Archive for May, 2009
persistent economic ties
Posted by Tim in evolving economic entities, innovation, networks, replication on 13 May 2009
There’s been a bit of a slow roll through the (mostly) academic blogs discussing a recent paper by Bronnenberg, Dhar & Dube from The Journal of Political Economy called “Brand History, Geography, and the Persistence of Brand Shares”. Here’s the abstract:
We document evidence of a persistent “early entry” advantage for brands in 34 consumer packaged goods industries across the 50 largest U.S. cities. Current market shares are higher in markets closest to a brand’s historic city of origin than in those farthest. For six industries, we know the order of entry among the top brands in each of the markets. We find an early entry effect on a brand’s current market share and perceived quality across U.S. cities. The magnitude of this effect typically drives the rank order of market shares and perceived quality levels across cities.
In other words, brands of consumer goods tend to be stronger in regions closer to where they were originally made, and this effect persists for a long time. Richard Florida was the first to discuss the paper. Tyler Cowen then picked up their example of Miller Beer, which was basically the first beer launched in Chicago (in 1856!), and which is still the number one beer there 150+ years later. Matt Yglesias was next, and showed the effect graphically using data from Andrew Gelman showing Starbucks per capita:
and Wal-Marts per capita:
Gelman himself then entered the discussion, pondering the possibility that social networks are playing a role in this. I think that his take is exactly right, and it ties in to another of the themes I keep coming back to – network ties are persistent, and difficult to break.
This is a critical point for innovators to understand. When you are trying to get a new idea to spread, it isn’t enough to get people to hear it, or like it. Most of the time, you also have to get them to break an existing tie if they are going to adopt your idea. This is true whether your idea is a new product, a new service, a new way of doing things or a new way of thinking about things. This reminds me of Seth Godin’s angle on aspirin advertising – it doesn’t matter how frequently a new aspirin is advertised, or even how good it is, because he doesn’t have an aspirin problem. He’s got a brand that he’s used for years, and it works. So why invest any time, effort or money into learning about alternative aspirins, let alone going to the trouble of actually switching?
Innovations are generally destructive – in order to create new ties of their own, they have to break old ones. And as the examples of Miller Beer in Chicago, Starbucks around Seattle and Wal-Mart around Arkansas show, breaking existing ties is often harder than you expect. It’s not enough to come up with a great new idea, you have to get it to spread. And that means not just connecting with people, but connecting with them strongly enough that they are willing to continue to give you their time, attention and/or money. Since we all have plenty of choice in how we spend these things, you better have a good strategy for doing this!
fail now! fail fast!
Posted by Tim in evolving economic entities, innovation, selection on 12 May 2009
I grabbed a copy of an odd little book yesterday – it’s called Books vs Cigarettes by George Orwell. It’s a collection of six essays. They’re all pretty good (Orwell is always pretty readable), but I don’t see a lot of logic in assembling these particular essays into one book (the title essay is excellent though). In any case, in the essay on book reviewing I ran across this quote:
Until one has some kind of professional relationship with books one does not discover how bad the majority of them are. In much more than nine cases out of ten the only objectively truthful criticism would be ‘This book is worthless’, while the truth about the reviewer’s own reaction would probably be ‘This book does not interest me in any way, and I would not write about it unless I were paid to’.
This reminded me of my experience at the radio station. I never fully appreciated just how much bad music was being made until I was Assistant Music Director and had to start sorting through all of it. It actually looks like Orwell formulated Sturgeon’s Law (90% of everything is crap) about 10 years before Sturgeon did. This is how Sturgeon phrased it:
“I repeat Sturgeon’s Revelation, which was wrung out of me after twenty years of wearying defense of science fiction against attacks of people who used the worst examples of the field for ammunition, and whose conclusion was that ninety percent of SF is crud”.
I think this is a really important idea. One of the points I keep trying to get across in my teaching is that ideas are cheap. It’s executing ideas that has value. One of the reasons for this is that 90% of ideas end up being lousy. There are two problems with this. The first is that we usually don’t know which ideas are the good ones. We can usually filter out the really horrible ideas that we come up, but there will always be uncertainty about which are the best ones. Idris Mootee has a nice post about one way to combat this – experiment a lot, fail fast, and fail cheaply. This has been a persistent theme for Tom Peters as well.
