Andrew Hargadon

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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.

A new MBA experience

As a whole, business has become increasingly aware of the role experience plays in the consumption of goods and services.  Pine & Gilmore's The Experience Economy is one of the earlier and more thoughtful calls for rethinking what we think we are really offering, and what is really being consumed, when someone buys an iPod, takes in a movie, or goes out for a burger.

Taking this approach, it's valuable to ask "what would make your customer's interactions with you a transformative experience?" Granted, buying a burger doesn't need to change anyone. But it could. And why not?

As usual, those of us in management are late to this insight and opportunity. Our MBA programs remain safe from such business ideas because we, as much as any organization, resist ideas that require widespread individual risk and change.

I've often wondered what would make the MBA a truly transformative experience--in which students emerge with a new and disciplined approach to thinking and acting that is fundamentally different from how they came in. And this is not unrealistic.  Our closest counterparts, Law Schools and Medical Schools, produce graduates who do think and act in very different ways than when they entered.

How, then, can we replicate the process?  On the one hand, business schools can increase the rigor of their program--focusing on teaching the discipline of thought and execution required of our graduates. This would change the nature of the experience by changing the content of the courses--a necessary change but also more about content than experience.

There is also the design of the entire MBA experience: How MBA students--many in the their late 20s and 30s--go to school, where they go to school, and how they interact with one another, their professors, and the schools community of administrators, staff, leadership, and extended community. And while most MBA programs will give lip-service to the rigor and relevance of their coursework, they would not consider changes in the fundamental delivery of the content.  They are stuck thinking that the value of the MBA is in the course content (the product) and not how that product is consumed (the experience).

All of this became crystal clear when I had the chance to visit Bainbridge Graduate Institute (BGI) in mid-June. I was there thanks to the invitation and persistence of Paul Hudnut, who teaches at BGI as well as at Colorado State.  Bainbridge Graduate Institute is one of the early pioneers that offers an MBA program with emphasis on sustainability, and triple-bottom line is the language they speak. While this is a very important part of BGI's mission and the identity of its students, it hides one of the more compelling and unique aspects of the place.

From the website:

Our MBA in Sustainable Business is a 2- or 3-year, part-time program designed for working individuals. Students and faculty meet in intensive classroom sessions for a 4-day weekend once a month, October through June, at the IslandWood environmental learning center on Bainbridge Island, 35 minutes by ferry from downtown Seattle. The academic year is kicked off with a 5-day orientation at Channel Rock, our eco-retreat center on Cortes Island in British Columbia.

 The "campus" is a beautiful environmental retreat with great accomodations  (and in truly modern business fashion, outsourced to reduce committed capital). Student are on-site only four days a month, but for those four days are there completely.

The MBA program combines distance learning with monthly, intensive, face-to-face classroom sessions.  Students build a strong, cooperative learning community with each other, the faculty and staff.

Granted, I happen to come upon the students when they were in the fire lodge, gathered around a campfire watching the graduating class put on skits, sing songs, and pass the mantle (t-shirt) of leadership to the next year's class. I hadn't seen such a display of a total immersion organization since summer camp.  But then the next morning I judged the presentations of their new business ventures for Paul's entrepreneurship class and was delighted with the quality of and commitment to the ideas.

In rethinking the MBA--as an experience rather than as a set of topics--I left Bainbridge with the realization that transformative experiences can tap the depth rather than the length of the immersion. Business students, faculty, and staff may get more out of 4 days of complete immersion interspersed with time away, online, and in reflection than they get from 4 weeks of routine lectures.

Wisdom in the entrepreneurial world

There is a strong survivor bias in studies of innovation and entrepreneurship--both in the academic literature and in the stories of practicing professionals. We tend to study the winners, the companies that made it out of the garage and onto NASDAQ. They're easier to find. Even the losers we study tend to have survived long enough to be noticed, which by itself makes them more successful than most new ventures.

When you're business is investing in new ventures--in picking winners--there is some value in studying how you've done that well. There is likely more value in studying what you did wrong. Bessemer Venture Partners has a pretty unique site describing the companies that they did not invest in: they call it their Anti-Portfolio. Every VC firm has such a history--few would acknowledge them publicly.

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.

Experience Design meets Operational efficiency at Starbucks

In perhaps one of the finest lessons in how design (especially experience design) stands against operational efficiencies, Howard Schultz, Chairman of Starbucks, spoke out against the many, small, entirely rational operating decisions that combined to create a single, subtle, yet incredibly powerful undermining of the "Starbucks" experience.

