innovation
Posted by Tim in innovation on 27 August 2010
Three blog posts that caught my eye this week demonstrate three different ways that you can fail at innovation:
- Ignore the small innovations: James Todhunter wrote an excellent post yesterday defending thinking about improvements as innovation. You should read the whole post, but here is a highlight:
Breakthrough innovation, incremental innovation, minor improvement—these are all points on a continuum of value creating solution generation. Incremental innovation is very beneficial to an organization trying to develop the core competence needed to support a high-performance innovation system. Specifically, incremental innovation delivers both short and long term benefits. In the short term, immediate business benefits can be realized—extended revenue life of a product, increased market share, better contribution to margin, etc. In the long term, incremental innovation provides a low risk platform to hone the basic innovation skills needed for successful, repeatable breakthrough innovation practice.
I don’t have much to add to that – I think’s he’s right. Which leads to the second way we can fail at innovation:
- Ignore the big innovations: As Todhunter points out, innovations occur along a spectrum. If you focus too much on one end of it, your long-range prospects aren’t good. The problem is that the two ends of the spectrum require different management skills, and different ways of envisioning the future.
Mike Masnick makes that point in an excellent post which discusses why Yahoo! missed the rise of Google:
Whenever we talk about innovation and things like patents, one common refrain is that no innovation would occur without patents because big companies would immediately copy the technology and destroy any up-and-comer. We’ve pointed out plenty of times that this simply isn’t true. For a truly disruptive innovation, big companies often won’t even notice you until you’re way ahead of them — at which point copying is fruitless. Hell, for nearly the past decade now, Yahoo’s tried every which way to “copy” Google, and it got them nowhere in terms of actual market share (actually, it got them so little that they recently gave up and outsourced it all to Microsoft).
Copying ideas is simultaneously easier than we think and much harder than we expect – which is part of why the debates around copyright and patenting are so vociferous. But overall, I think he’s right. Executing ideas is often very hard, which in turn makes it difficult for other firms to steal your idea. As Masnick points out, they usually too busy ignoring your big innovation to actually try to do it themselves. This leads to the third way to fail at innovation:
- Focus only on idea generation not idea execution: The latest version of this comes from a Fast Company post discussing R&D expenditures and patent filing. It shows (with some really nicely constructed graphics) that the US is spending a lot on R&D relative to the rest of the world, but is not patenting at an equally high rate. Innovation is about more than R&D, and about more than patents. So when they conclude:
It’s indeed troubling that we spend so much money on research that can’t readily be turned into world-beating products. So we should worry about the chart above–but just not for the obvious reasons.
I’m not at all convinced that anything that they are measuring is actually innovation. R&D contributes to innovation, and patents, used wisely, can also contribute to innovation.
But innovation is about successfully executing new ideas to create value, something that is captured by neither R&D spending nor patent filing.
These three common problems are all pitfalls into which many organisations stumble. You need to avoid all of them if you are going to successfully innovate.
Instead of Stockpiling Ideas, Make Them Flow
Posted by Tim in innovation on 26 August 2010
There’s a good post today by Michael Schrage concerning the recent article making the rounds claiming that America is suffering a creativity crisis. In short, he’s not buying that proposition. Here is one of the key quotes:
This point is vital: genuine creativity isn’t about ideas. It’s about translating ideas into ingenious products, services and solutions. Ideas are the seeds, not the substance, of creativity. Getting them to take root is easier than it’s ever been.
That’s why cover stories declaring creativity droughts in America feel so faux. Sure, they’re provocative. But the underlying science is psuedo; the overarching solutions are silly.
I agree with nearly all of the post, and it reinforces a couple of points that we have consistently tried to make here. The first is that any time we talk about ideas (and it doesn’t matter whether we frame the issue as “creativity” or “innovation”), we are better off thinking of it as a process rather than as an event. We must have great ideas, but more importantly, to be genuinely creative or innovative, we must execute great ideas.
As John Hagel perceptively pointed out in response to my post about using IP, this is a stock and flow problem. If we view idea generation as the critical creative function, then we will stockpile ideas. But in order to improve things, we don’t need stocks of ideas. We need well-executed ideas. The ideas must flow through some sort of selection and implementation process – and we better be good at both of these steps if we wish to succeed.
Finally, Schrage points out that the value of creative ideas (that have been executed!) is defined by whoever ends up using them. In other words, innovation is discovered in use. It is often very difficult to predict the best use for your idea in advance, and usually the best-laid plans are ruined at the first contact with the market. So one final skill that we need to build is flexibility – we need to be able to adapt our ideas as we’re executing them.
Generating creative ideas is a critical step in the innovation process. The problem is that too many people think of ideas as an end in themselves. If you do that, you end up stockpiling ideas, which doesn’t actually do you any good. Instead, think about managing ideas so that they get executed. To be creative, or innovative, you have to get the ideas to flow.
