I was reading an article on innovation by some researchers at Santa Fe Institute, "Innovation novelty and impact". The article tries to make a case for innovation matching patent code combinations. This looks to me to be a case of not framing the question correctly. Almost everyone who seriously studies innovation accepts the following definition: innovation is invention commercialized. I saw this definition attributed to a professor at MIT, but many claim to have said it.
This definition of innovation is based in part on the concept that technology and artifacts are created to solve customer and societal problems. Therefore, inventions must succeed in the market to become innovations. (Patents really have nothing to do with innovation except in the antiquated notion that government "licensing" preserves the proprietary nature of the solution.) Innovations create value for customers and allow the business to decide how much value it can capture from the customers.
Bill Aulet from the MIT Entrepreneurship Center discusses innovation in this video.
BCG Perspectives today had one of their usually excellent articles, "The Prerequisites of Profitable Adjacent Growth". The article states:
"There are five ways for companies to expand into adjacencies [nearby markets]:
(reformatted by me for clarity)
What caught my attention was the concept of "demand-centric growth". BCG defines demand-centric growth as follows:
"World-class innovators are moving from industry- or demographic-based segmentation to what we call “demand centric” segmentation, which identifies the drivers of decision-making by looking at the intersection of context (who the customer is, how he or she thinks, and what he or she does) and emotional or functional needs. Using richer data than was ever available before, companies can construct a “demand map” that clusters consumer choices in a particular category into common need bundles—or “demand spaces.”" (emphasis is mine)
This concept of "demand spaces" looks very similar to what some people call personas. An excellent definition of personas is on slide 17 of this Powerpoint, "The definitive guide to engaging content marketing 141111". My interpretation of what BCG is proposing is shown in the graphic below.
The male and female information is traditional demographic information. The four characteristics on the X axis show four different emotional reactions to a particular product. Definitions are shown below.
The Xs indicate the proposed adjacent markets, as defined by the matrix. You might ask how you would develop such detailed information. Customer mapping is one technique. See this excellent article, "Adaptive Path's Guide: Customer Mapping", for more detail on customer mapping. If you think such detailed information is not possible, see the bold text above. The amount of data available to marketers is on an unprecedented scale. Think of how much data the marketers will have when neuroscience advances :-)
Business Insider reports that Royal Bank of Scotland is testing Facebook at Work as an email alternative. RBS cites the better functionality of the experimental Facebook at Work as the reason for the choice. What the Bank really mean is that we have learned to communicate in a new way, Facebook, and we now prefer that way. Interesting that consumer-focused Facebook realized their attractiveness as a business product....or maybe they wanted to get ahead of the other messaging powerhouses.
This quote from Inside Intercom may explain it.
"Given so much of our work is based on the back and forth exchange of ideas, it’s not surprising designers are imagining a new generation of messaging products, with dialogue at their center. Conversational UIs are breaking out of messaging apps and into products we use every day.
The cause of this shift is simple: human nature.
We’re innately tuned to converse with others. It’s how we share knowledge, how we organise ourselves, and how we share emotions. Language has been part of our makeup for hundreds of thousands of years. So of course we message all day long in bursts and binges, with family, friends, and colleagues. Messaging has become a layer through which daily lives are conducted."
I have been using Slack for about a month. I am not impressed. WhatsApp did not impress me either. I look forward to seeing FB at Work.
Part of the benefit of teaching is what you learn from the students. Yesterday in class one of my students made what I thought was an interesting observation. More and more companies are disrupting themselves. He said that the ability to disrupt your own company was a competitive advantage. In other words, consistently disrupting your own company is a unique input or expertise that satisfies the conditions for a competitive advantage.
For those who forget how to define a competitive advantage, the definition is below.
