Monday 28 April 2014

30. A stop to this blog

The next series on this blog would have been on innovation in networks. But the number of readers is small and decreasing, and continuation on this basis is hardly worth while. Therefore, I am stopping this blog until further notice. If readership increases substantially I will pick it up again. I thank the few readers I had for their interest.

Best wishes,

Bart Nooteboom

Monday 21 April 2014


29. Roles of a go-between

 Since the art of trust is difficult, it may help to employ the services of a go-between with the appropriate knowledge, skills, experience, wisdom and trustworthiness. It can play a variety of roles. Some of them are more technical and others more relational. I will not mention all roles because some of them require too technical an explanation.  

 On the technical side:

 First, help to cross what I called cognitive distance: help partners to understand each other, technically, concerning the content of collaboration, in purpose, methods and means. For this, the go-between must have the required specialist technical knowledge.

Second, help to judge the partner’s potential and its economic value, in view of possible alternatives, and its reliability in competence.  

Third, provide an assessment of the fields of force facing both parties: risks and opportunities involved in the networks to which they belong, and other strategic risks and opportunities. A risk in a network is, for example, that trust in the partner may not suffice if some third party, a competitor perhaps, may take over the partner.

On the relational side:

Fourth, help mutual understanding of ideas, intuitions, attitudes, habits, positions, cultures and skills of collaboration. Look also at the levels on which trust is needed, and how they are connected: personal (who are we dealing with), organizational (how are they supported by their organization) and environmental (what are the outside pressures of competition, politics and the economy).

Fifth, the go-between can adopt a more or less formal role in arbitration or mediation, to prevent conflicts from arising or escalating to a legal conflict.

Sixth, perhaps the most important but also most difficult, help in the difficult process of building trust, preventing its undue collapse, and, if possible, to repair broken trust. This includes many of the features discussed in previous items in this blog. Help to practise openness, give benefit of the doubt when something goes wrong, help to empathise by understanding the partner’s situation and the circumstances and pressures he faces. Eliminate undue suspicions; help to deal with uncertainty concerning the causes of disappointments (the causal ambiguity I mentioned before). See to it that no unrealistic expectations are raised whose disappointment may destroy trust. Help to explore the limits of trustworthiness and the need for control. Keep an eye on imbalances of dependence, and try to compensate for them.

Seventh, not the least important, help to disentangle, with minimum damage and acrimony, relationships that have become irreparably damaged or where mutual benefit has dwindled, to adapt to changing conditions.    

These roles all require their specific knowledge, skills and experience, and they all require reliability in competence, and trustworthiness in the form of fair dealing. Some roles may be combined in a single go-between, but it would be difficult to combine them all.

Candidates for a go-between are various. There is certainly a market for it, for commercially operating go-betweens, but there would have to be a safeguard for competence and integrity, as with doctors and notaries. Banks, notaries, accountants, consultants, academics, and government agencies might all qualify, in one role or another.

Monday 14 April 2014


28. Psychology of trust

As I argue in my philosophy blog (http://philosophyonthemove.blogspot.nl), people have an instinct for self-interest and survival as well as an instinct for altruism, at least within the groups to which one feels oneself to belong. According to work in social psychology this is reflected in two opposing mind frames that people have, a frame of defence and mistrust, in protecting one’s interests (self-interest) and a frame of trust, in solidarity with the group (altruism).

A mind frame operates as a mental framework in which observation, sense making and interpretation take place, plus a repertoire of responses. This may be compared with my earlier analysis of scripts (in item 13 of this blog): what is observed is fitted into scripts and that triggers response, again according to scripts. In the defensive frame one will be inclined to scrutinize observed conduct for signs of danger and threat, taking untrustworthiness as the default: one mistrusts until contrary evidence arises. In the solidarity frame one will take trustworthiness as the default.

The default of trust rather than distrust is to be recommended. With mistrust, the trustee has to prove trustworthiness and that is as impossible as proving that a theory is true. And distrust blocks the opportunity for a relationship to develop and demonstrate trustworthiness. With trust as the default, when adverse conduct is experienced one can narrow the room for trust and tighten controls.

