Friday, July 29, 2016

When is Innovation Harmful?

Businesses and the people who work at them tend to go to extremes.  Rationally, an objective should be pursued only when it makes sense to pursue it – but emotionally, an objective becomes and end-all-be-all.  In particular, I’ve been thinking about the topic of innovation and the way in which firms seek to “always innovate” rather than focusing their time and resources for innovation in areas where it makes sense to be innovative.  Nothing – including innovation - is a categorical proposition.  It does not always make sense, and it is not always productive.   There are a number of instances in which innovation is pointless or counterproductive.  Here are a few examples:

Innovation Yields No Market Advantage

The main reason to innovate is to gain a competitive advantage in the market – so investing excessive effort in an innovation program that has no impact to market performance is wasteful and can be counterproductive.   A good litmus test is to ask whether the customer can witness and appreciate the results of innovation.  If the answer is “no” then your R&D dollars are likely better spent elsewhere.

A common misuse of innovation is on transforming internal services such as logistics and accounting.   These operations rarely have an impact on the customer and innovations seldom yield any noticeable improvement.   Efficient operations can improve financial performance and should definitely be considered, but unless logistics or accounting is a core service of the firm, innovation in these areas will likely be negligible in terms of market advantage.  The firm would be better off wither seeking to optimize (rather than innovate) or outsourcing these operations to a more efficient provider than attempting to improve its own internal services.

Market Demand Supports a Basic Good and/or Service

There are instances in which there is sufficient demand for a product that does one thing well and customers see no benefit in enhanced or ancillary services.  This can be tested through market research that asks the customer what they value in a product – where it is unrealistically believed that the customer would learn to want something if only they could get their hands on it, then test marketing will uncover a bad decision.

There are shopworn examples of the Swiss Army Knife, a tool that does many things poorly and nothing particularly well, or the Internet-enabled toaster that offers functionality that no-one wants enough to pay for.  There is plenty of demand for a toaster that just makes toast well.  It doesn’t need additional capabilities or new uses – it just needs to do one thing well.   Here, innovation is unnecessary and fruitless, and development resources are better directed to making the product better, cheaper, and easier for its existing purpose.

Time and Money are Needed to Innovate

Quick-and-dirty innovation is seldom fruitful, and while the innovation cheerleaders are constantly using fear of obsolescence to push half-baked ideas to market prematurely, it takes time to innovate well: to explore a problem, evaluate solutions, and set up operations to provide them requires a firm to move at a more deliberate pace, and a bread-and-butter product that is not innovative may still generate sufficient revenue for the firm to stay afloat. 

When this occurs, the current (and soon-to-be-obsolete) product is needed to provide the life-blood of the firm while it seeks to make significant changes in its core operations.  The basic product and its performance can be marginally improved by optimization and efficiency improvement rather than innovation.  Particularly when this product is scheduled to be phased out when its successor is sufficiently mature, investing in innovation on that line is not merely beating a dead horse, but trying to feed one.

We Don’t Know Why Our Competitors are Winning

In some instances, insiders at a firm have no idea why its competitors are winning – they may seek to imitate the practices of other firms (aka “industry standard best practices”) without knowing why other firms are doing these things.   This is a very bad practice because the company will eventually be doomed – but it is a very common one and a situation in which innovation is impossible because the firm does not understand the market.  Hence, any attempt at innovation would be a shot in the dark, more likely likely to waste scarce resources than save the firm.

This situation is entirely similar to the firm that needs time and money to innovate, but is different in that a firm in this position doesn’t know how to innovate at all – and if it can admit that, then it is a rational decision to stop innovation efforts and retrench until a strategic approach can be discovered and implemented.   Happy accidents occasionally occur when an ignorant person stumbles on a viable solution – but this is the exception rather than the rule.

