Archive for December, 2010

End of Year Innovation Questions

Posted by Tim in innovation on 24 December 2010

As you may have already guessed, John and I are mentally wiped out right now and are taking a short break from blogging. We’re saving up ideas and posts and will be ready to go again once the new year starts.

In the meantime, here are a few questions to consider. If you’d like to answer them in the comments, it would be fun to have a discussion on these issues:

What’s the most innovative thing you’ve done this year?
What will you do next year to build on this year’s success?
What is your greatest innovation challenge right now?

Here are my answers:

My most innovative idea was The Innovation Matrix.
Over the next twelve months or so I’m going to give serious thought to how to best use The Innovation Matrix within organisations to help them improve innovation. The two key issues here are figuring out metrics that can help scale the two axes, and to work on ways to effectively do research on this idea so that we can provide it with some empirical support.
There are two huge challenges coming up in the near future. The first is to figure out how to scale up all of the research and consulting opportunities that we are generating. John and I are pretty close to the limit of what we’re able to do on our own. We need to figure out some way to add resources.
The second challenge is to figure out a way to communicate more effectively about the issues that we discuss here in blog. This will include publishing some collected pieces as e-books, and we are also looking at other avenues for getting ideas out to people.

We’re curious to hear your thoughts on these questions, along with one more:

What we can here on the blog that will provide you with the most help in improving innovation?

Thanks for all of the help and support that you have given us this year. We hope that everyone has a great holiday season!

4 Comments

Which Ideas Are the Good Ones?

Posted by Tim in innovation on 17 December 2010

The problem is, we can’t usually tell in advance which ideas are good and which aren’t.

The New York Times has just published The 10th Annual Year in Ideas. As part of this, they asked Tyler Cowen to comment on the previous reviews. He noted this quote from the introduction to the piece:

The 2001 issue noted that, in its selection of items, ‘frivolous ideas are given the same prominence as weighty ones’; that is easiest to do when we still don’t know which are which.

The issue here for innovation is that we rarely know which is which. I’m tempted to say never.

One idea that he identifies as oversold was from 2005, which said that the $100 laptops would reduce poverty. They haven’t yet. On the other hand, will the impact of computers in the classroom be felt right away, or will we see the greatest impact in 10 years once the kids that have used them are starting their own businesses?

There are two important innovation lessons here:

First, we don’t know in advance which ideas are the good ones. So we need a system in place for testing them quickly to help figure out which ideas really are frivolous.
Second, innovations often take some time to really show their impact. You have to take this into account when you are trying to manage the innovation process.

6 Comments

Creating Value Through Innovation

Posted by Tim in book riffs, evolving economic entities on 13 December 2010

Who really gets excited about maximizing shareholder value? Or even profits? Is that enough to get you out of bed and in to work every single day? One of the reasons that I got interested in innovation is that it is about making things better – which to me is far more interesting. That’s why when I talk about innovation I define it as “executing new ideas to create value.”

All three parts of that definition are important – you need a genuinely new idea, you have to actually execute it, and it has to create value. The last part can be tricky because value can also be defined in a number of ways. In his upcoming book The New Capitalist Manifesto: Building a Disruptively Better Business, Umair Haque talks about value as something that makes the world a better place. The book is a handbook for building organisations that create precisely that type of value.

Personally, I like that as a goal much better than shareholder value or profits. After all, those are really just scorekeeping methods more than anything.

Haque is trying to provide ideas that don’t just innovate at the margins – he is aiming to trigger behavioural innovation, which is very disruptive indeed.

There are many appealing ideas in the book, which I recommend reading. One that jumped out at me is a story he tells about Google forming a unit called the Data Liberation Front. The objective of this group is to work with all of the Google products so that customers can transfer their data to other applications as easily as possible. In other words, if you do all of your work in Google Docs, and then decide that you want to switch to Microsoft Office, the DLF is trying to make that switch work as smoothly as possible.