The main point now is that one cannot be in two frames at the same time, but the other frame hovers in the background. Being in one frame one may switch to the other, depending on evidence, experience and emotions. The more robust a frame is, the less easily one will switch. When one feels threatened the solidarity frame may switch into the protective frame, and once that happens the reverse switch tends to be difficult. There is a saying that ‘trust comes on foot and departs on horseback’. The solidarity frame often is less robust than the protective frame.

The adoption of one frame or another depends on relational signalling: one treats observed conduct as a signal that indicates the frame the other person is in. That observation is fitted into scripts corresponding with the present frame. The trustee should be aware that what he/she does or says has that effect, and when being in the solidarity frame he/she should prevent doubt and ambiguity. Having received an e-mail message one should always respond to it, lest the sender wonders whether the massage was received and is getting attention, or the receiver is not interested.

This analysis further emphasizes the importance of openness discussed in the previous item of this blog. I add here that when one is in the solidarity frame one should make sure that this is reflected in what one says and does: demonstrating commitment, competence, and fair play. It is also important not to create too high expectations that can only lead to the disappointment that may trigger the partner’s switch to the self-interested frame.      
 

Monday 7 April 2014


27. Trust and openness

Trust pricks up its ears when expectations are disappointed. What is going on? The problem is that when expectations are disappointed, the cause is often ambiguous. What went wrong? Was there a misunderstanding in expectations? Was there an accident that was none on the trustee’s fault and prevented him/her from acting as expected? Was his/her competence less than thought? Did he/she not pay attention; was there lack of commitment? Or was he/she deliberately taking opportunistic advantage at the expense of the trustor? This is the causal ambiguity of trust. Often one cannot establish what cause is at work, for lack of information or ability to interpret what happens. Especially the opportunist will claim a mishap for an excuse.

When the trustor is under pressure or lacks self-confidence or is inclined to distrust he/she may jump to the worst conclusion, that of opportunism. If the trustee is in fact reliable, he should therefore when making a mistake or incurring an accident immediately report it, explain what happened, announce his commitment to immediately try to mitigate the problem, and promise that after the crisis he/she will engage in deliberation about how such problems may be prevented in the future.
 
That is trustworthy conduct. In other words, the problem of causal ambiguity yields the need for openness about failures. Secrecy does not pay. The trustor will conclude that the trustee acted opportunistically, because if not, why didn’t he/she come clean earlier, and help to solve the problem?

Take the bankers. Many people say that the bankers should have apologized for the financial crisis. But such apology alone is cheap. One should add what I just indicated: clarification of the causes, attempts to redress the problem, and commitment and deliberation for future prevention. Since the bankers did not do any of that all trust in them was destroyed. The conclusion was that they acted deliberately and opportunistically. 

The reverse side of this coin is that when something goes wrong the trustor should not jump to the conclusion that the trustee is opportunistic, but should extend the benefit of the doubt to the trustee and let him/her explain. Here empathy also comes in: the trustor should put him/herself in the shoes of the trustee, to try and understand what was going on.

There are further arguments for openness for the sake of trust. Not only should the trustee be open about his/her failures, the trustor should also be open to the trustee about his fears concerning the relationship. That gives the trustee the opportunity to try and reduce the risk involved. Secrecy robs the partner of opportunities to help. Good negotiation is not seeking to yield as little information and advantage as possible, as instinct may dictate, but to seek out problems on the part of the partner that carry great weight for him/her, and see if one can prevent or mitigate the problems at comparatively low cost. If the partner does the same, then in this give and take both partners will flourish.   
 

Tuesday 1 April 2014


26. Sources of trust

Trust is emotional, since it is related to vulnerability, risk, fear, and hope. It depends on character. With less self-confidence one feels more vulnerable and less inclined to trust. It depends on experience. Disappointments reduce trust. Trust can also be rational, in an analysis of the motives and conditions for people to be reliable.

