Monday, January 30, 2012

Things that money can't buy: (1) love; and (2) innovation

Horace Dediu posts a typically informative, data-heavy blog on the theme: "You cannot buy innovation."

The new data from Apple is interesting, but it's a well-established fact: companies that spend a ton on R&D often see little to no return on that investment, in terms of world-changing products. (Though, that being said, it may be that the true ROI on R&D funding comes not from products, but instead from patent licensing fees.)

Dediu defines innovation as "disruptive growth," and in fact disruption is exactly the sort of thing to resist R&D budgets. Research and development is top-down; it's the deliberate, methodical investigation of possibilities that have already been identified and embraced by company management. Disruption, on the other hand, tends to come via products that almost never gain necessary support within large, established corporations; disruptive products are the ones that management tends to kill because they're too risky, they're not aligned with current customer needs, and the upside is not well understood.

Even when we adopt a wider definition of "innovation," though, the problem remains: it's not an easy thing to plan or manage. There's more to innovation than a good idea -- there's also a lot of hard, painstaking labor involved -- but the good idea is where the ball starts rolling, and ideas can and do come from any part of the organization, top or bottom. Ideas that start at the top have an excellent chance of making it through to execution, but ideas that start at the bottom face a much tougher road. Someone needs to believe in it strongly enough to take it to his manager, and that manager needs to believe in it enough to take it to her manager, and so on, ad infinitum, until it reaches a high enough point in the food chain that the necessary resources can be put together. Every step along the way the idea can be killed -- because it's poorly understood, because it's competing for resources with another idea, because someone fears failure, because someone doesn't respect the person who supports the idea -- and so it's only the occasional idea that survives the gauntlet and makes it through. Even then there are likely to be so many design reviews and approval loops that what's built barely resembles the original inspiration. How likely is it, then, that the company follows through on its very best ideas?

Hierarchy varies inversely with innovation; the more layers to an organization, the less likely new ideas are to flourish. This, in fact, is the primary reason that small companies and startups tend to be more innovative: when you're only five people working out of a single room, there's more opportunity for ideas to be heard, discussed, weighed, and approved or discarded. Occasionally, large organizations try to boost their innovation by pushing decision-making powers farther down the org chart, or by creating small, independent units within the larger organization, but these efforts tend to be short-lived because, sooner or later, hierarchy will reassert itself.

So what is there to do? Some large organizations manage to innovate despite themselves. At Apple, the special sauce appears to be a fanatical devotion to quality; the focus throughout the organization is on building great products, not on profit. This allows them to develop and promote the iPad in the full expectation that it would disrupt the profitable Macintosh product line.

Other businesses have innovated via rebellion. The developers behind the very successful Forza Motorsport video game at Microsoft developed the game in secret until they had a product that was so good that no one would say "no" to it. The fact that they had to do this in secret speaks poorly of Microsoft Games, but it was a successful strategy. The risk in this scenario for individual employees is so high, however, that this can never be a standard approach to the problem.

Ultimately the best approach might be to hire really good people. The primary reasons for killing an idea -- fear, uncertainty, and rivalry -- are qualities you see in Grade B, mediocre employees. That sort of person was never in it to change the world in the first place. The best employees are the ones who can't help themselves; they solve problems and develop solutions because they can't stand the sight of failure. Fill your organization with people who are compulsive about going above the bare requirement, and innovation is almost certain to follow.