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.

 

 

 

How I Cleared a Room Full of Marketing Techies

Was it me?

Was it something I said?

I don’t think so. I think it was just that I was talking about B2B.

Let me explain.

Last week, I was in San Francisco talking at a marketing technology conference. My session, in which I was a co presenter, was going to be about psychographic profiling and A.I. – in B2B marketing. It was supposed to start immediately after another session on “cognitive marketing”. During this prior session, I decided to stand at the back at the room so I didn’t take up a seat.

That proved to be a mistake. During the session, which was in one of three tracks running at the time, the medium sized room filled to standing room only capacity. The presenter talked about how machine learning – delivered via IBM’s Watson, Google’s DeepMind or Amazon’s Cloud AI solution – is going to change marketing and, along with it, the job of a human marketer.

I found it interesting. The audience seemed to think so as well. The presenter wrapped up – the moderator got up to thank him and introduce me as the next presenter – and about 60% of the room stood as one and headed for the exit door, creating a solid human wall between myself and the stage. It took me – the fish – about 5 minutes of proverbially and physically swimming upstream before I could get to the stage. It wasn’t the smoothest of transitions.

I tend to take these things personally. But I honestly don’t think it was me. I think it was the fact that “B2B” was in the title of my presentation. I have found that as soon as you slap that label on anything, marketers tend to swarm in the opposite direction. If there is a B2B track at a general marketing show, you can bet your authentic Adam West Batman action figure (not that I would have any such thing) that it’s tucked away in some far-off corner of the conference center, down three flights of escalators, where you turn right and head towards the parking garage. My experience at this past show was analogous to the lot of B2B marketing in general. Whenever we start talking about it, people start heading for the door.

I don’t get it.

It’s not a question of budget. Even in terms of marketing dollars, a lot of budget gets allocated for B2B. An Outsell report for 2016 pegged the total US B2B marketing spend at about $151 billion. That compares respectfully with the total consumer Ad Spend of $192 billion, according to eMarketer.

And it’s definitely not a question of market size. It’s very difficult to size the entire B2B market, but there’s no doubt that it’s huge. A Forrester report estimates that $8 trillion was sold in the US B2B retail space in 2014. That’s almost half of the US gross domestic product that year. And a huge swath of the business is happening online. The worldwide B2B eCommerce market is projected to be $6.7 trillion by 2020. That’s twice as big as the projected online B2C market ($3.2 trillion).

So what gives? B2B is showing us the money. Why are we not showing it any love? Just digging up the background research for this column proved to be painful. Consumer spend and marketing dollar numbers come gushing off the page of even a half-assed Google search. But B2B stats? Cue the crickets.

I have come to the conclusion that it’s just lack of attention, which probably comes from a lack of sex appeal. B2B is like the debate club in high school. While everyone goes gaga during school assemblies over the cheerleading squad and the football team, the people who will one day rule the world quietly gather after class with Mr. Tilman in the biology lab to plot their debate strategy for next week’s match up against J.R. Matheson Senior High. It goes without saying that parents will be the only ones who actually show up. And even some of them will probably have to stay home to cut the grass.

Those debaters will probably all grow up to be B2B marketers.

It may also be that B2B marketing is hard. Like – juggling Rubik’s Cubes while simultaneously solving them – hard. At least, it’s hard if you dare to go past the “get a lead and hound them mercilessly until they either move to another country or give in and buy something to get you off their back” school of marketing. If you try to do something as silly as try to predict purchase behaviors you have the problem of compound complexity. We have been trying for some time, with limited success, to predict a single consumer’s behavior. In B2B, you have to predict what might happen when you assemble a team of potential buyers – each with their own agenda, emotions and varying degrees of input – and ask them to come to a consensus on an organizational buying decision.

That can make your brain hurt. It’s a wicked problem to the power of 5.4 (the average number of buyers involved in a B2B buying decision- according to CEB’s research). It’s the Inconvenient Truth of Marketing.

That, I keep telling myself, is why everyone was rushing for the door the minute I started walking to the stage. I shouldn’t take it personally.

