Archive for category evolving economic entities
An Innovation Manifesto
Posted by Tim in evolving economic entities, innovation, networks on 28 February 2010
There have been a few before, but here’s another Innovation Manifesto:
- Innovation doesn’t need a manifesto – it needs action.
- We won’t wait for someone to give us permission to innovate- we’ll just try things out.
- Innovations have a life-span – we will try to execute ideas that last, and that make things better.
- Not-Invented-Here is not for here. We will execute the best ideas we can find, regardless of where they came from.
- Innovation is a process of flow – we generate ideas, we select ideas, and we execute ideas. Since the last two are the parts that most people aren’t good at, those are what we’ll concentrate on.
- We will build fast prototypes, and iterate rapidly instead of trying to make things perfect from the start.
- We will find small, inexpensive ways to test our ideas.
- We will learn from the ideas that don’t work.
- We will scale up the ideas that do work.
- Innovation is the best way to enact strategy – we will keep the two aligned.
- Innovation happens in networks – we will understand ours as well as we can, and build them to facilitate innovation.
- Innovation is not invention – we will focus on making ideas work, not just having them.
- New ideas have to become embedded within the economy – we will build new networks for our great ideas, and put them within innovative business models.
- We know that innovation is the best way to keep our jobs interesting – we want to avoid this:
- We will not complain, we will instigate change.
- Our strategy and our brand are built by what we do every day, not by what we say. We will use innovation to build both.
- The purpose of innovation is to help our customers and to make the world a better place. These are our primary evaluation criteria. (from Graham Horton)
- We realize that the approach to innovation depends on the novelty of the idea. (from Ralph Ohr)
- Eliminate habits, that is the beginning of innovation. Both with risk & fun. (from Marion Popiolek)
- We will inspire others and bring them on board because innovation is a team sport. (from Jorge Barba)
So.
Who’s with me? What would you add?
How to Fail at Innovation
Posted by Tim in evolving economic entities, filter, selection on 25 February 2010
The way to fail at innovation is to try to avoid failing.
The idea of failure has popped up quite a bit this week for some reason. Innovation is filled with tensions that we have to become comfortable with if we’re going to succeed. One of the big tensions is between success and failure – when you’re innovating, you can’t have one without the other. In a very interesting post, Arne van Oosterom suggests that this is good argument for emphasising adaptability rather than innovation for many firms, as this eliminates the discomfort caused by the tension between the two.
I am in complete agreement with van Oosterom that adaptability is a desirable trait for organisations to develop. But in doing so, I don’t think we can abandon innovation. I think that we need to develop strategies for dealing with failure.
This was the conclusion reached by both Peter Yates (ex-CEO of PBL, among other things) and Patricia Cross (Non-Executive Director of Wesfarmers and numerous other organisations) in their talks at the Leaders’ Edge Luncheon here in Brisbane on Tuesday. The topic of the talks was ‘Tales from the Corporate Battlefield’ – and it sounds like both of them have been in plenty of battles. And one of the common themes that they touched on is that if you’re doing anything worthwhile, you will experience failures. It’s not fun, it’s not something to be embraced, but it’s inevitable.
This theme was also addressed by Hutch Carpenter in a fantastic post this morning. In making the point that innovative firms will fail, he included this picture:
He includes this quote from Jeffrey Phillips – one of the best innovation bloggers around:
As Edison and countless others have demonstrated, you rarely get it right the first time, and if you are stymied by early failure, then you’ll never find and implement the best ideas. Innovation, as has been pointed out by individuals with far more to say about it than me, will create some failures. Your job isn’t to avoid the failures, since you can’t predict them in advance, but to reduce the cost and impact of the inevitable failures. In other words, keep moving.
So there’s the contradiction that we have to deal with – if we’re going to successfully innovate, we have to fail. The key is to figure out how to do it as cheaply as possible. As I’ve said before, if everything that you try works, then you’re not trying enough things. These contradictions are one of the things that makes managing hard, but it’s also one of the things that makes good managers so valuable. Failing isn’t fun, and it’s natural to try to avoid it. However, it is a necessary element of success.
In other words, the one guaranteed way to fail at innovation is to try to avoid failing.
The Universe, Dark Matter and New Venture Success
Posted by John in connect, evolving economic entities, innovation on 10 February 2010
You have probably heard of the dark matter puzzle in astronomy. I don’t remember that much from the astronomy unit that I took as part of my science degree but dark matter is one of those big questions that just gets undergrad students thinking. Put simply, the universe is really heavy (!) but if we make a best estimate of all the matter that is around in stars, planets and other stuff then we still fall short of accounting for all of the mass by more than 50%. This is not a simple measuring error (it’s very hard to hide half of the universe behind a corner somewhere) and it means that current explanations of the structure of the universe are incomplete.
I’ve just written a conceptual paper with a colleague here at UQ Business School and some friends from the Kelley School of business at Indiana U, which starts with a similar ‘dark matter’ puzzle. Entrepreneurship has become a major area in business schools and the most fundamental question in entrepreneurship research is why do some ventures succeed and some fail? Now, different people have tackled this problem in different ways. Psychologists have tried to describe an entrepreneurial personality that has a greater appetite for risk. There are even twin studies, which show that if your twin is an entrepreneur then you are also more likely to be an entrepreneur. While these studies can identify the characteristics of entrepreneurs, linking psychological traits to new venture success has not provided convincing results.
