Friday, January 31, 2014

Free innovators from the state’s deadening hand

January 30, 2014 6:22 pm

By Edmund Phelps

Leaps of imagination are born of a vision of a new product or method, writes Edmund Phelps

Henry Ford’s low-cost car and Steve Jobs’ iPhone have enriched millions of lives in ways that no one envisioned. Yet neither sprung from groundbreaking scientific advances. Their genius was to use old technology in creative ways. Societies will be richly rewarded if they can find a way to quicken the pace of innovation. Yet misconceptions of the way forward are putting this goal farther out of reach.

A century ago, historians and economists linked innovation to the discoveries of scientists and navigators. As long as scientists were outside the economy – locked in ivory towers or embarking on distant expeditions – productivity gains were seen as beyond the influence of economic policy. The economist and political scientist, Joseph Schumpeter, supposed so for decades.

In Schumpeter’s time, however, scientists were coming inside the economy to engage in projects and innovate at companies from Bayer to DuPont. Economic theorists increasingly thought of the nation’s innovation as governed by a simple mechanism. How much research is conducted, and at what price, is determined by consumers’ demand for innovations and the supply of researchers to make them. If society cuts taxes on profit or boosts the supply of researchers, faster innovation is supposed to follow.

But this mechanist theory has done badly at explaining actual events. America’s slow technical progress since 1970 can now be understood as an effect of slowing innovation. In the mechanist view, this must mean one of two things. Either the profitability of innovations must have fallen, deflating demand; or the availability of researchers has fallen, choking supply. Neither explanation withstands scrutiny. Gross business profit relative to business output is near all-time highs; research spending relative to business output is not so low as to suggest a dearth of researchers. The theory also flunked the great test of history. The birth in about 1815, in Britain and America, of the first modern economies – economies rife with innovation – was not augured by any surge of scientists or of profits as a share of output.

The mechanical view of innovation means new practice, not invention or discovery. Most of it derives from having original ideas about what would be useful or enjoyable – thus using existing technology in new ways. Such leaps of imagination are more likely to come from business people of a practical bent than cloistered scientists.

A true innovation is rarely the result of noticing an opportunity. It depends on a vision of a new product or method, and an insight into how the economy will react to it. These often come from an idiosyncratic blend of experience and knowledge that is hard to convey to a chief executive or a government official.

Trying to innovate is not like planting cotton. It is a leap into the void, with unforeseeable costs and an unknown market reception. Success requires an entrepreneur with the right stuff – and a canny financier to spot him or her.

Most importantly, a high volume of homegrown innovation requires widespread dynamism, across the economy and down to the grassroots – so new ideas can come from anyone and anywhere.

Finally, innovation within a company requires employees, managers and owners who are in it not only for the small chance of a large material reward but also for the non-material rewards of mental stimulation, exploration and personal growth that innovative work usually presents – even if the project fails.

Yet we now see trained economists turning to the mechanist manual for switches to throw to regain lost dynamism. Proposed cuts in profit tax would not obviously coax innovative talent from established companies to start-ups, from which no profit flow is expected soon. It is cuts in capital gains taxes – paid as soon as a founder sells shares – that might give start-ups new blood.

Proponents of expanding government institutes for the advancement of science seem unaware that the explosion of productivity from 1820 to 1940 was driven by grassroots innovation, not big science; forgetful that true discoveries, like innovations, are a shot in the dark; and innocent of the institutional politicking that determines which ideas get funding.

Some mechanists say that if the financial sector will not lend to innovators, let the state supply more finance. Such suggestions are unhistorical: the colossal projects that have won state support have rarely matched the innovation brought by grassroots dynamism. They are also unworldly. Officials lack the insight and experience to know what partners to take on.

The state is no better suited to take a big role in technical innovation than in artistic creation. Nations with once-dynamic economies will be helpless to recover their prosperity as long as they misunderstand what causes economic progress.

The writer is the winner of the 2006 Nobel Prize in economics and author of ‘Mass Flourishing’


ROTMAN Magazine

Point of View: Andrew Atkins & Jay Cone

IN OUR WORK, we are often asked to improve the strategic thinking capabilities of a company’s leaders. Defining what a client means by ‘more strategic’ can be an intriguing and revealing exercise, because the variations between definitions say a lot about the assumptions and biases people bring to strategy.

