Strategic Intuition: an interview with author William Duggan

Strategic_intuition
Much has been written about innovation and the creation of new business and technology ideas. Little has been written about how a person makes that creative leap to come up with something new an valuable, the process that leads to the “Aha” moment.

Columbia Business School professor William Duggan has written about just this topic in his new book Strategic Intuition. I conducted an e-mail interview with Prof. Duggan to talk about the themes of his book, with a focus on the relevance of his ideas to entrepreneurs and startups.  First, though, here’s a brief introduction to his book.

Duggan describes the importance of strategic innovation right at the start:

It’s how innovators get their innovations, how artist get their creative ideas, how visionaries get their visions, how scientists make their discoveries…

Duggan is talking about not just any new idea but ones that are potentially game-changing, ones that seemingly come out of the blue and have a profound impact.

Duggan starts his book off by differentiating strategic intuition from the expert intuition that Malcolm Gladwell detailed in his bestseller Blink. Duggan goes on to describe how strategic intuition is achieved and how it is necessary for developing creative leaps into unexplored territory. He does so by investigating how strategic ideas get created through an examination of such diverse topics a Napoleon’s wartime strategy, Thomas Kuhn’s theory of scientific breakthroughs, and Buddha’s enlightenment. Duggan then discusses how strategic intuition has been applied in some well known and not-so well known business and political situations.

The following is the e-mail conversation that I (BE) had with Prof. Duggan (WD).


BE: Clausewitz, Kuhn, and Buddha are not obviously connected to each other or to business strategy. What was the inspiration to make these connections when preparing your book Strategic Intuition?

WD:  I noticed in reading that all three explain that good ideas come to you in the same way:  as flashes of insight.  Previous elements come together in your mind in new combinations.  They all talked about different subjects:  Clausewitz on military strategy, Kuhn on scientific discovery, Buddha on personal enlightenment.  So the content of the ideas is different in each field.  But the method of the good ideas forming is amazingly similar in all three.   

BE: In war, chess, and other disciplines, strategy and tactics go hand-in-hand. What is the relationship between tactics and strategic intuition, and how do tactics relate to what you call expert intuition?

WD:  The quick retrieval of the right tactic in the right situation is the essence of expert intuition.  An emergency room nurse is just walking by, glances at a child, and swings into action to save the child’s life.  The nurse can act so fast because she has seen that ailment before in some form, and her training or experience told her the right tactic to use.  Strategic intuition is different from this in three key ways.  First, it applies to new situations.  Second, it’s slow.  Third, it brings together many tactics in a new combination. 

BE: So simply put, expert intuition enables tactical action, while strategic intuition enables strategic action. In your book, you state that “Expert intuition works for familiar situations…But strategic intuition works for the unfamiliar” (p.7).  Your thesis here is that the application of intuition built from years of experience, such as that described in Gladwell’s book Blink, will not lead to innovations that can be provided by strategic intuition. People often try to apply their expert knowledge to new situations, thinking that insight from their own field of expertise will provide new and useful guidance to these new fields. Entrepreneurs often do this, and certainly venture capitalists rely on their own expert intuition when assessing new technologies and business plans. How can an entrepreneur tell when they are inappropriately applying their expert intuition and when their “flash” of insight is the result of a breakthrough from strategic intuition?

WD:  It’s entirely possible that some of what worked in field A will work in field B.  But you improve your chances if you also draw from field C, D, E, F, G and so on.  So you cannot set out blindly to apply field A to field B.  But it does often happen that you’re just going about your business in field A and it strikes you how to apply it to field B or C or D.  That’s good.  For example, Henry Ford got the idea to turn a stationary assembly line into a moving assembly line from the overhead rail of a slaughterhouse.  But he did not set out, as a planning exercise, to apply slaughterhouse ideas to carmaking.  That would be crazy.  So the moral is:  keep your mind open to using an idea from any field in any other field.  And notice that Ford was no expert on slaughterhouses.  You can borrow many ideas without any direct expertise at all in that field – which is another big difference from expert intuition, where everything depends on lots of direct practice. 

BE: That makes me think of a lesson I learned from a successful serial-entrepreneur in Silicon Valley: that startups often innovate by taking technology that is mature in one field and introducing it to a field in which that technology currently doesn’t exist, doing so at the moment when the market is ready for that unique technology transplant. You highlight this concept when discussing Thomas Kuhn’s The Structure of Scientific Revolutions. You note that “the common idea of how a leap of progress happens is a leap of imagination. Kuhn gives us an alternative to imagination…a selective combination of elements from the past makes something new. The elements themselves are not new” (p.16). It seems that many inventors and entrepreneurs develop innovations in ways similar to what Kuhn describes. The challenge is being able to identify those cross-disciplinary connections and to see the breakthrough that can arise from combining those previously unlinked technologies. What are your thoughts on whether these approaches by startups and entrepreneurs make them more naturally inclined towards strategic intuition than established market-leading companies?

