Tim Kastelle

Tag: Clayton M. Christensen

  • Having a “Risk Averse Culture” Increases Your Risk

    Having a “Risk Averse Culture” Increases Your Risk

    The Worst Excuse for Avoiding Innovation

    The most common objection I get from when we talk about the necessity of innovation is: “But I can’t innovate, we have a risk-averse culture.”

    I can’t tell you how sick of hearing this I am – it’s a terrible excuse for not trying out new ideas.

    I’m currently running a Lean LaunchPad course with six teams of researchers who are trying to build effective business models to support their scientific work.  During the last set of team presentations, one of the groups got up and said:

    We did some interviews, and everything we thought about our primary market was wrong.

    Think about the risks involved here.  First off, these are scientists, not marketers – so going out and talking to people is a leap.  Second, by working on their business model now, they are taking time away from their work in the lab.  Third, they risk status by getting up in front of their peers and admitting they don’t know what’s going on in the market.

    If you’re risk-averse, you could avoid all of those risks by not doing the program.

    But what is the point of Lean LaunchPad? It is to reduce the overall risk of failure when you send your great new idea out into the world.

    The biggest risk that these scientists face is that their research won’t get results.  The second biggest risk is that they get the results that they want, but they fail to get their ideas to spread so they don’t have the impact on the world that they are hoping for.  Both of those outcomes are lousy, and the risk of both is significant.

    By doing the Lean LaunchPad program, the reduce both of those risks.  They are doing very applied research, so getting feedback from industry makes it more likely that they will get good, usable results.  Furthermore, getting this feedback also makes it more likely that they can turn their good scientific results into commercially successful products that change the world.

    As Ian Frazer often says – there’s no point curing mice. If you’re doing important research, making it real and changing the world have to be your goals. Accepting the short-term risks of making yourself uncomfortable by talking to people in the market, investing time in the business side of your research not just the science, and being embarrassed in front of your peers is absolutely worthwhile if doing so reduces the risks of the larger failures.

    The Default Case is Not “Everything Stays the Same”

    This is the way innovation works – you test out new ideas, and doing so reduces uncertainty.  Testing new ideas is the primary driver of learning.

    You can afford to ignore this source of learning, if your business environment is completely stable.  But for most of us, that isn’t the case.  Consequently, we must innovate, we must try out new ideas in order to address the uncertainty that an unstable environment causes.

    Clayton Christensen, Stephen Kaufman and Willy Shih look at this issue in their article Innovation Killers (link to pdf). They illustrate it with this great diagram:

    When we assess the potential risk of innovating, it is normal to assume that things will continue as they currently are. In a stable environment, it might be safe to assume that taking the ‘do nothing’ option will result in stable returns.  In a dynamic environment, avoiding small-scale short-term risk actually increases your long-term risk.

    Imagine what would have happened if the scientists hadn’t learned that every one of their assumptions about the market was wrong – they would have invested more and more into building the wrong product on top of their research.  If they had avoided the short-term risk of doing the program, they would have dramatically increased the long-term risk of not realising the full impact from their research.

    Learning Reduces Risk

    Finding out that one of your assumptions is wrong early is one of the best possible outcomes you can have. It shows your learning, and that increases your chances of success.  Here are some thoughts from Peter Drucker in his classic book Innovation and Entrepreneurship:

    Entrepreneurship, it is commonly believed, is enormously risky. And indeed, in such highly visible areas of innovation as high tech – microcomputers, for instance, or biogenetics – the casualty rate is high and the chances of success or even of survival seem to be quite low.

    But why should this be so? Entrepreneurs, by definition, shift resources from areas of low productivity and yield to areas of higher productivity and yield. Of course, there is a risk they may not succeed. But if they are even moderately successful, the returns should be more than adequate to offset whatever risk there might be. One should thus expect entrepreneurship to be considerably less risky than optimization. Indeed, nothing could be as risky as optimizing resources in areas where the proper and profitable course is innovation, that is, where the opportunities for innovation already exist. Theoretically, entrepreneurship should be the least risky rather than the most risky course. (emphasis added)

    Why should this be so? Because entrepreneurship and innovation reduce uncertainty, and doing this reduces your overall risk.