To get a sense of what strategic thinking looks like in action, we often ask leaders to name a gifted strategic thinker and to describe what makes them gifted. The usual suspects emerge; among them, Steve Jobs, for his singular design vision and the turnaround he engineered at Apple; Gandhi, for his lasting effect on change movements for generations based on the success of civil disobedience; and Oprah Winfrey for her ability to leverage her brand across a wide spectrum of media   platforms from television and films to publishing.

While each of these individuals may indeed be or have been a gifted strategic  thinker, our understanding of what people mean by strategic thinking suffers from a focus on outputs over inputs. What this exercise makes clear is that we are good at identifying strategic outcomes; what we aren’t as good at is identifying how the strategic work gets done.

We believe that while strategic outcomes may be extraordinary and impressive, the inherent thought processes that lead to them are straightforward. Fundamentally, strategic thinking involves answering three basic questions, and, as indicated in Figure One, the order of those questions matters—a lot!

1. Where are we?
2. Where do we want to go?
3. How do we get there?

It’s a bit like the phrase, ‘Ready! Aim! Fire!’: the questions start by prompting us to take stock of our current situation; then we look at our desired future state. Starting with these two questions is essential, or we will fall into the all-to-common trap of taking action without a clear sense of purpose.  Imagine, “Ready! Fire! Fire!” Only after having defined a starting and end point are we prepared to chart our path.

Collaborative work ‘inside the arrow’ — the ‘How do we get there?’ part — involves three overlapping and iterative conversations that help to bridge the gap between our current situation and the desired future state:

THE PERSPECTIVE CYCLE. In the first conversation, we gather and organize information. 
THE INSIGHT CYCLE. In the second conversation, we develop a theory of what’s going on.

THE OPPORTUNITY CYCLE. Finally, we develop and test options.

As indicated in Figure Two, each of these steps is an iterative cycle of dialogue with stakeholders involving two key strategic thinking skills: Systems Thinking and Design Thinking. Let’s take a closer look at the process in detail.

First up is the Perspective Cycle, which involves scanning the environment for information and then organizing that information into patterns. In scanning, we are actively engaged with our environment and stakeholders at the periphery of our organization. We may track specific types of information to monitor trends, and we keep ourselves open to unexpected information that may provide clues to an emerging trend or issue.

Pattern recognition helps us organize individual data points into a coherent picture. In this state we are sense making and looking for connections that have meaning to us. It’s useful to bear in mind that our expectations and operating assumptions can exert a powerful influence on what data we attend to and what connections we readily make.  Counteracting this ‘confirmation bias’ is one of the great benefits of working collaboratively, because accommodating diverse perspectives will often cause us to look at our own perspective with fresh eyes.

Next up is the Insight Cycle, which involves building theories to explain the patterns we’ve discerned in the Perspective Cycle. Developing and refining those theories often requires a reframing of our understanding to accommodate evolving insights as we share our theories with stakeholders.  In this stage we are creating hypotheses about how the world works, and these hypotheses are limited by the constraints we believe are at play. When we reframe, we consciously challenge one or more of the constraints or assumptions to help us shift our perspective. Even if the specific constraint still pertains, the shift in perspective often serves to prompt fresh thinking and opens new opportunities for exploration during the Opportunity Cycle.

As shown in Figure Two, the overlap between the Perspective and Insight Cycles is the realm of Systems Thinking.  As we move from scanning to patterning to theory building and reframing, we are moving from attending to individual events to noticing patterns and then to discerning underlying structures that drive the patterns and events.  With Systems Thinking, we are focusing on the connections between data elements and recognizing that meaning lies in these connections. This focus on the whole rather than the parts is a central part of our understanding of what it means to be strategic. It’s literally seeing the forest and not just the trees. Furthermore, we are influencing the system through the perspective and insight conversations to build legitimacy for our strategic conclusions.

Finally, we can proceed to the Opportunity Cycle, which involves envisioning the possible while we investigate the actual. Envisioning continues the work we started in reframing by encouraging us to generate new possibilities or scenarios.    Investigating may include prototyping a new process or business as a way of learning our way forward into the new strategy. The options we identify through envisioning raise questions about near term choices. Investigating allows us to conduct experiments that will stretch our understanding of our options. We will be more flexible and responsive to changes in the environment through persistent investigating.

