Dr. Max Mckeown

You’ve probably heard the FedEx story. Rich student at Yale wrote a paper on the benefits of a national overnight delivery service. Skeptical professor gives the paper a ‘C’. The idea revolutionizes the post industry and becomes a multi-billion dollar corporation. What you may not know is that its founder gambled his $4 million inheritance on his idea. At one point, the company was so desperate for cash that he flew to Las Vegas to play blackjack and wired back his $27,000 winnings.

If FedEx hadn’t happened, another company would probably have figured it out. The technology, regulation, and customer demand eventually pointed in that direction. However, it wasn’t obvious in 1973. FedEx had to build a network and a market at the same time. For the innovation to work, its founder had to gamble everything he had and another $80 million from fellow gamblers.

If your innovation requires a network and a market, you can gamble enough to make it work. You could just forget about your idea. Alternatively, you can wait in the hope that someone else will take the gamble and that you will be able to come into an existing market in a fast second place.

Consider Malcolm McLean, a self-made millionaire who built the second-largest trucking company in the USA. He noticed that dockworkers had to individually load every box into a sling, raise them, lower them, remove the sling, and store them away. He realized that it would be better to use large containers and not open them until the final destination. Regulations meant that McLean could not operate as a trucker and a shipping company. Nothing happened with his idea for twenty years until he sold his company for $25 million and gambled it all on building a system and a market for containers.

Today over 18 million containers make 200 million journeys a year. Hand loading cost $5.86 a ton. Containers cost only 16 cents a ton. The container made it possible for Asia to become the world's workshop and brought customers a previously unimaginable variety of low-cost products from around the world. On the morning of McLean's funeral, container ships around the world blew their whistles in his honor. His gamble had paid off.

For established companies, the biggest gamble is to do nothing. Continuing in the same direction is still a choice. Assuming that the future will be the same as the past is still a wager. Why gamble everything on a lack of change? Isn’t it more likely that the world will be different?

The new CEO at General Electric (GE) recently gambled billions of dollars on green technologies. Eco-imagination, as he calls it, aims to make healthy profits by solving tough environmental problems. He hasn’t bet everything but he is spending more researching alternative fuels than the US government. More importantly, he has gambled by changing the focus and culture of the company. GE People will have to move from a conservative-by-the-numbers machine to a creative community focused on breakthrough innovation.

Being one of the first high rollers to place his bets has given GE some valuable advantages. GE in at the center of the ‘green is green’ corporate fraternity. By just associating itself with environmental innovation, GE will reap benefits as the planet seeks solutions. Leading the charge to greener technologies brings the company valuable, patentable knowledge and difficult-to-copy know how. It also allows GE to influence emerging standards, policy, and public opinion to its advantage. Getting ahead of rivals makes it more attractive to insist on the most demanding emissions and efficiency regulations. It also delivers high performance products that customers want: a jet engine that saves airlines over $350,000 per plan in annual fuel costs, a hybrid diesel-electric train with 50% lower pollution, a washing machine that uses 75% less energy, roof shingles with inbuilt solar panels, and a super-strong plastic that makes car components 40% lighter.

For GE, FedEx, and Malcolm Mclean, high stakes gambles bought their places at the table. Their investments were big enough to deliver their innovations. They gambled enough to change the world.

(Max Mckeown is the author of The Strategy Book, The Innovation Book +Adaptability: The Art of Winning in an Age of Uncertainty)

Further Reading!

Cudahy, BJ, 2006, “Box Boats: How Container Ships Changed the World”, Fordham Univ. Press 2006.

Broeze, F, 2002, "The Globalization of the Oceans: Containerization from the 1950s to the Present,” International Maritime Economic History Association, 2002.

Griscom, A, 2006, “G.E.'s Green Gamble”, Vanity Fair, VF.COM, July 10, 2006

Frock, R, 2006, “Changing How the World Does Business: FedEx's Incredible Journey to Success - The Inside Story”, Berrett-Koehler

Study after study, including Everett Rogers classic research, has shown a very similar s-shaped bell curve for successful innovation. You have probably seen it before but that shouldn’t stop another look. The importance of the curve is that it gives you an idea of what to expect – which groups to identify, what percentage of total market they represent, their characteristics, and what they want. If your innovation spreads then it will probably spread like this.

The Innovation Lovers are the 2.5% of people who embrace new ideas. They are looking for novelty and breakthroughs. They are willing to spend what it takes to have the latest gizmos and gadgets. They have technical expertise to allow them to understand and use experimental products. They are able to cope with innovations that don’t work. They play a role in testing your idea, providing an initial market, and spreading it outside of your company boundaries.