    Personally, I’m averse to going completely out of business.  That’s why I try as many small-scale experiments as I possibly can.  In the short-term, it looks as though I’m increasing my risk, but in doing so, I improve my long-term prospects.

    If we say you can’t innovate because our culture is risk-averse, we’re thinking about risk in a completely wrong way.  And that’s awfully risky.

  • All of Our Innovation Barriers Are Self-Inflicted – Reflections on the Drucker Forum

    All of Our Innovation Barriers Are Self-Inflicted – Reflections on the Drucker Forum

    What should management look like today – and tomorrow?

    I just got back to Australia from the 6th Global Drucker Forum that took place over the weekend, where these two questions (and others!) were addressed. Drucker was a great thinker, and one of his pieces inspired the title for this blog – so I was excited to go to the event.  Richard Straub and his team put together a great event this year.  I learned a lot, and, more importantly, got to spend some time with some awesome people over the days that I was there.  Here are some of my thoughts triggered by the event.

    Highlights from the Sessions

    I liked a lot of the things that happened during the formal presentations:

    Clayton Christensen gets off the stage to watch Roger Martin: my favourite moment on day one came when Clay Christensen walked off the main stage so that he could see Roger Martin’s talk.  This was also my favourite talk on the day – Martin was one of the few that talked more about what he’s working on now and his latest ideas, rather than going over his greatest hits (Pankaj Ghemawat was the other that did this). I loved Christensen’s move, because it showed respect for the ideas of others – it was generous, and set the tone for the rest of the Forum.

    During the discussion after the first set of talks, Martin had a great quote on some of the issues around managing solely for shareholder value:

    Every incredibly stupid theory has a core that sounds good.

    The Creative Economy is here: Steve Denning, Dan Pontefract and Bill Fischer had a great session looking at how we’re making the transition to the Creative Economy: here’s Dan’s description of the session. One of the highlights here was the focus on actual examples of firms taking action to distribute leadership and build innovation.

    Dan Pontefract, me, and the gorgeous ceiling in the Hall of Sciences in Vienna
    Dan Pontefract, me, and the gorgeous ceiling in the Hall of Sciences in Vienna

    Julia Kirby quotes Jim March: Julie Kirby opened the management and innovation session (the best one of the Forum) by quoting Jim March’s key idea on exploration versus exploitation. This is a core innovation idea – the responsibilities of management are split between exploring for new advantages, and exploiting existing ones.  Balancing the two is tricky, and that’s one of key challenges in managing innovation.

    The balance now needs to shift towards exploration: Rita Gunther McGrath talked about her research, which shows that the lifespan of competitive advantages is rapidly declining (a point that Nilofer Merchant returned to as well). McGrath cited research on what people report as barriers to innovation – then she said:

    All of our barriers to innovation are self-inflicted.

    Social isn’t just social media: Next up was Nilofer Merchant. I’ve seen plenty of talks by both McGrath and Merchant, since they are two of my favourite management thinkers, and I have to say that their talks at this event were by far the best I’ve seen from them.  It was a great session. One highlight from Nilofer came when she stopped and asked us to “do something social for one minute.” Of course, very few of us tweeted – instead, we talked, and connected – leading her to say:

    What we do to connect with each and build ideas – that’s social.

    Nilofer nails it.
    Nilofer kills it.

    What does collaborative leadership look like? Herminia Ibarra gave a great talk on leadership. Her killer line was:

    Our collective imagination has no real alternative to the heroic leader.

    She then went on to discuss what collaborative leadership looks like in an effort to start building a more productive set of ideas on this topic.

    Organisations should be flatter! In a talk that would have fit well in the Creative Economy session, Vineet Nayar discussed his experiences in making HCL Industries a flatter organisation. It was great to hear some of the issues in making flat organisations work – particularly since HCL wasn’t built that way, they had to reconfigure on the fly.

