Future Here Now: Feeding the Innovation Mind
Selection
One more selection for this week. This one is from Everybody Innovates Here, my 2019 book on building innovation ecosystems that actually work. Available on Amazon or Gumroad (and not on Bookshop.org for reasons that I am still trying to figure out).
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The Industrial-Fusion Age Innovation Clash
Despite our tablets and open offices and general lack of steam engines and child labor, the paradigms that surrounds our attempts at innovation are, at their core, Industrial Era systems. We think about work and creativity and how people relate to their work within the same structure of fundamental assumptions and expectations that governed the people who built cotton gins and Model T’s. Business pundits tout ways to innovate, but most treat systems for increasing innovation as bolt-ons, things to attach to the existing systems. The fundamental structure, too often, remains exactly the same.
That creates a mismatch, like trying to put an electric engine in a 1900s locomotive. The intakes and outputs are almost guaranteed not to line up right, and your jerry-rigs and modifications have a good chance of putting more strain on the system than it experienced before. And when that strain gets too severe and the old boiler risks blowing, your innovations are what's going to end up in the weeds beside the tracks.
Industrial- era organizations are designed to meet the objectives of industrial era systems. And bolting on a shiny innovation probably won’t work, because the thing that threatens the integrity of the Industrial-era machine is the thing that will be eventually rejected, regardless of its novelty or promised long-term benefits.
At the core, our innovation systems and our rewards have been bolted on to the industrial era model, and the unresolved mismatch with these parts of the old paradigm create unending strain on everyone:
We value specialization, when what the new system needs is generalism. Dermatologists make more money than general practitioners. Chief Finance Officers seldom lack a CPA or CFA. We tell our children to get “practical” degrees, and to go to graduate school so that their training aligns with the specific thing they think they want to do. That’s a central legacy of the division of labor inherent in the industrial model.
We know from our own life experience that a dermatologist probably won’t catch my potentially-fatal heart disease, and that a set of letters don’t guarantee that someone can complete a given task, and that careers change more quickly than they ever have. And if you read business press, you have probably seen articles about how tech companies are now seeking liberal arts graduates. But our paradigm still assumes each professional role will fit into a larger machine right where it’s supposed to be, and stay there, like the mid-20th century assembly line worker who spent years tightening the same bolt on the same spot on the chassis of every machine that rolled by.
We default to command and control, when our technologies demand decentralized decision-making. Conventional businesses, even those who have “flattened” their hierarchies over the past 20 years, still make most decisions by passing proposals through higher and higher levels of review and sign-off, until either an ultimate level of approval is achieved or the proposal is killed. Command and control protects the integrity of the system by rejecting new ideas that could possibly post a threat. But it’s those threats that we often need most if we’re going to actually make the big steps.
A couple of years ago, online retailer Zappos, already known for its unique approach to corporate culture, decided to radically decentralize its decision-making by implementing Holacracy - a highly structured organization model that eliminates all hierarchy and delegates nearly all decision-making to carefully designed systems of circles and areas of ownership across all of the employees. Zappos did this because they feared becoming disrupted - that a new online retailer without the baggage of their hierarchical review and decision process could take their market share and send them the way of Sears. They wanted to maintain flexibility, the ability to sense and react to changes in the market, to strengthen their ability to adapt in an unpredictable environment. It was an aggressive response, but it made foresighted sense in the light of the speed at which retail is changing
Nearly 30% of employees left within the first year. Those who left came from nearly every level and job description in the previous model - an indicator of how much even employees of a nontraditional company had internalized the industrial age business model. For some employees, the prospects of greater company health and personal engagement could not overcome their deep-seated adherence to the command and control model.
We understand transaction math but don’t know how to quantify mutual benefit. One of the emerging and seemingly self-evident principles of a network economy is that each participants’ livelihood is intrinsically interdependent on the rest of the system.
Unlike the Rockefeller-type Industrial-era megaliths, who could control every part of their process from mining to part stamping, most modern businesses of any size are dependent on their ability to tap into the network. Even a behemoth like Amazon captures its value from connecting and organizing the presentation of thousands of individual suppliers. It doesn’t print the books and make the things it sells all by itself.
The term “ecosystem” first entered business parlance through networks of small software startups. These micro-companies relied on the ecosystem for as much as they possibly could - shared co-working space, specialist contractors, support services like marketing, and more.
The expectation - which seemed radical through the eyes of a Rockefeller - was that the business did not have to “own” everything. It could tap into the ecosystem when needed to purchase only what it required. For computer chip makers, owning a silicon mine looks liked lunacy, although that would have been the assumption about how to run a big business 100 years ago.
But when mutual benefit ecosystems get measured in terms of transactions, their value is substantially understated. Because no one “owns” the latent potential of the ecosystem, it remains off the economic ledger - except for specific transactions, which are a fraction of the ecosystem’s total value. Traditional economics simply doesn’t account for it well.
And what we don’t measure, we don’t value.
This happens at the micro level, when a young network business struggles to demonstrate its value in transactional terms, despite the fact that its existence provides a crucial on-demand resource for other businesses. And it happens at the macro level, when policy makers default to big business incentives over investing in the startup ecosystem because the first one is a straightforward and (presumably) predictable transaction.