But this leads directly to the second problem – if 90% of new ideas are crap, we’re going to fail a fair bit in trying to execute them, and failing isn’t always welcome in businesses. Wendy Waters, writing at Richard Florida’s Creative Class site, gets at this issue nicely. Here’s one of they key quotes:
“If you’re going to have an innovative culture, you must understand that that comes with the acceptance of failure. Innovation comes with a lot of mistakes.” [says Tony Champman, CEO of communications firm, Capital C]
People generally hate to hear this. But innovation is evolutionary – you need variety, selection and replication. Creativity leads to variety, which is where Sturgeon’s law comes in. Then you have to be able to select. This is nearly impossible to do a priori, which means you have to experiment. The last part is that the idea has to spread, which is a separate issue again. But the bottom line is that to innovate, you must fail. If every idea that you try works, you’re not trying out enough ideas.
Even though I talk about this all the time, it’s still a hard lesson to learn. And filtering my own ideas is one of the key areas that I have to get better at. That’s one of the benefits of blogging – it gives you a chance to try out a wider range of ideas than you can in academic papers. Some of them work, some don’t. Part of the problem though is that Sturgeon’s Law almost certainly applies to blogs too. And since the Kristin Hersh post was pretty good, what do the odds tell us about this one?
the cone of uncertainty
Posted by Tim in innovation, networks, replication on 11 May 2009
Here’s a really nice talk that Paul Saffo gave for the Long Now Organization up on fora.tv.
It’s a bit long (85 minutes in total), but the 30 minutes of questions can be skipped. If you’re in a hurry, hit the link and then go to the menu to watch the sections titled ‘The Cone of Uncertainty’ and ‘S-Curves’.
There’s not a lot to say about it – I just think those are two good ways to visualise how we go about thinking about what might happen in the future. In particular, the section on S-Curves is pretty useful. It explains why we often overestimate the effect of something new when it is just starting out, only to underestimate it’s impact once it picks up steam. Since innovations nearly always diffuse along an s-curve, this is a pretty important concept to get a handle on if you’re interested in innovating.
Of course, s-curves are also a network story. In part we have diffusion s-curves because ideas spread through people connected within networks. When this happens, there is a critical point where the network quickly transforms from being somewhat connected to being mostly connected. It’s another reason why I think networks are so important in studying innovation.
So here’s your assignment: go and watch the video, then come back here and discuss. It’s worth 50% of your final mark.
kristin hersh is brilliant
Posted by Tim in business models, innovation on 10 May 2009
I subscribed to Kristin Hersh today.
That probably sounds a bit weird, so let me explain. If you’re not familiar with her, Kristin is pretty much a genius. She started making music over 20 years ago with her first band, Throwing Muses. The Muses have made around 7 records in that time, plus she has put out another 7 solo records, plus a couple with her latest band, 50 Foot Wave. She’s still active in both bands and in solo recording, and the songs that she writes for each of the three projects all sound distinctively different, but nearly every single thing she’s done has been fantastic. In short, she’s one of the most consistently good and innovative musicians around. And now she’s innovating business models.
At the end of 2007, Kristin severed all relationships with record companies, and decided to become user-funded. In doing this, she’s come up with several innovative ways to continue to make music and get it out to people that want to hear it. First off, you can subscribe to her music – that’s what I just did. She’s offering her new songs for free from her website, but with a subscription, you get all kinds of bonus things, like concert tickets, cds and other stuff.
Next, she’s trying to set this up as a co-operative. So all the music that she posts comes in flac format, with a creative commons license set up to encourage people to add to and share the music.
To that end, Kristin also uploads the raw recording files as “stems”. Please consider using these files as a starting point and bring your own vision and creative ideas into the mix. Really. It’d be so cool to hear what you’d do if you were part of the session. Think about getting your hands dirty in that way and uploading the result to Kristin’s RW page.
