Andrew Hargadon

Score another one for Recombinant Innovation

Two researchers at UC San Diego modeled the H1N1 virus, looking for ways to fight it (and other pandemics) (MIT Tech Review).

Biochemist Andrew McCammon and undergraduate lab member Daniel Dadon used a sophisticated computer program to simulate all possible conformations--27 in all--of the H1N1 virus's flexible neuraminidase protein.

Using "massive" computing power, they simulated how the virus and, in particular, a suface protein could take shape.  Witih a set of 27 possible structures, they then looked at a library of FDA-approved drugs and searched for which of these drugs would bind to the protein in one of its possible permutations.

This is a great story of the value of recombinant innovation.  By taking another look at the problem (27 other looks, to be exact) they could then go in search of existing solutions that solved one or more of those problems. And in pharma, existing solutions avoid the enormous costs of developing novel solutions.

In this way, the next big thing in Pharma could be the beginning of the end.  At least of of the money machine for big Pharma—the development of wholly new drugs (and their patent-protected profits) to treat diseases.  

The current model has a catch-22: patents are necessary to support the enormous risk of developing drugs that fail to have the effects, or have worse side-effects, than promised.  But because only patent-protected profits can recoup the enormous R&D expenses, only new (read patentable) drugs are developed. This despite the fact that many old drugs have valuable uses "off-label."

The value of a recombinant innovation process comes from the ability to exploit sunk costs, to leverage the value of ideas that have already been well developed and tested.  This computer simulation hopefully points to a new and cost-effective way to see how old drugs can be used in new ways.  Old drugs that we already know perform and perform safely.

"If you start with compounds that are FDA-approved, it may be a faster way to find good drug leads," says Rommie Amaro, who specializes in pharmaceutical and computer sciences at the University of California at Irvine. "There's a long process to get a drug reviewed, and the molecules have to be metabolically okay for people to ingest. So instead of starting with random leads from a chemical library, if you start with compounds that are FDA-approved, you could already have the more harmful compounds weeded out."

Creative efficiency or efficient creativity?

Is the great paradox in managing innovation a red herring?

The paradox in managing innovation is the difficulty--if not impossibility--of simultaneously having an efficient organization and an innovative one.

Organizations must perform efficiently to survive and thrive in their current environment, but they must also retain the ability to adapt should the environment change. The tension is between adaptation and adaptability, between exploitation of current resources and opportunities and exploration for new ones.

A red herring is a device (literary, academic, or otherwise) that is "laid across the track" to divert or distract people from solving a problem directly. Like this definition.

Our obsession with the tension between the wild and crazy side of innovation and the button-downed nature of ongoing operations is distracting us from one of the more real problems in managing innovation.

A recent article on 3M describes the "struggle between efficiency and creativity" that is represented by their recent CEO succession. James McNerney came to 3M from GE, and brought with him Six Sigma, the efficiency program GE made a standard management practice in the 1990s. McNerney cut costs and improved margins:

The plan appeared to work: McNerney jolted 3M's moribund stock back to life and won accolades for bringing discipline to an organization that had become unwieldy, erratic, and sluggish.

But, as the great tension would suggest, the plan came at a steep price:

At the company that has always prided itself on drawing at least one-third of sales from products released in the past five years, today that fraction has slipped to only one-quarter.

The author and a host of academics then lay bare the tension:

Those results are not coincidental. Efficiency programs such as Six Sigma are designed to identify problems in work processes—and then use rigorous measurement to reduce variation and eliminate defects. When these types of initiatives become ingrained in a company's culture, as they did at 3M, creativity can easily get squelched.

The tension here is clearly between exploring for what you don't know (the protagonist) and exploiting what you already know (the protagonist). Between color and light, and drab routine.

The terms exploitation and exploration harken back to the oil companies who used to have (and had to have) two separate divisions. One division was responsible for exploiting existing fields, in which productivity was measured in barrels/day and $/barrel, and improvements could be proposed and tested with relative confidence. The skills of exploiting were disciplined management, analysis, and the routinization of work.

But wells inevitably dry up and market demands grow, so oil companies also needed a division that continuously explored for new oil fields. The skills of exploring for oil were independence, risk taking, intuition, and an ability to live out of a suitcase.