Disruption in the Rear View Mirror

Oh..it’s so easy to be blasé. I always scan the Mediapost headlines each week to see if there’s anything to spin. I almost skipped right past a news post by Larissa Faw – Zenith: Google Remains Top-Ranked Media Company By Ad Revenue

“Of course Google is the top ranked media company,” I yawned as I was just about to click on the next email in my inbox. Then it hit me. To quote Michael Bublé, “Holy Shitballs, Mom!”

Maybe that headline doesn’t seem extraordinary in the context of today, but I’ve been doing this stuff for almost 20 years now, and in that context – well-it’s huge! I remembered a column I wrote ages ago about speculating that Google had barely scratched its potential. After a little digging, I found it. It was in October, 2006, so just over a decade ago. Google had just passed the 6 billion dollar mark in annual revenue. Ironically, that seemed a bigger deal then their current revenue of almost $80 billion seems today. In that column, I pushed to the extreme and speculated that Google could someday pass $200 billion in revenue. While we’re still only 1/3 of the way there, the claim doesn’t seem nearly as ludicrous as it did back then.

But here’s the line that really made me realize how far we’ve come in the ten and a half years since I wrote that column: “Google and Facebook together accounted for 20% of global advertising expenditure across all media in 2016, up from 11% in 2012. They were also responsible for 64% of all the growth in global ad spend between 2012 and 2016.”

Two companies that didn’t exist 20 years ago now account for 20% of all global advertising expenditure. And the speed with which they’re gobbling advertising budgets is accelerating. If you’re a dilettante student of disruption, as I am, those are pretty amazing numbers. In the day-to-day of Mediapost – and digital marketing in general – we tend to accept all this as normal. It’s like we’re surfing on top of a wave without realizing the wave is 300 freakin’ feet high. Sometimes, you need to zoom out a little to realizing how momentous the every day is. And if you look at this on a scale of decades rather than days, you start to get a sense that the speed of change is massive.

To me, the most interesting thing about this is that both Google and Facebook have introduced a fundamentally new relationship between advertising and it’s audience. Google’s outré is – of course – intent based advertising. And Facebook’s is based on socially mediated network effects. Both of these things required the overlay of digital connection. That – as they say – has made all the difference. And there is where the real disruption can be found. Our world has become a fundamentally different place.

Much as we remain focused on the world of advertising and marketing here in our little corner of the digital world, it behooves us to remember that advertising is simply a somewhat distorted reflection of the behaviors of the world in general. It things are being disrupted here, it is because things are being disrupted everywhere. As it regards us beings of flesh, bone and blood, that disruption has three distinct beachheads: the complicated relationship between our brains and the digital tools we have at our disposal, the way we connect with each other, and a dismantling of the restrictions of the physical world at the same time we build the scaffolding of a human designed digital world. Any one of these has the potential to change our species forever. With all three bearing down on us, permanent change is a lead-pipe cinch.

Thirty years is a nano-second in terms of human history. Even on the scale of my lifetime, it seems like yesterday. Reagan was president. We were terrorized by the Unabomber. News outlets were covering the Iran-Contra affair. U2 released the Joshua Tree. Platoon won the best picture Oscar. And if you wanted to advertise to a lot of people, you did so on a major TV network with the help of a Madison Avenue agency. 30 years ago, nothing of which I’m talking about existed. Nothing. No Google. No Facebook. No Internet – at least, not in a form any of us could appreciate.

As much as advertising has changed in the past 30 years, it has only done so because we – and the world we inhabit – have changed even more. And if that thought is a little scary, just think what the next 30 years might bring.

Shopping is Dead. Long Live Shopping!

Last week, a delivery truck pulled up in my driveway. As the rear door rolled up, I saw the truck was full of Amazon parcels, including one for me. Between the four of us that live in our house, we have at least one online purchase delivered each week. When compared to the total retail spending we do, perhaps that’s not all that significant, but it’s a heck of a lot more than we used to spend.

We are a microcosm of a much bigger behavioral trend. A recent Mediapost article by Jack Loechner reported that online retail grew by 15.6 percent last year and represents 11.7 percent of total retail sales. An IRI report shows similar trends in consumer packaged goods. In 2015, ecommerce represented just 1.5% of all consumer packaged good sales, but they project that to climb to 10% in 2022. In fueling that increase, Amazon is not only leading the pack, but also dominating it to an awe-inspiring extent. Between 2010 and last year, Amazon’s sales in North America quintupled from $16 billion to $80 billion. Hence all those packages in the back of the afore-mentioned truck.

