Archive for category time
Business Model Innovation for News
Posted by Tim in business models, innovation strategy, time on 13 March 2010
We’ve talked quite a bit about the situation in which the news industry currently finds itself. It is interesting because it is an industry in the middle of massive disruption, which makes it a great case study. Consequently, lots of other people are talking about it as well.
This week I tweeted abougt two stories on this topic – Marc Andreessen’s interview in which he says that media companies have to “burn the boats” and fully commit to digital, and Hal Varian’s talk urging news organisations to “experiment, experiment, experiment”.
In another of his fine weekly reviews, Mark Coddington summarises this discussion and points to two interesting responses to Andreessen from Alan Mutter and Paul Gillin, who both think that it is a bit too early to burn the boats.
Here are some of the highlights. First off, Andreessen -
[he] was talking about print media such as newspapers and magazines, and his longstanding recommendation that they should shut down their print editions and embrace the Web wholeheartedly. “You gotta burn the boats,” he told me, “you gotta commit.” His point is that if traditional media companies don’t burn their own boats, somebody else will.
Mutter’s response:
some 93% of the industry’s $45 billion in sales were associated with the legacy print product. Even though ad revenues probably fell $10 billion in 2009, print-driven newspaper revenues sill are running at better than $30 billion a year.
It doesn’t take a certifiable Silicon Valley genius to see that no business can walk away from some 90% of its revenue base without imploding.
And then Gillin’s:
In their most recent round of earnings reports, most publishers stated that they are now deriving between 12% and 16% of their revenue from online advertising. Most of them have also not done nearly as much as they can to monetize other sources such as events, transaction fees and value-added and classified advertising. Once publishers reach the threshold of 20% online revenue, they can conceivably shutter their print operations while sustaining the business and the brand. They’re trying to get to that threshold gracefully, though. Lots of money can still be made in print if publishers can manage that asset down steadily while reducing costs in lockstep….
Burning the boats isn’t a wise strategy at the moment. But it’s a good idea to start collecting firewood.
Finally, here’s Varian:
In my view, the best thing that newspapers can do now is experiment, experiment, experiment. There are huge cost savings associated with online news. Roughly 50% of the cost of producing a physical newspaper is in printing and distribution, with only about 15% of total costs being editorial. Newspapers could save a lot of money if the primary access to news was via the internet.
New tablet computers like the Kindle, iPad, and Android devices may encourage people to read online news at home in the comfort of their easy chairs. At Google, we certainly don’t think we have all the solutions, but we are definitely keen on working with the news industry to help it attract bigger audiences and generate more ad revenue. Experiments like Fast Flip, Living Stories and Starred Stories may help pull together the at-work and at-home access to the news. Online news access on handheld device like cell phones and tablets is likely to be quite different from traditional newspapers reading, with much more multimedia content, interactivity and reader involvement. The transition to a fully online news will be difficult, but there’s a good chance that we will emerge with a significantly more compelling user experience.
My opinion is that it’s a diabolically hard problem. I agree with Mutter and Gillin that you simply can’t walk away from more than 90% of your current revenue. The print operations must continue as the news organisations follow Varian’s suggestion to promiscuously experiment – a recommendation that I strongly endorse.
The thing that bothers me about most of this discussion, however, is that the vision is still conservative. There’s no point in simply porting news online. These organisations must be experimenting with finding ways to create entirely new experiences around the news – the game must be fundamentally changed.
That’s what makes me at least partially sympathetic to Andreessen’s argument – the current news organisations have to find a way to psychologically move away from print, and they also have to move away from the idea of recreating newspaper on a website, or a smart phone, or a tablet. That doesn’t cut it. So here is my prescription – and I think that it is generic to all large, entrenched incumbents facing major disruption:
- While maintaining your current core operations, you have to abandon them psychologically. This is what Andreessen is getting at – full commitment to the new model requires no safety net, at least in his view. I’m not sure this is entirely true. The main point is that one way or another, you have to come to grips with the idea that your core operations are on a death watch.
- The second step is that you need to follow Varian’s advice and start experimenting. Try it all – big bets small bets, and everything in between. Prototype rapidly, get your new ideas out there, get feedback, and iterate. I believe that the future of news will look nothing like a newspaper that just happens to be online. I don’t know what it will look like, and the key point is that no one else does either. That’s why the rapid prototyping approach is great – it gives you a chance to shape the new future.