In a memo entitled "The Commoditization of the Starbucks Experience," Schultz describes how these many decisions have led Starbucks away from its roots and even from its guiding principles today. What a terrific note Schultz has written--something that should be required reading for every MBA in the country (and every design student as well, for what challenges they will face in corporations):

Over the past ten years, in order to achieve the growth, development, and scale necessary to go from less than 1,000 stores to 13,000 stores and beyond, we have had to make a series of decisions that, in retrospect, have lead to the watering down of the Starbucks experience, and, what some might call the commoditization of our brand.

Many of these decisions were probably right at the time, and on their own merit would not have created the dilution of the experience; but in this case, the sum is much greater and, unfortunately, much more damaging than the individual pieces. For example, when we went to automatic espresso machines, we solved a major problem in terms of speed of service and efficiency. At the same time, we overlooked the fact that we would remove much of the romance and theatre that was in play with the use of the La Marzocca machines. This specific decision became even more damaging when the height of the machines, which are now in thousands of stores, blocked the visual sight line the customer previously had to watch the drink being made, and for the intimate experience with the barista. This, coupled with the need for fresh roasted coffee in every North America city and every international market, moved us toward the decision and the need for flavor locked packaging. Again, the right decision at the right time, and once again I believe we overlooked the cause and the affect of flavor lock in our stores. We achieved fresh roasted bagged coffee, but at what cost? The loss of aroma -- perhaps the most powerful non-verbal signal we had in our stores; the loss of our people scooping fresh coffee from the bins and grinding it fresh in front of the customer, and once again stripping the store of tradition and our heritage? Then we moved to store design. Clearly we have had to streamline store design to gain efficiencies of scale and to make sure we had the ROI on sales to investment ratios that would satisfy the financial side of our business. However, one of the results has been stores that no longer have the soul of the past and reflect a chain of stores vs. the warm feeling of a neighborhood store. Some people even call our stores sterile, cookie cutter, no longer reflecting the passion our partners feel about our coffee. In fact, I am not sure people today even know we are roasting coffee. You certainly can't get the message from being in our stores. The merchandise, more art than science, is far removed from being the merchant that I believe we can be and certainly at a minimum should support the foundation of our coffee heritage. Some stores don't have coffee grinders, French presses from Bodum, or even coffee filters.

Schultz has a point. Perhaps even more than he mentions. For while the Starbucks experience has lessened, many small coffee shops have been able to reap the spillover benefits of Starbuck's scale and success. The market for premium coffee drinks is made: the majority of Americans now know what a latte is--many even know what a half-caf-no-fat-no-foam-latte is. And there is an increasing infrastructure supporting small and micro-roasters that enable even small, intimate, and local coffee shops to roast their own beans. Personally, I hold half my meetings at our best local cafe, Mishka's, because the owner roasts his own coffee in the roaster set smack-dab in the middle of the store (and because I used to swim with him).

In concluding his memo, Schultz does not shrink from his portion of the blame for what has happened at Starbucks. That's impressive. And I look forward to seeing the outcome of this memo. But I'm doubtful they can right this ship. When it comes to experience design, it can be an enticing (and worthy) goal for large service organizations but ultimately a dangerous one. Real experiences depend heavily on connecting with real people--both their employees and their customers--and the sheer scale of Starbucks makes it almost impossible to manage this connection efficiently without sucking the soul from it. And the aggregation of many small efficiency gains can be hard to pass up when you're a large corporation.

5 things every academic should know when pitching investors

As Director of the Center for Entrepreneurship at UC Davis, I work with a number of faculty and students who are interested in seeing their research move from the lab into the market. To do so often requires pitching investors on their ideas. The challenge is that these are two very different worlds--with very different values, frameworks, and language. Not an insurmountable challenge, but usually enough to derail the initial meeting.
With this in mind, here are a few quick tips to help prevent some of the more common mistakes that academics make when pitching their ideas to investors.

1. It's about the business, not the science. Until they know it's a good business, they'll give you the benefit of the doubt on the science. That means, for the 15-20 minutes you have their attention, your first priority is probably convincing them you're working on a clear and valued solution to an equally clear customer (and market). In most cases, the market and customer are already well-defined and your research is improving on a common product or process: a better malaria drug, or more efficient light bulb. Here the priority is convincing them your solution is better than what's out there. In addition to showing that your research is valuable and valued, talking about the business potential is a strong signal that you understand a care about bringing your ideas all the way to the market, they are investing in you as much as the research.

