Part 2: Understanding Your Innovation First Principles
In the previous post, Part 1 (Three innovation horizons) a view emerged of how the patterns industry maturity run through each horizon. From mature businesses flattening the curve to extract profit for longer, to adjacent opportunities for growth, to the emergence of new activities underpinned by fundamentally new principles. In this post, Part 2, we will explore further how progress happens and industries form, and how an understanding of the fundamental structure and patterns of change is crucial to long term success.
From scarcity to abundance: First principles of an industry
The path to finding value is to recognise that major market and economic shifts involve a reorganisation of the patterns of what is scarce and what is abundant. There is always a scarce resource and the identity and location of this defines an industry.
To paraphrase Silicon Valley Venture Capitalist, Chamath Palihapitiya; Our brains are wired to solve a particular type of problem; when we observe the world around us, we ask ourselves, what is the limiting (scarce) resource that exists in front of me today and how do I solve it? When we fundamentally solve that problem, the limited resource inevitably becomes abundant (a process of commodification).
The path from identifying a novel scarcity towards industrialisation and commodification gives it the ‘S-curve’ pattern. Early-on everything is uncertain and a market does not yet exist. It might be dismissed as an expensive toy. Then a viable model and point of advantage forms around the new resource or activity, and it takes off. As more join the growth, a new industry forms.
Later in the life cycle, increased competition and industrialisation of activity shifts the point of advantage from differentiation (novelty) to commodity (scale, efficiency). The majority of large, established organisations compete at the top of the S-curve because it is now stable enough to sustain and advantage can be derived from size. This is one reason why so much activity occurs at H1.
Horizon 3 thinking requires an organisation to search for signals of emerging principles. The next generation problem, the emerging scarce resources and how technology might make these abundant and accessible. It is not about making predictions, because it’s nearly impossible to perfectly define how these shifts will play out until they occur. Instead it requires actively honing an ability to detect change, make sense of the world and run scenarios against the current state of the organisation (We call this ‘Strategic Foresight’). This doesn’t need to be purely hypothetical, an organisation may build prototypes, incubate capabilities and launch speculative businesses. The measure of success is not (yet) on sustainable profit, or capturing a position at all costs. Instead the focus is on learning, increasing options and building adaptive capabilities. Failure can be common, even desirable when it enhances learning and your ability to fight another day.
Reframing and assessing your current position: First principles of your organisation
Successfully working at further horizons, particularly H3, forces an organisation to re-examine who they are, what they do, who they do it for and why. They must form an understanding both of themselves and the market from first principles.
This thinking requires an organisation to truly understand the dynamics of their current position. Mature organisations have many obscuring layers of myths, assumptions and practices that represent accepted truths about ‘how things are done’ or ‘the way this industry works’. These act as thinking shortcuts that provide most members the freedom not to think about all the details and foundational assumptions day-to-day. To do so is too much overhead for most needs. This is typical when you are optimising a large, complicated body for efficiency in an environment with low rates of change. Elon Musk recently described this as “reasoning by analogy”, while eminent scientist Richard Feynman described this type of knowledge as “fragile”.
The flip-side is that doing something really well at scale is often a cause of inertia when trying to do something novel. Understanding something at the level of first principles allows you to break down complicated things into basic elements, examine the context, base truths and assumptions and reassemble from the ground up. This anti-fragile thinking allows you to detect the difference between the message and the noise, understanding why something was successful or not and course correct. You can examine what something was designed to accomplish, the context that drove it and potential implications of change. In times of uncertainty, ambiguity, and change, first principles thinking offers a path forward and a lens on the past. It’s a lighthouse in a storm.
This type of thinking doesn’t come naturally to many. Often, mature organisations are structured to discourage it. You need people who have the tools to ask; Where are we? What might cause this equilibrium to shift? Why should we believe this thing? What are the potential alternative interpretations and paths?
These people are pioneers at the edge of disruption, revelling in big problems and ambiguity. They can explore novel concepts, spot emerging opportunities and challenge assumptions. For this reason, they are often semi-peripheral to a firm or connected through an ecosystem. The idea is to bring in new perspectives through bridges outside your network. What they produce will sometimes be difficult to understand and certainty can be hard to find. That is when you know you are in the right place. Because if everyone can see it, then by definition it is not pioneering and it’s opportunity value is limited. Within this space are the seeds of your future organisation and the things it will need to be good at.
Preparing your business for the future and looking at your third horizon requires an in depth understanding of your business and its environment. Challenging long held assumptions and encouraging the exploration of novel concepts will help prepare your business for unfolding futures and adapt while it still can.
In the last post in this series, I will propose a selection of alternative ways to frame innovation horizons.
