THE DYNAMICS AND PHYSICS OF INNOVATION
After 30 years in the technology and finance industries, I am struck by one overwhelming observation. Humans can’t scale. We design our world around our limitations as human beings. Our limitations force us to specialize. Whether in sport, study, or career. In business, organizational structures reflect human limitations. We aggregate talent into disciplines and organize into silos. How we structure, how we compete and how we collaborate. Operations, strategy, and distribution. We thrive in silos. We reflect these silos in financial metrics and form policies to resolve ambiguity and uncertainty. We enshrine these limitations into our operating model.
While corporations organize vertically in silos, technology is horizontal. Over time becoming infinitely scalable. Technology is disrupting the traditional structure of the corporation by collapsing the very silos and policies we created to support our own inability to scale. Technology is achieving this through prediction and measurement, not policy. Challenging what we have assumed as foundational. Challenging us to re-appraise our beliefs on a first-principles basis.
Every first-principles innovation journey begins with aspiration. A frictionless low cost, high growth state propelling the corporation to higher performance and value. Every innovation process must refine aspiration to potential, reconciling the inevitable constraints of capital, people, time, and technology. From potential needs to be translated into execution to deliver measurable results. In the delta between potential and measurement, lies the most challenging aspect of innovation and transformation. People.
The parallels between Corporate Innovation and Physics are significant. Physicists have long searched for formulae bridging the gap between prediction and measurement. With every generation of technology, we advance our learning, our understanding and relentlessly close the gap. Assimilating data into knowledge and edging ever closer to our ultimate objective. A theory of everything. A formula to explain it all.
The corporate innovation journey is not dissimilar. We seek to bridge the gap between potential and execution. We test our hypothesis and measure results. Explain failures and accelerate successes. Refining our models, methods, metrics. Like physics, the critical question is ‘are we executing against and measuring the right things?’
The complication with innovation is people. The clash between emotion and logic. The human equation. Innovation projects rarely fail because of technology. They frequently fail because of people. We all know the signs. Passive or aggressive resistance. Skepticism or outright rejection. The tension between results today and results tomorrow. The short and the long game.
This paper extract serves as a thesis for innovation. An assimilation of learning across a career of successes and failures. Across corporations and startups. Across industries. A framework for initiating, executing, and measuring innovation. A framework for continued learning.
Aspiration and Inspiration
The headlines CEO’s dream of.
World’s best …
A distant aspiration transformed into reality. A transformation always in progress. None the less, a milestone to celebrate. The defining question is, how do you get from here to there?
The legacy of most leaders is legacy. Legacy thinking. Legacy process. Legacy systems. Their organizations competing for the future, mired in the complexity of the past. According to Innosight, 50% of the S&P is expected to be replaced in the next ten years. S&P 500 longevity is forecast to more than halve from 33 years in the 1960s to 14 years in the 2020s. Companies are dying as kids.
The legacy of most leaders is legacy. Legacy thinking, legacy process, legacy systems.
A better reason to innovate is to drive a growth mindset across the corporation. Income trumps cost any day of the week. The challenge is most older institutions aren’t driven by CEO’s obsessed by growth. Most CEO’s are obsessed with cost. And cost-cutting in the digital world is a sure-fire road to failure. Who wants to make a project successful that makes them redundant?
Every institution was once a startup, driven by a high energy entrepreneur with ambitions of conquering a market. A startup resolving a simple problem with a simple solution that resonated and scaled. The startup exploits market asymmetry and accelerates. It’s size and agility giving the startup an advantage over the inertia of large mass incumbents and their resistance to changing direction. If the startup can sustain the asymmetry, the startup scales. Transitioning from niche to mainstream. Now a market force in its own right.
As growth begins to taper, the elegance of the simple solution requires complexity to defend it from both commoditization and new market innovations. The startup transitions from offense to defense. Professional management is embedded to create the controls and compliance demanded of high-profile companies. Every new person and every new product increases complexity. The freedoms of the past evolve to become the constraints on the future as companies like Facebook and Uber know too well.
In a world of rapidly evolving technology, time and barriers to scale are diminishing. Lifecycles are shrinking. Technology execution is the core competence to master in any organization. Technology is rarely the constraint. Human factors are the biggest challenge in change and transformation. The leadership challenge is to arbitrate between logic and emotion and to address the fears and emotions of employees throughout the course of transformation.
