HBR 2007 Breakthrough Ideas, Part 2

Stephen DeAngelis

February 7, 2007

Yesterday I reviewed ten of the twenty “Breakthrough Ideas for 2007” as selected by the editors of the Harvard Business Review. Today I conclude that review starting with idea number 11.

11. Innovation and Growth: Size Matters. Geoffrey B. West, president of the prestigious Santa Fe Institute, discusses why he believes size matters when it comes to innovative organizations. He writes:

“Although we can’t yet predict how specific cities or companies will evolve, we’ve found general mathematical relationships between population size, innovation, and wealth creation that may have important implications for growth strategy in organizations. … Social organizations, like biological organisms, consume energy and resources, depend on networks for the flow of information and materials, and produce artifacts and waste. So it would not be surprising if they obeyed scaling laws governing their growth and evolution. Such laws would suggest that New York, Santa Fe, New Delhi, and ancient Rome are scaled versions of one another in fundamental ways—as, potentially, are Microsoft, Caterpillar, Tesco, and Pan Am. To discover these scaling laws, Luís Bettencourt at Los Alamos National Laboratory, José Lobo at Arizona State University, Dirk Helbing at TU Dresden, and I gathered data across many urban systems in different countries and at different times, addressing a wide range of characteristics including energy consumption, economic activity, demographics, infrastructure, intellectual innovation, employment of ‘supercreative’ people, and patterns of human behavior such as crime rates and rates of disease spread. … To our surprise, a new scaling phenomenon appeared when we examined quantities that are essentially social in nature and have no simple analogue in biology—those associated with innovation and wealth creation. … A doubling of population is accompanied by more than a doubling of creative and economic output. We call this phenomenon ‘superlinear’ scaling: by almost any measure, the larger a city’s population, the greater the innovation and wealth creation per person. … The social and structural similarities between cities and firms suggest that our conclusions extend to companies and industries. If so, the existence of superlinear scaling that links size and creative output has two important consequences: First, it challenges the conventional wisdom that smaller innovation functions are more inventive, and perhaps explains why few organizations have ever matched the creativity of a giant like Bell Labs in its heyday. Second, it shows that because organizations and industries must apparently innovate at a continually accelerating rate to avoid stagnation, economizing by reflexively cutting R&D budgets and creative staffs may be a dangerous strategy over the long term.”

Although some studies about innovation have argued that innovation is best fostered in small organizations, West concludes the opposite. My colleague Bradd Hayes addressed this apparent conundrum in his book about innovation The Politics of Naval Innovation. One of his conclusions was that “the best way for a large bureaucracy to foster innovation is to function like a small one. ‘As Albert Wohlstetter stated it, ‘Large organizations tend to be run by rules and there tend to be standard problems. Therefore, people who are working together on something else seem to be beyond the pale. When you are looking in a large organization, the important thing is that you really try to encourage simulating working in a small organization.'” In other words, you have Palo Alto Research Center embedded in Xerox or a Skunk Works embedded in Lockheed Martin. This gives you both the benefits of size discussed by West as well as the freedoms associated with smaller organizations.

12. Conflicted Consumers. Karen Fraser talks about how ethical questions about a company can affect its customer loyalty. She writes:

“A ‘stealth’ segment of apparently loyal customers who have ethical concerns about your company … are poised to switch as soon as a viable alternative emerges. In other words, they buy your product but they’d rather not. I call such customers ‘conflicted consumers,’ and my research shows that more of them are out there than business leaders and their market research teams may realize. In a survey of more than 1,300 consumers in the United Kingdom, nearly one in four said they bought products and services from companies whose ethical reputation they deemed poor or very poor. Their concerns ranged from the exploitation of workers to corporate environmental practices to the marketing of harmful products. … Although some companies see little need to pay attention to the preferences of ‘ethical types’ who will never, they believe, buy their products, my research indicates that the distinction between ethical types and “our customers” is blurring, and that the majority of consumers, in one way or another, need to have their concerns addressed.”

I addressed corporate ethics last year [Corporate Conscience] and concluded: Corporations that do the right thing will eventually discover that it pays off. A Resilient Enterprise is one that works with rather than exploits local workers, governments, and the environment. A good rule of thumb for any business to operate by is: don’t do anything you wouldn’t be happy to discuss if you read about it on the front page of the New York Times — because you probably will.

