Category Archives: The New Marketplace

Is Amazon Creating a Personalized Store?

There was a brief Amazon-related flurry of speculation last week. Apparently, according to a podcast posted by Wharton, Amazon is planning on opening 300 to 400 bricks and mortar stores.

That’s right. Stores – actual buildings – with stuff in them.

What’s more, this has been “on the books” at Amazon for a while. Amazon CEO Jeff Bezos was asked by Charlie Rose in 2012 if they would every open physical stores. Bezos replied, ““We would love to, but only if we can have a truly differentiated idea,” he said. “We want to do something that is uniquely Amazon. We haven’t found it yet, but if we can find that idea … we would love to open physical stores.”

With that background, the speculation makes sense. If Amazon is pulling the trigger, they must have “found the idea.” So what might that idea be?

Amazon does have a test store in their own backyard of Seattle. What they have chosen to do there, in a footprint about the tenth of the size of the former Barnes and Noble store that was there, is present a “highly curated” store that caters to “local interests.”

Most of the speculation about the new Amazon experiment in “back-to-the-future” retail centers around potential new supply chain management technology or payment methods. But there was one quote from Amanda Nicholson, professor of retail practice at Syracuse University’s Whitman School of Management, that caught my attention; “she said that space represents ‘a test’ to see if Amazon can create ‘a new kind of experience’ using data analytics about customers’ preferences.”

This becomes interesting if we spend some time thinking about the purchase journey we typically take. What Amazon had done online brilliantly is remove friction from two steps in that journey: filtering options and conducting the actual transaction. For certain kinds of purchases, this is all we need. If we’re buying a product that doesn’t rely on tactile feedback, like a digital file or a book, Amazon has connected all the dots required to take us from awareness to purchase.

But that certainly doesn’t represent all potential purchases. That could be the reason that online purchases only represent 9% of all retail. There are many products that require an “experience” between the filtering of options available to us and the actual purchase. These things still require the human “touch” – literally. Up to now, Amazon has remained emotionally distant from these types of purchases. But perhaps a new type of retail location could change that.

Let me give you an example. If you’re a cyclist (like me) you probably have a favorite bike shop. Bike stores are not simply retail outlets. They are temples of bike worship. Bike shops are usually an independent business run by people who love to talk about their favorite rides, the latest bikes or pretty much anything to do with cycling. Going to a bike store is an experience.

But Trek, one of the largest bike manufacturers in the world, also recognized the efficiency of the online model. In 2015, they announced the introduction of Trek Connect, their attempt to find a happy middle ground between practical efficiency and emotional experience. Through Trek Connect, you can configure and order your bike online, but pick it up and have it serviced at your local bike shop.

However, what Amazon may be proposing is not simply about the tactile requirements of certain types of purchases. What if Amazon could create a personalized real world shopping experience?

Right now, there is a gap between our online research and filtering activity and our real world experiential activity. Typically, we shortlist our candidates, gather required information, often in the form of a page printed off from a website, and head down to the nearest retail location. There, the hand off typically leaves a lot to be desired. We have to navigate a store layout that was certainly not designed with our immediate needs in mind. We have to explain what we want to a floor clerk who seems to have at least a thousand other things they’d rather be doing. And we are not guaranteed that what we’re looking for will even be in stock.

But what if Amazon could make the transition seamless? What if they could pick up all the signals from our online activity and create a physical “experiential bubble” for us when we visited the nearest Amazon retail outlet?

Let me go back to my bike purchasing analogy in way of an example. Let’s say I need a new bike because I’m taking up triathlons. Amazon knows this because my online activity has flagged me as an aspiring triathlete. They know where I live and they have a rich data set on my other interests, which includes my favored travel destinations. Amazon could take this data and, under the pretext of my picking up my bike, create a personalized in store experience for me, including a rich selection of potential add-on sales. With Amazon’s inventory and fulfillment prowess, it would be possible to merchandise a store especially for me.

I have no idea if this is what Amazon has “in store” for the future, but the possibility is tantalizing.

It may even make me like shopping.

 

 

 

A New Way to Determine Corporate Value

Last week, I talked about the trend of “hyper” expectations and corporate valuations. Peter Fader, a marketing professor at the Wharton School, commented, “This is why we need to replace the guesswork of tech valuation with the more rigorous, valid, and operational notion of “customer-based corporate valuation.”

