Research by Mucking About

I am a long standing fan of the Ig Nobel awards. The Ig Nobel awards are an initiative by the magazine Air (Annals of Improbable Research) and are handed out on a yearly basis – often by real Nobel Prize winners – to people whose research “makes people laugh and then think” (although its motto used to be to “honor people whose achievements cannot or should not be reproduced" – but I guess the organisers had to first experience the “then think” bit themselves).

With a few exceptions they are handed out for real research, done by academics, and published in scientific journals. Here are some of my old time favourites:
• BIOLOGY 2002, Bubier, Pexton, Bowers, and Deeming.“Courtship behaviour of ostriches towards humans under farming conditions in Britain” British Poultry Science 39(4)
• INTERDISCIPLINARY RESEARCH 2002. Karl Kruszelnicki (University of Sydney). “for performing a comprehensive survey of human belly button lint – who gets it, when, what color, and how much”
• MATHEMATICS 2002. Sreekumar and Nirmalan (Kerala Agricultural University). “Estimation of the total surface area in Indian Elephants” Veterinary Research Communications 14(1)
• TECHNOLOGY 2001, Jointly to Keogh (Hawthorn), for patenting the wheel (in 2001), and the Australian Patent Office for granting him the patent.
• PEACE 2000, the British Royal Navy, for ordering its sailors to stop using live cannon shells, and to instead just shout “Bang!”
• LITERATURE 1998, Dr. Mara Sidoli (Washington) for the report “farting as a defence against unspeakable dread”. Journal of analytical psychology 41(2)

To the best of my knowledge, there is (only) one individual who has not only won an Ig Nobel Award, but also a Nobel Prize. That person is Andre Geim. Geim – who is now at the University of Manchester – for long held the habit of dedicating a fairly substantial proportion of his time to just mucking about in his lab, trying to do “cool stuff”. In one of such sessions, together with his doctoral student Konstantin Novoselov, he used a piece of ordinary sticky tape (which allegedly they found in a bin) to peel off a very thin layer of graphite, taken from a pencil. They managed to make the layer of carbon one atom thick, inventing the material “graphene”.

In another session, together with Michael Berry from the University of Bristol, he experimented with the force of magnetism. Using a magnetized metal slab and a coil of wire in which a current is flowing as an electromagnet, they tried to make a magnetic force that exactly balanced gravity, to try and make various objects “float”. Eventually, they settled on a frog – which, like humans, mostly consists of water – and indeed managed to make it levitate.

The one project got Geim the Ig Nobel; the other one got him the Nobel Prize.

“Mucking about” was the foundation of these achievements. The vast majority of these experiments doesn’t go anywhere; some of them lead to an Ig Nobel and makes people laugh; others result in a Nobel Prize. Many of man’s great discoveries – in technology, medicine or art – have been achieved by mucking about. And many great companies were founded by mucking about, in a garage (Apple), a dorm room (Facebook), or a kitchen and a room above a bar (Xerox).

Unfortunately, in strategy research we don’t muck about much. In fact, people are actively discouraged from doing so. During pretty much any doctoral consortium, junior faculty meeting, or annual faculty review, a young academic in the field of Strategic Management is told – with ample insistence – to focus, figure out in what subfield he or she wants to be known, “who the five people are that are going to read your paper” (heard this one in a doctoral consortium myself), and “who your letter writers are going to be for tenure” (heard this one in countless meetings). The field of Strategy – or any other field within a business school for that matter – has no time and tolerance for mucking about. Disdain and a weary shaking of the head are the fates of those who try, and step off the proven path in an attempt to do something original with uncertain outcome: “he is never going to make tenure, that’s for sure”.

And perhaps that is also why we don’t have any Nobel Prizes.

Can entrepreneurship be taught?

“Entrepreneurship can only be self-taught. There are many ways to do it right and even more wrong, but it cannot be processed, bottled, packaged, and delivered from a lectern”, one of my readers – Michael Marotta – commented on an earlier post.

I am not sure I agree with the suggestion of that statement, namely that "entrepreneurship can only be self-taught". Of course we hear it more often - "you cannot teach entrepreneurship" - but I have yet to see any evidence of it. Granted, this is a weak statement, since the evidence that business education helps with anything is rather scarce (although there is some)!

However, the fact that the majority of entrepreneurs did not have formal business education does not tell me anything. Suppose out of 1000 attempted entrepreneurs indeed only 100 had formal business education. It might still be very possible that out of the 100, 50 of them became successful, where out of the 900 others only 300 became successful. This means that out of the 350 successful entrepreneurs, a mere 50 had formal business education. However, 50% of business educated entrepreneurs became successful, while only 1/3 of entrepreneurs without business education did.

My feeling about the potentially influence of business education on the odds of becoming a successful entrepreneur are quite the opposite of Marotta’s. I see quite a few attempted entrepreneurs with good business ideas and energy, however, they make some basic mistakes when attempting to build it into a business. The sheer logic of how to set up a viable business - once you have had a good idea - is something that is open to being "processed, bottled, packaged, and delivered from a lectern" (although that is hardly what we do in B-school).

Having a great idea and ample vision and energy perhaps is a necessary condition for becoming a successful entrepreneur, but it is not sufficient; this requires many other skills, and for some of them, education helps. Out of the 10 different skills needed to become a successful entrepreneur, perhaps only 5 can be taught or enhanced through business education, but those 5 will clearly improve your odds of making it.

Perhaps the majority of successful entrepreneurs do not have formal business education, but I have yet to meet a successful enterpreneur who did go to business school who proclaims his/her education was not a great help in becoming a success. Invariably, those people claim their education helped them a lot. In fact, many of such business school alumni donate generously to their alma mater. For example, one of London Business School's successful alumni entrepreneurs, Tony Wheeler (founder of Lonely Planet travel guides) regularly donates very substantial amounts of money to the School, because he believes his education there helped him greatly in making his business a success, and he wants others to have the same experience and opportunity.

In the absence of any formal evidence on whether business school education helps or hinders becoming a successful entrepreneur, I am inclined to rely on their judgement: business school education helps, if you want to become a successful entrepreneur.

Steve Jobs – the man was fallible

As a student, at Reed College, Steve Jobs came to believe that if he ate only fruits he would eliminate all mucus and not need to shower anymore. It didn’t work. He didn’t smell good. When he got a job at Atari, given his odor, he was swiftly moved into the night shift, where he would be less disruptive to the nostrils of his fellow colleagues.

The job at Atari exposed him to the earliest generation of video games. It also exposed him to the world business and what it meant build up and run a company. Some years later, with Steve Wozniak, he founded Apple in Silicon Valley (of course in a garage) and quite quickly, although just in his late twenties, grew to be a management phenomenon, featuring in the legendary business book by Tom Peters and Bob Waterman “In Search of Excellence”.

But, in fact, shortly after the book became a bestseller, by the mid 1980s, Apple was in trouble. Although their computers were far ahead of their time in terms of usability – mostly thanks to the Graphical User Interface (based on an idea he had cunningly copied from Xerox) – they were just bloody expensive. Too expensive for most people. For example, the so-called Lisa retailed for no less than $10,000 (and that is 1982 dollars!). John Sculley – CEO – recalled “We were so insular, that we could not manufacture a product to sell for under $3,000.” Steve Jobs was fantastically able to assemble and motivate a team op people that managed to invent a truly revolutionary product, but he also was unable to turn it into profit.