    "Great ideas are great, but without execution they don't work."
    “Great ideas are great, but without execution they don’t work.”

    It’s Not All About the Content

    One thing that the Forum brought home for me is that we focus too much on content.  The agenda was absolutely packed with talks.  On the one hand, this was good because the lineup was awesome.  On the other hand, this format also has some serious limitations.  One is that when we’re hearing so many great ideas, we need time to discuss and reflect – we need to do those social things that Nilofer talked about.

    It reminds me of my executive education courses.  When people are new to lecturing, the tendency is to pack in as much content as possible.  But over the years, I take out big chunks of content every time I deliver my innovation course, and that always makes it better.

    We need to do this at conferences too – an idea I learned from Johnnie Moore.

    Day one ended with a monster 2 hour session, and by then my attention was shot. So, while I got to meet John Hagel in person (yay!), I wasn’t able to give his talk the attention it deserved (boo!).  However, meeting leads to my real highlights of the Forum, which were:

    • Lunch on day one with Rita Gunther McGrath, Nilofer Merchant, Dan Pontefract and Jamison Steeve. The conversation was thought-provoking and fascinating.  It was a great group too – Nilofer is a friend, Dan is a friend that I was meeting in person for the first time, I’ve admired Rita’s work for years, and I didn’t know Jamison at all before this, and he’s terrific too.  Later, Rita and I both tweeted about the enormous value of meeting people face to face.
    • Speaking of which, at lunch on day two I finally met Bill Fischer in person. Like Dan, he’s someone that I’ve been interacting with online for years.  But it was wonderful to meet face to face. We’re hatching plots together now too.
    • Many other personal encounters throughout the event were also memorable. Distance still matters.  Interacting in person is expensive, time-consuming and causes a ton of jet-lag if you live in Australia – and it is completely worth paying the price to have the experience.
    I meet Bill Fischer!
    I meet Bill Fischer!

    We need to build our events to take advantage of the magic that happens face to face.  Content is fine, but it is only part of the story.

    We Need More Jazz

    My favourite part of the formal program was the end – the least scripted part of the event.  We finished with eleven of the speakers coming up and giving a five minute summary of their reflections on the Forum, followed by a short Q&A with the editor of the Harvard Business Review and Chair of the Forum, the quick-witted Adi Ignatius.  You can see Steve Denning’s summary here to get a flavour of them.

    This was a great session.  Some of the people struggled with it a bit, and ended up giving versions of their normal talking points.  But the people that really engaged with the process were fantastic.  They were thinking on their feet, and the whole session was exciting – no one knew what was going to happen next.

    It was quite a contrast to many of the formal talks, which were exactly that – formal.  Many of them were like classical music concerts – live versions of things we’ve heard many times before.  Sometimes, this can be magic, but it can also be a bit stale.  The final session was more like jazz – there was improvisation around a theme.  This format is dangerous, because you can bomb.  But it’s also more exciting, and, ultimately, more rewarding.

    We need more jazz in our events.

    And now I’m back in Australia.  Tomorrow I give a talk of my own for the International CFO Forum in Sydney (check out the cool set of videos that we made for this).

    I’m trying to figure out how to get more of the magic of social, and more jazz, into the event. That’s all part of figuring out what management should look like today – and tomorrow.

  • Innovation Thoughts on Zero to One by Peter Thiel

    Innovation Thoughts on Zero to One by Peter Thiel

    How do we build things that move society forward? That is the core question addressed in Zero to One by Peter Thiel and Blake Masters.  I finished the book today, and here are some key quotes (in bold) and my thoughts on them.