Trust depends on conditions. Under threat of survival trust will be less. If there is no alternative for partners, and they ‘are condemned to each other’, there is pressure to make trust work, as among marriage partners, and government departments.   

Rational analysis goes as follows. As indicated in the previous item in this blog it is useful to distinguish between reliance, which includes both control and trust beyond control. Control can be based on formal hierarchy (the trustor is the boss), a contract, dependence of the trustee on the trustor, or the need for the trustee to maintain his/her reputation. In one-sided dependence the most dependent submits to the power of the least dependent, and while this is not necessarily fatal, it is wise to aim at a balance of mutual dependence. 

There is also the possibility of a hostage: the trustor has something of value to the trustee and can threaten to treat it badly unless the trustee acts reliably. In old times that took the form of family or nobility surrendered to the trustor. Nowadays it typically takes the form of information that is sensitive to the trustee, such as knowledge concerning a product or technology. The trustor can threaten to make information public or to pass it on to a competitor of the trustee. Ït is a form of blackmail.

Beyond control, trust can be based on norms, morality or ethics, or on personal empathy or identification, or simply on routine: a relationship has become habitual and the question of reliability no longer comes up. Empathy is the ability to put oneself in the shoes of the partner, to understand his/her position and how he/she thinks. Identification goes further, in feeling a bond, thinking like the other, or making his/her fate part of one’s own. Empathy is needed for trust, but identification may go too far, locking a relationship up.

Trust and control are both complements (they go together) and substitutes (they replace each other). Control can never be complete and where control ends one must surrender to trust. And vice versa: trust can hardly be absolute, trust should not be blind, and where it ends one may want to have some control. But the more trust one has the less control one needs to exert, which gives more room and flexibility for the relationship.

The greater uncertainty is, concerning behaviour and conditions, and the more difficult it is to monitor conduct of the trustee, the more difficult it is to exert control, and the more one needs trust. That is the case, in particular, in innovation. There, one must leave room for the unexpected. And uncertainty limits the scope and force of contracts and monitoring of compliance.

Sunday 23 March 2014


25. Trust

Collaboration requires management of its risks. It requires trust, but what does that mean? Trust is a slippery concept and needs clarifcation. Here I make use of my book Trust: forms, foundations, functions, failures and figures (Edward Elgar 2002).

Trust is a psychological state, a disposition that can lead to trusting behaviour.

What can one trust? The subject of trust is the trustor, the object is the trustee. One can trust things (the car) but it becomes interesting and more difficult when the object has a will of its own. One can trust a person but also an organization (e.g. on the basis of its reputation) or an industry (banking) or an economic system.

To trust one needs trust on all levels. People with good intentions may be caught in larger, countervailing interests. One needs trust in the people, the organization they work for and one has to take into account the pressures of survival on both. Will teaching ethics to bankers eliminate their misconduct? Bankers claim that they would prefer not to misbehave (taking too much risk and hiving it off on society; paying exorbitant bonuses) but can afford to do so only if other banks go along, and since all banks argue like that they lock each other up in their misconduct (in a prisoners’ dilemma). Thus one will either have to impose a way out of that dilemma or change financial markets to eliminate the incentives for misconduct. Ethical reform may help but does not suffice.

A distinction has been made between confidence and trust. With the first, one has no choice; one cannot regret to have become dependent, it was inevitable. Thus one speaks of confidence in the economy, or God, or the legal system.

Another important distinction is that between trust in competence, the technical ability to act in line with agreements, and trust in intentions, the will and commitment to do so according to the best of one’s ability, and not to cheat. Failure in competence requires a different response from failure in intentions.

A preliminary definition of trust may be: one is vulnerable to actions of an other and yet one feels that no great harm will be done. That leaves open many reasons to have trust.

A useful notion is that of reliance, which includes trust and control. The trustor may exert control over the trustee, for example with a contract, or as ‘the boss’. Trust goes beyond control, where the trustee is trustworthy on the basis of morality, ethics, friendship or custom or habit.