When Jobs was fired from Apple – in 1985 – CEO John Sculley took control. Sculley is often described as a bit of a failure, because “nothing revolutionary came out of Apple under his watch”, “he could have done so much more with the company” and especially for “being stupid enough to boot out a genius like Steve Jobs”. However, the years after Sculley took over were some of Apple’s most profitable. The man did something right, and that was focus on exploiting the competitive advantage that Apple had built up.

In management research, following terminology cornered by the legendary Stanford professor Jim March, we often say that firms have to balance exploration with exploitation. Exploration refers to developing new sources of competitive advantage and growth. Exploitation refers to making money out of them. Steve Jobs was “insanely great” at exploration, but not – at the time – at exploitation. Sculley was.

Now Steve Jobs is a legend. And rightly so; our world literally would have looked different without him. However, what Steve Jobs’ legendary status also tells me is that we – mere mortals – are inclined to overestimate the omnipotence of CEOs. We overdo it when we ascribe the failure of an entire company to just one man or woman (e.g. Enron’s Jeff Skilling) but also when we ascribe the entire success of a company to one individual.

Steve Jobs wasn’t omnipotent (John Sculley had qualities Jobs didn’t) and he wasn’t always right (eating only fruits does not eliminate the need for an occasional shower). His day-to-day influence on Apple over the last years must have been limited, given his rapidly and severely deteriorating health. If anything, he simply would not have been able to be around enough to control and take care of everything. Nevertheless, the company did well in spite of his absence. And of course that is his laudable achievement too; he managed to build a company that could do well without him. And perhaps that may prove to be his best business lesson after all: how a great leader eventually makes himself superfluous.

Can countries benefit from having their domestic firms acquired by foreign companies?

When a foreign company acquires a domestic firm, it often leads to outcries of indignation, nostalgia (“another of our once great companies in foreign hands”), and calls for legislation to prevent any more foreign poaching. Politicians and union leaders proclaim that the foreign owners may not be dedicated to keep up investment in the subsidiary, and that the take-over threatens national jobs and other economic interests. “Most governments are reluctant to see their corporate treasures fall into foreign hands”, the BBC wrote in an article devoted to the topic.

But is all this (slightly xenophobic) fear justified? Well, maybe not; at least not on all dimensions. Because we have increasing evidence that foreign ownership of a firm may actually also benefit firms, specifically in terms of their innovativeness. And this increased innovativeness may clearly benefit the host country.

Professor Annique Un, from Northeastern University in Boston, for example, did a pointy study. She collected data on 761 manufacturing firms operating in Spain, examined which ones were foreign hands and what their innovation output was in terms of new products introduced in the market. And the answer was pretty clear: foreign owned firms were more innovative than purely domestic firms.

Interestingly, Annique also corrected her models for the amount of R&D investments spent in the companies, and it turned out that this was not what was driving it; foreign owned companies were not just more innovative because they were investing more. Instead, they were more innovative irrespective of R&D. As a matter of fact, they were able to generate more product innovations for the same level of investment; meaning that they were simply better at it.

The study’s results suggested that they were better at it for two reasons. First, foreign parents seemed to use their domestic subsidiary to channel innovation into the country. Put differently, it seemed a foreign-owned company could tap into its parent’s superior repository of innovative stuff, and most of them gratefully made ample use of that option. Secondly, the foreign-owned companies were simply also better at coming up with new stuff on their own, in comparison to their domestic counterparts. Apparently, something about them being foreign-owned stimulated them to be more agile and creative, which resulted in more product introductions.

Whatever the reason behind this foreign-driven surge in innovation, the host country was better off for it; the evidence clearly showed that the foreign mercenaries stimulated diversity in the markets, giving customers more choice, while raising the bar for everyone. And this is not a benefit we hear many politicians, newspapers, and union leaders proclaim and acknowledge, when yet another foreign corporation is eyeing up their country’s corporate treasures.

Five mistaken beliefs business leaders have about innovation

The vast majority of companies want to be innovative, coming up with new products, business models and better ways of doing things. However, innovation is not so easy to achieve. A CEO cannot just order it, and so it will be. You have to carefully manage an organisation so that, over time, innovations will emerge. And CEOs often make a number of common mistakes, that hamper rather than induce such processes.

Believe the numbers
One common mistake is to insist on “seeing the numbers” too much too soon. “What is the size of the market?”, “what is the Net Presen Value calculation?”, “payback time?”, and so on. What they are forgetting is that, for a truly innovative product, for example, it is impossible to reliably produce any numbers. If a CEO insists on hard numbers before the project is even started, it will by sheer definition kill off any truly innovative ones, simply because you cannot compute the size of a market that does not exist yet.

One CEO who understood this well was Intel’s Andy Grove, at the time that an engineer proposed to him to work on something called a “microprocessor”. The engineer could not produce any numbers, consumer research, and not even a good idea in what sort of applications this product was going to be used, but Grove gave permission and a budget anyway. It made Intel one of the most successful companies the world of business has ever witnessed.

Believe success has been attained
Another innovation killer is sustained financial success. We call it the success trap. When an organisation becomes very good at something, top of its industry, it usually starts to focus on the thing (product, technology, or business model) that made its success, crowding out other options and points of view. Initially, this may make it even more successful, but there is going to come a time that its business context is going to change: new technologies, consumer preferences or foreign entrants emerge. And then the company and its top management finds itself trapped in the one thing it does so well, rigidly believing that what brought it its success, will continue to make it prosper. But, in reality, it is rapidly becoming obsolete.

A great illustration of this is the 43 companies featured in the famous business book “In search of excellence” by Peters and Waterman in 1982. These companies were considered to be the most excellent companies in the world at the time but, at present, only 5 of them would still make the list; many of them having disappeared altogether (e.g. Atari, Tupperware, Digital). It illustrates that, paradoxically, it is especially the most successful companies, the top performers of their industry that find it difficult to adapt and survive when the world around them changes.

Believe they know the competition
What always strikes me, if I ask a CEO (or anyone else in an organisation for that matter) “who is your main competitor?”, they always reply with the company that is most like them. And subsequently they can tell me anything about that firm; its strength, weaknesses, products and plans. But in a way, when it comes to innovation, that is slightly delusional. The company that is most like you is really the least important competitor, simply because they are in the same boat as you are.

The most threatening competition often comes from a completely different angle: an adjacent industry, innovative start-up, or substitute. And that is a phenomenon of all times. Sailing shipping companies suffered from the steam engine, radial tyre champion Firestone was brought to its knees by the introduction of bias tyres, newspapers are being squeezed by the internet, while watchmakers suffer from the fact that nowadays everybody already has the time at hand on a mobile phone or laptop. Thinking your biggest competitor is the company most like you, will leave a company dangerously exposed to outside innovation.

Believe that because everybody had always done it this way, it is the best way of doing things
Industries are rife with habits and business practices from which no-one can quite remember why we do them this way. When challenging a CEO on one of those business practices, he lamented to me “Freek, everybody does it this way, and everybody has always been doing it this way; if it wasn’t the best way of doing things, I am sure it would have disappeared by now”.

