Clarifying Disruption: Operations vs. Innovation


Part 1 of Series

The word disruption has multiple meanings in global business with the most commonly used definition some variation of “the act of interrupting continuity”.  Within the context of logistics, supply chain, manufacturing, IT, and other business operations, disruption is obviously an experience managers work diligently to avoid.  A good example of a recent operational disruption was caused by the Sendai quake and tsunami; a natural disaster which was unpreventable, but predictable and therefore can be mitigated with careful risk management planning.

In the context of innovation, however, and long-term economic survival, disruption can be paradoxical when “the act of interrupting continuity” of tightly controlled markets, stale products, and outdated business models is not an evil, but rather can be a savior to businesses, ecosystems, and economies, preventing eventual operational disruption, or as we’ve seen in many cases—complete failure.

Animal Instincts

Central to the theme of disruption in innovation is the nature of our species.  We humans tend to be creatures of habit even when presented with evidence that the behavior is self-destructive in the long-term.  In similar fashion, individuals and organized groups such as governments and corporations often refuse to change behavior even when continually presented with evidence that the cost of the short-term comfort zone may well be long-term survival, and of course fear and greed are ever present.

While resistance to change is often strongest in absolute monopolies, similar cultures are commonly found anywhere deep disequilibrium exists in the tension between security and progress, speaking to the need for competition.  Entire industries or regions can become static relative to the world quickly today, displaying little evidence of awareness in decision making.  Mix in a heavy dose of risk averse corporate cultures, conflicting (real and perceived) interests internally and externally, a bit of PR spin, and regional translation leakage between multiple native languages, confusion surrounding the issue of disruption becomes the norm rather than the exception.

History is overflowing with examples of the high costs of failing to intentionally disrupt the status quo with innovation.  A few recent cases that come to mind include:

Government

  • Failure to disrupt poor U.S. fiscal management and lack of accountability (in part with innovation) over a long period now threatens operational disruption

  • Failure to disrupt the U.S. healthcare and public educational system has greatly exacerbated the U.S. fiscal challenge, reflecting why prevention of negative spirals with continual improvement is so important

Mobile Technology

  • Nokia’s failure to maintain leadership in smart phones is now significantly impacting not just Nokia, but Finland’s national economy

  • Rim’s response to the iPad, which seemed unable to take the risk to cannibalize, failed to physically disrupt by tethering the Playbook with the Blackberry phone

  • Border’s failure to embrace disruptive digital publishing ended with liquidation

Offensive and Defensive Strategies

The need to disrupt static cultures, reform or replace decaying business models, and introduce competitive products is well known in management circles of course, so many kinds of offensive strategies, tactics, and systems have been crafted to overcome this age-old challenge, including motivational techniques, educational tools, recruitment practices, incentives, internal R&D, outsourcing, partnering, spin-offs, join ventures, acquisitions, IP licensing, and strategic venture capital. Quite a few companies have prospered through multiple business cycles employing a variation of all of the above in a persistent quest to achieve and maintain an optimal balance between growth and risk over the short-term and long.  The number of companies achieving mediocrity upon maturity is far greater, however.

One common method of defense is the formation of cartels, particularly with commodities or commoditized products that are susceptible to innovative new comers or companies moving into their markets.  Cartels and oligopolies can generate high margins for long periods of time and form very strong barriers to innovation, but eventually market and trade imbalances combined with innovation and conflicting interests of the members begin to fragment the cartel and erode market power, opening a window for competition that has proven to be healthy for incumbents, markets, and economies.  When economies stagnate, it’s generally a sign that incumbents have too much market power, usually achieved in part by manipulating the political processes, which is just one reason of many why corruption should be avoided.

The word cannibalism is sometimes used to describe what is often a difficult internal corporate process of intentionally replacing aging products that are still providing a significant portion of cash flow, with more competitive products. Another term used to describe disruptive innovation in the broader economy is creative destruction, popularized by Joseph Schumpeter in the 1940s, which describes the theory of replacing the old with the new in the entrepreneurial process. In the modern global economy, situations and cultures that allow progress without disrupting entrenched interests are quite rare.

In part 2 of the series, we’ll explore how innovation is beginning to revolutionize the innovation process in the digital enterprise.