Now, maybe all this still represents “small potatoes” in the total world of retail, but I think we’re getting close to an inflection point. We are fundamentally changing how we think of shopping, and once we let that demon out of the box (or bubble wrapped envelope) there is no stuffing it back.

In the nascent days of online shopping, way back in 2001, an academic study looked at the experience of shopping online. The authors, Childers, Carr, Peck and Carson, divided the experience into two aspects: hedonic and utilitarian. I’ll deal with both in that order.

First of all, the hedonic side of shopping – the touchy, feely joy of buying stuff. It’s mainly the hedonic aspects that purportedly hold up the shaky foundations of all those bricks and mortar stores. And I wonder – is that a generational thing? People of my generation and older still seem to like a little retail therapy now and again. But for my daughters, the act of physically shopping is generally a pain in the ass. If they can get what they want online, they’ll do so in the click of an OneClick button. They’ll visit a mall only if they have to.

In an article early this year in The Atlantic, Derek Thompson detailed the decimation of traditional retail. Mall visits declined 50 percent between 2010 and 2013, according to the real-estate research firm Cushman and Wakefield, and they’ve kept falling every year since. Retailers are declaring bankruptcy at alarming rates. Thompson points the finger at online shopping, but adds a little more context. Maybe the reason bricks and mortar retail is bleeding so badly is that it represents an experience that is no longer appealing. A quote from that article raises an interesting point:

“ ‘What experience will reliably deliver the most popular Instagram post?’—really drive the behavior of people ages 13 and up. This is a big deal for malls, says Barbara Byrne Denham, a senior economist at Reis, a real-estate analytics firm”

Malls were designed to provide an experience – to the point of ludicrous overkill in mega-malls like Canada’s West Edmonton Mall or Minnesota’s Mall of America. But increasingly, those aren’t the experiences we’re looking for. We’re still hedonistic, but our hedonism has developed different tastes. Things like travel and dining out with friends are booming, especially with younger generations. As Denham points out, our social barometers are not determined so much but what we have as by what we’re doing and whom we’re doing it with. Social proof of such things is just one quick post away.

Now let’s deal with the utilitarian aspects of shopping. According to a recent Harris Poll, the three most popular categories for online shopping are:

  1. Clothing and Shoes
  2. Beauty and Personal Care Products
  3. Food Items

Personally, when I look at the things I’ve recently ordered online, they include:

  • A barbecue
  • Storage shelves
  • Water filters for my refrigerator
  • A pair of sports headphones
  • Cycling accessories

I ordered these things online because (respectively):

  • They were heavy and I didn’t want the hassle of dragging them home from the store; and/or,
  • They probably wouldn’t have what I was looking for at any stores in my area.

But even if we look beyond these two very good reasons to buy online, “etail” is just that much easier. It’s generally cheaper, faster and more convenient. We have a long, long tail of things to look for, the advantage of objective reviews to help filter our buying and an average shopping trip duration of just a few minutes – start to finish – as opposed to a few hours or half a day. Finally, we don’t have to contend with assholes in the parking lot.

Online already wins on almost every aspect and the delta of “surprise and delight” is just going to keep getting bigger. Mobile devices untether buying from the desktop, so we can do it any place, any time. Voice commands can save our tender fingertips from unnecessary typing and clicking. Storefronts continue to get better as online retailers run bushels of UX tests to continually tweak the buying journey.

But what’s that you say? “There are just some things that you have to see and touch before you buy?” Perhaps, although I personally remain unconvinced about the need for tactile feedback when shopping. People are buying cars online and if ever there was a candidate for hedonism, it’s an automobile. But let’s say you’re right. I already wrote about how Amazon is changing the bricks and mortar retail game. But Derek Thompson casts his crystal ball gazing even further in the future when he speculates on what autonomous vehicles might do for retail:

“Once autonomous vehicles are cheap, safe, and plentiful, retail and logistics companies could buy up millions, seeing that cars can be stores and streets are the ultimate real estate. In fact, self-driving cars could make shopping space nearly obsolete in some areas.”