And standard economic theory would support his point of view: The market is darwinian, therefore it should be weeding out bad practices. But, in reality, he is wrong. In many businesses, practices emerged with good reason, but once the circumstances changed, firms carried on using them for no reason whatsoever. Did newspapers have to be printed for so long on ridiculously large (and expensive) sheets of paper? Heck no; the english law, set up in 1712, that newspapers were going to be taxed based on the number of pages they printed was abolished in 1855. Could low-cost airlines not have worked many years earlier? Are buyback guarantees in book publishing (set up during the Great Depression) really still needed? Is detailingin the pharmaceutical industry still a useful practice? That everybody does it this way is no reason not to challenge it. The greatest innovations often come from challenging industry convention.

Believe the customer
The final error CEOs often make when it comes to innovation, is to ask their customers for their opinion. Pretty much any company I know has a yearly customer survey. However, there are two things wrong with this. Firstly, these people are already your customer; sure they are going to be satisfied with you; the others have already long voted with their feet. We call it selection bias. You are selecting to ask the ones who already like you, but what about the ones who don’t?

Secondly, even when a company is asking potential customers about their ideas for innovation, in the form of market research, it is tricky. It is usually some shape or form of asking respondents whether they would like (and buy) the new idea. Consumer research often is useful but not for truly innovative ideas and markets that do not exist yet. Research on the fax machine came back unambiguous: every respondent answered that they would never buy a machine like that; likewise for the mobile phone. As Farooq Chaudhry, producer at the highly innovative Akram Khan Dance Company, once put it to me: “Customers? Forget about them”; if you want to be really innovative, you have to be leading the customers; not be led by them.

Big firm innovators: What large companies can do to be just as innovative as small entrepreneurial ones

Big companies are thought to rarely be the real innovators in an industry. Usually, radical change – whether a new technology or an entirely new business model – comes from outside the industry, and is introduced by an entrant into the field. On average that is true – research confirms it – and there are various reasons for that. It pertains to a phenomenon I called “collective inertia”; established players often seem paralysed when significant, paradigm-busting change is sweeping through their business.

Why big firms are often slow to adapt

That is because those existing players usually do not see an interest in destroying their own business and competitive advantage; newspapers were reluctant to move into on-line media because it cannabilised their existing business, traditional airlines were reluctant to embrace the low-cost model, and steel companies shunned away from minimill technology. These new technologies and business models ate into their current business and therefore they were not keen, to say the least.

There is often also a softer, almost psychological component to it. It pertains to phenomena such as the success trap, escalation of commitment, and the Icarus paradox in business. Years of continued success have wedded the firm to its own proven formula and business model, and the new, initially often inferior technology is not something they believe in and particularly want to get involved with.

Hence, we see that existing players in an industry usually are not the inventors of radical new innovations and often even late adopters – often too late… Quite a few of them do not survive the transformational turbulence in their business as a result of their own inertia.

However, Professors Lin Jiang and Marie Thursby from Georgia Tech and Justin Tan from York University discovered that there are some exceptions to this rule, and some incumbents do manage to be inventors during the stage of technological dirsruption. And that is pretty interesting, because those firms teach us what existing players can do to prevent missing the boat, and becoming obsolete when their environments change – a problem that clearly bugs many of them.

Big firm innovators

Lin, Justin, and Marie examined the semi-conductor industry, where the initial reliance on vacuum tubes was replaced by bipolar technology, which in turn was replaced by complementary metal-oxide semiconductors (CMOS). At present, that technology is under threat from nanotechnology. Using extensive patent analysis, Lin and colleagues examined which existing players did not succumb to the new entrants, and were able to contribute to the new technology. And they found three key, related characteristics:

First, the firms that were able to contribute significantly to fresh knowledge in the new and emerging domain had forced themselves to continue to scan for new technological areas. They had not just rested on their laurels, trying to make the most out of an existing technology. In spite of the technology not being under threat yet, their R&D engineers had continued to scan the environment for new, substitute technologies. And now this paid off.

Second, the firms that did manage to be inventors in the newly emerging domain had maintained a broad portfolio of alliances – specifically a portfolio of alliances that consisted of both firms that were pretty close to its current set of activities and firms that were in entirely different domains. Such a combination of alliance partners is thought to assure that the firm is exposed to really radically different things, but at the same time also to things that are more within its own familiar domain of comprehension!

Finally, the successful inventors had always maintained clear ties to sources of scientific knowledge in the public domain, by collaborating with university scientists, reading scientific publications, and so on.

Innovations usually consist of some form of recombination of other, existing sources of knowledge. The aforementioned results show that if existing, successful players in an industry force themselves to continue to access a variety of external knowledge sources – in the form of experimenting with new technologies, maintaining alliances, and accessing university sources – they can not only survive a radical change in their business but even contribute to it. Hence, do keep an active, open mind and door, and let knowledge flow in, even if you think you are currently doing just fine.

The hidden costs of outsourcing

I’d say there are even more hidden dangers to outsourcing than giving up control of key activities. What is also a major risk, is that of the loss of particular capabilities which – and you might not quite realise this at present – are crucial to your performance in further downstream activities.

Let me give you an example. My colleague at the London Business School Markus Reitzig, together with his co-author Stefan Wagner, examined outsourcing in one particular process; a firm’s filing and enforcement of patents. Firms that do R&D usually try to protect their inventions by getting a patent. Once the patent is granted they often need to engage in enforcing it, for example through proactive and reactive litigation. These different types of activities – patent filing and patent enforcement – are such specialised activities that usually they are carried out by different individuals within an organisation.

And now comes the trick: Quite often, firms would chose to outsource the patent filing to some external, specialised law firm – “because they’re the experts and can do it more efficiently than we can”. At first sight, that seems to make sense. However, one of the crucial activities conducted for patent filing is the identification of “prior art”. Prior art encompasses all knowledge disclosed to the public before the patent is applied for. And if a firm outsources the entire patent-filing activity, it also leaves this identification and interpretation of prior art to the external solicitors. The problem is that, in the process, the firm will also lose a rather important “by-product”, namely knowledge about the firm’s technology competitors. That is because, as a result of investigating prior art, firms usually learn an awful lot about competitors working on similar issues. And that knowledge is rather relevant further down the line…

Markus and Stefan examined the firms that had outsourced patent filing and statistically compared them to a bunch of firms which continued to do both activities in-house (despite many telling them “you should really stop doing that, you know; it’s old-fashioned; haven’t you ever heard of outsourcing?!”). And they found that the firms that had not outsourced their patent filing activities were much better at identifying potential technology competitors (and their weaknesses) early on. This gave them the possibly to successfully attack them proactively. Firms that gave up on their own in-house patent filing function, and outsourced it to some external specialist, found themselves ill-equipped for patent enforcement activities. Consequently, their downstream performance plummeted.

My guess is that what Markus and Stefan found for patenting is true for many activities; outsourcing one sub-process might have undesirably (hidden) consequences for some other function somewhere else within the firm. These linkages are largely unknown and often impossible to observe, quantify and measure. However, that does not mean that the costs are not very real!

You have to be careful with outsourcing. What may seem like a relatively tangential activity to you, which you could safely put in some externals’ hands, might accidentally make you lose a capability which is critical further down the line. And once you’ve lost that in-house capability, it will be very hard to get it back.