This tension was immortalized in the organizational literature by James March, one of the founding fathers of the field, in a brief 1991 article entitled "Exploration and Exploitation in Organizational Learning."

There are profound differences, however, between searching for oil and developing a firm's next new products or strategies. One of the biggest differences is that, when oil is discovered, there is little doubt that it's oil, that the organization is capable of exploiting it, and that it will contribute to the bottom line in some way at some time. This is more akin to discovering a warehouse of widgets just like the ones you're already selling. Regardless of whether you drill 6 wells or 6,000, if one of them is a gusher nobody debates whether this will cannibalize existing markets, not work at all, distract from our current focus resources, etc...

I can't recall a single innovative new product that was obviously and unambiguously valued in it early days by the organization. So there is more to innovation than simply exploring for new ideas.

What is missing is a very significant step that lies between innovation and operations (between exploration and exploitation): execution. At least, that's what I would call it. It's the process of converting an idea, even a prototype, into a set of resources, procedures, metrics, and marching orders that can enable an organization to effectively replicate, scale, and manage the new venture.

I move around in the worlds of design and innovation and have met a lot of wildly creative people. Having good ideas is actually pretty easy for them. I also work with a lot of smart people in operations, and knowing how to ferret out problems, reduce variability, and manage others to task comes pretty easily to them. The challenge is in how these people work together. Good ideas only help the company to the extent they can be routinized--exploiting the exploration.

The big challenge in managing innovation lies, I would suggest, not in building up two very strong skills in innovation and in operations, but rather in building the bridge between them--of developing the people and processes that facilitate the routinization of novelty. Of turning good ideas into practical processes that the larger organization can value, adopt, implement, and manage.

Forget 3M--think about Toyota. They are leaders in manufacturing efficiencies and also at exploring the new frontiers of innovation automobiles. How have they managed the tension? Read any number of books on them (but the original Machine that Changed the World remains the best read) and you find that they are extremely effective at recognizing those ideas that can be routinized and doing so before their competition. Sometimes decades before. Consider the Prius. Ford and GM had many of the same technologies lying around R&D, but having the ideas is not the same as converting them into manufacturing routines, processes, supply chains, and ultimately customers. That's execution.

With the obsession between innovation and efficiency, the skills to execute--and the people who have them--are being largely ignored in modern corporations. And certainly ignored within business schools. Which is a shame.

7 questions to ask a potential co-founder

In starting a business, one of the first and most important decisions you can make is choosing the right partners. The more new businesses I am involved with, the more I see just how critical are these early decisions about the people rather than the ideas, company names, logos, and other distracting conversations.

The success or failure of a new venture hinges on the performance of the founding team: the mix of skills determines whether you can manage the diverse challenges you will face; your ability to support and challenge each other will decide how well you manage setbacks; and the culture you create through your interactions will have a lasting impact on the company.

Choosing a partner not only can be a difficult and time-consuming decision, it should be. If it's not, there is something wrong. What follows are seven questions you should ask a potential partner before deciding to drive a new venture forward.

1. How well do you know your partner?

Business partnerships are often equated to marriages. Knowing your partner can eliminate many future uncertainties and headaches. Whether you are partnering with a coworker, friend or family member, make sure you really know your partner's strengths, weaknesses, work ethics, and family and financial obligations. Going with your gut--or with longtime friends--can often backfire as we tend to focus on the positive aspects of the relationship and ignore and underestimate the warning signs. Asking tough questions of each other in the beginning will avoid potential disaster in the long run.

2. What strengths and weaknesses do you each bring to the partnership?

Opposites attract. A good partner will complement your skills and assets. Though you may share the same visions, having a partner with a different skill set will enable you to double your strengths and minimize your weaknesses. Choose a partner that is able to challenge your viewpoint and strategy, in an effort to find the best possible solution.

3. Do you have a shared vision?

Although a strong partnership will often consist of two people with different but complementary skills, sharing a common vision gives the partnership focus, drive and ambition. Make sure ahead of time that both parties are committed to the partnership's success and are willing to invest the necessary time, energy and money required.

