Musings on Entrepreneurship and Innovation
Friday, February 16, 2007Role Players in the Innovation Ecosystem
This is the fourth installment in a series of posts I've made about my effort to synthesize recent thinking about innovation as an expression of the evolutionary algorithm. In my previous posts, I've tackled the topics of physical technologies and the fitness landscape, deductive tinkering and the evolutionary algorithm, and business models as the product of co-evolution. Now, I'd like to take a stab at identifying some of the key roles played in the innovation ecosystem. And, because theory is useful inasmuch as it helps guide our actions more successfully, I'll try to frame the roles played by my firm, as just one example.
Recall that evolution is a recursive algorithm for searching design spaces for fitness peaks:
- Differentiate to create variety in order to search a sufficiently broad subset of the fitness landscape given constrained resources;
- Select those designs that are the most fit; and
- Amplify or replicate those designs
So, the key roles to be played are the following: originating differentiated physical technologies and business models, selecting among the competitors, and amplifying those deemed most fit given a dynamic environment. Note that roles and people are not the same thing. One person (or organization) can play more than one role in a system.
Originators and Entrepreneurs Create Differentiated Products and Business Plans
"Inventor" strikes me as too expansive and proprietary of a word to describe the role of creating differentiated physical technologies (by which I mean a device that fulfills a human purpose). Lately, I'm tending toward Brian Arthur's use of the term "originator" to describe the role:
Originators think in terms of achievable actions and deliverable effects -- what I'm calling functionalities -- and they combine these in solving problems.
Brian Arthur, The Logic of Invention
Originators sense underserved needs and their candidate solutions are the result of recombination and deductive tinkering. The systematic application of the scientific method increases the chance for success.
Entrepreneurs, on the other hand, play the role of creating new business models: combinations of physical and social technologies. Entrepreneurs, too, engage in deductive tinkering. (One of the most striking examples of entreprenurial deductive tinkering I've witnessed was Greg Gianforte's use of "8 1/2 x 11-inch prototypes" to launch RightNow Technologies.)
Markets Select From Available Business Plans
Although the vast majority of economic decisions are made within the context of what Eric Beinhocker calls "Big Man" hierarchies, the last 200 years have provided compelling evidence that markets are superior to Big Men when it comes to playing the role of selecting from among a huge array of business plans. The crowd may not be omniscient, but when organized as a well functioning market, the crowd seems to have more wisdom than the expert.
I say that markets select business plans - combinations of physical technologies and social technologies - because, outside of an experimental setting, physical technologies (products) are only available in the context of a business plan. For example, one cannot purchase an iPod (a physical technology) independent of the bundle of capacities that reflect Apple's business model.
One of the interesting trends we've experienced at EIP is the growing interest in the accelerated use of the market to test the fitness of a new product. Although the systematic market research conducted by the likes of AcuPOLL and BASES continue to be valuable tools for the resolution of uncertainty through deductive tinkering (the weeding out of weak concepts, in particular), the market forecasts generated by these firms seem to be received with increasing skepticism by business decisionmakers - at least in the context of whether or not to commit to a full-scale launch of a new product.
And, why shouldn't companies be skeptical? After all, numerous researchers have concluded that the annual failure rate of new consumer products is 75% or higher! Many products doomed to failure are launched by successful, sophisticated companies utilizing the best available expert analysis. Companies blame modelers for making overly optimistic forecasts; and modelers are critical of companies that fail to follow-through on their marketing plans. (I, on the other hand, see the long tail distribution of market outcomes as symptomatic of the uncertainties related to information and adoption cascades among users.) Whatever the underlying causes of failure, launching a new product is a risky business, and the moment of truth comes when a product is made available for prospective users to purchase or ignore. Consequently, some companies are looking for ways to get to the moment of truth faster and cheaper. Direct response television (DRTV) is one such technique:
In addition to couponing for established products, Clorox also uses DRTV as a testing platform for new products, correctly surmising that real data from television viewers as to the appeal of a new product is more valid than comments from focus groups.
Tim O'Leary, founder of Respond2, The New Age of DRTV
As Robert Axelrod and Michael Cohen noted in Harnessing Complexity:
...companies that can learn quickly about consumer reactions can afford to explore more of the space of possible products.
The faster you can explore a shifting fitness landscape, the greater your chance of finding and climbing a fitness peak before it's occupied by an entrenched competitor.
