Strategy. Innovation. Brand.

Innovation

The Big Sort and The Big Short

Put two books in the blender. Then press "mash".

Put two books in the blender. Then press “mash”.

I used to be a book monogamist. I would start a book and read it — forsaking all others — until completion did us part. Then I would find another book and start the process over again. You could say that I was a serial monogamist.

Now I’m a book polygamist. Rather then reading an entire book from start to finish, I read randomly selected chapters in more-or-less randomly selected titles. I’ll read a chapter in Book A, followed by a chapter in Book B, followed by a chapter in Book X (ooh!), followed by Book D, and then back to Book A. I started doing this because I’ve read about the mashup theory of innovation, which suggests that innovations are frequently a mashup of two (or more) existing ideas. You mash up a Broadway play with a circus and get — voilá — Cirque de Soleil. Mash up a sports car and a sedan and you get – hier ist — a BMW.

Since most books really only have one idea (if that), I thought it would be useful to mash up ideas from multiple books at the same time. What do I have to show for my efforts? Well, I’m probably one of the few writers to mash up the Global Innovation Index with the World Happiness Report (click here). I’m about to mash up those two with measures of national cultural dimensions. I’ve also discovered that countries become more egalitarian (as measured by the power distance index) the farther north you go. I’d like to mash that up with another little-known fact — the incidence of multiple sclerosis increases the farther north you go. I’m not sure what egalitarianism has to do with MS but, at the very least, it’s an interesting question to ask.

At the moment, I’m reading The Big Sort and The Big Short more or less simultaneously. Given their titles, the two books seemed just perfect for mashing up. The Big Sort is subtitled, Why The Clustering of Like-Minded America is Tearing Us Apart. The basic idea is that we have sorted ourselves into homogeneous thought clusters. As the author points out, “The result is a country that has become so polarized, so ideologically inbred that people don’t know and can’t understand those who live a few miles away.” (For my previous article on The Big Sort, click here).

The Big Short, subtitled Inside The Doomsday Machine, tells the story of how a few people made bazillions of dollars by recognizing the mortgage bubble and betting against it. Of course, the mortgage bubble also triggered the biggest financial crisis since the Depression. Both books tell fascinating stories about modern America. By reading them together, I’m trying to mash them up. Could it be that thought clusters led to the doomsday machine? By separating ourselves into “ideologically inbred” clusters, did we help establish the conditions that produced a massive bubble?  I’m still trying to tease the two together but, if nothing else, it’s another interesting question to ask.

I once took a course called Comparative Literature. Among other things, we compared the epic Spanish poem The Cid with Albert Camus’ The Stranger. We found surprising parallels in plot, structure, and description. What I’m doing now is really not that different. It’s a surprisingly good (and easy) way to come up with interesting insights. So, what do you think? What books would you like to see mashed up?

 

 

Does Happiness Cause Innovation? Or Vice-Versa?

I'm happy being innovative.

I’m happy being innovative.

Does happiness cause innovation? Or is it the other way round: does innovation cause happiness? Or is there a third variable that causes both happiness and innovation to vary together?

In the past, I’ve written about measures of national happiness (here and here) and measures of innovation (here, here, and here). I’ve been wondering: are happiness and innovation correlated? It seems like a reasonable thought but I haven’t had any evidence to make an inference. Until now.

I’ve just been reviewing the Global Innovation Index of 2012 (the GII) as published by INSEAD (the business school) in conjunction with the World Intellectual Property Organization (part of the UN). One of the goals of the GII is to develop effective measures of innovation that can be applied at the national level. INSEAD has published the report annually since 2007. Each year, it evolves and adds new variables. In theory, each year it becomes a better reflection of the true state of innovation around the world. In the 2012 edition, the report incorporates about 80 different variables.

What struck me immediately was the relationship between the GII and the World Happiness Report that I’ve written about before. While researching this article, I also stumbled across the Legatum Institute‘s ranking of national happiness. Though Legatum uses a different method, the results closely match the World Happiness Report. Indeed, the top ten countries in each report are the same — though in different order.