WD:  I don’t think people in startups and new companies have better ideas than people in big companies.  I do think big companies make it harder to change direction, and most good ideas mark some kind of change of direction.  So it’s easier for a good idea to come true in smaller companies.  This is why I personally try to work mostly with big companies.  They have elaborate methods for generating and implementing ideas that run completely counter to how flashes of insight really happen.  When someone in a big company has a great idea, the company is already lumbering along a different path, and some top executive will have to admit that there is a better idea now and we need to spend a lot of money to change direction.  You can see why that seldom happens.  But it’s within the power of companies to make it happen.  That’s where I try to help.

BE: Are you familiar with IDEO’s approach of iterating customer observation and rapid prototyping as a way to gain insight into product use and to develop product innovations? Their approach seems to be a variant of Kuhn’s stages of scientific breakthrough.

WD:  There’s a wonderful book by Andrew Hargadon, How Breakthroughs Happen, that shows how IDEO draws existing elements from very different fields to make a new combination.  That’s exactly strategic intuition, and I think that’s the heart of their success.  Customer observation and rapid prototyping are good, but many companies do that.  I think what Hargadon points out is the most important piece of the puzzle.   

BE: Do patents embody strategic intuition or expert intuition—or do these concepts of intuition not apply to patent development?

WD:  The patent system is in chaos because better information – chiefly the internet – lets everyone trace backwards all the elements that you combine for a new patent.  So the people who did each element claim a piece of the new patent pie.  I think inventions are almost always strategic intuition in action, not expert intuition.  By definition it’s a new combination rather than a repeat of the same tactic in the same situation.

BE: In the traditional scientific method, one develops a hypothesis and then proves or disproves that hypothesis through experimentation. Kuhn points out that scientific breakthroughs do not occur though the scientific method; rather, breakthrough ideas occur after the assimilation and analysis of information, then experiments prove the truth of the breakthrough idea, and finally hypotheses are developed to explain the results. How do these concepts relate to innovation in business? One might view the traditional scientific method as akin to the market-research approach to business strategy: define a product offering based on knowledge of current customer demands, prove those demands with market research, then release the new product. Clayton Christiansen might call this incremental innovation. Kuhn’s scientific breakthroughs could be viewed as disruptive or radical innovations, where ideas are not readily apparent from current customer and market trends. Startup companies can be particularly adept at the equivalent of Kuhn’s approach because they typically have the breakthrough idea, take it to market, and then understanding the market and customer needs after assessing the success of the product.

WD:  The traditional scientific method does not start with a hypothesis.  That’s the experimental method, which is step 2 of the scientific method.  Step 1 of the scientific method is the work you do before you come up with a hypothesis and the experiment to test it.  And scientists know how you start that first step:  look in the laboratories of other scientists.  So whenever someone wins the Nobel Prize, ten other people come forward to say they did this and that piece of the work.  As in the patent system, that’s true.  So yes, starting with market research is a version of the experimental method, not the scientific method.  Market research should come after you have your new idea, because otherwise you have no idea which market to research, and you can spend a fortune researching exactly the wrong market. 

BE: Thanks for the clarification. Speaking of right and wrong markets, one strategy for finding new markets is Blue Ocean Strategy (BOS), described by Kim and Mauborgne in their book of the same name. Where do the concepts of strategic intuition intercept with the strategy of developing a business in an uncontested marketplace? The BOS concept seems at odds with the advice from Clausewitz, in that BOS advises not to compete directly in a fight for market share but to move to a battlefield where the enemy doesn’t even exist.

WD:  BOS makes the correct observation, after the fact, that the best business ideas create new markets rather than compete within existing markets.  But BOS does not tell us how to get an idea that creates a new market.  In fact, it leads you down exactly the wrong path, by telling you first to identify a new market with nobody in it.  That’s actually a recipe for losing a lot of money, because by far the overwhelming majority of markets with nobody in it have nobody in it for a very good reason:  there’s no money to be made there.  Let’s take Microsoft:  after the fact, we can see that they were the world’s first company to specialize in operating software, when there was nobody else in the market.  But did the idea for Microsoft come from first identifying that empty market?  Of course not.  Bill Gates and Paul Allen had no idea that operating software would be a big business until after their first success – BASIC for the Altair – which they put together from existing elements that were within the grasp of millions of computer geeks at the time.  Their flash of insight brought those previous elements together.  Then they realized they were first in a new market.  First the flash.  Then the blue ocean.  Not the other way round.

BE: “First the flash…” This is one of the main points of your book: that the flash is an acknowledged part of innovation, yet no one before has explained fully what is required to spark that flash. That’s where strategic intuition comes into play. You state, “What triggers active problem solving is the ability to recognize when a goal is achievable…There must be an experiential ability to judge the solvability of problems prior to working on them” (p.47). This speaks to the need for experienced management teams on startup companies proposing breakthrough technology, and experienced teams are something that venture capitalists look for in companies that they are considering for investment. It also speaks to the need for researchers to immerse themselves in their field of investigation if they want to develop their own breakthrough ideas. Yet it is often thought that someone with no experience in a specific industry might bring fresh eyes to problems and not be restricted in their thinking by common wisdom and past assumptions, i.e., they do not have expert intuition for that field. Is this thinking naïve or wishful thinking?

