GUEST POST from Tim Kastelle

No Risk, No Return

“It’s important that we start experimenting. We’ll do any experiment that can guarantee a 20% return on investment.”

That’s what a senior manager said to my Phd student Paul Newbury. We laughed about it when he told me, but…. I actually hear this far too often. Any idiot can say yes to a project with a guaranteed 20% return. That’s not an experiment.

Experiments are things where we don’t know the answer in advance. Jeff Bezos said this about experiments:

“If you only do things where you know the answer in advance, your company goes away.”

And then there’s this from Alan Kay:

“If you don’t fail at least 90% of the time, you’re not aiming high enough.”

It’s a topic that for some reason has been following me around for the past week. It illustrates a core innovation problem: if we don’t take a risk, we can’t innovate. If don’t innovate, we don’t grow. But we hate risk, so we avoid them.

Avoiding Small Problems Creates Big Ones

Last week I was talking to Cassandra Kelly and Nigel Lake. They are co-CEOs of Pottinger, and they’re doing absolutely fascinating and important work there. Cassandra was talking about how consultants often operate – they identify a problem and then they use further engagements to try to eliminate all possible risk for their clients. When she said this, I blurted out “But that’s like trying to raise germ-free kids.”

The problem with raising kids in a germ-free environment is that decreasing their exposure to germs and illness early in life greatly increases their chances of contracting much more serious illnesses as an adult.

Similarly, if you live in a region prone to drought, you need to have regular small fires. If you don’t have lots of small fires, then the fuel load builds up so much that you eventually have a devastating big fire.

When we try to avoid the risk of small problems, perversely, we increase the risk of having bigger ones.

With genuine experiments, we don’t know the answer in advance. That means we risk small losses if the experiment doesn’t work. But if we avoid those small losses, we increase the risk of having the company go away.

We Grow by Messing Up, and Learning

We learn to ride a bike by crashing a lot. We minimise the damage by going slowly, and using training wheels. But you can’t learn to ride a bike without trial and error. We build this new skill by failing, but then learning from it.

Seth Godin says that if we try to avoid risk, we’re putting ourselves in a prison:

“…we’re losing our ability to engage with situations that might not have outcomes shiny enough or risk-free enough to belong in the palace. By insulating ourselves from perceived risk, from people and places that might not like us, appreciate us or guarantee us a smooth ride, we spend our day in a prison we’ve built for ourself.

Growth is messy and dangerous. Life is messy and dangerous. When we insist on a guarantee, an ever-increasing standard in everything we measure and a Hollywood ending, we get none of those.”

And Julien Smith says that scars are a sign that you’ve lived and learned:

“A life that has been wasted leaves a body intact and pristine– but a life that has been properly used leaves scars.

Scars tell stories. They are what’s left by mistakes we’ve made. They’re what remind us of the places we’ve been and the people we’ve known.”

If we want to grow as people, we have to mess up. That only works if we learn, but that is how we build new skills and attitudes.

If we want our organisations to grow, it’s the same deal. We have to try stuff, do more of the things that work, and learn from the things that don’t work. These are at the core of building your innovation capability.

If the world ran like clockwork, then we could only do those experiments that guaranteed a 20% ROI. But the world isn’t a machine – it’s a complex system.

In a complex system, the way to think about the future is this:

• We can’t predict the future.
• But we can learn about the patterns from which the future will emerge.
• In fact, while we can’t control the future, we can influence it.
• The best way to influence the future is by innovating through experiments.

That’s how to grow. Innovate through experiments. Take some risks, get some scars, learn.

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GUEST POST from Tim Kastelle

The conflict between efficiency and insight:

One key step in innovating is generating novel ideas – and this is based on insight. So how can we increase insight? That is the topic of the excellent book Seeing What Others Don’t by Gary Klein (check out Harold Jarche’s review here).

Klein starts by looking at the impact that insight has on performance, using this diagram:

According to Klein, performance improvement results from a combination of reducing errors and uncertainty, while increasing insights. This is a fundamental tension in organisations. As Paul Sloane says:

“Businesses are good at getting better but poor at getting different.”

Jeffrey Phillips outlines how firms manage this balance, and why it is easier to focus on efficiency at the expense of insight and innovation:

“Businesses, with timelines and incentives that are somewhat different, focus on short term financial results, which tends to shift the balance between innovation and efficiency toward efficiency. Most initiatives that focus on improving efficiency have an immediate, and positive financial impact. Thus efficiency is rewarded, and initiatives that are rewarded are repeated.  Innovation often has a negative short term impact – costs without an immediate benefit – so innovation is far less likely to produce a short term financial benefit, and therefore much more difficult to do.  Slowly, over time, the scales shift from a balance between efficiency and innovation to ever more efficiency and increasingly less innovation.  Eventually efficiency is well understood and easily accomplished, but it has ever decreasing marginal returns. Innovation, on the other hand, becomes more difficult the less it is practiced, and is viewed as risky, uncertain and become even less likely to be taken up.”