4. What type of partnership will you form?

Put your legal affairs in order. Even partnerships with the best of intentions can fail miserably if the proper legal agreements are put down on paper. At first, begin by putting in writing such things as expectations (and agreements) about profit-sharing or ownership. Then answer the harder questions: How will decisions be made (easy if you agree, not so if you don't)? What will happen if one of you decides to leave the business? Whether for professional or personal reasons, this happens often); In the event of one's death, how is ownership and control going to be determined?

5. Do you like this person?

Liking your partner is essential to your partnership's success. Much like a marriage, a long-term partnership will suffer the same ups and downs. Make sure this is someone you like enough to want to weather through adversity when the going gets tough.

6. If your partner is a friend, how strong is your friendship?

Partnership with a friend can be fun and rewarding but also brings the possibility of greater devastation. If the partnership fails, chances are the friendship may as well. Decide ahead of time if your friendship can withstand the inevitable disagreements, downturns, and even dissolution of the business.

7. What is the exit strategy?

Before the ink even dries on the partnership papers, sit down and decide what the exit strategy will be. Having this conversation ahead of time can prevent heartache and dissension in the future. Decide how, when and why the partnership will dissolve. A well-thought out exit strategy can allow partners to exit a partnership gracefully and with dignity, rather than with recriminations and regret.

The first penny...

Josh Kopelman has a great post on pricing models and adoption rates for new internet services, in his blog Redeye VC: The First Penny

Josh expresses beautifully the challenge entrepreneurs face in trying to offer services on a subscription basis (no matter how low). The demand for these services drops precipitously as price increases from $0 to $0.01.

Most entrepreneurs fall into the trap of assuming that there is a consistent elasticity in price - that is, the lower the price of what you're selling, the higher the demand will be. So you end up with hockey stick looking revenue charts that go up and to the right, all supported by an "it only costs $2 month" business plan.

The truth is, scaling from $5 to $50 million is not the toughest part of a new venture - it's getting your users to pay you anything at all. The biggest gap in any venture is that between a service that is free and one that costs a penny.

This is why hybrid business models are becoming necessary--advertising, syndication, brokerage fees. Anything before charging the actual users.

Inside the mind of a student of innovation

Just stumbled onto Peter Rip's blog EarlyStageVC. While some of my best friends are VCs, I'm not and so I can't say how representative his blog is of the general VC mindset. But I can say he is a great student of innovation.

VC's have a unique perspective on the innovation process--they are by necessity both intimately involved in new ventures (betting $Millions will do that) and objectively distanced from them (to be able to pull the plug, if need be).

What this provides, in Peter's case, is a great perspective on the innovation process that generalizes well beyond software and the Silicon Valley. And is refreshingly devoid of the traditional bus-book approaches to managing innovation.

In one telling post, How to double your valuation, he talks about what it takes to create value in a new venture:

So how do you double your valuation? Pick one application; serve one type of customer and be in that business. Show how you can conquer a specific set of competitors by virtue of the technology, but don’t be in the technology business. If you can persuade your investors that the first beachhead is attainable and interesting, you will get credit for subsequent applications and the big, horizontal play. Tell a story that shows you understand who your customer is, how to get to them, and why they will buy or use your product/service. Show how powerful the technology and team are, but stay on message about the focus. Let us imagine the Future.

• Don’t enable – solve


• Don’t provide context – provide conclusions


• Don’t ask customers to build – ask them to use

Technology is raw material. Create finished goods.

All ventures--from Si Valley startups to internal projects, should be managed to create and demonstrate concrete value quickly while still promising a broader platform for future and dramatic revenue growth. Is your company managing the development of new ventures in this way?

Evolving metaphors

Mike at Life on the Road has carried the conversation about MySpace in an interesting direction (see his post as well as his comments to my previous post). One of his central arguments is that social networking sites are not all that different from most other "destination" sites: places where people come to connect with similar people.

I agree with this line...in it's extreme, social networking sites are just another kind of chum to draw users in (to sell them ads, goods, and services). It's a particularly convenient kind of chum, as the users develop it for you.

Prodigy, as one of the first ISPs, started life thinking they were part mall and part newspaper--meaning they thought they were going to make money by selling ads and getting commissions on third party internet sales. Instead, users flocked to their message boards and email and, in so many words, used it as a social networking site. Prodigy's response was to begin charging by the email and by the hour for their message boards. Users left, and Prodigy never got them back.