WD:  That quote is from Gary Klein, the world’s leading expert on expert intuition.  But as to your question:  I think the confusion comes from the meaning of “experience.”  Napoleon won his first battle against terrific odds without any previous combat experience.  Yet he had studied all the major battles of history, and so had all the experience of previous generals to draw on.  Expert intuition requires direct experience.  Strategic intuition requires knowledge, which you can get from reading or talking to people.  So yes, someone with no experience in an industry can bring fresh eyes to it.  But it’s unlikely that someone with no knowledge of an industry can do the same.  So someone from the slaughterhouse industry could bring a fresh idea to Henry Ford, who was already in the car business.  But someone has to know the car business too, to understand why the moving rail is such a good idea.  So I guess that argues for insider/outsider teams, where one person knows the industry and someone else brings fresh eyes.  The problem there is that their fresh eyes might not be the ones you need.  So imagine that Henry Ford brought in someone from the shipping industry, not the slaughterhouse industry.  There’s no way to predict which fresh eyes you need.  That’s why my favorite formula is someone with deep industry knowledge who consciously opens their mind to drawing from other fields – like Henry Ford himself. 

BE: I agree completely with what you say. I’ve found that some of the most innovative people I know are those who have a wide variety of intellectual interests and look for inspiration from outside of their field of expertise. How should these people, or any entrepreneur attempting to develop new technology, think about Clauswitz’s decisive point when considering their own business strategy?

WD:  The key to the “decisive point” is the contrast with the “objective point.”  Like everyone else, an entrepreneur must set goals.  But never think they’re set in stone.  An example is Puma, which Jochen Zeitz took over when it was a small, failing shoe company.  He made a tough four-year plan to outsource production and streamline operations.  A year into it, the Beastie Boys wore one of his styles at a concert – the Clyde – and the shoes sold out overnight.  It was a decisive point:  he realized he had a fashion sports apparel company, and threw out his objectives.  The decisive point is where you win.  The objective point is just your current guess on where your latest idea will take you. 

BE: Right, and Zeitz’s strategic intuition enabled him to identify that decisive point and take action. In a completely different field from military strategy, photographer Henri Cartier-Bresson talked about the decisive moment defining creative success in photography: “There is a creative fraction of a second when you are taking a picture. Your eye must see a composition or an expression that life itself offers you, and you must know with intuition when to click the camera.” The decisive point and the decisive moment seem to be similar concepts, both requiring experience from which intuition is drawn, the presence of mind to be looking for the breakthrough, the actual epiphany, and finally the execution.

WD:  My guess is that Cartier-Bresson is talking about expert intuition in that subset of professional fields where there is a lot of waiting and then quick action.  Hitting a baseball is similar.  Martial arts have a whole philosophy and discipline for this.  It shades into strategic intuition if the situation is new enough – perhaps if Cartier-Bresson takes on a new subject, a hitter faces a new pitcher, or a samurai confronts a new enemy.  Napoleon spoke in terms similar to Cartier-Bresson’s about the moment when you make your decisive move in a battle – that is, when the decisive point appears. 

BE: Miss that moment, and you risk failure. One builds up strategic intuition, in a way, to be prepared to take advantage of that decisive moment when it occurs. Do you believe that everyone has the ability to have strategic intuition—to innovate and create that flash of insight that combines elements from the past into something new? How can a company identify individuals who are better at this than others? What steps can be taken to successfully promote the development and application of strategic intuition?

WD:  My own view is that strategic intuition is an ordinary function of the human mind.  Can some people do it better than others?  I have no idea.  We have no way to measure.  Ray Kroc was 52 years old, struggling to sell milkshake machines, when the idea for McDonalds struck him in a classic flash of insight – he called it an “Idaho potato” hitting him on the head.  The day before you would think he had no strategic intuition at all.  The day after, you’d think he had a lot.  Did his capacity for strategic intuition change overnight?  I doubt it.  I do have a survey that shows how close people think to the basic ideas of strategic intuition, so companies could use that, but how you answer a survey and what you do in action are two very different things.  So I’m not sure how to identify people with more strategic intuition.  But I think I know how to promote the development and application of strategic intuition:  that’s what my whole book is about.  First, learn what strategic intuition is.  (That’s in the book.)  Second, apply tools that use it.  (Those are in the book too.)  Third, stop using other tools that inhibit strategic intuition.  This third step is the hardest, and that’s why big companies suppress strategic intuition so much. 