The expertise of disrupting oneself is similar to the expertise of designing airplanes for quick rebuilding. This airplane manufacturer can crash, rebuild and test again faster than their competitors. This expertise enables them to get to market faster. The self-disruptor is constantly identifying a smaller feature set that satisfies an unserved portion of the market. The ability to see the unserved need and match it with a feature set repeatedly becomes a competitive advantage.
The more I think about this idea the more I like it. Imagine that you are running a food company. It might be easier to identify new products looking for ways to disrupt existing products rather than the more traditional ways used in the food industry.
One of the most challenging issues in corporate management is the training, development and support of employees. The current environment increases the challenges for the reasons listed below.
In considering the development of a new approach to corporate staff development and support, four factors need to be considered.
Corporate Strategic Goals and Objectives
I am sure most F500 corporate CEOs are confident that the company strategy is well articulated. Now imagine that we are onboarding a graphic designer contractor to a project. Imagine the contractor is from Tajikistan, a Moslem woman and English is her fourth language. Now how confident are we about the clarity of the strategy given the social, cultural and language issues? How confident are we that our information and support systems have been designed to recognize the particular needs of this woman contractor?
Since the 2008 financial crisis, U.S. federal regulators have scrutinized large corporations. Scrutiny with respect to risk exposures increased after the Snowden affair of 2014. Such events of extreme consequence will probably increase. Therefore, it becomes incumbent upon corporations to keep their staff abreast of regulatory requirements but also the philosophy and concepts underlying the regulation. I hope the woman contractor from Tajikistan is familiar with, for example, FCPA regulations.
The pace and scope of change has increased as computing power has increased, whether we examine the actual change or the pace at which new information circulates in world markets through informal communication systems (such as Twitter or WhatsApp). This complexity strains employee’s ability to stay current and understand new issues sufficiently to develop proactive strategies.
Standards for Software, etc
Employees and third party workers all over the world have become accustomed to beautiful interfaces for a large feature set of necessary information all on their phone. Formats include You Tube videos, Slideshare presentations, e-books, PDFs, MOOCs and 100 other formats and delivery mechanisms. On any subject you can get information in the format you prefer. Few corporations have yet reached this level on proprietary applications let alone their information archives (if they even exist).
Next post I will talk about the solution.
Today the AVC blog has a story about their portfolio company Kickstarter joining President Obama and the UN to fund raise for Middle East refugee relief. This is an interesting "partnership" for several reasons:
Since WW II corporations in the U.S. have gone through several "periods" in which the nature of the corporation was redefined. First we had simple companies that produced mostly industrial products and the bare consumer necessities.
The first noteworthy change was the conglomerate period in the 1960s where acquisitions of any kind added value. High PE (price-earnings multiple) companies purchased low PE companies but the added earnings plus cost savings were erroneously valued by the market at the higher PE ratio.
Then in the 1980s the first private equity firms appeared to do LBOs (leveraged buyouts). In the early days the PE firms were able to buy undervalued companies, strip out and sell unnecessary assets and earn a nice profit selling the remaining company.
As the undervalued assets disappeared, the private equity firms switched to doing rollups. Buy a platform company in an industry and then buy multiple companies in the same industry. This strategy produced scale, economies of scale and administrative cost savings.
Today we see a trend toward companies themselves (with no help from Wall Street) outsourcing operations to reduce costs and focus on the areas that are critical to creating value for the customer. More on this theme in this article from Danielmiessler.Com, "The Future of Renting vs. Buying".
What all of these examples make clear is that the concept of a corporation changes to address the opportunities to extract additional value. As Ronald Coase made clear in his Nobel Prize winning work, corporations are formed as a means to reduce (transaction) costs. While this logic was originally applied to understand integration efforts in corporations, starting with the LBO phenomenon we see corporations basically decoupling functions and assets to lower costs. This trend toward decoupling will only accelerate in the years ahead as we become comfortable with using IT to manage and control a wider and wider range of remote third party functions.