With complex problems like this, what we usually try to do is build models with a whole range of different factors that might explain success. In addition to psychological factors, we can also add to the model the type of industry, previous new venture experience, team experience, venture capital involvement, just to name a few variables. While research can show that these many of these factors can be correlated with new venture success, even the most comprehensive models can only explain about 20% of success. Just like the dark matter problem in astronomy, using our conventional thinking on new ventures means that 80% of success can’t be explained by established theory.
But maybe we have been looking at the success of new ventures in the wrong way. What if we start thinking about it as a process of building connections and growing a network. Usually when Tim and I talk about networks, we mean contacts between people. Another way of thinking about a business is as a network of all sorts of things including machines, documents, reporting systems, finance, supply and distribution chains and, of course, people as well. An entrepreneur has to build this network AND hold it in place. In other words, the main task of an entrepreneur is as a filterer and connector. Filtering matters because it is about screening opportunities to change and build the network, but the connecting and holding it together is the real work of the entrepreneur. Holding the connections in place is often the biggest test of the new venture. Pulling different technologies together, making them do something different and keeping partners in agreement on the business plan are all examples of where ventures fail because the connections fall apart.
So, how does this help us with the unexplained 80% of new venture success? I think the answer to this lies in thinking about a chess game. A chess board only has 64 squares and 32 pieces but beyond the first handful of moves, virtually every chess game evolves differently. The process of continually forming and adjusting connections means that every new venture has a different pathway and a lot of the opportunities and success depends on being in the right place at the right time. In other words, chance plays a significant role in the success of new ventures. We are never going to be able to build a model of new venture success that explains everything.
Having said that, the real task ahead of us is to research new ventures as dynamic systems that evolve over time. It won’t give us simple answers, but it might give us a better understanding of the wide variety of challenges that these businesses face and from there we may be able to derive some general principles of failure and success.
New Ideas in Old Systems
Posted by Tim in business models, evolving economic entities, networks on 4 February 2010
The fundamental point that I was trying to make in yesterday’s post is that most of us are facing the same innovation problem: it is extremely difficult to get new ideas to spread within most organisations. We are a bit deceived because we hear about innovation at Google, and 3M, and Apple, and we think that all of our organisations should work like that. Unfortunately, most of them don’t. My examples yesterday came from education, and I know that a lot of people in the public sector think that innovation is unusually hard in their organisations. But nearly everyone resists change. Here are some examples.
First off, here’s ex-Pitney Bowes CEO Mike Critelli on how they faced disruptive innovations:
In 1999, two start-up companies challenged us with online postage solutions. My chief operating officer, Marc Breslawsky, and I were in a minority among the senior team in believing that these companies posed no threat to us. Many employees and high-level executives, one or two board members and many shareholders told me that the world had changed and that I was in danger of ignoring potentially disruptive innovation. The reason Marc and I turned out to be right is that we understood that disruptive technologies are successful only when they are superior to the older technology they replace and when they can be marketed profitably. Neither condition was met.
The blog post discusses how Critelli has consistently had a world view that differed from those around him, and how this made it hard for him to get his ideas across. Many of his examples are cases where he was ultimately right – and in particular, I think that his experiences in changing healthcare are admirable. However, in this case, he wasn’t visionary – he was just lucky (be sure to read Mike’s response to this in the comments!).
Those two conditions are not actually required for disruptive innovations to succeed – especially the first one. Those two conditions are what entrenched incumbents always say when they discount the threat that new challengers pose. As the many studies by Clayton Christenson, Scott Anthony and others show, disruptive innovations are usually technologically inferior when they are introduced. This is precisely why the large firms don’t react – because they correctly perceive that their technology is better. The disruptive innovations change by creating a new market based on different business models, and different value networks.
This misperception of the threat posed by new technologies is one of the reasons that it is often very difficult to introduce innovations within established firms. The fact that P-B’s stock price is now 1/3 what it was when those threats appeared in 1999 suggests that a little more innovation would have proven useful for them.
Here’s another example – Kodak. Simon Waldman has a really nice post on some of the issues that Kodak was grappling with around the same time that Pitney Bowes was thinking about online competitors. He says that they didn’t react to the threat posed by digital cameras because:
* They were distracted by a ferocious price war with Fuji in the late 90s
* They were petrified of cannibalising their film business with digital (further compounding the impact of the Fuji price war)
* They massively underestimated how quickly consumers would ditch film
* Decades of comparable success had made them fat and way, way too happy with themselves
A few months ago, I asked this question to my favourite Swedish PhD student, Christian Sandstrom who has made something of a speciality of creating fabulous Slideshare presentations on the changes in the photographic industry. He responded quickly, but I never posted it here. You can see his answer here.
Here’s the quick summary
* Over aggressive diversification left them burdened with debt and in a weak financial state for dealing with the Fuji price war.
