Trust No One, Trust Nothing

In just one day last week looking at the headlines on MediaPost – two different articles mentioned a lack of trust – a lack of trust in contextual ad placement and a lack of trust in audience measurement data. But our industries trust issues go far deeper than just those two instances. Article after article cite an erosion of trust and the spreading of relational fault lines in every aspect of the industry.

The question of the day is “Where did the trust go? The follow up question then becomes, “What do we mean by trust?”

That is a difficult question. Trust is a word with many, many meanings. Over 20 years ago, University of Minnesota business professors D. Harrison McKnight and Norman L. Chervany wrote an extensive review to answer just that question. In it, across the many constructs of trust, they identified four dimensions: benevolence, integrity, competence and predictability. But not all these dimensions are required in all applications of trust.

First of all, there are two broad categories of trust: structural trust – trust in a system – and interpersonal trust – trust in a person. In their analysis, McKnight and Chervany looked at six constructs of trust that can apply in different situations. For the sake of this discussion, let’s focus on two of these:

“System trust: the extent to which one believes that proper impersonal structures are in place to enable one to anticipate a successful future endeavor.”

And…

“Situational Trust – meaning that one has decided to trust without regard to the specific persons involved, because the benefits of trusting in this situation outweigh the possible negative outcomes of trusting.”

What trust that did exist in marketing what an outcome of these two constructs. Both tend to apply to the structure of marketing, not the people in marketing. The headlines I cited earlier both pointed to a breakdown of trust on the system level, not the personal level. Now, let’s look at those four dimensions as they apply to structural trust in marketing. No one has ever accused marketers of being overly benevolent, so let’s set that one aside. Also, I would argue – strenuously – that marketers today – including those at agencies – are more competent than ever before. They have been mostly successful at turning marketing from an arcane guessing game that paraded as art to an empirically backed science. So a lack of competency can’t be blamed for this trust breakdown. That leaves integrity and predictability. I suspect there’s a compound relationship between these two things.

The reason we’re losing structural trust is that marketing is no longer predictable. And this lack of predictability is triggering a suspicion that there has been a corresponding lack of integrity. But the unpredictability of marketing is no one’s fault.

Marketing today is analogous to physics at the turn of the last century. For 200 years the universe had been neatly ruled by Newton’s Laws. Then physicists started discovering things that couldn’t be so neatly explained and the Universe became a place of Uncertainty Principles, Schrödinger’s Cat and Strange Attractors. Everything we thought was predictable in all situations suddenly become part of a much bigger – and more complex – mystery.

Similarly, mass marketing could run by Newton-like laws because we were dealing with mass and weren’t looking too closely. Apply enough force to enough people with enough frequency and you could move the needle in what seemed like a predictable fashion. But today marketing is a vastly different beast. We market one-to-one and those “ones” are all inter-connected, which creates all types of feedback loops and network effects. This creates complexity – so predictability is as dead at the afore-mentioned Schrödinger’s Cat (or is it?)

I don’t think this comes as news to anyone reading this column. We all know we’re being disrupted. I think we’re all beginning to understand the challenges of complexity. So why don’t we just accept it as the new normal and continue to work together? Why are clients feeling personally betrayed by their agencies, market research firms and ad delivery platforms? It’s because our brains aren’t very nuanced when it comes to identifying trust and betrayal. Brains operate by the “when you’re a hammer – everything looks like a nail” principle.

Rationally, we understand the different between interpersonal trust and situational trust, but we have to remember that our rationality is reinforced by emotional rewards and cautions. When we’re in a trusting relationship – or system – our ventrial striatum, medial prefrontal cortex and caudate nucleus all perk happily along, priming our brains with oxytocin and pushing all the right reward buttons. But whether it’s a person or a situation that betrays our trust, the same neural mechanisms fire – the insula and amygdala – creating feelings of frustration, fear, anger and resentment.

Now, none of this is the fault of anyone in marketing. But humans work on cause and effect. If our marketing is not working, it’s easier to assign a human cause. And it’s much easier to feel betrayed by a human than by a system.