The hidden dangers of outsourcing

Outsourcing is one of those words that have become hideously fashionable in corporate lingo in the last 5 to 10 years. A business cynic – which obviously I am not! – might conjecture that perhaps it is popular because it appeals to some fundamental human desires for shirking and procrastination, finally telling managers “to stop doing certain stuff” rather than always pushing them “to do more”. I, as a more thoughtful business observer, on the contrary, think that outsourcing often makes sense, simply because you cannot, and should not try to do everything yourself. Other companies can sometimes do a particular thing better and more efficiently than you, if alone because they can bundle and specialise in it, and then you’re better off buying it from them.

Some companies take it a bit far though… Some time ago I was talking to a senior executive of a major airline and they actually had the idea that in the future they might be able to get rid of all their staff, facilities, pilots, planes, and so forth, and concentrate on “being the director of the chain”; that is, not actually do anything but tie together all the activities conducted by others. Hence, outsource everything accept for the coordination between all the parts. Well… here is my opinion: You can forget about that. Try that, and it won’t be long before nobody needs you anymore.

The classic example of that is IBM’s PC in the 1980s. It was IBM’s plan to outsource everything, add its brand name and just one little microchip connecting all the PC’s ingredients. They outsourced the PC’s microprocessors to some geeky guys who owned one of those founded-in-a-garage little companies in Palo Alto (the little company’s name was Intel) and the operating system to yet another geeky guy with big glasses heading a founded-in-a-garage little company in Seattle (the geeky guy’s name was Billy Gates), in the process provoking the genesis of the most powerful alliance the world of business has ever witnessed: Wintel (Windows and Intel).

Because following in IBM’s footsteps towards Palo Alto and Seattle were all the other computer manufacturers which copied the PC; hence buying their microprocessors from Intel and their operating system from Microsoft. And not for long, Intel, Microsoft and end users alike could not quite remember why they needed IBM in the first place and completely “disintermediated” them. It were Intel and Microsoft that reaped the great big benefits of the booming computer market and not grandfather Big Blue IBM, which ended up in a severe crisis as a result of it.

Hence, be careful with outsourcing; giving up control might get you more than you bargained for (especially if it concerns geeky guys in a garage).

In a crisis, innovate

Recently, an executive – an ex-student – told me about his company. The company has a handful of competitors (it is a local business) highly similar to itself, and they’re all losing money in the current economic climate. Now one competitor – the worst-performing of the lot – has started to accept assignments for a fee below its cost price, just enough to cover its variable costs and at least earn back a tiny bit of its fixed costs. My ex-student asked me, “What can we do?”

The answer isn’t easy. But it is of course a rather typical situation to be in. It happens in most industries in trouble; some bloody competitor – often the lousiest one of all – starts to sell below cost price, out of pure desperation. Actually, my ex-student’s company responded in a way that is just as typical: they said, “But their product is inferior; we deliver quality, and customers will always want to pay for that” (and stuck to their comparatively high price). But customers didn’t. And they seldom do. Even if there is a minor quality difference – and it’s usually just minor; at least in the eyes of the customer – if the price difference is large enough, you’ll lose a lot of clients; more than you can afford.

So what can you do? What else can you do than lower your prices too, tighten your belt, hold your breath, and hope the crisis blows over before you bankrupt yourself? Because that’s what companies usually do.

I’d say the phenomenon is rather common, so the solution can’t be.

It reminded me of the English newspaper business some years ago. All quality newspapers were in trouble; stuff had started to move on-line big time, free newspapers such as the Metro had flooded the market and, on top of that, the general trend was that people simply read less. The four main players in London – The Guardian, The Times, The Daily Telegraph and The Independent – were all in decline but The Independent was the one widely expected to fall the first. The others had deep pockets due to rich owners and, due to a price war several years earlier, which had hit The Independent hardest, it was basically broke.

Now, The Independent could have done what most companies in such a situation do: moan about it, cut some more costs (or whatever is left of it) and attempt to prolong an inevitable death. But it didn’t. It took a plunge. It launched a small-sized version of its newspaper; the denounced “tabloid” format. All newspapers had been talking about it for a long time, but everyone had dismissed it as too risky (customers won’t like it), phoney or plain cheap. But The Independent launched it, and it worked (customers loved it). They survived.

Was it a coincidence that out of the four main players it was The Independent that launched the thing? Of course not. It was The Independent who basically had nothing to lose; it would have been the first one to go under had the industry continued as is. But it chose to not just prolong its demise: it took a plunge, and recovered.

The same happened to the famous Southwest Airlines. In its early days, when it was in deep trouble, it had to sell one of its four planes. Yet, it didn’t try to just save some more costs and continue with 75 percent of its operations, prolonging an inevitable decline; it took a plunge. It said “we’re going to run 100 percent of our operations but with just three planes!” and, in the process, invented the widely successful low-cost airline model, having scrapped all frills and complications, combined with the emergence of a must-succeed culture.

So, when you’re down: innovate. Don’t just wait for the inevitable to happen; prolonging your decline out of some false hope that you’ll weather the storm. Storms kill; get out of it while you can.

Down-town Calcutta firms

I'll admit it: I have a love-hate relationship with organisations. On the one hand, they’re fantastic, and they produce things that no individual could have produced by himself, such as airplanes, open-heart surgery and sky-scrapers. However, on the other hand, they can be incredibly stupid. British Gas who sends 28 letters and 3 bailiffs for a £100 bill despite having received evidence on multiple occasions that the meter is your neighbour’s (as you may gather, this is not a hypothetical example…), Firestone which continues to invest in bias tyres while the whole world (including their own employees) understands radial technology is the future, and Ahold which continues to make acquisitions although even the most junior HQ employee is starting to suspect things are getting out of hand.

Yet, the thing that I probably dislike most about large firms, is that so many of my (very well-educated and intrinsically motivated) friends seriously dislike going to work on a Monday morning – because, despite the façade, corporate life is rather dull, repetitive and unexciting. I also think this is probably the clearest symptom that organisations are not making sufficient use of the potential of what is likely to be their most valuable resource: people.

But many large organisations would like to be more entrepreneurial and vibrant. And therefore, they send their employees on training programmes and culture courses, in which they build sandcastles together, climb poles, play drums or go line-dancing, to develop some positive team-spirit, and provide them with entrepreneurial energy and creativity.

My favourite anecdote regarding this issue comes from my late and great colleague Sumantra Ghoshal, who used to say the following: He would tell executives that every year in August, during his children’s summer holiday, he would take them to his native Calcutta for a month. However, down-town Calcutta would be so humid and hot in August that he could not do anything else than lie on his bed and be sleepy all day. However, when he’d spend spring in Fontainebleau – where he lived for many years when he was on the faculty at INSEAD business school – which is located right in the middle of a protected forest in France, he could not help become cheerful seeing the flowers blossom, start to whistle a song, run through the forest and leap up to grab a branch!

"The problem with large organisations", he’d say, "is that most of them create down-town Calcutta in summer within them".

And then they send you on a training course to improve your creativity and entrepreneurial energy. "But the problem is not me!" he’d shout; "place me in the Fontainebleau forest in spring and you’ll see that I have all the energy and creativity you'll ever need". I don’t need a course; you need to change your organisation.

The Monkey Story

The experiment involved 5 monkeys, a cage, a banana, a ladder and, crucially, a water hose.