A narrower, tighter definition of trust then is that one expects no great harm to be done even though the trustee has both the opportunity and the incentive to cheat or to neglect the relationship, because his ethical stance will prevail. However, it is too much to expect the trustee to be loyal even at the cost of his/her own survival. The extent to which the trustee foregoes advantage at the expense of the trustor depends on his/her moral strength and on pressures of survival.

In sum, trust is a four-place predicate: the trustor (1) trusts the trustee (2) in some respect (3, competence, intentions), under certain conditions (4, pressures).

Monday 17 March 2014

24. Problems of cooperation

 What are the risks of collaboration? First, there are risks of dependence. Collaboration is no problem as long as partners do not become dependent on each other and can easily step out when dissatisfied. But relationships without dependence are usually shallow. Dependence can arise from unique value of the partner, for which there is no replacement, from specific investments that have value only in the relationship, or because one is not allowed to step out (as in tasks assigned in public administration). When dependence is one-sided the least dependent partner is tempted to use the resulting power to exact a greater share of jointly created value.

One remedy is to equalize dependence, in shared ownership of specific assets, an offer of unique quality, or market position. One-sided dependence may also be mended by building coalitions with others to build countervailing power.

A second risk is that of spillover: unintended transfer of knowledge or competence that is expropriated or imitated and used to compete. This risk can be direct, in the partner becoming a competitor, or indirect, in spillover through the partner to a competitor with whom the partner collaborates. This risk has often been overestimated. The issue is not only whether sensitive information reaches a potential competitor, but also whether he then has the absorptive capacity for it, and the resources needed to exploit it, and the incentives to do so. If by the time all those conditions are fulfilled the information has become obsolete, the risk disappears.

One instrument of control of spillover is to demand exclusiveness: to forbid application in collaboration with third parties. For this one pays a price of locking the partner up in a conceptual prison. It is important for oneself that the partner keeps on learning and improving, and it is by engaging in relationships with others, also one’s competitors, perhaps especially one’s competitors, to tap from more varied sources of knowledge and competence, that the partner learns.

An important factor is reputation: partners are withheld from doing damage because it will affect their reputation and thereby options for future collaboration, also with others. . For this, it is important that a reliable reputation mechanism is in place.

Beyond control, one can aim for trust on the basis of values, ethics, morality or empathy, identification, friendship and routinization. Trust is a slippery and complex notion that I will discuss in some detail later in this blog.

In view of the problems it is tempting to integrate the collaborating parties under an overarching management with the authority to demand information, resolve conflicts and impose sanctions, in ways that would not be possible between separate, autonomous organizations. However, unified hierarchy mostly reduces variety as a source of ideas, reduces speed of decisions and implementation, and reduces the motivation to perform that comes from independence and one’s own responsibility to survive. The challenge is to resist this reflex of integration and to learn the art of managing the risks of collaboration between autonomous parties.

Monday 10 March 2014


23. Innovation by interaction

Earlier, in item 15 in this blog I discussed the importance of cognitive distance for learning and innovation, in collaboration between people or organizations. Such distance should be large enough to tell or show each other something new but not so large that there is no mutual understanding and tolerance. We need distance for potential novelty but proximity to realize it. Why and how, more precisely, does that work? Here I apply my theory of invention, set out in item 18.

In item 15 I showed that at any cognitive distance one is faced not only with the need to fit the ideas of the other into one’s own cognition, but also the need to help others fit one’s own ideas and practices into theirs. Thus people can help each other to cross cognitive distance and trigger shifts of thought.

In terms of the cycle of invention discussed in item 18, this positing of one’s ideas into the minds of others entails generalization, the attempt to fit one’s ideas into novel areas. Depending on cognitive distance, this yields misfits in understanding that require adjustment. People will try to ‘put it differently’, thinking back to how they came to grips with the idea, what other ideas they tried, and what other ideas are related to it, in their experience. In terms of the cycle of invention, this entails differentiation. As people do this reciprocally, they are stimulated to try and fit elements of the other’s thought into their own thinking, in hybrids of thought and practice (reciprocation), which stimulate a novel synthesis thinking and action (accommodation).