The result? In about 16 months there have been over 80 remixes of the songs posted on her site, plus another 50 things (art, photography & writing) inspired by the music. That’s a fair bit of creative effort that’s been unleashed in a relatively short period of time.
The third innovative idea is the 10-4 project. Here’s her description:
This time, the Great Idea Inside Billy’s Head was this:
“We’ll offer people in our web community the chance to buy CD-R’s of Kristin playing 10 songs of their choice. They’ll pick the 10 songs from a menu of 200 — no guesswork on our part as to what anyone wants to hear — they’ll tell us. We’ll burn the CD’s ourselves and Kris can personalize and sign them: 10-4 (your name here).
We’ll charge $50 for this CD, ensuring that only a few people will partake initially. But if they like it, word’ll spread.”
Wicked, I thought. I never know what people want to hear. Some seem to only like old Throwing Muses songs, some only like the most recent release, some people only like Sunny Border Blue, some people want unreleased material, some like me to scream real loud, some like me to whisper, some just like Your Ghost over and over and over again. Now the set list can be someone else’s fault decision. And when ThrowingMusic webinatrix Tine says, “I want one!” I know it’s a good idea.
We sold 100 in record time (under 20 minutes). Of course.
“A hundred?” I asked.
“A hundred,” answered Billy.
“Literally a hundred?” I asked, hoping he was kidding.
“Get to work, he replied.
And so, Kristin has made over 100 personalised CDs for people.
All this adds up to a revolutionary new business model for music. One of the things that I noticed in subscribing is that interacting with an artist this way feels more relational than transactional. This might just be a fan’s delusion, but if you read the forums and comments on Kristin’s blog, there is a definite sense of community formation surrounding this venture. And this is very different from the recent experiments by Radiohead and Nine Nails. Those were essentially about the bands trying to shift the power in their relationships with the record labels. Kristin Hersh seems genuinely interested in eliminating the middleman completely. And this new model sets up an interesting dynamic – saying that I am giving money to help sustain her as an independent musician makes me feel like I have an actual stake in how she does. Over the years I’ve done plenty to spread the word – I played the Throwing Muses constantly when I was on the radio, I’ve included songs from several of Kristin’s projects on compilation cds I’ve given to friends, I’ve badgered people to buy cds and go to concerts. But it definitely feels like the ante has been upped now.
My prediction is that in another 18 months or so, Kristin will be making more money from her music than she ever has before, and that she’ll have built an incredible community with the people that care about her music. Furthermore, the most recent batch of songs that’s posted suggests that, most importantly, this arrangement will give her the space she needs to perform at the absolute top of her game. I hope I’m right!
Will this business model work for everyone? Probably not. There are a few key points:
- The community-building effort has to be absolutely sincere. If people decide that this is simply a cynical ploy, the whole thing will blow up. I don’t think this will happen with Kristin, but not everyone can pull that off.
- This arrangement will be harder to pull off if you are a new artist, or if you are too big. The new artists won’t have a big enough base to draw sufficient numbers of people willing to pitch in. An advantage for Kristin is that she has been connecting with people over a long period of time, and that connection is strong – it’s a great base to build from. On the other hand, artists that are huge can’t pull off the community-building. The fan base will be too big – which will make it impossible to forge links of sufficient depth.
- Finally, I think you have to have a pretty wide artistic range to make it work. Being able to pull material from Throwing Muses, 50 Foot Wave and the solo work is a tremendous advantage.
Why didn’t the record labels figure out this model? That is an issue worthy of much more discussion. For now, I’ll just share with you the notice that appears with the official video for Your Ghost on youtube:
NOTICE
This video contains an audio track that has not been authorized by WMG. The audio has been disabled. More about copyright.
When your entire business model is built around preventing people from hearing music, well, the music won’t spread very far, will it?
