Making Innovation More of a Science and Less of an Art
One of the greatest challenges facing innovation professionals is to find the right approach to a given innovation problem. Whether that’s instilling the innovation mojo in a large corporation or simply helping teams become more innovative, the ways to do this seem to be more of an art than a science. However, during the last ten years there has been a strong push to turn this art form into more of a science. Recently a colleague of mine faced a crisis. Their company had decided they weren’t innovative enough but they had no idea how to solve the creativity and execution problem. So the company hired one consultant after the other to help them solve their “innovation problem”. They went through change management processes to startup approaches to innovation but in the end it simply seemed that after all their experiments, management still believed the company was not innovative enough.
A scientific approach to innovation is the key and that’s what conferences like Innova-Con 4 are all about. After this ordeal, I met my colleague and he uttered something to me I think everyone in every company looking to become more innovative has thought: “I’ve design-led my way through more lean startup failures that I think the most innovative thing we’ve done is to learn how to innovatively fail!”. So what can we do? During the last fifty years we have seen a plethora of innovation models for all types of purposes. Everything from Doblin’s Ten Types of Innovation to Ries’ Lean Startup model to the latest trends in Design Led Innovation. It seems every week someone comes up with a new ad hoc model for innovation and tries to sell it to the world. So a major challenge has been to sort through these different models and this has led to highly capable groups around the world to establish standards and evidence around the effectiveness of different approaches to innovation: and their work is starting to bear fruit.
Out of this desire, new global organisations promoting this scientific agenda have arisen and they have begun spreading their message at many global events. One such event which embraces a scientific approach to innovation is Innova-Con 4 taking place in Washington D.C. this year (2017) from the 29th to the 31st of March. It is the celebration of creating a scientific, repeatable approach to mastering all types of innovation problems. To do so, the new breed of science inspired innovation organisations create a body of knowledge based on best practices and then go and look for evidence based around such best practices to make sure that recommendations are grounded in facts and not opinions. For my colleague, this was exactly the type of approach he needed: a scientific one. It is one that he can point to as having an empirical and theoretical basis for success and one which is auditable and can be repeated again and again with the same results and without resorting to ad hoc hand waving. With such tools he has an authority to point to when any questions are asked around why he makes the choices he does and he knows that his choices will be based on sound science. Innovation is difficult and we need all the help we can get to improve its success rate. It is scientific approaches like the ones that Innova-Con 4 highlights that we need more of and hopefully this conference will inspire more of it.
From Bankruptcy to Industry Leading Success – The LEGO Story
LEGO has earned the right to celebrate. Not only are kids playing with more mini LEGO people than there are human beings on the planet (Delingpole J, 2009) but in 2015, they were nominated by Forbes as the most powerful brand in the world. For a company which was on the brink of bankruptcy in 2004, the toy maker has made an amazing turnaround. They restructured, hired a new CEO, and forged more licensing partnerships than ever before. Most importantly, they discovered the secret to some of the world’s most successful, low risk innovation strategies. These strategies helped LEGO create a powerful brand envied by every other company in the world. However, successes like these are not, and need not be, restricted to global companies with billions in revenue. The point of low risk innovation tools is that one can use them to test ideas in any setting and with any budget. Whether you are a cash strapped startup or a Forbes 500 firm, sustainable innovation can be your ticket to success.
Out of LEGO’s lessons and that of hundreds of other companies, I have distilled the most successful techniques to innovate cheaply and effectively. They are all contained in the book Innovation Tools and, as an additional bonus, the readers of the Innovation Management community can get it for free this week. Among others, my book answers questions regarding how strategies used by companies like LEGO are able to turn companies around from looming bankruptcy to industry leading success. When LEGO restructured and returned to their core business to climb out of a $300 million loss in 2004, they realized innovation as usual was not an option. The first step on the toy maker’s journey was to embrace their loyal and creative fan base. They hired so-called “adults fans of LEGO” for their design team and began to crowdsource new toy kits. A typical engineering mistake is wanting to invent all the things the product might consist of in one go…
As the crowdsourcing venture proved successful, the block manufacturer turned this into a full blown open innovation policy by opening up the LEGO Ideas portal. Through user input, this online platform generates hundreds of new product suggestions each year and uses some subtle and powerful open innovation techniques, employing everything from social media to peer selection to entice fans into contributing new designs. Within its factories, LEGO has also embraced a philosophy of rapid prototyping, even to the dismay of its older engineers. David Gram, Head of Marketing at Lego’s Future Lab, stated that “[W]e only develop the few key features that are really needed. A typical engineering mistake is wanting to invent all the things the product might consist of in one go … we throw that into the market and get feedback from consumers” (Durkin P, 2015). This is a technique blossoming all over the world in Maker Faires, Hackerspaces, and Makerspaces.
As big and successful as LEGO is, they could still benefit from the many other innovative strategies employed by other industry leaders. For example, there are powerful forces driving both the creation and dissemination of knowledge to the world. As many technical discoveries are driven by access to the latest information, this will be a game changer for business. For startups or large companies pursuing numerous risky ventures, information is power, and risk mitigation is the name of the game. Another powerful shift disrupting traditional industries is the new way software is delivered around the world. Products are now able to be delivered in smaller parts, requiring less commitment from a consumer and turning the decision to use a tool into a “no-brainier.” This is even affecting industries with business models based on completely unrelated ways of delivering their services such as medicine.
For startups or large companies pursuing numerous risky ventures, information is power, and risk mitigation is the name of the game. Another important piece of the innovation puzzle is us; you and I. In the end, it is up to us to make the innovation decisions, but how do we decide? This question can be answered by one of the most exciting developments of the 21st century: a symbiosis between two powerful branches of science, behavioral economics and innovation. Although these tools are important for a company’s and entrepreneur’s day-to-day work, we also want to know why all this innovation stuff even matters. What happens when we innovate cheaper? What benefits are there to simply lowering our innovation risk beyond the obvious? Understanding the basics of these techniques and integrating them into your innovation strategy is what differentiates the disruptors from the disrupted. Up until now, it has been difficult to find them all collected in one place with enough details to be able to successfully use these innovation tools (Shellshear E 2016).