So, how does happiness relate to innovation? Look at the table below, which compares the top ten countries in the World Happiness Report (WHR), Legatum, and the Global Innovation Index (GII). Half of the top ten most innovative countries (with *) are also among the world’s happiest countries. The correlation seems to grow stronger if you look past the top ten. For instance, the USA is 11th on the WHR and ninth on the GII. Similarly, Canada, New Zealand, and Norway are 11th, 12th, and 13th on the GII and all three are in the top ten of both WHR and Legatum.

Why should happiness be related to innovation? I’m not at all sure. Part of the reason I’m publishing this is to ask my readers: what do you think? Let’s gather the best ideas and see if we can test them logically. Over to you.

WHR Legatum GII
1 Denmark Norway Switzerland *
2 Finland Denmark Sweden *
3 Norway Sweden Singapore
4 Netherlands Australia UK
5 Canada New Zealand Netherlands *
6 Switzerland Canada Denmark *
7 Sweden Finland Hong Kong
8 New Zealand Netherlands Ireland *
9 Australia Switzerland USA
10 Ireland Ireland Luxembourg

The Most Innovative Companies of 2012

many small light bulbs equal big oneBoston Consulting Group just published its annual (since 2004) ranking of the 50 most innovative companies in the world. BCG polled 1,500 executives and asked them to rank companies by innovation. More importantly (from my perspective), BCG asked the executives about their company’s plans, strategies, and tactics regarding innovation. You can find the entire report here. I’ll summarize some of the key findings below.

Perhaps the most important finding is that investment in innovation has recovered from the turmoil of the recession. Seventy-six percent of executives said that innovation is a “top three” priority — the highest level in the survey’s history. And they’re putting their money where their mouth is — 69% said they plan to increase spending on innovation in 2013, the highest level in six years. Further, companies that emphasize innovation tend to generate superior total shareholder returns (TSR). The most innovative companies of 2012 generated TSR premiums (compared to less innovative companies in the same sector) of 6.3% over three years and 3.5% over ten years.

How did these companies become so innovative? BCG identifies six key factors:

Get customers involved early — innovative companies get customers involved to generate new ideas and to separate the wheat from the chaff. One of the key reasons to involve customers is to ensure that weaker projects “fail fast and fail cheap”.

Use data to drive tough decision making — it’s hard to make tradeoffs among promising projects. Which ones will succeed? Which ones will simply be distractions? The most innovative companies allow executives to make firm decisions for “the right reasons on the basis of the right data”.

Think strategically about tradeoffs — “Best practice companies do not make [tradeoff] decisions in reference to last year’s budget but rather on the basis of the size of future opportunities.”

Ensure senior leadership commitment — “The most commonly cited force driving innovation was the CEO.”  I don’t mean to brag but this is exactly what I found in my dissertation, a study of innovation in colleges and universities in 1984. It’s the person at the top who sets the innovation culture.

Envision innovation as a holistic system — don’t just try to optimize one piece of the puzzle. Create a strong vision for the need for innovation throughout the company and then build the enablers, including culture, processes, and organization.

Optimize intellectual property to create value — lots of companies have bright people. The most innovative companies also have collaborative processes and decision rules to create and capitalize on intellectual property.

The Structure of Predictions

The cost of my services may go down.

The cost of my services may go down.

I like to think about the future. So, in the past, I’ve written about scenario planning, prediction markets, resilience, and expert predictors. What have I learned in all this? Mainly, that experts regularly get it wrong. Also, that experts move in herds — one expert influences another and they begin to mutually reinforce each other. In the worst cases, we get manias, whether it’s tulip mania in 17th century Holland or mortgage mania in 21st century America. Paying ten times your annual income for a tulip bulb in 1637 is really not that different from Bank of America paying $4 billion for Countrywide.

I’ve also learned that you can (sometimes) make a lot of money by betting against the experts. The clearest description of “shorting” the experts is probably The Big Short by Michael Lewis.

I’m also forming the opinion that the reason we call people “experts” is because they study problems closely. They’re analysts; they study the details. Like college professors, they know a lot about a little. That may make them interesting dinner partners (or not) but does it make them better predictors of the future?

I’m thinking that the experts’ “close read” makes them worse predictors of the future, not better. Why? Because they go inside the frame of the problems. They pursue the internal logic of the story. Studying the internal logic of a situation can be useful but, as I pointed out in a recent article, it can also lead you astray. In addition to the internal logic, you need to step outside the frame and study the structure of the problem. If you stay inside the frame, you may well understand the internal dynamics of the issue. But, in many cases, the external dynamics are more important.