How does this make any sense? It works because it requires innovation to create products and services that pull people in – that keep them coming back. Here is a quote from Brian Fitzpatrick, the guy that founded the group:

If we’re locking users in, chances are there’s no sense of urgency to innovate and make products better. What keeps people coming back to search? Is it because they signed a two-year contract? No way! The reason people keep coming is it meets their needs best…

You can think of it as a better, new type of lock-in: lock-in through innovation. Yesterday’s was based on formats or barriers, like frequent flyer programs: the goal was to create a hostage situation.

…

We’re not liberating data out of altruism. We’re doing it because it makes good business sense, because it drives long-term sustainable growth.

Haque then goes on to say:

Listen, though, to Fitz’s final lesson, because he’s saved the best for last: “Disrupt yourself before someone else comes along and does it. Everyone says someone will come along and replace Google. We think it should be Google.” Now that’s the beating heart of a resilient organization.

It’s counterintuitive, but initiatives like the Data Liberation Front are the real lifeblood of Google’s evolutionary edge. Much has been written about Google’s experimental approach: rapid, frequent, always-on “bucket” tests in which a baseline product is compared to versions with minor differences, so the “best” product or service can be discovered. But initiatives like DataLib go deeper: they provide the evolutionary pressure that makes Google keep experimenting in the first place.

Continuous experimentation is a key to innovation success. But this is talking about innovating at a meta-level – creating an environment that both requires and supports experimentation, and consequently, which requires and supports innovation.

The New Capitalist Manifesto is most useful in getting you to think about these types of issues. Haque focuses on how to change our behaviours in ways that create new structures, which is both innovative in itself, but which also help to support innovation.

Many of his points resonate with ideas from The Power of Pull by John Hagel, John Seely Brown and Lang Davison. Haque argues that with the Data Liberation Front, Google is building a strategy based on creating value rather than one based on building barriers to competition. This is definitely a pull strategy – and you can hear that idea in the quotes from Fitzpatrick.

There are significant benefits to using this kind of pull strategy:

As Haque argues, it forces you to innovate continuously to stay ahead.
More importantly, it forces you to innovate so that you create genuine value – you have to create products, services and ideas that attract people, and that materially make their lives better to succeed. This is a risky strategy, because it is hard to do this. But the payoffs are substantial.
Finally, by forcing you to innovate to create genuine value, pull strategies are inherently more sustainable.

Innovate to create genuine value. Making the world a better place is a good reason to innovate. And it is a lot more interesting and rewarding than all those scorekeeping reasons.

5 Comments

The Problem of Filters and Silos

Posted by Tim in book riffs, filter on 11 December 2010

Here is a quote from Why The West Rules – For Now by Ian Morris – explaining some of the issues with the inter-disciplinary approach he has taken in writing the book:

This courts all kinds of dangers (superficiality, disciplinary bias, and just general error). I will never have the same subtle grasp of Chinese culture as someone who has spent a lifetime reading medieval manuscripts, or be as up-to-date on human evolution as a geneticist (I am told that the journal Science updates its website on average every thirteen seconds; while typing this sentence I have probably fallen behind again). But on the otehr hand, those who stay within the boundaries of their own disciplines will never see the big picture.

And therein lies the problem. Science updates every thirteen seconds – it’s impossible to keep up with that much new knowledge. Our only hope is to filter the flow somehow.

One way that we do this is by working in silos – our silo becomes the filter. Everything from outside our area of specialty gets ignored.

This helps with the information overload problem, but it creates a new one. Big ideas come at the edge of specialisations, and, particularly, at the intersections. To come up with big ideas you need to be outside of the core (see this post for some ideas on how to do this).

This is another tension in innovation – the need to be both in the core and at the edge. As usual, the best answer is to change this from an either/or into a both/and.

Both/and solutions are hard to execute. You have to accommodate yourself to conflicting intellectual demands, and you have to be comfortable with a relatively high level of uncertainty. That’s what makes innovation both challenging and rewarding.

(photo from flickr/contemplative imaging under a Creative Commons License)

2 Comments

The Knowledge Economy is the Economy

Posted by Tim in complex systems, evolving economic entities on 10 December 2010

When I started this blogging chapter in an attempt to find the answer to the question in the blog “What does a knowledge economy look like”, I had some half-formed ideas as to where I might go with all this, but nothing to really tie the threads together. I think I do now.