- Forget focus groups or consumer feedback. In saying this, I’m certainly not saying ignore the customer. However, they don’t have any more of an idea of how they’ll use new technologies than anyone else does right now. It’s smarter to figure out what jobs they are trying to get done. That will help you figure out which experiments are the most promising to prototype.
- The last suggestion is the tough one – in all turf wars between the current way of doing things and the experiments, you must support the experiments. You have to be willing to cannibalise your current strengths. Remember, your current model is dead, even though it’s still operating. Consequently, the way we’ve always done things can not be allowed to interfere with trying to make the new way of doing things. Arguments like “we’ve always done it this way” and “but that will take away revenue from our cash cows” represent capitulation and defeat. Ignore them.
These ideas are fairly easy to type, and a whole lot harder to execute. However, if you’re facing disruption, it’s your only choice. Try everything you can think of, see what works, do more of that, and learn from what doesn’t work. That’s the algorithm for business model innovation, and implementing it gives you your best chance at surviving the disruption.
The Economy is a Network
Posted by Tim in complex systems, connect, networks, time on 9 March 2010
The word “network” causes a lot of the same problems that “innovation” does – it is used in so many different ways that it is often hard to tell exactly what the user means, it’s in fashion to the point of sounding like hype, and as a consequence a lot of people are ready to stop using it altogether. So when I say that “the economy is a network” it can cause some confusion. Do I mean it is like a network? That is has network-like properties? That it’s something between a hierarchy and a market?
No. I mean that the economy is a network – and that the best way to analyse it as a network. In network analysis, a network consists of nodes (people, firms, countries and so on) and the connections between them (economic exchange, friendship, family relationships, disease vectors and so on). An economic network then is one where people are the nodes, and the economic relationships form the connections between them.
Thinking about economics in this way leads to some useful insights. I was reminded of this when I read Umair Haque’s latest post today – The Real Roots of Recovery. Here is how he sets up the problem that he’s trying to address:
What is an economy? Is it just rivers of money and stuff, flowing back and forth between consumer and producer, resting on a bed of information? That’s more or less the way we’ve conceptualized it. It’s why economists often say that banks and funds make up the “financial economy,” while industries that make stuff are the “real economy.”
When we conceptualize an economy that way, the implicit goal for both “producers” and “consumers” is merely accumulation of money and stuff. More, more, more. That’s what I call a “thin” economy. That kind of economy is thin in three ways: it’s brittle, easily broken; it’s fragile, crisis-prone; and it’s as shallow as Paris Hilton.
His suggestion is that to make a stronger economy, a “thick” economy, we need to focus on making real connections with others.
Yet even that’s just a beginning. The economy is “constructed” by us: built anew every second of every day by each of our billions of tiny decisions, emergently. The real change begins with each of us, and the choices we make.
This is a network story! The issue with networks is that ties are expensive to maintain. If we think about economic ties, the involve money, attention, time and care. My read of Haque’s argument is that we tend to only think of the ties in terms of exchange. In this view, we choose to buy a loaf of bread, we pay for it, and that’s that. That’s thin. A thick network tie will consider attention, time and trust as well.
What does this mean in practical terms? If we think of our economic relationships as network ties, then the idea that every transaction is a one-off makes no sense at all. Each time we need something, we have to figure out who is cheapest, where they are, and how to make that transaction. On the other hand, if we think of economic relationships as network ties, as something that persists – we value them differently. Now trust becomes more important, as does attention. We want ties that we don’t have to worry about because we know what we’re getting. We want a stable, persistent network. The way to get that is to build relationships with the people in our personal economy. We don’t have to recreate a whole new network each time we need something.
Viewing the economy this way also changes where we want to be in the economy. Take a look at this network diagram from Valdis Krebs:
The people that I’ve circled are those with high betweenness centrality (learn about that here). In an exchange economy, those are great positions to be in because you can take advantage of your position in between two big clusters. Any goods or information that has to pass between the two groups has to go through you, and this is profitable. However, this also leads to a brittle network. If you lose the people with high betweenness, the network breaks down as the groups become isolated.
If you take a network view of the economy, you become worried about the overall structure of the network. You build links between people so that there is redundancy in the network (network weaving!). This is the strategy that O’Reilly Media has used very successfully. In a network economy, we try to build up the structure of the network to increase resiliance.
