Chapter 3: Myth and Magic

Once we have understood what is really happening when companies appear to turn against revolutionary innovation, we will look at some solutions that can really help companies do new things. Which structures work and which don’t? How do we incentivise and manage amid uncertainty? Does it have to be so stressful? How should executive teams be managed in the process? How do we best ensure that we learn from our mistakes?

What we will find is that this is a subject area unnecessarily full of myth and magic.

3.1    Myth: Everyone loves innovation

Setting out on a search for people who are innovation-averse is likely to be a fruitless task. Ask anyone about the importance of innovation and you’ll see that you’ve found the rarest of topics — something that everyone agrees on.

Like mother’s milk and apple pie, new is universally a Good Thing. Much better than old. And you’d be crazy not to be all for it. But asking if people are in favour of innovation is not really the right question. Instead we should ask: ‘What do you want more than innovation?’

In reality, how many people really went to work for a twenty- year-old company with thousands of staff in order to do new things? How many people really ask questions in job interviews about how often their prospective employer completely changes direction? How many managers really relish rethinking how they report their successes and failures?

Choosing innovation makes the employee’s career path much less certain. And, although many employees might understand the need to change, few will wholeheartedly push for that change to happen. Faced with important uncertainty or unimportant certainty, many will choose the latter.

3.2    Myth: Innovation can be made predictable

We’ve all watched enough TED (Technology, Entertainment and Design) talks to know that the brave innovator’s story normally involves lots of uncertainty and risk. This is indeed inherent in doing new things — as every five-year-old knows.

Yet, companies with a ‘macho’ management culture, in particular, often place a strong emphasis on the apparent ability to predict the future, sometimes in the same breath as praising thinking ‘outside the box’. These companies want to have their cake and eat it.

By valuing intuitive prediction over continual learning, companies create a culture where failure is likely to be delayed, more expensive and less productive.

The same management guru who is telling you about everyone in your business being an innovator probably also likes to talk about processes for making innovation more predictable. Like their shareholders in turn, these companies would love to find a predictable method of innovating, a method for creating sure-fire winners every time.

But if we try to introduce the predictability of regular management to innovation, we will only drag out failure. When we incentivise a particular skill — such as predicting the future — you can guarantee that people will start trying to deliver it and demonstrate it. And, thus, energy is expended on making impossible forecasts rather than on trying to find and evaluate ideas. In fact, the company has scored an own goal by creating a culture where staff are actively dis-incentivised from either trying new things or learning from their experiences.

3.3    Myth: Imagination is the key to innovation

There is a popular misconception that the hardest part of innovation, the most important job for the innovator, is coming up with great ideas. In books, and on TV, innovation is about the spark, about having an amazing idea. It’s a process that takes place in the mind of the inventor.

As noted above, talk about innovators and the imagination springs to a brooding but primly-dressed gentleman, perhaps Edison or Tesla, or someone with crazy hair and wild eyes, perhaps Einstein or Doc Brown from Back to the Future. They have big brains, are buzzing with ideas and can’t tie their shoelaces for the excitement this causes, all of which can result in disappointment when we actually start doing innovation for a job, in offices, with people who wear suits. It also conceals the key fact that the having of ideas is just one — admittedly important — part of the innovation process.

An innovation team looking to actually create something of value must be able to quickly understand the potential of ideas, and develop them so that they clearly resolve a customer challenge or create a new opportunity. The team must be able to figure out the commercial and technical realities of the product, as well as how to explain it to customers in a way which can be clearly understood — and which makes them want to spend their hard-earned money on it.

A successful innovation team must have all this nous, as well as the ability to actually make the product good. Sparky creativity alone is nothing without a more practical pair of hands to make sure ideas are related to the market, and still nothing without the careful guidance to execute the ideas effectively, keeping the original customer value proposition alive in the process.

3.4    Magic: The misdirection of success stories

In TV drama The West Wing, Josh Lyman, Deputy Chief of Staff to the US President, is talking to the Surgeon General of the United States who has publicly expressed her reservations about the legal status of marijuana. Josh points out that a very low proportion of Americans (23 per cent) are in favour of decriminalisation. The Surgeon General replies that the figure is much higher if you limit the sample to those under 30. Josh replies: ‘Well that’s a shock. Did you know the number gets even higher than that if you limit the polling sample to Bob Marley and the Wailers?’ (Season 2, Episode 15: ‘Ellie’.)