 

The Assisted Reality of the New Marketer

Last week, MediaPost’s Laurie Sullivan warned us that the future of analytical number crunchers is not particularly rosy in the world of marketing. With cognitive technologies like IBM’s Watson coming on strong in more and more places, analytic skills are not that hot a commodity any more. Ironically, when it comes to marketing, the majority of companies have not planned to incorporate cognitive technologies in the near future. According to a report from IBM and Oxford Economics, only 24% of the organizations have a plan to incorporate CT in their own operations.

Another study, from Forrester, explored AI Marketing Readiness in Retail and eCommerce sectors. The state of readiness is a little better. In these typically forward thinking sectors, 72% are implementing AI marketing tech in the next year, but only 45% of those companies would consider themselves as excelling in at least 2 out of 3 dimensions of readiness.

If those numbers seem contradictory, we should understand what the difference between cognitive technology and artificial intelligence is. You’ll notice that IBM refers to Watson as “cognitive computing.” As Rob High, IBM’s CTO for Watson put it, “What it’s really about is involvement of a human in the loop,” and he described Watson as “augmented intelligence” rather than artificial intelligence.

That “human in the loop” is a critical difference between the two technologies. Whether we like it or not, machines are inevitable in the world of marketing, so we’d better start thinking about how to play nice with them.

 

I remember first seeing a video from the IBM Amplify summit at a MediaPost event last year. Although the presentation was a little stilted, the promise was intriguing. It showed a marketer musing about a potential campaign and throwing “what ifs” at Watson, who quickly responded with the almost instantly analyzed quantified answers. The premise of the video was to show how smart Watson was. But here’s a “what if” to consider. What if the real key to this was the hypotheticals that the human seemed to be pulling out of the blue? That doesn’t seem that impressive to us – certainly not as impressive as Watson’s corralling and crunching of relevant numbers in the blink of an eye. Musing is what we do. But this is just one example of something called Moravec’s Paradox.

Moravec’s Paradox, as stated by AI pioneer Marvin Minsky, is this: “In general, we’re least aware of what our minds do best. We’re more aware of simple processes that don’t work well than of complex ones that work flawlessly.” In other words, what we find difficult are the tasks that machines are well suited for, and the things we’re not even aware of are the things machines find notoriously hard to do. Things like intuition. And empathy. If we’re looking at the future of the human marketer, we’re probably looking at those two things.

In his book, Humans are Underrated, Geoff Colvin writes,

“Rather than ask what computers can’t do, it’s much more useful to ask what people are compelled to do—those things that a million years of evolution cause us to value and seek from other humans, maybe for a good reason, maybe for no reason, but it’s the way we are.”

We should be ensuring that both humans and machines are doing what they do best, essentially erasing Moravec’s Paradox. Humans focus on intuition and empathy and machines do the heavy lifting on the analyzing and number crunching. The optimal balance – at this point anyway – is a little bit of both.

In Descarte’s Error – neurologist Antonio Damasio showed that without human intuition and emotion – together with the corresponding physical cues he called somatic markers – we could rationalize ourselves into a never-ending spiral without ever coming to a conclusion. We need to be human to function effectively.

Researchers at MIT have even tried to include this into an algorithm. In 1954, Herbert Simon introduced a concept called bounded rationality. It may seem like this puts limits on the cognitive power of humans, but as programmers like to say, bounded rationality is a feature, not a bug. The researchers at MIT found that in an optimization challenge, such as finding the optimal routing strategy for an airline, humans have the advantage of being able to impose some intuitive limits on the number of options considered. For example, a human can say, “Planes should visit each city at the most once,” and thereby dramatically limit the number crunching required. When these intuitive strategies were converted to machine language and introduced into automated algorithms, those algorithms got 10 to 15% smarter.

When it comes right down to it, the essence of marketing is simply a conversation between two people. All the rest: the targeting, the automation, the segmentation, the media strategy – this is all just to add “mass” to marketing. And that’s all the stuff that machines are great at. For us humans, our future seems to rely on our past – and on our ability to connect with other humans.