Competition never sleeps and LEGO is continuously being challenged by new disruptive innovators attacking their market side-on, such as Minecraft. Although the block manufacturer has a license to produce Minecraft styled pieces, challenges can come from anywhere. Full throttle up the innovation curve requires low risk tools to balance the innovation and fiscal imperatives. LEGO has discovered this, but have you? The point is that we need to keep innovating without risking financial ruin. This is a difficult balance that my book seeks to discover. It details some of the best techniques available to not just turn an almost bankrupt company around, but also to supercharge any business or entrepreneur wanting to develop the next unicorn opportunity.
Behavioral Innovation: The Need to Pivot, Why We Don’t and What We Can Do About It
When was the last time you seriously thought about your blue chip investments going broke? At what point will those shares be worth nothing? Although it may sound ridiculous, the question is serious because at the current rate of disruption, half of the Australian Stock Index S&P 500 will be replaced over the next 10 years (Anthony S D et al, 2016). Where does that leave your investments? The need and act of a business pivoting is natural. It can almost be seen as a form of corporate evolution. Over the years, the largest businesses only keep their top spots by evolving and chasing the sunrise markets and leaving the sunsets. Intel famously pivoted from manufacturing memory sticks to microprocessors. HP pivoted from making precision oscillators to computers and peripherals. And Nokia has famously taken its business model from a paper mill to rubber goods and then finally to mobile phones until they crashed, failing to pivot in time.
However, for each success story there are hundreds of other businesses which failed to pivot and stuck with a dying business plan. Why? In mature businesses there are a myriad of reasons – corporate culture, shareholder inertia, lack of capital, bureaucracy, etc. Many large companies can be forgiven for not having seen the woods for the trees and stuck to their guns in what they thought was a successful market. Companies which have less of an excuse are startups. Businesses with a sole purpose to exploit a single technology. They are portrayed as nimble, agile, market focused but many display characteristics opposite to that, sticking with a dying product until the company dies itself. In the startup space, one study found around ten percent of all startups die due to a failure to pivot (Mahmood T, 2015). Many of the most famous startups only exist because of a pivot – Twitter from Odeo, Paypal from Confinity, Instagram from Burbn, etc. Unlike in the large corporation case, it is much easier to hypothesize why a startup didn’t pivot and it has a lot to do with a cutting edge field of research called behavioral innovation.
People typically take known behavioral biases from economics and simply apply them to an innovation framework. Behavioral innovation is a field still in its infancy. At the moment, it suffers from having its main theoretical framework copied and pasted from behavioral economics. People typically take known behavioral biases from economics and simply apply them to an innovation framework. However, it should be more than this. The field should, at a minimum, be looking at the unique psychological shortcuts we take to be innovative and how this affects our innovation efforts both positively and negatively. It could take inspiration from many fields such as behavioral economics, psychology, innovation economics and more. By having a better grasp of these processes we can design better innovation policies, brainstorming activities, investment decisions and much more. Innovation has become the zeitgeist of the 21st century and if there was one area that researchers should be focusing their efforts to bring about tangible positive change in society, then innovation is it.
The fact that the field of behavioral innovation has been left as the ugly duckling of the behavioral economics swan needs to change because a better understanding of this new discipline will have profound effects on everything from macro policy setting to startup decision making. There are a myriad of techniques and approaches to doing innovation; such as idea generation, co-designing with stakeholders, speaking to users and potential customers, mapping value propositions, collaborating across disciplines. This is widely taught across Universities. For example, at Design Factory Melbourne, Swinburne University, design, engineering and business students are educated to collaborate and use various innovation doing techniques applied to real project briefs with companies for many years. However the techniques for innovation doing are not enough. We know an open mind-set is necessary for innovation and you are able to see peak creativity when you are happy and having fun, but how much do we really know about achieving this desired state of behavior in a business setting and how does this relate to the hard business decisions that need to be made?
Behavioral economics to innovation
Despite all the training, we still see startups refuse to pivot in spite of a failed product/market fit, a lack of market validation or minimal traction, then we can see an application of behavioral innovation in action. These companies are trying to innovate. They have the goal of successfully developing an innovative product on their agenda and they fail miserably. Why? The sunk cost fallacy of innovation. Although not the only possible cause of this behavior, it is one which interests us here. In behavioral economics, the sunk cost fallacy of economics occurs when we ascribe an overly optimistic probability to the success of an outcome after we have invested in it. The probability just seems to change. For example, if an individual were to buy a theatre ticket but then find out that the performance had changed to one which they no longer wanted to see, then they would be more likely to go to the show and waste their time than if they had not purchased a ticket. Think about that. Instead of doing something else they enjoyed, people would incur an additional cost by going to watch a show they didn’t want to watch merely because they paid for the ticket!
For startups we see the sunk cost fallacy of innovation occurring. It occurs when a new business follows an idea over the financial cliff because they have invested our time and effort (and often money!) in exploring it. When a startup fails to pivot, then I believe that a major contributing factor is the sunk cost fallacy of innovation. If we can beat this, then maybe we can save an extra ten percent of our startups. An easy win! What can we do about this and how does one know that one has reached the point of no return? The answer to this question is something investigated in the forthcoming book “Innovation Tools” (Shellshear E, 2016) and it comes down to finding the point where perseverance no longer makes sense. This is the point is not difficult to find. It occurs when a startup asks its mentor or another independent third party, that if they had a choice between investing their time and money in the startup’s opportunity or using that money to do something else, and the advisor says do something else. At this point we are starting to sink. When someone else would not invest in your opportunity given the facts you have presented to them, then by going further you are displaying the sunk cost fallacy of innovation.
A word of warning: although we have framed it as something undesirable, if the psychological mechanisms behind the sunk cost bias cause you to be more resilient and tenacious, then in many startup situations this can be a good thing. It just depends on the context. The sunk cost fallacy is only one of many biases which people can display and as a starting point to look at behavioral innovation, it is an obviously applicable one. However, as mentioned earlier, the field should be much bigger than this and its elucidation here will hopefully lead to others to explore more. As stated earlier, the applications of behavioral economics biases to behavioral innovation like the above only scratches the surface of the possibilities in this field. The analysis above, like much previous work, is a direct translation from behavioral economics to innovation but it is clear that if researchers put their head to it, there are amazing possibilities right in front of us. And if the motivation to do some interesting research is not enough, then the trillion dollar imperative to transform the world’s economy to something sustainable should be.