BE: You quote from Napoleon’s memoirs: “I bent my policies to accord with the unforeseen shape of events” (p.76). One common characteristic among many successful startups in Silicon Valley is their flexibility towards their business strategy.  Startups often reach unanticipated roadblocks and their ability to readjust their business plan with decisiveness—to find new applications or customers for their technology and abandon their original business plans–can determine whether they will succeed or fail.  You note that, “He [Napoleon] passed up more battles than he fought, looking for only those he could win” (p.172). This speaks to the need for startups to narrow their focus on what they are trying to achieve. Venture capitalists shudder when they see a business plan with multiple markets being addressed because this indicates a lack of focus for the startups inherent limited resources. Are restricted focus and strategic constraints necessary for the successful application of strategic intuition?

WD:  I think this is actually easier than it looks.  It’s very rare for a business plan to include the most important thing:  what previous elements combined in the entrepreneur’s mind to make up the new idea.  Since that’s not in the business plan, the VC must ask the entrepreneur in person.  If there’s a good answer, the VC will then have as good an idea as the entrepreneur of what markets the idea might or might not fly in, at least to start.  Then as the entrepreneur wants to change strategy, the VC will be up to speed to understand why. 

BE: This being a blog about innovation, I have to ask the obvious question: what is the relationship between strategic intuition and innovation?

WD:  Strategic intuition is how successful innovation happens.  I’ve studied countless cases, and when there was enough information to identify the source of the actual idea for innovation, it was always strategic intuition.  It’s really a simple idea:  for something complex to work, each piece that makes it up has to have worked before, in some way, sometime, somewhere in the world.  Innovators don’t dream – they combine.  How else could it possibly work?

BE: Our discussion has only scratched the surface of the material and insight provided in your book Strategic Intuition. I recommend to those readers of this blog who have found these topics interesting to seek out the more in-depth discussions in your book. Thank you, Bill, for what has been for me a fascinating discussion. Best wishes, and good luck with your book.

Success Lessons from Coach Carr

CarrCoach Carr has resigned as head coach of the University of Michigan’s football team. He leaves as the fifth most winningest coach of all time in the Big Ten, having brought a national championship to Michigan for the first time in half a century. Yet he leaves at the urging of most Michigan football fans because he failed in one non-negotiable requirement of his job. I am a Michigan fan, my cats are named Maizey and Blue, and I appreciate and value what Carr has done for this program. Yet I agree that Coach Carr needed to go.

And this is a key message to be heard by all highly skilled and seemingly successful employees everywhere, from Silicon Valley to around the world. Take notice of Coach Carr.

I am sad to see Coach Carr go, I really am. He achieved greatness for Michigan over his 13–year tenure. Similar success at other universities would have ensured his iconic status and everlasting love among those fans and alumni. But Carr failed to make Michigan competitive against Ohio State University, and at the University of Michigan that is a breach of the unstated non-negotiable requirement to be head coach. Even though Carr has a career record of 6–7 against OSU, his record against OSU’s current coach is a mere 1–6. Not good enough.

Reading the details above of Coach Carr’s extraordinary success at Michigan, the unknowing reader may not understand why his departure was inevitable. His departure may be even more perplexing given the value that Carr brought to his players. By all accounts, Carr is one of the most decent coaches in Division I football. Coach Carr has been a players’ coach, looking out for the well-being of each student player in his team, providing life-lessons that will help them well beyond the last time that they touch a football, and as a result engendering their everlasting loyalty towards Carr. Players truly love him.

But failing on one key requirement has forced Carr’s departure from Michigan.

And this is a key message to every motivated, achievement-oriented worker in the US. Know the fundamental requirements of your job. If you don’t know, ask. Because if you don’t meet those requirements—that one key “achieve this or else,” possibly unspoken component—then you will be lucky to survive no matter how successful you are in all the other aspects of your job. Just ask Coach Carr.

SF Mayor Gavin Newsom, whom I recently posted about, sent this message loud and clear to senior city officials: two months ago, he told them to submit letters of resignation. All 400 of them. Now, most if not all of those letters he intended to reject. So why would he ask them to submit a resignation letter if he didn’t plan on accepting it? I believe Newsom wanted to send the exact same message that I’ve been talking about: that no matter how well they have played the political system and become comfortable in their job, San Francisco officials have a non-negotiable requirement to meet the needs of the citizens of San Francisco. Fail to meet those needs and your job is at risk.

Such messages can be valuable wake-up calls to anyone—the mere knowledge of their existence can be job-saving. Unfortunately, most people don’t have the in-your-face warnings received by those under Newsom, or have the obvious demands of their job laid bare like they are to every Michigan football coach. Which is why every employee, particularly those who have achieved success in their job, needs to understand what their job’s non-negotiable requirements really are, and whether their successes satisfy those key requirements or are simply nice-to-haves.