GE: A Different Company for a Different World

One week ago today, John Flannery took over as the new CEO of General Electric. He’s only the 3rd person in the past 36 years to have held the role. He takes over from Jeff Immelt, who in turn inherited the post from the iconic Jack Welch in 2001. Welch started his reign in 1981.

GE has been around for a long time. It actually predates the Dow Jones Index by 4 years (having been founded in 1892) and is the only one of the 12 original companies listed that still exists. It – perhaps more than any other company – serves as a case study for the evolution of the multi-national mega corporation. But GE is in trouble. Share prices are down. It’s struggling to retain its considerable grip on the industries in which it competes. Flannery has his hands full.

The GE story is also interesting because Jack Welch was the first rock star CEO. In 1981, when the Welch reign began, we were still very much in the era where sheer bulk equaled success. Size bestowed a considerable advantage on companies like GE. Welch recognized this and introduced the now famous “Number One or Number Two” strategy; where he pared down GE’s portfolio to just the industries where they could be either first or second in the world.

Ironically, given that he was lionized as one of the great corporate strategists of his era, Welch was relatively unimpressed with the classic interpretation of strategy.

“Forget the scenario planning, yearlong studies, and 100-plus page reports that “gurus” suggest. They’re time consuming and expensive, and you just don’t need them. In real life, strategy is very straightforward. You pick a general direction and implement like hell.”

It was this embracing of flexibility in planning that eventually led Welch to rethink the rigidity of his “One or Two” dictum. Jeff Immelt followed the same playbook, shutting down portfolios like finance and placing a heavy bet on high tech infrastructure. But despite Immelt’s best efforts, GE’s market cap dramatically eroded, shedding almost 30% and $150 billion in value over his 16-year stint as CEO. When you stack it up against Welch’s numbers – a 2790% increase in market cap in the 20 years his hand was on the steering wheel – it’s hard not to come to the conclusion that Immelt was a horrible CEO and Welch was a super star. But as logical as this seems, it’s based on faulty logic – what Phil Rosenzweig calls the Halo Effect. That fact was, the world of Immelt’s GE was a vastly different place than was the world of Welch’s GE, even setting aside mega events like 9/11 and the financial meltdown of 2008.

In those 16 years, many of economist Ronald Coase’s original reasons why a corporation exists disappeared. Most of them had to do with the market friction that came from a rapidly expanding physical market place. If you want the exhaustive analysis of this, go ahead and plow your way through the 600 plus pages of Alfred Chandler’s seminal work – The Visible Hand. But to pare that down to the barest essentials: it was much more efficient to actually build physical things and distribute them to a geographically dispersed market when you had a vertically integrated corporation where you could manage every step of the process. This was the world in which Jack Welch became the CEO of GE.

That’s not the world we live in today. Because transactional friction has been ruthlessly eliminated by technology, the efficiencies of the open market usually equal and sometimes exceed that of a corporation. Need a massive international transactional platform? The emerging blockchain commons can provide that. Need marketing capabilities that weren’t even dreamt of by even the biggest multinationals just a decade ago? Take your pick of almost 5000 MarTech vendors. Your start up office grown too big for your garage? You can even rent a corporate headquarters, complete with all the bells and whistles.

So the biggest question facing Flannery in 2017 is this: Are mega corporations – and, by extension, GE – even relevant any more? If we stick to Coase’s strict definition, the answer is probably no. But perhaps there’s another reason for corporations to exist: the critical mass of innovation.

Although she was vilified for it, I believe Marissa Mayer was on to this when she herded all of Yahoo’s teleworkers into the same physical location. In the infamous memo, Yahoo’s HR Director, Jackie Reses, said,

“Some of the best decisions and insights come from hallway and cafeteria discussions, meeting new people, and impromptu team meetings. Speed and quality are often sacrificed when we work from home. We need to be one Yahoo!, and that starts with physically being together.”

Mayer defended her decision by first acknowledging that “people are more productive when they’re alone,” and then stressed “but they’re more collaborative and innovative when they’re together.