How to Turn a Failure into a Wild Success
After six months of hard work, we were sitting together on a warm spring afternoon enjoying a beer in one of Melbourne’s new hipster bars. We had learned a lot, traveled all over Australia and met amazingly passionate people. We’d put together a lean startup with a focus to test a simple business idea and we’d heard countless times how much our tools were needed. There was only one problem. We had failed. It was over. We’d decided to fold the company. Our hypothesis that Australian Manufacturers would collaborate as a means to an end and thereby solve their problems was false. We had tested it with a dozen SMEs and a group of billion dollar multinationals. In both cases we had failed to get the companies to commit. So we sat there and looked at each other realizing it was a failure we had to embrace and not a success. But how would we cope? …when you were broke and had to admit to the failure, it seemed a lot easier said than done. Our problem is one faced by everyone from lone entrepreneurs to global corporations. Things go wrong, perfected plans fall apart and momentum grinds to a halt. We were not alone.
But everywhere we looked, phenomenally successful businessmen were telling us to embrace failure, to learn from it and benefit from its edifying nature. It was just when you were broke and had to admit to the failure, it seemed a lot easier said than done. The lean startup methodology tells us to fail fast to learn fast. Iterate through the build, measure, learn cycle as quickly as possible to improve our product market fit. Top product developers opine on the benefits of failure. The lack of success has even been proven to be a better way to lead to disruptive new ideas than success itself because it forces us to look for alternative strategies (Asaad and Eskandar 2011). The problem is, no one says what to do when it all goes wrong. What to do when you fail. If we turn to statistics, then the best thing an entrepreneur can do is to get up and try again. Numerous studies show that a second time entrepreneur is more likely to succeed than a first time entrepreneur (Vital 2012). In fact, it has been claimed that one of the reasons why Israel’s startup scene punches so much above its weight is that most entrepreneurs have a number of failures under their belts (Nicholas 2015).
When we get to the bottom of it, innovation is all about taking risks. To drive innovation in large corporations it is critical to have a culture which embraces risk taking because the flip side of taking risks is that failures will occur. A company culture which demands innovation but does not support and accept failure is clearly one which is destined to fail. Obviously this is not to endorse failure due to sloppy work or avoidable mistakes. Failure arising from testing the unknown is the type of failure which can be valuable and must be allowed. A company culture which demands innovation but does not support and accept failure is clearly one which is destined to fail. Jorge, one of Internet’s top innovation bloggers and thought leaders (Jorge 2015), recognizes the importance and difficulty of failing. Having been part of a number of failed enterprises he wrote “[I]n order to figure out which ideas will work, people move fast to implement those ideas. I’d argue that more important than that is the ability to recover from failure just as fast”. So what I’d like to know is how do we quickly and sustainably recover from a failure?
Coping with failure
To answer this we turn to the most reliable source of answers – cutting edge research. For companies the latest research points to creating frameworks to support failure. Whether that is failure tolerant leaders, collaborative innovation schemes to share risk or an empathetic corporate culture, there are many ways companies can support the necessary failure involved in any risky innovation (Farson and Keyes 2002). The benefits? Companies which develop such a supportive climate, and provide employees with psychological safety to pursue their initiatives, have been positively related to a number of firm performance measures (Baer and Frese 2003). For startups and entrepreneurs one of the best ways to deal with failure is to be realistic and not fall victim to the latest wave of romantic headlines about “youngest billionaires”. 90% of startups fail and this applies to you. If you don’t think you are the special 10% but one of the 90% and set yourself the goal of starting three or four startups from the outset (or at least pivoting three or four times), then you will be able to cope with the failures that much better. This has helped me significantly – to know I’m not a lone loser but just like everyone else. It gives me the edge to grit my teeth, dust myself off and go again.
When pursuing multiple businesses at the same time, the failures in one business seem to help raise the chances of success in the other ventures Another strategy which worked well for me is to launch all three of my startup ideas at the same time while I was still validating the market for each idea. This not only brings you faster to your goal but a Harvard Business Review report even demonstrated that when pursuing multiple businesses at the same time, the failures in one business seem to help raise the chances of success in the other ventures (Ucbasaran D et al 2011)! The added benefit is that it will force you to focus on the core of each business and help you stick to doing the minimum to test each idea instead of adding unnecessary bells and whistles too early – a core part of methodologies such as the Lean Startup. Coping with failure is important not only for us psychologically but for the economy at large but many people simply don’t know how. As Jorge put it succinctly “Failure isn’t the goal as it relates to innovating. Rather, your ability to recover from failure fast is just as important as your ability to fail fast.” (Jorge 2015)
The Best Tools to Derisk Innovation
At the start of the twenty first century the innovation buzz has become deafening. It commands the attention of everything - from the popular media to scientific journals. Innovation is claimed to be the driver of economies and the competitive edge of companies. With innovation being the core of many new management styles, one question still remains for the enthusiastic manager; what are the concrete tools for my employees to build our revolutionary innovations? At the core of any innovation management technique is a risk management philosophy to lower risks along the development and implementation chain. Whether it is focused on minimizing waste via Lean Thinking, correctly addressing consumer needs via Design Led-Thinking or hedging bets via Equity Style Management, the focus is always on how do we reduce the risk inherent in being innovative? Risk and innovation are inseparable. You cannot have one without the other.
The best you can do is to minimize your risk for a given innovation and innovation is an extremely risky business. Around 4% of innovation initiatives achieve their internally defined success criteria. Even worse, only 12% of research and development projects even return their capital cost (Keeley 2004, Franklin 2003)! 4% of innovation initiatives achieve their internally defined success criteria. As with many things, we are lucky we live in the twenty first century. Apart from being blessed with the innovation buzzword, we are also blessed with numerous tools to address risks and reduce them to manageable levels. To nail the execution. These tools are being used by the most successful startups around the world, the best management teams running Fortune 500 companies as well as by people geared for success. What I am talking about is not each of the different parts of a given management style such as Lean Management (Wikipedia 2016). The different T abbreviations are well known, TQM, TFM, TPM, TSM, etc and the ways to implement them are also well understood.
But a question I hear from many executives is, when I implement a given technique, what catalysts exist to make my specific implementation successful? What tools can I use to take the risk out of my personal innovation problem? The tools to achieve these goals nowadays are focused around a few enabling principles. They are mostly about connecting the right people to the right problems. And doing this in the simplest and most frictionless way possible. We are seeing this with Crowdsourcing, Crowdfunding, Open Innovation (both ingoing and outgoing), Open Access, Open Source, and many more. These are some of the tools I tell people to use to solve their problems. But as many know, the devil is in the details. Launching a successful Crowdfunding campaign can sometimes be more expensive than simply using the campaign costs to fund your innovation. Open Innovation has led to many high-profile failures with companies from Chevrolet to BP receiving the dreaded “Crowdslap” (Howe 2016). These tools may solve many problems but not all. There exist other problems which involve a solution focused on a different business model which cannot be solved so easily by the crowd.