Finally, thinking about the economy as a network helps with innovation. In an exchange economy, you just have to get your new ideas out there. If they are better, people will buy from you. Everyone that has ever tried to get a new idea to spread knows that it’s not this easy. We have to get people to disconnect from whatever ideas they’re currently using and adopt ours. If we think of the economy as a network, this process makes sense. Our innovative ideas (new products, newservices or new ways of doing things) have to build new connections. Often this means that we need people to break old connections. This is the central problem in idea diffusion.
The economy is a network. Think about it this way and suddenly we move beyond transactions. The nature of the economic ties between us becomes much more important. These ties involve money, time, attention and trust. If we pay attention to these four things as we build up our economic network, we’ll start building a thicker, more resilient economy.
Why Your Great Idea Will Fail
There are a few reasons why your great idea will fail. The main one is that it will fail because it isn’t executed, or it isn’t execute well. We’ve talked about the problems with focusing just on ideas many times before. Last week I read an outstanding post by Matt Perez and realised why this is a problem. Here is one of the key parts from Matt’s post:
As I’ve been saying in several posts, I think it is obvious by now that more and more the future will be dominated by companies that can keep up a consistent stream of innovation. Given the system today, patents are a necessary evil for some industries, but woe to those who focus solely on protecting their one (and only) brilliant idea. Better to spend money and effort in creating and sustaining a culture (and processes and metrics) that makes innovation possible, even disruptive innovations.
As I read this, I realised that the issues with ideas and innovation are a stock and flow problem. When we focus just on compiling ideas, we are working on increasing our stock of ideas. Often, when we do this, we think that more ideas are better.
The problem is that better ideas are better, not more ideas. In order for this to make sense, we need to think about the flow of ideas. This is why I think that Matt’s point about the importance of having an innovation culture and process is so critical. We need to be able to translate ideas into action. That is why tools like the Innovation Value Chain are so effective. It’s not that the model is perfect, or the only tool to use. But it works because it gives us a feel for the way that we process ideas – we need to generate good ones, we need to select the most promising ones to try out, and we need to get our great ideas to spread. We miss a lot of these critical steps if we only focus on building our stock of ideas.
In arguing this point, it is easy to discount idea generation too much. As Harold Jarche points out, we need both stock and flow to make things work. But the most common mistake when firms try to become more innovative is to focus entirely on building their stock of ideas, which is why I think it’s important to emphasise the importance of building a process that facilitates idea flow.
Hugh MacLeod makes this point in a different way in his post today:
Products are idea amplifiers. The molecules and/or bytes are secondary.
This gets at the importance of the last part of the Innovation Value Chain – getting ideas to spread. And it also illustrates the importance of good quality ideas – if everything that we are trying to sell is based on ideas, then quality is clearly important. But at the same time, we have to execute them, and we have to get them so spread.
So your great idea will fail if it is only part of an idea stock. If it’s your one great idea, that you hang onto no matter what, the odds of succeeding are low. On the other hand, if your great idea goes into an idea flow process, then your chances are better. We need “consistent streams of innovation” to win – and for that, we need to concentrate on improving our idea flows, not just increasing our stocks.
(Photo from The Stock Solution Photo Agency under a Creative Commons license, and the cartoon is the latest from Hugh MacLeod’s daily newsletter, which you should subscribe to)
Innovation for the Long Term
Posted by Tim in innovation strategy, time on 9 February 2010
We had some rain here over the weekend. Here is what was reported in yesterday’s Australian Financial Review (emphasis added):
Heavy rains fell across NSW and south-east Queensland over the weekend, which flooded homes and roads, brought down trees and caused motor accidents. But in good news for Sydney, 115 millimetres of rain fell across the Warragamba catchment which could result in dam levels rising over the coming days. The rainfall is ill-timed for the NSW government as it coincides with the switching-on of a $2 billion desalination plant, which will run regardless of dam levels for the next two years as it undergoes engineering testing. Nevertheless, dam levels remain at 50 per cent of capacity and this is the first significant rainfall over the Sydney catchment since mid-2007…
I am still astonished by the logic in the part that I highlighted. It is basically saying this: Australia has been in a country-wide drought for 7 of the past 8 years; Sydney hasn’t had any significant rain in 2.5 years; the dams have fallen below 50%; but the $2 billion investment in a desalination plant might look bad because it rained over the weekend. This is lunacy.