The Early adopters are the 13.5% of people who lead opinion. They are a respected part of the local social system. They’re the go-to-guys-and-gals if you want to check before adopting a new idea. They are ahead of the majority but not so far that they leave the majority behind. They show others to use innovation and take their role seriously. If they use it, the majority concludes that the new idea is ready to use.

The Early majority are the 34% of people who follow opinion leaders closely. As a result, they adopt innovations just before the average member of a system or market. They may know about a new idea for a long time before they buy into it. They bring an innovation from minority to mass market. They interact with the late majority and help establish the idea as commonplace.

The Late majority are the 34% of people who adopt innovations with some level of scepticism. It is only after nearly half of the people in their group have already started using a new idea that they cautiously adopt it. Sometimes this is due to financial constraints that mean they would rather not risk money on something that may not be necessary.

The Laggards are the final 16%. They are the last to adopt an innovation. Some of them may avoid a new idea completely. They base their decisions on the past. They are as suspicious of change as innovators are enthusiastic. They don’t go looking for new information and so may only learn very late of the existence of new ideas. Adopting new ideas may involve resources they are not able to risk losing.

This s-shaped curve of innovation adoption is what tends to happen if the approach to communicating new ideas follows traditional patterns. It’s easier for inventers to sell to people who love new ideas – they have the resources, the interest, and the knowledge to invest in new concepts. The people with the greatest propensity to use innovation receive the most attention from the people who are trying to create mass markets.

The problem is that the innovators are not like the mass market. Ideas for innovators only need to be different to be attractive. Products don’t have to be simple because they are like complexity. Services don’t have to be compatible with prevailing values in the system because they don’t share those values. Many innovations stall at this stage because they don’t focus on the hardest to reach groups. You need to design products for the late majority and the laggards because they are the most demanding groups. They want the product to be simple, cheap, and obviously better than alternative solution.

The s-shaped curve is useful for internal and external innovation efforts. If you have an idea, it needs to find a market inside your company or network before you can implement it. Thinking about how your colleagues and management fit against the adopter descriptions is a powerful way to start spreading your idea.

Even successful innovations, those that become popular and offer clear improvements, can be painful for many. The new way replaces the old way, it requires new skills, new approaches, it makes what you used to do redundant. It may even make you, the individual worker, redundant. It can make the previously important, irrelevant. It can make the previously profitable, penniless.

People Pain: Not everyone embraces innovation. Not everyone should. They may not understand why change is necessary. Maybe it isn’t. They don’t believe that the new approach will work. Maybe it won’t. They believe the old way is better. Maybe it is. They distrust the people selling the change. They fear failure. They know that the change will hurt even if it’s better over the long term.

Let’s face it. Some new ideas are worse than the old way. Attempts at innovating can be disastrous. The University of Utah bet its reputation on cold fusion and lost. Marconi bet the whole company on mobile phones and lost. Motorola bet $6 billion on the Iridium satellite phone network and lost. The Chinese state bet $30 billion on the Three Gorges Dam in China and has created an environmental crisis. Being new is not the same as being good.

Necessary Pain: Even ideas that work can be painful. Pain does not mean that an idea isn’t worthwhile. Innovation is a gamble. No one knows what will work before something new is tried. The dot.com crash appeared to be a waste of money but instead it provided the experimentation funds necessary to making significant progress. The advances paid for by the dot.com boomers have made the internet technology we enjoy possible. The Iridium satellite network was sold for only $25 million, a huge loss for Motorola, but a huge boon for the 250,000 scientists, explorers, and jet-setters who pay for go anywhere coverage. Cold Fusion may revolutionise energy production. It’s impossible to predict.

Some of the pain is just hard work. Most people learn quickly, then slowly, and then stop. Innovators put the effort in to achieve greatness and are willing go beyond existing knowledge at the risk of failure and humiliation. Ten years of relentless practise is necessary before becoming world-class – even the young whiz kids often associated with high tech innovation, develop their skills over a decade or more. At thirteen years old, Bill Gates had already gained the programming skills sufficient to debug mainframe computers, by the time he launched Microsoft he had put more than ten years of hard work.