Put like this, the absurdity of selecting only those examples that meet the criteria you are trying to test seems obvious and easily avoided.

However, it is exactly this effect — ‘selection bias’ — which has led to many of the most enduring myths about innovation practice.

Over and over again, we have heard companies follow this syllogism: Company X (Dropbox, Apple, etc) does its development, marketing and so on in this way and is very successful. We want to do our development, marketing and so on in the same way (so that we are successful too).

Ostensibly, it’s a seductive argument but there is a snag: the sample size of companies that ‘do X’ has been reduced to one or two successful firms and the research has then been used to conclude that those businesses are successful. We have no way of knowing, however, how many other companies have ‘done X’ and failed.

Perhaps the most common anguished cry for innovators in recent times has been: ‘How can I be like Instagram?’ This strikes us as a very odd question. Fundamentally, what Instagram did was build an attractive iOS app which allowed users to apply effects to their iPhone pictures and to share them. The company certainly captured the imagination of iPhone users, built an app that was intrinsically viral and well designed, and have been hugely successful (they had 30 million registered users when they were sold to Facebook in 2012 for $1bn). So, of course, they are a popular role model for other startups wanting to make $1bn. But the question ‘How can I be like Instagram?’ is unhelpful because if we spend our time looking only at successful startups, we will forget to include the luck factor in our calculations, since we have already selected a bunch of companies who have clearly been pretty lucky in some regard. There are tens,     if not hundreds, of businesses that do what Instagram does but have neither 30 million users nor $1bn of Facebook’s money.

A similar, and very human, phenomenon is the desire to listen to stories about successful companies which follow a narrative structure that wouldn’t be out of place in a pre-schooler’s reading book.

As the great planner Stephen King describes in a 1960s paper, the typical form of case histories is marvellously abridged:

‘[…] the usual sort of agency case history in which our immaculate heroes proceed, without hesitation, from brilliant analysis to startling conclusion and in the final frames stride into the sunset pursued by pathetic bleats of gratitude from their half-witted clients.’ 

We see the same behaviour from businesses when they describe their early years, or a particular breakthrough moment. Of course, if you are writing for an annual report, or an autobiography, there is a strong incentive to remove the bits that don’t appear clear-headed and decisive. This leaves readers forced to believe that the leader in question is some kind of super-human savant, never erring from the path of rational thought, able to foresee not just the running of their own business but even the future desires of their customers and otherwise unpredictable turns in both the market and their competitors. Real-life case histories are rarely so flattering, although a lot more interesting and instructive.

Whenever we have spoken to clients about what really happened in the early days of their businesses, we hear stories much more like Super Gran than Superman. Such stories don’t feature the narrative of a great, all seeing hero or heroine. Instead, they tend to be characterised by early confusion and lack of knowledge, followed by either a dawning or sudden realisation of where an opportunity, market or even manufacturing technique might lie. Typically, however, it is not the first of these apparent ‘epiphanies’ that sets the course for success, and entrepreneurs often slog away for years before finally settling upon a winning formula. History is, of course, written by the victor.

Rory Sutherland sums up our tendency to create flattering histories and its consequences beautifully:

‘You’ll observe this phenomenon in most descriptions of battles, wherein victory is usually attributed (especially by the victors) to a few early strategic decisions made by the most senior people on the field. It simply doesn’t do to say that Agincourt was the result of an unusually muddy field and some opportunistic Welshmen with big mallets.’

‘And it is an absolute must in an agency pitch, where the secret of success is to mug the audience with an irrefutable sequence of logic even though every single person in the room knows that things will almost never turn out that way.’

‘… it matters to me as a creative person because, in maintaining the pretence that our business [advertising] works through a rational and sequential process, I feel we are perpetrating a minor fraud. And the victim of this fraud is creativity itself. Because in suggesting in our case studies that we arrived at success through process, we are falsely paying to logic a debt that we really owe to magic. The magic of imagination, or insight. And, as a result, we are causing the left brain to be overvalued at the expense of the right.’ 8

  True descriptions of the sequence of events in innovation are very rare. When did you last hear, ‘We tried 95 things and were as surprised as everyone else when the last one worked’? It may be less flattering for those involved but such stories are undoubtedly more helpful for future generations of revolutionary innovators. They provide reassurance that even if the path is neither easy nor clear, it can still have a valuable destination; they make it obvious that eyes and ears should be kept open looking for more information, rather than firmly closed avoiding distractions.