The desal plant may or may not be a good idea. Whether it is or not will depend on a number of factors – projected rainfall over the coming years, projected population trends for the Sydney region, and trends in water use/conservation. Many of the assumptions that underpin a model of the impact of a plant will be debatable. Nevertheless, there is simply no way to judge the wisdom of a $2 billion investment based on whether it rained this week or not. This is the worst kind of short-term thinking.
We see the same thing happen in business here. Every time there is a down-turn in the price of iron, multiple mining projects are put on hold. To me, this doesn’t make much more sense than judging the merits of a desal plant based on last week’s rainfall. According to some talks I’ve had with folks in mining, the thing that is happening here is that their due diligence systems require them to calculate the net present value of projects based on current prices. So when prices are high, they build like crazy, and when prices drop, everything stops. It seems to me we’d be better off looking at expected long term prices of whatever they’re digging. But then, the miners are all making a ton more money than me, so maybe I’m missing something…
This is also an innovation problem. When the global financial crisis hit at the end of 2008, investment in innovation fell through the floor through pretty much all of 2009. This is, again, crazy – for a couple of reasons. Tom Fishburne illustrates the first reason perfectly (his cartoons are great, and you should check out his site):
He’s drawn it exactly the way that I talk about it in classes – you can’t just turn innovation on and off like a faucet. Innovation takes time, and it needs a process. Short-term thinking combined with NPV hurdles for new ideas is one of the best possible way to ensure that you will never come up with an innovative idea again.
The second reason that it is crazy is that we know that the best way to manage innovation is through the use of some kind of portfolio process. This mixes small bets with big ones, and it is the best way to make sure that we have a constant flow of good new executed ideas. One tool that is very useful for this is the Three Horizons model.
We have talked about this a few times – the very short description is that 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.
When we shut off innovation in a downturn, it is usually the longer-term innovation projects that get killed. These are the ones that will ensure that we are still in business in five years, or in ten. It is absolutely critical that we consistently innovate across all three time horizons. Unless our very survival is under threat right now, we can’t afford to stop investment in innovation. Even if it did rain over the weekend.
(Storm photo by flickr/Richard.Fisher under a Creative Commons license)
Grit versus Intelligence in Innovation
Posted by Tim in book riffs, innovation strategy, time on 6 February 2010
When I was younger, I placed a high value on intelligence. It made sense, since I was reasonably smart. However, it wasn’t until I added some grit that I started to really get things done. Up until my university years, most things came pretty easily to me. I was fortunate in that I was able to concentrate and learn a lot about things that interested me, so almost by accident there were some things that I ended up building some skills in. But it wasn’t until university that I started having to make the conscious decision to work harder, and do things that weren’t immediately fun if I wanted to get anywhere.
The summer after my first year, I got a job as a floor hand in a feed mill. It was really hard work. For the first couple of weeks, I could barely drag myself home at the end of each day – I felt broken. At the end of those two weeks, my boss Doug called me and the other new floor hand in, and chewed us out pretty comprehensively. The basic message was that we had to work a whole lot harder, or he’d get rid of us.
My first impulse was to tell him to screw himself. I was working harder than I ever had before – I had no idea even where to begin. I went home and talked about it with my Dad. He agreed with me that it didn’t seem fair. But then I started thinking about what it would mean if I quit. What if I didn’t find another job? I had to make money over the summer as part of my scholarship arrangements. After a lot of thought, I went in the next morning and asked Doug for some specific suggestions that I could follow to get better. He gave some, and I discovered that I could indeed work harder than I had been.
That’s when I got some grit. It still took a long time for me to get better at digging in and working at things, but I’m getting there, slowly.
I bring this up because Julien Smith highlighted an excellent article yesterday by Jonah Lehrer in the Boston Globe on the issue of grit versus intelligence. Lehrer starts by discussing a stream of research from psychologists that has shown in many cases, grit accounts for success more than intelligence does. It starts by talking about the story of Isaac Newton and the falling apple:
There is something appealing about such narratives. They reduce the scientific process to a sudden epiphany: There is no sweat or toil, just a new idea, produced by a genius. Everybody knows that things fall – it took Newton to explain why.
Unfortunately, the story of the apple is almost certainly false; Voltaire probably made it up. Even if Newton started thinking about gravity in 1666, it took him years of painstaking work before he understood it. He filled entire vellum notebooks with his scribbles and spent weeks recording the exact movements of a pendulum. (It made, on average, 1,512 ticks per hour.) The discovery of gravity, in other words, wasn’t a flash of insight – it required decades of effort, which is one of the reasons Newton didn’t publish his theory until 1687, in the “Principia.”