As shown in Figure Two, the overlap between the Insight and Opportunity Cycles is the realm of Design Thinking.  As a discipline, Design Thinking focuses on generating innovative answers to situations that people are motivated to change. We think of innovation as creativity put to productive use. At the intersection of Insight and Opportunity, we’re translating the possible into the practical.

In 2011, IDEO’s Peter Coughlin and Seattle University’s systems thinking expert Colleen Porto gave a joint presentation at the annual Systems Thinking in Action conference, where they proposed an integrated view of Systems Thinking and Design Thinking. They showed that the processes are similar in that they are both ways of building understanding of your environment. However, maintaining their separate areas of focus allows us to tap into the power that each discipline contributes to strategic thinking.

The gifted strategists we listed earlier were undoubtedly successful, but none of them achieved their success alone.  Great strategic thinkers and great leaders are distinguished not by their ability to single-handedly come up with answers, but by their ability to spark collaborative activity by asking questions. The leaders we listed worked with an extensive network of collaborators to achieve their success. They recognized that people bring differing skills and perspectives to the dialogue and that tapping into a diverse group improves the quality of the work and increases the legitimacy of the process and outcomes.

When you engage collaboratively, you can improve the quality of your group’s strategic thinking by asking powerful questions. To get a sense of your own strengths and preferences, take the self-assessment on page 114. These two dozen questions will provide an indication of which thinking skills are your strengths, and where you will benefit from involving others to balance out your weaknesses. Following are a few questions under each thinking skill to get you started.

Thinking Skill #1: Scanning
• What kind of data or information might help you understand this situation?
• Do you have enough data to focus your effort? If not, what data do you believe is missing?
• Who in your organization has regular contact with your customers, competitors, suppliers and strategic partners? What are their observations about the changing environment?

Thinking Skill #2: Patterning
• In what categories or ‘buckets’ does information seem to be falling?
• What themes are emerging as you explore this situation?
• What behaviours, actions, or outcomes have happened in a regular or repetitive fashion?
• What seems to be the most pertinent information on the table at the moment?
• In what ways are the variables that affect your business changing? Which are becoming more important?  Which are becoming less important?

Thinking Skill #3: Building Theories
• What explains the patterns you’re seeing?
• What are some conclusions that others have drawn or solutions others have tried? What unusual or surprising solutions have you seen?
• What hunches do you have about what is actually happening, causing things to happen, or likely to happen?
• What hypothesis is emerging? What hypotheses have you heard others express?

Thinking Skill #4: Re-framing
• You’ve heard others describe the problem or situation.  How do you understand the problem or solution?
• What assumptions underlie the description or your understanding?
• How would the understanding change if you altered one or more assumptions?
• What would be the consequences of looking at the issue in a different way?

Thinking Skill #5: Envisioning
• Picture a person or place that is related to the topic at hand.
• Picture what this person/people is/are doing or saying now with regard to this issue.
• Picture a successful application or demonstration of your idea.
• Build a story about the future based on your theories about emerging trends. How does the story you created differ from carrying the status quo into the future?

Thinking Skill #6: Investigating
• How did you arrive at that conclusion?
• Imagining this plan of action is implemented success-fully, what are the systems implications? Might there be unintended consequences?
• Who are the stakeholders that will be impacted and what is your strategy for working with them?
• What criteria should we use to assess the merits of our picture of the future?
• What question does our picture of the future raise?
• How might you design an experiment to help you assess the plausibility of the picture of the future you created?

In closing
The six strategic thinking skills embedded in the Perception, Insight and Opportunity Cycles are simple and commonly practiced, but often go unnoticed when people engage in strategy work. Being aware of these skills and developing conscious competence in them will make you much more confident and capable in charting a path forward for your organization.

Andrew Atkins is the Chief Innovation Officer at Interaction Associates, based in Boston, Massachusetts. His clients include Merck Serono, Tory Burch, and GE.

Jay Cone is a senior consultant at Interaction Associates.  His clients include TJX, GE and Dell.