Industry Pain: Making everything digital has made it easier to send, store, and search our literature, art, movies, and music. As the publishers feared, digitising has also moved the money away from selling the physical copy. They responded by attacking the people doing the innovating, like Napster for music or Side Reel for television. They also attacked the people who enjoyed what the innovators were doing, like suing a grandmother because her grandchild downloaded free music tracks. Has attacking either of these groups worked? No. Sales of physical copies reduce year on year. People don’t want them, they have experienced better. They have changed the way they want to interact with their music.

Selling devices to store music and movies has been lucrative. iPod. Vodafone. Selling advertising to show the content free has created billions of dollars. Radio. TV. YouTube. Why pay inflated prices for content you can listen to free? Why put up with archaic region protection that stops you watching the latest movies? Why only watch what is in the shops? Forget this talk of piracy costing money. Don’t blame consumers. Bollywood now simultaneously releases films directly via DVD, download, and online. Instead of complaining about stolen revenues, it has found a way of making money from non-customers while making movies free.

Making money can work if you understand the curve, or the wave, or the shape of the revolution. Spend time figuring out what a disruptive technology offers to customers. It’s a smarter use of time than beating them up for daring to try something new that doesn’t suit you.

Unnecessary Pain: Some innovation pain is the result of mistakes. Some of the pain is the result of the willingness of one group to make painful decisions for other groups. Pain that they do not have to feel.

Consider your own pain threshold. How much will you pay to get your idea to work? Then think about the price for other people.

The more they share your obsession and your passion, the more they will be willing to pay.

Involve people to increase the likelihood of success. Remember, all innovations come at a price, so make it worth paying.

(Max Mckeown is the author of The Strategy Book, The Innovation Book +Adaptability: The Art of Winning in an Age of Uncertainty)

Further Reading!

Howe MJ, Davidson JW, Sluboda JA. 1998. Innate talents: reality or myth? Behav Brain Sci 21 (3): 399-407.

McGraw, TK, 2007, “Prophet of Innovation: Joseph Schumpeter and Creative Destruction”, The Belknap Press of Harvard University Press

Norbert, MJ, 2006, “The Impact of Digital File Sharing on the Music Industry: An Empirical Analysis”, Topics in Economic Analysis & Policy: Vol. 6 : Iss. 1, Article 18.

Schumpeter, J, 1912/1934, “The Theory of Economic Development: An Enquiry Into Profits, Capital, Credit, Interest, and The Business Cycle”, Cambridge, MA, Harvard University Press Schumpeter, J, 1942, “Capitalism, Socialism, and Democracy”, Harvard University Press

Smith, A, 1776, “The Wealth of Nations”, Everyman’s Library (1991 Edition)

The ideal design is the simplest design. The first solution that springs to mind is rarely the simplest, and seldom the best. You start by trying to get your head around the nature of the problem. The obvious parts of the problem get your attention rather than new ways they could fit together. Your mind tends to be constrained by the existing system instead of looking outside it. It’s easy to think of improvement as adding something rather than taking something away.

Each attempt at improving an existing solution makes the solution more complicated. It becomes difficult for people to imagine that the next generation of product or service could be anything else. How can it be better if it’s simpler?

Mike Pearce, an architect, figured out a way of building offices in Africa without air-conditioning. He based his design on termite mounds that have to stay at a constant 87 degrees. Termites build tunnels that direct breezes at the base of the mound into chambers of cool, web mud that flow to the peak. They continually open and close the channels to maintain the temperature. His design used ten percent less energy, and saved millions by not buying or using air conditioning.

There is always a choice. Invent something that is an improvement within an existing system or invent something completely new. Improvement of an existing system seems to be less of a risk. A new invention depends on unproven ideas that may never bring rewards. This is the real innovators dilemma: Should I take the risk to create something new or just keep making obvious improvements to what exists?

Yet something important has changed the balance of risks. The scale of experimentation has increased so much that breakthroughs are happening, outside the system, with far greater regularity. The level of expectation among customers and investors assumes improvement as normal and build them into the share price. They reward breakthroughs. They reward breakthroughs because they are so difficult, because they require guts, and because the chances of getting it right are relatively slim for any one company.

Not so long ago, Toyota asked a team to create a car that would be fuel efficient and environmentally friendly. The choice: Should they design an improved traditional internal combustion engine and gain 50% fuel efficiency? Or deliver a completely new hybrid engine with 100% better fuel economy? They chose the hybrid, launched on time, and the Prius became the first mass market hybrid vehicle beloved of the great, good, rich, and famous.

The example illustrates the choice necessary and the benefits of a simpler design. The car engine is still complex but the redesign of the global system for obtaining fuel and dealing with the consequences is simplified. Toyota now has a ten-year lead on its nearest hybrid rival and the reputation for innovation that it wanted.