I had a chance to look at Professor Fader’s paper. Essentially, he proposes a new model for the valuation of subscription-based businesses based on a calculation of customer lifetime value that uses publicly available information. While interesting in it’s own right, there is a fundamental shift of thinking here that I believe should be explored further.

There are a few standard equations that are used to calculate the value of a firm. If the firm is public, essentially its value is determined by its share price. And that share price is determined by activity in the market – the activity of shareholders. And that activity is dependent on analysts who pass judgment on companies based on projected return to shareholders. At every turn, our entire system of business finance is very heavily weighted towards ownership, which makes sense in a market-based economy. Buyers and sellers determine value.

But what Fader et al are proposing brings another essential stakeholder into the equation – the customer. It’s amazing to me that all the valuation equations we use to determine the value of a corporation don’t involve any direct measure of that corporation’s customer. Sure, we include things like profit, revenue, free cash flow and none of these things would exist without customers, but we never actually attempt to determine the value of a customer. Fader starts the process with the estimation of that value. That simple paradigmatic shift yields a very different view of the world.

For example, if we are to determine the value of a company through the lifetime value of its customers; we have to look at that company in a much different way than the typical financial analyst. We have to look at things like customer loyalty, brand affinity and the likelihood that a company will gain new market share through the disruption of markets. Last week, I used Amazon as an example. Here is a company that has been tremendously disruptive. It has essentially created a new marketplace and, in the process, upended retail as we know it. One would expect this to be taken into account when trying to determine the value of Amazon.

The problem is that things like customer loyalty and brand affinity are emotions. Emotions are not things that are easily quantified. It’s much easier to measure things like quarterly earnings and discounted free cash flow. Most of these things depend on using the past to predict the future. They also rely on the firm’s ability to prognosticate. Typically, all the heavy lifting of factoring in the fuzziness of things like future customer value is left to the company. If a company misses its projections, it is penalized by the analysts, resulting in a decrease of share price.

Ultimately, the gap between how we have historically determined the value of companies and how we might in the future comes down to a matter of our ability to determine what may come to pass. We strive for perfect predictability. We want to place our bets based on solid information and analysis. But, in a disruptive marketplace, this desire for predictability may ultimately sink us. Customers will always determine the value of a company and in a marketplace where transactional and switching costs are both plunging, those customers have the ability to switch buying behaviors instantly. The old saying, “No one ever got fired for buying IBM” has not been true for at least three decades.

Like it or not, if we want to get a true picture of the value of a company, we’re going to have to use some guesswork. And, most importantly, we’re going to have to make sure we include customers in whatever equation we’re using.

 

Nobel Intentions, Ignoble Consequences

It was 20 years ago that I discovered the Internet. According to the International Telecommunication Union, that put me in select company. There were only 77 million users of the Internet by the end of 1996. That represented a little more than 1% of the world’s population. 66% of those were in the US, due likely to access restrictions in other areas. I know I logged on to the Web as soon as I could. I had actually been online with Compuserve for a few years prior to that, but it was in 1996 that the first ISP opened in the Canadian city I live in. I was one of the first to set up an account.

Three years later I changed my business to focus exclusively on online marketing. We became one of the fastest growing companies in Canada. Eleven years after start up (or, more accurately, realignment) we sold that company.

Things moved rather quickly after I first went online. At least, I thought they did. But compared to the growth of other start ups – say, Google for instance – I was a very little fish in a very big pond.

The Nobel Survey

In 2001, Cisco conducted a survey of past Nobel Prize winners. By then, Internet usage had mushroomed. Half a billion people – almost 9% of the world’s population – were online. The Internet appeared to be a real thing. The question asked was, “Where will the Internet take us over the next 20 years?

The Laureates were mostly optimistic in their replies. Here’s a quick summary

  • 87% said the Internet would improve education.
  • 93% felt it would provide greater access to libraries, information and teachers.
  • 74% saw the coming of virtual classrooms by 2020.
  • 82% said it would accelerate innovation
  • 83% felt it would improve productivity
  • 72% believed it would improve quality of life and provide more economic opportunity to people in less developed countries
  • 93% saw it improving communications with people in other countries
  • 76% predicted a breaking down of borders

On the negative side, 65% feared it would violate personal privacy, 51% saw it increasing alienation and 44% felt it would lead to greater political or economic inequity.