13. What Sells When Father Knows Best. Phillip Longman argues that companies must take notice of religious and political conservatives because they have more children and are, therefore, spawning future consumers. He writes:

“People who are social, religious, or political conservatives tend to have more children, and that fact has profound implications for culture, for politics, and for business. … This link between fertility and conservatism is found not only in the United States but in Europe, Israel, the rest of the Middle East, and elsewhere. There is a strong correlation between adherence to traditional Christian, Judaic, or Islamic values and high fertility. And as an increasing share of all children is descended from people whose conservative values have led them to raise large families, we see the emergence of societies in which the patriarchal and highly pro-natal values of the Abrahamic religions are dominant. … Patriarchy always makes a comeback, because its adherents put more genes and ideas into the future than do their secular counterparts. … How can business leaders profit from—or at least prepare for—this trend? … The new patriarchal family will value products and services that allow fathers to stay home as well. One example is eBay, which drastically lowers the barriers to running a home business. A combination of nanotechnology and biotechnology may allow millions of households to produce large amounts of the food, energy, and manufactured products they currently acquire from the global economy, thus restoring the traditional home-centered economic basis of the patriarchal family.”

This is a pretty controversial subject and I’m not sure it will play out exactly the way Longman thinks.

14. Business in the Nanocosm. Professor Rashi Glazer looks to the future of nanotechnology, not the technical revolution it may foster, but the socioculture and business implications it could generate. He writes:

“Nanotechnology may change society over the next few decades just as much as information technology has over the previous few—and in ways that are still hard for our minds to grasp. Nanotechnology is distinguished from other forms of technology, past and present, by the infinitesimal size of the materials involved (less than 100 nanometers wide) and by its method of operation. Conventional manufacturing carves or distills a purpose-suited device from a mass of raw materials. Nanotechnology, like nature, assembles objects atom by atom, following a design that calls for only what is needed: a place for every atom and every atom in its place. … Ever since Adam Smith laid out their essential characteristics, market economies have been understood to rest on specialization: Individuals are producers of one thing and consumers of everything else. In what is sometimes called the nanocosm, by contrast, consumers could become the sole producers of finished products of all kinds. Consequently, they would continually evaluate whether to make or buy. We are all aware of the decentralizing and personally empowering effects of PCs and the Internet. By making individuals largely self-sufficient, the nanocosm would push these effects to the extreme, in essence creating a Robinson Crusoe economy. Nanotechnology would thus hasten the trend away from manufacturing prowess and physical assets (hardware) as sources of competitive advantage. Obviously, the vast number of companies that offer durable or even disposable items would be at risk—as, ultimately, would those handling inventory and logistics or offering after-sale customer service, maintenance, and repair. In short, the ability of end users to perform for themselves functions now performed by other economic agents would wipe out large segments of the value chain. Competitive advantage would lie in knowing the customer and designing the manufacturing blueprint and software. We might also anticipate the emergence of a new entity, midway between the traditional make-and-sell, command-and-control organization and the more modern sense-and-respond, adaptive organization. This new entity would function as a systems integrator, focusing on ‘menu design,’ component acquisition and assembly, and efficient coordination of the activities and interactions of the market-savvy designer, the PMU maker, the PMU operator, and the provider of the atomic building blocks.”

Nanotechnology products are just starting to reach the marketplace and Glazer’s vision of a world where consumers have home-based “replicators” like those found in Star Trek still sounds a bit like science fiction. That doesn’t mean, however, that companies shouldn’t already be considering how they might adapt to such a future.

15. Act Globally, Think Locally. Professor Yoko Ishikura asserts that the conventional wisdom of “think globally, act locally” needs to be turned on its head. Ishikura writes:

“Here’s a paradox of our age: The more global the economy and your business, the more important location and physical proximity become. Yes, issues of location—the choice of a factory site, for example, or the tailoring of a marketing message to a region—have always been of strategic importance. However, the conventional emphasis has been on how location affects a company’s costs and revenues. In today’s knowledge-based economy, we need to reevaluate the very concept of location. Advances in communication technology have enabled—indeed, require—companies to tap into local information that they can use throughout their businesses. Managers increasingly understand the importance of drawing on diverse sources of information, especially from outside the organization, to spur innovation. … In the early 2000s, many Japanese manufacturing firms moved their production plants to China in order to take advantage of lower labor costs. Over time, they realized that some activities, such as exchanges between the production-engineering and manufacturing departments, weren’t proving effective—for example, the desired product specifications couldn’t be achieved—when the departments were physically separated. There was just too much subtle back-and-forth that needed to occur in person. Partly because of this, some of the companies have moved some of their manufacturing processes back to Japan. … Companies today need both global reach, in order to spot useful local ideas and incorporate them into strategy, and physical proximity, in order to effectively tap sources of tacit knowledge and thus sustain competitive advantage. For both, location matters.”

