Yesterday I went to a seminar from Bill Eggers, hosted by Deloitte. Bill is a specialist in thinking about governmental reform and the digital economy, but most of his messages about innovation apply to all organizations. It’s been a long time since I took three pages of notes in a seminar so I might do a few different posts on some of Bill’s ideas over the next few weeks.
As you might know from our posts, a lot of the research work that Tim and I do relates to the role of networks in transferring knowledge within organizations. When the right knowledge goes to the right place, the result can be a change of products or processes – in other words, innovation. When we work with larger organizations it becomes apparent that transferring knowledge becomes harder because people start to lose track of who-knows-what and who-knows-who. The result tends to be that these organizations start to face declining returns to scale as learning and innovation become harder.
In Bill’s talk he brings up a slide of declining returns to scale in the Japanese beer industry. This isn’t surprising because we know that all industries work like this. As the industry produces more product over time, it gets harder to find more efficiencies to drive the unit cost down.
Most activities incur declining returns to effort too- even simple tasks like a computer game such as Tetris. As we expend more effort, the marginal improvements we make diminish. Note this this issue of diminishing returns is different from the diminishing returns to organizational size but it relates to my next point.
But while there is a general principle of declining returns to scale and effort, Bill showed a curve generated from the computer game, World of Warcraft, which shows increasing returns to effort and scale. As players put more time into the game, their rate of progress increases rather than decreases. So what is going on here?
I haven’t played World of Warcraft but a big part of it is that it’s a virtual community of gamers. As people get more familiar with the game they become part of the network that enables the exchange of expertise. The bigger the network, the more expertise. This increasing returns phenomenon is a network effect and it is the presence of the network that means WoW players get increasing returns to effort and Tetris players get declining returns.
I think that there is a lot of value in trying to set up these virtual networks to get around the problem of large organizations, and to take advantage of untapped expertise in the population, but I also think that there are going to be some limiting conditions to the effectiveness of these networks.
WoW seems to work well because it is a very focused community with its own language. This means that everyone understands most things that are being talked about. In many organizations that we do our network research on, there are many communities of specializations, which results in a fragmentation of the network.
Another issue is that most of the knowledge involved in WoW is codifiable. We can put the information into words and numbers and the receiver will be able to make sense of it and learn. In organizations, a lot of knowledge is tacit and experiential, which limits what can be achieved in virtual space.
These caveats aside, the prospect of increasing returns to scale through the digital innovations that are being brought into organizations are tantalizing. The “rules” of learning and organization may yet be totally re-written.
John,
I’m not sure about the WoW example. The reason why experience points grow faster probably isn’t because people get better, but because they join clans and stronger clan members help weak ones in order to build up the clan.
– Greg
Hmm, this is interesting, but I’m trying to wrap my head around the graphs — I think the Tetris graph and the WoW are current displaying apples and oranges. One is things learned in the game and one (despite the presence of the word “experience”) is really displaying points, not knowledge.
I suspect that points in Tetris would actually follow a similar curve to the WoW example (more and more points as you develop mastery), although possibly less steep, just as the new-things-to-learn curve in WoW would also diminish over time (although over a much longer period of time than in Tetris).
Part of the challenge of game design is ensuring that there is still something new and novel throughout the game, and exponentially increasing rewards are part of what keeps players engaged.
Thinking about the implications for organizations is interesting – can we actually have a system that provides increasing rewards in a normal organization? One way to do it is to throttle the rewards and access early on, releasing them only when people have earned access (or “leveled up”), but that’s really counter-intuitive (“But this could help them! We don’t want to restrict access!”). Saw some really nice stuff about that in a presentation by Stephen Anderson (start at slide 84 – http://www.slideshare.net/stephenpa/the-art-science-of-seductive-interactions).
Interesting stuff. Thanks for posting – will be thinking on this for a while 🙂
Hi Greg
thanks for the tip on WoW nuances. I’ll interrogate a WoW player to get a better feel for the collaboration dynamics. Probably a PhD student who should be spending more time on the thesis.
John
Hi Julie:
interesting thoughts here. I think experience curves usually measure performance outputs because knowledge is so hard to measure (e.g. the declining cost of producing beer in Japan). The learning is implied rather than measured directly.
Keeping people in engaged in collaboration is a really interesting issue. Tim has blogged before on the ‘gift economy’ where we don’t expect immediate rewards for our contributions. Gift economies are also dependent on networks where contributing to a growing network also means that a gift will come back at some stage. In economic sociology it’s called “generalized exchange” if you want to chase it up. Thanks for link and the comment!
John