Andrew Hargadon

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?

7 things every environmental entrepreneur should know

A lot is happening at the intersection of environmentalism and entrepreneurship these days, and it's creating a hybrid form: the environmental entrepreneur. Some are coming from the entrepreneurial community. Many more are environmentally driven and, realizing that "commerce is the engine of change," are starting new ventures. Here's some quick advice based on having a front row seat at the intersection for the past few years.

1. Solve the right problem first.
   That problem has to be the customer's. Your project will, by definition, benefit the environment and coming generations (you're an environmental entrepreneur, right?). But if it doesn't also benefit the people who have to pay for it in the first place, it will die. If the first slide in your presentation doesn't clearly describe a living customer and a real pain they are feeling now (and you could solve), then you're not ready. Don't lead with global warming, greenhouse gas emissions, or wetland protection unless you're talking to the people who feel this pain directly (like foundations and policy makers). Instead, talk about how your solution will help the customer--help grow market share, reduce costs, improve quality, increase margins, reduce weight, grow hair, or get their kids into Princeton. Solving the customer's problem first focuses you on the here and now, forcing you to be the one person who understands better than even your customers, what they need.


2. Always solve more than 1 problem.
   Good ideas solve someone's problem. Great ideas solve more than one problem. Don't waste your time pushing one-dimensional solutions, the successful ventures, green or otherwise, that you hear about solve multiple problems at once. That means solving the problems of suppliers, distributors, retailers, and regulators, and investors. Powerlight developed a solar panel system that clicks together, has a layer of insulation underneath, doesn't require penetrating the existing roof, and is durable enough to walk on. This reduces the efficiency of their panels (as they don't tilt toward the sun) but it makes installation easy, and installers recommend them. Whose cooperation do you need? What do they get out of the deal? Run the numbers. If everyone doesn't win, go back to the drawing board until you find a solution where everyone does.


3. Embrace style.
   Somewhere along the way, style became the antithesis of substance. Nearly 100 years of Madison Avenue advertising has made style a cheap substitute for substance (just look at the US auto industry). But you can't blame them. Consumption is as much about identity as it is about performance. Nike, Coca-Cola, Apple, and Chevy all sell identity as much as the products their names are on. The Prius was helped by images of celebrities filling the gas tank; Willy Nelson's name scored style points for biodeisel among truckers; even Gore is revamping his style to great effect. Think about your new venture: Style has a substance all its own. What's yours? What's your company's identity and who wants to share it with you?


4. Don't make leaps.
   Most environmental entrepreneurs have visions of fixing entire systems--after all, that's what's broken--and design solutions that promise wholly new technologies enabling (and requiring) wholly new behaviors. Think hydrogen fuel cell vehicles, which require innovations in fuel cells, fuel, fueling stations, fuel companies, and fuel distributors, to mention just a few. But that's where most promising ideas fail. Innovations succeed when they offer evolutionary, not revolutionary, changes in behavior. Create a design that provides small steps, easy changes, for your customers. Edison designed his electric light to look and act just like the gas lighting existing customers were used to. Only later did people start using electricity for other uses. Natura non facit saltum: Nature does not make leaps. Neither will customers.


5. Know when good enough is good enough.
   You will always have two choices: keep working on the product or get it into the hands of customers and see what happens. Hundreds of millions have been poured into perfecting the Hydrogen fuel cell vehicle, all based on what people think the automobile industry will want in 15-20 years. Jadoo Power Systems, on the other hand, found a way to put hydrogen fuel cells into the hands of customers today. How? By taking the technology that exists today and designing products that people need now. Jadoo sells power solutions to video crews, rescue workers, and the military--all of whom will pay right now for something than provides the same power for less weight. And by doing so, they are learning dramatically (doubling performance while halfing costs). Get to the market as soon as you can--there is no substitute for learning what people will pay for, and how they'll actually use it.


6. Forget the better mousetrap.
   Emerson had it wrong. Build a better mousetrap and the world will not beat a path to your door. The better mousetrap--or whatever your solution--is the beginning, not the end. Once you have that, you need to market it. You need to get the word out to your customers quickly and effectively by building a website, sending out a press release, writing an editorial (or better yet, an article describing the problem, the market, and the opportunity better than anyone else has yet). Who needs to know about your product? How are they going to hear about it? How can they reach you? The light bulb was 40 years old by the time Edison started marketing his version. The steam engine was over 100 years old before James Watt found the investors, distribution channels, and manufacturing partners to bring it to the mass market. We remember Edison and Watt because they built successful business around existing mousetraps.


7. Remember, success makes you the new problem.
   Careful what you wish for--you just might get it. Any company that succeeds grows, and any company that grows needs to worry about managing cash-flow, making payroll, paying creditors, and staying around in the long-term. Compromises start to creep in, waste starts to add up, and pretty soon you're part of the problem. For environmental companies, this is especially challenging. A world filled with electric cars would be a world littered with lead-acid batteries and darkened by coal-burning power plants. Look to companies who, like Patagonia in the last decade or Hewlett-Packard in the 1950s, turned away from growth in order to remain the companies they wanted to be in the first place. Just remember, when you succeed, why you started in the first place.