Coach Carr knew what his key requirements for success were, but unfortunately in sports one’s success does not lie in one’s own hands. Carr was unable to succeed in the most important demand that his job required because of many factors out of his control. And for this failure I am very sad. Carr is a great coach and deserves a better retirement than he is getting. His memory will be blemished in a way that many will call unfair. But I also understand that there are non-negotiable requirements that must be met by any coach of Michigan Football. And under Coach Carr, those requirements were not met.

So, with a lump in my throat, that’s the end of story for Lloyd Carr, a man whose career almost anyone would envy and admire. Do envy and do admire.

As always, Mitch Albom has honorable and tear-worthy words by which to remember Coach Carr. For what it’s worth, I still occasionally re-read Albom’s near-poetic words written upon Bo Schembechler’s death. Bo spoke about the honorable Michigan tradition when he first took the Michigan head coach job. Both Bo and Carr have indelible added to that tradition.

Newsom Insights

San Francisco is a surprisingly small city considering its world reputation (7×7 miles with a population of 750,000), and it’s not uncommon for city residents to run into people of note in ordinary situations here.

I found myself last night sitting beside and talking to San Francisco Mayor Gavin Newsom in the cafe section of a downtown SF restaurant. Mayor Newsom is someone whom I have admired since he’s been in office—he’s made many tough but innovative decisions about how to run the city. This is a particular challenge because the mayor of San Francisco has to make decisions that are impactual and assessed on a local, national, and international scale—pressures that the mayors of most cities do not have to worry about. It would also be easy for a mayor of this city to simply focus on local issues (after all, it’s the residents who will re-elect him) and ignore the city’s potential influence on the rest of the nation and the world. In my opinion, Newsom has been effective at these different scales exceptionally well—addressing the demands of city residents such as myself while making decisions that will impact the rest of the country and the world.

Because of this, Newsom has also been subject to pressures and criticisms at the local, national, and international scale. Problems with the homeless remain a constant pressure on the mayor locally, Newsom’s brief gay marriage allowance has been blamed nationally for the results of the ‘04 presidential election, and just this weekend the mayor seems to have upset China over his decision to cancel a planned trip to China in order to oversee the recent oil spill in the San Francisco Bay. Yet despite these pressures he still has to deal with more mundane city issues such as making an appearance at the opening of a new tourist-friendly plaza in downtown SF.

Despite the incredible challenges that face prominent politicians such as the mayor of SF or NYC, business executives typically views politicians as a disreputable lot whose skills who have little to offer those seeking to improve their practices in corporate America. If one wants to learn how to be a better manager, entrepreneur, or CEO, one reads books by Lee Iacocca on how to reinvigorate a company or articles in the Harvard Business Review on how GE injected innovation into their development process. Certainly, I’ve tried to learn from prominent executives and entrepreneurs that I’ve met in Silicon Valley. Whether it’s working alongside a serial founder of successful startups, having business meetings with famous VCs, or chatting over dinner with chief executives of a multi-billion dollar technology companies, I’ve felt that I’ve learned successful traits and habits from many business people with whom I’ve interacted. The one group of people I have not looked to nor expected to find guidance from is politicians.

That’s why I feel that I had an epiphany while talking with Mayor Newsom. What struck me the most about the conversation was the extraordinary variety of issues that the mayor has to deal with on a daily basis, and how the breadth of these responsibilities overwhelm typical issues that face corporate CEOs. Yet it’s the latter group—CEOs, captains of industry, prominent VCs—to which people like myself typically look for advice on how to be effective in the workplace, through case-studies and lessons-learned in books, magazine articles, and blogs. Learning from politicians is completely off the businessperson’s radar.

Listening to Mayor Newsom detail how he’s addressing the various issues facing San Francisco—keeping the 49ers in from moving to another city, solving the recent oil-spill crisis, preserving the city’s benefit from tourism, improving the city’s homeless situation, working with both the state and federal government on city problems—makes corporate issues of dealing with stockholders, organizing sales and R&D teams, and increasing market share almost trivial by comparison. This isn’t even considering the fact that the mayor faces public scrutiny of his every move and behavior the likes to which no CEO has even been subjected.

I’ve written quite a bit on this blog about the nature of leadership and the skills necessary to run startups and technology companies. It was clear to me last night that being the mayor of a city like San Francisco is a more complex a job than the role of CEO in most, if not all companies. It was also clear that there is much that can be learned and applied to business from the methods of effective leaders in challenging political roles, such as Gavin Newsom in his current mayoral role.

Time management, e-mail control, collaboration, communication, delegating, employee optimization, meeting customer needs, decision making—these are all topics about improving effectiveness in business that are discussed endlessly in blogs and books targeted to every level of employee. We typically look for people like Jack Welch to teach us how to be more effective managers. The fact is, however, that each of these aspects of the work process are honed to razor-sharp effectiveness by politicians like Mayor Newsom, and we could well be better served by examining the processes that they incorporate into their day-to-day actions.