15 Years later…

I think you could safely put a check beside every single box on the Nobel Laureate wish list. In fact, as optimistic as these predictions seemed just 15 years ago, they seem conservative in hindsight. Online classrooms have been a reality for a few years and education is undergoing a massive reformation. In 2011, 10 years after the survey was conducted, McKinsey estimated that 10% of GDP growth in developed countries was directly attributable to the Internet. And the fact that almost half the world now has Internet access speaks to the role it plays in communication across cultures.

But none of the laureates predicted a gut punch to the cab drivers of the world. No one foresaw the short-sheeting of the traditional hospitality industry. And there was not a peep of new forms of investment predation that would be measured in microseconds.

The Biggest Can of WD-40 Ever

All the benefits of the Internet – and all the negative consequences – come from the same common factor: the elimination of friction. Economist Ronald Coase rightly identified friction – or, in his terminology, “transactional costs” – as the reason corporations exist. Until very recently, geographic distance introduced friction into pretty much every aspect of our society. It took physical resources to overcome friction. Physical resources required capital. Capital could most efficiently be raised and controlled by corporations.

The Internet enabled a new type of connection. It was agnostic to physical distance. But, more importantly, it was a peer-to-peer connection. There was no hierarchy to the Internet. Hierarchies depend on friction. As soon as that friction is removed, the hierarchies begin to fall apart. They are no longer required.

All the good things that were predicted in 2001 came from a removal of friction. But so did all the bad. In the case, the word “regulation” can be often be substituted for “friction.” Regulation is just another form of hierarchal control.

I’ve been “online” for 20 years now. It certainly accelerated every aspect of my life; most positively, some negatively. But one thing’s for certain. Going backwards is not an option.

Welcome to the World of Wicked Problems

The World is becoming a wicked place. And not in the way you think (although that may be the case as well).

I’m referring to the explosion of wicked problems. Wicked problems are thorny, complex, dynamic problems that defy black and white solutions. These are questions that can’t be answered by yes or no – the answer always seems to be maybe. There is no linear path to solve them. You just keep going in loops, hopefully getting closer to answer but never quite arriving at one. Usually, the optimal solution to a wicked problem is “good enough – for now.”

I believe the ability to deal with wicked problems will be the single biggest factor in separating winners from losers in the future. Dealing with wicked problems requires a different tool set than the one we’ve always used in the past. It requires open, nimble minds. It requires the ability to break complexity into components that can yield individual insights, then synthesizing those insights together into a workable process. Most importantly, however, it requires a willingness to start all over again when that process is finally put in place. And you have to do that with a totally open mind; jettisoning any baggage you might be carrying from the past iteration. In short, it requires an approach I’ve referred to in the past as Bayesian Strategy.

A world full of wicked problems also requires a new kind of leadership. In the past, we wanted leaders who had all the answers. But in a world of wicked problems, there are no answers. In this world, we need leaders who understand the value of adaptability and iteration. Open minds are critical. Beliefs take a back seat to curiosity and imagination.

I’ve had a recent history of taking beliefs to task. Beliefs are cognitive short cuts we use to avoid thinking. In a fairly stable and predictable world, beliefs served a purpose. They are the intellectual equivalent of habits. If the same actions (or thoughts) always yield the same results, why bother with rational analysis? It’s a waste of energy. If we can predict what the end looks like, stopping to rationalize looks an awful lot like wavering or being indecisive.

But predictability is becoming increasingly rare. With wicked problems, we need to be willing to tear apart our view of the world and test it for validity. We need to unpack our beliefs and be willing to sacrifice them if empirical evidence shows them to be false. We need to introduce scientific rigor into our thought process.

This comes down to the difference between complexity and complication. Sending a man to the moon and sequencing the human genome were both complicated problems. Currently, climate change would fall into the same bucket. In each case, there was a lot to be done, but we knew what we had to do. We just needed to marshall the resources to do it. We could predict what the end would look like. This was a world where we needed unwavering leadership and a belief in a commonly understood end-state. To be successful, we just had to get sh*t done.