For example, innovative business models which break down once expensive services and products and deliver the services and products in a more affordable form. It is these business model “tools” such as Hackerspaces, X-as-a-Service offerings, Uber style companies and many more, which are solving the concrete problem of simply having access to expensive capital to test ideas. These businesses are leveling the playing field for access to enabling technologies. Small startups can now launch products to cater for the entire world on a shoestring budget. Again the successful implementation of these tools has become challenging for many. However this needn’t be the case. What has made their usage so much easier, is that these tools are tried and tested. You can learn from the best. How a mastermind crowdfunded their idea. How someone prototyped their Minimum Viable Product at a hackerspace. Like searching on Google how to unblock your drain, it is now possible to easily find others’ success stories and emulate their best practices. It is now possible to easily find others’ success stories and emulate their best practices.
For many companies the low lying fruit has already been picked. This means that innovations are becoming more complex. Finding the right combination of the aforementioned tools has also become a challenge. But when done successfully it can see an idea skyrocket on the back of very little. A few cheap tools and some help from the crowd. Done correctly, this is a major innovation in its own right. This is a topic which fundamentally interests me and which I see as being a major stumbling block for anyone who wishes to implement a Lean or Bootleg strategies to start a company or launch a major new innovation initiative within a mature firm. We all know the principles but what are the tools? This incessant question has bothered me so much that I decided to write down the best tools available to companies and individuals and put them together in a book which will be forthcoming soon. As innovation speeds up, we all want to keep up. The new tricks used by others to keep up their pace are now hidden in broad daylight, it is a matter of recognizing them and knowing how to use them. You no longer need to bet the bank to win big with innovation. As with all styles of innovation management, you just need to manage your risk properly.
The True Value of Your Ideas
The mantra of ideas being worthless can be heard from all corners of the globe. Venture capitalists back founders and not ideas. In 2009, the entrepreneur and author Seth Godin got the nine of his alternate MBA students to come up with 111 ideas each to create 999 business concepts (Godin 2009). The point? To prove that “Ideas are a dime a dozen. The money is in the execution.” But is this correct? Your gut feeling demands that your best insights are worth more than nothing, right? Right. There are many reasons why people say ideas are worthless. Some claim that for VCs ideas are worthless so they can pay you less for your business early on. Others have seen so many ideas that they feel like there is an oversupply and so their value is nothing. The most common one, however, is that the value is not in the idea but in its realization. Take two companies with a similar idea, Google and AltaVista, one is the multibillion dollar envy of the tech world, the other a broke, wound up company bought out by Yahoo. The difference? The execution. On the other hand, sure, lots of businesses fail but a great execution isn’t going to turn a rubbish idea into a success. Bad ideas that are driven to profitable businesses often turn out to be a sham, cheating people of their money and time.
Ideas are a dime a dozen. The money is in the execution. In this dichotomy, idea vs execution, people assume you only have two things you can control, your idea and your team (execution). Other factors such as timing, competition, etc are assumed out of one’s control. With only two things to decide upon, where does this leave us? Are ideas really worthless? The answer is no and it has been clearly demonstrated by a German company called Rocket Internet (Gordon and McCrum 2015). In 2007 three brothers, Marc, Oliver and Alexander Samwer founded the company Rocket Internet in Berlin, Germany. Its business model has been described as a “copycat” by the New York Times (Scott 2014) and its products would seem to confirm this. In 2012 Rocket Internet started FoodPanda, a food delivery service, copying the GrubHub (established 2004) business model from America. For most other popular business ideas, they have their own version. Uber – EasyTaxi, AirBnB – WidMu, Blue Apron – Hello Fresh, etc.
The model is clear, take a successful American business and found a copycat somewhere else in the world where the business is not yet active. Mostly this means in their home country Germany but it can be anywhere else such as Sao Paolo for EasyTaxi. Rocket Internet has demonstrated that ideas are worth a lot because they take the good ideas and repeat them with another team and a simple execution formula. The execution becomes routine, the teams are composed of whoever is available, so where does it leave the value? In the idea. But clearly ideas without a good team to execute them are worthless. Lacking good people, a good idea is like a stray dog looking for a master. The most famous example of this is the Shockley Semiconductor Laboratory. Started by the Nobel Prize winning William Shockley, the laboratory built some ingenious products in the semiconductor industry that were set to revolutionize the industry. The problem? Shockley himself. Although his ideas were revolutionary, William’s management style has been described as abrasive and paranoid in many articles and books (Coller 2009). He routinely insulted and belittled his staff making working with him near to impossible.
As to be expected, his relationship with his initial backer disintegrated and Shockley was left to his own devices with the company floundering in 1969 as the transistor industry flourished. Where does it leave the value? In the idea. If our ideas are worth something then how do we value them? TED speaker and author, Derek Sivers (Sivers 2009) has suggested a tongue in cheek formula to compute the worth of an idea but convincing propositions are hard to come by. As we now know, a billion dollar idea in right hands is worth a billion dollars. In the wrong hands nothing. My suggestion is the following: If you have a great team who can execute on your billion idea, then it is worth exactly that. Companies such as Rocket Internet have shown us that a good execution can be orchestrated.
The wide range of businesses they have entered also show that being an expert in the given field is not necessary and so the value of the team is less. Once we realize that all the different parts can simply be clipped on to generate success, then all that is left to drive value is the idea. Each part of the business becomes a commodity apart from the one thing which isn’t formulaic. A good idea is exactly that, good. People can create hundreds of ideas but this doesn’t mean any of them are good. Because so many of the parts of a startup have become systematic, the most valuable thing now is a tool to determine the value of an idea. What we need is an idea to value ideas. Now that is something valuable and worth much more than any single idea. It is something VCs have struggled with for years and still seem not to have cracked it. If you have one great idea, then this should be it. Any takers?