Friday I had lunch with a very talented business owner I have known for about two years. I was told that one division of the business (the origin of the company) was on hold, one division was growing revenue at low double digits and a new product line in a new division was about to launch. I told the owner that I now recommended for early stage and small businesses to target at least 100% annual revenue growth, as a means to build a company that can scale. The owner's response was "I do not want to scale".
Here are the three reasons to scale a business:
Stanford Business has a new article out this week, "Exploring the Ethics Behind Self-Driving Cars". It is a great article if you teach ethics in an academic setting, but the more important point is to put us all on notice. There are many new issues we need to address as artificial intelligence is added to our lives.
The article frames one conundrum. Should the car be programmed to protect your life or should it also consider the lives of pedestrians and people in other cars. Personally I think we should separate the car from the software. I can buy my car from BMW but the AI software comes from Google or Apple or MIT Automotive. Yes, there may be some issues similar to using Windows on so many different computers, but I could pick the moral position I want. No General Motors ethics for me. (BTW, whose software would you trust more--General Motors or Google or Apple)
By chance I talked to some industry people on this topic last week. They say that their analysis shows that driverless cars will have fewer accidents than human drivers. Maybe, as soon as we eliminate all human drivers we will not have so many ethical questions and the professors at Stanford can go back to thinking about Resource-based Theory.
SSIR has an interesting article, "Why Criticism is Good for Innovation". The article advocates the use of a rubric to evaluate new projects or products. A rubric is a scoring tool to evaluate criteria relevant to an analysis. The real value is that referring to the rubric reduces the risk that a comment is taken as a criticism, thereby potentially demotivating the creative type. The article does not suggest the outline of such a rubric, but I will.
For a new product or project, a rubric should evaluate the feasibility of commercialization. The factors that should be considered would include:
Perhaps assign ratings of high, medium and low to reflect attractiveness or risk. Smarter yet, work on each factor until it has a high positive rating.
These factors should give one sufficient opportunity for feedback on objective issues such that one would never make the "criticism" personal.
Peter Drucker, the leading management thinker of the 20th century, had a little noted idea referred to in HBR simply as "Theory of the Business". Basically Drucker believed that every company has two or three key assumptions that determine success or utter failure. These assumptions represent the biggest risks in the business, which I talked about in this previous post, Business Model Assumptions.
Drucker's way of thinking about critical assumptions is demonstrated well by this figure from the European Innovation Institute.
To launch the iPod Apple had three key assumptions, one of which was untested and two where other companies provided evidence to reduce the risk. I think we could apply Bayes Theorem to get a better understanding of the risk.
At any point in the life of a startup, one could ask what are the 2-3 assumptions that have to be tested in the next 6-12 months. Powerful tool to bring focus to management. Also clearly highlights the skills and resources required to succeed.
The key to creating a great product and company is to create value for the customer. Value is that unique combination of emotional and economic benefits that motivate the customer to purchase. In the best situation the product enables the customer to create their own additional value. In an even better situation, value for the customer is derived from the value/content that the customers create. An example may help.
Options 2 and 3 allow for multiple opportunities to create value beyond just the code base from the platform.
If we examine Twitter, it is not clear there are use cases developed by the users or by curating the user content. So it is not required to be successful, but I think the more value creation the more attractive.
On a related theme, the proprietary code should be for the principal value creation for the customer. The remaining code in the stack can come from the open source community. This idea is explained very well here.
This quote in a story in Fast Company caught my attention:
"...a system in which a program can be written to find an answer—or to execute a smart contract that can buy something, sell something, or do something. In aggregate, a group of smart contracts could run what is known in Ethereum-speak as a "decentralized autonomous organization" (DAO) or a "distributed autonomous corporation" (DAC)—in other words, a corporation distilled to its most basic tasks, and operated by little more than code and the logic of if this, then that." (emphasis added) Companies will have a single asset, a code base using AI, that will enter into transactions with independent service provides to create, deliver and capture value.
