Monday, October 24, 2016

The Harm in Trying

There is in the present day a mania for innovation, with firms desperately trying to demonstrate that they are constantly delivering new ideas to the market for fear of being seen as stagnant and decaying by their investors.  But at the same time, there is the fact that new products and new companies fail the majority of the time.  The actual rate is hotly debated (the Pareto assumption of 80% is the most commonly cited term by those who have done no actual research, but even the most generous sources typically suggest a success rate of less than 50%).  

Putting the two together, this indicates that businesses are very excited about innovating, but are not particularly good at evaluating whether a novel idea is actually any good.  In spite of this, there remains the general assumption that innovation is always a good thing, and even when an innovative idea fails, “what’s the harm in trying?”

The harm in trying is that failure weakens the reputation of a company and its brands.   Customers who were loyal to the brand are embarrassed by its failure and lose faith in its products in general.   Prospects whose first exposure to the brand is a poor idea are disappointed by their encounter and become doubtful of the brand’s established products.   In all, people have more confidence in a company that seems stagnant than one that seems desperate and incompetent.

The harm in trying is that even success can weaken the integrity of a company and its brand, particularly when new products are incongruous with the market’s conception of the brand it can cause dissonance and a loss of the brand’s strong association with its areas of core competence, to the point that the market becomes confused about what the brand means.  Even brand loyalists become doubtful when the meaning of a brand is diluted by new products that suggest the company is moving in a new direction, and the future of its traditional product lines is uncertain.

The harm in trying is a great deal of wasted capital in pursuit of wild ideas.   It is often pointed out that companies have become exponentially more efficient in their operations, which should result in greater revenues for the same level of expense.   But where is this additional capital being used?   Product prices are not declining at a corresponding rate to efficiency.   Wages certainly have not increased to reward workers for this additional productivity.   Investment earnings have not changed significantly in over fifty years.   There seems to be a pit between the top-line revenues and bottom-line profits of a firm into which the windfall of productivity is falling, and it may well be the cost of chasing new ideas that end up wasting a great deal of capital.

I don’t mean to come off as a Luddite here, or to suggest that all innovation is bad and that we ought to collectively stop trying to evolve – but merely to point out that innovation for innovation’s sake is a bad idea.   The collective “we” must pause for a moment to be clear on the goals we are trying to achieve – because while a successful innovation can deliver to the market, the workforce, and investors, not all innovation is successful, and a majority of innovations fail in a harmful way.   Perhaps we need a better method of screening new ideas rather than rushing them to market?   This seems the most likely culprit.

Tuesday, October 18, 2016

Emotion and Economics

The study of economics is based on the rational decisions people make in production and consumption of goods and services, or so it is said.   But economic behavior is like any other human behavior, driven by a psychology that is far more emotional than rational – and it is the emotional aspect that is very often overlooked or pointedly ignored by economists.   The vast majority of economic activity is driven by our emotions.

Every product, be it good or service, is desired for the satisfaction of a need or a want.   But “desire” is an emotional state and the difference between a need and a want is subjective.   The litmus test for a need is to ask if a person can survive without something, and very many of the things we claim to be physical needs are actually emotional desires.

Consider clothing, which is said to be a need because it provides protection from the environment (sunburn and hypothermia).  In temperate climates neither of these needs is valid and even in hostile climates, a person needs only one set of clothing to provide the protection required for survival.  Everything else about clothing is a want – the want to be stylish, the want to avoid having to do laundry daily, etc.   The same can be said for food and drink, as we pay for more quality and quantity than is necessary for survival.  So even our needs are to a great degree wants that address a desire for convenience, esteem, sensual pleasure, or some other non-survival urge.

In terms of human desires, there are fundamentally only two: we wish to maintain our present state or we wish to improve upon it.   Economically, we wish to continue to consume the products we presently consume or we wish to consume something more, something better, or both more and better.   This is the basis of all human desire, hence of all behavior that is undertaken to satisfy desire, hence all economic behavior.

The second factor in economic decisions involves cost.   Everything we wish to obtain must be produced, either by our own effort or that of someone else (who expects payment in exchange for their effort).  The most basic driver of a transaction is the belief on the part of both participants that what they will gain from the transaction is worth more to them than what they have to part with (or undertake) to obtain it.  

This is why economics in a free economy is productive rather than zero-sum: both parties gain something that they value more, for emotional reasons.   When we talk about prices, we speak of them as if it is a balanced equation: that to buy a shirt for twenty dollars means the shirt equals twenty dollars.  But the person who bought the shirt valued it more than twenty dollars, and the person who sold it valued the twenty dollars more than the shirt.   This dual profit is conveniently ignored, and this is the reason economic theories are often surprised by reality.

The relatively new field of behavioral psychology seems to consider this, but in a very superficial and unsatisfactory manner.   If there is to be a school of economics that lends itself readily to application to real-world economic behavior, it must make better account of the emotional side of economics.