I think that this is a critical issue for innovation. We’ve talked a lot about the gaps that are common between inventing something and the idea actually getting embedded in the economy – there are several examples here, and a discussion of Edison and the light bulb also illustrates the point. Randy Haykin talks about another great example by showing how many of the features in the new iPad from Apple originated in the Navigator – a prototype the firm made in 1987.
You have to have intelligence to come up with these great ideas, but you have to have grit to get them to spread. It’s not an either or situation – one way or another, you need both. As Lehrer says, the genius idea is attractive, because it doesn’t require nearly as much effort. But the simple fact of the matter is that to successfully innovate, we need perseverance. Execution is at least as important as ideas, probably more so.
That’s why I think that Ignore Everybody and 39 Other Keys to Creativity by Hugh MacLeod is one of the best innovation books I’ve ever read. He talks about creativity not as inspiration, but as hard work. Here’s an excerpt from one of his 39 other keys ‘Dying Young is Overrated’:
But the kid thinks it’s all about talent; he thinks it’s all about ‘potential’. He underestimates how much time, discipline and stamina also play their part. Sure, there are exceptions. But that is why we like their stories when we’re young. Because they are exceptional stories. And every kid with a guitar or a pen or a paintbrush or an idea for a new business wants to be exceptional. Every kid underestimates his competition, and overestimates his chances. Every kid is a sucker for the idea that there’s a way to make it without having to do the actual hard work.
So the bars of West Hollywood and New York are awash with people throwing their lives away in the desperate hope of finding a shortcut, any shortcut. And a lot of them aren’t even young anymore; their B-plans having been washed away by Vodka & Tonics years ago.
Meanwhile their competition is at home, working their asses off.
Innovation is not about having great ideas. It is about having great ideas, and getting them to spread. You need both grit and intelligence to do this. If you need some more grit, I can put in a good word for you with Doug at the feed mill…
(Feed mill picture (not the one I worked at!) from flickr/rverspirit under a Creative Commons license)
Innovations That Last
Posted by Tim in design, innovation strategy, time on 2 February 2010
Here’s another video:
Innovations that Last from Tim Kastelle on Vimeo.
Here’s the brief summary:
Today I wore to work a shirt that I bought in 1994. I’ve worn it a whole lot in the time since I bought it. It was made by Timberland, and it’s a well-made shirt that is still in pretty good shape. Since I bought it, Timberland has become more interested in making shirts that give the appearance of ruggedness rather than providing actual ruggedness. So there are no 16 year shirts for sale from Timberland now.
The shirt contrasts with two pretty cool gadgets I’ve got on my key ring – one is a little pocket knife that folds up and looks like a key, the other is a usb stick that looks like a key. Both are pretty flashy, and it is very convenient to have with me all the time with my keys. However, both have fatal flaws – every time I use the bottle opener on the knife, I cut my fingers, and the usb stick comes with a cap that covers the contacts, which just will not stay on the stick. Now the cap is lost, and if I don’t do something, the contacts will get scraped, and the stick will become unusable.
The shirts and boots that Timberland is making now, and the knife and the usb stick are all examples of poor strategy for the 21st century. They look flashy and they seem innovative, but they’re not built to meet real needs, and they’re not built to last.
I think that we have to focus our innovation efforts on ideas that are more durable. We have to come up with products and services that are sustainable. We have to make shirts that will last 20 years – I know we have the technology for it! We have to make usb sticks that are convenient, but which don’t come with built-in features that will trash them in a short period of time.
In other words, we have to make sure that our innovations take time into account. Whether we know it or not, all innovations have a life span – the way to make them live a long time is to make sure they meet real needs sustainably.
I Have No Idea How the iPad Will Do!
Posted by Tim in business models, innovation strategy, networks, time on 31 January 2010
With all the feverish discussion and prognostication about Apple’s preview of the iPad, I want to be the first person online to make this prediction:
I have absolutely no idea how the iPad will perform.
I’ll go one step further – neither does anyone else. The benefit of making predictions right now is that if you happen to end up being right, you can link back to your post in a few years. If you’re wrong, well, who reads blog posts that are a few years old?