That’s not to say that business books and magazines like that Harvard Business Review have no value. For sure, some of the organizational approaches of Mayor Newsom overlaps with the current wisdom of corporate America, whether its differentiating between incremental vs radical innovation as described by in The Innovator’s Dilemma or making sure that you have the right people on the bus as advised in Good to Great.

Still, I’d love for someone to shadow Mayor Newsom and relay how he optimizes his day-to-day time management of business practices. This would be information that could be valuable to employees at every level in a corporation and would likely represent best-practices that exceed even the strictest disciplines of corporate CEOs.

Funny how a random meeting at a unplanned stop can have such an impact on one’s thinking.

The Physics of Pricing

The Associated Press had a great article that I read today (in the SF Chronicle) on the use of advanced mathematics to help determine product pricing strategies. So-called price-optimization tools from companies such as Khimetrics (acquired by SAP) and Zilliant analyze massive amounts of historical sales data to find clues for better pricing that would be difficult to discern without their sophisticated models. (These software systems cost in the 7–figures—assuming that Khimetrics&Zilliant apply their own analysis to their own pricing in a kind of post-modern self-reflexive business analysis, their customers must be hugely self-conscious about the “optimization” of their bill).

PhysicsThis whole field of analysis in part began, according to the article, when Khimetrics’ founder, Ken Ouimet, was studying complex systems in a university Physics department and he epiphonied (which should be verb) that shoppers have no more sense than a hydrogen atom (or something like that). Next thing you know, mathematical models developed to simulate the motion of atoms in gas are being used to model the purchasing behavior of beer-and-Doritos-buying consumers.

The article and its sidebar have several interesting examples of the successes  of these systems. The systems determine, of course, which products have price elasticity and which don’t. That’s not necessarily difficult for experienced retailers to figure out. What is difficult is to fine-tune pricing on a huge inventory of widely differing categories of products with barely discernible differences within categories.

What’s even more interesting is their analysis of relationships between products and subsequent recommendations to exploit correlational behavior. Beer drinkers, for example, will pay careful attention to price when buying their brew (“10 cents cheaper? Mickey’s Big Mouth for me!”) , but will snatch up snacks to go along with the beer with little concern for cost. So, drop the margins on beer and crank them up on Cheetos—balance this adjustment correctly and you’ve just increased your bottom line.

And guess what? Those consumers care even less about price during big sporting event weekends—turn the pretzel-price up even higher during NCAA Tourney action! Increase the price of mint leaves during Kentucky Derby weekend and you’re golden. Who would have thought that sophisticated mathematics could improve the profitability of such unsophisticated businesses as Safeway’s and Albertson’s.

Personalization/Individualization is a consumer theme that has hit practically all consumer markets, with the extreme perhaps being the ability to completely customize your Nike shoes online so that no other shoe in the world is identical to the pair that you buy. This is normally viewed as empowering for consumers: a good thing.

Consider now the logical continuation of price-optimization. With store cards (e.g., Safeway cards) that people use to take advantage of item discounts, companies are amassing large amounts of personal information that can be correlated with buying habits. Cross-correlate this data with other databases that can be purchased from other sources, and the ability to personalize pricing becomes incredible once price-labeling become easily and quickly changeable (be afraid when grocery store prices are shown with LCD displays).

Herein lies the dark side of too much power from too much information.

Your price-optimization consultant tells you that students coming back from the bar after midnight don’t care too much about the price of frozen pizzas? Nudge those babies up by 15 cents every late-evening and watch your profits climb. Obese people less sensitive to the pricing of chocolate truffles? Put a weight sensor in the gourmet candy aisle. Mercedes drivers less discriminating towards wine prices? Do I really have to spell out for you what to do?

The AP article I mentioned at the beginning of this post predicts that store prices will become more like the mystical pricings of airplane tickets, and I doubt many consumers will relish that thought. Have you ever heard anyone say they wish other businesses priced their products like the airline industry? Where two people sitting beside each other who bought their tickets on the same website pay wildly different prices because their purchases were on different days? Imagine that you are in the register line at Virgin Records with the latest Bond DVD in hand, and the person in front of you buys the same DVD causing the price of your identical DVD to increase by $1. Welcome to the world of airline pricing strategy!

The days of setting prices based on a fixed margin, on prices from competitors, or simply on an incremental increase over last year’s prices is becoming a fading, quaint tradition. Welcome to the Machine.

I sound cynical, yes. But still…

I have to appreciate the evolution of process sophistication. Of modern thinking challenging and overcoming the wisdom of experience (goodbye Willie Loman). This is the essential nature of science, of business, of innovation: new ideas obsoleting the currently accepted lore. I particularly like seeing advanced mathematical theory being applied to such innocuous business processes as the pricing of ketchup. Luddites take note!

Truth be told, I’ve always had a warm spot towards the practical application of esoteric mathematical theory. In fact, since my college days I’ve had a warm spot towards the mathematical discipline of Information Theory (welcome “information theory” googlers!), probably because I tried a long time ago to apply it to neural signals and failed completely (but others eventually succeeded).