How insight works

How can we address this problem? Klein’s answer is to increase insight. To figure out how to do this, he studied 120 cases of insight, looking for commonalities. Which he didn’t find. Instead, he found five forms of insight, some of which contradict the others: contradictions, coincidences, connections, curiousity and creative desperation.

His basic premise is that these forms of triggering events cause us to change the stories that we tell ourselves, and, ultimately, others. It is this change in story that leads to performance improvements. Here is how Klein maps the process:

One of the routes to insight is curiousity – this is based on keeping an open mind. This is how many scientific discoveries come about. But contradictions generate insights through being skeptical – this is the opposite of keeping an open mind! Klein’s insight is that it is not the type of action that defines an insight, but rather the outcome – the change in the story.

This illustrates a very common error that we make when we study things – we don’t classify them very well. Previous insight researchers have focused on the act that led to the insight. This led to arguments about whether they were always generated by a flash of inspiration, or if they incubate and build up over time. It turns out they do both. And both open minds and skeptical minds can generate important insights.

The critical step is changing the story that we tell ourselves about how what we’re thinking about works.

Increasing the up arrow

Klein agrees with Phillips that the natural tendency in organisations is to over-emphasize the down arrow of efficiency at the expense of the up arrow of insight. And he has some ideas for improving you insight capabilities.

The first step is to understand the different forms of insight, and how they work to create changes in behaviour. This is the change in story that we have already discussed.

Inside of organisations, Klein advocates using insight advocates. These are people that collect and share stories of how insights have been generated and successfully acted upon inside the organisation. We know that one way that people become more innovative is by having role models.  Actively gathering and telling stories of insight will help to create these role models within our organisations. It helps to build community too.

Another tool is to build some capability in helping people gain insights. Klein says:

“Many professionals have a dual mission – to gain their own insights and then to enable others to grasp these insights or even to reach ones that are different but valuable. Therapists are continually trying to gain and give insights in their sessions with patients. Artists and writers also traffic in insights even though they rarely have a direct relation with their audiences. Historians are engaged in seeking and sharing insights. And, of course, teachers are also in the insight business.”

Managers should be on this list as well. I’ve said before that removing obstacles is one of the most important jobs that managers have. This includes removing obstacles to insight.

Finally, Klein talks about the need for willpower – removing gumption traps. This can mean being open to changing your behaviour and goals in response to insights. Klein says:

“Organizations demonstrate willpower when they act on insights, particularly insights about their primary goals. An insight about a gola isn’t about being flexible and adapting plans in order to reach the original goal. It’s about changing the goal itself.”

Insight is a critical part of innovation. If we are to innovate, we must be able to generate insights. This can’t be done on a schedule, but we can make changes that improve our odds. The tools that we need to use reduce our mental and organisational rigidity. They disrupt our thinking, and they change our stories.

This often makes people uncomfortable. But it’s what we need to do to find new ideas.

image credit: thoughtful image from bigstock & brainleader

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GUEST POST from Tim Kastelle

A Business Model Problem – Copying Everyone Else

Business model innovation is too often overlooked by firms. I ran across a great example today of the kind of opportunity that is available. Check out this graphic from Lean Analytics by Alistair Croll and Ben Yoskovitz:

This shows the response to the question – “how do you set your price?”

The response is mind-boggling.  More than half of the firms surveyed just take prices from their competitors. A quarter use cost-plus, which is a terrible tool too. But at least it relates to some kind of real number from inside your own firm. 18% guessed.

Eighteen percent guessed!

And just over 20% based their price on data gathered from their own customers.

At a minimum then, 70% of firms put no strategic thought at all into how they set prices, which, arguably, is one of the most important metrics in your business.

Business Model Opportunity – Make Up Your Own!

Innovative new products and services work best when they are supported by an innovative business model. If 70% of firms aren’t even thinking about how they set their prices, then how many are thinking about innovating their entire business model.

Not very many.

This is a huge opportunity – this is a big part of why business model innovation is so powerful.