One of the reasons to question MySpace's metaphor is to better understand what business they're in--what value they're in the business of creating--and what business they want to be in. Are they the new Viper Room, the new Mickey Mouse Club or the new NBC?

Google, as Mike notes, has done a very good job of not allowing its original metaphor (an index on steroids) to become fixed in its users' minds. Instead, their continual introduction of new tools has forced users to continually revise their assumptions about what Google is and does. More so than any one feature (like mail or calendar or maps) this series of new tools ensures that Google remains a living and evolving business concept. And its users never pigeon-hole them.

It's up to MySpace to think past the initial metaphors (their own and their users'), use the current traffic to shape a new form that is more defensible and adaptable than the current one.

MyTwoCents on MySpace

So here's a question: What is MySpace?

Aristotle once said:

The greatest thing by far is to be a master of metaphor; it is the one thing that cannot be learnt from others; and it is also a sign of genius, since a good metaphor implies an intuitive perception of the similarity in the dissimilar. (De Poetica)

Organizations--especially startups--must also master the metaphor.

I'll be the first to admit that emerging technologies are tethered to the market's dominant metaphors, which are built from people's current and past experiences. We make sense of the new only in terms of the old.

But I have also argued the issue is not whether new technologies are interpreted through old frames, but which old frames. This weekend, after reading both a WSJ story on MySpace (MySpace, ByeSpace) and a parent's experience with facebook.com (Facebook... ), I saw the enormous leverage of a good metaphor in business.

So what is MySpace?

Is it the next media platform--a new company with the reach and influence of an NBC? Does its phenomenal ascendance and enormous population of demographically perfect users mean it is the platform that will usher in a new golden age for marketers. What they last saw in the 1950's with television and its ability to reach 75% of the viewing audience at a single moment? Is MySpace the next television?

Or it is not the network but rather the hot show--the Mickey Mouse Club or Davy Crockett that sold millions of mouse-eared hats and coon-skin caps. The kids across America who watched these shows were the canaries in the marketing coalmines (pardon my own metaphors), giving advertisers a glimpse into the power of that new medium to create and drive buying behavior from the ground up. Before then, kids were an elusive target and, a few decades later, were so bombarded with advertising that no one message carried as much weight. Is MySpace a glorified, 24/7 Mickey Mouse Club?

What I realized this weekend, reading both the business press and a parent's account of these social networking sites is that, to me, these social networking sites are exactly that. When I was a junior in high school, after basketball games we would all meet at the nearby McDonalds (Mickey D's). When I was a senior, we shifted to Burger King (the BK lounge). Why the shift? As Yogi Berra would have explained, "Nobody went to McDonald's anymore, it was too crowded." The same flocking behavior accounts, on differing scales, for shifting fortunes of the club scenes in LA and New York.

MySpace is the new BK Lounge. Granted, a national one, but it's the place kids go to see and be seen.

The discerning teenager--and when it comes to social networking, perhaps nobody is more discerning--now talks candidly about where they choose to spend their online time and why. Kids talk about how MySpace is getting too crowded, too mainstream, and they are looking for somewhere else to hang out. Somewhere with a bit of cachet. And for this reason, the club/lounge seems the closest metaphor for social networking sites.

The problem with this metaphor is that, while it accounts for the phenomenally easy growth of MySpace, it also predicts an equally easy abandonment by its users. Time will tell.

McDonalds with a purpose.

Govindappa Venkataswamy, an opthalmologist, passed away July 7th. He's not an American icon, but could (and should) be for his entrepreneurial ways. The WSJ just began a weekly column honoring the passing of prominent business figures, and Dr. V's passing is an especially nice way to inaugurate the column.

Dr. V Started the Aravind Eye Care System with an 11-bed clinic in 1976, and has since grew it into a five-hospital system. The Aravind system provides affordable surgery for the masses--quite literally--and now impoverished cataract patients can have their eyesight restored for about $40--and if that's too much, for free. It also proved that there was a way to make money at the bottom of the pyramid; the free are paid out of the profits of paying patients.

What makes the Aravind system interesting to innovation is the origin of its success:

He was inspired, Aravind says, by the assembly-line model of McDonald's founder Roy Kroc -- learned during a visit to Hamburger University in Oak Brook, Ill. ... "Can't we do what McDonald's and Burger King have done in the United States?"