* They put too much focus on ‘hybrid’ solutions – using digital as a way to sell print (eg the Photo CD system)
To me, this sounds a whole lot like the problem that George Siemens is describing in education – they were trapped by their underlying beliefs and ideology. Their fundamental belief was that film would retain its dominance. Digital photos were technologically inferior (especially when they were first introduced), so why would anyone switch from film? Digital cameras took the normal route for disruptive innovations – they found a niche that would value their strength – people that wanted to post pictures on the web. They didn’t care about the poor quality – pictures looked lousy on the web back then anyway. And being able to transfer a digital photo straight to your computer was much easier and much faster than taking a picture, getting it developed, and then scanning it.
Like Pitney-Bowes, Kodak didn’t provide a great environment for innovators back then. Change was being fought hard.
Here’s a third example, going on right now – news. Here’s Felix Salmon arguing that the physical system of producing newspapers is one of the things that is making their transition to digital extremely painful:
Spencer Ackerman uncovers a bit of the hidden point here: newspaper conventions have been built for physical newspapers, and can look silly in the age of the web — especially when the stories themselves appear, pretty much unchanged, on newspapers’ websites. It might make sense for the physical LA Times to run one big story about Afghanistan, but once that decision is made, no one is going to chop that one big story into three smaller ones for the website.
Once again, inertia within the existing system makes it highly resistent to change, as we’ve discussed quite a bit here.
I think that the big difference between the public and private sectors in innovation imperatives is not that the private sector has the profit motive, but rather that occasionally private firms go out of business. It’s not Schumpeter’s “carrot of spectacular reward” that motivates innovation, but the “stick of destitution”. Even with this difference, fighting the inertia within established systems is our fundamental problem – no matter which sector we’re in. It’s hard to get new ideas to spread. That’s our challenge. We’ll keep talking about ways to meet it.
Changing the Game for News
Posted by Tim in aggregate, business models, connect, evolving economic entities, filter, innovation strategy on 23 January 2010
A lot of people have been talking recently about a Harris Poll that shows that 77% of people in the US say that they won’t pay for online news. Specifically, this is the question they were asked:
How much, if anything, would you be willing to pay per month to read a daily newspaper’s online content?
And 77% chose the answer “Nothing.” These poll results are absolutely useless – primarily because the question ignores innovation. Here are some things that these results do not say:
- They do not say that information wants to be free.
- They do not say that daily newspaper content has zero value, or value approaching zero.
- They do not say that newspaper readers (or people interested in news in general) are a bunch of freeloaders.
The only thing this polls tells us is that whoever set up the poll is incompetent, and probably shouldn’t be listened to on any further matters of importance. This is fundamentally the wrong question to ask.
If you had asked people in 1980 “How much, if anything, would you be willing to pay per month to watch a television channel’s online content?”, the answer would be “Nothing.” And yet, cable television did reasonably well.
If you had asked people in 1987 “How much, if anything, would you be willing to pay per month to have another phone in addition to the one that you already have? And also, it will have a different number.”, the answer would be “Nothing.” And yet, mobile phones did reasonably well.
Of course people say they’ll pay nothing for news online! What idiot would say that they would? They get it for free already, from a number of good sources. We’ve never really paid for news. Cable TV and mobile phones worked because they offered something fundamentally different from what people already had. Cable didn’t take off until people heard about 24 hour sports on ESPN, and 24 hour news on CNN, and 24 hour music on MTV. Prior to this, you had sports on the weekend, and news at 6 pm and 11 pm, and music, well, never. Cable changed the value proposition.
Mobile phones changed the value proposition too – they allowed you to use the phone anywhere. And eventually, they allowed you to send short text messages. Even still, for me at least, this had negative value until smart phones came along and gave me a portable computer with gps.
And the big problem is that you can’t ask customers what they would want with these things in advance, because we don’t know. You can just experiment. With phones, the telcos always thought that the market was for businesspeople. Initially it was. Once they introduced texting, all of sudden there was a huge market for teens, which drove further innovation.
News has to experiment now, and they need to specifically think about how they create value with Aggregating, Filtering and Connecting. I’ve talked before about many different possible approaches to this. We can develop new funding models, like Jeff Jarvis has. We can develop new value creation models, like Dan Gillmore advocates. We can consciously develop an aggregate, filter and connect model, like politico.com’s or Dan Conover’s.
The main point is that this situation requires business model innovation. To figure out how to do that successfully, we have to ask new questions. We need a news version of cable television. Or a news version of mobile phones. The entire model has to look different. Polls that ask if you’d pay for current content online are not just worthless, they’re harmful, because they prevent us from asking the questions that can lead us to genuine innovation.
The Pace of Economic Evolution
Posted by Tim in evolving economic entities, innovation strategy, time on 11 January 2010
The pace of economic evolution is slow. Shockingly slow. Here are some examples:
The Difference Engine:
Invented: 1823 by Charles Babbage
First Built: 1998 by the London Science Museum
First Sold: Never
Photocopier
Invented & Prototype Built: 1938 by Chester Carlson
First commercial prototype: 1948 by Haloid (who licensed the patent from Carlson)
First Sold: 1949, but only in very small volume until 1959
Computer Mouse
Invented and Demo’d: 1968 by Doug Engelbart
First Commercial Prototype: 1974 by Xerox
First Sold: 1981 with the Xerox Star PC
Revolutionary new ideas seem like they come out of nowhere. However, as these examples show, even in the fast-moving technology world, the pace of this change is pretty slow. Incredibly slow.