Here are some ideas for taking advantage of this opportunity:

• Be a Lean Startup. Lean startups turn into innovative firms, because they are built on an experimental, data-driven culture. If you are using lean startup correctly as an approach, then you will end up as one of the 21% of firms that sets your price based on customer data. Better yet, your entire business model will be based on hypothesis testing. Lean Analytics provides a great set of tools for doing this. Croll & Yoskovitz match metrics with where you are in the growth trajectory:
  1. Empathy: where you identify a real problem for people that needs solving.
  2. Stickiness: where you prove you have a solution to the problem that works.
  3. Virality: where you structure your solution so that the idea will spread.
  4. Revenue: where you start making money.
  5. Scale: where you get big.
• Use Lean Startup Principles in an established firm. Lean Analytics suggests that intrapraneurs go through the same five steps with new innovations as startups, but with one big additional step: find an executive sponsor. In a large firm the process looks like this:
• Test Your Business Model Like a Scientist. The point with all of this is that you can build a new business model based on data. The stats on pricing show that only about 20% of firms are doing this right now. Imagine the advantage you can gain if you base your entire business model on genuine feedback from customers.

When you get right down to it, innovation is about solving real problems for people. That’s how you create value. Even if your solution to a problem is genuinely novel, it’s extremely hard to get people to listen to your idea if you cram it into the same old business model that they’re used to seeing.

That’s why copying from competitors is such a bad idea. There’s nothing distinctive about that.

So go out and talk to people. Identify real problems that they face, and build a hypothesis about how to solve one of them. Then test that hypothesis carefully. If you do that, you’ll build an innovative business model on top of your core innovation.

The thing that makes business model innovation so powerful is that so few people do it. You should give it a try.

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GUEST POST from Tim Kastelle

90% of Everything is Crap

That is how Sturgeon’s Law is often phrased. To see what it means, let’s back up a bit and start by finding the flaw in this argument: most innovation consultants are lousy, so innovation consulting is worthless.

We see arguments like this all the time, about innovation consultants, about regular consultants, about academics, and about bloggers, and those are just the categories that apply to me!

The flaw in the argument is that just because we can find examples – often plentiful examples – of garbage in a field, this does not by extension make the entire field garbage.

I was reminded of this again this New Yorker review of Brainwashed: The Seductive Appeal of Mindless Neuroscience by Sally Satel and Scott Lilienfeld, which suggests that the argument they make in the book could be read as having this construction. I haven’t read the book yet, so I can’t say if does or not.

In his new book Intuition Pumps, and Other Tools for Thinking, Daniel Dennett recounts the full quote from Theodore Sturgeon outlining what has become known as Sturgeon’s Law:

“When people talk about the mystery novel, they mention The Maltese Falcon and The Big Sleep. When they talk about the western, they say there’s The Way West and Shane. But when they talk about science fiction, they call it ‘Buck Rogers stuff,’ and they say ‘ninety percent of science fiction is crud.’ Well, they’re right. Ninety percent of science fiction is crud. But then ninety percent of everything is crud, and it’s the ten percent that isn’t crud that is important, and the ten percent of science fiction that isn’t crud is as good or better than anything being written anywhere.”

Dennett follows this by saying:

“A good moral to draw from this observation is that when you want to criticize a field, a genre, a discipline, an art form,… don’t waste your time and ours hooting at the crap! Go after the good stuff, or leave it alone.  This advice is often ignored by idealogues intent on destroying the reputation of analytic philosophy, evolutionary psychology, sociology, cultural anthropology, macroeconomics, plastic surgery, improvisational theater, television sitcoms, philosophical theology, massage therapy, you name it. Let’s stipulate at the outset that there is a great deal of deplorable, stupid, second-rate stuff out there, of all sorts. Now, in order not to waste your time and try our patiences, make sure you concentrate on the best stuff you can find, the flagship examples extolled by the leaders in the field, the prize-winning entries, not the dregs.”

Innovation Lessons From Sturgeon’s Law

I’ve been guilty of discounting entire fields based on the poor examples.  Dennett is right – it’s bad practice. Here are some lessons that we can learn from this:

1. Don’t trust sweeping statements, like “big firms can’t innovate.” Of course big organisations can innovate. Most of them don’t. Maybe even 90% of them are lousy at innovation. Actually, most small organisations are pretty bad at innovation too. And yet, we still have plenty of innovation going on. Arguments that make sweeping generalisations about an entire class of organisation are never right – when someone makes an argument like that, ignore them.

2. Use the positive deviance approach to figure out does work. Here it is:

Positive Deviance is based on the observation that in every community there are certain individuals or groups whose uncommon behaviors and strategies enable them to find better solutions to problems than their peers, while having access to the same resources and facing similar or worse challenges.

The Positive Deviance approach is an asset-based, problem-solving, and community-driven approach that enables the community to discover these successful behaviors and strategies and develop a plan of action to promote their adoption by all concerned.

3. In a complex system, classification is really important. The economy is a complex system, and in complex systems there are no one-size-fits-all solutions. So you need to classify things. This means that things that look like either/or issues actually have both/and solutions. This also means that outliers are important. We tend to ignore outliers because they are, well, so outside the norm. But that’s just the point. In a system where the majority of examples are bad ones, we have to study the outliers to figure out what works.