The New Form of Startup Scaling
For most startups, the biggest question haunting them today is not money but scale. According to Forbes magazine, the number one cause of startup death is premature scaling (Furr 2011). So the question on every entrepreneurs’ lips is: How quickly and when to scale? But before you answers that, I’d like to ask you why no-one seems to be concerned with the even bigger question, what is scaling all about? And what is so different now that small groups of people can create billion dollar businesses on their own? For generation Y and Z, many believe that scaling is a 21st century problem. To receive VC funding or earlier stage investments, one always needs to be able to demonstrate the ability to ramp up sales quickly. Because of this many young entrepreneurs think that the question of scale is fundamentally a startup issue. But it’s not. The success of businesses for centuries has been all about effective expansion. Even for ancient businesses wanting to grow, skillful scaling was the key to prosperity.
Thousands of years ago, when the Christian church was just a small group of insurgents fighting for their spiritual goals, they formed some of the longest enduring corporations. In fact, according to the famous historian Bruce Brown, “[t]he oldest surviving corporation of any sort is the Benedictine Order of the Catholic Church, which was founded around 529 A.D.” (Brown 2015). As these organizations took it upon themselves to scale, with the meagre means of sending people on foot or horseback for the expansion, it happened in a straightforward manner. Each person could convince a fixed number of people to join. Some were more effective than others and some had better opportunities than others simply because they lived in a major city. This form of scaling, using people to attract more people or business, increases linearly for each person. Over time as the size increases, the growth of the corporation multiplies because more and more people are coming in contact with new opportunities (including the old members). There is a limit to this (all the remaining non-customers) but in theory, the business can scale quite quickly.
When it comes to profit-driven businesses, one of the oldest is probably StoraEnso. It was founded in 1288 in northern Sweden and back then was called Stora Kopperberg, named after the large copper mine the company dug its riches from (Brown 2015). The mine became so powerful that, in the 1600s, it was supplying two-thirds of European copper needs with roofs of royal palaces from Versailles in France to Stockholm in Sweden being made from the versatile material (ERIH 2015). One of the oldest surviving companies in the world is StoraEnso founded in 1288. The approach of this corporation was similar to that of the church but less effective. To mine more material, more people were employed. In this case, each person simply added a fixed amount additional business and growth simply scaled additively. Basic tools and machines to assist with the work increased the level of scaling but the company wasn’t built around these machines; they just made certain jobs simpler.
It wasn’t until the industrial revolution and the entrance of machines dedicated to taking over a significant portion of a company’s core business that increases scale became more meaningful. As companies such as textile manufacturers built their business around efficiently combine machines and people, a new type of scaling entered the picture. This kind of scaling meant businesses could quickly achieve the benefits of economies of scale and, with a modest capital investment, they could become massively profitable businesses. All due to their new form of scaling. The manufacturing industries initially dominated this form of scaling. Human-machine mixes became the basis for a new way to grow a company and explore new forms of profitability. With the appearance of electrical machines, conveyer belts, mass production and other improvements, the scaling just got better and better. In spite of the improvements, the type of scaling was still the same. It wasn’t until our digital lifestyles began that we experienced new explosive and exponential scaling which would redefine profitability. It would become possible to have thirteen man teams running businesses worth over one billion dollars (Wikipedia 2015).
Digital businesses have ushered in an unforeseen growth phenomenon. Powered by the Internet, companies are no longer restricted by proximity, transport or factory space limitations. They are open to the world and exposed to billions of customers – on day one. The profitability of these businesses is on a different scale to manufacturing ones. Even as manufacturers try to get in on the game, leveraging the internet to sell their goods, they are still unable to achieve the same level of scale due to having their scalability limited by their production capacity. Higher revenue per employee for Internet babies is the norm. Digital companies have shown us a different way to scale and a different way to measure productivity. This is why a company such as Uber which owns no cars but only code and apps can be worth more than one of the world’s largest car manufacturers, GM, which makes the cars so that this business can even be possible.
Uber owns no cars but is worth more than GM. What digital companies are showing is that the old yardsticks to measure companies are no longer applicable. It is no wonder so many people are left scratching their head after hearing how much a new tech startup is worth. The 21st century’s digital business’s biggest asset is its powerful, cheap scaling. And we still haven’t seen the end of it yet. As the introduction of electricity to manufacturing made production that much more powerful, similar things are happening for tech startups with platforms like the Apple App Store and Google Apps Marketplace. We have begun the second phase of more profitable scaling. If we look beyond this and remember the mind boggling profitable companies the Internet connected world has given us, then we can only wonder what this will mean for the next revolution in the ability for companies to scale. Thirteen man teams running billion dollar companies will become common and boring. As it starts people will scramble to take advantage of it but the billion dollar question is, has it already begun?
Cut Costs in Health Care by Treating it Like Pollution
We seem to have a problem. Health care costs are doubling every thirteen years in the US, (Regalado 2013). By 2030 they will devour a third of the US federal budget (Regalado 2013). In spite of this, the US was ranked last in 2011 by the Commonwealth Fund in quality of health care among similar countries (Wikipedia 2013). We can sense the impending disaster and it seems the hope is that our usual panaceas for all problems, policy, technology or better education, will someday deliver us from our pains. But how? The current status is that health care costs have been increasing from 13.6% of GDP in 1995 up to 17.9% in 2011 (World Bank 2013). Policy solutions seem to be difficult to find because often they involve saving money at the expense of someone’s health. Paradoxically, technology improvements that should be reducing health care costs seem to be costing the health care system more money than they are saving it, (Skinner 2013). The few serious cost reducing advances have a hard time finding wide spread acceptance, (Cohen 2013). Better education is also failing to find traction; we know more about the foods we eat than ever but problems like obesity are still on the rise (Wikipedia 2013).
Since there seem to be no obvious solutions within healthcare itself to make care more affordable, I suggest that we look outside of healthcare to find an innovative solution. My suggestion is to look for appropriate solutions by considering how we have reached society’s goals in other contexts, e.g., pollution control. In particular, by equating health care costs with “pollution”, we could set a goal of minimizing “pollution” but at the same time demanding that such minimization does not negatively affect “economic activity”, i.e. health care professionals being able to guarantee the same quality health care for the lower price tag. When it comes to pollution, there exist numerous methods to provide financial incentives to reduce it; cap-and-trade systems, carbon taxes, etc. Although each of these ideas has its merits, it seems difficult to apply any of them in a straight forward manner to healthcare. However, there is one method that has successfully improved pollution management which does seem promising for healthcare, technology forcing standards, (Goodstein 2011).