Sound familiar? In 1910, when Ford's engineers came back from studying the assembly lines of the Chicago meatpacking plants (first publicized in Upton Sinclair's 1906 book, The Jungle), one of his chief engineers said "If they can kill pigs that way, we can build cars that way." From food to cars to food to the operating rooms of Tamil Nadu:

The assembly-line approach is most evident in the operating room, where each surgeon works two tables, one for the patient having surgery, the other for a patient being prepped. In the OR, doctors use state-of-the-art equipment such as operating microscopes that can swivel between tables. Surgeons typically work 12-hour days, and the fastest can perform up to 100 surgeries in a day. The average is 2,000 surgeries annually per surgeon -- nearly 10 times the Indian national average. Despite the crowding and speed, complication rates are vanishingly low, the system says.

What if the best ideas of modern economies were, with care, put to better use? As Dr V said, " Intelligence and capability are not enough. There must be the joy of doing something beautiful."

A grain of salt for the long tail...

Guy Kawasaki offers a good counterbalance to the hype surrounding (or soon to surround) Chris Anderson's new book, The Long Tail. The idea of the Long Tail is that, in a single market, the combined size of many niche products can be as big as from a single (or relatively few) mass-market products. Anderson's original idea stemmed from comparing the sales of pop hits and artists to niche songs and singers on iTunes and Amazon. Of course, this was also how General Motors ate Henry Ford's lunch in the 1920s, by introducing multiple makes and models against the mass market-driven Model T.

The threat: Big companies are caught between a rock and a hard place. On the mass market side, Walmart and others are squeezing their margins to nothing. On the other end, smaller companies are increasingly stealing away niche chunks of their more profitable, lower volume products.

The promise: Companies that master the long tail will see their revenues and share grow where those that can't will watch theirs wither.

The grain of salt: The long tail may hold vast riches in many markets but, as Guy points out, before a company can exploit the long tail, they (and their market) must meet a serious set of requirements...read his post for these.

However, I think there is one area where the Long Tail still may hold promise for big companies: The back catalog. The hundreds, if not thousands, of SKUs that companies have maintained if only to avoid the trouble of formally killing them off. These are the countless products dating back decades which someone, somewhere still needs or wants.

It may be difficult for a company to find, contract for, or develop new products to build themselves a brand-spanking new long tail. But the ideas behind the long tail may still enable companies to find new value in their back catalogs in the same way that eBay has enabled so many of us to find new value in our attics and garages.

The trick will be finding those customers you had neglected before--the mom & pop shops, the weekend users, the 40-year old virgins, who still want whatever you first sold them 20 years ago.

Finally, and unrelated to the rest of the post, Guy utters a classic line:

"Everyone knows that the innovator’s dilemma is to find a tipping point in order to cross the chasm."

Sums up management thinking in the 1990s.

The ethanol mousetrap (and moonshot)

As Ethanol, the solution du jour for our energy needs, comes into the spotlight, it reveals itself to be as realistic a near-term solution (and long-term panacea) as its predecessor, hydrogen. Ethanol will not now, nor may it ever, provide the energy independence people seek. As Julia Olmstead writes in Counterpunch:

Improving fuel efficiency in cars by just 1 mile per gallon -- a gain possible with proper tire inflation -- would cut fuel consumption equal to the total amount of ethanol federally mandated for production in 2012.

Many others have made this same point before. What's interesting, to this innovation-obsessed blogger, is the underlying impact that the concept of ethanol and other innovations has on the innovation process itself--especially when that process requires public effort and political will. What does the thought of a simple, clean solution just around the corner do to our ability to act with the solutions we hold in our hands (like raising mileage standards by 1 mpg)?

If a bird in hand is worth two in the bush, why is a technological solution in hand worth less than one around the corner? Is it the promise that this next one will take less effort and will to implement than the ones we have available today?

That promise of the better mousetrap that sells itself undermines more than just green technologies. It undermines innovation in organizations big and small. The possibility that tomorrow's idea will be easier to implement than todays keeps us tolerating the status quo. It's just like Annie sings: "The sun will come out, tomorrow. You can bet your bottom dollar." Or was she pushing solar?