If we take Dennett’s argument seriously, if you are trying to make the case that big firms can’t innovate, then you have to explain how Google, Li & Fung, IBM, Apple etc. aren’t innovative. If you can prove that, then you’ve made your case. If not, your argument is bad.

Here’s why I keep coming back to Sturgeon’s Law: managing is hard, and when people make simplistic, false statements about how it works, it makes it even harder. Short, declarative, pithy statements make great blog post titles, and they’re very retweetable. Complex arguments using classification and shades of grey do neither.

But our world of management is complex, needs classification and is grey, not black or white. We need to build our skills in dealing with this.

image credit: disgusted expression image from bigstock

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GUEST POST from Tim Kastelle

Look for Innovation From the Edge

On one of my trips to Silicon Valley last year, Matt Perez invited me to go along with him to a one-day conference on The Future of Money. Throughout the day people made presentations looking at innovations they were working on that would redefine money in years to come.

The ideas ranged from the trivial, like the bank that had “the world’s first social credit card” – it was social because you can like it on Facebook – to the insanely ambitious, like the guys that are “going to replace the world’s banking system with tweets!”

I was disappointed that through the entire day, there was only one presentation looking at where the future of mobile money is going to come from – Africa.

That picture is from Jan Chipchase’s great presentation called Designing Services for Financial Inclusion, which you can download here.

Chipchase just put out a book called Hidden in Plain Sight, which recounts what he’s learned after many years of studying how people use technology around the world. Much of his work has taken place in developing countries, and there are definitely technologies that are world-leading coming from those places. Mobile money is one of them. Here is what he says in the book:

“However, when it comes to cutting-edge technologies that haven’t yet been implemented in the community or country you’re interested in, it helps to go elsewhere, to the early-adopter places. They aren’t always the most tech-savvy cultures, just the ones that took a particular step first. For next-generation display technologies, Seoul is the place to look. For mobile money services, Kenya provides the dominant model. Tokyo, as discussed at the top of this chapter, is good for looking at highly integrated services across ticketing, noncash payments, and location-based services. “Cutting-edge” can mean many different things when it comes to mobile phone use, and San Francisco, Tokyo, Afghanistan, Ghana, Kenya, and India are all worth a visit to understand their mobile ecosystems.

…

Today, Kenya’s M-Pesa is considered one of the most successful mobile banking services in the world. And Uganda Telecom has since launched their formal mobile wallet offering, M-Sente. The informal practices around airtime transfers and converting airtime to currency played an important role in this growth: building literacy around mobile use; generating trust in the process of transferring abstract things (airtime, money); making it easier to identify areas for improvement; and ultimately priming expectations as to what could be.”

He goes on to explain one of the main reasons that mobile banking is taking off in Africa – in countries with little formal banking, cash is dangerous to carry:

“The gap between developed and developing countries in terms of access to financial services is striking: about 49 percent of households around the world have deposit accounts, but that ranges from close to 100 percent in Japan to less than 1 percent in the Democratic Republic of the Congo and Afghanistan. Access is growing, but the numbers don’t always add up to significant gains. For instance, from 2008 to 2009, the nation of Burundi (population 8 million) doubled the total number of ATMs across the country—from 2 to 4 (using an ATM as a signifier of more formal banking services). In contrast, Canada, with the highest concentration of ATMs per capita, had about one for every 458 adults. But regardless of nationality, people are driven by the same basic motives when it comes to their money. The difference is that, in a place like Canada, if you ask someone why he puts his money into bank accounts, he might say, “Because that’s where it goes,” whereas if you ask a Burundian with no bank account why he sews his money into the lining of his coat, his response is paradoxically more likely to tell you about the essence of banking: he wants his money to be safe, until the very moment that he needs it.”

That’s a much more compelling reason to store your money in a phone than we’re used to hearing.

I love that there are people in Silicon Valley trying to replace banks with tweets. It might sound nuts, but so did being able to make a video call to anyone in the world with an internet connection for free. When you’re in a place with lots of people with ambitious ideas, every once in a while one of them hits. If we look at the scale of ambitions from “like the social credit card on Facebook” to “replace banks with tweets,” it’s great to have more people working at the ambitious end.

However, it’s also possible to get too caught up in the world you know. That’s why I love Chipchase’s work – he’s out on the edge. As John Hagel and John Seely Brown have told us, the edge is where innovation takes place:

“Edges are powerful sources of business innovation because they are places of potential and friction, where traditional products and practices are no longer adequate to address unmet needs or unexploited potential. Much tinkering and experimentation occurs on the edge, as well as heated debate about the most promising options to address emerging needs, intensified by the diverse backgrounds, skill sets, and perspectives of participants gathering on the edge. By playing a part in this experimentation, companies participate in rich flows of new knowledge, flows that are the primary sources of innovation.”