Thursday, October 13, 2016

Fostering Innovation

I had the opportunity to chat with an acquisitions editor for a small publishing firm, and recognized that her job was highly analogous to the way in which innovation is fostered in commercial organizations.   Perhaps I’m chasing an analogy, but here goes …

The job of an acquisitions editor is to develop relationships with individuals who have interesting perspectives – or more specifically, individuals whose perspectives would be interesting enough to a sizable body of readers that her firm can make a profit on printing books that communicate those perspectives.

The editor, herself, is not possessed of an innovative perspective: if she were, she would write books instead of soliciting others to write them.  But at the same time, she is able to assess ideas and recognize when someone else has an idea that would be compelling to the market her firm serves, to establish relationships with those who have the potential to become authors and, and ultimately to deliver those ideas to a market that is willing to pay for them.

This strikes me as entirely similar to an executive when they sponsor an innovative project: they do not know the solution to their problem (or a method to seize an opportunity) and lack the domain knowledge to formulate a solution to the problem – but they are able to recognize when someone else has a good idea, to help them develop that idea, and to push that idea to the market where it will be profitable.

In terms of our conversation, the editor approached me because she saw all of this blabbering I do online and believed there might be potential to develop me into an author.   She is very aggressive in building relationships with unknown thinkers – because those who are already known have established relationships with other publishing houses, she has to hunt fresh talent from the body of people who are not already published. 

And back to the analogy: the executive who wishes to be innovative must seek out relationships with unknown innovators – the unrecognized people within his own firm, or those who are undervalued by their current employers – and bring them aboard his own organization.    Again, those people who are already known for having had innovative ideas in the past are already employed and valued by their employers, and are unlikely to move.  Not to mention that a person who is acknowledged for one idea tends not to have another – they exploit their one innovation for all it’s worth and cease to think laterally – but perhaps that is a separate topic.

The editor invests significant time and takes on significant risk in investing her firm’s resources in the development of unknown authors.  They are unproven, and their books may not sell as well as expected.   There is the constant hope of discovering someone who will become the next trendsetter and whose book will sell exceedingly well, and there are a lot of authors on whom the firm breaks even or takes a small loss – but this is not considered to be failure, but the cost of exploration.

Likewise, the executive takes significant risk in sponsoring an innovative idea that is, by its very nature, entirely different from ideas that have been tried and tested.   The innovative idea may take the market by storm, or it may fail horribly.   And ideally, the executive recognizes that the failures are merely bets that were lost on the way to placing one that will be a huge winner, and is not discouraged by innovations that do not have as much commercial success as was hoped.

Finally, something that this particular editor recognized is the need to build relationships with people before they become successful.   Once a person has been recognized for an idea, he will be beset by the larger publishing firms with more resources to bring him aboard.  The key to her personal success is establishing relationships with people who have untapped potential, so that when the time comes and they have a breakthrough idea, she is already known to them and stands a better chance of getting them to work for her, even when the bigger houses come to them after the fact.

Likewise, the innovative executive must build relationships with people who have promise, but have not yet produced their “big idea.”   If they do not show any interest until a person has an innovative idea, they are seen as parasites rather than facilitators of innovation, and people bristle when they are approached in this manner.   While some like to think that they own all of their employees ideas, they will find it very difficult to extract them unless there is already a trust relationship in place that began long before the innovative spark took flame.

In closing, my sense is that this particular editor is a very smart professional, who has succeeded in establishing a connection with me that she can exploit if ever I have a breakthrough idea (still writing, still waiting).   Her approach to gathering talent and managing relationships seems to be very sensible and perhaps even a bit innovative, given that it is highly unusual in the industry.  And I think that “leaders” in the commercial sector would do well to emulate her practices, as their challenge is the same – whether an innovative idea leads to a book or a commercial product is incidental, and the process of building a network of individuals with potential seems entirely analogous.

Friday, October 7, 2016

Perfection of Object vs. Perfection of Experience

Where technophiles are in control of a company, their goal is the perfection of their product – to increase the performance and efficiency of the product, to add more features and functions, and otherwise to make the product “better” by an abstract technical standard.   But a far more important question is whether the market agrees with their ideas about what makes a product more desirable.

Sometimes, the answer is “yes.”   When a significant market segment sees gas prices as burdensome and is frustrated by how slowly web pages load, there is sufficient demand for a more fuel-efficient engine and a faster internet connection and the firm that delivers this quality will attract customers.    But the market does not have an unlimited appetite for efficiency improvements – where the majority of the market is satisfied with their gas mileage and internet speed, there is no appeal for a product that is “better” than the competition in these regards.