If you’re wondering what I’m going on about, here’s another version of Your Ghost:
And here are the Throwing Muses doing an excellent version of Shimmer a few years ago:
And one from 50FootWave:
If you like either of those, go to Kristin’s site to hear lots more…
shameless self promotion
Posted by Tim in innovation on 9 May 2009
Actually, when I first typed that, it said ‘shameless elf promotion’, which would probably be better…
In any case, I’m giving a talk on the evening of May 25th as part of Brisbane’s Innovation Festival. It’s going to cover fairly basic stuff, like what innovation is and why it is critically important especially in tough economic times. More details here…
trees vs. electrons
Posted by Tim in innovation, networks on 7 May 2009
I find it ironic that Wired magazine, of all things, is much better to read in its physical paper version than it is to read it on its website. Every time I buy a copy, it seems a bit archaic (and wrong!) to be reading the physical version. But the design in the real magazine is much better – it’s more interesting visually, and it conveys information much more effectively than the digital version does.
Although, this could just more a case of me being of the wrong generation. I’m more comfortable with reading online than a lot of people in my age group, but that’s probably not saying much. Still, I’d like to argue that this is really just a case where design matters. The design of the paper version of Wired is just better. That’s my angle and I’m sticking with it…
In any case, one way or another you should read the cover story from the April issue about fixing the electric grid. It’s pretty US-centric, and if you’ve been following the smart grid discussion at all there won’t be much new there. But if you’re new to the topic, it’s a nice outline of some of the issues that most of the developed countries are now facing with their systems of electrical supply.
The whole story is fascinating from a network/systems perspective. At the country level, the electric grids are essentially self-organising networks. And the current sorry state of most of them is a pretty good demonstration that emergent self-organisation isn’t unequivocally good. Really, it’s just a process – and consequently neutral. I suspect that fixing the electric grid is really a wicked problem, as are most of the ones that are worth tackling these days. It also shows that when you’re innovating, it isn’t enough to come up with a good idea. In order for your idea to spread, you have to break connections within the current economic network. The electric grid is highly interconnected with the rest of the economy, and part of the problem in trying to fix it is that doing so requires the breaking of quite a few connections. That is in large part why innovation is also usually destructive – something it pays to bear in mind.
emerging themes
Posted by Tim in innovation, time on 5 May 2009
In my previous incarnation as a blogger I mostly wrote about entertainment-related things. But one of the themes that quickly emerged was a discussion of the various projects that my cats got up to – including building a particle accelerator, starting a management consulting company, computer repair (see above) and making a trebuchet. I probably won’t be writing too much about those projects here. However, a couple of innovation-related themes have emerged pretty quickly.
One of those is time, another is sustainable innovation. As I mentioned before, I think that these two issues are closely connected. John’s three horizons discussion is also strongly time-dependent. I’ve been talking with Alex Stathakis, the Project Manager for the UQBS Sustainable Business Unit about sustainable innovation as well. Alex definitely thinks using a long time frame, and he gets frustrated when firms and policymakers are unable to do the same. I can see why. It’s similar to the way John & I react when we run across someone who looks at Horizon 3 issues as simply being those that will come into play some arbitrary time in the future, rather than thinking about innovations that will transform their industry.
While time is one tricky concept to get a handle on when thinking about sustainable innovation, even just defining innovation in a useful way can prove difficult. When you’re taking the long view, new ideas that simply improve the efficiency of the status quo don’t look very innovative, even if they’re in a ‘green’ area. From this perspective, innovation is primarily concerned with game-changing ideas. On the other hand, when you define innovation as only being disruptive ideas, then a huge percentage of firms and people will (rightfully) decide that they are not innovative. This can have drawbacks too. John & I are doing some research projects with a couple of firms that are pretty resource-intensive (carbon-intensive too). These firms often think of themselves as not being innovative at all. The problem with this is that if they don’t think they can innovate, then they don’t have any chance at all to change to more sustainable approaches to their business. So we end up emphasising the importance of the incremental innovations that they regularly execute. It’s only by getting them to see the effectiveness of these small innovations that we can help them see the bigger possibilities that are open to them. So these cases require a much more expansive definition of innovation.