There are a few things that you can do to find the edge. First, test your assumptions. It’s an assumption that being on a social network makes your credit card “social” – an assumption that I think is false.

Second, as Nilofer tells us, travel, read and meet people. She talks about these as ways to fuel personal growth, which is true. But these are also ways to find the edge – they take you place you haven’t gone, and give you new ideas. If you never get out of Silicon Valley, you can’t find the cutting edge of mobile money in Kenya. If you’re reading widely, you can at least learn about it.

Finally, deliberately break your routine. To innovate you have to make your own map, not follow a recipe.

The future of mobile money is happening right now in Africa. Where is the future of your industry happening?

Note: If you want more from Chipchase, check out his book – it’s definitely worth the read. And you can also watch his TED talk from a few years back:

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GUEST POST from Tim Kastelle

How to make gradual change look like a big jump:

One of the big privileges in my job is that I get to travel a fair bit. As part of this, I’ve been coming to Palo Alto about once a year for the past five years. This is interesting because that is infrequent enough that the changes that look gradual to those that live here look like jumps to me when I’m here so irregularly.

The big jump I’ve noticed on this current trip is that electric cars are finally taking off.

On previous trips, I saw lots of Tesla cars – all in showrooms. This trip, they’re on the road:

And it’s not just Teslas. The place I usually stay has had reserved parking spaces for electric cars since 2009. Previously, I haven’t seen any cars in them. On this trip, they’re taken, and they’re using the charging stations:

Observing the Lead Users

Jean-Louis Gassée wrote a really interesting post on Tesla this week. In it, he talks about how Palo Alto has always been a leading indicator of where green vehicles are heading:

“Walking Palo Alto’s leafy streets in the early 2000?s, I witnessed the rise of the Prius. Rather than grafting “green” organs onto a Camry or a disinterred Tercel, Toyota’s engineers had designed a hybrid from the tires up…and they gave the car a distinctive, sui generis look. It was a stroke of genius, and it tickled us green. What better way to flaunt our concern for the environment while showing off our discerning tech taste than to be spotted behind the wheel of a Prius? (I write “us” without irony: I owned a Gen I and a Gen II Prius, and drive a Prius V in France.) Palo Alto was Prius City years before the rest of the world caught on. (Prius is now the third best-selling car worldwide; more than a million were sold in 2012.)”

The Prius case is interesting, because when they first came out, the response was very similar to what we’re hearing about Tesla now.  The car was too expensive, it was elitist, it would only sell to radical greenies, and so on.  And now it’s the third best-selling car in the world.

I don’t know if Tesla will ever get to that point, but it is definitely moving electric cars along the innovation diffusion curve.

Innovation Diffusion Lessons from Tesla

This diagram shows how innovation diffusion usually works. New ideas spread along an S-Curve – the solid line in the diagram – or if they fail they follow the curve marked B. But when there’s a lot of hype around an idea, we expect it to follow the curve marked A. Incumbents that think they have a lot of time to respond expect the new idea to follow the curve marked C.

But new ideas that succeed don’t follow any of these curves – the follow the S Curve.

We can see why by looking at Tesla and the other electric cars that are just starting to take off.  Here are some of the lessons:

• New ideas spread much more slowly than we expect. The first electric car was made back in the 19th century, before there was a dominant design for cars. GM introduced the EV1 in 1996 – seventeen years ago. That made everyone expect electric vehicles to take off – it’s where the hype really started.  But new ideas spread slowly – the time value for X is always longer than we expect it to be.

• Disruptions start in niches. When the Prius came out, it was relatively expensive. Gassée’s recounting is pretty accurate – it first took hold with people that were willing to pay a bit more to show off their greenness. But it eventually spread from that niche. He thinks that Tesla will do the same:
  
  “The numbers point to a future where Tesla can leave its niche and become a leading manufacturer in a too-often stodgy automotive industry. And, of course, we Silicon Valley geeks take great pleasure in a car that updates it software over the air, like a smartphone; that has a 17? touchscreen; and that’s designed and built right here (the Tesla factory is across the Bay in the NUMMI plant that was previously occupied by Toyota and GM).”