One line of argument that I find really interesting, though, is being taken by people who are arguing that the iPad will revolutionise… something. The argument is by analogy – and what a lot of people are saying in response to critics of the iPad is that people hated the iPod and the iPhone when they were released as well. In particular, the initial response to the iPod introduction was pretty universally tepid.
Garry Tan from Posterous has collected a few of these, and this one pretty well sums them up:
I still can’t believe this! All this hype for something so ridiculous! Who cares about an MP3 player? I want something new! I want them to think differently! Why oh why would they do this?! It’s so wrong! It’s so stupid!
Haha! It wasn’t Apple that was stupid – they were stupid! Right?
Well, maybe. It’s easy now to look at the iPod’s 70%+ market share and wonder how anyone could have missed that it was a game-changing innovation. I’ll tell you how. The fact of the matter is that all the people that were skeptical about the iPod as a product innovation when it was introduced were actually completely correct. There wasn’t much there. Take a look at the iPod sales figures from wikipedia:
The first iPod was introduced at the end of 2001, and you can see that sales figures for the first three years were not good at all. By the middle of 2004, the iPod’s market share had been sitting in the 20-30% range for a while. By the end of 2005, that had shot up to over 70%. What happened?
iTunes happened.
Because the iPod and iTunes are so closely interconnected now, it is easy to forget that iTunes didn’t exist for the first years of the iPod. At the time, the iPod was just another mp3 player. The innovation with the iPod was not in the product – it was the innovation in the product’s value network. It was a similar story with the iPhone. And that is why nearly everyone that is yapping about iPad right now is completely missing the point. Because we don’t know what it’s value network is going to look like yet, and this is what will actually determine whether the iPad will take off quickly like the iPhone did, or slowly like the iPod.
Even when you make great products like Apple, your innovations never stand alone. They work within the context of their economic network. The better you understand this, and the more innovative you are in constructing your value networks, the more successful you’re likely to be.
So the next time someone talks to about all the great new features something has, ignore them. Instead, think about the business model and the value network that will support the great new thing.
Low Tech Networks
Everything is different now that we’re all knowledge workers, right? The digital world has changed everything… hive mind… singularity… chaos! change! panic! PANIC!
Maybe. Maybe not.
Yesterday I talked about the risks and rewards of low-tech innovation – if we re-think the most basic parts of our value networks, the parts that we take for granted, we can find great opportunities. Then today I read this in Shop Class as Soulcraft by Matthew B. Crawford discussing motorcycle repair (emphasis mine):
You also develop a library of sounds and smells and feels. For example, the backfire of a too-lean fuel mixture is subtly different from an ignition backfire. If the motorcycle is thirty years old, from an obscure maker that went out of business twenty years ago, its proclivities are known mostly through lore. It would probably be impossible to do such work in isolation, without access to a collective historical memory; you have to be embedded in a community of mechanic-antiquarians.
In all this talk of digital transformations, it is easy to forget that we are talking about systems and processes that have been around for a long time. A lot of the digital things that seem new to us now are simply new in digital form, not in general.
Crawford’s example shows how no matter how low- or high-tech our profession, we still depend on our network for storing, filtering and finding information – the extended brain works in all fields. And it is this network that creates value, that generates ideas, that innovates.
All of our economic and intellectual activity takes place within networks. The ones in which we’re embedded play a substantial role in what we are able to accomplish as individuals. It doesn’t matter if we’re twittering, developing a scientific theory in the 19th century, fixing motorcycles, writing a PhD, figuring out a new way to our job, or just thinking about something. Our networks help us create ideas, and they help us spread those ideas. They even help us craft those ideas. The better we know our networks, the more effective our ideas will be. That’s how we deal with the challenges of the digital age – through our networks.
(photo from flickr/zen under a Creative Commons license)
Behavioural Innovation
Posted by Tim in innovation strategy, time on 24 January 2010
I’ve been reading a lot of things from Umair Haque recently, and there he has some ideas that are definitely worth exploring. This is a talk that he gave last year which outlines several of his major themes. It is 20 minutes long, and well worth the time:
Umair Haque at BRITE ‘09 conference from Center Global Brand Leadership on Vimeo.
Haque emphasises the importance of creating thick value. Thick value comes from innovations that have authenticity (they create genuine value for people), and that are also sustainable. Here is an example of thin value – in 2007, Comcast increased revenues by 12%, net income by 175%, and their stock price increased by 50%. While all this was happening, customer satisfaction – already among the lowest in an industry not noted for customer service in the first place – fell by 7%. These kinds of numbers are not sustainable.