A false belief with truthful characteristics
It is often said that people don’t like change. This is a false belief with truthful characteristics. Humans thrive on change. Change energizes us, educates us and elevates us. What people don’t like about change is personal risk and uncertainty. Most employees are risk-averse. They see ambiguity and uncertainty in their role, their career, their future. Like a P&L forecasting certainty on the cost side and uncertainty in potential revenues, employees see the same challenge at a personal level. Change requires an energy premium, a growth mindset and risk tolerance. It is not for everyone in the same way it is not for every company.
Creativity Loves Constraints
Creativity loves constraints.
- Marissa Mayer, Former Product Manager, Google
Constraints set important boundaries and challenges in innovation. Capital and talent are not abundant. Regulatory compliance is not negotiable. The business must continue to deliver results today while innovating for tomorrow. These positive boundaries challenge and empower innovation.
Sacred cows, perpetuated internal beliefs of success, business silos, outdated metrics, previous failure. These are artificial barriers reflecting our human inability to scale. Artificial structures impeding first-principles thinking and limiting transformation potential. Technology is a horizontal, not a vertical. These negative boundaries stifle innovation.
The first challenge in innovation and transformation is working out where to start. Simple physics informs you:
- Any change in direction or trajectory requires the application of force.
- Any application of force will meet resistance.
- The amount of force required is determined by mass x acceleration.
These are the business interpretations of the Laws of Motion developed in 1686 by Sir Isaac Newton. A simple but powerful framework for creating and sustaining change. These are the fundamental laws of physics. They are also the fundamental laws of innovation. They succinctly describe why the hardest challenge in innovation is getting started. Accelerating. What to expect in initiating change. And what is required to sustain acceleration?
Whether launching a rocket or a new financial product, Newton’s framework empower boards and leadership teams with a simple framework for understanding the drivers of change.
Force (Capital & People) = Mass (size and complexity) x Acceleration (Growth or Alpha)
Acceleration (growth) is the objective of all innovation. Whether that growth is driven by lowering cost, reducing friction or accelerating revenue, the output of innovation is a direct financial impact. Not all impact can be accurately quantified in advance, as with physics, there is often a difference between prediction and measurement. The gap is learning. One of the primary deliverables of every innovation project.
The innovation journey for any leadership begins with force. The application of Capital and people. The optimal structure of innovation focuses on three core competencies and objectives.
Short Term Impact
Process improvement teams focus on incremental innovation. How do we shorten a queue? Using tools such as human-centered design, they redesign process to improve operational efficiency.
Innovation teams focus on first-principles innovation. Why is there a queue? Using advanced technology, they challenge original assumptions and evaluate change in the context of modern technology.
HR teams focus on the emotional side of the transformation equation. Empowering through learning, building and importing new capabilities and driving evolutionary performance.
Process Improvement teams are inwardly focused. They have a cost mindset. Their tactical objective is to drive operational efficiency. Re-engineering existing process and driving short term results. Using human-centered design (HCD) and lean principles applied organization resource, capabilities and tools, PI teams start with the customer and work back to a solution.
Where Process Improvement teams start with ‘what’, First-Principles teams start with ‘why’. First-principles innovation teams are outwardly focused. Their strategic focus is growth. They question fundamentals, looking for best practices across industries. Assuming Einstein’s maxim, make it simple, not simpler, they recognize most constraints as being dynamic. A function of measurement which may no longer be constrained with the exponential growth of technology, connectivity and IOT.
Everything should be made as simple as possible, but not simpler.
- Albert Einstein
© 2019 FinMirai KK
If you found value in this article, please “clap” (up to 50 times).
This article is part of our FinMirai Publication, please follow us to read more from our writers, like hundreds of readers do every day. Our LinkedIn page, Facebook page and our Instagram account are there for you as well.
FinMirai is the leading Japanese Venture Studio enabling Japanese Financial Institutions (JFI’s) to accelerate their innovation transformation through a proven framework of learning, venturing and capital. Through our venturing program, FinMirai enables startups co-ventures to localize and connect in to networks of JFI’s.
Formerly Chief Innovation Officer at DBS Bank and Group Innovation Head at AIA Company Limited, Steve has created new products, businesses and companies across the technology and financial services industries. He is a private investor in Artificial Intelligence, Life Sciences, Healthtech and Fintech and has served on the advisory boards of HK Agency Science and Technology Research Institute, Intel, Veritas Genetics and as an Investment Committee member of True Global Ventures. Steve holds an EMBA from Helsinki School of Economics and has attended leadership courses at IMD and Wharton.