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Black Swans & Radical Innovation


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Ideas on correlation of NNT's ideas on Black Swans and Radical Innovation in general

Published in: Business, Education

Black Swans & Radical Innovation

  1. 1. On The Black Swan and Radical Innovation Ideas from: The Black Swan. The impact of the highly improbable, Nassim Nicholas Taleb, Allen Lane (Eds.), 2007, Hardcover, 366 pages, ISBN: 978-0713-99995-2, £20, Paperback, ISBN 978-0141- 03459-1, Innotiimi Head Office, Vapaalantie 2 A 13, FIN-01650 Vantaa, Finland Juhani Lehtonen e-mail:
  2. 2. What is a Black Swan? • NNT uses the term to illustrate • Unfortunately, after the the dangers that arise when we occurrence of a Black Swan, use our limited experience of the hindsight bias kicks in, and the world to produce confident event seems, in retrospect, to assertions about the future or have been much more about the world beyond that predictable than it really was. experience. • Before Europeans discovered Australia they were convinced that all swans were white. The observation of just one black swan in Australia was sufficient to invalidate a belief that had been based on thousands of years of observations of white swans. 1
  3. 3. What is Radical Innovation • For an invention to be • If an invention fulfils criteria 1 considered radical it has to fulfil and 2, one can ex ante claim that three criteria: it is a radical invention. • Criterion 1: The invention must • If it also fulfils criterion 3, one be novel: it needs to be can ex post claim that it is a dissimilar from prior inventions. successful change agent, • Criterion 2: The invention must causing a radical technological be unique: it needs to be change in an industry. dissimilar from current inventions. • Criterion 3: The invention must • This probability calculations for be adopted: it needs to influence radical innovation meets the the content of future inventions. requirements of “Black Swans”: they are not prdictable • Can we use this somehow? Kristina B. Dahlin, Dean M. Behrens: When is an invention really radical? Defining and measuring technological radicalness. Research Policy 34 (2005) 717–737 2
  4. 4. The Efficiency and Innovation Culture Control & ‘Engineering’ Creativity & Entrepreneurship Control & Creative and Measurement Entrepreneurial Short-Term Environment Informal and Results Ad Hoc Decisions Effective Project Bold and Management Audacious Uncertainty Improved Hit Rates Action (Chaos) Well-Oiled in Machinery Product Launches Long-Term Criticism and Show Playful Perspective Stopping Culture Formal Procedures and ISO Standards Good NPV and Fun and Minimal Risk Laughter 3
  5. 5. What Works Against Radical Innovation in Established Firms Conservative Strategy Focus on Competing in Current Markets Closed Firm Boundaries Lower Gross Margins and Longer Time Limited Scanning of the Periphery Horizons Not Accepted Intellectual Property is ”We are Doing Fine, Why Rock the Boat?” Jealously Guarded ”We Do Everything Ourselves!” Core Business Organization Risk Averse Culture Budgets Reside within Business Units Risk Aversity & Intolerance to Failure Sales Targets & Upgrades Rule ’Analysis Paralysis’ & Slow Decisions ”Who Is Going to Fund It?” ”It Looks Risky! We Need More Analysis” Out of Tune with the Market Rigid Stage Gate Process Limited Market Intelligence Gantt Charts, ’Slip Rates’ and NPV Overconfidence with Internal Presume Predictability Ideas and No Proactive Scouting People are Accountable to Plans ”We Know Our Customer ”What’s the Plan? Show Me the Numbers!” 4 Dr. Axel Rosenø: Developing Radical Innovation Capabilities in Established Firms Front End of Innovation Europe. Vienna, 31 January 2008
  6. 6. The Challenge of Predictability: Problem of Inductive Knowledge 160 Turkey daily food amount 140 120 100 80 When do we know we are not Turkeys? 60 Thanksgiving 40 20 0 250 500 750 1000 • The history of 1000 days does not tell anything about what’s going to happen next. This naïve projection of future can be applied to everything 5
  7. 7. How to Develop Radical Innovation Capabilities: Prepare for Black Swans? Dual Strategic Focus • Dedicate Resources to Long-Term Projects Open Innovation • Develop and Communicate Market Vision • Import Ideas From the Outside • Learn to Spot Disruptive Innovation Opportunities • Export Ideas To the Outside • Collaborate with Partners Parallel Embrace Risk & Organization Celebrate ’Failure’ • Give Ventures a Life of Their Own • Embrace Risk and Celebrate ’Failure’ • Set Up New Venture Unit • Develop Leadership Practices for Creativity • Create a Radical Innovation Hub • Build a Network of Intrapreneurs Customer Oriented Innovation Learning-Based Innovation • Drive Strategic Innovation Around • Stimulate the Front End of Innovation • Customers’ Value Activities • Engage in Learning-Based Planning • Segment Markets in Insightful Ways • Evaluate Projects on Vision, Options and Instincts • Identify and Address Unmet and Unspoken Customer Needs 6 Dr. Axel Rosenø: Developing Radical Innovation Capabilities in Established Firms Front End of Innovation Europe. Vienna, 31 January 2008