In the information age, when connectivity is so ubiquitous, some people still appear surprised that some human interactions need to occur face-to-face. Virtual meetings and video teleconferences have not replaced face-to-face encounters. Certain business sectors (like IT, biotech, and financial services) cluster into regions because people still need to meet with one another in person. This is not a new idea, but it is one that we need to be reminded of occasionally.

16. Seeing is Treating. Siemens executives Klaus Kleinfeld and Eric Reinhardt discuss the breakthroughs being created by the convergence of imaging technologies and biotechnology. They write:

“Health care often advances hand in hand with technology. When several technologies can be leveraged simultaneously, the possibilities for real breakthroughs in care multiply. That’s occurring today with the convergence of imaging technology and biotechnology—enabled by advanced health care information technology—which promises to radically change diagnosis and treatment for many chronic diseases. Like other technological convergences in our digital and granular world, this one will redefine industry boundaries and inextricably link distinct businesses. … Biotechnology’s real promise lies in the increased potential for combining diagnosis and treatment. … Biomarkers … could, for instance, have a serum attached, or could be used to switch off the tumor’s angiogenesis receptors, stopping growth in its tracks. In a similar way, radiation therapy could be carried directly to the tumor, minimizing damage to adjacent healthy tissue. Intelligent IT tools would help physicians compile and manage the data gathered through all these tests to improve patient care and safety. Such high-tech methods of diagnosis and treatment would not necessarily be simpler than current methods, but they would have a higher success rate and would certainly be easier on patients. And because patients would be cured earlier, before they needed specialized care, survival rates would improve and health care costs would be reduced. In short, the convergence of imaging and biotechnology can improve the quality of health care, the delivery of health care, and the operational and financial performance of both health care providers and medical technology companies.”

Real breakthroughs often (maybe even most often) occur when convergence is at play. Frans Johansson calls this the Medici Effect, a subject I have discussed in an earlier post [The Medici Effect].

17. The Best Networks Are Really Worknets. Christopher Meyer discusses the fact that all networks are not created equal. The value and structure of a network, he insists, depends on what you expect it to do. Meyer writes:

“An unruly nebula of concepts is floating around the business world right now—social webs, open innovation, customer-created content, and more—all exploring one big question: Now that we see the power of human networks, how can we use them to produce value? Applications ranging from InnoCentive, Eli Lilly’s network for solving scientific riddles, to Internet Based Moms, a Web site where work-at-home moms can seek and share advice on starting Internet businesses, prove the point that many heads are better than one. But up to now, network-building efforts have been hit or miss. … Networks lend themselves to at least five basic tasks. They can scan the horizon, as the Global Business Network does, for events and patterns with implications for corporate strategy. They can help to solve problems: InnoCentive does this by posing problems to a far-flung population of scientists. A network can innovate for its own benefit. Members of the Polycom User Group, for example, seek new ideas for using Polycom’s conferencing products by interacting with other users and by sharing best practices. Networks can be used to exert influence: It was only when researchers experiencing errors with the Pentium microprocessor banded together that Intel took the issue seriously. And a network can efficiently allocate resources. The staffing company Aquent uses its substantial network to match marketing and communications professionals with projects that need them. Because networks perform diverse functions, they require diverse forms. … The right time to decide on and implement the technology of the network—something often mistakenly treated as the first step—is only after the work has been defined, the right kinds of people identified, and the nature of the exchanges and experience carefully considered. … The odds of getting that value from a network are exponentially higher when you put the work first.”

I couldn’t agree more. The reason that Enterra’s Enterprise Resilience Management℠ Solution begins with our Enterprise Resilience Management Methodology® is that good solutions emerge from asking and answering good questions. Get the questions wrong and you get the solution wrong.

18. Why U.S. Healthcare Costs Aren’t Too High. Charles R. Morris argues that healthcare spending is up because the cost and recovery times for basic procedures are falling. He writes:

“There is nearly a consensus that American health care is careening toward fiscal catastrophe. Reasonable estimates of unfunded health care liabilities are sky-high. But the belief that health care costs threaten to wreck the U.S. economy is misguided. In the first place, procedure by procedure, those costs are quite probably falling. It is spending that is rising, which is not the same thing at all. The advent of minimally invasive techniques means that, for example, the cost of a gallbladder operation has dropped substantially, and the patient can usually return to work the next day instead of sitting at home for a week. But because many more people are now willing to undergo the surgery, total spending is up. … the challenge is one of financing, not affordability. The current primary financing mechanisms—employer-based insurance and Medicare—are clearly breaking down. And privatization is an unrealistic solution: While it may, barely, be feasible to privatize old-age pensions (the savings shortfall is far smaller in pensions than it is in health care), privatizing both pensions and health care is a pipe dream. Instead, in time-honored fashion, a succession of presidents and Congresses will respond to the challenge with a mix of cuts and patches. Spending will keep on rising, and it will continue to shift toward government accounts. Taxes will go up after a lag, and everyone will lie about it. Over time, some highly imperfect but tolerable new accommodation will emerge. Elegant it won’t be. That’s just the way we do things.”