Creating a sustainable future for advertising and publishing are both complex problems. This makes them wicked. And they’re not alone. Wicked problems are emerging everywhere: educational reform, transportation infrastructures, global economic dynamics, national security, even the future of democracy. In each area, technology and its gravitational pull on society are dealing a handful of wild cards into the deck. We have no idea what success might look like. We are trying to find answers in a whirling, emergent environment, where rules are constantly in flux.

Here, we have to take a different approach. It’s not a straight line. It’s an endless loop.

This Message Brought to You by … Nobody

People talk about the digital revolution. I think it’s an apocalypse”
George Nimeh – What If There Was No Advertising? – TEDx Vienna 2015

 

A bigger part of my world is becoming ad-free. My TV viewing is probably 80% ad-free now. Same with my music listening. Together, that costs me about $20 per month. It’s a price I don’t mind paying.

But what if we push that to its logical extreme? What if we made the entire world ad-free? Various publications and ad-tech providers have posited that scenario. It’s actually interesting to see the two very different worlds that are conjectured, depending on what side of the church you happen to be sitting on. When that view comes from those in the ad biz, a WWA (World Without Advertising) is a post apocalyptic hell with ex-copywriters (of which I’m one) walking around as jobless zombies and the citizens of the world being squeezed penniless by exploding subscription rates. Our very society would crumble around our ears. And, for some reason, a WWA is always colored in various shades of desaturated grey, like Moscow circa 1982 or Apple’s Big Brother ad.

But those from outside our industry take a less alarming view of a WWA. This, they say, might actually work. It could be sustainable. It would probably be a more pleasant place.

adspendingLet’s do a smell test of the economics. According to eMarketer, the total ad-spend in the US for this year is $189 billion. That works out to just shy of $600 per year for each American, or $1550 for the average household. If we look at annual expenditures for the typical American family, that would put it somewhere between clothing and vehicle insurance. It would represent 2.8% of their total expenditures. A little steep, perhaps, but not out of the question.

Okay, you say. That’s fine for a rich country like the US. But what about the rest of the world? Glad you asked. The projected advertising spend worldwide – again according to eMarketer – is $592 billion, or about $84 for every single person on the planet. The average global income is about $10,000 per year. So, globally, eliminating advertising would take about 0.84% of your income. In other words, if you worked until January 3rd, you’d get to enjoy the rest of the year ad free!

So let’s say we agree that this is a price we’re willing to spend. What would an America without advertising look like? How would we support content providers, for example? Paying a few one-off subscriptions, like Netflix and Spotify, is not that big a deal, but if you multiply that by every potential content outlet, it quickly becomes unmanageable.

This could easily be managed by the converging technologies of personalization engines, digital content delivery, micro-payments and online payment solutions like ApplePay. Let’s imagine we have a digital wallet where we keep our content consumption budget. The wallet is a smart wallet, in that it knows our personal tastes and preferences. Each time we access content, it automatically pays the producer for it and tracks our budget to ensure we’re staying within preset guidelines. The ecosystem of this content marketplace would be complex, true, but the technology exists. And it can’t be any more complex than the current advertising marketplace.

A WWA would be a less cluttered and interruptive place. But would it also be a better place? Defendants of the ad biz generally say that advertising nets out as a plus for our society. It creates awareness of new products, builds appreciation for creativity and generally adds to our collective well-being.

I’m not so sure. I’ve mentioned before that I suspect advertising may be inherently evil. I know it persuades us to buy stuff we may desire, but certainly don’t need. I have no idea what our society would be like without advertising, but I have a hard time imagining we’d be worse off than we are now.

The biggest problem, I think, is the naiveté of this hypothetically ad-free world. Content will still have to be produced. And if the legitimized ad channel is removed, I suspect things will simply go underground. Content producers will be offered kickbacks to work commercial content into supposedly objective channels. Perhaps I’m just being cynical, but I’d be willing to place a fairly large bet on the bendability of the morals of the marketing community.

Ultimately, it comes down to sustainability. Let’s not forget that about a third of all Americans are using ad blockers, and that percentage is rising rapidly. When I test the ideological waters of the people whose opinions I trust, there is no good news for the current advertising ecosystem. We all agree that advertising is in bad shape. It’s just the severity of the prognosis that differs – ranging from a chronic but gradual debilitating condition to the land of walking dead. A world without advertising may be tough to imagine, but a world that continues to prop up the existing model is even more unlikely.