  8. 8. Why: Because of Mediokristan and Extrimistan • Radical innovation capability is about preparing the organization for possibilities that are not anticipated and can not be projected 7
  9. 9. Mediokristan and Extrimistan Mediokristan Extrimistan • Winners get a small segment of • Winner-take-almost-all effects the total pie • There are no physical constraints • Subject to gravity to what the number can be • Total is not determined by a • Total will be determined by a single instance or observation small number of extreme events • Tyranny of the collective • Tyranny of the accidental • Events are distributed according • The distribution is either to the “bell curve” Mandelbrotian “gray” Swans or totally intracable Black Swans • My view: Radical innovation happens in extrimistan! 8
  10. 10. How to Succeed with Radical Innovation: Make Extrimistan a Possibility • Options mentality and Experimental processes appear to be strong risk management by-learning practices that promote RI success measured in any manner • Project and portfolio evaluation and ongoing oversight using an options orientation is strongly and directed related to RI success. This relationship is strong under all levels of industry clockspeed for all measures of RI success except Legitimacy. There, the relationship between options orientation and legitimacy is even stronger when industry clockspeed is high. It may be that RI oversight boards are more credible when they use processes that recognize that, since futures are unpredictable, funding incrementally may save money in the long run. • Experimental processes have strongly significant direct impacts on all indicators of RI success. These hold regardless of industry clockspeed, indicating the universality of experimental processes as a learning based risk management too. • The development of dynamic capabilities for managing highly uncertain phenomena such as radical innovation includes a risk management-by learning capability. O'Connor, G. C., et al., Risk management through learning: Management practices for radical innovation success, Journal of High Technology Management Research (2008) 9
  11. 11. Examples of Extrimistan • Facebook • Mark Zuckerberg founded Facebook while still a student at Harvard University. Website membership was initially limited to Harvard students, but was expanded to other colleges in the Ivy League • It later expanded further to include any university student, then high school students, and, finally, to anyone aged 13 and over • The website currently has more than 100 million active users worldwide • Facebook received its first investment of US$500,000 in June 2004 from PayPal co-founder Peter Thiel • Microsoft announced on October 24, 2007 that it purchased a 1.6% share of Facebook for $246 million • On November 30, 2007, Hong Kong billionaire Li Ka-shing invested $60 million in Facebook • Technically speaking, we already know the company is worth about $15 billion (IPO in 2009-2010?) 10
  12. 12. Examples of Extrimistan • Shuji Nakamura and the blue leds • For two decades, researchers working for the biggest players in the electronics industry, from RCA and Hewlett-Packard to Matsushita and Sony, tried their hands at the blue laser diode and failed. Nakamura, a self- described country boy, did it while working for Nichia Chemical Industries Ltd. in Tokushima, Japan. • Analysts estimate that those companies, along with a couple dozen universities, spent roughly $1 billion in pursuit of blue-light devices since the 1960s. • Engineers wanted blue and true green because with those colors, along with the red they already had, they could build fabulous things, such as a a white- light-emitting device as much as 12 times more efficient and 12 times longer- lasting than an ordinary lightbulb. • quot;If I had gone to a big company, it would have been very difficult for me to do research freely,quot; he says in retrospect. quot;At a big company, say Sony, there are very, very good researchers. So I would have had to ask them what I could do.quot; 11
  13. 13. Joke A man was driving along a freeway when he noticed a chicken running along side his car. He was amazed to see the chicken keeping up with him because he was doing 50 MPH. He accelerated to 60 and the chicken stayed right next to him. He speeded up to 75 MPH and the chicken passed him up. The man noticed the chicken had three legs. So, he followed the chicken down a road and ended up at a farm. He got out of his car and saw that all the chickens had three legs. He asked the farmer quot;What's up with these chickens?“ The farmer said quot;Well, everybody likes chicken legs. I bred a three legged bird. I'm going to be a millionaire.quot; The man asked him how they tasted. The farmer said quot;Don't know, haven't caught one yet.” • We run into not anticipated issues with Radical Inventions (Invention ≠ Innovation) • We need to use this unanticipated to create the innovation out of the invention! 12
  14. 14. Let’s keep on developing! ☺ Actually Company Radical Innovation Development is about Anticipating Grey Swans. I’d be happy to discuss more: Innotiimi Head Office, Vapaalantie 2 A 13, FIN-01650 Vantaa, Finland Juhani Lehtonen e-mail: