Two years ago, Elliott Ichimura, a
colleague of mine, pulled together ideas from eight different sources to
produce the Virtuous Cycle of Innovation shown above. The eight sources
he used are:
Weird
Ideas That Work - Robert Sutton
Leading the Revolution - Gary Hamel
The Sources of Innovation - Eric von Hippel
The Art of Innovation - Tom Kelley |
Serious
Play - Michael Schrage
The Circle of Innovation - Tom Peters
Business Dynamics - John Sterman
MIT Strategy course -
Rebecca Henderson |
At the time, the elegant inner cycle of entrepreneurship -> innovative
ideas -> value creation -> cash flows -> incentives, primed by high
leves of R&D investment, was still fueling many sectors of the economy.
What stopped the cycle, and why? I believe four structural, systemic and
cultural factors, which were temporarily overcome during the exuberant 1990s,
turned the virtuous circle back into a vicious cycle and led to the abandonment
of innovation as a driver of the economy:
- Short Term Focus: Businesses, especially public companies,
are rewarded for short-term performance. The effect of this is to encourage
actions that have positive bottom-line impact in the next fiscal quarter,
even if their longer-term effect is negative. So in Elliott's chart, the
arrow from profitable cash flows to investment (in innovation) was cut, as
investment was shifted to activities with a more immediate payback.
- Oligopoly: In many sectors of the economy, it is cheaper
to buy (or buy off) innovation than to encourage it. When one or a few companies
dominate the sector, they can corral all intellectual energies in the sector,
locking up whole areas of intellectual property with massive numbers of broad
patent applications, fiercely pursuing entrepreneurs who threaten this intellectual
property, and buying off entrepreneurs they can't scare off, then shelving
the ideas. In the chart, the oligopoly's cash flow converts the incentive
for entrepreneurship into a dis-incentive for entrepreneurship.
- Risk Aversion: The new age business thinkers of the '90s
recognized that risk was a positive, an asset, rather than a negative. Some
companies even exploiting this awareness, accepting and trading risk as a
marketable commodity. Ironically, one of those was Enron. Cultural, this
shift in thinking was unsustainable against our human aversion to risk. In
the chart, the failure rate that was briefly considered a learning opportunity,
began once again to be considered an unacceptable cost, and risks, even those
that might have yielded huge opportunities, stopped being taken.
- Change Aversion: Very few people really embrace change.
It is threatening, creates anxiety, makes it harder to plan and predict.
Business, like people, changes when it must. What we saw briefly in the 1990s
was a flurry of what is called discontinuous change, the Innovator's Dilemma
. There were so many innovations occurring that some of them, often accidentally
or serendipitously, began to impact completely different sectors of the economy
in unexpected ways. Miniaturization, laser and fibre optics technologies,
and connectivity technologies had especially strong and broad impact on many
businesses.
But as the number and pace of innovation slowed, due to the first
three factors above, many businesses breathed a sigh of relief, shelved their
e-business strategies and went back to business as usual. The reaction of
the commercial entertainment industry to peer-to-peer networks (i.e. sue
them and close them down, rather than adapting to them), is a perfect example.
The rate of change in the business environment has notably slowed in recent
years, and the recession has less to do with the slowdon than does basic
human nature.
Will we see another virtuous cycle of innovation in the future? Undoubtedly.
Even the most conservative businesses realize that a lack of innovation stifles
the economy and leads to stagnation. Our change aversion is balanced against
our entrepreneurial spirit. We like new ideas and trying out new things
-- that is how we learn and grow. Eventually the pendulum will shift back,
driven by a new set of basic human needs, and the virtuous cycle will shift
back into gear.
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2:12:12 PM 
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