Business Firms Amplify Successful Elements of Business Models
A business firm is composed of one or more business models - combinations of physical and social technologies. In the context of consumer products, large, successful incumbent firms seem to have an advantage when it comes to adopting and amplifying elements of business models selected by the market. After all, successful incumbents have accumulated resources that give them - at least on paper - relatively high capacities to act. The potential capacities are real, but the effective capacity of an incumbent is sometimes limited for at least two reasons. First of all, when you are standing near the top of the mountain, the next step you take is likely to be downhill:
...it is very difficult for successful, incumbent companies to make long jumps in the PT landscape [that is, launch dramtically new and different products]. When you are on top of a local peak, there are far more ways to go down in fitness than up, and leaping to a new architecture appears highly risky.
Beinhocker, The Origin of Wealth
Secondly, the traditional firm is an amalgam of three distinct capacities: product innovation, customer relationship management, and infrastructure management. Each is characterized by different economics, culture, and competition. (See Unbundling the Corporation by John Hagel.) We've found that an incumbent's bundle of capacities tends to be inelastic, at least in the short-term. Those firms who subscribe to the tenets of Open Innovation apparently have reached a similar conclusion, at least in regard to their interest in licensing or divesting products and business models cultivated in-house.
So, because of the accumulations that come from previous success, incumbents can be hobbled by a very rational sense of risk as well as an inflexible business architecture. Consequently, incumbent firms are not always well suited to climb new (but as yet uncertain) fitness peaks.
Of course, incumbent firms aren't the only game in town - entrepreneurs can, and do, create new firms in order to amplify the early market success of new business models. Of course, the advantages and disadvantages that new firms face are the mirror image of those faced by successful incumbents:
From the perspective of an entrepreneur or a new entrant starting in the low valley of a new architecture, there are lots of ways up and many new, untried peaks to explore. Most attempts up from the entrepreneurial valley will wind up in dead-end canyons or on disappointing short peaks. But with enough explorers working away, someone will eventually find an attractive route up.
Beinhocker, The Origin of Wealth
The role of entrepreneur in developing and amplifying new business models is clearly important, but I take issue with the essentialist view of the entrepreneur. Some play the role better than others, but the role, rather than the identify of the player, is what's important in the evolutionary process. Consequently, I tend to agree with Beinhocker when he asserts:
The entrepreneurial process is a form of deductive-tinkering...The great English economist Alfred Marshall compared entrepreneurs to medieval knights and hailed them as the heroes of capitalism. But, from the point of view of evolution, they are not the only source of economic innovation and therefore not the only heroes. Middle managers can be heroes too...This middle manager uses the same deductive-tinkering process used by the bold entrepreneur...From an evolutionary perspective this middle manager is just as important a source of Business Plan diversity as the entrepreneur -- perhaps more so.
Clockspeed, Ambiguity, Modularity and Brokers
As I've written about elsewhere, as the information content of products and services has increased, the clockspeed of business has increased. With an increase in clockspeed has come increased ambiguity and the challenge of the Red Queen Effect. In a faster-paced world, today's fitness peak could slide into the void tomorrow, but a new peak could rise equally as fast from the depths.
Given the uncertainty associated with a changing fitness landscape, there is a premium on flexibility. Modular systems offer such flexibility - to the extent that interfaces between modules are well-defined and transaction costs are low. However, the proliferation of interfaces across functions and between organizations creates challenges, because specialists, unavoidably, speak different languages and tend to draw different meanings from the same observable evidence. Consequently, the broker role is another important function in the evolution of innovation.
EIP as Originator, Broker, and Entrepreneur
At least to me, the preceding theory is potentially useful in that it can help me better understand the roles EIP should play in the innovation econosphere. During the first year or so of our existence, we've played a supporting role as originator and a primary role as a broker. Furthermore, it seems increasingly clear that there is a need and opportunity for us to play a proactive role as entrepreneur:
- We've played the role of originator to the extent that we invest in, and build upon, the initial work of our inventor-partners to resolve uncertainty via a systematic process of deductive tinkering.
- EIP is a broker in that it seeks to connect physical technologies (new consumer products) with firms having an appropriate businss model via licensing. In our broker role, we are developing expertise in the methods and tools of collaborating across functional and organizational boundaries.
- As I noted previously, we're finding that the business models of successful incumbents are pretty inflexible in the short-term. Consequently, in those cases where an appropriate business model doesn't already exist, we may be compelled to play a supporting role as entrepreneur in order to fabricate a business to complement our physical technologies.
Notwithstanding our concerns about the risk-aversion and inflexibility of large incumbent firms in the consumer products industry, we're not BigCo-bashers. The capacities of incumbents can, indeed, amplify the success of a new product, and we only get paid here at EIP if such amplification occurs. Even in those cases where we facilitate the creation of a new business model to market test and incubate a new product, I expect that we're likely to have an eye toward selling the new business, or licensing the underlying intellectual property, to a larger incumbent.
My next post in this series will explore the topic of increasing adaptive capacity.