Information theory tells us, well, how much information is in something and how much information can be transferred by a transmission channel. How informative is the weatherman in San Diego when all he predicts in every forecast is that the weather the next day will be sunny and in the 80s? Even if is accurate 95% of the time? Information theory would tell you that his information content is low because there’s not much information in declarations of a near sure thing (Listen and be astounded: I am here to tell you that you will take a breath in the next 60 seconds! See?! How amazing is that?).

That being said, my prediction is that the next New Thing in business/marketing will be an information theoretic approach to marketing. Some marketing channels will be proven to have much more information capacity to target consumers than others, and the capacity of each channel will be calculated to the nearest bit, allowing companies to charge millions of dollars for advice on which channel will provide the highest information ROI for your marketing message. Advertising a NASCAR race on American Idol, or promoting hearing aids in Mad Magazine? That’s less than 1 bit of advertising information. Advertising for either product in Golf Magazine, however—that’s called maximizing your channel capacity.

Informationtheory.com is already taken. Marketinginformationtheory.com is not. What’s your guess on how long until all of the latter’s related domains are taken?

Corante in BusinessWeek

The Corante Innovation Hub, of which I am a part, is mentioned in the October 9 issue of BusinessWeek (subscription required to see the link). It says that the Corante Innovation Hub is the place

to get top-quality entries on innovation and creativity all in one place…It adds up to a mix of new voices, helpful context, and ahead-of-the-curve musings on everything from design to the newest ways to measure innovation.

Of course, we get press right when there’s a down-time in my blog from my own personal chaos (for those following, I close on my house tomorrow and move this weekend—expect posts to become more frequent soon thereafter).

I’m glad that my colleagues and Corante are getting recognition and, hopefully, increased attention for their hard and thoughtful work. I also can’t wait to get back to normal life and start posting again—amazing how much I miss it.

BusinessWeek Gets, Fumbles Innovation

The latest BusinessWeek (BW) magazine (June 19 issue) includes a 32–page insert called Inside Innovation. It’s a new section that will be offered quarterly. I’m sure that I’ll be reading several new posts from my fellow Corante Innovation Hub bloggers on this new mini-mag, so I thought I’d get my thoughts down before they become influenced by the comments of others (I look forward to reading others’ thoughts after I write this).

A BW editor explains this new offering by saying that “innovation is ‘the new black.’” To those who have been wearing black for a while, this declaration of popularization might suggest that it’s time to find a different color. With a mainstream presence comes popular acceptance, however, so those who have had difficulty promoting innovation tools and processes in the past might now start finding greater acceptance of these concepts among corporate executives—not a bad development at all.

Let’s take a look at what’s inside Inside Innovation.

inshort is a Wired Gadgets-style array of interesting innovation tools&trends, such as cards to inspire creativity or innovation camps.

inproducts gives a short description of a cool car—eye candy that could be confused for an advertisement except for the fact that no one would buy print ad space for a $722,534 car.

intouch gives a hip print layout of a BW blog, including Recent Comments and Recent Posts. I’ve got to admit, printing a BW blog post in their magazine is certainly creative, but it feels akin to printing the results of a Google search.

inprofile tells us about the director of the IIT Institute of Design in Chicago. The story begins with interesting details about the program he’s created but ends with PR-like information that doesn’t quite belong in a business magazine on innovation. I was disappointed that I didn’t learn more about the school than the sketchy details on its curriculum or receive concrete examples of what its graduates are doing to bring design innovation into companies—the school does sound fascinating and innovative.

indepth is easily the most interesting article for me. It provides informative, albeit short, profiles of “five archtypal achievers from the in25, our list of forward-thinking leaders.” There is perhaps nothing new here that one hasn’t read in other online and print sources, but it has rich content for those looking for examples of how innovation happens in successful companies. Reading these case studies got me thinking about how I could incorporate their concepts, and that’s the best that you can ask of such an article. As a bonus, we are provided with 9 Notions of Innovation from Google’s innovation gatekeeper, Marissa Mayer, and photos of books on these innovators’ shelves that presumably identify sources of inspiration, e.g., The Big Moo, Rules of the Red Rubber Ball, The Wisdom of Crowds. (Congrats to fellow Corant blogger Chuck Frey for having Innovation Tools listed as one of the five profiled achiever’s favorite blogs).

indata gives graphics on…data, e.g., 32% of the world’s languages are from Asia, and there are 874 million native Chinese speakers. Some of the graphical data is interesting, but some are difficult to interpret what their relation is to innovation.

inprogress provides an interesting short account of how Bank of America created their Keep the Change service, with the article sectioned by The Problem, The Research, Prototyping, and Marketing. I found it interesting that BofA developed this financial service with the help of an unnamed “innovation and design research firm in Palo Alto, Calif.” using IDEO’s approach of customer observation, a procedure typically associated with consumer product design.

inblogs recommends three blogs on innovation, two of which I already read. The blog that you are currently reading is not one of the three, heh.

indesign provides a Wired-style product rave that is essentially a full-page ad for the Xbox.

insight concludes Inside Innovation with five tips for introducing innovation into your company, provided by the founder of Jump Associates. Short and reasonable advice.