It’s a framing problem.

Here is a framing problem. Which came first, the duck or the rabbit?

Brugger and Brugger (1993) found that children shown the above figure were more likely to see a rabbit if asked on Easter Sunday, while children tested on a Sunday in October tended to see it as a duck (See this for details).

The blogs “The World is Getting More Complex – Or Is It?” and “The World is Changing Too Quickly! 1898 Version” also respond to a framing problem. It is such a truism that the modern world is getting more complex that people tend to take it as their frame and just look for (or assume) confirmation of the belief. For the most part, the idea that it may be questioned in whole or in part is rarely entertained or looked for.

The blog “Common Knowledge” in which I asked “Robinson Crusoe had a simple economy – or did he?” reflects framing problems on two levels. First, economists cannot see a resource allocation problem without framing it in terms of scarcity, and so they typically frame Crusoe’s problems in terms of scarcity, despite his eloquent and detailed protestations that he faced no such problem.

Second, Crusoe’s choices in Mankiw’s example are typical of such exercises in economics textbooks in being framed in terms of activities (providing and consuming goods or services) in which all relevant knowledge was assumed to be in Crusoe’s possession – despite the fact that in the real (that is fictional) Crusoe world he devoted a great deal of his time and resources to knowledge activity.

This in turn lead to the biggest framing issue of all – the disciplinary frame of economics itself as set out in the blog “The Complexity of Economics and the Paradox of Mankiw”. As Mankiw notes “economists … study how people make decisions; how much they work, what they buy, how much they save, and how they invest their decisions” (1998, p.4), with Mankiw describing “parents deciding how to spend their family income. They can buy food, clothing, or a family vacation. Or they can save some of the family income for retirement or the children’s college education” (1998, p.4).

The problem here lies with what we mean by “decision”, which like “innovation” is one of these words in English which can mean many things, including an act or a process. The economics frame of reference typically sees “decision” as an act or choice between competing alternatives. But in reality it can be difficult to fully specify in advance what a meal will taste like, how people will react to your new clothes, what a vacation experience will be like, and what quality of retirement or education your savings will provide. In many of these cases there may be some uncertainty as to the nature, value and or cost. This may involve the individual or household undertaking search, experimentation, review and assessment activities, and this may even continue after the initial purchase has been made. The maintenance of this artificial divide between knowledge and non-knowledge economic activity is reflected in Mankiw’s description of the parents “deciding” in his example

But, in reality in such cases it is decision as a knowledge generating and organizing process that ultimately matters for outcomes and resource costs, and indeed in many cases the actual choice stage may absorb little in the way of resources and time. For example, Hamlet is a play revolving around a decision (“to be or not to be …?”) and the whole of “Hamlet” is based on the decision process here and how its constituents and influences ebb and flow over time – and not just the period of the play, but over time that went before. A conventional economics formulation of this as decision expressed as simple choice between alternatives (once you have the knowledge as to what “be” and “not be” are here) would have led to a very short play and extremely disgruntled audiences.

The point of all this is that process – and the generation and accumulation of knowledge – can be integral aspects of economic behavior even where their presence is either ignored or underemphasized. The problem is that even where the existence of knowledge activities is recognized in economics, the convention – or frame – has been to treat them as residuals or add-ons which can somehow be treated as separable and isolatable from “normal” economic activities, as in Machlup’s early (1962) analysis of the economics of knowledge in the United States which was largely concerned with what he described as the knowledge “industries” of education, R&D, communication and information industries.

At this point the idea of writing this chapter as a series of blogs really comes into its own. After reading my blog on the Paradox of Mankiw, Professor John Foster (Economics, UQ), wrote to me that what he thought was needed was a “‘Principles of Economics, Volume 2’ i.e. the one (Alfred) Marshall never got ’round to writing”.

Now Marshall is widely regarded as the first modern economist who saw that; “knowledge is our most powerful engine of production” (Principles of Economics 4/1/2) and indeed he saw that economics itself “has … as its purpose firstly to acquire knowledge for its own sake” (Principles: 1/4/5). So, suppose we sketch a “Principles of Economics Volume 2” and subtitle it “The Knowledge Economy”; what would such a sketch contain?