 

Giving Thanks for The Law of Accelerating Returns

For the past few months, I’ve been diving into the world of show programming again, helping MediaPost put together the upcoming Email Insider Summit up in Park City. One of the keynotes for the Summit, delivered by Charles W. Swift, VP of Strategy and Marketing Operations for Hearst Magazines, is going to tackle a big question, “How do companies keep up with the ever accelerating rate of change of our culture?”

After an initial call with Swift, I did some homework and reacquainted myself with Ray Kurzweil’s Law of Accelerating Returns. Shortly after, I had to stop because my brain hurt. Now, I would like to pass that unique experience along to you.

In an interview that is now 12 years old, Kurzweil explained the concept, using biological evolution as an analogy. I’ll try to make this fast. Earth is about 4.6 billion years old. The very first life appeared about 3.8 billion years ago. It took another 1.7 billion years for multicellular life to appear. Then, about 1.2 billion years later, we had something called the Cambrian Explosion. This was really when the diversity of life we recognize today started. If you’ve been keeping track, you know that it took the earth 4.1 of it’s 4.6 billion year history, or about 90% of the time since the earth was formed, to produce complex life forms of any kind.

Things started to move much quicker at that point. Amphibians and reptiles appeared about 350 million years ago, dinosaurs appeared 225 million years ago, mammals 200 million years ago, dinosaurs disappeared about 70 million years ago, the first great apes appeared about 15 million years ago and we homo sapiens have only been around for 200,000 years or so. And, as a species, we really have only made much of dent in the world in the last 10,000 years of our history. In the entire history of the world, that represents a very tiny 0.00022% slice. But consider how much the world has changed in that 10,000 years.

Accelerating Returns

Kurzweil’s Law says that, like biology, technology also evolves exponentially. It took us a very long time to do much of anything at all. The wheel, stone tools and fire took us tens of thousands of years to figure out. But now, technological paradigms shifts happen in decades or less. And the pace keeps accelerating. The Law of Accelerating Returns states that in the first 20 years of the 21st century, we’ll have progressed as much as we did during the entire 20th century. Then we’ll double that progress again by 2034, and double it once more by 2041.

Let me put this in perspective. At this rate, if my youngest daughter – born in 1995 – lives to be 100 (not an unlikely forecast), she will see more technological change in her life than in previous 20,000 years of human history!

This is one of those things we probably don’t think about because, frankly, it’s really hard to wrap your head around this. The math shows why predictability is flying out the window and why we have to get comfortable reacting to the unexpected. It would also be easy to dismiss it, but Kurzweil’s concepts are sound. Evolution does accelerate exponentially, as has our rate of technological advancement. Unless the later showed a dramatic reversal or slowing down, the future will move much much faster than we can possibly imagine.

The reason change accelerates is that the technology we develop today builds the foundations required for the technological leaps that will happen tomorrow. Agriculture set the stage for industry. Industry enabled electricity. Electricity made digital technology possible. Digital technology enables nanotechnology. And so on. Each advancement sets the stage for the next, and we progress from stage to stage more rapidly each time.

So, for your extended long weekend, if you’re sitting in a turkey-induced tryptophan daze and there’s no game on, try wrapping your head around The Law of Accelerating Returns.

Happy Thanksgiving. You’re welcome.

The Required Conditions for Innovation

Statistically speaking, it appears that there’s a correlation between atheism and innovation. But my point in last week’s column was not to show that atheists are more innovative. My goal was to try to hypothesize what the underlying causation might be. I don’t really care if atheists, or Buddhists – or Seventh Day Adventists for that matter – are more innovative. What does interest me, however, is what is unique about an environment in which both atheism and innovation can flourish.

Why am I so focused on innovation? Because innovation drives economic growth. It is the force that unleashes Schumpeterian Gales of Creative Distruction. In any formula measuring economic performance, Innovation always equals N. It’s a very big deal. The biggest deal.

That means the conditions that lead to innovation are worth noting. And I started on the national scale for a reason. Sometimes, it helps to change our perspective if we’re exploring the “why” of a question. Either pulling back to the macro or zooming in to the micro allows us to see things we may not see when we remain stuck in our current context. So, what can we learn about the conditions of innovation from the world’s most innovative countries?