The Firm is Stable and Profitable 

Perhaps the best reason not to innovate is that innovation is unnecessary: the firm has a commanding position in its target markets and is entirely capable of sustaining itself on its revenue and there is no plausible evidence to suggest that the competitive landscape will change.  Or more importantly, when there is no sign that customers are dissatisfied with the product, and change would decrease satisfaction and loyalty rather than increase it.  The best example of a firm that shot itself in the foot by innovating where it was utterly unwanted by the market can be summed up in two words:  New Coke.

This brings us back to the original consideration: that the extremists who feel that innovation is always necessary lack and understanding or appreciation of stability and success by current methods.   There are many firms whose operations are successful and who can maximize performance by maintaining their present operations.   There is always room for improvement, or so it is said, but in this situation efficiency improvements that do not jeopardize the firm’s position in the market and the financial sustainability of existing operations are better than innovating with wild abandon.

Tuesday, July 26, 2016

Collateral Damage

A few incidents in the media lately have called attention to the “problem” of indiscreet employee remarks in social media – some of them entirely outrageous, others seemingly innocuous – that led to the termination of employees.   This has been an ongoing issue, and is a constant threat to the employee and a constant concern to the customer – but as usual, the attention is drawn to a symptom, rather than the root cause.

The root cause, to my way of thinking, is the breakdown in a relationship between employee and employer, which is being poorly handled on both sides.  Depending on the editorial slant of a given publication or a particular journalist, on the various factors they believe to have the most influence on the sentiment of their readership, it can be spun to favor one side or another, and even the details of a given incident are skewed depending on which “side” is describing the situation.

Evil Employees

Business publications tend to take the perspective that the employee is evil – and stir up a great deal of panic among management and HR types over the potential that some disgruntled employee who seeks to harm his company for no good reason would use social media as a way to vent his frustrations, either indiscreetly or through a desire to get some sort of retribution for a situation in which the employer is completely innocent.

But that’s likely not entirely true: it’s not reasonable to suggest that the employees of a firm are taken out of the blue with a desire to harm their employers.  There is always something that was done to a person that causes them to react, and the fact that they react through social media simply reflects that the employer’s self-defined methods of reacting were not regarded as sufficiently effective.

Any negative remark an employee makes in a public forum has probably been made in the workplace, either directly to or within earshot of management, and probably multiple times.  It was either ignored or suppressed, and the situation perpetuated until the employee found another avenue of expression.

In instances where the employee never said anything in the workplace, that’s likely an even worse situation: he had no reason to expect it would be heard – or had reason to expect that if he voiced a negative opinion, there would be an equally negative reaction on the part of the firm.   The very worst firms are likely those whose employees say nothing at all.

Evil Employers

Consumer publications tend to paint the employers as evil, using the typical spat of pejoratives to paint businesses as callus feudal overlords who expect to inflict suffering on their subjects and to be thanked for doing so, and that the employee is the innocent party who was merely expressing his opinion, off the clock and as a private citizen.

But neither is that entirely true:  in the incidents I’ve seen, the employee who made a negative remark about their company was at best indiscreet, and a person of reasonable intelligence would realize that if they make a negative remark about a company in public, just as if they make a negative remark about a person in public, that it’s going to get back to them eventually, and they will not be pleased about it.

The “public/private” dichotomy is often held up as a defense, but it holds little credibility.   There are certain communications in which privacy is expected – but in most instances, the individual posted their remark to a place were it could be widely seen.   A claim of “I didn’t think at the time” may hold some water, but “I didn’t know at all” holds none.

Also, in many instances, the remark in question called out the company by name: the employee didn’t state that “My boss humiliated me for a making simple mistake” but that “Mr. ______ at _______ humiliated me by _______ for making a simple mistake.”     The person who makes such a remark knows, but failed to consider, that a simple text-search would call this to the attention of the very person and company they were writing about, and that they would not be happy to see it, even if it’s an accurate description of what actually occurred.

Toxic Relationships

Because the story is spun one way and the other, there’s not much that can be learned from a single incident, but taken collectively, there’s much to be learned about the relationship in considering both sides of the story comparatively: every negative comment arises from an incident or a chain of incidents that have caused the employee to form a negative opinion and to feel that communicating it internally would be fruitless.  The react solely to the comment is to do nothing to rectify the situation that gave the employee incentive to make such a comment.

Thursday, July 21, 2016

Fragmentation and Consolidation in the Banking Industry

I recently read James Haycock’s book about the alleged disintegration of the banking industry.   His vision is that independent currency will replace state currency, peer-to-peer lending will topple the consumer lending industry, and all the services offered by banks as we know them today will be split out among small independent niche companies that provide individual services.   It’s panic-mongering nonsense, of course, largely because the premise ignores the same thing as so many other half-witted technology fanboys: the customer.

Technology only becomes dominant if it is adopted by the customer, and it is only adopted by the customer if it offers value – in terms of more benefits or less effort.   Merely because something is possible does not mean it is valuable, and historically the demise of many firms and entire industries has shown that doing things that are fascinating to technology advocates and industry insiders is not a sure (or even likely) method of developing a sustainable business.

And on the topic of history: the disintegration of banking is not at all a step forward, but a step backward.   Until the last century or so, the bundle of services offered by modern-day banks were completely disintegrated: there was a mint that produced money, a treasury that stored it, banks that stored it, money-lenders that loaned it, capital firms to invest it, and a fleet of specialized companies that handled other matters of exchange.  These services were integrated into the modern-day bank, which offers the customer the convenience (the “less effort” requirement for adoption) of conducting all their money-related business with a single firm rather than several.

To suggest that disintegration of banking is the way of the future simply ignores that it was the way of the past – from which the industry evolved away, and for very good reason.  One might as well predict the death of supermarkets and departments stores, suggesting that customers will purchase each of the hundreds of items they use direct from the manufacturer, in a digital version of a medieval market square.  This is the way of the past, not of the future.

Even in the digital channel, evidence shows integration, rather than disintegration, is happening: began as a niche retailer, selling only books, but over time has become an online retail center for a broad variety of consumer goods.  Meanwhile, most firms that attempt to specialize in a single product or product category have largely been failures.  There are very few instances in which a single-product site has been successful or even sustainable.

Granted, there might be cost savings – but the sheer inconvenience would cause the effort required to exceed the value.   While most customers use fewer than ten banking products, there is still some hassle in dealing with multiple providers, and cost savings are generally in favor of a single provider who will offers better rates to customers who purchase multiple products and who subsidizes the cost of unprofitable products with the profits of profitable ones.

With this in mind, I do expect that the disintegration of banking services will affect few people and will likely be short-lived.   Unless a provider offers considerable value that far surpasses the inconvenience, there is simply no reason for the customer to undertake the hassle of dealing with multiple niche providers simply because it is possible for them to do so and technology makes it marginally less inconvenient.

Friday, July 15, 2016

Psychology and Commerce

In the early twentieth century, Atkinson noted that psychology was a young science at the time, and that it had only been within the past few years that the topic had garnered any interest at all in commercial affairs.   Psychology was considered a very immature academic subject and as such it was (justly) regarded as an academic bauble with no importance to real-world affairs.

However, it was the methodology of the psychologists that soured business on psychology – Freud, Jung, and others of that time took a fanciful approach to the subject, and their “study” on the topic seemed more in the nature of mythology and mysticism than science.   More sober minds had more rational approaches to the topic, but the field itself was poisoned by the shamans of psychology.   Those who paid attention realized that behind the showmanship was something of genuine importance: the study of human behavior and its motivations.

All business is based on the interactions among people.   The buildings, machinery, and ledgers were all merely vehicles through which people interacted with one another.  In essence, a business consists of a core group of people (the employees of the firm) interacting with other groups of people (suppliers, investors, customers, regulators, etc.) to pursue their mutual interests, recognized and motivated by their desires.   Given this, it is more than merely beneficial to understand how people think and what motivates them to take action – it is foundational.

It was also during the early twentieth century that psychology became prescient.  Until then, the means by which most people survived was an interaction between man and nature – while some commerce existed, the majority of the world’s population existed by struggling to extract the means of survival from nature.   Commerce and trade had existed for centuries, and industrialism had begun a few centuries earlier, but the majority of things that most people consumed were fashioned from raw materials in their own households.  To have something required the knowledge of making it.

Over many years, this changed, and in the present day few people make things for their own consumption, but instead make things to trade with others to obtain the items they need to consume, and the method of survival has far less to do with the interaction between man and things (though this is ultimately necessary for consumer goods to be fashioned) and more to do with the interaction between man and his fellow men.  The number of people whose work requires physical contact with the product has dwindled, and they are far surpassed by the number of people whose primary work requires contact with other people.

Previous studies of human behavior had focused on observable physical actions (praxeology) without considering the internal motivations – or at best, these motivations were speculated upon based on the premise that they were related strictly to the functional consequences of the action (teleology).   That is: a person takes action because they desire to achieve the consequences of that action, therefore the sum total of their motivations would be predicated on those that would lead to an effective and efficient outcome.

In all, this was a good start, but woefully insufficient to describe human behavior – which is at its core emotional and irrational, and reasoning is later applied to justify or explain it.   The cognitive school of psychology, which is presently in its youth, if not infancy, makes a more serious effort to understand motivation on the emotional and precognitive effort.

The difficulty of analysis is compounded by the economic progress of society: in the present day, the majority of effort and money spent is no longer in pursuit of the basic survival needs of mankind.  Food, shelter, and clothing no longer require the majority of individual or societal resources, and as a consequence psychological needs that are based on things other than functional necessity motivate the majority of human behavior.

Things have only been thus for a few decades in developed countries, though by the mid-twentieth or early twenty-first century, mankind may have reached yet another tipping point at which survival requires so little effort that it may be taken for granted, and that non-functional needs that are entirely psychological are the primary focus, and delivering upon them the primary motivational force for human effort.

Monday, July 11, 2016

Voice Commands and Mobile

I’ve been lurking on a discussion about the use of voice commands in the mobile channel.  The proponents suggest that this is the next evolution for mobile computing, as one of the greatest limitations of the channel is in the difficulty of using the keyboard to input text.   It seems like a rational premise, but I rather side with the opponents of the proposition.

The problem is that the mobile device is not a verbal channel – which is self-evident in that it is called a “mobile device” rather than a phone.  The telephone is one of the least-used applications, and users prefer text messages and email.   In general, users seem to prefer the privacy of their mobile device, particularly in public spaces – and their interaction ceases to be private when they speak aloud. 

Further evidence is the lack of popularity of agent programs such as Apple’s Siri, which at first was not used because it was painfully unintelligent and tedious, but which has remained unpopular even now that the voice recognition and logic have been significantly improved.   People simply do not care to use voice commands with their mobile devices.

There are a few edge cases in which voice command makes sense: use of a mobile keyboard while driving is particularly dangerous and unwise, and using a voice interface seems a better choice.   I don’t have the sense there is much benefit it doing so – given the studies that show that drivers engaged in phone conversations, even hands-free, are just as impaired as drunk drivers because it is the distraction of their cognitive senses, not just the loss of a hand, that causes the greatest danger.

And of course, there is the indication that voice command might make the mobile channel more accessible for the vision-impaired user seems entirely plausible, though it seems this is a niche market and a visually impaired person might find it more convenient to simply place a call rather than attempting to use the voice command system of a mobile site or application.

The suggestion that the voice interface would be popular when using mobile device in a private environment seems a bit contrived.   It can neither be proven nor disproven that users do (or would) find voice commands to be preferable, as their behavior in private cannot be witnessed and self-reporting is likely to be inaccurate, either way.

At this point, the discussion has died down to the point where I felt it useful to take a few notes.  If it is resurrected and the proponents of voice commands can find a valid argument in its favor – but for the present I’m satisfied to rest on the conclusion that it is an interesting concept that is likely not going to be practical or commercially viable.