“Principles of Economics Volume 2; the Knowledge Economy” would certainly build on aspects relating to knowledge activity such as bounded rationality, transaction costs, behavioral theory, evolutionary processes, complex systems, and the role of institutions. It would cover not just Machlup’s knowledge industries but most of most firms (think design knowledge, legal knowledge, marketing knowledge, etc) and most other institutions in the economy besides. It would cover innovation, hierarchy and organization where a Volume 1 like Mankiw would just cover markets. It would cover networks and alliances and entire firms not usually associated with the knowledge industries, like Nike which is essentially a design and marketing organization. Is this all economics? Well, if economics is about allocation of resources under conditions of scarcity, yes this is all about economics.

And this is where the notion of frame again becomes important. Why should John Foster’s volume be Volume 2? Suppose we switch the frame and call it instead “Principles of Economics Volume 1: the Knowledge Economy”. If we did that and reversed the order, how much of economic matters would be left over for what would be now “Principles of Economics Volume 2: the Bits of The Economy Where Knowledge Activities Are Not An Issue” – in other words, the conventional introductory economics Mankiw-type text?

The answer is, not much. It would be like a one-line Hamlet (“question: to be or not to be? – please delete which not applicable”) without the ambiguity and uncertainty. All the interesting, time consuming and resource-absorbing activities – that is, all the knowledge activities – would have been covered in Volume 1 on the Knowledge Economy. If you really do have enough in terms of quantity and quality of information to maximize your utility or profit (the conventional basic economics Mankiw frame), then the decision (choice) is already made for you, you just feed the information into your cognitive or mechanical calculator, press a synaptic or keyboard button, and watch the answer pop out. The real economy, the one where the actual work is done, the one that absorbs resources, takes time, and has real decisions (not mere choices) is the one that would have been covered in the volume on the Knowledge Economy. In short, once it is seen in its proper frame, the answer to my introductory question in the blog “What Does a Knowledge Economy Look Like?” is quite simple. The knowledge economy looks like the economy. That is because to all intents and purposes it is the economy. It is just a matter of choosing the right frame.

And of course the frame you start with will influence what you see later, which is why well-trained orthodox economists find it difficult to frame resource allocation problems as being about anything other than prices, markets, and decisions expressed as constrained maximization choices. The frame is the real economic problem, as generations of MBAs who get a proselytizing orthodox economist to teach them introductory economics could testify (and to all these MBAs I humbly beg forgiveness on behalf of my profession – sorry MBAs, you were right all the time….)

This has been a great experience and opportunity and I now have to tie these threads into something coherent. My thanks to Tim and John for letting me do all this and to those who have given valuable comments on-blog or off-blog (please keep them coming).

(P.S. if you are interested, some key words to Google here are Kahneman, Tversky – and Nudge)

2 Comments

Are Entrepreneurs Born or Developed?

Posted by John in innovation on 9 December 2010

Entrepreneurship is now a pretty big deal. Business schools all over the world have courses in this area and some even make it their major focus of teaching and research. Governments are also interested in entrepreneurs and routinely ask themselves how they can develop a more entrepreneurial national culture. Many years ago, an economist called Schumpeter recognized that risk taking and trying new technologies and business ideas was essential for economic growth. However, the current fascination with entrepreneurs would have even surprised Schumpeter.

I mainly spend my time working on innovation and strategy but over the years I’ve seen the rise of the entrepreneurship field and kept notes on some ideas that I have found interesting. One of these is the issue of nature versus nurture. In other words, is there an inherent psychological bias that makes an entrepreneur or is it something that can be learned and developed? This question matters because if entrepreneurship is largely psychological then government and business school efforts to increase the number of new ventures through training might have limited effects.