• It takes time to work out the business model. One of the reasons that the value for X is longer than we expect is that it takes time to learn how to make the new idea work. A big part of this is building a good business model around it. Farhad Manjoo compares Tesla to Apple, and he explains how their business model is evolving:
  
  “But even though its prices were competitive, Apple was able to keep its profits high, thanks to amazing manufacturing efficiencies. Now Tesla seems to be following the same path. At $70,000 the Model S, its family sedan, is still a very expensive car, but it’s far cheaper than the $109,000 Roadster that Tesla launched in 2009. This week, the company announced that in the first quarter of 2013, it earned its first-ever corporate profit. It sold 5,000 cars in Q1, and its list of orders is growing by 20,000 per year. Part of the reason Tesla has turned profitable, Musk explained in a shareholder letter, is by making its production processes more efficient. Among other things, the company reduced the amount of time it takes to build a car by 40 percent. Over the long run, Musk aims to keep lowering the price of its cars—he’s hoping to release a $30,000 car in the next three or four years—while keeping the company’s gross profit margin at 25 percent, which is very high for the car industry.”

• Slow diffusion makes it easy to mock new ideas. All of this comes together to show how it is pretty easy to mock a new idea – the first stage of responding to a disruptive innovation, followed by aggression, bargaining and getting smashed like a but.

• Steven Johnson made the Apple-Tesla comparison first, and this quote from him pulls all of these issues together:
  
  “The question is whether Tesla is the Apple of 1985 or the Apple of 2005. Tesla critics tend to see it as the former: a luxury car maker for people who have the spare change to experiment with ultimately impractical electric cars. The Roadster and the Model S, in this scenario, are the automotive equivalent of the original Macintosh: an expensive experiment that will never capture a mass audience. The believers see Tesla as closer to Apple right before the launch of the iPhone: a company about to help propel (and profit from) a massive sea change in consumer behavior.In large part, those two alternatives ultimately come down to a single, crucial question: how close are we to the obsolescence point for combustion engines? Most scenarios assume that we are not very near indeed. Warren Buffett apparently thinks all cars on the road will be electric by 2030, but most analysts assume it will take us that long just to get to 50% EV penetration. But what if Buffet is correct, and the EV tipping point is right in front of us? What if Buffet is underestimating the rate of change?”

  I think Buffett is right.  It looks to me like we’re starting to hit the tipping point. The analysts are assuming that electric vehicles are going to follow curve C. But students of innovation know that they will follow the S-Curve.Time to get ready for your electric car. And I guess we can start planning for flying cars next – maybe that’s how I’ll do my traveling in the future!

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GUEST POST from Tim Kastelle

Earlier this year I ran across a couple of striking charts from Horace Dediu’s fantastic Asymco blog. He regularly puts together very compelling stats on the state of the technology industry, and this post looked at the market share for various operating systems over time.

The first chart shows the the market share of various systems, and you can see the rise and then slip of Microsoft here:

You can see how Texas Instruments dominated things around 1977, only to be replaced by first Atari, then Commodore, before it disappeared entirely. Atari and Commodore held on until the early 90s, then they disappeared as well.

The tipping point from the Apple OS to Windows happened early too, followed by a long period of domination for Microsoft right up until about 2007. Currently Android + iOS have about 55% of the personal computing OS market, and Windows has about 45%.

However, if you look at the data another way, looking at the total number of OS sales, you can see a slightly different story. Here’s Dediu’s original chart:

This chart shows a slightly different story. The market share for Windows isn’t falling because its sales are dropping – it is falling because with the advent of smartphones and tablets, the overall size of the personal computing market has doubled.

There are several important innovation lessons here:

• When a market is forming, the race is for the best business model. If you look at the market shares around 1982, Atari, Commodore, Apple and Microsoft all had significant market shares. Microsoft won because it developed a robust business model the fastest. As Greg Satell points out, they won because they developed modular architecture first. Furthermore, while their code wasn’t open, their API was – and openness is a big innovation advantage as well.

• In a mature market, the threats come from outside. Microsoft still dominates the desktop. The problem right now is that the desktop is being rapidly overtaken by more portable computers. Even as Apple revived a bit on the desktop with the introduction of the iMacs in the early 2000s, their market share in this market still didn’t go up that much. It only took off with the iPhone and then the iPad. The threats to Microsoft’s position came from segments outside of their core market. They knew this was coming for a while, but it wasn’t until the introduction of Windows 8 that they really attacked this issue head-on.

• Your market is never stable. One dangerous assumption that organisations make is that they know what market they are in, and that this will remain stable.  Information technology is wreaking havoc on traditional industry boundaries. John and I visited a research lab for an engineering company last week, and it was very clear from the projects that they are working on that the firms that will win in this traditionally very conservative industry will be the first ones to become fully knowledge-based. As projects get more complex and more expensive, managing the flow of data becomes increasingly important.

• Nothing ever stays the same. The Justice Department didn’t need to break up Microsoft. The evolution of the market has taken care of their dominant position. It’s always tempting to think that today’s winners will also be front-runners tomorrow. This is very rarely true. That’s why we have to innovate.