One can increase abilities to cross cognitive distance by an accumulation of knowledge and experience in the practice of crossing distance.  However, as one accumulates knowledge one needs to search at increasing cognitive distance to still encounter something new, finding fewer and fewer sources of further novelty, and increasingly one has only oneself to counsel. Geniuses and wise people are lonely.

The two-sidedness or reciprocity of the process of learning by interaction yields immense leverage, compared to interaction with non-human nature, since in the mutual adaptation of discourse the ‘receiver’ can shift his stance and outlook to catch a meaning and the ‘sender’ can adapt to such stance in pitching his meaning, and revising his metaphors and bringing in meanings from yet other contexts.

In theory of knowledge, the cycle of invention is my answer to the old problem of object and subject, or of the outside and the inside. Are objects in the world causes of the cognition of the perceiving subject, in the form of representations in the mind, as empiricism claims, or are objects in the world perceived in terms of prior cognitive categories of the subject (such as time, space and causality), as idealism claims, or are object and subject inseparable. According to the cycle all three are right. Objects are perceived and made sense of in terms of categories employed by the subject but those may be changed (in accommodation) in the process of absorbing perceptions into mental categories (in assimilation).    

Monday 3 March 2014


22. The valley of death

When an innovation has passed the stage of proof of concept, and even when it has passed market tests, with prototypes, that is not the end of it. Often then the real problems start, in a valley of death in which many innovations strand.

The usual take on this is that now one has to pass from development to production, with corresponding investment and organization. Emphasis shifts from technical and commercial viability to efficient production and competition in the market. Rising volume of demand offers an opportunity for economies of scale, and increasing price competition, upon entry of competition, enforces its utilization.

The entrepreneur needs to develop into a manager. Production volume starts to increase, division of labour is needed, the distance between entrepreneur and the shop floor increases, direct supervision becomes unworkable, the entrepreneur must delegate, and more formal procedures of control have to be implemented.

Often, entrepreneurs cannot take this hurdle. Their psychology of stubbornness, independence, will to power, personal leadership, risk taking and informality, become a liability. Then they are replaced by people more prone to management, or the firm is taken over by an already established, larger one, with deeper pockets, more know-how, specialist support, more contacts, market position, brand name, and access to distribution channels. The entrepreneur often opts out, sells the firm, and starts anew elsewhere, in serial entrepreneurship.

From the perspective of previous items in this blog, concerning the tensions between exploration and exploitation (item 16) and the cycle of invention (item 18), the valley of depth obtains more perspective.

The transition is one from exploration to exploitation. As discussed in item 17, the problem is limited in case production is relatively stand-alone, with products being tailor made, varying between customers, with the need of variety and a degree of exploration within exploitation. Pressures of scale are also less with more custom-made products. 

In terms of the cycle of invention, varying the product according to context, in production, already entails differentiation and reciprocation.

In the case of a more systemic, inflexible production logic, the firm may opt to specialize in exploration and seek a partner in exploitation. In item 17 I indicated the case of small, exploratory biotech firms in partnership with large pharmaceutical companies.

According to the cycle of invention, the problem lies mostly in the transition from accommodation, in the search for a workable and viable novel combination, to the stage of consolidation, where the novelty needs to be embedded in institutions or to shift them (infrastructure, skills, laws and regulations, technical standards, distribution channels, and customer practices). Established firms will try to block or slow down entry.

An alternative to conforming to established institutions is a rush into further, more political entrepreneurship to break them open to the innovation, against powerful lobbies of established interests. This accords with the Schumpeterian concept of the entrepreneur as one who achieves creative destruction.

There are ways to help entrepreneurs through the valley of death, with support from experienced entrepreneurs and specialists, and alliances that are carefully crafted to fit the problems of combining exploration and exploitation and the stage of development along the cycle of discovery.

