John’s post How Accountants Kill Innovation ended up causing a bit of a stir this week. The press release that went with it was pulled from the UQ Business School website complained about it, but the post here got a huge number of reads, and the press release got picked up by BioTechnologyNews.net, where it was popular enough to end up as that site’s story of the week on Industry-News.net. Part of the traffic on the blog here was driven by the 21 tweets that it got (including one from CPA Australia – so accountants nationally are maybe not as thin-skinned as our local faculty).
All of which is interesting from the standpoint of tracking how ideas spread. Idea diffusion is one of the key things we talk about here, but that’s not what I want to talk about today. I’m interested in the analytical aspect of John’s post. He was talking about research findings that show that in Australian Biotechnology firms, using a Real Options valuation approach leads to better innovation results than using Net Present Value to evaluate potential projects. Firms using NPV actually had a negative return to innovation in their study – so the title of the post really should have been How NPV Kills Innovation. But then the idea wouldn’t have spread nearly as well.
The thing that concerns me about the study though is the use of tools in the first place. I recently read Innovation: The Missing Dimension by Richard Lester and Michael Piore. It’s one of the most insightful books that I’ve read in a while, and I recommend it strongly. Lester and Piore are reporting on the results of a massive number of case studies that they conducted in the cell phone, blue jeans and medical devices industries.
Their key finding is that to innovate succesfully, firms need to be good at both analytical and interpretive processes. Real Options and NPV are typical analytical processes that are used to evaluate potential new products. Lester and Piore argue that in addition to these types of tools, firms also need to be able to interpret the needs of their customers (which is essential the argument of Roberto Verganti in Design-Driven Innovation as well). Here’s how they describe it:
Analytical processes work best when alternative outcomes are well understood and can be clearly defined and distinguished from one another. Interpretive processes are more appropriate when the possible outcomes are unknown – when the task is to create those outcomes and determine what their properties actually are. These two ways of proceeding involve very different kinds of skills, different ways of working together, different forms of managerial control and authority, and, ultimately, different ways of thinking about the economy. The two processes are in fundamental opposition to each other, making it difficult for people to think about both of them at the same time. Yet the ability of businesses to think about these two approaches separately and to manage them simultaneously is the central challenge of product development.
That’s the real problem – analytical tools like NPV kill innovation, but we need them (or at least something like them) to innovate. The real achievement of Lester and Piore is to document how we need both analysis and interpretation in a wide variety of industries, and they include some suggestions for doing this successfully. The main one is to be aware of the necessity of both processes and how to use them effectively.
Interpretive processes are most important at the start of developing our new ideas. Design-driven tools are very effective early in the process, and they do lead to finding new competitive spaces. Disruptive innovations are most likely to arise from interpretive processes.
Because interpretation requires ambiguity and extended conversation, the biggest thing that managers need to do is to prevent shutting down discussion too early. This is the tendency in organisations dominated by analysis – they jump to a preferred option far too early.
The time to use analysis is once you have settled on the ideas that are best. This is the time to optimise things.
Innovation is filled with difficult contradictions to manage – incremental versus radical, short-term versus longer term, open models versus closed, and analytical versus interpretive. In most cases, firms need to find a balance between each of these oppositions. It is hard to do this, but the firms that are successful at finding these balances also tend to be the most innovative. And the most profitable.
Nice post Tim. I think it also leads into the discussion of tools versus heuristics. I didn’t get space to talk about it on the post the other day but one of the big contributions of the paper is that it builds constructs called ‘Real Options Reasoning’ and ‘NPV reasoning’ which capture tools and heuristics together. Recent surveys show about 10% of Australian firms formally use RO in a complete technical sense but many firms analyze their projects like a real option more informally. Now that I think of it, analyse is probably the wrong word- construct is probably more accurate. If we did a survey item which said, “do you use real options’ most of our sample wouldn’t know what we were talking about. The paper is actually very sympathetic to Lester and Piore in these sense that biotech firms use both tools and heuristics to make decisions, but some heuristics and tools are more supportive of innovation than others. Perhaps the real value of real options as a heurtstic is that it allows time to experiment and learn rather than analyze and commit. Hmmmm…..
I think that your last point may be exactly correct John – that is what I was thinking as I was reading through the comment.
Tim,
Thanks for this. As I like to say, if we could quantify the “next big thing” it would be the present “big thing..”
– Greg
Very true Greg!
I love your post, Tim. Emergence (of next-level ideas, innovations, paradigms, etc.) happens at the edges of what is known and unknown. The linear-focused, logical analytical is works for what’s known, but the unknown requires interpretive processes, engaging them with the whole-brain “design thinking” and simultaneity, not just left-brain linear, verbal-only interpretation. In doing this work with entrepreneurs and organizations for 16 years, I’ve seen exponential leaps happen consistently by engaging right-brain, non-habitual creative processes in the interpretive stage, shaping and forming the unknown into a new viable structure.
Thanks for stopping by & thanks for the comment Michelle! I took a quick look at your website and it looks like you are doing some great work in this area.
Tim,
interesting post and just like my response to John’s post on Personality and Network , I agree with Lester and Piore. Analytical and Interpretative processes must be employed by innovative companies. Innovation and Design depend on both.
Let me illustrate using a metaphor in Arts/Drawing.
One of the ‘strategies’ for drawing is the use of Positive and Negative space. This simplifies viewing the object by defining the known (positive space) and the unknown (negative space). Sometimes it’s easier to to go one way first – as in drawing an intricate vase (or the human figure/face)- focusing on its silhouette (that which is “outside” of it) helps to define it first. Ultimately, the drawing captures both.
In this sense, I think Analytical and Interpretive processes can go both ways. Analytical processes are sometimes required to identify and narrow down the ‘best options’. And as you mentioned, interpretive processes can precede analysis. I guess if you use just one then innovation is harder, if at all possible.
Lester & Piore certainly argue that you need both for innovation – and that seems right to me too.
It’s really interesting that you bring up the example of negative space – I’ve been wondering if that could be a useful metaphor when thinking about innovation. I’ll have to give that more thought…
Thanks for another insightful comment!
Re: Negative Space and Innovation
If you think of innovation as deviating from that which already is (exists), then you go into that which is not (or could be). I think consideration of negative space is essential for innovation to happen.
Innovation as an act of creating can be viewed as experimenting with the malleability of boundaries – and for me – the most visual representation of that is the notion of positive and negative space.
I look forward to hearing how your thoughts evolve.
I think that’s a very good point Malyn. I’ll definitely give this some more thought. Thanks for the useful idea!