The 5 monkeys would be locked in a cage, after which a banana was hung from the ceiling with, fortunately for the monkeys (or so it seemed…), a ladder placed right underneath it.

Of course, immediately, one of the monkeys would race towards the ladder, intending to climb it and grab the banana. However, as soon as he would start to climb, the sadist (euphemistically called “scientist”) would spray the monkey with ice-cold water. In addition, however, he would also spray the other four monkeys…

When a second monkey was about to climb the ladder, the sadist would, again, spray the monkey with ice-cold water, and apply the same treatment to its four fellow inmates; likewise for the third climber and, if they were particularly persistent (or dumb), the fourth one. Then they would have learned their lesson: they were not going to climb the ladder again – banana or no banana.

In order to gain further pleasure or, I guess, prolong the experiment, the sadist outside the cage would then replace one of the monkeys with a new one. As can be expected, the new guy would spot the banana, think “why don’t these idiots go get it?!” and start climbing the ladder. Then, however, it got interesting: the other four monkeys, familiar with the cold-water treatment, would run towards the new guy – and beat him up. The new guy, blissfully unaware of the cold-water history, would get the message: no climbing up the ladder in this cage – banana or no banana.

When the beast outside the cage would replace a second monkey with a new one, the events would repeat themselves – monkey runs towards the ladder; other monkeys beat him up; new monkey does not attempt to climb again – with one notable detail: the first new monkey, who had never received the cold-water treatment himself (and didn’t even know anything about it), would, with equal vigour and enthusiasm, join in the beating of the new guy on the block.

When the researcher replaced a third monkey, the same thing happened; likewise for the fourth until, eventually, all the monkeys had been replaced and none of the ones in the cage had any experience or knowledge of the cold-water treatment.

Then, a new monkey was introduced into the cage. It ran toward the ladder only to get beaten up by the others. Yet, this monkey turned around and asked “why do you beat me up when I try to get the banana?” The other four monkeys stopped, looked at each other slightly puzzled and, finally, shrugged their shoulders: “Don’t know. But that’s the way we do things around here”…

I got this story from my colleague, the illustrious Costas Markides. It reminded him – and me – of quite a few of the organisations we have seen. Over the years, all firms develop routines, habits and practices, which we call the firm’s “organisational culture”. As I am sure you know, these cultures can be remarkably different, in terms of what sort of behaviour they value and what they don’t like to see, and what they punish. Always, these habits and conventions have been developed over the course of many years. Very often, nobody actually remembers why they were started in the first place... Quite possibly, the guy with the water hose has long gone.

Don’t just beat up the new monkey – whether it is a new employee, a recent acquisition or a partner; their questioning of “the way we do things round here” may actually be quite a valid one.

It looks like we don’t have a strategy…

Whenever I interview people at a particular company regarding their firm’s strategy – for instance because I am writing a business case about them – I try to make a point of not only finding out exactly what their strategy is, and why it works, but also where it came from. That is, how they came up with the strategy in the first place. And usually, I get a perfectly logical and rational answer – at least at first…

However, often, when I subsequently “dig deeper” into the organisation, by interviewing middle managers and engineers (who have been there for a long time), by talking to the CEO again, by reading up on some company documentation, etc., it appears that the (wonderful) strategy was not the result of some sort of rational analysis at all. Instead, invariably, it seems, there was some lucky moment or unexpected event which triggered the company to alter its course and move into a new direction.

Hornby accidentally saw itself appear in the hobby market (instead of the toy market) when they spent their cost savings from outsourcing on adding detail and quality to their products; CNN figured out it could become a global (instead of US) news company when Fidel Castro (picking up the American satellite signal in Havana) told founder Ted Turner he watched it all the time, Southwest invented low-cost airlines when competition forced them to sell a plane but decided to try and fly the same routes with three instead of four aircraft, and Bisque founder Geoffrey Ward switched from being a plumber to selling designer radiators when people kept knocking on his door asking whether they could buy that funny-shaped radiator which he had just removed for a client and placed in his workshop window to make it appear shop (to see off the civil servants who had told him he was illegally located in a retail zone).

But why do people, in retrospect, almost always want to make it sound like it was the result of some thorough analysis and innovative thinking? Ego? Embarrassment? I guess that might play a role; “rational thinking” sounds better than “ehm… we stumbled upon it, I guess…” But, I’ve also found that people I interviewed who weren’t there at the time of the strategic switch at all – and therefore can’t take any credit or blame for it anyway – make it sound all logical. And that’s, I guess, because in retrospect, it all sounds so bloody obvious: moving into the hobby market, becoming global, not handing out food, newspapers and hot towels on a 45-minute flight (but instead focusing on turning the darn thing around on the tarmac in 20 minutes and fly again). It just makes so much sense, that it just had to be the result of thorough analysis and thinking – surely.

But admitting – even if alone to yourself – that the best strategies often emerge when you weren’t really planning for it, could actually help you get lucky more often. Andy Grove – former CEO and Chairman of Intel – figured that one out when Intel moved its microprocessors into computers after IBM (finally) convinced them that they could be applied in their PCs and, “yes, they really wanted to buy them”. After that, he said:

“We say we have a top-to-bottom strategy. But don’t act top-to-bottom. You can look at it positively or negatively. Positively, it looks like a Darwinian process: we let the best ideas win; we match evolving skills with evolving opportunities. Negatively, it looks like we don’t have a strategy…”

And you want to make sure ideas reach you from everywhere: suppliers, customers, competitors, bloody civil servants and, yes, even Fidel Castro.

Is innovation over-rated?

Innovators are always the heroes of the story. They saw the opportunity when no one else could see it; they persisted stubbornly when everyone said they were a fool; they suffered hardship but eventually defied the odds to make it big, and so on and so forth.

And innovation is great. But we hear very little about the (undoubtedly many) poor sods who think they’re seeing something but it really is just their imagination, who persist stubbornly and foolhardily with something that ain’t never going to work, who continue suffering hardship till they vanish.

Do innovating firms perform better? Evidence from academic research on the topic is certainly equivocal: it is very hard to find solid evidence that firms that innovate (e.g. obtain more patents) perform better.

It so happened that I had a database of about 1300 firms active in some segment of the pharmaceutical industry, and all their innovations. Note, innovations do not all have to be real blockbusters but could just be new types of products or applications. These new types really can concern truly novel drugs new to the world but more often they concern a new dosage of some existing drug, a new intake form (e.g. pills versus injections), a new application of the same drug (i.e. a different disease for which a particular existing drug might also work), etc. Thus, not all of them are very radical innovations, but they are all new enough for them to have required clinical trials before their launch.

Using these data, I first tested, through some fancy statistical methodology, whether such innovations contributed to the growth of the firms over the subsequent years. The answer was a clear “no”; in fact, innovators grew more slowly.

Then I thought “perhaps they are innovating because they’re running out of growth”, so I applied a different (and even fancier) statistical technique to correct for that. Still, the answer was a resounding “no”: innovators subsequently really had more trouble growing and it was a direct consequence of the innovations.

So then I thought, “Perhaps I am looking at the wrong thing; and I should not be looking at growth but at firm survival”. Therefore, I changed my (already fancy) statistical methodology to test the impact of innovations on firm survival. But no, innovators died (i.e. went bankrupt) more often than non-innovators.