To create thick value, he says that we need to focus on Behavioural Innovation, which he places at the top of a ladder going from technological innovation through process, product & service, business model and institutional innovation.
What he means by behavioural innovation is reconceiving the costs and benefits that we are responding to when we innovate and interact with our customers and partners. This creates a framework we can use to move beyond only responding to profit opportunities, or to game-theoretic competition. In some ways this approach is similar to triple-bottom-line methods – it involves taking into account the long-term needs of our partners, taking care of the resources that go into creating our products and services, and demonstrating genuine leadership. The result of this is building value that lasts. In the Comcast example, it means starting by using the customer satisfaction numbers as the target that you are managing, not the stock price. At least for starters…
So what does this mean in practical terms? There are some clues in some of Haque’s earlier work. He has several substantial resources available for free from his website bubblegeneration.com. His 2004 piece, The New Economics of Media is a 107 slide powerpoint presentation, which is essentially a free e-book. Like the talk, it is well worth reading, and thinking about. It is one of the sharpest analyses of the economics underlying some of the recent issues that have occurred across the music, news and publishing industries. In this he argues that the blockbuster model of creating content creates thin value, because there is very little financial motivation to improve quality.
Instead, he recommends creating micromedia. This is content that is tailored to the specific needs of smaller groups of people. This takes advantage of the fact that media are actually consumed in a networked manner – our media consumption is complementary. I don’t just read and think about things in a vacuum. I write about the things that are interesting, and link to them here in the blog, I tweet about them, I cite them in articles – I basically spend a lot of time trying to help ideas to spread. I also use these ideas to help build my own ideas, so that they’ll spread too.
As everyone follows similar paths, we influence each other. This creates snowball effects, and increasing returns. If we follow this model, the motivation for increasing quality is actually very high – because the better we are at connecting up the ideas that we run across, the better our own ideas will be, and the more likely they’ll be to spread.
I’m obviously oversimplifying a very sophisticated argument for the sake of brevity. But I think that there are a couple of critical points here as we extend this approach beyond media. One is that when we are innovating (creating new connections), we need to take time into account. Is our innovation sustainable? The second point is that we need to adopt business models that create genuine, lasting value for our economic partners. This requires us to change the way we think about costs and benefits. It requires behavioural innovation.
Yet Another Example of Why Inventions and Innovations are Different
Posted by John in innovation, time on 23 January 2010
One of my secret pleasures is Ken Burns documentaries. Ever since I saw his breakthrough work on the American Civil War about 20 years ago I have been mesmerized by his careful and beautiful use of images, narrative, music and cinematography (another innovation). It doesn’t really matter what the topic is… the Lewis and Clark expedition, Jazz or even something I don’t even care about that much like Baseball, if I get to watch 10 minutes of the first episode then I am hooked for the rest of the series.
The ABC are currently screening a Ken Burns documentary titled “National Parks: America’s Best Idea”. Once again, its a stunningly beautiful film that makes me consider upgrading to high definition TV. While the title says that national parks are an idea (invention), it becomes very clear through the stories of different parks that they are better described as innovations.
In most cases they begin as an idea in the head of an inspired individual but as we’ve said many times on this blog, ideas are not the problem. In almost every case the process of creating a national park involves building a coalition of supporters and users to redefine the value of wilderness. In some instances, such as Yosemite, the originator of the idea never lived to see the park’s creation. Even the awesome Grand Canyon national park was a struggle to overcome the plans by an Arizona senator to turn it into a hydro electric scheme.
Innovation is hard and ideas can be just the beginning of a long journey.
Cumulative Disruption
Posted by Tim in innovation, innovation strategy, time on 15 January 2010
If anyone ever asks you why innovation is important, consider this:
| Year | Technology | Lighting Efficiency |
|---|---|---|
| 1750 B.C. | Oil Lamp | 17.5 (lumen hours per BTU) |
| A.D. 1800 | Tallow Candle | 22.2 |
| 1815 | Whale-oil Lamp | 39.4 |
| 1875 | Kerosene Lamp | 46.6 |
| 1883 | Electric Light, Carbon Filament | 762.0 |
| 1920 | Electric Light, Tungsten Filament | 3,463.7 |
| 1992 | Compact Flourescent Bulb | 20,111.1 |
The data are from a paper by William Norhaus (you can get a pdf version of it here – it is paper CFDP 1078). As each new lighting technology has been introduced, the efficiency of lighting has increased dramatically. One interesting point is in his data though – when each new technology was introduced, the unit cost for the same amount of light tended to be higher than it was with the dominant technology of the time. That’s part of why it is often hard to get new ideas to spread, even when they are demonstrably better than what they’re replacing. It’s why Edison had to build power plants and dig up the streets to get people to use his Electric Light into widespread use.