And the numbers look a lot bigger.
We prize efficiency over flexibility. Flexibility requires redundancy - the ability to fall back on an alternative system or funding source or person when Plan A falls through. But efficiency has been the watchword of the Industrial Era, symbolized by the assembly line precision and Six Sigma process evaluations. In the traditional assembly line, each movement, each micro-step, even the placement of each part storage bin is precisely choreographed, with no margin for improvisation. Which is why most traditional assembly line roles today are filled by robots. And which is also why an error at one station shuts down the whole line. In a traditional assembly line, there are no work-arounds.
As Nassim Taleb so clearly articulated, highly efficient systems are inherently fragile - if one part goes out of alignment, the entire machine falls down. Which is why economies crash over obscure mortgage bundling schemes, or why power goes out across multiple states due to a cascade that started with one tree sagging onto the wrong power line. When everything is precisely, efficiently, optimally connected, redundancy gets cut - it was redefined as waste.
An ecosystem lives or dies by its redundancies. When the forest fire burns, trees release their seeds to lay the groundwork for the new growth. When climate change makes a habitat inhospitable for one creature, another may move into that niche. When a store in a commercial district goes out of business, other astute business owners may notice increased demand for a product as consumers look for a new option, and stock more of the thing they are seeking. A system that can manage the inevitable shocks and setbacks without falling apart has a chance of returning to equilibrium, and even growing. But that requires a reasonable level of redundancy.
We create complex systems, forgetting that this makes them fragile, not resilient. This idea is also embedded in the assembly line efficiency concept, but it’s worth digging into the question of how complexity inherently leads to fragility.
How we manage land use is a good example. When zoning laws were first created in the early 1900s, and through the 1970s, the primary principle used to decide how land should develop was separation of uses -- factories should be away from residences, commercial should be closer to residential but not too close, etc.
This was feasible as long as one was zoning never-developed farm fields, but most places with existing factories and houses and commercial buildings already had some intermingling. We dealt with this by creating more and more layers of zoning complexity - first non-conforming uses to sequester those old factory neighborhoods, then setbacks and floor area ratios and landscape requirements to make new construction match the existing environment (or a longed-for, upgraded future), then overlays and performance objectives and special incentives zones to tweak the process in one way or another.
Every community is different, but these attempts to standardize through complexity often created three sets of unanticipated opportunities for the whole system to break:
Understanding of the zoning process becomes limited to a very few, both within government agencies and outside. This means that the process of determining a change to permitted land use (for example, when a proposed business does not explicitly fit the permitted land use categories) is dominated by expensive experts. As a result, reusing older properties for new uses can become even harder, especially for potential business owners who cannot afford big legal fees.
The lack of clarity around what is permitted and what kind of change is possible exacerbates land use conflicts. Since most people cannot decipher the code to understand for themselves, they may find themselves blindsided by a permissible land use that they didn’t know was possible.
The accretion of tweaks and overlays and amendments over time can create conflicts within the code itself. It’s not unusual for two points of code to indicate conflicting preferred land uses or setback standards or landscape requirements when applied to a specific parcel, although those regulations might have made sense by themselves.
And when any of these breaks occur, the cost in time and money, trust and frustration, and loss of faith in the larger system, can easily outlast the approval process.
We treat externalities as far more external than they actually are. In classic economics, externalities are a kind of accounting trick: since the core focus is on the specifics of a transaction, an “externality” is an outcome of the transaction that doesn’t show up on the balance sheet for either party. When the transaction results in something that neither the supply nor the demand side value, it’s called an “externality” and tossed aside.
Except that tossing it aside doesn’t make it go away.
Before I was born, my father and my grandfather opened a small paint factory. They bought the ingredients, made the paint, canned it and sold it to companies that used it on their machinery, their buildings, their streets. But sometimes something went wrong with the making of the paint -- an ingredient was off, someone put the wrong thing in by accident, someone misunderstood what the customer wanted and made the wrong thing. This was before environmental regulations.
When that happened…. They dumped it in the woods behind the factory. An externality. Problem solved. Except that those chemicals and rusting cans are still leaching into the creek at the bottom of the hill decades later.
Environmental regulations that make businesses responsible for their toxic waste were established to force those costs back into the supply/demand equation. Without those requirements - especially when you have a defunct company where all the owners are dead - those “externalities” become someone else’s problem. In many cases, they become everyone’s problem. To the people affected by what the buyer or seller did not want, those chemicals are not “externalities” at all.
Most of the most significant limitations of an industrial era mindset and systems in this Fusion economy come down to the fact that depending more on a network, and less on ourselves, means that externalities are no longer externalities at all. If it affects the network, it will affect us, one way or another. Even when we persist in the industrial mindset, our resistance doesn’t change the fact that we are increasingly dependent on these interdependencies.
None of the paradigm clashes in the list above are obscure, or require specialized knowledge, or constitute some kind of inside ball, incomprehensible to anyone but a few high priests. And that’s the point.
We know in our guts, just from what goes on around us, that our existing systems are coming up short in meeting these emerging challenges. We are acutely aware of our need for something fundamentally new, but we can’t see what those new systems really look like yet. So, to use the old saying, we too often stick with the devil we know, even when the clashes threaten to overwhelm us.