Researchers have found that when the population of a city grows, the amount of productivity scales supralinearly. If you double the population of a city, you don’t just get a 100% boost in productivity, you also get a 30% bonus. Cities are the most effective innovation engines ever devised. And the reason is simple. When you pack a bunch of intellectually diverse people into the same space, magic happens. Mayer understood this. Unfortunately, the realization was “too little, too late” to save Yahoo but that doesn’t mean her logic was faulty.

As John Flannery steps into the CEO role, he may run full speed into the realization that the benefits once bestowed by being massive have turned into liabilities. What once made GE great now threatens to drown it. But there are still 300,000 different minds that work for GE. Frankly I’m not sure mega corporations can ever be relevant again in a friction-free marketplace, but if they can, the answer lies in the innovation potential of those minds.

Sir Martin and the Terrible, Horrible, No Good, Very Bad Week

Sir Martin Sorrell must feel like he’s trying to hold water in his bare hands.

First, the normally bullish European Investment Bank Exane BNP Paribas – double whammied Sorrell’s WPP last week with a double downgrade – from “outperform” to “underperform” – and dropped their target price for the stock by a whopping 27%. The analyst quoted in the release, Charles Bedouelle, said, “Marketing is driven by mobile, nimbler brands, ecommerce and automation. These areas are dominated by platforms where agencies are sparse, raising the risk of lower mid-term growth.”

Then, just yesterday, Mediapost’s Joe Mandese told us that Pivotal Research Group downgraded the entire ad sector, including Interpublic, Omnicom, Publicis and WPP. This time, analyst Brian Wieser said, “While we continue to expect growth for agencies, challenges that became much more visible by the middle of last year are likely to compress expansion in years ahead vs. prior expectations.”

Or, in simpler terms – “The gig is up Guys.”

WPP and the rest of advertising’s usual suspects have depended on an ad market with a significant amount of inherent friction. Friction creates pockets of value for intermediaries, who turn a profit by dealing with that friction on behalf of its clients. This friction has been relentlessly eliminated from the market in the past two decades thanks to technology. Yes, advertising has become more fragmented, but more significantly, it’s also become more fluid. The advantage once offered by agencies has been flipped into an anchor. Business models founded on the exploitation of friction in markets are not very good at dealing with transparency and fluidity.

When I was heading my own digital service company, we could chart the lifespan of a client with pretty reliable predictability. We specialized in search and most of our clients retained us when they were just starting out. This is the period when there is the greatest amount of friction – starting from standing still. We’d get them up and running and within a few months start delivering some pretty impressive ROI numbers. Over the next few years, we’d expand campaigns and find pockets of unexploited potential. Returns would grow. Budgets would increase. Clients would be happy. Life was good.

For awhile.

But there was an inevitable tipping point. As campaigns matured and Google – bless their techie hearts – relentlessly removed friction from the search advertising market, our perceived value would start to decline. At some point, it became an academic line item decision. When the cost of bringing search in house was less than our agency fees, we knew the end was near. We might prolong it for a year or two but the math was working against us. I remember one particularly somber December 24th when we received word from our largest client that they were not renewing our contract for the coming year. That represented about 16% of our total yearly revenue. And this was a client who loved us to pieces just 12 months earlier. It was not a happy Christmas. But it was pretty hard to argue with their logic.

Now, compared to WPP, we were a pimple on the butt of a flea on the tail of a dog who happened to be riding an elephant. And just like WPP, we were always looking for ways to add value by diversifying in other areas. But I suspect the logic is the same. If you depend on friction to add value, and that friction is disappearing, sooner or later you’ll disappear too. Your business model will slip right through your fingers. Just like water in Sir Martin’s hands.

 

The Death of Sears and the Edge of Chaos

So, here’s the question: Could Sears – the retail giant who has become the poster child for the death of mall-based retail shopping – have saved themselves? It’s an important question, because I don’t think Sears was an isolated incident.

In 2006, historian Richard Longstreth explored the rise and fall of Sears. The rise is well chronicled. From their beginnings in 1886, Richard Sears and Alvah Roebuck grew to dominate the catalog mail order landscape. They prospered by creating a new way of shopping that catered specifically to the rural market of America, a rapidly expanding opportunity created by the Homestead Act of 1862. The spreading of railroads across the continent through the 1860’s and 70’s allowed Sears to distribute physical goods across the nation. This, combined with their quality guarantee and free return policy, allowed Sears to rapidly grow to a position of dominance.

