Innovation (cont.)

The real question in the innovation framework is how much and when? The answer is driven by the rate of change in the environment. In stable regimes, management can focus on exploitation and innovate in efficiency and productivity. In volatile regimes, management needs to focus on exploration and innovation in new products and services.

 While it seems simple (innovate at the rate of change in the environment), monitoring the rate of change in the environment gets to be tricky. Change in mechanical systems tends to be a straight line (turn the radio knob up half way and the volume goes up half way), but change in biological systems tends to reflect hockey sticks. It tinks along and tinks along over a long period not making much headway and then it all of a sudden a tipping point is reached and it turns upward as major change over a short period of time. The tipping point is usually some nominal event not predictive of the great change that follows. Think about what caused the 1929 stock market crash and Great Depression. Historians say nothing happened on that Black Thursday. Consider how a teenager shooting the Archduke Ferdinand in far off Herzegovina set off WWI with twenty million deaths. Why did Rosa Parks refusing to give up her seat on a bus set off the Civil Rights movement?

 All of these exhibit this "sudden change" phenomena. If you will recall the discussion of Complexity Science, then we can match up these sudden and unpredictable changes with systems that have worked themselves into the edge of chaos. On one side are sub-critical systems where little causes create little effects. On the other side are super-critical states where little causes create big effects. The above situations are in critical states where little causes can create little effects or big effects in an 80/20 power law:  lots of little effects and a few big effects. Businesses would experience this as long periods of stability punctuated by radical change.

 All of this brings us back to the practical matter of when and how much to innovate in business -- how does one spot tipping points after long periods of stability? There are two distinct characteristics: 1) the odd story that makes no sense 2) happening in increasing frequency. Let me give you an example of something that happened at the City of Littleton.  We had a company which took the mercury out of coal fired power plant flues and they wanted to know the prospects for coal (no coal, no business). We set up a listening post for energy stories and  kept getting articles that North Dakota’s unemployment rate was 2%--and this was during the Great Recession.  We were thinking it was some statistical anomaly that had to do with how farming employment was reported.  What eventually became clear from these odd stories increasing in frequency was that horizontal drilling and fracking had opened up whole new oil fields, drawing roughnecks from all over the country. It changed the coal equation dramatically as the price of natural gas fell almost 90%.