One place to start is the list of market-changing inventions that were created more or less by mistake. For example, did you know that Skype was originally created as a peer-to-peer file sharing network before the application as a communication medium evolved? Or that Viagra, a drug now used to treat erectile dysfunction, began life as a treatment for high blood pressure and heart disease? It was only through trials of the drug during 1992, in the somewhat unlikely location of Merthyr Tydfil, that the medication’s libido-enhancing power was realised after it was initially reported as an undesirable side-effect. Rogaine was also originally intended as a treatment for high blood pressure before its effects on hair growth were observed. WD40 was designed to prevent corrosion of nuclear missiles and was the fortieth attempt at a successful formula to do so, whereas Post-it notes were a by-product of a failed search for a strong adhesive. The list goes on.

3.4.1     The tale of David and Goliath

There’s a reason why we don’t tell children stories of the big guy crushing the little guys. Where’s the fun, justice or inspiration in that? Instead, the stories that work are the ones where the little guy, against all the odds, manages to overcome adversity.

And it is presumably this preference for the story of the underdog which drives our bias towards the ‘startup kills established player’ story archetype. Whether it is true or not. As a result, examples of innovation which do not fit the romantic David and Goliath-type story are often forgotten or overlooked. People ask why Microsoft couldn’t have invented Twitter, for example, discounting entirely that Microsoft did invent something similar and almost exactly as popular — Instant Messenger — several years previously.

But there is a bigger bias yet in this type of tale. As the story is told by the victor (and its triumphant PR team), it looks as if the single David of the startup — in a moment of self-assured mastery — fells the Goliath of the established business. But be sure that there was more than one potential David in this story. In fact, every Goliath is being attacked by a swarm of Davids, each with their own variation of the slingshot.

Put this way, it can be pretty tough on the big guy. With small but significant threats on all sides, the corporation must assess which is a real challenge to their business and which can safely be ignored.

Again a product of selection bias, when history comes to be written, the most dangerous opponents seem obvious. Of course, Kodak should have been most scared of the digital camera, and Microsoft of the tablet computer; but at the time that these threats emerged, the respective companies were already battling on multiple fronts that seemed, in terms of day-to-day business, much more important.

Without the benefit of hindsight, the selection of which battles to fight is a lot more difficult. The large player is likely to prioritise the markets in which they currently have the highest returns and margin even though these may not be the markets which eventually come to be the most lucrative or decisive. The market focus of the incumbent becomes a risk to the established player, although it is often only with the benefit of hindsight that the correct strategy can be identified.

We do not need to praise the David in the story for their choice of market space; the success of their selection is guaranteed by their status as eventual victor. A colleague of ours at Fluxx despairs when he hears the phrase ‘What were the chances of that happening?’, because he knows, the event having already happened, that the chances were exactly 100 per cent — and knowledge of this does not help us predict our own lives or companies’ futures any better.

3.4.2     Magic: Lies, damn lies and retrospective business plans

One of the major challenges with attempting to copy the products and successes of competitors in your own market and other markets is that it can be extremely difficult to understand their financial plans and incentives, which are rarely public.

Speculation on how — or even if — companies are turning a profit is rife, with analysts and pundits queuing up to offer opinions on the potential business models of companies such as Dropbox and Twitter.

When startups spend a lot of time talking about their breakthrough financial models, it is worth remembering that their primary audience is likely to be the venture capitalist they would like to fund them, the bankers who already fund them, and the super- mega multinational they are hoping will one day buy them and get all these bankers and funders off their backs. Therefore, such statements may not be grounded in anything like reality. Conveniently, startups do not need to show their working (under the heading of proprietary information), and their maths may not need to work if their hype can blast them to the stratosphere of investment before their predictions need to come true.

As an example, we have spent considerable time analysing various ‘freemium’ models and find that many could never deliver profitable business under any circumstances. Have we missed something amazing, or is it possible there is simply nothing to miss? Beware the offhand interview and press release; just because it appears in the Wall Street Journal, doesn’t mean it was subject to scrutiny or audit. If you can’t make the sums work yourself, it is very unwise to assume that a model exists purely by the existence of other speculative businesses run on a similar basis — no matter how much venture capital is being poured into them. If you want to play this way, you should become a venture capitalist yourself.