This again illustrates the importance of executing ideas. There are enormous differences between having a great idea, and making it into something that actually works. Part of this involves leaping technological hurdles, and part of it involves devising a workable business model.
The delays also reflect the difficulty of diffusing new ideas, even when they are demonstrably better than the ones that they are replacing. Part of this is due to the difficulty of breaking existing connections within value networks, and part of this is due to the natural reluctance that many people have to take up new ideas.
This is true not just of new products, but also of new services and even new ways of doing things. All of these are really embodiments of new ideas. As innovators our number one challenge is to get our ideas to spread. This is true no matter what our role is, no matter what field we’re in.
So the next time you feel discouraged because your ideas aren’t picked up quickly enough, just remember the Difference Engine, the photocopier and the mouse. All great ideas, and all of them took a long time to get executed. We just have to keep at it.
Photos:
Difference Engine: Electronics Weekly
Chester Carlson and his photocopier: Wired
Engelbart’s Mouse: techgossip
Craft or Scale? An Innovation Dilemma
Posted by Tim in evolving economic entities, filter, innovation strategy, time on 8 January 2010
In December of 1992, there were 50 websites on the internet. A year later, when they started building Yahoo, we had jumped to 623. So if you were going to build a search engine, what would be the best way to index things? Actually, at the time there weren’t any search ‘engines’ – we’d go to a search ‘index’ for information about the net. When the numbers were small, it made a lot of sense to build these by hand. People could look at each new site as it was built, and figure out in which categories it best fit. Why would you need an algorithm or an engine to do this? After all, it would take longer to make one than it would to look at everything that was there on the net at the time.
This is what Yahoo’s first home page looked like:
Each of these links (only 32,000!) was categorised by hand – at the time, indexing the internet was a craft. It took skill, some people were better at it than others. When we chose between Yahoo, Lycos or AltaVista, the choice was usually based on which had better people working for it. If one of them had someone that knew more about the area we were interested in, we would get better search results from that index. It was idiosyncratic, and often very frustrating when you tried to find something specific.
A bunch of stuff then happened, the indices added bots to search for new pages automatically, and they started figuring out ways to rank results more effectively. But there was still a significant amount of craft that went into building a search site. Then we had Google, with their algorithms. When I first used Google in 1997 or so, I was amazed at how much better the search results were. I could actually find what I wanted! At scale, Google’s algorithms were much more effective than Yahoo’s craft.
This poses a dilemma for innovators. When we start out with our new idea, first off, we just need to make sure that it works. Usually, this takes craft. The problem is, the methods that we use at the start often lock is in as our market grows. In the face of Google in the late 90s, the original search engines argued that human judgment provided better search results than an algorithm. The problem that they had was this:
Craft worked ok when there were 30,000 pages to index, but it didn’t work so well when there were 30 million. DMOZ tried to crowdsource indexing, and even that couldn’t keep up.
The transitions from markets that reward craft to those that reward scale is difficult to make. This is the point that Geoffrey Moore made in Crossing the Chasm – many innovative new firms fail when they have to make that jump. His book is a good starting point for developing a strategy to scale your new ideas.
A thought that I’ve had recently though is that in markets that reward scale, there are often innovation opportunities within niches for craft. Google search results are still based on popularity, so I think there actually is an opening for expert indexing of topics where popular isn’t necessarily best (you have the chance to be a good filter). When you’re competing against giants, there are bound to be some openings – and finding these are often the way that disruptive innovations start (see the Scott Anthony video here for more on that).
The other interesting thing is that when your big-scale market is eventually replaced by something else, it opens up craft opportunities again. For example, you can still buy buggy whips. Hand-crafted, beautifully made buggy whips. Despite the fact that cars made them obsolete over a century ago.
So there are two main points. First, if you’re bringing an innovation to market, figure out how it will scale. If you don’t, you’re likely to lose out to a fast follower that has. We tend to think that things increase along a straight line, not exponentially. Craft often scales along a straight line, but it doesn’t do very well on an S-Curve (which is what everything actually follows!) Second, if you’re looking to disrupt a scaled market, figure out a way to take advantage of craft. If you can figure out a way to scale craft, then you really have a winner!
Networks for Design Driven Innovation
Posted by Tim in business models, design, evolving economic entities, networks on 3 January 2010
How do we come up with substantially new products, services and ways of doing things? When we are able to do this well, innovation provides our organisations with difficult to replicate competitive advantages. Yesterday, I talked about some of Roberto Verganti’s ideas in this regard in his book Design-Driven Innovation. One of the key points in the book is that breakthrough innovations come from creating a new meaning for your product or service. I interpret this as a form of business model innovation. So how do we create new meanings?
One of Verganti’s ideas that I find very appealing is that doing this combines cultural and technological ideas. He says that one of the ways to do this is to find interpreters – people that are experts in fields (often cultural) outside of your industry. You build alliances with interpreters so that you can collaboratively form new meanings for your products or services. He illustrates this concept like this:
And here is why he says that this creates unique advantages:
Managers tend to be attracted to codified approaches to innovation. They love tools, step-by-step processes, applications, instruments. They implicitly assume that innovatino systems can be bought and replicated at once. Indeed, one reason for the acclaim for user-centered innovation… is that it has been codified and packaged in a form that is digestible to executives. Highly codified approaches, however, have a downside: competitors can easily replicate them.
The relational assets that back design-driven innovation are of a completely different nature. They are embedded not in tools but in relationships among people. Relational assets rest on how one or more people in your organization know the intrpreter… This relational knowledge cannot be codified in address books but rather is tacitly preserved and nurtured by people. Like any form of social capital, it cannot be bought immediately but must be built over time. Such knowledge requires cumulative investments, punctuated by attempts, failures, and successes.
I think that this is correct, and it raises several important points:
- First, it emphasises the critical interplay between culture and technology. We know that innovations are technologies – even new processes can be thought of as technologies according to Brian Arthur. Nevertheless, technologies don’t become innovations until we know what they are for – and this meaning is always cultural. For example, SMS messaging has quite different meanings in Japan, Australia, and South Africa, even though the actual technology is the same in all three cases. Thinking seriously about culture can only make us better innovators.
- Second, the uniqueness and complexity of our collaborative networks is a significant source of competitive advantage. We already know that we can’t build competitive advantage on codified knowledge. Verganti argues that three are relatively small numbers of exceptional interpreters in each of the areas included in his network schematic – so relationships with these interpreters tend to be unique and impossible to replicate. The way that we use our network to construct unique know-how is a great example of tacit knowledge, which we can use to build a competitive advantage.
Finally, Julien Bleecker summarises nicely in his review of the book:
It is not about following trends, but exploring alternative scenarios and materializing designed contexts that are proposals to users — points of entry to quite new experiences, with new meanings
If this is correct, then design-driven innovation is an excellent method for dealing with environmental uncertainty. By assessing a range of unique scenarios, organisations have an opportunity to shape the future, at least a little bit. Which is about all we can ask for, these days. I know that there are some issues with how well research based on Northern Italian firms generalises to the rest of the world – the business ecosystem there is unique. Still, Verganti’s book rings true to me – I think that it is a method that is well worth further exploration.
Ten Great Free e-Books for Innovators
Posted by Tim in book riffs, evolving economic entities, innovation strategy on 25 December 2009
I hope that everyone is having a great holiday season. Whenever I make a new friend, one of the first things I usually do is buy them a book. I’m not exactly sure why – probably because I really value ideas & books, and I want to share them with people that I like. So for all my digital friends here, I thought that since it’s the holidays, I would give you links to a great set of books that are all downloadable for free.
Books to help with Business Model Innovation
One of things that creates opportunities for business model innovation is change in the environment – particularly in technology that creates platforms. The obvious platform technology driving change these days is the internet. I know that tech books tend to age poorly, but there are two that came out at the end of the 90s that I think are still essential reading.
New Rules for the New Economy by Kevin Kelly: This book does a great job of identifying key generic issues about the internet. Kelly was writing about the the technology drivers towards free pricing back in 1997, as well as the importance of managing your business as a network, and even a good description of how fitness landscapes can help you build strategy. If you haven’t read it yet, you should.
The Cluetrain Manifesto by Rick Levine, Christopher Locke, Doc Searles and David Weinberger: Takes a bit more of a marketing angle than New Rules, based around 95 theses for doing business effectively on the web. It starts with ‘Markets are conversations’ and builds from there.
There are some more recent books that also help us figure out how to deal with the changes wrought by the web.
The Wealth of Networks by Yochai Benkler: A more theoretical look at the network economy. Benkler talks about the impact that the web has on the economics of production and innovation, and then looks at the how this is leading to changes in politics and culture.
Networks, Crowds & Markets: Reasoning About a Highly Connected World by David Easley and Jon Kleinberg: Economic value is created through networks. Benkler’s book lays out the case for this idea, and Easley and Kleinberg provide an excellent guide to actually analysing networks. This book is comprehensive and gives you an excellent grounding in social network analysis. The downloadable version is a pre-release copy, so I’m not sure how much longer it will be available.
The Future of the Internet: And How to Stop It by Jonathan Zittrain: An excellent book which contrasts what Zittrain calls the generative web, which enables builders to make new things, and the closed web of proprietary technologies. He describes the main ideas in the book in this very entertaining talk:
Intellectual Property
The Public Domain by James Boyle: Boyle follows on from some of Zittrain’s arguments to address how the current intellectual property regime is broken. Copywrite and patents were designed to encourage the sharing of new ideas, but they are often now being used to prevent the generation of ideas. Boyle talks about how to correct this perverse situation.
Against Intellectual Monopoly by Michele Boldrin and David Levine: Boyle’s approach is from the legal angle, and Boldrin & Levine look at the same issues from more of a game theoretic view. Both are worth reading.
Getting Ideas to Spread
Unleashing the Ideavirus by Seth Godin: Another classic, this time from Seth Godin. The basic thesis is that ideas that spread, win. Godin talks about a number of strategies that we can use to get our ideas to spread quickly and widely. (also check out Godin’s latest project What Matters Now)
Intertwingle by Judy Breck: I actually haven’t read this one yet, so I can’t tell you too much about it. But it has an endorsement from Howard Rheingold, her blog is excellent, and it looks pretty interesting, so I think it’s worth giving it a go.
I suppose there should be some Fiction too
Makers by Cory Doctorow: If you want some fiction about innovation, this is a good one to read. An entire sci-fi book about business model innovation – what could be better?
So there you have it – that ought to be enough to keep you out of trouble this holiday season. And hopefully these will give some great ideas to go out and execute in the new year. Enjoy! If you have any other suggestions, I’d love to hear them.
Tradition is Not a Business Model
Posted by Tim in evolving economic entities, innovation strategy, replication, time on 23 December 2009
I’m currently reading The Nature of Technology by W. Brian Arthur. It’s a fantastic book. This morning I ran across this quote discussing the spread of innovations:
There is another reason the old pricniple persists beyond its time, an economic one. Even if a novel principle is developed and does perform better than the old, adopting it may mean changing surrounding structures and organizations. This is expensive and for that reason may not happen. In 1955 the economist Marvin Frankel wondered why cotton mills in Lancashire did not adopt the more modern efficient machinery of their American counterparts. He found that the new machinery in the English setting would indeed be more economical. But it was heavy, and to install it the Victorian brick structures that housed the old machinery would have to be torn down. The ‘outer’ assemblies or elaborations thus locked in the inner machinery, and the Lancashire mills did not change.
Oh, and, the Lancashire mills went out of business in time as a consequence.
This story made me think of two things. The first is that when you come up with a new idea, it does not spread automatically. Like I said yesterday, you have to fight to get the innovation embedded into the economy. There are always surrounding structures and organisations that will have to change to accomodate an innovation. You can’t just build a better mousetrap – you have to get people to want a better mousetrap too.
The second point is that if you are well established in an industry, and you are surrounded by structures and organisations that lock you in to one way of doing things – you have to be aware of what is going on in the marginal niches. You always have to be asking if we were starting today, would we do this? The worst excuse for doing something is ‘that’s the way we’ve always done it’. When I hear that phrase, my heart always sinks.
Our current structure always constrains what we can do. Even if we are not innovating ourselves, we have to take this into account, and think about what competitors without those same constraints might be able to do. This is hard to do, but responsible managers have to do it.
As the authors of the journalism Internet Manifesto put it – Tradition is Not a Business Model!
(picture from www.historic-uk.com)
Linking Innovation to Strategy, part 3
Posted by Tim in evolving economic entities, innovation strategy, time on 16 December 2009
One of the more alarming aspects of the global financial crisis has been the corresponding downturn in innovation-related spending by firms. Obviously, if you lost your job or your house or your retirement savings this issue doesn’t seem so critical, but I think it is important even so. The reason is that future jobs and future prosperity require innovation efforts right now. One of the big challenges in managing innovation is maintaining a portfolio of innovation efforts that cover everything from incremental to radical innovations. One of the tools that we’ve found very useful in doing this is the three horizons model.
The three horizons model was first published in The Alchemy of Growth by Merhdad Baghai, Stephen Coley, and David White in 1999. The fundamental idea behind the model is that we need to be thinking about innovation across three time frames.
When you innovate using the three horizons framework, the first horizon involves implementing innovations that improve your current operations, horizon two innovations are those that extend your current competencies into new, related markets, and horizon three innovations are the ones that will change the nature of your industry. In general, H1 innovations tend to be incremental, while H3 are more often radical innovations. There are several key ideas that arise when using the three horizons model.
The first is that you must have innovation efforts aimed at all three time horizons. If you only look at the exciting transformative H3 innovations, you’ll lose business to current competitors who are using incremental innovations to improve their operations. Consequently, you might have the best ideas for the future, but you’re no longer around to execute them. On the other hand, if you only focus on H1 incremental innovations that make your current business better, you’ll end up being replaced by organisations that are driving disruptive innovations in your field. Using the three horizons framework helps us balance our innovation efforts between incremental and radical, which is important.
The second issue is that horizon 2 is incredibly difficult to manage. H2 innovations seem very similar to your current products and services, and the overpowering temptation is to use the same metrics to assess their success. However, because these ideas are new, it takes time to get them configured effectively. This means that if you treat H2-oriented innovations just like H1-oriented innovations, you are likely to abandon them too quickly because it will seem like they’re not performing well. You have to figure out a way to ringfence H2 innovation efforts.
The final point is that people often mistake the three horizons model for a planning tool – it isn’t. John and I have talked about this before (here and here, to start with)- this is one of the critical mistakes people make when applying this tool. While the diagram has a scale that says ‘time’, it really means ‘information’. This diagram from a UK Foresight report is useful:
The key issue is the amount of information that we have available to plan for the time horizons. So H3 is not ‘5 years from now’ – it is ‘a time where we don’t really know what will be happening’. For some industries that might be 25 years down the road, like, well, I can’t think of many good examples actually. For others, that time might be right now – the news industry is a good example of this. Turbulence can compress the three horizons so that we’re dealing with all of them at once. When this happens, it is very chaotic and stressful, but it’s also a time of great opportunity.
If you are using a three horizons type approach to innovation, it becomes clear that you need to continue investing in innovative activities across all three time horizons, even if you’re in the middle of a global financial crisis. To do this effectively, you need to have some idea of where you’re heading in the future, and that’s why I think it’s a useful tool for linking innovation to strategy.
Extra resources:
- The first entries in this series: Part 1 – the Strategy Diamond and Part 2 – Business Models.
- Good blog posts on the three horizons model by Andrew Curry and A Thousand Tomorrows.
- An article from the Journal of Future Studies by Andrew Curry and Anthony Hodgson – opens a pdf file.
Lessons from Babbage’s Difference Engine
Posted by Tim in evolving economic entities, innovation on 12 December 2009
Here’s a nice video on Charles Babbage and the Difference Engine:
It’s an example that I use in my classes to illustrate two big points. The first is that invention is not innovation. You don’t have an innovation until you have an idea that is ready to spread, and you can’t have that if you can’t execute your idea at least once.
The second is the fact that it is critical to consider how your new ideas embed themselves within the existing economy. A big part of Babbage’s problem was that manufacturing technology simply wasn’t capable of building his machines until many years later.
It really is possible to be too far ahead of your time. If you are, you can still be a genius like Babbage, but it’s a lot harder to be a successful innovator.
(thanks for profhacker for the original link to the video)
Innovation strategy and the return of the conglomerate
Posted by John in evolving economic entities, innovation, innovation strategy on 3 December 2009
We have been writing a bit about innovation strategy lately. While innovation and strategy are often poorly connected in the literature and in organisations, a real connecting point between the two is taking an evolutionary approach to both. In other words, if we manage both strategy and evolution as evolutionary processes of variation, selection and amplification (Eric Beinhocker’s equivalent word for ‘reproduction’ in the biological model of evolution), then they become very compatible activities. As I have said earlier in a talk to the Brisbane Innovation Network, innovation can become a means for executing strategy as part of a dynamic evolutionary process.
I’ve been thinking more about the consequences of adopting an evolution model for strategy and it has led me to some conclusions about a possible return to the conglomerate business model.
Conglomerates, or highly diversified portfolios of businesses, were once very common in developed economies. GE is probably the world’s best known conglomerate. In Australia, many people would not have heard of Wesfarmers but they own a wide variety of businesses including Coles and Bunnings (retail), insurance, gas distribution and coal mining. Since the Coles acquisition, Wesfarmers has around 90% of its business in retailing and has arguably lost its conglomerate status.
The paradox with Wesfarmers is that the business text books all say that conglomerates are bad and will eventually die out as a relic of bad business practices from the last century. Businesses don’t need to diversify to manage risk because shareholders can do it themselves. What shareholders really want is for businesses to ’stick to the knitting’ and focus on the core competence of the firm. This is an easy mantra to follow until we look at Wesfarmers success as a diversified portfolio of businesses.
A lot of books were written about the mystical powers of Jack Welch during his tenure as GE’s CEO. It’s a pity that there aren’t books written about Michael Chaney, the CEO of Wesfarmers, who outperformed Welch in terms of returns to sahreholders during the 1990s until 2007, when he resigned to become chairman of the National Australia Bank.
Now Wesfarmers success couldn’t just be a result of chance. They actively managed the portfolio and acquired and sold many businesses over a number of decades. Even with the current ructions in the international economy and the difficulties of turning around the Coles business, Wesfarmers still has a 17% annualized total shareholder return over the past 10 years.
So what makes Wesfarmers work? I’ve got to admit to struggling with this question over the past 10 years of using it as a case study in my strategy lectures on business diversification. However, if we look at the Wesfarmers model through the lens of evolution, things start to make sense. Much has been written on Wesfarmers in the Australian business media but I’d like to focus on three activities that were central to their corporate business process.
The first of these is that there was always a large group of analysts in the corporate office looking at new business opportunities. It really didn’t matter what business they were in, as long as it fitted with the goal of providing sustainable returns to shareholders. This is really a process that generates variety in the business – the first step in evolutionary strategy.
Many of the old, failed conglomerates produced variety in the business portfolio, but Wesfarmers is highly disciplined in the selection phase of the evolutionary model. The benchmark for performance was 18% return on capital employed. If the business unit fell to 16% this was cause for remedial action and 14% could signal the divestment of the business. It is probably the adherence to this selection discipline that has set Wesfarmers apart from other conglomerates that have faded into business history. Finally, Wesfarmers would move capital to growing businesses to support expansion (amplification).
Business fashions are like clothing fashions. They come and go, and then come back again. I’m not saying that the conglomerate is about to make a rapid comeback but there is a lot we can learn from Wesfarmers. The dominant logic in business schools is that only the strongest survive and this comes through focus and effort to build on existing strengths. It’s worth quoting Charles Darwin here:
“It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change”
A changing environment demands much from strategy. Out the the top 100 firms publicly listed in the US in 1900, only two continue to survive today. Maybe it’s time to take another look at the conglomerate business model.
Three lessons for adapting to disruptions
Posted by Tim in business models, evolving economic entities on 3 December 2009
How do we fix news? We need an answer because having news reported accurately and quickly is a central part of well-functioning democracy. This makes the problems facing newspapers these critical. Arianna Huffington gave a talk yesterday at the journalism conference put together by the Federal Trade Commission in the US – here is the transcript. She provides a few ideas about how to go about building a better business model for news.
Huffington’s talk split into three parts. In the first, she talked about how the metaphors that people are using for news are all wrong.
So it’s a false metaphor. And if you start from a false premise, you will inevitably be led to a false conclusion. Or, to put it another way, if you chug-a-lug too many of old media’s metaphoric beers, you will end up staggering down the street of illogical thinking and banging into the lamp post of wrong revenue models.
I’ve talked previously about how getting your analogies right can make it easier to figure out how to adapt to disruptive innovations. The big problem here is that people are making analogies for news not to figure out a better business model, but to frame arguments designed to protect their current business models. The first lesson here is that if you have to go to the FTC to lobby for legislation, your business model is well and truly broken.
The second section of the speech discusses how the poor use of analogies has led to poor potential business models. She emphasises the importance of experimenting in this area.
And all across the country, passionate entrepreneurs are doing just that, experimenting with new and creative revenue models. TechDirt.com is monetizing its engaged and highly informed community by turning them into focus-groups-for-hire. ProPublica is using a not-for-profit model to produce impact investigative journalism. And there are many different powerful local journalism models, including Voice of San Diego, which supports its award-winning local journalism with a combination of advertising and public radio-style contributions from foundations and users.
The new paths to success are still being charted — and much remains uncertain. But this much is clear: we can’t use an analog map and expect to find our way in a digital word.
Again, this is something we’ve talked about here. The key to innovation is experimentation. Jeff Jarvis and the CUNY Graduate School of Journalism have put together a list of twenty three ways that news organisations can generate revenue. The way to innovate out of the news business model problem is to experiment, find the things that work, and do more of them. This isn’t a very attractive model if you’re a gigantic oligopolist, so I guess I can see why lobbying the FTC seems like a better idea. Even so, that isn’t going to work. You have to try things.
Huffington concludes by talking about new models for generating news. Again, the key here is experimenting. Different combinations of content will support different revenue generation models. The thing that I particularly like about Huffington’s talk is that she has found a business model that works, but she doesn’t tell everyone that they must follow the same model. This is smart. We need to find multiple business models for news.
So the three lessons here for adapting to disruptive innovations:
- Get your analogies right – finding the right analogy can make it easier to adapt to an uncertain future.
- Experiment! Try different combinations of content and revenue generation, see which ones work, and do more of those things.
- There is not just one right solution – there are likely to be many.
These ideas aren’t just important for journalism, they apply to everyone that is facing a turbulent business environment. And who isn’t these days?
(All of our discussions of news business models are indexed here.)
adapting to disruptive change
Posted by Tim in evolving economic entities, innovation strategy, time on 2 December 2009
Yesterday I wrote about how Western Union decided not to invest in telephone technology back in 1880. After posting, I sent this off over twitter:
An #innovation lesson from the story of Western Union & the telephone http://ow.ly/HBvt
About an hour later, that post got retweeted:
Good story, good lesson: RT @timkastelle: An #innovation lesson from the story of Western Union & the telephone http://ow.ly/HBvt
The author of that tweet? @WesternUnion! And that got me thinking about a couple of things. The first is that even though not investing in telephones back in 1880 probably wasn’t the smartest move, WU is still around, which is actually quite an accomplishment – none of the other 12 companies listed in the first Dow Jones Industrial Average are. How did they manage that?
As my friend Mike pointed out, they got at least a little bit better at forecasting what was coming. Probably more importantly, they have been an innovative firm right from the start. They produced the first stock ticker in 1869, the first consumer charge card in 1914, the first commercial satellite in 1974, and the first disposable prepaid phone card in 1993. One way to respond to disruptive change is to introduce plenty of potentially disruptive ideas yourself.
Another is to figure out ways to reinvent your business model. Western Union went out of the telegraph business in 2006. They’re still around because they are now the dominant firm in international money transfer – something they introduced as a secondary business line back in the 19th century.
This story is interesting. To stick around, you have to be able to adapt to changing environments. Sometimes, you can drive the change yourself, but other times change is thrust upon you. Innovation is essential to dealing with both situations.
The second thing that struck me about that retweet is that it is pretty cool that it happened at all. It means that WU is monitoring twitter, that they have a real person responding to what comes across the line, and that they’re not scared to pass along stories that might not be entirely positive. All of these are things that firms need to be doing these days. The fact that Western Union is on top of this now is encouraging. Maybe it will help them figure out how to deal with the next disruption that they’ll face, like money transfer through mobile phones…
Here’s a nice 5 minute talk from Matt Milan that illustrates some of these points – key quote ‘He who maintains the quickest rate of change survives’:
The New Strategy – Toronto Ignite Version from Matthew Milan on Vimeo.
(Thanks to Jorge Barba for the original link to this video – check out his blog, it’s a good one!)
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