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Overcoming the Enterprise Differentiality Paradox


The low cost of replication with digitized products has long been known to be seriously disruptive in the music and publishing industries. However, the conflict between low cost replication of business software, rigid architecture, and customer differentiation relative to the broader economy is not generally well understood, although vitally important.

When enterprise software matured to the point of early adoption in the 1970s, it provided a substantial competitive advantage to those in a position to leverage wisely. Followers of the early adopters did so largely due to the perception by decision makers—based on compelling evidence—that adoption was essential to their future, and so the great commoditization cycle in enterprise software had begun. In the early 1980s a very similar pattern began with front office software, captured primarily by Microsoft, with commoditization slowly gaining strength in the 1990s.

While front office software could be neatly packaged and sold in storefronts or through consultants for desktop installation, back office systems for operations required on-premise customization and integration with incompatible systems, meaning a very large investment with ongoing maintenance, and high costs for adaptation. Within a few years, custom applications were increasingly sold as products, exploiting the nearly free replication costs, but this benefit was not without cost as wider adoption of back-office products soon began to erode the competitive advantage; the commoditization cycle was in motion.

In addition to the direct impact of commoditization on the software industry, which is well understood in business and finance, another dynamic was occurring that was considerably less visible and largely misunderstood, which is the impact on organizations when the vast majority worldwide are using the same operating and decision systems. As software systems became more ubiquitous, competitors in industry after industry were increasingly using similar systems, which began to extend the software industry’s commoditization to customers, and by extension the broader economy. This dynamic extension of commoditization evolved in conjunction with globalization and consolidation of industries over the past two decades. Indeed, the commoditization of business software acted as a catalyst to global consolidation of industries as business software customers were increasingly competing on price rather than value added differentiality. Competing on price alone with reasonably good management dictates outcomes that are primarily due to scale, particularly when automation systems are very similar between competitors; not quite singularity in the enterprise given the current maturity of technology, yet trending in that direction. Lack of differentiation does not a robust, durable economy make; competing on scale and price alone is a race to the bottom for everyone but market leaders.

This situation may at first appear attractive for business software vendors and their investors, particularly market leaders, as managing a commodity that has become essential can be a lucrative annuity. Dancing with complexity in technology, however, contains considerable risk of broken toes, particularly with software, which is anything but a finite resource. History has proven that substantial risk exists for incumbents that commoditize their customers.

Enter the Internet and Web, followed by cloud computing, and much smarter mobile adoption. Taken together with advances in hardware, software, semantics, analytics, and organizational systems, the opportunity to introduce truly adaptive enterprise computing in near real-time has finally arrived. It’s been a long voyage; one full of discovery and adventure which I hope will prove to have been worthy of our patience.

Innovation in the Enterprise


One of the better reports on innovation in the enterprise was published by PWC, so I wanted to share a link to it and provide a few comments.

Generally speaking this report supports most of the claims we’ve made at Kyield during our applied R&D journey, including knowledge systems, the power of semantic search, an integrated systems approach to the innovation challenge, and what the role of the CIO should be, among others.

What I do not see discussed is the importance of meritocracy, although to be fair to PWC they discuss it elsewhere in detail; nor is there much discussion on the need to protect the ideas of the best and brightest in social environments, without which those ideas are likely to exit and become disruptive.

In the digital world, despite the needs of individual members of the ecosystem, one cannot (nor should not attempt to) silo innovation from crisis prevention or meritocracy, meaning also the need to embrace management of internal cannibalism. Let’s not forget our important lessons of the broader needs of the economy with respect to creative destruction, or we will indeed likely continue to see a continuation of jumping from one systemic crisis to another. So while they have done better than most revealed publicly, it does not appear that they have completely mapped the innovation genome.

That said, this report by PWC is worth serious time and reflection. Their domain is after all, like thousands of other market leaders, frequently found in our web logs.

Mark Montgomery

Clever is Cute as Sustainable is Wise


If the financial crisis confirmed anything, it is that the majority of humans are followers, not leaders, and that leaders throughout our society have yet to capture the significance of technology to their members and organizations.

One of the primary causal factors cited by thought leaders in studying crises is poor leadership, to include those who accept misaligned or conflicted interests. When we see “skimming off the top” in others we label it corruption, yet few see it in themselves at all, or choose to ignore it, resulting in the same outcome. While balance is obviously needed for survival—indeed managing that balance well is key for modern leaders, when we over-emphasize short-term profits, we then elevate the influence and power of those who are skilled at winning very short-term battles, rather than long-term wars. I have personally experienced that strategy in organizations and observed it in many others; it doesn’t end well.