Monday 24 February 2014


21. Internationalization

What drives the cycle of invention, discussed in item 18, in particular the move towards new niches (generalization)? In developmental psychology, there is a ‘principle of over-confidence’: an instinct to apply what is successful outside the context in which it was learned, as observed in child play. Having learned to hit a hammer on blocks the infant recklessly tries it out on the passing cat. One may even speculate that people have this instinct because while risky it leads to innovation, which was advantageous in evolution.

This psychological drive may also play a role in the internationalization of business. In economics, there are other considerations, such as the need for sustained growth of profits, to expand to new markets. Such may be the motives, rather than any planned effort to learn, even though in fact it leads to learning. However, I heard from a former CEO from Shell that they have caught on to the principle and now use internationalization as a deliberate strategy for innovation.

The cycle of invention throws light on the debate, in the management literature, on the conduct of multinationals, in processes of globalization. There, an important question is whether multinationals should engage in a ‘global strategy’, imposing the practices from their home country worldwide, or allow for variety, in a ‘multi-national strategy’.

There are many relevant considerations here. The choice depends on economic arguments, such as the need for a uniform practice to maintain economies of scale. That, in turn, depends on technological opportunities and competitive pressures on price, and on commercial considerations, such as demand for differentiated products as a function of different circumstances of use, technical differentiability of products, or, on the contrary, market considerations to maintain a uniform product worldwide (e.g. to reduce search costs, as in the case of McDonald’s). This is not the place to reiterate the relevant literature.

The point here is that even if multinationals have the power to impose their familiar practices, with their offer of employment, technology, capital and access to global markets, to impose their home country practices, it may in the longer term be wiser to employ adaptation to different circumstances in different host countries, as a learning strategy (for a study of these two alternatives, in multi-national ventures in China, see Child, 2002).[1] 

In the first case, the firm may just hire local labour and impose conditions on local suppliers. In the second case they would engage in collaboration or joint ventures with local firms. The latter would force them to immerse themselves in local mentalities and practices, which would provide the variety that feeds innovation. 

In more detail, the extent and form of loosening one’s home practices may follow the logic of the cycle of invention. In differentiation one may still keep practice close to the chest, with local collaboration but maintaining autonomy, further relaxing it in reciprocation, with local alliances, and for accommodation a breakaway from the parent firm in local joint venture. Perhaps, in the stage of consolidation one might re-integrate the activity into the large firm, to re-establish economies of scale.


[1] Child, J. 2002. ‘A configurational analysis of international joint ventures’, Organisation Studies, 23/5: 781-816.
 

Monday 17 February 2014


20. Entrepreneurial roles

 Along the cycle of discovery, discussed in preceding items, we can identify different forms of entrepreneurship.

Generalization entails the transfer of application to novel areas. For products this entails entry into new markets. This reflects Mangoldt’s notion of entrepreneurship, and was recognized also by Schumpeter.

In differentiation practices are adapted to differences in demand. This may connect with the arbitrage notion of entrepreneurship, ‘filling gaps in markets’. However, while it entails the realization of existing potential, it also entails learning and conceptual change, leading up to a next innovation.

Reciproca­tion is more Schumpeterian in that it explores elements for novel combi­nations. Schumpeteri­an entrepreneurs­hip comes more into its own in accommo­dation towards novel combinations in novel architectures, where existing structures of action are broken down and from the debris novel practices are experimen­tally built up, to survive, die or be improved in the subsequent stage of consolidation.

However, there are ambiguities in the attempt to fit existing notions of entrepreneurship along the cycle. How far does the arbitrage notion of entrepreneurship (Smith, Cantillon, Austrian economists) go? To what extent does it include adaptation in the form differentiation and reciprocation? Does it overlap, and where, with Schumpeterian entrepreneurship? In reciprocation, perhaps? Perhaps this matching exercise becomes too forced, and serves to show that the distinctions and boundaries between old notions of entrepreneurship are unclear. Perhaps we should go beyond them, to provide new perspectives and aspects of entrepreneurship, as follows.