Some research does support the psychological theory of entrepreneurship. I’ve seen research findings that show how the psychology of entrepreneurs and children at risk of dropping out of society are similar in many ways. This makes sense because there are many anecdotal stories about school dropouts who become very successful entrepreneurs. Their school reports will often describe them as backward or lacking in attention. I’ve also seen research from Imperial College London using a study of twins which shows that if you are an entrepreneur than your twin is also more likely to be an entrepreneur. Have a think about the entrepreneurs that you know. Are there some common characteristics? The people I know who fit this category are entrepreneurial in many parts of their life. They enjoy risks and get bored very easily. In several cases, this extends to their romantic life too (but that’s not a story for this blog….).

I think that it’s hard to ‘make’ an entrepreneur. A few seminars or a book is not going to change someone’s psychological perceptions of risk. If someone is going to become an entrepreneur without the psychological profile then I think its going to be the result of a very significant life event. Just recently, ABC television ran a documentary on Frank Lowy, the founder of the Westfield shopping mall business. I’ve always been a fan of Lowy and it’s a case that I use a lot in my courses. What started as a delicatessen on the outskirts of Sydney in the 1950s is now the biggest shopping mall company in the world. He is an innovator and is known for taking calculated risks.

I’m not sure what the psyche of Lowy is and I don’t think he is going to let me do a series of tests on him but there is a good case for the notion of Lowy’s life turning him into an entrepreneur. As a Hungarian Jew, he survived the holocaust (click on the link to the documentary to see the amazing story of how he found out what happened to his father) and then became an elite soldier in the war that formed the state of Israel. After surviving these events, many people are compelled to try to start a new life and every day alive is one more day that they didn’t expect to have. It changes the attitude to risk and how opportunities are considered.

My late grandfather was very much in the Lowy mold. He had fought with the Dutch resistance during the second world war and had lost most of his friends. The remnants of his group left Groningen in the early 1950s and were determined to start all over again. They didn’t really have a plan. One was a professional builder so they though they would give that a try. Canada was an option but they came to Australia where there were three families living in a house on the outskirts of a small town. Eventually the business got going and they went on to build schools, offices and radio stations. I got to know my grandfather well over the years and he was a very cautious man. What turned him into an entrepreneur was the seminal experience of war and hardship, not books and courses. I think he could have benefited from formal business training but that’s not what made him move to the other side of the world and risk everything to start a business.

I watched a debate on television last night about immigration. On one side was the view that refugees are a threat to the economic and social future of the nation. On the other side was the idea that there are many good reasons to increase refugee intake. It seems to me that someone who is going to take a punt on making a new life in a new country is more likely to develop a successful business than someone from a comfortable middle class background. I wonder what Frank Lowy makes of all this?

(photo from flickr/evansville under a Creative Commons License)

7 Comments

Don’t Keep Fighting the Last Battle

Posted by Tim in complex systems on 8 December 2010

I ran across an interesting quote from Will Wilkinson in an article he wrote about wikileaks:

The basic question is not whether we think Julian Assange is a terrorist or a hero. The basic question certainly is not whether we think exposing the chatter of the diplomatic corps helps or hinders their efforts, and whether this is a good or bad thing. To continue to focus on these questions is to miss the forest for the texture of the bark on a single elm. If we take the inevitability of future large leaks for granted, then I think the debate must eventually centre on the things that will determine the supply of leakers and leaks.

For our purposes here, I’m not too interested in whether or not wikileaks is a good thing. The thing that strikes me about that quote, and the broader point that he is making in that post, is that the reaction of governments to wikileaks is almost identical to the most common reaction of incumbents to disruptive innovation: they invest all of their time and energy in fighting a battle that is already irrelevant.

The technology to share documents widely is here now – if something happens to Julian Assange, or if the wikileaks site is shut down by denial of service attacks, that capability remains. Trying to shut down this instance of whistleblowing is like the record companies suing twenty people that have shared files (or 100 or whatever). It doesn’t address the fundamental issue.

When you face a disruptive innovation, the worst thing you can do is try to fight to make sure that the world goes back to the way it used to be. It never does. Overall, this can be either good or bad (see the fights between internet pessimists and optimists, for example).

The thing that you have to do is figure out how to respond to the change. How can you compete in the new landscape?

This is a very difficult question to answer. However, you have to address it – otherwise you’ll keep arming yourself for the last battle, instead of the next one.