And this is where many firms disconnect from the market – they attempt to perfect their product in ways that the market does not value, or continue to pursue a quality that the market no longer values.   Internet access is a fitting example: two decades ago it was a serious concern, but today most product offerings offer sufficient bandwidth for the consume needs, yet firms continue to advertise their network speed to a market that doesn’t feel the need for more than they have.

This is easier to witness for goods than for services because the capabilities are evident in the object, but firms who produce a service also suffer from the same issues.   Consider the way in which hotels are constantly adding additional services for guests, and the way that guests are beginning to resent paying fees for services they do not use (the “resort fee” for a workout room and a pool that the guest never visits).  In this regard, it is easier to measure customer discontent with an overly-sophisticated product that leads them to pay for capabilities they do not value when the product is a service, but it can also be seen in goods where customers reject the “high end” model that offers unattractive qualities for an additional cost.

This is to say that perfection of product is only meaningful to the market when it contributes to perfection of experience.   Where any product is enhanced in ways the customer does not value, that enhancement is an unnecessary cost and an undesirable price premium to a customer who seems no benefit in the additional sophistication.

Unfortunately, the technophiles seldom see this.  They pursue perfection of object regardless of whether it is what the market desires, and often pointedly ignore perfection of experience until it becomes a significant detriment to their revenues.   When customers switch to a simpler and less expensive alternative, it hits the providers of complex and expensive ones in the pocketbook.   Maybe they recognize this in time, or maybe they continue to pursue perfection of product and attempt to “educate” the customer as to why they ought to pay more – though most do this very poorly, failing to connect feature to benefit at all.

This may well be the reason that technology firms are so short-lived.  During the brief moment in time where the goals they are pursuing happen to coincide with the desires of the customer, they experience commercial success.  But this is entirely by coincidence, and when the market changes, the firm clings to the objectives that led to its temporary success, ignoring the signs that its interests are out of joint with those of the market.

The solution to this problem is simply one of customer awareness: considering the problem the customer is trying to solve (rather than the solution the firm provides) and asking more insightful questions to recognize not only that “X is important,” but the degree to which having “X” contributes meaningfully to the customer experience – and to stop pursuing it beyond that point.

Monday, October 3, 2016

How Innovative Managers Kill Innovation

I recently read Verganti’s book on Design-Driven Innovation, which was focused on a significant point that many writers about innovation seem to miss: there is an enormous difference between being personally innovative and creating an environment in which innovation can flourish – and neglecting this difference is the very reason that many managers kill innovation when they mean to nurture it.

The innovative individual is a creative thinker whose ideas are highly unusual (they would not be very innovative if their ideas were mundane), who requires an environment in which they are able to explore these thoughts, to gain support to develop them, and to have just enough direction to keep them from going too far afield so that their ideas can be implemented.  If they are controlled rather than directed, their creative faculties shut down and they become order-takers, doing as they are instructed rather than thinking outside the box.  This is the very nature of creativity.

The problem is that when an innovative person (or one who merely fancies himself to be innovative) rises to a position of authority, they continue to try to be personally innovative and treat their staff as helpers rather than independent thinkers.   The innovative manager is the idea-man, and his staff are merely drones that do his bidding and do not have the freedom to pursue their own idea – which, in effect, is to stop them from being innovative and become order-takers.

The result of this behavior is not innovative management, but traditional management – in which there is one mind and many hands to carry out its work.   So rather than having a staff of ten or twenty creative minds all contributing innovative ideas, the firm has one creative mind (the boss) and ten or twenty people who are not permitted to think, and who in time become disgruntled and drift away, or remain as warm bodies collecting a paycheck and not putting their minds to good use.   Obviously, this is not what is intended by a firm that sets up an innovation lab – but it is very often the end result.

To be effective as an innovative manner means putting one’s own creativity aside (or pursuing them individually while refraining from using the authority of their office from dragooning others into supporting roles) and recognize that being an effective manager of knowledge-workers requires facilitating the work of others rather than relegating others to handle the mundane tasks and subordinating them to authority.

Few creative people are able to successfully lead other creatives for this very reason – they wish to continue pursuing their own ideas and treat their staff as resources to do so, rather than remembering what it is like to be a subordinate to a traditional leader who kills innovation.   They may pay lip-service to the notion, and constantly criticize their staff for not contributing ideas while behaving in a way that discourages or prevents their staff from doing so.  With hire-and-fire authority, a word of discouragement is a significant threat that intimidates and silences those who do not fall in line, so even an occasional discouragement trumps their inspirational speeches, even in rare instances when they are earnest.

Whether traditional leaders are trained in creativity or creative individuals are trained in leadership, this point seems to be lost: that the way to manage innovation is to give creative people the support, resources, and latitude to pursue their own ideas with only gentle direction to keep them aware of the constraints – and it is especially important to make creative people aware that the transition to a leadership role requires them to make a shift in their approach, to be a champion of workers who deliver innovative ideas rather than attempting to remain personally innovative to the detriment of others whose task it is to innovate.