Atheism = Innovation?

Let’s look at the atheist factor. How might a lack of religion lead to a surfeit of innovation? I think it may have something to do with belief – or rather – the lack of belief. When we believe something, we usually don’t go out of our way to prove it true. That also means we never find out it’s false. But nations that have a lot of atheists are not a very trusting lot, at least when it comes to things like government and other institutions. There was a moderately negative correlation (r=-0.4425). They are skeptics. And when it comes to innovation, skepticism is very healthy.

If we looked back to Alex Pentland’s ideas about Social Physics, we need two types of social interactions: exploration and engagement. The first of these is where innovation comes from. And skeptics are more exploratory than the trustful. They probe the unknown rather than rely on their beliefs. As Pentland says in his book Social Physics, “If you can find many such independent thinkers and discover that there is a consensus among a large subset of them, then a really, really good trading strategy is to follow the contrarian consensus.”

Ideological Diversity

It’s not just skepticism, however, that drives innovation. It’s also ideological diversity. You need a social network that encompasses a lot of different experiences and points of view. The broader the spectrum of ideas, the more likely that you’ve captured something that approximates the truth somewhere in that spectrum. If you can trade monolithic beliefs for a healthy respect for ideas that may not mirror your own in your own organization, you’ve probably laid the groundwork for innovation.

Going Rogue

Not so many years ago, an organization I was part of called for a rather rushed retreat of all the executive management. We gathered in a posh ski resort for a brainstorming session. All the top managerial talent was present. The CEO took the stage and called on us to be innovative. But he, like most managers, did not encourage diversity. Rather, he believed unity was the way to innovate.

“No one can go rogue!” he preached from the corporate pulpit. In other words, “No one can disagree with me.”

If this CEO (who has since stepped down) had looked at countries like Sweden, or Japan, or South Korea, he might have realized that sometimes, “going rogue” is exactly what you need to come up with a new idea.

Are Atheists More Innovative?

A few columns back, I talked about the most innovative countries in the world, according to INSEAD, Johnson School of Management and WIPO. Switzerland, of all places, topped the list. At the time, I mentioned diversity as possibly being one of the factors. But for some reason, I just couldn’t let it lie there.

Last Friday afternoon, it being pretty miserable outside, I dusted off my Stats 101 prowess and decided to look for correlations. The next thing I knew, 3 hours had passed and I was earlobe deep in data tables and spreadsheets.

Yeah..that’s how I roll. That’s wassup.

But I digress. What initially sent me down this path was a new study out of the University of Kansas by Tien-Tsung lee and co-authors Masahiro Yamamoto and Weina Ran. Working with data from Japan, they found that the amount of trust you have in media depends on the diversity of the community you live in. The more diverse the population, the lower the degree of trust in media.

This caught my attention – a negative correlation between trust and diversity. I wondered how those two things might triangulate with innovation. Was there a three-way link here?

So, I started compiling the data. First, I wanted to broaden the definition of innovation. Originally, I had cited the INSEAD Global Innovation Index. Bloomberg also has a ranking of innovation by country that uses a few different criteria. I decided to take an average, normalized score of the two together. In case you’re wondering, Switzerland scored much lower in the Bloomberg ranking, which had South Korea, Japan and Germany in the top three spots.

With my new innovation ranking, I then started to look for correlations. What part, for example, did trust play? According to Edelman, the global marketing giant, who publishes an annual trust barometer, it plays a massive role: “Building trust is essential to successfully bringing new products and services to market.” Their trust barometer measures trust in the infrastructural institutions of the respective countries. So I added Edelman’s indexed trust scores to my spreadsheet and used a quick and dirty Pearson r-value test to look for significant correlations. For those as rusty as I when it comes to stats, a perfect correlation would be 1.0. Strong relationships show up in the 0.6 and above range. Moderate relationships are in the 0.3 to 0.6 range. Weak relationships are 0.3 and below. Zero values indicate no relationship. Inverse relationships follow the same scale but with negative values.