The case that I’ve been following is the cost of healthcare in the United States. The experts all seem to be pointing in the same direction: healthcare costs will continue to skyrocket and ultimately bankrupt the country. The experts are pointing in one direction so, as in the past, I think it’s useful to look in the other direction and predict that healthcare costs won’t climb as rapidly as in the past or may even go down.

Here are two interesting pieces of evidence that suggest that the experts may be wrong. The first is a report from the Altarum Institute which notes that 2012 represented the “…fourth consecutive year of record-low growth [in healthcare spending] compared to all previous years in the 50-plus years of official health spending data.” Granted, there’s a debate as to whether the slowing growth is caused by the recession or by structural changes but the experts (yikes!) suggest that at least some of the shift is structural.

The second piece of evidence is a report by Matthew Yglesias in Slate that documents the dramatic decline in spending for healthcare construction. Spending to construct new hospitals dropped precipitously in 2008 and has stayed low, even during the recovery. As Yglesias points out, construction spending is “the closest thing we have to a real-time forecast of what the future is going to look like.”

So, are the experts wrong? As Chou En Lai liked to say, it’s too soon to tell. But let’s keep an eye on them. Otherwise, we could be framed.

 

Thinking Outside the Frame

Make way!

Make way!

An ambulance, racing to the hospital, siren blaring, approaches an intersection. At the same time, from a different direction, a fire truck, racing to a fire, approaches the same intersection. From a third direction, a police car screeches toward the same intersection, responding to a burglary-in-progress call. From a fourth direction, a U.S. Mail truck trundles along to the same intersection. All four vehicles arrive at the same time at the same intersection controlled by a four-way stop sign. Who has the right of way?

The way I just told this story sets a frame around it that may (or may not) guide your thinking. You can look at the story from inside the frame or outside it. If you look inside the frame, you’ll pursue the internal logic of the story. The three emergency vehicles are all racing to  save people — from injury, from fire, or from burglary. Which one of those is the worst case? Which one deserves to go first? It’s a tough call.

On the other hand, you could look at the story outside the frame. Instead of pursuing the internal logic, you look at the structure of the story. Rather than getting drawn into the story, you look at it from a distance. One of the first things you’ll notice is that three of the vehicles belong to the same category — emergency vehicles in full crisis mode. The fourth vehicle is different — it’s a mail truck. Could that be a clue? Indeed it is. The “correct” answer to this somewhat apocryphal story is that the mail truck has the right of way. Why? It’s a federal government vehicle and takes precedence over the other, local government vehicles.

In How Doctors Think, Jerome Groopman describes how doctors think inside the frame. A young woman is diagnosed with anorexia and bulimia. Many years later, she’s doing poorly and losing weight steadily. Her medical file is six inches thick. Each time she visits a new doctor, the medical file precedes her. The new doctor reads it, discovers that she’s bulimic and anorexic and treats her accordingly. Finally, a new doctor sets aside her record, pulls out a blank sheet of paper, looks at the woman and says, “Tell me your story.” In telling her own story, the woman gives important clues that leads to a new diagnosis — she’s gluten-intolerant. The new doctor stepped outside the frame of the medical record and gained valuable insights.

According to Franco Moretti, similar frames exist in literature — they’re called books. Traditional literary analysis demands that you read books and study them very closely. Moretti, an Italian literary scholar, calls this close reading — it’s studying literature inside the frame set by the book. Moretti advocates a different approach that he calls distant reading….”understanding literature not by studying particular texts, but by aggregating and analyzing massive amounts of data.” Only by stepping back and reading ourside the frame, can we understand “…the true scope and nature of literature.”

In each of these examples we have a frame. In the first story, I set the frame for you. It’s a riddle and I was trying to trick you. In the second story, the patient’s medical record creates the frame. In the third, the book sets the frame. In each case, we can enter the frame and study the problem closely or we can step back and observe the structure of the problem. It’s often a good idea to step inside the frame — after all, you usually do want your doctor to read your medical file. But it’s also useful to step outside the frame, where you can find clues that you would never find by studying the internal logic of the problem. In fact, I think this approach can help us understand “big” predictions like the cost of healthcare. More on that next Monday.

 

 

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