I’m still not sure how to best formulate these ideas about time and sustainability. One of the whole points of blogging about these things is to help sort out what I think. Another is to elicit some feedback. I remain convinced that innovation has to play a central role in moving to more sustainable business models. John Thackara has some interesting ideas along these lines as well. In any case, I need to make some progress in my thinking here, because it’s pretty clear that my cats aren’t going to bring in much revenue with their crazy schemes…
Use and misuse of the three-horizons
Posted by John in innovation, innovation strategy, time on 1 May 2009
About three years ago, Gerald Marion, a friend from the Brisbane office of Deloitte, introduced me to a book called the Alchemy of Growth. This is an interesting book and one of its main ideas is that there are three horizons for developing new business opportunities. Its a reasonably simple idea with Horizon 1 being the current business, Horizon 2 being a related business and Horizon 3 being a completely new business that could disrupt the existing business.
As an example, we can look at a company like Beach Petroleum. For Beach, Horizon 1 is the core assets of oil and gas production in the Cooper Basin in central Australia and the Gippsland Basin off the south-east coast of Australia. Their Horizon 2 play is primarily the coal-seam methane investment in the Surat Basin in that has grown to a point where it is now a business in its own right. Horizon three plays include exploration of potentially huge oilfields in Tanzania and joint ventures in South Australia in geothermal energy. The model is dynamic in the sense that, over time, Horizon 3 becomes Horizon 2 and Horizon 2 becomes Horizon 1. Because competitive advantage in any business is transient, the core of the business needs to be moving into different spaces. This is logical to me and fits with the classical ideas from Edith Penrose on the growth of firms.
I like the model because it says that competition is restless and staying still and being good at what you do must be counterbalanced by trying new businesses out in Horizons 2 and 3. Connecting to some of Tim’s thinking on this blog, it means that you need to be climbing your current Horizon 1 peak but you also need to be thinking about jumps onto the slopes of H2 or H3 peaks. It’s a portfolio management tool like the BCG matrix without the assumptions that make the BCG matrix so risky to use. However, like the BCG matrix it means that firms need to actively manage their portfolio of businesses with the use of organic growth, acquisitions and divestments.
So far so good….. so where does the misuse of the three horizons happen? I think that the problem becomes when the three horizons is used as a conventional planning tool. Going back to the Beach Petroleum example, we could use the three horizons to say that Horizon 1 will last 1-2 years while core business in being driven by the declining Australian oil and gas fields and then Beach will move to Horizon 2 where international oil and gas ventures will be the main earner for the business and then there will be a move into Horizon 3. When Tim and I talk to firms who are using the three-horizons, this is a typical interpretation. The biggest risk is that using the model this way eliminates any consideration of uncertainty. Firms move from H1 to H3 as part of a long term plan. Now, what we know about this type of planning is that it suffers from optimistic assumptions and bounded rationality. Long-term planning fails because of uncertainty. Who could have predicted world events from the past two years? To borrow a phrase, prediction is very difficult, especially when it concerns the future. A 3 horizons model that describes in detail what horizon 3 will look like is deeply flawed. Uncertainty is real and the further we go into the future the more uncertain the world becomes. Uncertainty can come from within the firm in terms of innovations and also beyond the firm from new competitors and operating environments.
I think there is a role for conventional planning processes in horizon one. We can set targets, estimate demand and manage progress. Horizon 3 is not just along the time dimension, it is also along the uncertainty dimension and when there is time and uncertainty together, the best way to approach a business opportunty is like an financial option (or in correct terms, a real option). Taking a stake in a new business and trying something out buys an option in horizon three. If the idea pays off then the option can be “exercised” by moving into horizon two as a fully operating business. If the idea doesn’t pay off then the option can be abandoned. The trouble is that we don’t know in advance what will eventually pay off and what won’t. Taking a conventional analysis and planning approach to horizon 3 will prevent innovation because innovations, by definition, involve taking measured risks to do something that hasn’t been done before.
Going back to the Beach example, geothermal energy is an uncertain and lengthy investment in energy innovation. Beach is reserving the right to play but they certainly don’t see it as a foregone conclusion that they will turn into a geothermal company. If the investment is unsuccessful then that is just another opportunity that can be crossed of the list.
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Tim was named #5 in the Top 40 Innovation Bloggers in 2011 at Innovation Excellence.
Tim and John were both named in the Top 40 Innovation Bloggers in 2010 at Innovation Excellence.
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