    1. Of course, it’s easier to copy a model than to make something new. Doing what we already know how to do takes the world from 1 to n, adding more of something familiar. But every time we create something new, we go from 0 to 1. The act of creation is singular, as is the moment of creation, and the result is something fresh and strange.  Thiel’s argument is that startups that are aiming to have a big impact need to focus on building the first instance of something – going from 0 to 1.  But it’s not just startups.  Thiel also talks about how HP was successful throughout the 1990s by consistently building important new things – and that their decline started when they stopped inventing.
    2. Engineers frequently … do not understand distribution. Since they don’t know what works, and haven’t thought about it, they try some sales, BD, advertising, and viral marketing—everything but the kitchen sink…. This one is from Tren Griffin’s blog, not the book, but it’s still good (I’m borrowing Griffin’s format for this post too – he writes an excellent blog, which you should check out).  Griffin’s comment is: “Engineers have a tendency to believe that people will be lined up outside the door with crisp but non-sequentially numbered stacks of $100 bills waiting desperately to buy what they have designed.  They love what they create and think other people will too. Selling and marketing is a much harder problem than most engineers realize.” This is another version of the mousetrap problem – it’s not enough to build something new.  In fact, Thiel says that you need to answer seven questions that demonstrate that you have a clear advantage – including in distribution.  The questions are:
    3. …the seven questions that every business must answer: 1. The Engineering Question Can you create breakthrough technology instead of incremental improvements? 2. The Timing Question Is now the right time to start your particular business? 3. The Monopoly Question Are you starting with a big share of a small market? 4. The People Question Do you have the right team? 5. The Distribution Question Do you have a way to not just create but deliver your product? 6. The Durability Question Will your market position be defensible 10 and 20 years into the future? 7. The Secret Question Have you identified a unique opportunity that others don’t see? The book goes into useful detail on how to address all of these questions.  The advantage that startups have here is that don’t have path dependency locking them into the wrong answers to these questions, as larger firms sometimes do.  Flexibility is the big advantage that you have when you’re starting out.
    4. Paradoxically, then, network effects businesses must start with especially small markets. Facebook started with just Harvard students—Mark Zuckerberg’s first product was designed to get all his classmates signed up, not to attract all people of Earth. This is why successful network businesses rarely get started by MBA types: the initial markets are so small that they often don’t even appear to be business opportunities at all.  This is another problem for big companies – if you’re only looking to add new $1b product lines (or even $100m), then you won’t go into these micro-segments that you need to dominate to succeed.  This is another version of Clayton Christensen’s idea that disruptive innovations start in niches. Related to this, he has also said:
    5. Never ever hire an MBA; they will ruin your company.  That’s from an article on Slate by Nathan Furr.  It also included the diagram at the top of this post – which illustrates the issue.  There are different sets of skills that you need when you are exploring (going from zero to one) versus when you are exploiting a known idea (going from 1 to n).  Startups are usually exploring.  And it’s true, we don’t do a very good job of teaching the management skills that you need to do this in our MBA programs.  The challenge for larger firms is that you need to do both.  More on this issue soon.
    6. As a good rule of thumb, proprietary technology must be at least 10 times better than its closest substitute in some important dimension to lead to a real monopolistic advantage. Anything less than an order of magnitude better will probably be perceived as a marginal improvement and will be hard to sell, especially in an already crowded market. The clearest way to make a 10x improvement is to invent something completely new. If you build something valuable where there was nothing before, the increase in value is theoretically infinite. A drug to safely eliminate the need for sleep, or a cure for baldness, for example, would certainly support a monopoly business.  When I raise this issue in talks, people often struggle with it – how we can get a 10X performance improvement?  It’s not easy.  But there is plenty of research (not cited by Thiel) that shows that this is true.  This is why you really do need to aim high when you’re building new things.
    7. Doing something different is what’s truly good for society—and it’s also what allows a business to profit by monopolizing a new market. The best projects are likely to be overlooked, not trumpeted by a crowd; the best problems to work on are often the ones nobody else even tries to solve.  The fact that 10X improvements are hard to come by is why Thiel focuses on contrarian thinking throughout the book.  This isn’t to say that there is no value in making smaller jumps.  But most systems are dominated by the outliers – the big, discontinuous jumps.

    I don’t agree with everything that Thiel says – and some of his non-business views are pretty objectionable.  Peter Sims has a thoughtful post on his issues with Thiel’s take on monopolies, which is worth reading.  At the end of the post, Sims says:

    Sorry Peter, I don’t buy your argument, but thank you as always for provoking thought.