1b. Most investors have science advisors of one kind or another, and you may or may not be talking to them. Find out in advance if you will--and if so, then you can delve more deeply into the science behind the solution. Even then, be sure to show you understand the business aspects as well.

2. Know your solution. Can you state, in 30 seconds or less and in a language my grandmother would understand, the problem you are solving and how you're solving it? It's called the elevator pitch, and most entrepreneurs can give you theirs at the drop of a hat. Most elevator pitches include the customer, the problem, and the solution. For more information, try looking here or at http://yourelevatorpitch.com/

3. Know your competition. What's the dominant solution? What's the best currently available? What else is under development? How is yours better? Nothing shouts "Ivory Tower" like someone who doesn't know (or particularly care) about what other solutions are coming out and how theirs matches up.

4. Know your audience. What kind of investors are you talking to: angel investors, venture capitalists, equity investors? Do they prefer investing in very early stage companies (seed money for launching a company), early rounds of an established start-up, or later rounds? Are they general-purpose investors (increasingly rare) or do they prefer to invest in particular markets/sciences (like information technology, healthcare, green technology)?

5. Know your own objectives. Are you trying to raise money? Are you trying to interest them in licensing the technology? Are you doing this because your dean or chairperson asked you to? Be explicit with your objectives (to yourself at least) and open and close your presentation appropriately. One valuable objective is to learn as much as you can about the market potential of your research. In this case, be up front about it--don't make up a customer or market if you don't already know. Find out your audience's expertise and set yourself up at the beginning of your talk by saying "I'm not sure how my research can best be brought to the [investor's preferred] market and so I'll talk a little about the technology and then I would like to have a conversation about how you think we might take this forward."

and as an added bonus track:

6. Ask questions. What are they interested in hearing about? Investors are as often looking for talented people as new ventures, and you may be able to help them by providing your scientific opinion on what's happening in research that might soon affect markets. Similarly, you might have a doctoral student or post-doc that could work for them or one of their portfolio companies. Finally, you might know colleagues who are working in areas that they have invested in. How can you help connect them to other people, ideas, resources? What goes around comes around, and the more you can help them connect, the more they will help you.

Bringing business skills to scientists...

Have been busy lately developing a new program aimed at bringing business skills to scientists working in green technology: the Green Technology Entrepreneurship Academy.

For the last few years we have been running a set of business development programs that bring doctoral students (and post-docs) from science and engineering over to the business school where they learn how to think and act like entrepreneurs, and how to work with MBAS to turn their research ideas into potential (and real) businesses (Business Development Programs).

We've been having a blast doing this--it is essentially a mash-up combining business coursework with a design studio model for prototyping potential new ventures. Students learn how to talk to customers, explore alternative business models, model the finances, learn from these "prototypes" and then cycle through again until they have generated a business they have confidence can work. More on this later.

For now, am happy to see there is a sea change underway--particularly in green/sustainable technologies--around the role of the academic scientist.

Traditional views of science have held that scientists should be insulated from the demands of modern business and government policy--the better to search for knowledge and truth free from the influences of the market. But the cost of being free from the influences of others is the loss of influence over others. Scientists are increasingly finding they have little influence over increasingly critical areas of policy and technological change. There is, in the academy, an increasing recognition that scientists have an obligation to assume more of a leadership role in business if they want to bring about new and sustainable alternatives to current industrial practices.

The AAAS held its annual meeting last week in San Francisco, with the theme of "Science and Technology for Sustainable Well-Being." AAAS President John P. Holdren set the tone, and reflected this changing rol, when he said:

Challenges such as poverty, climate change and nuclear proliferation pose unprecedented global risks that require scientists and engineers to join with political and business leaders in a concerted search for solutions

And from the business side, Larry Page (co-founder of Google) added his own two bits:

There are lots of people who specialize in marketing, but as far as I can tell, none of them work for you," Page told researchers at the annual meeting of the American Association for the Advancement of Science late on Friday.

Page's comments got to the root of the problem. Scientists "need to think that business and entrepreneurship is a good thing." By not accepting this concept, scientists can too easily avoid taking on the challenging tasks of pushing their research into the market where it can make a difference. The Green Technology Entrepreneurship Academy is one way of giving science a voice in the public policy debate and in the direction of technological change. By training tomorrow's scientists to understand business and entrepreneurship, we can ensure that tomorrow's science can make a difference.

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?