Perhaps this novel idea caught my attention because I had spent the weekend reading about datafication, which is explained in a study by Ericsson "The Impact of Datafication on Strategic Landscapes". Digitalisation is the evolution of IT starting in 1950 which brought us apps, mobile devices and a focus on IT for productivity improvement. Datafication is the new approach to IT which recognizes the changes coming in IT from the large number of physical objects capturing or generating data. The differences in digitisation and datafication (from the Ericsson study) are summarized below.
Now, as every aspiring entrepreneur knows, one must understand the customer and their problem to successfully start a new business concept. The question one should be considering is whether datafication provides sufficient information for the code based AI company to successfully identify a large need and develop a solution. Ericsson believes the answer is yes and the data source will probably be your cell phone, which captures and generates data on your entire life. When a company with no humans is analyzing data about you, it brings privacy issues to a whole new level.
Maybe the solution to the problem of the morality of capitalism is to replace the human managed companies with "no humans" companies. Might be more socially aware :)
Instead of robot challenges every weekend, maybe we should have challenges for best code to autonomously operate a company.
I am teaching a new course, "Risk Analysis in Business Concept Development for Engineers and Entrepreneurs", which is a graduate level course in the Engineering School at FIU. Most people think about business risk in terms of:
There is another more meaningful way to think about risk:
Assumptions=Risk=Cash Flow Variance
Two key concepts in the course:
Some readings for the course:
Image credit: http://commons.wikimedia.org/wiki/File:Variance_various.svg
A few observations I found interesting today:
I have become something of a collector of different models of social entrepreneurship. For the purposes of being accepted as an example of a different model of social entrepreneurship, the company must be for-profit and have a unique way of delivering measurable social impact. The examples I have collected are not necessarily the first such companies. The only distinction I make is I do not accept CSR projects.
Two examples recently caught my eye:
Wonder how much seafood, if any, Carnival buys from Norton Sound or any other native corporation in Alaska. The new division should consider such questions.
I have just returned from vacation in Alaska. Most majestic landscape I have seen anywhere in the world. As is my custom, I read some books about Alaska and the indigenous population. The indigenous people have been in Alaska for 16,000 years and have survived two ice ages. After 16,000 years in the same place a people develop a comparatively advanced culture very suited to the surroundings. All was bliss and comparative harmony until the Russian explorers arrived in the 1700s.
These early explorers were charged with determining whether a colony should be established. With the abundance of furs, Alaska was a natural location for a colony. In keeping with the "business model" of the time, to establish a successful colony one maximized financial return with complete disregard (exploitation) of the local population. The Russians improved on run of the mill exploitation by kidnapping the natives' wives and children until a ransom was paid in pelts. As the fur trade grew in monetary terms the Russians looked to change the business model from exploitive to sustainable. The Russians were never able to achieve sustainable colonies in Alaska, which prompted them to sell Alaska to the U.S. government for a mere $15 million. The Russians failed because they never engaged the self-interest of the locals and the local market forces to support the colony.
The errors by the Russians are the mistakes I see frequently in social entrepreneurship:
BCG.Perspectives has a very interesting new article, "Navigating a World of Digital Disruption". The article focuses on how the BCG clients (F500) can be disrupted and how they can position strategically and tactically to improve their performance. However, I found the more valuable parts to the article to be:
I really liked the graphic below. One point to note, I think you can only strategically focus on one "architecture" at a time for an line of business. For example Amazon uses communities to do book reviews, but the Amazon strategy is a platform strategy for its original business. I THINK A LOT OF STARTUPS TRY TO COMBINE PLATFORM AND COMMUNITY AND THAT IS WHY THEY DO NOT GET FUNDED. YOU CAN ONLY BE ONE.
The article also has an interesting proposal for how NGOs and multi-laterals could re-organize agriculture to be more sustainable and effective through big data.
This is an article worth reading slowly and not speed reading. Thanks to @John_Menenzes for the heads up.