    I feel the same.  The book is extremely though-provoking throughout, and worth a read.  I’m still sympathetic to the little bets approach, but I also see the value in aiming high as Thiel argues.  They’re important issues to be thinking about.

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  • The Four Stages of Responding to Disruptive Innovation

    The Four Stages of Responding to Disruptive Innovation

    What can we learn from the experiences of the record and newspaper industries about effectively responding to disruptive innovation?

    That’s the question that I discussed with Andrew Byrne from The Cloakroom this afternoon.  As we talked, I realised that the steamroller scene from A Fish Called Wanda perfectly illustrates what normally happens.  Here is the scene – it contains a ton of spoilers and bad language – but the movie came out in 1988, so if you haven’t seen it yet I’m not sure what you’re waiting for:

    As Ken rolls towards Otto with the steamroller, you can see the four stages of responding to disruptive innovation.

    1. Ridicule: as Greg Satell says, innovation always looks crappy:

      However, the kind of innovation that changes paradigms is usually crappy. The stuff that doesn’t work all that well. The carpetbaggers who come into your industry utterly unprepared to service your existing clients. That’s where the danger often lies.

      Because it looks crappy – it’s not very threatening at first. So the powerful incumbent ridicules it – just like Otto ridicules Ken on the steamroller.

    2. Aggression:  once the threat is recognised, when there finally is a response, it’s usually aggressive.  When Otto realises that he might be in trouble, he starts shooting.
    3. Bargaining: when aggression doesn’t work, we bargain. How we can we coexist? How can we fit the disruptive ideas into our current business models?  Otto bargains like crazy.
    4. You get smashed like a bug: it ends when the steamroller runs you over

    We’ve seen this pattern again and again. How can you get crushed by a steamroller? Go through that response cycle.

    Clay Shirky points out today that the steamroller is heading towards higher education now. It’s a must read article – both for those interested in higher ed and for those interested in innovation.

    Here is one of the key quotes:

    Every college provides access to a huge collection of potential readings, and to a tiny collection of potential lectures. We ask students to read the best works we can find, whoever produced them and where, but we only ask them to listen to the best lecture a local employee can produce that morning. Sometimes you’re at a place where the best lecture your professor can give is the best in the world. But mostly not. And the only thing that kept this system from seeming strange was that we’ve never had a good way of publishing lectures.

    If you read the article, you can see the first two stages of response from established universities to massively open online courses (MOOCs) – ridicule and aggression.  Soon we’ll start to see bargaining – “how can we fit these in with our normal operations without having to change anything?”

    There is plenty to learn from what’s been happening to news over the past few years.  What is the best response for higher ed? We need to break the ridicule-aggression-bargaining-smashed like a bug cycle.  There are a few ways to try to do this.

    In another very good post, Greg says that you need to ask this question:

    If someone came to you with a breakthrough innovation, how would they sell it?

    Answering this question will help you recognise the barriers to put up to innovation – it can help you identify blind spots.

    Another good question to ask is: if we were starting today, would we do this?

    If you were starting a new university today, would you build a big campus with lots of gigantic buildings? Who would you hire? Would you deliver lectures locally, even if they’re not among the best in the world?

    The new higher ed experiments have answers to these questions that are very different from those that we get from most existing universities.  That’s a danger sign.

    The best respons: start experimenting like crazy.  There are two good reasons to do this:

    1. No one knows what will end up working best.  When that is the case, you should be in there yourself, experimenting away, in case you run into a business model that will work.  After all, the existing universities do know a few things about educating.
    2. It builds absorptive capacity. Absorptive capacity is the ability you have to take in ideas from the outside.  It’s really hard to absorb ideas from outside your organisation if you arent’ generating and executing new ideas within it.  Building a culture of experimentation and execution will make it easier to adopt the new business model that works if someone else comes up with it.
    The danger signs come if you are going through the first three stages of responding to disruptive innovation: ridicule, aggression, and/or bargaining.  If you’re doing that instead of experimenting, we all know what comes next.
    Smash.

     

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