Maybe you should buy some shares in Amazon, if you haven’t already. P.S. You can buy them online.

 

The Status Quo Bias – Why Every B2B Vendor has to Understand It

It’s probably the biggest hurdle any B2B vendor has to get over. It’s called the Status Quo bias and it’s deadly in any high-risk purchase scenario. According to Wikipedia, the bias occurs when the current baseline (or status quo) is taken as a reference point, and any change from that baseline is perceived as a loss. In other words, if it ain’t broke don’t fix it. We believe that simply because something exists, it must have merit. The burden of proof then falls on the vendor to overcome this level of complacency

The Status Quo Bias is actually a bundle of other common biases, including the Endowment Effect, the Loss Aversion Bias, The Existence Bias, Mere Exposure effect and other psychological factors that tend to continually jam the cogs of B2B commerce. Why B2B? The Status Quo Bias is common in any scenario where risk is high and reward is low, but B2B in particular is subject to it because these are group-buying decisions. And, as I’ll soon explain, groups tend to default to Status Quo bias with irritating regularity. The new book from CEB (recently acquired by Gartner) – The Challenger Customer – is all about the status quo bias.

So why is the bias particularly common with groups? Think of the dynamics at play here. Generally speaking, most people have some level of the Status Quo Bias. Some will have it more than others, depending on their level of risk tolerance. But let’s look at what happens when we lump all those people together in a group and force them to come to a consensus. Generally, you’re going to have a one or two people in the group that are driving for change. Typically, these will be the ones that have the most to gain and have a risk tolerance threshold that allows the deal to go forward. On the other end of the spectrum you have some people who have low risk tolerance levels and nothing to gain. They may even stand to lose if the deal goes forward (think IT people who have to implement a new technology). In between you have the moderates. The gain factor and their risk tolerance levels net out to close to zero. Given that those that have something to gain will say yes and those who have nothing to gain will say no, it’s this middle group that will decide whether the deal will live or die.

Without the Status Quo bias, the deal might have a 50/50 chance. But the status quo bias stacks the deck towards negative outcomes for the vendor. Even if it tips the balance just a little bit towards “no” – that’s all that’s required to stop a deal dead in its tracks. The more disruptive the deal, the greater the Status Quo Bias. Let’s remember – this is B2B. There are no emotional rewards that can introduce a counter acting bias. It’s been shown in at least one study (Baker, Laury, Williams – 2008) that groups tend to be more risk averse than the individuals that make up that group. When the groups start discussing and – inevitably – disagreeing, it’s typically easier to do nothing.

So, how do we stick handle past this bias? The common approach is to divide and conquer – identifying the players and tailoring messages to speak directly to them. The counter intuitive finding of the CEB Challenger Customer research was that dividing and conquering is absolutely the wrong thing to do. It actually lessens the possibility of making a sale. While this sounds like it’s just plain wrong, it makes sense if we shift our perspective from the selling side to the buying side.

With our vendor goggles on, we believe that if we tailor messaging to appeal to every individual’s own value proposition, that would be a way to build consensus and drive the deal forward. And that would be true, if every member of our buying committee was acting rationally. But as we soon see when we put on the buying googles, they’re not. Their irrational biases are firmly stacked up on the “do nothing” side of the ledger. And by tailoring messaging in different directions, we’re actually just giving them more things to disagree about. We’re creating dysfunction rather than eliminating it. Disagreements almost always default back to the status quo, because it’s the least risky option. The group may not agree about much, but they can agree that the incumbent solution creates the least disruption.

So what do you do? Well, I won’t steal the CEB’s thunder here, because the Challenger Customer is absolutely worth a read if you’re a B2B vendor. The authors, Brent Adamson, Matthew Dixon, Pat Spenner and Nick Toman, lay out step by step strategy to get around the Status Quo bias. The trick is to create a common psychological frame where everyone can agree that doing nothing is the riskiest alternative. But biases are notoriously sticky things. Setting up a commonly understood frame requires a deep understanding of the group dynamics at play. The one thing I really appreciate about CEB’s approach is that it’s “psychologically sound.” They make no assumptions about buyer rationality. They know that emotions ultimately drive all human behavior and B2B purchases are no exception.

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.