Richard N. Foster has looked at this problem in a couple of outstanding books. He outlines the key issue in this interview:

“Let me tell you how I got to the term “creative destruction.” In the 80’s, I was in a search for “the excellent company” – the all-seeing, all-knowing, all-wise company that made all the right moves in advance, and that made more money for its shareholders than any of its competitors. This was the permanent outperformer stock – the really good deal. I looked at 4,000 companies over 40 years, and what I found stunned me. There was no such company, and there never had been such a company!”

“I thought something had to be wrong. Was I looking at the problem in the right way? No company had been able to outperform the market for any substantial length of time. (GE came as close as any, but didn’t do any better than the overall index). Somehow the market – managed by nobody – was performing better than all the brains on the planet. But why? Then I realized that the reason markets outperform companies was closely tied to what Joseph Schumpeter called “creative destruction.” This was actually a phrase that came from the Hindu religion, dealing with the transformation of an individual throughout their life, from creation, onto death, and ultimately rebirth.”

My friend Geoff sent me this quote from Joseph Campbell last week:

“The interior of man has been essentially the same for 40,000 years, since the first emergence of Homo Sapiens Sapiens. Myth has to do with the spiritual potentialities of this constant, this human being. But the images of myth must be derived from the environment of today and in this place. There is therefore a constant transformation of the image, but not of the reference.”

This is probably true – it explains why so many of the stories that we respond to as humans have such similar structures, and similar points.

But another constant is that in business, things change. If you’re running a business, that’s a very good argument for innovating. As innovators, our job is to invent the future.

image credit: maze thinking image from bigstock

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GUEST POST from Tim Kastelle

When firms are trying to become more innovative, they often don’t know where to start. Here’s one idea, start by making your people lunch.

Drake Baer wrote a terrific profile of a startup called Thumbtack discussing how their decision to hire a full-time chef has transformed their business.

Cofounder Sander Daniels lists the reasons they made this decision:

• Meals build community: Everyone on the team eats together every day
• Meals build networks: On Wednesdays they have an open dinner where recruits can hang with the company
• The team is more productive: People aren’t leaving the office to wait in lines or scrounging around for food
• Everyone is eating awesome food, so everyone is healthy

And they say this in their Food Rules for Startups manifesto:

“Often startups try to attract talented teammates by offering benefits like ping-pong tables, video games, or gym memberships. While those things are valuable, a culture of good food is an order of magnitude more important. Sharing meals around quality food builds an environment that encourages collaboration and celebrates excellence. The team is excited to come to work because they value and respect the full work environment. We believe every company can benefit from a food-centric culture.”

Baer outlines why this is a broadly good idea, but I want to talk about why this is a great innovation idea.

If you do something like this, you are actually changing your business model. I’ll use the Business Model Canvas version of the business model to illustrate the discussion:

When you start cooking people lunch (and changing all the other food-related processes in your workplace) you are changing a key activity. The first consequence that a lot of people will think of is that you are adding cost. This is true, you are a cost. But if your people are healthier, you are also reducing the costs that accrue from poor health. And your productivity goes up, etc.

More importantly, this will attract a different, probably better, pool of people that want to work for you. So your key resources change.

Idea generation will improve as people problem-solve together at meals – so another key activity changes. Your key partnerships will change as more people learn about and interact through the company at the open dinners. This may in fact lead to new channels to customers.

As all of these back-end activities change, you will be coming up with great new ideas that can lead to new value propositions, different customers, and so on. One change to one activity has a domino effect throughout your entire business model. After that happens, you are running a firm that is substantially different from all the other ones in your market.

Here are some of the important lessons in this:

• You can innovate anything. Not everyone can afford to invest millions in R&D. Not everyone can start entirely new product categories from nothing. But everyone can think about their business model and find ways to change it. Find the things that everyone else takes for granted – like “we get our own lunch” – and change it. It can transform the way you do business.

• Face to face is still critically important. Here is what Valeria Maltoni says:
  Emails, phone calls, or in person meetings are the best conversion tools for individual connections. In a post that has helped me research the question of influence more thoughtfully over the years, Stephen Downes said that rather than being a question of linkage, influence originates from [diversity, autonomy, openness and connectivity.]

• Yes this probably will work for you. When I talk to people about ideas like this, they will often say something like “That’s fine for a startup, but that would never work here in the real world.” Why not? If you’re running a big company, isn’t it important to have healthy and productive people? Every single CEO that has ever said “our people are our most important asset” should be doing something like this. If they’re not, then maybe it’s their real estate that is their most important asset, or their fleet of vehicles, or….. something. But if your firm is built on people, you need to take care of people.

The idea that changing one activity can change your entire business model is powerful.  It takes time to reorganize the other components of the business model to adjust to this, and that can be hard.  But it can also be an important source of competitive advantage, because innovative business models are harder to copy than innovative products.