In the 1920’s and 30’s, Robert E. Wood, the fourth president of Sears, took the company in a new direction. He reimagined the concept of a physical retail store, convincing the reluctant company to expand from its very lucrative catalog business. This was directly driven by Sear’s foundation as a mail order business. In essence, Woods was hedging his bet. He built his stores far from downtown business centers, where land was cheap. And, if they failed as retail destinations, they could always be repurposed as mail order distribution and fulfillment centers. But Wood got lucky. Just about the time he made this call, America fell in love with the automobile. They didn’t mind driving a little bit to get to a store where they could save some money. This was followed by the suburbanization of America. When America moved to the suburbs, Sears was already there.

So, you could say Sears was amazingly smart with its strategy, presciently predicting two massive disruptions in the history of consumerism in America. Or you could also say that Sears got lucky and the market happened to reward them – twice. In the language of evolution, two fortuitous mutations of Sears led to them being naturally selected by the marketplace. But, as Longstreth showed, their luck ran out on the third disruption, the move to online shopping.

A recent article looking back at Longstreth’s paper is titled “Could Sears Have Avoided Becoming Obsolete?”

I believe the answer is no. The article points to one critical strategic flaw as the reason for Sear’s non-relevance: doubling down on their mall anchor strategy as the world stopped going to malls. In hindsight, this seems correct, but the fact is, it was no longer in Sears DNA to pivot into new retail opportunities. They couldn’t have jumped on the e-com bandwagon, just as a whale can’t learn how to fly. It’s easy for historians to cast a gaze backwards and find reasons for organizational failure, just as it’s easy to ascribe past business success to a brilliant strategy or a visionary CEO. But the fact is, as business academic Phil Rosenzweig shows in his masterful book The Halo Effect, we’re just trying to jam history into a satisfying narrative. And narratives crave cause and effect. We look for mistakes that lead to obsolescence. This gives us the illusion that we could avoid the same fate, if only we are smarter. But it’s not that simple. There are bigger forces at play here. And they can be found at the Edge of Chaos.

Edge of Chaos Theory

In his book, Complexity: Life at the Edge of Chaos, Roger Lewin chronicles the growth of the Santa Fe Institute, an academic think tank that has been dedicated to exploring complexity for the last 33 years now. But the “big idea” in Lewin’s book is the Edge of Chaos Theory, a term coined by mathematician Doyne Farmer to describe a discovery by computer scientist Christopher Langton.

The theory, in its simplest form, is this: On one side you have chaos, where there is just too much dynamic activity and instability for anything sustainable to emerge. On the other side you have order, where rules and processes are locked in and things become frozen solid. These are two very different states that can apply to biology, sociology, chemistry, physics, economics – pretty much any field you can think of.

To go from one state – in either direction – is a phase transition. Everything changes when you move from one to the other. On one side, turmoil crushes survivability. One the other, inertia smothers change. But in between there is a razor thin interface, balanced precipitously on the edge of chaos. Theorists believe that it’s in this delicate interface where life forms, where creativity happens and where new orders are born.

For any single player, it’s almost impossible to maintain this delicate balance. As organizations grow, I think they naturally move from chaos to order, at some point moving through this exceptional interface where the magic happens. Some companies manage to move through this space a few times. Apple is such a company. Sears probably moved through the space twice, once is setting their mail order business up and once with their move to suburban retail. But sooner or later, organizations go through their typical life cycle and inevitably choose order over chaos. At this point, their DNA solidifies to the point where they can no longer rediscover the delicate interface between the two.

It’s at the market level where we truly see the Edge of Chaos theory play out. The theory contests that adaptive systems in which there is feedback continually adapt to the Edge of Chaos. But, as in any balancing act, it’s a very dynamic process. In the case of sociological evolution, it’s often a force (or convergence of forces) of technology that catalyzes the phase transition from order back to chaos. This is especially true when we look at markets. But this is an oscillation between order and chaos, with the market switching from phases of consolidation and verticalization to phases of chaos and sweeping horizontal activation. Markets will swing back and forth but will constantly be rewarding winners that live closest to the edge between the two states.