Technology forcing standards are a way of providing powerful incentives to firms and economic agents to improve the efficiency of their operations according to some standard (in the case of pollution it means reducing pollution per unit of output). The way the incentives are provided is by requiring the firms and economic agents to fulfill certain technological requirements by a fixed deadline. As an example of a successful technology forcing standard, in 1975 Congress introduced the Corporate Average Fuel Economy (CAFE) and mandated that car companies had to achieve an average of 18 miles per gallon (mpg) by the 1978 model year, and 27.5 mpg by the 1985 model year. Corporations were to be heavily fined if they failed to comply (however, there was some leniency built into the system to ease the transition). When one looks at fuel efficiency over this period, the CAFE policies can be regarded as a success. Average fleet fuel economy increased to 28 mpg by 1987 and had legislation forced car companies to continue in this direction, then we could have seen major increases through the 1990s (the CAFE standards were only increased again in 2009).
Technology forcing standards could be used in a similar way in health care to reduce costs. There are numerous former expensive specialist based procedures which were disruptively innovated until they were inexpensive and simple enough for the average consumer to carry out without the help of a doctor. Examples such as home pregnancy tests (which at the start of the 20th century involved a doctor sacrificing a rabbit to test for pregnancy!), blood glucose monitoring kits and infusion pumps demonstrate that technological improvements can reduce the costs of health care. The simplification of such procedures, once the realm of specialists, shows the effect innovation can have on reducing the costs of health care and at the same time maintaining quality. Technological improvements are also continuing to benefit more complex and specialised areas of medicine, e.g., heart surgery. Initially advances such as angioplasty empowered non-surgeons to treat conditions that were typically treated by cardiac surgeons.
This field is still presenting numerous opportunities for innovation and to see where improvements can be made we can look overseas, where local conditions sometimes allow more innovation. For example, in the US an artery clearing coronary bypass can cost more than $100,000, whereas in India the same procedure costs less than $2,000, (Gokhale 2013). Technology forcing standards, properly implemented, should lead to the correct incentives to maintain high quality health care while also reducing costs. It would of course be undesirable to create perverse incentives that merely result in medical service providers reducing costs by denying health care to yet more people. Technology forcing standards, properly implemented, should lead to the correct incentives to maintain high quality health care while also reducing costs. To achieve this, the government could first assess the costs of certain surgical procedures and demand that such services need to be carried out for a price less than or equal to some reasonable amount. Such a scheme should simultaneously guarantee the quality of operations.
This could be done by statistically measuring and comparing outcomes with previous performance. There are numerous advantages with such a transfer of expertise from pollution control to health care. First and foremost, such a scheme has the significant advantage that it leaves the cost saving strategies up to the relevant experts, i.e., doctors, hospitals and medical service providers. That these groups of people can achieve this has already been demonstrated. Technology forcing standards would hopefully give medical service providers the incentives to demand cost-saving technologies which would then encourage innovators to develop more cost-effective solutions to meet the medical service providers’ needs. Another significant advantage is that technology forcing standards seem to be easier to legislate than other options such as cutting costs, reducing health care coverage or higher taxes, (Goodstein 2011).
The Creative Destruction of Your Job
The rise of crowdsourcing, crowdfunding, crowdtransporting, crowdletting, etc., has transformed our economy. It has also ushered in the era of the shared economy. Previously marginalized people can now contribute, no matter how small, to all walks of life. It seems to be a fantastic opportunity for the world to access the untapped skill of the crowd. But what about the people whose jobs this makes redundant? Whither the expert? With the exponential growth in the internet, we have seen similar growth in internet based companies and services. Many of these companies and services exploit the internet’s connectivity to be able to reach people who were previously excluded from a typical business’ day-to-day affairs. These individuals are often willing to offer their “expertise” in return for money, recognition or simply because it is fun (Ipeirotis, 2010). More importantly they are often willing to offer their “expertise” at a much lower price than an expert carrying out the same work.
This has led to the proliferation of business opportunities such as Threadless, Airbnb, iStockPhoto, Über and hundreds more. These businesses engage thousands of people mostly on a casual basis, who are more than happy to make a bit of money on the side. However, for every flower each sharing bee pollinates, it leaves one less for the bees living only from pollinating flowers. In each of the previous examples, Threadless potentially puts professional T-shirt designers out of a job, Airbnb makes hotel chains seem uneasy about it pampering their guests, iStockPhoto shutters work opportunities for professional photographers and finally Uber is slowly but surely putting taxi drivers out of work. Admittedly, professionals in the respective industry have the opportunity to jump boat into the new form of sharing economy. It is an option but a very uncertain one. The sharing economy is often based on one-off opportunities for its workers. Sure there is money to be earned but it is typically not a stable wage and one that is not as well paid as the original job done solely as a professional.
This makes the switch for those whose vocation is threatened all the more difficult. In addition, each of the sharing economy disruptions often employs technologies or business models foreign to practicing professionals in the areas they are disrupting. It often means exploiting the internet to sell larger volumes of products at a lower price. This makes the switch for those whose vocation is threatened all the more difficult. Jump back to your perspective now. You are a consumer of these services. You now have unprecedented access to photos that were previously too expensive or difficult to find; you can now hire a fully equipped apartment for your family, avoiding a poorly outfitted or ridiculously expensive hotel room; taxis close to you and on demand as well as T-shirts that are cheap, unique and with clever designs. Who’s to complain? Just like automation before it and other related technological advances, the sharing economy is great at disrupting the job status quo. Although instead of completely removing jobs, it is making them more spread out and accessible now. Just like a disruptive innovation, it opens up new markets or replaces previously expensive services with cheaper and more basic ones. One could almost say it is democratizing access to certain services.
In fact, this disruption of the expert can be seen as the hallmark of our society’s inexorable improvements in living standards. For example, in medieval Europe, guilds controlled the ownership of tools and the supply of materials for numerous industries. This prevented others from gaining access to certain knowledge or carrying out the work of guilds. These services included everything from doctors to bakers and granted the members of such a guild a monopoly. However, according to certain experts (Ogilvie 2011), the guilds generated no clear positive externalities and it seems that industry only started to flourish after the guilds began fading into irrelevance. Despite the claim that such organizations maintain quality, granting more people the ability to provide services seems to be a good thing. This is actually a central tenet of free-market principles. The crumbling of the structures which protected previous industries from entry (skill barriers, cost barriers, etc.) has already exposed many professional services to the vagaries of the free market. The services now provided by sharing economy is continuously expanding and entering markets previously thought to be the domain of experts.