Give it some thought – what are the activities that everyone in your firm or industry take for granted? If you can innovate lunch, you can innovate anything.

image credit: thumbtack chef Thea Baumann by Anastasia Tumanova

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GUEST POST from Tim Kastelle

Stop and think about the computer you’re carrying around with you right now. Not your laptop, your phone. Actually, maybe calling it a computer is selling it a bit short.

Check this out:

The picture is from here, and it raises several important innovation points:

1. Your market is never stable. Did phone makers think they were in the camera business in 1993? What about camera makers? We’ve seen an incredible collapse in categories as many different industries become increasingly IT-based. When something like this is happening, you need to be thinking about your business model. As your market changes, it opens up new opportunities for collaboration and value creation, as well as new threats. There is a pretty good chance that your business model will need to change as the boundaries of your market shift.

2. We’re all in the knowledge business now. The control room for a mine looks identical to the control room for a space shuttle launch. Construction companies now are more concerned with getting the right data to the right people at the right time than they are with traditional logistics. Again, this means that you need to be thinking about your business model. It’s getting increasingly difficult to build a competitive advantage based on keeping your customers ignorant (think of the way cars were sold pre-2000 or so). Even if you’re making stuff, knowledge flows are really important.

3. It’s pretty cool! I don’t know about you, but I think it’s pretty cool to have all that capability packed into one device. Yes, it has downsides. It’s dumb to be checking email right when you wake up like I nearly always do. But that’s also part of figuring out the best way to use new tools – do dumb stuff until you find the best applications. Even though some say that we’ve run out of big ideas, I think that we live in pretty amazing times.

The transition from brick-sized handsets to palm-sized supercomputers would have been unimaginable for most of us in 1993. On the other hand, as William Gibson said, the future is already here, it’s just not evenly distributed.

So what ideas that will be transformational by 2033 are here already? What impact will these ideas have on the business that you’re in right now?

image credit: confused businessman image from bigstock

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GUEST POST from Tim Kastelle

Here is one of the biggest innovation obstacles around: the need for certainty.

Dwight Towers posted a great quote from Frederick Douglass over the weekend that gets at the problem:

“If there is no struggle there is no progress. Those who profess to favor freedom and yet deprecate agitation are men who want crops without plowing up the ground; they want rain without thunder and lightning. They want the ocean without the awful roar of its many waters.”

Douglass was obviously talking about bigger issues than I am, but the same principle holds. You can’t innovate without uncertainty.

Here is how Jeffrey Phillips puts it in his book Relentless Innovation:

“Everyone understands from the beginning how difficult it is to create compelling new ideas in any sutation, much less to convert those ideas into viable products and services. To compound the difficulty, executives are asking for disruptive ideas while expecting the business to continue to operate at full effectiveness and efficiency. Middle managers receive these messages and understand the unspoken dichotomy in the request: create radical, valuable new products and services but don’t upset the status quo.”

You can’t manage that way. To gain the benefits of innovation, which are substantial, you have to learn to live with some uncertainty.

Sacha Chua addresses this issue in the context of figuring out what you should do with your life in a really good post on passion and uncertainty:

“When people wish for passion, I think what they’re really wishing for is certainty: the knowledge that this, here, is exactly what you are meant to do, that intersection of what you love, what you’re good at, and what the world values. The certainty that this is the best way to spend this moment in time, and the ease of not having to make yourself do something or fight distractions.”

This is why I think that the single most important management skill to develop is a tolerance for ambiguity.

Just as you don’t get crops without plowing the ground, you don’t get innovation without creating uncertainty. In some respects, tolerating uncertainty isn’t enough – you have to actively invite it in.

There is no innovation without uncertainty.

Sacha asks a really good question: what happens if you let go of the need for certainty? What if you don’t know that what you’re doing will work? What if people hate your idea? What if there’s a chance you could be embarrassed? And worse, what if it happens in front of your peers, or your boss?

If you have to have certainty, none of these bad things will happen. But you won’t innovate. You won’t learn what you’re capable of doing, and you won’t get better. In fact, it’s impossible to learn without making mistakes.

Learning is the way around this problem. If we actively court uncertainty, then we put ourselves in a position to learn.

In a complex economy, the way to think about the future is this:

• We can’t predict the future – there is no certainty.
• But we can learn about the patterns from which the future will emerge.
• In fact, while we can’t control the future, we can influence it.
• The best way to influence the future is by innovating through experiments.

Here’s my prescription for tomorrow: Let go of the need for certainty. Try an experiment.  Learn.

I’ve got my experiment planned – what’s yours?

image credit: from flickr/Ecoagriculture Partners

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