The result? Not only was there no positive correlation, there was actually a moderately significant negative correlation! For those interested, the r-value was -0.4224. Based on this admittedly amateur analysis, trust in national institutions and innovation do not seem to go hand-in-hand. Some of the most innovative countries are the least trusting and vice-versa. It certainly wasn’t the neat supposed linear relationship that Edelman referred to in their press releases for their barometer.

Next, I turned to the obvious – the wealth of the respective nations. I added GDP per capita as a data point. Predictably, there was a strong positive correlation here – I came up with an r-value of .793. Rich countries are more innovative. Duh.

Now comes the really interesting part. What was the relationship between cultural diversity and innovation? If my original hypothesis was correct, there should be at least a moderate correlation here. The problem was trying to find an accurate measure of cultural diversity. I ended up using three measures from Alesina et al: Ethnic Fractionalization, Linguistic Fractionalization and Religious Fractionalization. I averaged these out and indexed them to give me a single score of cultural diversity. To my surprise, my hypothesis appeared to be significantly flawed – my r value was -0.2488.

But then I started analyzing the individual measures of diversity. Ethnic Diversity and Innovation showed a moderate negative correlation: -0.5738. Linguistic Diversity and Innovation showed a less significant negative correlation: -0.3886. But Religious Diversity and Innovation came up as a moderate positive correlation: 0.4129! Of the three, religion is the only measure of diversity that’s directly ideological, at least to some extent.

This seemed to be promising, so I pushed it to the extreme. If religious diversity shows to be correlated with innovation, I wonder how the prevalence of atheists would relate? After all, this should be the ultimate measure of religious ideological freedom. So, using a combination of results from a worldwide Gallup survey and a study from Phil Zuckerman, I added an indexed “atheism” score. Sure enough, the r-value was 0.7461! This was almost as significant as the correlation between national wealth and innovation! Based on my combined innovation scores, some of the least religious countries in the world (Japan, Sweden and Switzerland) are the most innovative.

So – ignoring for a moment the barn-door sized holes in my impromptu methodology and a whack of confounding factors – what might this hypothetically mean? I’ll come back to this intriguing question in next week’s Online Spin.

Innovating Along the Edges

If you want innovation, go to Switzerland. According to the Global Innovation Index, those Swiss are the most innovative people on the planet. Next is the UK, then Sweden. The Dutch are pretty damn innovative too, coming in at number four. Then you have the good old USA rounding up the top 5.

My fellow Canadians? Less innovative, apparently. We’re at #16. Those damn Luxembourgians and Icelanders even beat us (ranking 9th and 13th respectively). But hey, we beat the Japanese (19) and we’re miles ahead of China (29), Russia (48) and India (81).

Pillars of Innovation

So, what makes a country innovative? And, by extension, what lessons can we learn about encouraging innovation generally? The publishers of the index look at five pillars of innovation: Institutions, Human Capital and Research, Infrastructure, Market Sophistication and Business Sophistication.

If you look at these, it makes sense that the better off the country, the more innovative it will be. These are the countries that can invest in education and the infrastructure needed to support innovation. I would also add risk taking to the prerequisites of innovation. I suspect that may be why my fellow Canadians are less innovative on average than Americans.

But, if you talk to Sandy Pentland, there is another factor to consider: Physics. Specifically, Social Physics.

The Physics of Innovation

If we look at innovative environments, the most successful example is a city. Cities, especially some cities, are hot beds of innovation. New York, for example, or San Francisco, or Boston, continually crank out more innovative ideas per person than most places you could name. Why are cities more innovative, per capita, than rural regions? Sure, there are aspects of the five pillars there: good universities, lots of smart people, sophisticated marketers. But the main reason may come down to the nature of networks you find in a city.

Alex “Sandy” Pentland just happens to live in an innovative city – Boston. And he works at MIT, one of the most innovative institutions in the world. There he heads up perhaps the single most innovative department, the Entreneurship Program at MIT’s Media Lab. So, it’s fair to say that Pentland knows a thing or two about innovation. But what really fascinates Pentland is the way people connect and, by doing so, spread ideas. This is what he refers to as “Social Physics.”