We all love to believe that immortality can be captured in our corporate form, whether it be our company or our own body. But history shows that we all have a natural life cycle. We may be lucky enough to extend our duration in that interface on the edge of chaos, but sooner or later our time there will end. Just as it did with Sears.

 

 

 

Don’t Be Evil – Revisited

I have to confess, I was actually a fan of Google’s “Don’t Be Evil” philosophy. Predictably, once they went public with it, the cynics were quick to tear it apart. Was it naïve? Of course it was. The minute Google did anything that smacked of ethical transgression; there were scads of people willing to point fingers. But the fact was, at least Google was trying. It gave those inside the Googleplex a common code of conduct. More than one planning meeting’s blue sky postulation ran up against the “Don’t be Evil” mantra which caused the conversation to veer in another – hopefully less evil – direction.

Some columns back, I talked about the corporate rush to embrace morality and voiced my own skepticism about this born again fervor. I’m skeptical because I don’t believe that capitalism and morality play very nice together. It’s tough to make a profit and make the world a kinder place at the same time. I think you can certainly set your sights in that direction, but as Google found out, if you wear your morality on your sleeve there are many who look for every opportunity to call “bullshit” on you. That’s likely why they downplayed the whole “Don’t Be Evil” thing in 2015 when Alphabet was formed.

But I still think that Google generally tries to be good. And, perhaps not coincidentally, Google is now most valuable brand in the world, according to Brand Finance When you’re a huge company you have your finger in a lot of pies and some of them, inevitably, will upset someone somewhere. The trick here is that what is evil is in the eye of the beholder. Is AirBNB good because they have enabled a new option for travellers to connect with property owners and find better value accommodation, or are they evil because they’re disrupting an established industry and putting thousands of people out of work?

It’s hard to combine the church of morality and the state of profitability. That’s why most corporations elect to keep the two separate. Microsoft is a good example. Under the reign of Bill Gates, Microsoft was even called the “Evil Empire” because of their predatory and monopolistic business practices. Yet Forbes recently tagged Microsoft as having the second best corporate social responsibility program in the world, right behind –you guessed it – Google. How do you reconcile the two? Thanks to the Bill and Melinda Gates Foundation, Bill Gates is one of the world’s most generous philanthropists. He really, really, really wants to make the planet a better place. But as head of Microsoft, he also made a shit load of money (some of which he is currently giving away) by being an asshole. He, perhaps more than anyone, personifies the dynamic tension we talk about when we refer to corporate ethics.

Let’s go back to the value of corporate brands on the Brand Finance list and the role ethics might play. It’s a timely discussion, especially right now. United Airlines was heading in the right direction, 81 on the list, up a whopping 53 spots from 2016. But then they gave the thumbs up to drag Dr. Dao down the aisle in front of an entire plane full of smart phone equipped passengers. Pepsi was number 33 on the list. But that was before the Pepsi marketing execs gave the green light to the Kylie Jenner abomination masquerading as an ad.

There’s evilness, and then there’s just bone-headed, tone deaf, shake your head in bewilderment stupidity. How the hell do these things happen? Even taking into account the “two sides to every story” factor, how did the multiple United staff members who must have had a part in the Dao debacle think that this could possibly be the way to treat a paying customer flying the “Friendly Skies”? How did the Jenner ad pass through what must have been multiple rounds of approval at Pepsi with no one whispering “WTF”?

Here, it’s an issue of culture. Culture is defined by Merriam-Webster as: the set of shared attitudes, values, goals, and practices that characterizes an institution or organization. And the tone of the culture is generally set from the top down. Corporate ethics depend on the ethics of the founders, CEO and executive management. While having a moral CEO might not be enough to guarantee consistent corporate ethics, it’s a lead pipe cinch that if you have a scum-bag in the CEO role, the company is probably going to be a pretty sleazy operation.