6 Comments

The World is Changing Too Quickly! 1898 Version

Posted by Tim in complex systems on 6 December 2010

Note: This is a guest post by Neil Kay. It is part of a chapter that he is writing for a book that I am editing with David Rooney and Greg Hearn called Handbook of the Knowledge Economy, volume 2. We’ll post Neil’s chapter as he writes it over the next few weeks. He explains the overall theme of the chapter here. I’ll do the same with mine, which is seriously overdue too. – Tim

I have a nice addendum for my blog “The World is getting more complex – or is it” Professor John Foster (UQ Economics) sent me some useful comments on my other blog on Mankiw and mentioned Alfred Marshall (widely regarded as the first modern economist) and whose “Principles of Economics” was first published in 1890.

John’s mention of Marshall prompted me to go back to original sources and I found this gem in Marshall which really is an interesting addition to the question of whether the world is more (or less complex) than say 100 years ago:

The conditions of industry change so fast that long experience is in some trades almost a disadvantage, and in many it is of far less value than a quickness in taking hold of new ideas and adapting one’s habits to new conditions. A man is likely to earn less after he is fifty years old than before he is thirty; and the knowledge of this is tempting artisans to follow the example of unskilled labourers, whose natural inclination to marry early has always been encouraged by the desire that their family expenses may begin to fall off before their own wages begin to shrink. (“Principles” VI.XII.38)

That is a remarkable paragraph which raises so many questions when it is set against modern experience (and not just about complexity, but also rate of innovation, distribution of income, demographics, amongst other things) that it is best just to let it percolate.

Mind you, Marshall was not always right, I also found this other gem “Adam Smith was not indeed the only great English economist of his time”. (“Principles” App.B.9)

Indeed (said the Scot through gritted teeth), and Adam Smith was not even an English economist.

6 Comments

Always Push the Edge: Innovation Lessons from Children’s Book Author Graeme Base

Posted by John in innovation on 2 December 2010

Like Tim, I grew up reading a lot of books. However, I just don’t recall the quality and quantity of books that are available for my pre-school age children. Nearly 40 years ago I remember reading a lot of Dr. Seuss but apart from that there wasn’t a lot of literature that I would now make an effort to read to my own children.

Being a children’s author must be a tough job because there seem to be hundreds that are really good. Standing out is from the crowd is difficult indeed and competition is intense.

My favorite author is an Australian by the name of Graeme Base. The signature of his books are the exquisite and detailed drawings but his books have evolved to become much more than the artwork. His first really successful book, ‘Animalia’, was published in 1986 and has sold more than a million copies worldwide. It’s an ABC picture book like many others but the illustrations took more than three years to complete. That might sound very slow, but take a look at one of the pictures and you will start to understand why.

The next book that I bought for the kids was ‘The Waterhole’. It’s a combination of counting, hidden animals and a conservation tale all in one and again, some of the illustrations are breathtaking in their complexity and creativity. Like Animalia, The Waterhole pushed the dimensions of what was possible in a children’s book.

Not everything that Graeme Base does is successful. One book called the “Discovery of Dragons” pushed the edge, but doesn’t quite work. Again, the illustrations are spectacular but the story line has a level of humor that is hard for children to get and it’s told in a series of letters, which is also difficult. Personally, I love the book, but I can’t imagine that it sold very many copies. But this is the thing with Base… I don’t think he sets out to be a commercial success. It’s just not in his mindset and this is what allows him to create books that will given to children in 40 years and beyond. In fact, on his website, Graeme talks about being fired from an advertising agency after management told him that he was ruining the business.

His latest book, The Legend of the Golden Snail was released in October. It’s a morality tale but it also has a very elegant visual puzzle that includes a website. Graeme also has put Animalia into an iPhone ap. I’m pretty sure that that he is starting to think about books beyond ink and pages.

What makes him successful is that he has found something that he is passionate about- not what market research tells him to do. If we really enjoy what we do then pushing the edge becomes part of a journey. Not everything works and some things fail but if we keep learning, there is always the chance that the next work of genius will be just around the corner.