The world now has a car that delivers performance, fuel economy, less pollution, and reduces reliance on oil rich, war torn regions including the Middle East. With a new design, it is possible to re-imagine abetter automotive system than coping with wars, repairing pollution damage, and distributing fuel. Without the new idea, there are fewer possibilities.

It also illustrates the necessity and benefits of reaching beyond expert comfort zones. The Prius required automotive engineers to work on electrical systems like motors and batteries. Instead of tinkering at the margins of efficiency on the plateau of traditional engines, they have moved to a new learning curve.

This is the benefit of breakthrough innovation. It allows you to achieve more by overcoming contradictions and constraints. In the old system, the performance objectives were impossible, in the new system, the performance objectives are just a starting point for additional improvements. Until a new breakthrough innovation is necessary, a design that will create more advantages with fewer disadvantages.

Not all breakthrough innovation has to be big. However, all breakthrough innovation is only obvious after it succeeds at which point it opens new doors to yet more possibilities.

From Cradle To Crave - It feels natural that organisations would have a life-cycle that mirrors the life, pimples, wrinkles, and death that every individual experiences. The simplistic view would be that if you can identify the part of the life-cycle, the appropriate actions are obvious. Just manage effort around what is going to happen anyway. You can mother the child, push the young adult, pamper the middle-aged, ignore the elderly and bury the dead.

One of the problems with this approach is that organisations are made by humans but differ significantly from their individual members. Some organizational characteristics have typical patterns but these are not fixed. They don’t have to die. They regenerate, transform, and experience metamorphosis. Change within them depends on ideas not on biological body clocks. They survive as long as they keep finding someone to feed them.

Exactly To Plan – Some change happens the way it is intended. Change may bring the benefits that were expected. Believing that it will always bring the benefits desired is mistake. Even if change happens as planned, the benefits may not be as desired. There is a ripple effect. One change leading to several more, some anticipated, others completely unimagined. They cascade outwards like complex family trees so that the destination is rarely clear at the start of the journey.

It is easy to become locked into a planned pattern of change. This may happen because efforts to bring about planned change were successful. If it worked so well the first time, why not repeat a winning formula? It may also continue even after failure becomes constant, continual, and chronic. Your colleagues become committed to the plan through bias and group think. With no-one successfully challenging the effectiveness of the plan, the reaction to failure may be to invest more time, resources, and effort in trying to make it work. No new thinking – just wasted effort poured into a flawed view of how to achieve objectives.

Them, Us, and Compromise – A lot of change happens because of discontent with the way things are. Usually, someone somewhere is unhappy with what they’re getting and wants more. It could be shareholders, or customers, your boss, the unions, or someone’s spoilt children, luxury loving toy-boy or bling crazy trophywife.

Dissatisfaction with the status quo leads the individual to seek satisfaction by changing the situation. The problem is that one set of desires often conflict with another set of competing desires about what is best. Part of this is opinion, the same goal with different views on how it can be achieved. Part is conflict because a change may be good for someone and bad for someone else, the goal is the source of disagreement.

Where you have more power than those who disagree, it’s likely that the superficial victory will be yours. Just remember that you haven’t won the argument. You may need to win the argument to engage imagination, good-will, and talent. Some will actively continue to change your mind, or get your plan reversed. But often, all your comrades and underlings have to do to ruin your shiny new plan is to refuse to believe in it.

Survival Of The Fattest – There’s a view that evolution, or competition, will naturally lead to improvements. That view is wrong. There is no certainty that what survives is fitter, or better, or stronger, or more helpful than what becomes extinct. In times of plenty, the competition changes so that everyone survives, and the worst do best because their behaviour is focused on acquiring more stuff rather than contributing. And not everyone in power can notice the difference.

There is a general increase of survival for the species, or company, that is best adapted to its circumstance. But this adaptation may be down to luck. The animal or corporation that survives just happens to have the right combination of size, weight, colour, and abilities. Animals don’t grow tails, fins, or wings deliberately.There was no plan it just turned out that way. The pattern is very similar for the complex processes that lead to particular organisational designs and decisions.Figuring out which part of success is due to good fortune and which is due to good judgement is difficult, perhaps impossible.