Some cities promote innovation because they promote a certain type of network connectivity. In order for innovative ideas to spread, there needs to be two types of connection: exploration and engagement. The first offers a clue to why cities may be particularly innovative. Sparks of creativity tend to come from interface areas, or the edges of social groups, where different ideas and viewpoints come into contact with each other. If you’re surrounded by people who look, speak and think the same way you do, you get an “echo chamber.” There is no diversity in your exploration. But if you’re in an environment that lends itself to encountering diverse ideas and points of view, your exploratory connections become “mash-ups” of innovation. As Steve Jobs said, “Creativity is just connecting things. When you ask creative people how they did something, they feel a little guilty because they didn’t really do it, they just saw something. It seemed obvious to them after a while. That’s because they were able to connect experiences they’ve had and synthesize new things.” But you can only see that “something” if you’re in an environment that allows connections.

Back to those Swiss

So, the five pillars of innovation aside, perhaps the Swiss advantage in innovation comes from the fact that it’s a pretty small country that has 8 million people and 4 official languages. Also, 74% of those people live in a city. That mean’s that there are lots of social “edges” coming into contact with each other.

Once they settle on a language, I’m guessing the Swiss have some pretty interesting conversations.

The Messy Part of Marketing

messymarketingMarketing is hard. It’s hard because marketing reflects real life. And real life is hard. But here’s the thing – it’s just going to get harder. It’s messy and squishy and filled with nasty little organic things like emotions and human beings.

For the past several weeks, I’ve been filing things away as possible topics for this column. For instance, I’ve got a pretty big file of contradicting research on what works in B2B marketing. Videos work. They don’t work. Referrals are the bomb. No, it’s content. Okay, maybe it’s both. Hmmm..pretty sure it’s not Facebook though.

The integration of marketing technology was another promising avenue. Companies are struggling with data. They’re drowning in data. They have no idea what to do with all the data that’s pouring in from smart watches and smart phones and smart bracelets and smart bangles and smart suppositories and – okay, maybe not suppositories, but that’s just because no one thought of it till I just mentioned it.

Then there’s the new Google tool that predicts the path to purchase. That sounds pretty cool. Marketers love things that predict things. That would make life easier. But life isn’t easy. So marketing isn’t easy. Marketing is all about trying to decipher the mangled mess of living just long enough to shoehorn in a message that maybe, just maybe that will catch the right person at the right time. And that mangled mess is just getting messier.

Personally, the thing that attracted me to marketing was its messiness. I love organic, gritty problems with no clear-cut solutions. Scientists call these ill-defined problems. And that’s why marketing is hard. It’s an ill-defined problem. It defies programmatic solutions. You can’t write an algorithm that will spit out perfect marketing. You can attack little slivers of marketing that lend themselves to clearer solutions, which is why you have the current explosion of ad-tech tools. But the challenge is trying to bring all these solutions together into some type of cohesive package that actually helps you relate to a living, breathing human.

One of the things that has always amazed me is how blissfully ignorant most marketers are about concepts that I think should be fundamental to understanding customer behaviors: things like bounded rationality, cognitive biases, decision theory and sense-making. Mention any of these things in a conference room full of marketers and watch eyes glaze over as fingers nervously thumb through the conference program, looking for any session that has “Top Ten” or “Surefire” in it’s title.

Take Information Foraging Theory, for instance. Anytime I speak about a topic that touches on how humans find information (which is almost always), I ask my audience of marketers if they’ve ever heard of I.F.T. Generally, not one hand goes up. Sometimes I think Jakob Nielsen and I are the only two people in the world that recognize I.F.T. for what it is: “the most important concept to emerge from Human-Computer Interaction research since 1993.” (Jakob’s words). If you take the time to understand this one concept I promise it will fundamentally and forever change how you look at web design, search marketing, creative and ad placement. Web marketers should be building a shrine to Peter Pirolli and Stuart Card. Their names should be on the tips of every marketer’s tongue. But I venture to guess that most of you reading this column never heard of them until today.

None of these fundamental concepts about human behavior are easy to grasp. Like all great ideas, they are simple to state but difficult to understand. They cover a lot of territory – much of it ill defined. I’ve spent most of my professional life trying to spread awareness of things like Information Foraging Theory. Can I always predict human behavior? Not by a long shot. But I hope that by taking the time to learn more about the classic theories of how we humans tick, I have also learned a little more about marketing. It’s not easy. It’s not perfect. It’s a lot like being human. But I’ve always believed that to be an effective marketer, you first need to understand humans.