As you can tell, I found this mash-up between FastCompany and Wired Magazine to be below the typical standards of BusinessWeek. This is unfortunate, because it may reinforce the BW editor’s notion that innovation is a flavor of the week that is not to be taken as seriously as the rest of the BW content. I hope that BW continues with Inside Innovation but that their writers and editors give it the level of journalistic seriousness that is provided to the rest of the magazine’s content.

Edit (6/15/06): Looks like I’m not the only one with these opinions.

Culture Clubs Innovation

Jeffrey Phillips posted some interesting thoughts at Innovate on Purpose about what he learned at this year’s Front End of Innovation conference.

Jeffrey learned from talking to attendees that their biggest problems with creating innovation within companies was not process-related or tool-related but culture-related. I was surprised at first by this finding—I’ve posted before on how companies acknowledge that they need to innovate but the biggest problem they face is not knowing how. Whirlpool was the classic example of a company that found out they couldn’t just say to its employees, “Let’s be innovative, everyone,” as if they were a corporate version of the young Mickey Rooney and Judy Garland inspiring their friends to solve a problem by enthusiastically exclaiming, “Let’s put on a show!”

Innovation Obstacles ShadowBut on second thought, the complaints that Jeffrey heard at the innovation conference make sense. First of all, the IBM CEO Global Study on Innovation that I recently reviewed states explicitly that corporate culture is an impediment to innovation. The chart to the right is from that study and plots the top six most significant internal obstacles to innovation, with the numbers corresponding to the percentage of CEOs who named each entry as an obstacle. The results show that the biggest obstacle to innovation is corporate culture. One CEO explained this by saying,

Employees behave as if it is inappropriate to rock the boat.

This is one of many reasons that an innovation process needs to be put into place. If employees see that their company has gone to a great effort to recruit their ideas, they will be more likely to participate. A complete process needs to be in place for this to work, however, because recruiting ideas is only the first step in the process and without the right followup steps, employees will consider their efforts as wasted.

Jeffrey goes into detail on what he thinks the specific corporate culture roadblocks are. Read his post for a more complete discussion, I’ll simply highlight his thoughts here and provide my own.

Lack of Motivation
Jeffrey notes that most employees need to be motivated to participate in a new process. Given the comments from the CEO survey, I would say that this is particularly important if a company expects employees to offer ideas that are different from the current direction of the company or the “obviously correct” approach of the industry.

Jeffrey says that tying compensation to innovation is one way of addressing the motivation issue. To my knowledge, most companies reward employees for contributing to their patent portfolios, so doing the same for their innovation process is an obvious move. I would guess that many companies do not have a formal compensation policy in place for innovation as they do for patents. If pressed, those responsible for these decisions would say that this is what bonuses are for, but those are often too ill-defined and abstract, or simply absent, to be motivating factors.

Making senior management’s support for innovation visible is another suggestion of Jeffrey’s, although I’ve already discussed why this often is no more than lip-service to generating innovation within a company. I prefer Jeffrey’s suggestion to develop innovation metrics that measure the success of the process and people’s contributions to it. This would go hand-in-hand with creating a formal innovation process that is as well-thought out and implemented as most companies’ patent process.

Size and Complexity
Most companies are too big and organizationally complex to easily implement a corporate-wide innovation strategy, so nothing gets implemented. Jeffrey rightly suggests that this can be resolved by starting small. Pick a unit within the company and develop an innovation process. Once success is demonstrated within this unit, expand to other areas within the company.

The only problem that I see with this approach is if the development and implementation of innovations that get generated within the small unit requires other units to prove its success. For example, if an innovative user interface is developed through a group’s new innovation process, then sales&marketing and the rest of R&D are going to be needed to productize this innovation and demonstrate the financial value of what that unit’s innovation process has produced.  I offer this more as a caution rather than a criticism. Starting small before going big makes a lot of sense and drives many other business models.

 Cost
Any new corporate process is going to cost money, both in tools, people’s time, and perhaps the support of outside consultants. A company’s obsessive focus on expenses and safe ROIs will limit any new developments within a company and limit them to licensing proven successful technology from others that invested in innovation. They will rarely be technology leaders in their field and will continue to produce products with lower margins and prices than their more innovative competitors.

Jeffrey says that not developing an innovation process is short-sighted given the potential benefit that can result from increased innovation within a company. I suggest that the previously offered solution to Size&Complexity—starting small and proving value within a small business unit before going corporation-wide—is probably also the best solution to the Cost roadblock. Start small, limit costs, and prove value. The success of this approach, of course, may have the same difficulty that I mentioned previously: wide corporate involvement and greater expense may be necessary to prove the value of the innovation in the consumer marketplace.