Then I thought “ah, it must be because innovation is risky; innovators may be the big failures of the industry but they are probably also the biggest success stories (I should really have thought of this earlier… better not tell anyone…)”. So I used an even fancier statistical methodology to model not only the average survival probability of the innovators (vis-à-vis the not-so-much-innovators) but also their “variance”. But no… innovators really did fail more often than non-innovators and with very little “risk”! In layman terms: they died pretty quickly and you could be sure of that. No risk-return trade-off here: do not innovate and you’ll get higher return for less risk…!

So then I gave up.

Might the answer simply be that innovation really is not such a very smart thing to do for a firm…? It seems, as an organisation, your chances of success are quite a bit better, and with little risk, if you simply stick to your guns, or at least not try come up with the new stuff yourself (but just wait patiently to imitate it).

But if that is the case, perhaps we shouldn’t tell anyone… Because innovation really is great and, as a society, we need it. But if everyone finds out that you, as an individual firm, are better off without it, nobody might do it anymore… So let’s keep this one under wraps, and between you and me, alright…?

The Red Queen

“They were running hand in hand, and the Queen went so fast that it was all she could do to keep up with her: and still the Queen kept crying 'Faster! Faster!' but Alice felt she could not go faster, thought she had not breath left to say so. The most curious part of the thing was, that the trees and the other things round them never changed their places at all: however fast they went, they never seemed to pass anything”.

Have you read Lewis Carroll’s “Through the Looking Glass”? If so, you might remember the passage above when Alice meets the Red Queen. They are running and running, but appear to be stationary. Competition among organisations can have the same effect. In order to keep up with competition, firms have to change continuously, in terms of adopting new technologies, launching new products and services, adapting to new business models, etc. Sometimes it can feel like a race, and be quite exhausting.

“Suddenly, just as Alice was getting quite exhausted, they stopped, and she found herself sitting on the ground, breathless and giddy. Alice looked round her in great surprise. 'Why, I do believe we've been under this tree the whole time! Everything's just as it was!'

'Of course it is,' said the Queen, 'what would you have it?' 'Well, in our country,' said Alice, still panting a little, 'you'd generally get to somewhere else – if you ran very fast for a long time, as we've been doing.' 'A slow sort of country!' said the Queen. 'Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!'

Although quite exhausting – if you don’t like running – it does make organisations better. Professor Bill Barnett, from Stanford, studied Red Queen effects among companies at length. He found that those exposed to ongoing competition and change improved considerably and became much stronger firms.

This is due to a “Darwinian effect” and a “learning effect”. First of all, in such a race, the weakest firms go bankrupt, leaving only the strongest competitors. However, it also stimulates firms to learn and adapt quickly. And if you’re learning and adapting, and becoming a more agile competitor as a result of it, it prompts your competitors to do the same (or die). It’s a bit like an arms race… But one that consumers, and society as a whole, benefit from.

Bill documented another, long-term effect though; sometimes everybody is running in the wrong direction. Or at least, someone took a bit of a wrong turn and everybody followed. It is related to this thing we call the success trap; firms have been running in a particular direction only to find out that the world has just changed and some other corner of the market has become more attractive. This triggers the entry of newcomers, while the original leaders struggle to catch up, simply because they had advanced so far into the other corner of the world.

This is nothing new; we’ve seen it in the disk-drive industry, but also among freight companies using sailing ships when steamboat technology was introduced, among retail banks adopting innovative products and technologies, petrol stations evolving into self-service stations, with car-washes and mini-markets, in the steel industry when mini-mills emerged, tyres in the automotive industry changing from bias to radial technology, and so on. The Red Queen is everywhere, and there are few places where you can afford to stand still. And if you want to get into such a race, look for an industry where everybody is running in the same direction; they’re bound to get stuck in a corner some time soon.

ISO9000 makes you reliable, myopic, efficient and dull – and unable to invent post-it notes

Sometimes, management practices, intended to improve the functioning of the organisation, have unanticipated consequences. Sometimes these consequences are negative, but also only apparent in the long-run, making firms adopt techniques which are really not very healthy for them (at least in the long-run).

Take ISO9000. ISO9000 certification constitutes a process management technique through which firms are expected to follow (and document) a number of procedures, aimed at creating consistent, efficient processes, in which best practices are standardised and deviations from the best practice are avoided. It leads to efficient, high-quality products with minimal digression from the standard.

This all sounds very logical, justified and desirable, right?! So what am I whining about?

Well, professors Mary Benner from the University of Pennsylvania and Mike Tushman from the Harvard Business School examined what happened to the innovation output of firms adopting ISO9000 techniques. They collected information on 98 firms in the photography industry and 17 firms in the paint industry, which they all followed from 1980 till 1999. They measured, among others, all their patents and documented whether these innovations were really “close to home” for the firm (representing minor variations on what they were already doing) or more exploratory discoveries (representing truly new potential avenues for growth). And they found a very clear pattern.

Firms that adopted ISO9000 norms started doing significantly more “close to home” inventions at the expense of truly new, exploratory innovation. The “more of the same” patents, induced by the ISO9000 processes, crowded out the discovery of truly new techniques and products.

How come? Well, by definition, ISO9000 minimises deviations from “the best way of doing things” in the firm. Yet, often, the best innovations are discovered by accident. Just like random genetic mutations can produce whole new species in nature, random deviations from the norm in organisations sometimes turn out to be “mistakes” which become the firm’s next big blockbuster product. Think of how the post-it note came into existence: A bloke named Spencer Silver was working in the 3M research laboratories in 1970 trying to find a super-strong adhesive. Spencer developed a new adhesive, but it was ridiculously weak. It was so weak that although it stuck to objects, it could easily be lifted off. It was a clear error. Yet, ultimately, this super-weak adhesive became 3M’s famous, money-spinning post-it note.

Although usually deviations from the norm merely produce plain, sheer mistakes, which should get corrected quickly, if you rule out all mistakes, you will never be fortunate enough to develop a “mistake” that turns out to be your post-it note. ISO9000 annuls all deviations from the norm. But, as a (unintended) result, you become a lousy inventor.

A Creosote bush: How "exploitation" drives out "exploration"

Established, very profitable companies often find it difficult to remain innovative (which may get them into trouble in the long run). In contrast, entrepreneurial, innovative companies often find it difficult to start producing efficiently and make a healthy profit out of their inventions. That is because the organisation required to be creative and innovative is usually quite different from the organisation that is suited for efficient, mass-scale production.

Professor Jim March from the Stanford Business School eloquently put it like this: he said there is a fundamental tension between “exploitation and exploration”. Exploration involves innovation and creativity, which often requires a high level of autonomy for people in the organisation and a flat organisational structure. Exploitation is associated with words such as productivity, efficiency and control, which requires hierarchy and clear rules and procedures.

If a company is financially successful, exploitation often starts to crowd out exploration. This relates to the idea of “the success trap”: organisations start to focus more-and-more on what they do well; the thing that brings them success and prosperity. Yet, this comes at the expense of other things, which may not be so profitable now but which could (have) become important for the firm in the long run.

Even the famous Intel fell into this trap. In the 1980s and 1990s, Intel had become hugely successful in the microprocessor business by being extremely innovative and running many experiments in semi-conductors. Yet, once they had developed an enormous advantage in microprocessors, they gradually stopped doing anything else. In 1996, CEO Andy Grove recognised the long-term dangers of this and remarked “There is a hidden danger of Intel becoming very good at this. It is that we become good at one thing”. Yet, he also found himself unable to revive Intel’s entrepreneurial creativity.

In 1993 microprocessors had made up 75% of Intel’s revenues and 85% of its profits. By 1998, this had increased to 80% of its revenues but 100% of its profits! This mega-company basically had only one product on which they relied to bring in all the dosh. That sounds a bit risky... The company’s COO, Craig Barrett remarked about this that Intel’s core microprocessor business “had begun to resemble a creosote bush”. In case you're not a botanist (and, like me, only appreciate plants when they come on plate), a creosote bush is a desert plant that survives by poisoning the ground around it, so that nothing else can grow in its vicinity… Quite a peculiar way to qualify your top-selling product I'd say, but not a bad analogy. Microprocessors were so successful that no other product could grow within Intel, because it would always look bad in comparison to these damn processor things.

Of all organisations that I have been studying over the past few years, the one that has probably impressed me most in this respect is the famous Sadler’s Wells theatre in London. On the one hand, they are phenomenally innovative, putting on the most novel and creative modern dance shows on the planet. But, on the other hand, they also stage a substantial number of shows that are tried and tested, and from which they know that they will reap a healthy profit without much of a doubt.

How do they maintain this balance so well? There are several complementary explanations, but one of them is that they work on it continuously; literally every day. They aim for about 15-30% of totally new innovative shows in the programme (often the result of a collaboration between artists who usually wouldn’t work together, because they have very different styles, background and training) and discuss this issue all the time. They do that in regular formal meetings, which invariably involve people from various departments, but also on an ongoing informal basis (that is, in the corridor, in the restaurant and in the toilet).

They are always discussing which show should go where on the theatre’s calendar, for how long it should be scheduled, what other show needs to be scheduled around the same time, etc. Because they continuously discuss and work on it, they manage to get the balance right. And, as their numbers show, the cool thing is that often, those shows which at the time were exploratory and considered risky and innovative, are now the ones that contribute most to their bank account.

Bloody useless lab rats – or are they?

Can you have a useful R&D department that is perfectly useless? Perhaps I should explain the question... Most R&D departments are supposed to generate new technologies, products, processes, etc. But not all do. Some R&D department seem to never come up with anything that makes it to market. Clearly a waste of money, these lab-rats, right?

Well, maybe not.

For a long time, economists and other folks studying organisations assumed that R&D departments are supposed to come up with stuff. And only if they come up with good stuff – which eventually makes it into a sellable product and reaps a profit – is an R&D department worth the investment. Clearly, if they never come up with anything at all, that’s money down the drain – or at least, that’s what everybody assumed.

Then, two professors of strategy (note, not economists!), Wesley Cohen and Daniel Levinthal, discovered an interesting insight. To put it in a simplified nutshell: sometimes, firms with R&D departments that never come up with anything at all still seemed to benefit from them?! How can such a seemingly useless bunch of Gyro Gearlooses still be worth their while?

The trick is that, in many industries (and in most industries to some extent), whatever firms invent comes into the public domain, much like radio signals or air pollution. Hence, other firms can easily access and imitate it. Economists always assumed that this process is costless; you just pick it up and do it too. Therefore, unless you’re in one of those rare industries in which patents really work, it’s actually kind of nice if your competitor invents something new; you can do it too without having had to spend all this R&D money!

However, this turned out to be a bit of an oversimplistic view of the world. Imitating your competitor is not that easy. It turns out that firms that never invest anything in R&D actually have quite a lot of trouble nicking ideas from others. They just don’t quite understand them well enough. In contrast, firms that do have an R&D department – even if the geeks never invent anything themselves – appear to be much better at copying others. That’s the unexpected benefit of having your own R&D: R&D equips you, as a firm, to be better at “stealing” things from others. Because of your investments in R&D, you are better able to really understand the technology and apply it in your own products and processes.

Wes and Daniel examined this phenomenon at length and wrote a series of articles about it in a bunch of heavy-weight academic journals, with telling titles such as “Innovation and learning: The two faces of R&D”, “Absorptive capacity: A new perspective on learning and innovation” and, my favourite, “Fortune favors the prepared firm”. It shows that there are two benefits from investing in R&D: the first one is to invent stuff; the second one is to build up the capacity to understand, assimilate and apply the things that others come up with in your own products and technologies.

Patent sharks

You never heard of patent sharks?! You’re kidding, right? Ok, I’ll admit it, I had never heard of them either. But they sound pretty scary, right? Well… ok, perhaps not; the word “patent” sort of seems to take the edge of the word “shark” a bit. Yet, now that I have learned more about them, I have to admit, I am starting to believe that they should send some shivers down your corporate spine; they really are quite creepy.

My colleague at the London Business School, Markus Reitzig, has been studying patent sharks at length. I always found IP (intellectual property) a bit of a bore when it comes to research topics but, admittedly, his research did remind me of Jaws III, but then with briefcase, pin-striped suit and, importantly, a mob of solicitors to accompany him. Let me explain.

As you may know, when it comes to the effectiveness of patents, pharmaceuticals are a bit of an exception. In most industries, patents provide only very limited protection against imitation by competitors. Usually, the part of the product that is patent-“protected” can be substituted or “invented around”. Therefore, what firms have started doing is protect their products with as many patents as possible. That is, it is not uncommon in some high-tech industries to have over a 1000 different patents protect many little components in a firm’s product. They figure, one of them may not do the trick but if you have such a bunch of them, collectively they should give some protection.

Yet, since competitors do the same, as a result, researchers have long noticed that patents have become sort of a corporate currency. How does this work? Well, whatever you want to do, in terms of developing a new product or technology, you’re bound to infringe on someone’s patent. Luckily, that someone is likely to need to infringe on some of your patents too. Rather than going to court, firms usually strike a deal: “I will forgive you for infringing on these 84 patents if you just absolve me from infringing on your 63 ones”. And this system generally works quite well.

However, given the plethora of patents in such industries, the difficulty is that you seldom know in advance exactly which patents you will be infringing on; there are just too many of them lying around. What has now happened is that some specialised firms – the infamous “patent sharks” – have started taking advantage of this. They acquire patents not with the intention of using them, but with the aim to extort money from the unknowing infringers.

When a patent shark finds out that a certain firm is using a technology which more or less falls under one of its patents, it waits patiently until that firm has fully committed itself to the technology (and has incorporated it in its products, marketed them, made additional investments, etc.). Then the shark surfaces…

It will demand large sums of money for the infringement. If the firm refuses, they will roar “court action!” and threaten to shut them down. And the nice thing – at least, for the shark – is that the patent doesn’t even have to be a real good one. Even if it is only a half decent patent, with little chance of holding up in court, often they can convince a judge to issue an injunction, forcing the firm to suspend business pending the court’s decision. And this can be so potentially disastrous for the firm that it quickly coughs up the dough to make the shark go away.

For example, NTP, a pure patent-holding company, filed a suit against RIM; the producer of the best-selling Blackberry. RIM was confident that the five patents NTP was throwing at them would not hold up in court – because all of them had already been preliminarily invalidated by the US Patent and Trademark Office while two of them had already received a final rejection! – but when it seemed that a particular US district court judge (“The Honorable Judge James Spencer”) was inclined to grant the injunction, which would have costed RIM billions in lost revenues and deteriorated competitive advantage, they promptly – but undoubtedly grudgingly – decided to hand over 612.5 million dollars to NTP.