(the drought photo is from flickr/Mundoo under a Creative Commons License)
How Can Governments Support Innovation?
Posted by John in innovation on 25 August 2010
I had an interesting conversation with someone from the government sector whose job is to support innovation and increase the number of innovating firms in the economy. While I can see why governments want to foster innovation, I think that his job is extremely difficult because he is actually trying to affect the strategy of companies and how their boards and managers view innovation. Given that there are so many firms in the economy (about 80,000 in the Brisbane region alone), this is going to be a Herculean task. I don’t know how else to convince firms to innovate because in the end it is the people in the firms that decide to pursue innovation as a means to create value.
My own opinion is that what governments can actually do to promote innovation is somewhat limited. There is very little international evidence that R&D tax breaks can encourage innovation. There is a good deal of evidence that it results in more R&D spend but the relationship between this expenditure and innovation output is unclear. I recall getting a phone call from somebody asking me to provide evidence that tax breaks supported R&D. It turned out that he was from an accounting firm who had a specialist group of people working on maximizing the tax refunds for R&D. He wasn’t impressed when I showed him the studies that were unable to point to a clear link between tax breaks and innovation.
Another government tactic is what Professor Alan Hughes at Cambridge University calls the “cargo cult”. The original south pacific cargo cults were developed by islanders after the second world war. When the US brought wealth and materials to the islands through their military operations it was accompanied by airfields, planes and soldiers. After the war, some islanders tried to bring back the cargo by carrying out rituals with artifacts that looked like the planes and airfields.
Alan says that a lot of government innovation strategy isn’t very different from a cargo cult. If we can see a thriving and innovative region such as Silicon Valley, all we need to do is replicate the conditions and it will happen. While this doesn’t mean building planes out of sticks and leaves, it usually means spending money to create institutes and attracting companies from a particular sector (usually biotech or software) to create a cluster without really understanding what made the original cluster so successful in the first place.
The problem with cluster theory is that there is very little evidence that firms in clusters do any better than firms that aren’t part of clusters. We also know that innovation is widely spread throughout the economy and many “old” industries are just as innovative as the fashionable new ones.
Well… enough criticism… so what actually works? In a comparative study of the UK and US economies, Professors Alan Hughes and Andy Cosh (MIT) found that the US government’s procurement program was successfully acting like a venture capital fund. Governments face a range of significant long term challenges in critical areas such as health, education, power, and water. Identifying areas for breakthrough technology and challenging innovative firms helped to support these firms and at the same time create valuable innovations. This is quite different from a development grant. Firms usually say that these are too small and too slow with costs incurred in putting the grant together. Far better to challenge a firm with a real project.
While this works in the US, I also know that Brisbane City Council have a similar program (albeit on a smaller scale) and it is paying off for the council and for the firms that are involved in the procurement program. This morning the Lord Mayor, Campbell Newman, announced that council would fund its own renewable energy project to meet its strategic targets. He also said that this was part of kick-starting the industry in South East Queensland.
Firms don’t need innovation welfare. They need sophisticated partners and customers.
Relative Comfort
A Guest Post by Rick DeWitt
One of the ways people manage anxiety is to operate within their comfort zone. We each have our own internal sense of how much is too much, and how much is too little, and the comfort zone is in between.
We have comfort zones about many aspects of our lives, such as intimacy, athletics, and money. When we drop below our comfort zone, our survival instincts kick in, and we respond by doing something radical to get back. When we risk pushing the top of our comfort zone, we optimize our performance and grow. However, if we go too far, we will again do something radical to get back.
Comfort zones belong to individuals, and everyone is different. Where a pauper’s zone may range from $10K to $20K, a millionaire’s zone may be $1M to $2M. One person might think a walk around the block is good exercise, while another person doesn’t even break a sweat for the first mile. Roughly speaking, these comfort zones appear to vary exponentially from one person to the next.
Although our subjective perception is exponential, our resources are objectively linear. Suppose the millionaire gave $10K to a pauper? The millionaire stays within his comfort zone, but he pauper would think his ship had come in. Suppose the pauper gave $10K to the millionaire? He would lose his life savings, and the millionaire would not be moved. Although the objective value of the gift was constant in both cases, the emotional value is vastly different. The emotional value comes from the direction in which the gift moved.
Compassion is giving a gift according to need. Although I used philanthropy as an example, we have comfort zones about myriad aspects of our life. Whatever you have, give some of it away. Teach. Give a hug. Host a fun run. You may find yourself pushing the upper boundary of your own comfort zone around joy.
Note from Tim: I’m happy to have this post from Rick. He is currently a Mad Scientist, following a career as a programmer for Microsoft (where he only worked on the the cool stuff), and early success as a schoolyard football player.