Culture depends on clearly understood values and practices that adhere to those values. If this is in place, it gives the rank and file the confidence to hold up their hand when “off-culture” things occur. It would give the United flight attendant the moral obligation to say, “What a minute. Maybe we shouldn’t drag a paying customer who had already been seated forcefully off the plane like a common criminal. That just doesn’t seem right to me.”

Things like Google’s “Don’t Be Evil” dictate may seem naïve in the corporate world, but it was a value that helped define the culture. Perhaps we shouldn’t be so quick to criticize it. Maybe we need more of that particular type of naiveté.

Want to be Innovative? Immerse Yourself!

In a great post earlier this year, VC Pascal Bouvier (along with Aldo de Jong and Harry Wilson) deconstructed the idea that starts ups always equate with successful innovation. Before you jump on the Lean Start Up bandwagon, realize the success rate of a start up taking ideas to market is about 0.2%. Those slow-moving, monolithic corporations that don’t realize they’re the walking dead? Well, they’re notching a 12.5% hit rate. Sure, they’re not disrupting the universe, but they are protecting their profit margin, and that’s the whole point.

The problem, Bouvier states, is one of context. Start-ups serve a purpose. So do big corporations. But it’s important to realize the context in which they both belong. We are usually too quick to adopt something that appears to be working without understanding why. We then try to hammer it into a place it doesn’t belong.

Start-ups are agents in an ecosystem. Think of them like amino acids in a primordial soup from which we hope, given the right circumstances, life might emerge. The advantage in this market-based ecosystem is that things move freely – without friction. Agents can bump up against each other quickly and catalysts can take their shot at sparking life. It is a dynamic, emergent system. Start-ups are lean and fast-moving because they have to be. It is the blueprint for their survival. It is also why the success rate of any individual start-up is so low. The market is a Darwinian beast – red of tooth and claw. Losers are ruthlessly weeded out.

A corporation is a different beast that occupies a different niche on the evolutionary timeline. It is a hierarchy of components that has already been tested by the market and has assembled itself into a replicable, successful entity. It is a complex organism and has discovered rules that allow it to compete in its ecosystem as a self-organized, vertically integrated, hopefully sustainable entity. In this way, it bears almost no resemblance to a start up. Nor should it.

This is why it’s such a daunting proposition for a start up to transition into a successful corporation. Think of the feat of self-transformation that is required here. Not only do you have to change your way of doing things – you have to change your very DNA. You have to redefine every aspect of who you are, what you do and how you do it.

If you pull out your perspective dramatically here, you see that this is a wave. Call it Schumpeterian Gale of Creative Destruction, call it a Kontdratiev Wave, call it whatever you like – this is not simply a market adaptation – this is a phase transition. The rules on one side of the wave are completely different than on the other side – just as the rules of physics are different for liquids and gases. And that applies to everything, including how you think about innovation.

We commonly believe start-ups are more innovative than corporations. But that’s not actually true. It’s the market that is more innovative. And that innovation has a very distinct characteristic. It comes from agents who are immersed in a particular part of the market. As Bouvier points out in his post, start up CEO’s solve a problem that’s “right in front of their nose.” Think of the typical start up founder. They are ear lobe deep in whatever they are doing. From this perspective, they see something they believe to be a need. They then set out to create a new solution to that need. This is the sense making cycle I keep talking about.

For a lot of start ups, sense making is ingrained. The entrepreneur is embedded in a context where it allows them to make sense of a need that has been overlooked. The magic happens when the switch clicks and the need is matched with a solution. Entrepreneurs are the synaptic connections of the market, but this requires deep immersion in the market.

There’s something else about this immersion that’s important to consider – there is nothing quantitative about it. It’s organic and natural. It’s messy and often chaotic. It’s what I call “steeping in it.” I believe this is also important to innovation. And it’s not just me. A recent study from the University of Toronto shows that creativity thrives in environments free of too much structured knowledge. The authors note, “A hierarchical information structure, compared to a flat information structure, will reduce creativity because it reduces cognitive flexibility.”

Innovation requires insight, and insight comes from being intimately immersed in something. There is a place for data analysis and number crunching, but like most things, that’s the other side of the quant/qual wave. You need both to be innovative.