Musings on Entrepreneurship and Innovation
Sunday, October 22, 2006Business Models as Product of Co-evolution
In my previous posts in this series, I've focused on the evolution of physical technologies or inventions. The purpose of this post is to present Eric Beinhocker's take on how innovation is the product of the co-evolution of physical technologies and social technologies.
Physical and Social Technologies are Interdependent
It's critical to recognize that invention is a necessary, but insufficient, condition for innovation. Consider this observation by Michael Schrage:
Simply put: innovation isn't what innovators do; it's what customers, clients and people adopt. Innovation isn't about crafting brilliant ideas that change minds; it's about the distribution of usable artifacts that change behavior. Innovators - their optimistic arrogance notwithstanding - don't change the world; the users of their innovations do.
Schrage may overstate the case to make his point, but others such as Andrew Hargadon echo the sentiment:
Too often people believe that good ideas will sell themselves. But having a good idea...is the end of the beginning. The pursuit of innovation requires patiently and humbly building a new network of people, ideas, and objects around the original innovation.
Recently, Amar Bhide has emphasized the interdependence between the upstream activities of invention and product development and the downstream roles of venturesome consumers. Similarly, the interaction between would-be innovators and lead users has been a recurring theme in the work of Eric Von Hippel.
In The Origin of Wealth, Beinhocker frames the interdependence of invention and adoption as a co-evolutionary process. He begins by defining social technologies:
Social Technologies (STs) are methods and designs for organizing people in pursuit of a goal...Social Technology fitness will therefore depend on three factors. First, the ST must provide the potential for non-zero-sum payoffs. Second, it must provide methods for allocating the payoffs in such a way that people have an incentive to play the game. And third, the ST must have mechanisms for managing the problem of defection...Just as people use deductive-tinkering to search Physical Technology space, they use deductive tinkering to search for fit STs in ST space.
He then explains how PTs and STs are combined into business plans:
Business Plans are thus built up from atomistic PTs and STs, which are combined into modules, which are then further combined into Business Plans. The glue that binds it all together is strategy...we can think of a strategy as a hypothesis about what combination of modules will be profitable in a given environment...
Translated into an economic context, this means that the objective of any Business Plan should be the survival and amplification of its business...it is management's job to devise and execute Business Plans that enable the businesses of their firm to endure and grow over time...In evolutionary systems, profitability is not an objective in and of itself; rather, it is a fundamental constraint that must be met if a business is to achieve the objective of survival and replication (or enduring and growing)...Thus from both an evolutionary and practical perspective, paying a competitive return to one's shareholders is a constraint, not an objective, and while it may be a vitally important constraint, it is nonetheless only one of many constraints in the economic fitness function.
In biological terms, the genome of a firm is composed of one or more business plans that, in turn, are combinations of "DNA" sequences: physical and social technologies. Reminiscent of the selfish gene hypothesis, Beinhocker asserts:
...the interactors in economies must be businesses - it is the businesses that do the "living and dying"...Nonetheless, evolutionary selection is not acting on Business Plans as a whole, but on elements within Business Plans.
In other words, business firms come and go, but successful physical technologies and social technologies tend to endure and spread.
Business Plan Evolution and Open Innovation
Given the dynamic complexity of the combination and recombination of physical technologies and social technologies into business plans, predicting the course of evolution is likely to be impossible. Consequently, Beinhocker suggests a portfolio approach:
In addition to creating a portfolio with a sufficient number of experiments, the competing Business Plans also need to be spread across the fitness landscape in such a way as to maximize the effectiveness of the evolutionary search process...When thinking of "jump distance" in the Business Plan landscape, we should consider three dimensions: risk, relatedness [to firm resources], and time horizon.
It strikes me that the Open Innovation paradigm as practiced by Proctor & Gamble and others reflects an attempt to increase the fitness of such firms' portfolios of business plans.
Source: Open Innovation: Researching a New Paradigm
That is, Open Innovation appears to be set of emerging practices aimed at the following:
- Increasing access to differentiated physical and social technologies
- Engaging in deductive tinkering in order to postulate which combinations of such technologies are likely to represent fit business plans
- Use markets and market proxies in order to select the business plans to which to dedicate resources for the purposes of amplification and replication
The Inventor's Challenge
Viewed through the powerful lens of the evolutionary algorithm, the task of converting an invention into a successful innovation can be daunting:
- The invention must represent a sufficiently differentiated way for a user to accomplish his or her goal.
- Such an invention must be combined with the right social technologies (e.g., manufacturing expertise, distribution networks, marketing know-how, etc.).
- The resulting business plan must offer the prospect for compelling profit and must make sense in the context of a firm's ever-changing portfolio of business plan experiments in terms of risk, relatedness, and time horizon.
Consequently, in my next post in this series, I'll explore the roles in of different inhabitants (e.g., originators, entrepreneurs, incumbents, technology brokers, and customers) in the innovation econosphere.