It’s hard to find the “breakthrough” idea here. I would have been delighted to read an idea about how to better finance healthcare. Maybe next year.

19. In Defense of “Ready, Fire, Aim.” Clay Shirky writes about the hit and miss success of open source projects.

“The open source software movement has been one of the great successes of the digital age. Open source projects such as the Linux operating system and the Apache Web server—as we learn nearly every time we pick up a business publication—have turned the efforts of a widely distributed group of programmers, who contribute those efforts free, into world-class products. Yet when we look closely at the open source ecosystem, a very different picture emerges. For example, the world’s largest open source site, Sourceforge, hosts more than 100,000 projects, and its most popular software is downloaded tens of thousands of times daily. But most projects have never broken a hundred downloads, and more than half are simply inactive: A project was proposed, but nothing happened. If the vast majority of open source projects are failures, has the press been wrong to emphasize the movement’s few successes? The answer is—obviously and measurably—yes. So can businesses that face seemingly formidable competition from existing or future open systems breathe easy? Absolutely not. Open systems are a profound threat not only because they outsucceed commercial firms but also because they outfail them. They grow not in spite of failure but because of it. In traditional business, trying anything is expensive, even if only in staff time spent discussing the idea; so some advance attempt to distinguish the successes from the failures is required. Even at firms committed to experimentation, considerable effort has to go into reducing the likelihood of failure. And because green-lighting ideas that turn out to be failures will be noticed more than killing radical but promising ones, many people err on the side of caution.”

The fact that you often have to fail to succeed is not a new idea. Thomas Edison, among others, taught us that lesson a long time ago. But, again, this is one of those lessons of which we need to be occasionally reminded. What Shirky highlights here is the cost efficiency of letting a lot of people spend their own time and money to discover what works and what doesn’t. Sharing the load in this way drastically reduces the cost of experimentation and failure.

20. The Folly of Accountabalism. David Weinberger argues that the reaction to the accounting scandals earlier this decade have resulted in an unhealthy search for villains to hold accountable. He writes:

“Accountability has gone horribly wrong. It has become ‘accountabalism,’ the practice of eating sacrificial victims in an attempt to magically ward off evil. The emphasis on accountability was an understandable response to some god-awful bookkeeping-based scandals. But the notion would never have evolved from a buzzword into the focus of voluminous legislation if we hadn’t also been lured by the myth of precision: Because accountability suggests that there is a right and a wrong answer to every question, it flourishes where we can measure results exactly. It spread to schools—where it is eating our young—as a result of our recent irrational exuberance about testing, which forces education to become something that can be measured precisely. … Accountabalism manifests itself in a set of related beliefs and practices:

It looks at complex systems that have gone wrong for complex reasons and decides the problem can be solved at the next level of detail. …

Accountabalism assumes perfection—if anything goes wrong, it’s a sign that the system is broken. …

Accountabalism is blind to human nature. …

Accountabalism bureaucratizes and atomizes responsibility. …

Accountabalism tries to squeeze centuries of thought about how to entice people toward good behavior and dissuade them from bad into simple rules by which individuals can be measured and disciplined. It would react to a car crash by putting stop signs at every corner. Bureaucratizing morality or mechanizing a complex organization gives us the sense that we can exert close control. But grown-ups prefer clarity and realism to happy superstition.”

Although Weinberger is arguing against the effectiveness of trying to legislate morals (something that prohibition should have proven 80 years ago), he is also arguing that accountability makes cowards of decisionmakers and squashes creativity. He argues that accountabalism is blind to human nature because it assumes that if we are watched we won’t cheat. We know that isn’t true. On the other hand, regulations and standards are necessary so that people know what is expected and can be prosecuted when criminal activity takes place. Weinberger doesn’t tell us where to draw the line between over-regulation and anarchy.

Overall I found HBR’s list of ideas interesting to read and ponder and I think its editors deserve real credit for taking the time to review and select them from among the hundreds they receive each year.