Tuesday, April 22, 2014

Conditions where innovation thrives

There's an old joke that I've used before to make a point.  It draws on the stereotypes we have of people from different countries in Europe.  Basically it goes something like this:
Heaven is where the French are the cooks, the Italians are the lovers, the Germans run the trains and the English are the police.  Hell, on the other hand, is where the English are the cooks, the Germans are the lovers, the Italians run the trains and the French are the cops.  The idea is to play on various stereotypes that we have about what's "best" and "worst" about each country's citizens.

I was thinking about this joke and an analogy recently when talking with a colleague at lunch.  We were talking about what would make the perfect conditions for innovation.  Which factors should be present or absent, which barriers could be lowered or removed.  For example, there's an economic analysis that examines why the airline industry is a poor investment.  The product (seats) are transient, the workforce is heavily unionized, the industry is heavily regulated, there's high competition and little control over the price of key inputs.  Never mind the fact that the airlines are so susceptible to bad weather, which they don't control.  When you consider these factors, it's little wonder that the industry has lost money over a span of several decades.

But, what if we could design the optimal innovation environment or industry?  What would that look like?   My assertion has always been that Google is an archetype of a firm or industry that has the best opportunity for innovation.  Here's why:

  • Low cost, low risk product development.  Google's product development costs and risk structures are fairly low.  Any SaaS software team is fairly small compared to enterprise software development teams, so the cost to develop a new application is fairly low, due to
  • Short development times.  Google can quickly create a stub of code and try out a new feature or product in a very short period of time.  Typically this is because of
  • Little regulation or compliance issues.  Unlike many other industries (pharmaceuticals, financial services) Google isn't heavily regulated. Unlike these industries, Google has few compliance and regulatory hoops to jump through. It's products won't cause bodily harm, and they don't hold a store of value for their clients, who are open to
  • Experimentation and trials.  Google can place an incomplete product in the market, label it as beta and people can try it out and give feedback.  Google can also close an underperforming product very quickly, because it doesn't have to "recall" it from its users.  Google can simply shut down a product on the web.  People are accustomed to some quirky behavior from Google products, and the fact that some may exist for only a short period of time.
  • Large customer base.  Google has a large customer base that reflects a significant portion of the total population.  If it works after launch, it is probably a winner, whereas many firms will see products succeed in small trials but lack large scale adoption.  Google can also capture a lot of feedback on its products very quickly.
  • Low barriers to entry and exit.  As I stated before, for Google products on the web, it's easy to enter the market as part of Google's platform and easy to leave as well.
  • Strong employee base, constantly refreshed.  Google attracts many top end college graduates, and is typically considered a very desirable place to work, until you build enough insight or equity to start your own firm.  Therefore, Google is constantly refreshing its employee base with some top talent, making it a compelling idea factory.
  • Culture.  While Google's vaunted "20%" time seems to be fading into oblivion, there is a compelling corporate culture and anthology of stories about Google Search, Gmail and other products that were created by innovative employees.  Google must continue to innovate and has a culture based on innovation.
So, is there a lesson here for firms that want to innovate more successfully?  It's often not possible for heavily regulated firms to completely reverse some of these factors.  For example, the regulations and compliance components aren't likely to change, but it might be possible to work more closely with the regulators to understand what's allowable and what isn't.  Culture is difficult to change but not impossible - just requires a dedicated focus over a significant period of time.

But what this may point out is that innovation in more heavily regulated firms will move more slowly in the areas where products and services are regulated, but there may be opportunities in any industry that reflect what Google is doing.  Increasingly more data is digital and available on the web.  Can any industry create value on the web, where the regulations are lower, the development times are shorter and the willingness to experiment far greater?  I think the answer in many cases is "yes", but it may take a mindset change in order to identify these areas of innovation possibility.

This doesn't mean that we should abandon innovation in the core business, just that innovation can move at different speeds depending on the barriers (or enablers) we choose to emphasize.
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posted by Jeffrey Phillips at 5:58 AM


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