What do you do now? Thinking about how change happens, allows you to more effectively craft attempts to make things better. You know better than to overrely on plans, or life-cycles, and to consider the relative merits of competition and negotiation. Plans do not turn out the way you wanted, so unexpected results will occur. Good and bad things will happen that were not anticipated, so stay alert to new possibilities that are outside of your original plan. Identify the differences in opinion that drive change in your situation and consider how they can be shaped to allow progress to be made. Use differences to improve decisions and challenge assumptions so that what worked in the past, or has been tried in the past, does not trap you. Use your understanding of change to allow you to make changes.

(Max Mckeown is the author of The Strategy Book, The Innovation Book +Adaptability: The Art of Winning in an Age of Uncertainty)

References

The pace of innovation is increasing. It’s getting faster and more reliable. That doesn’t mean that individual companies can rely on innovation to keep them ahead of the competition. It means that they can rely on the competition to keep delivering innovation. The only way to compete is to out-innovate.

BMW has its own company-wide innovation factory. It has six hubs on three continents and claims it is the only car company with innovation management covering every part of development. First, in the research stage the whole network, suppliers, universities, and employees, search widely for emerging trends and technologies. Second, specialists assess the suitability of new technologies. Third, engineers adapt technologies to customer requirements and implement them ‘perfectly’ in BMW products.

These three steps provide a good starting point. The search is wide: Everyone knows that useful ideas may come from anywhere. The pursuit is relentless and focused: Everyone expects the process will produce innovations that contribute to the “perfect driving machine”. Application is holistic: Innovation councils including representatives from all departments consider the design of the whole car very early in the development process. Innovation is cultural: BMW explicitly demand unconventional thinking and views boundless curiosity as a core skill.

If you want to build an innovation factory, there are many roles to consider. Their influence depends on the level of innovation required. Bear in mind that the more the innovation strays from the traditional expertise of an individual the less influential they will become. Those people who provide links to the outside world make the biggest difference. While too much involvement from a powerful manager can tend to edge choices away from radical and back to conservative. Experienced managers are most likely to choose the past rather than the future.

One reason for choosing the past is fear of the unknown. The future can also make specific skills and experience rooted in the past redundant – leaving some people unsure of how they contribute. Just as important is that the future flows from shifting tastes. Some people are just more in touch with fashion – either because of age, part of the package of generational sensitivities. Or because they are perpetually avant-garde.

The innovation factory differs from the invention factory of yesteryear. It wants to do the new, new, radical thing not the better, better, obvious thing. Why park a car when it can learn to park itself? Why steer when it can learn to drive? Let the car wake you up if you’re sleepy and spray negative ions to reduce your stress. Relax while the car adjusts your seat position, mirrors, makes your calls, and send your emails. Feel good about yourself as you switch from petrol to hydrogen power at the flick of a switch. This is not science fiction. Innovation factories at Nissan, Mazda, Jaguar, BMW and Citroen already have these technologies – in production or in prototype. They enjoy making fantasy transportation real.

At one time, Nokia’s innovation factory assembly line snaked all the way out of the door. It rolled past Indian design students and ethnographers who tried to understand how form can follow function. It rippled into the lives of customers inviting them to create the future together through Nokia Beta Labs and the Nokia Lounge. It tried to make enough room for its own people to think in new ways. Customer and employee competitions entries led to prototypes and products: Phones with self-cleaning nanotechnology, phones as flexible wristbands, and phones to help the elderly stay independent. But even this was not enought because the innovation factories of Apple, Samsung, Xiamoi and Google were even more effective.

In the bad old days, we had technology push from R&D labs to the world via pushy sales people. Then those marketing people began using customer surveys to pull R&D towards particular products. The innovation factory is something else – it’s a relentless, playful, curious run towards the future. It’s the management of creativity and creativity with management. Fordism replaced by Facebookism.

Most companies want the results of innovation, they may invest in it, but only a minority realise what it means, or what the innovation factory needs.

(Max Mckeown is the author of The Strategy Book, The Innovation Book +Adaptability: The Art of Winning in an Age of Uncertainty)

References

Gelb, M, Miller-Caldicott, S, 2007, “Innovate Like Edison: The Success System of America's Greatest Inventor”, Dutton Adult

Gemünden, HG, Salomo, S, Hölzle, K, 2007, “Role Models for Radical Innovations in Times of Open Innovation”, Creativity and Innovation Management 16 (4), 408–421 Haikio, M, 2002, “Nokia: The Inside Story”, FT Prentice Hall

Hargadon, A, Sutton, R, 2001, “Building an innovation factory,, Harvard Business Review” (2001 Feb), pp. 157–166

Kiley, D, 2004, “Driven - Inside BMW, the Most Admired Car Company in the World”, John Wiley & Sons