One problem with the short-term leadership model is that the skills for software programming, instant trading, manipulating markets, or otherwise amassing great wealth quickly, does not necessarily translate to good leadership in a private company, government, or stewardship in philanthropy. Indeed, in my own observations and those of many others, quite the opposite is often true, yet our information institutions instruct society to emulate the clever rather than the wise. Should we be surprised then at the trend line of manipulation, polarization, and ever deeper crises?

Unlike the early days of the industrial revolution, in the second inning of the information revolution we now understand that most of the challenges facing the human species are long-term in nature, so we must realign our thinking and structures accordingly, including financial incentives and leadership development. Alas, since the long-term has been greatly compressed by consistent failure of short-term behavior, our entire species must now learn to act in the short-term on behalf of our mutual long-term interests. Easier said than done in our culture. The good news is that it’s quite possible…tick-tock, tick-tock, tick-tock.

The process of identifying, mentoring, and recruiting strong leaders often consists of conflicting advice that tends towards self-propelling cultures, regardless of organizational type. In addition to skill sets and track records sketched from misleading data, leaders are often selected based on ideology, dysfunctional networks, and susceptibility to peer pressure, instead of independent thought, good decision making, and wisdom.

Given the evidence, a rational and intelligent path would be to reconstruct our thinking and behavior surrounding the entire topic of leadership and organizational structures, and then tailor that thinking specifically for the environment we actually face, with tools specifically designed for the actual task. For many cultures, such a path begins by emerging from deep denial and embracing evidence-based decision making. Once emerged from the pit of denial, they soon discover among other truths that resources are not infinite after all, personal accountability is not limited to the inefficiencies of organizations, and that both the problems and solutions we face are inextricable from computing, organizational management, and personal accountability. Only then will the path to sustainability began to take shape in the vision field in sufficient form to differentiate the forest from the trees.

Yet another of the many disciplines related to this topic defines psychosis as a “mental disorder characterized by symptoms, such as delusions that indicate impaired contact with reality”.  An appropriate translation of insanity might be “refusal to adopt tools and models designed to achieve sustainability”, aka survival.

If this sounds familiar in your organization, it could well be traced to your leadership development model and process, for leaders are the decision makers who have budget authority. Perhaps it’s time for your organization to redefine strategic from clever to wise, and synchronize the organizational clock with present-day reality?

Semantic enterprise elevator pitch (2 min video)


Thoughts on the Santa Fe Institute


A topic of considerable thought, discussion and debate for many of us long before a series of ever-larger crises, the Santa Fe Institute (SFI) chose the theme of complexity in regulation for their annual meeting this week. Prior to sharing my thoughts on the important topic of simplifying regulation in a future post, which will be covered more extensively in my book in progress, I want to focus a bit on SFI.

I was fortunate to attend last year’s 25th anniversary meeting at SFI, but this year I was only able to view the final full day via webcast, which was excellent. The official SFI about page can be found here, although having written many of these descriptions myself; I’ve yet to write or read one that captures the essence of the organization, people, or contributions, so please allow the liberty of a few additional lines in first person.

I have been following SFI regularly for over 15 years, and since moving to Santa Fe nearly two years ago have had many interactions. SFI essentially pioneered complexity as a discipline, but has also been a leader in what I refer to in my own work as a mega disciplinary approach to discovery, without which frankly many researchers and their cultures can become blinded, and discoveries stalled, with R&D performing substantially below potential.

One of several strengths at SFI is their ability to draw from a very broad universe of scholars, each of whom is a leading expert in a specific discipline, but also share an interest in complexity theory—which affects everything else, as well as the need to work across disciplines to optimize learning.

The intimate size and environment of SFI is no doubt partially responsible for attracting so many leading scholars to contribute and engage. After living in Santa Fe, visiting the campus and attending multiple events, with a great many exchanges with larger institutions for 30 years, I can certainly understand the appeal for permanent faculty, visiting scholars, post docs, and business network members.