Nevertheless, as each new lighting technology was refined, the labor-cost of lighting fell through the floor:
The amount of time you had to work to pay for one kLH by 1992 was 1/100,000,000 of what it was in 1750 B.C.
This makes me consider a few questions:
- This is a great example of the cumulative impact of successive disruptive technologies – it can be enormous. So consider – are any changes like this coming in your industry? Probably so – so what can you do to prepare for these changes? Or to drive them?
- This gigantic drop in the price of lighting has made people in recent years significantly better off. If we are working on innovating, will our innovations have a similar impact? Wouldn’t you want them to? We should be working on things that make a real difference.
- That is why it is important to think about buildership. I’ve talked previously about innovation strategies that we can use to build long-term innovations – and again, wouldn’t you rather work on things that will make a difference?
Innovation can have huge impact on peoples’ lives. Innovating is powerful, and it comes with responsibility – and we should consider both aspects when we build our innovation strategies.
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!
The Best Innovation Opportunity Ever!
Posted by Tim in business models, innovation strategy, time on 6 January 2010
We are facing the best innovation opportunity in the history of business right now, and everyone is missing it. The sector that provides the best opportunity for innovation right now is older adults. And you can tap into this market with one fairly simple change to your business model.
My wife Nancy is a geropsychologist. When she asks her students at the start of each semester what words come to mind when they think about aging, and nearly everything is negative: sick, alzheimer’s, nursing home, dementia. These thoughts dominate our thinking about business opportunities in this sector as well. Everyone knows that all of the populations in developed countries are aging rapidly. People that are 65+ are going from 10-15% of the population in 2000 in most countries to 25-40% of the population by 2025. So what opportunities does this present?
A recent cover story in Business Review Weekly here in Australia talked about how the baby boomers can make you rich. Their suggestions: invest in nursing homes and health care.
This is wrong!
Most firms start with an older adult business model based on the assumption that these people are sick, and they need care, and that is where the opportunities lie. In most western countries, how many older adults are in nursing homes? About 5%. How many are sick? Less than 10%. Why are we building our business models around less than 10% of the biggest segment of the population? This is insane. So my prescription is this: start with a simple business model innovation – your target market is actually the 90% of older adults that are healthy and active!
Tom Peters has been talking about this for a while. So has Ken Dychtwald. Here are some facts about older adults:
- There are lots of them, and soon there will be even more.
- The overwhelming majority of them are active and healthy.
- They have TONS of money (70% of the wealth in America, according to Peters).
- They see more movies, buy more clothes and more cars and more, well, everything than any other segment of the population.
- They have time on their hands and they want interesting things to do.
- They’re the fastest growing age group on Facebook, and their use of other social media outlets is also growing rapidly.
Whatever you do, change your business model to target these older people, not the sick ones. Once you have done that, do what Saul Kaplan suggests and start learning what they want. Then start innovating.
We need iPhone apps for older adults. We need movies, vacations and consumer products that meet their needs. We need them in our social networks and focus groups. Peters recounts a number of cases of firms that have successfully made a product or two targeting older adults then says:
These are all great cases. But they are just… cases. Isolated events in a Grand Marketing Narrative that continues to treat Youth as its hero.
They are a far cry from Strategic Realignment. And anything less than Strategic Realignment – that is, reorienting your enterprise from the ground up to serve the emerging [older adult market] will you in the cramped, low-growth world of ‘niche’ marketing.
Review the numbers: If a group controls the vast majority of wealth and discretionary income, then it is the market.
He’s right. It’s the best innovation opportunity ever. How will you take advantage of it?
I’ve written this in response to Braden Kelley’s call for posts on the topic: What product or sector is in greatest need of innovation. His Blogging Innovation site is a terrific resource, which you should definitely check out!
(Photo from flickr/OSU HHS under a Creative Commons license)
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)
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