The shared economy business model is one of many disruptions which bring services to more people and at the same time opens up job opportunities for less skilled workers (think of the loom, Ford’s production line, computer programs, etc.). Although this time it seems somehow different. We are replacing expert occupations with new jobs that don’t always seem to be as attractive or able to provide employees with the wherewithal to survive. So what is seen as an advantage for the average consumer has far-reaching implications for those employed in such industries. However, the question is, are these services benefiting the long term good of society, at a short term loss to those employed? If the shared economy is similar to other historical advances for the common good, then maybe we should all start working on ways to innovate our highly skilled jobs out of existence via the crowd?
Answering these questions is not simple. There are always two sides to this discussion and one side is from society’s perspective and the other side is from the individual’s perspective. Here I’m going to look at both and explain how we can get the most out of these shared economic systems. In my eyes, the answer revolves around education. In my eyes, the answer revolves around education. Like the guilds that fell before them, the experts whose jobs are eroded away by crowd-based activities are often replaced by easier and cheaper access to services and products for society. Based on this one would think that the rise of things like the sharing economy seem to be intuitively good for society. The question remains what to do about the newly unemployed? I think that the answer lies in education and retraining. In fact regardless of what one thinks of the shared economy, providing easy access to education never seems to be a bad bet regardless of the reason why. Neither for society nor for the individual. It is well known that education bestows significant benefits on individuals such as:
- Children and youth acquire more expanded social capabilities than those not in school (Holsinger 1974),
- There are large direct effects of education on status attainment (Duncan et al. 1972),
- Even a direct causal role in occupational transition even late in the individual’s career (Blau and Duncan 1967)
For our society, there are strong arguments that investments in education lead to a stronger economy. For example, economists infer the aggregate positive economic effects of education based on the income differentials between educated and less educated (Blaug 1969). However, there are more direct correlations between investments in education and a stronger economy when one compares different countries (Freeman and Soete 1997). However, there’s more than one way to educate a person. One could also argue for skills training on the job, paid for by the employer not the government. However, this seems risky for employers because they pay all the costs but the employee has all the benefits and could easily leave the job to a new employer (if such training doesn’t create loyalty). Hence, logically one would believe that universities need to supply this because employers would have too low incentives to provide it.
In addition, a taxi company would hardly be prepared to send its drivers to programming courses to improve their employability. In the 19th and early 20th century it was schools that provided the education and for most jobs it was sufficient. Because technology has advanced, now it’s the universities that need to fulfill this role. So, if we wish to provide benefits for society with the great advantages of the shared economy and at the same time give individuals a chance to adjust to the new economy, then education is the key. You should be concerned by the escalating higher education fees. If you agree with this, then you should be concerned by the escalating higher education fees over the last 20 years. This has made education unaffordable for millions of people. If the government decides not to support this necessary training by somehow reducing education fees, then one can only hope that the appearance of massive-open-online-courses or similar ideas will be able to fill the gap.
Based on massive-open-online-courses poor completion rates and limited focus, this solution still seems a way off. Hence we can surmise that the sharing economy seems to be good for society, we just need to make sure it’s also good for me an you. My opinion is we need to keep people educated and equipped with the right skills for today to make sure the system is sustainable. To achieve that, we need to increase the access and affordability of education. As Alvin Toffler once stated “The illiterate of the 21st century will not be those who cannot read and write, but those who cannot learn, unlearn, and relearn.”
The Unexpected Impact of Modern Innovations
Today’s pace of life can make you feel like you are strapped to the top of a rocket. With more and more screaming for your attention, we barely have time to send that long forgotten birthday card, let alone to sit down and think about the long-term effects of our innovations. But what if your latest and greatest innovation turned out to damage the lives of millions instead of improve them as planed? What if your proudest moment was also your most heinous? At the start of the dual Oscar winning documentary “An Inconvenient Truth”, Al Gore draws our attention to two important components of the modern world. Although both have been around for thousands of years, by advances in technology, they are now able to detrimentally affect the lives of millions, or even billions, of people on the planet. The first is weapons innovation. The second is the effect our advances are having on climate change. When improper checks and balanced are used, we can now add a third to this; information technology.
If we’re not careful, it may cause more damage than climate change and armaments combined. When it comes to the climate and weapons of mass destruction, we either have a grip on it or we are starting to try and control it. For information technology, we are in completely unknown territory, so we can only guess the outcomes. It is also an area of innovation used and exploited by practically everyone pushing the innovation agenda. The problem with that is, if we’re not careful, it may cause more damage than climate change and armaments combined. Why? Let’s first take a step back and create a dichotomy of the type of serious information technology disasters. The first type is major and seriously affects a limited number of people. The second type is catastrophic and affects exponentially more. And the scariest thing about both types? They both occur in the same way. It’s only the number of people affected which differs. An example of the first type of major disaster caused by our data driven lifestyles is the London Ambulance Service chaos of 1991(Körner 1996).
Like most innovation projects, tragically the disarray was caused by the government trying to achieve an admirable goal; ambulances reaching 95% of emergencies within 15 minutes. The plan was to achieve this via a computer-aided dispatch system. However, as they started to partially implement the system via a semi-automatic scheme, the number of emergencies reached within 15 minutes dropped from the normal 65% to 30%. Ignoring these poor results, the fully automated system was introduced and after the first day fewer than 20% crisis situations were reached with the percentage falling again the next day. After only six hours of using this system, it was taking staff up to 10 minutes to answer incoming phone calls. The volume of calls increased. People wondered why ambulances weren’t coming. Management decided to switch back to the semi-automated system. One week later the whole system crashed and 1.5 million pounds were flat lined.
Why did this happen? Because management was determined to introduce the new technology in 14 months. It was estimated after the disaster that a proper implementation should take around five years with all the necessary testing and quality controls. This is a point I will return to later. An example of the second type of major disaster is the health care scare in California in 2007. It was a malfunction in the Department of Health Services’ new automated computer system which cut off the entitlements of thousands of poor seniors and people with disabilities. As a result, Medicare promptly cancelled their healthcare coverage (Dormehl 2014). Unlike the first type of disaster, things like this not only affect a city, but whole states or countries. Although few disasters of the second type have occurred, we are nonetheless witnessing our society getting closer and closer to such catastrophes as can be observed in the constant stream of headline technology problems (credit card fraud, identity theft, etc.). What’s worse, sometimes systems that purport to protect us can cause more harm than good. One such system is the one used to classify people as terrorists at airports.