Getting scared already? I guess you should. There just might be some shark circling underneath, in your blue ocean… holding some obscure patent which could cost you an arm and a leg, if not more.

“Innovation networks” and the size of the pie

It’s becoming a bit of a corporate buzzword – “innovation networks” – but one that (to my slight disappointment) I actually quite believe in.

More and more companies I see and talk to seem to realise that it is quite difficult to be innovative on your own. For true innovation, almost by definition, you need a wide variety of capabilities, knowledge and insights. It is just difficult to find such diversity within one organisation. If you, as a firm, are trying to come up with fundamentally new things, you would likely do well to also look outside your own organisation’s boundaries, whether anyone knows anything that just might be useful and interesting for you.

This is what “innovation networks” are about; combining and tapping into other companies’ knowledge resources to, collectively, come up with something that neither firm could have done by itself.

IBM, for example, does it consistently and in a highly structured way. They work with specific partners on specific projects. Some of these partners are from outside their industry but others could even concern straight competitors. For example, in their Cell Chip project, developing multi-media processors, they work with Sony, Toshiba and Albany Nanotech. In their Foundry R&D project, designing manufacturing processes for mobile phone chips, they work with Chartered, Infineon, Samsung, Freescale and STMicroelectronics. And they have several other similar projects, with yet different groups of partnerships.

However, the networks can also be of a more informal nature. For example, the successful Sadler’s Wells theatre in London, which focuses on the creation of ground-breaking modern dance, has no orchestra or ballet of its own. Instead, it tries to create innovative modern dance shows by putting artists in touch with each other who otherwise would not have worked together. They organise dinners during which those artists meet, they give them some studio time and budget to improvise and experiment, and assist them with advice and other facilities to get them to combine their skills and talents to create new forms of modern dance. What they ask in return is that the artists premiere their performance in Sadler’s Wells.

The most striking example of informal innovation networks I have seen, however, is that of Hornby; the iconic English producer of little model trains and Scalextric slot car racing tracks. They have some more or less formal alliances with software producers and digital electronics companies, which for instance led them to develop virtual reality train systems and digital slot car racing tracks (allowing multiple cars in lanes, which can overtake each other; clearly the most prevalent schoolboy dream since the emergence of Samantha Fox!). Yet, they also have some striking informal networks, which stimulated their innovativeness.

For example, one of their latest innovations is a real steam train (which retails at a whopping £350), and I mean real steam. The little whistler doesn’t run on electricity but on actual steam. The interesting thing is how they came up with it. Well, or actually, they didn’t… One of their customers did. They maintain close networks – on-line, by organising collector clubs, tournaments, etc. – with their collectors. Through these networks, they learned about a hobbyist who had invented a real model steam train. They went to visit him and adopted his rudimentary technology.

But the most striking example of their informal innovation networks I saw when I visited Frank Martin, Hornby’s CEO, at the company in Margate some time ago. In his office lay a piece of slot car racing track. “Look” he said “a very innovative and sophisticated new surface, which is not only much more realistic but also much less slippery for the toy cars. Our Spanish competitor sent it to us”. I said “what?! why would your competitor do that? are you sure it is not a fluke? are you paying them for it?” And he replied “no, whenever they invent something new, they send it to us. And we also send them stuff”.

They have no contracts or any other formal arrangements in place for these exchanges. They just figure, ‘we could shield our innovations from our competitors but we’re all much better off if we share them’. The size of the pie (the total size of the market) will increase as a result of it, and they all benefit; much more than when they would all keep their innovations to themselves.

It is a peculiar type of innovation network, if your customers and even competitors become part of it and share their innovations with you, purely on the basis of trust and reciprocity, but it is certainly a formula that works for Hornby. They managed to quintuple (I had to look up this word) their stock price over the past few years, partly as a result of such innovations. Innovation is important to many companies in many businesses; too important to (merely) leave to your own devices.

Eating uncle Ed – don’t worry, it’s called downsizing

About a century ago, the Fore people, who inhabited Papua New Guinea, had the habit of burying their deceased relatives, just like many other societies. Yet, on some sunny day, Uncle Ed died, and it was just around lunch time. Uncle Ed’s relatives were about to put him into the ground when one of his cousins (who looked particularly hungry) said “why bury all that good meat; it’s a waste; we might as well eat it”. And so they did.

When the following month another relative died, they did the same thing, and not for long, the whole village was eating their deceased relatives, rather than putting them into the ground. The advantages were obvious; there had actually been quite a bit of famine and malnutrition among the Fore people and this habit enabled them simply to not be so hungry.

Some time later, a visitor from a neighbouring village witnessed the practice. When he got home and his cousin died, he quickly convinced his relatives to rather than bury the good chap, consume him on the spot. Gradually the practice started spreading to all villages in the tribe, until the habit of eating deceased relatives had become the norm and the Fore’s proud tradition.

Yet, unfortunately, they ate everything, including their relatives’ brains. As a consequence, they developed a horrible, lethal disease called Kuru (which is related to Creutzfeld-Jacob, aka mad cow disease). The disease has quite a long incubation time (i.e. it takes several years before it becomes apparent) but eventually the Fore people started getting sick and dying in masses. Of course, they noticed something was seriously wrong but, due to the disease’s long incubation time, had no idea that their misery was caused by the habit of eating their deceased. The practice continued until half of the Fore population had been wiped out and Australian invaders put an end to it (because they thought it was gross, not because they understood it caused the disease).

Why am I telling you this story – after all, you might be reading this just before lunch? The reason is as follows: Many managers and companies remind me of the Fore people.

Let me explain: The Fore’s practice clearly was detrimental; after all, it was killing them! Yet, the reason for them adopting it was clear too: the practice gave them an immediate advantage, namely less hunger and less starvation. In the long run, however, they were definitely worse off for doing it but the problem was that, due to the practice’s incubation time, they could not understand that it was this habit that they had picked up many years ago that was causing the problems.

Quite a few popular management practices have the same characteristics. The problems they cause only occur in the long run and are therefore underestimated or not understood at all. The benefits are immediate.

Take, for example, the practice of “downsizing” (or rationalizing, restructuring, reorganising, etc.: that is, making people redundant). It is a trend that has now been going on for at least a decade and a half; companies – even if they are not in financial difficulties – engage in systematic programmes to reduce the headcount in their organisations. The short-term benefits are clear: It leads to lower costs (sometimes accompanied by a positive response from the stock market to the announcement of the programme). Yet, there is also evidence of sizeable long-term detrimental influences, such as reduced innovation and lower employee commitment and loyalty. However, such consequences are only noticeable in the long run.

Usually, when a firm faces a serious problem, for example due to a lack of new products in the pipeline, top management does not realise that the lack of innovation is caused by the downsizing programme that they engaged in a near decade ago. Just as it did for the Fore people and their illness, the long lead time makes it all but impossible for managers to connect and understand cause and effect. Thus, not only will top management take inappropriate action to solve the problem (not seldom another cost-cutting programme…), it also remains unclear to other firms that downsizing is harmful, leading them to adopt and continue the practice too.