This year’s event was organized by Chris Wood and David Krakauer, who are two individuals at SFI I have had the pleasure to get to know recently (forgive my informality here; it comes natural). David heads up the faculty and Chris divides his time between research, administration, and running the SFI business network. These two represent a diverse faculty and also make an interesting combination, with Chris being the calm diplomatic type while David exudes sufficient rebelliousness at times for me to wonder, despite his brilliance, how he prospered at Cambridge (due to my own rebel instincts and frustration with academia), until reflecting on his current role. It is precisely the challenge when shepherding deep diversity that brings out the best in people; one of several skills David demonstrates when leading groups.

A good way to learn more about SFI from afar is to view a sample of their research online, including videos. Their model, however, like many—is not perfect, as the institute is substantially dependent on donations in what has been a very uncertain time and economy of late, so for those who may be seeking a worthy tax deduction this year, I would urge you to consider a donation.  For larger corporations and foundations, I recommend exploring the SFI business network, which is similar in many respects to the experimental virtual network I operated in the late 1990s, but also benefits from the physical conference interactions throughout the year, not just with SFI scientists and staff, but also with other business network members. Several of our network members have also been business network members of SFI, so I have known quite a few over the past dozen years, including Franz Dill on our Kyield advisory board who represented P & G for many years at SFI. For corporate and foundation executives in particular, I highly recommend viewing a short video interview with SFI Vice President Nancy Deutsch to explore relationship options.

Unlike universities and federal labs that grew large physical empires with massive overhead, the small size of SFI, fewer conflicts, independence, location and talent attract exceptional human quality, providing a rare situation certainly worth preserving and improving. My hope for SFI is that the community and entity will continue to adapt, evolve, and forge a strong and diverse financial structure that could become a model for the future.

While it may not always be obvious to some of my colleagues in business and finance, the independent theoretical research produced by SFI is essential for thinking through and eventually helping to overcome the world’s most pressing challenges, which is from my perspective excellent long term strategic alignment for any mission statement.

Mark Montgomery
Founder & CEO
Kyield

Myths and Truths about Innovation


In my daily filtering of news and intelligence, I usually find one or more quotes on innovation that blatantly abuses the term for some other agenda. While such efforts are obvious to me, they are obviously not obvious to many or presumably such attempts would not receive so much digital ink. It’s an issue that has bothered me for many years, with almost daily reminders so this morning I am taking a bit of time to clear the air.

What innovation is, but is rarely reported to be

  • A highly complex system when functioning well

  • An essential foundation for economic security and job creation

  • Reflected by a substantially new  improvement, method, or function

  • Rarely revolutionary, although often disruptive & threatening to some/many

  • Can also be defined as invention and/or V/V, but often is not

  • Individually can range from extremely simple to extremely complex

  • Can be sourced either from individuals or within group (s)

  • A creative process usually requiring discipline and inspiration

  • Often described by great innovators as a spiritual experience

  • Substantially dependent upon cultures and tools

  • Affected by incentives and disincentives; macro and micro

  • Driven by motivational factors, which must be tailored

  • Increasingly dominated by digital workplace architecture

  • Substantially a bottom up process, not top down

  • Impacted by CEO leadership within and across organizations

  • Copied every day by predators worldwide

  • Harmed by unstructured/open systems in the long-term (exploitation)

  • Often killed internally by combination of apathy, dysfunction, and fear

  • Usually dependent upon wisdom of customers and distributors for adoption

  • Often requiring salesmanship for adoption

  • Normally requires substantial investment to market in sustainable manner

  • Highly susceptible to distractions, noise, and multi-tasking

  • Negatively impacted by organizational layers

  • Damaged by large administrative budgets (5% good – 40% fatal)

  • Often killed by industry eco-systems due to protectionism

What innovation is not, but is quite often spun to be

  • Related to R&D budget size, unless a super collider, space shuttle, etc.

  • Related to politics, with rare exception

  • Nearly as impacted by physical location as many claim

  • Necessarily related to degrees and formal education

  • Protected by society, justice system, or organizations

  • Better in large organizations—quite the opposite is usually true

  • Necessarily recognized by customers, particularly until tested

  • Helped by bureaucracy in any way, shape, or form

  • Usually assisted by ubiquitous IT, unless theft is factored as beneficial

  • Necessarily of higher quality in academia, gov, or corp labs

  • Easy, durable, or normally of a short duration

  • Helped by exploiting the most creative

  • Necessarily adopted even if badly needed or invaluable

  • Impossible to measure, track, visualize, and incentivize

  • Well served by current IT systems and/or most organizations