These systems are so inaccurate that each week around 1,500 ill-fated airline travellers are incorrectly classified as terrorists. Examples of this include “a four year old boy, former Army majors and an American Airline pilot who was detained 80 times over the course of a single year.” (Dormehl 2014) As more and more services enter the realm of code, the previous example is becoming more common. However, it is not just such errors but also intentionally designed features which can cause harm unintentionally; physical, psychological or both. Goolge’s powerful ad serving machine, AdWords, is known to present African-Americans with adverts such as “Have you ever been arrested?” accompanying their Google searches (Dormehl 2014). As software relentlessly devours more services with more hastily implemented code, we can only pray for the best. According to the co-founder of one of Silicon Valley’s most powerful venture capital companies, Marc Andreessen, software is currently eating the world. As software relentlessly devours more services with more hastily implemented code, we can only pray for the best.
These looming disasters should urge us to think and reflect on these new innovation tools as we are proselytizing innovation’s benefits. If our idea is to be released upon millions, are we sure what we’ve done has the necessary quality controls behind it to minimize a snowballing disaster? As the pace of innovation picks up, there is a clear need to make sure our checks and balances are appropriate for the millions affected by our ideas. In this respect, many 20th century risk mitigation tools may no longer appropriate. We need to carefully consider a set of quality checks appropriate for the extreme reach of our innovations. Examples such as the 2010 Dow Jones Flash Crash, which annihilated 1 trillion dollars of wealth in just 300 seconds, is a violent reminder of the lack of proper quality controls. As the people defining the innovation agenda of some of the largest and most influential companies in the world, we have a responsibility to think about the tools and techniques we are developing. It is a matter of professionalism even if you aren’t interested in an ethical debate because it would be tragic to be a victim of one’s own proud innovative idea. You just need to ask yourself, am I the masters of my innovations or is my drive to innovate mastering me?
Game-changing Innovations are Right in Front of You, So Why Don’t You See Them?
Your greatest innovation opportunity may be right in front of you. The problem is you don’t see it. Every day for the last decade of your life this problem has annoyed and frustrated you. Its solution is worth billions of dollars and would open up a totally new market. The problem is, like the millions of other people who have this problem, you don’t think of it as a problem anymore. You’ve been desensitized. You’ve lost your ability to innovate because of something called habituation. In scientific terms, habituation is the process of becoming desensitized or unresponsive to non-threatening stimulus because of repeated exposure to it. That annoying mark on the wall that you stopped seeing; habituation. That annoying clock tick-tocking in the background that you don’t hear; habituation. That horrible odour your colleague left behind that you no longer notice; habituation. That billion dollar frustration which you could easily solve but no longer notice; habituation.
Habituation is an amazing form of learning. It has been shown in essentially every species of animal (Jennings 1906). So it must be essential to every species’ survival and have arrived early in the evolutionary game. It allows us to save energy and reduce stress by not wasting full-blooded survival antics in the face of a gust of wind. It also plays a role in less life threatening things such as when you’re eating, giving you the feeling of being full when you’re not (Raynor & Epstein 2001). A lack of habituation is a catalyst for game-changing innovations. For companies and individual it is a bane. It stops us from noticing those itches which are worth a fortune. If you could turn off this learning process, then all of a sudden you would notice all the things people tolerate because they have learned to ignore them. However, if you were to draw their attention to it, they would notice the annoyance and gladly pay for your solution. A lack of habituation is a catalyst for game-changing innovations.
One might object that in companies it’s usually not finding an idea that is a problem but the execution. However, for the real innovators in us, sometimes we’d like a way to find new disruptive ideas and not just incremental ones. It is the recognition of everyday frustrations that can lead to that. In fact, one of such inconvenience seems so obvious you could imagine the ancient Greeks using it, if they had noticed it. Indeed, you use them every day to open almost every door you encounter which doesn’t open automatically; doorknobs. Such an obvious convenience should have been around forever, however, this is not the case. They first started assisting people’s door problems in the late 19th century when Osbourn Dorsey invented such a mechanism. He then filed and later received a patent for the first doorknob device which we now recognise. Up until that point, many people probably thought doors were a necessary challenge with the large heavy latches commonly seen on gates nowadays.
The upshot is we need a way to dishabituate us so that we can see the simple game-changing innovations such as doorknobs. We need a way for annoying things to become annoying again. But how do we do this? Luckily researchers have been asking exactly this question for decades too. In the meantime they have discovered many practical ways to intensify your innovation itch (Kaufman & Needman 1999). What’s more they’re extremely easy to do and some of them are even enjoyable! The first and probably most well-known is to change the context. This means dramatically changing the way we look at our surroundings. Redecorate, refurnish, take away and add back things. By doing so, a situation becomes new to us and so we notice everything about it again. As you do this, try and notice all the frustrations. The next one is something you have probably been told a thousand times. Be a good listener. Next time someone complains, listen and ask yourself what you can do about it.
The visitor who is not used to your annoying way of opening doors (maybe because he/she doesn’t have any) may have a good point. In this context, complaints can be one of the greatest sources of innovation. Seeing how others live their life and cope with their problems can be an extremely powerful innovation kick. The final one I’ll address here is changing your point of view on life. Get out of your everyday rut and experience something totally different. Travel overseas and outside your time and comfort zone! When you come back, not only will everything be new to you again but you’ll hopefully have altered your perspective too. Seeing how others live their life and cope with their problems can be an extremely powerful innovation kick. Each of the suggestions presented here is relatively simple for most people to do but are three of hundreds of ways of exposing one to life’s endured frustrations. They won’t open your eyes to every frustration but should provide one with impetus to thinking about ways you can learn to notice serious innovation opportunities.
You may now rightfully ask, what was the doorknob inventor’s dishabituation trick? There must have been thousands of people who were annoyed by the cumbersome latch and similar devices. We can’t be sure but it could have been cultural and due to Osbourn Dorsey’s background as an African-American. This may have helped him not accept the status quo and notice the frustrating door opening mechanisms in place and decide there must be a better way. Starting the desensitization cycle may make evolutionary sense but it may also be blocking you from seeing your next big opportunity. For some innovative ideas, saying it’s right in front of your eyes seems to be quite apt, it just may require you to look twice at what’s really there.