In consolidation we find:

  -         Recognition of success and failure. This requires sense of realism, in the judgement of technical and commercial viability.

 -          Adapting or innovating systems of application to allow the innovation to achieve its fullest potential. This requires managerial innovation and corresponding capabilities, for utilization of economies of scale and scope, in division of labour, and corresponding standardization of practices, and development of organizational structure for coordination.

In generalization:

 -          Risk taking and vision for expansion into new applications and markets, and design of corresponding systems of coordination.

In differentiation:

-                      Incremental innovation by adaptation of practices to new conditions of demand and production, while maintaining the basic elements and architecture of existing practi­ce. This requires ‘intrapreneurship’.

-                      On the level of top management it requires the ability to combine the maintenance of efficient exploitation with an allowance for local deviations, in appropriate forms of decentralization.

In reciprocation:

-                      Importation of elements from ‘adjacent’ practices that in novel contexts appear to be better in some respect of product or production, while maintaining the architecture of the practice at hand. The requirements from the previous stage apply to a higher degree: imagina­tion to produce ideas for novel combinations. The intrapreneur requires an ability of diplomacy to obtain scope for experimentation while still adhering to demands for coherence with existing practices.  

-                      On the level of top management, the problem of combining efficient exploitation and local deviations, for the sake of exploration, becomes more problematic. Patterns of collaboration are required with outside firms, typically in joint ventures. This requires the ability to ‘let go’, and skills of cross-cultural management.

In radical novel combinations:

-                      Trials of new combinations of elements from diverse practices in a new architecture. This requires a high degree of risk acceptance, courage, determination, perseve­rance and charisma and leadership to bring other people along, including internal or external suppliers of capital.

-                      This stage requires a large degree of organizational autonomy. If the origin of ideas lay inside a large, integra­ted organization, this will often require a spin-off, particularly when the existing system of exploitation is highly systemic. Top management may then need to be entrepreneurial in the sense of facilitating external corporate venturing.

Clearly, along the cycle, the requirements of entrepreneurship vary greatly, and require different people with different competencies. For example, while radical innovation requires courage, independence, boldness and determination to tenaciously pursue an idea, consolidation requires a sense of realism, in the recognition of failure, and the ability to step back and design structures of coordination and seek compromise between conflicting interests. Few people will be able to combine such competencies.

Monday 10 February 2014


19. Levels of Invention

 The notion of scripts, discussed in item 13 of this blog, can be used to elaborate on the theory of invention discussed in the previous item, in an analysis of levels of invention. 

When self-service restaurants emerged, compared to service restaurants the order of nodes, and details of their functioning, were changed into: entry, food selection, paying, seating, eating, and leaving. If one does not know the new script, and assumes that of a service restaurant, one enters and sits, and will not get food. The altered sequence of activities has implications for the nodes. For example: Selection is no longer done from a menu but by picking up items on display.

In the item on invention I employed a cycle of generalization, differentiation, reciprocation, accommodation and consolidation. They can each be clarified in terms of scripts.

In generalization, i.e. application in a novel environment, an existing script is fed into a new superscript. Think of an existing product in a new user environment. A bicycle, for example, introduced to rough terrain, or to beaches. 

In differentiation, script structure and nodes are preserved but in one or more nodes a different selection of subscripts is made from existing repertoires. Bicycle tires need to be wide not to sink into soft soil. 

In reciprocation one borrows subscripts or entire nodes from other, outside scripts observed in the novel environment. Bamboo bicycles have recently been developed in Africa, to deal with local conditions. In Africa, bamboo is in ample supply, bamboo bicycles are very light, and can hence easily be carried across obstacles, in the heat, and due to easy speed there is less need for gears.

In accommodation, one tries to eliminate obstacles in existing script structure for realizing the potential or efficient use of new nodes, by changing the order of nodes or the nature of their connections. Bamboo frames cannot like steel frames be welded together, and require a novel technology for connecting and fixing parts of the frame.  

The logic also indicates hat there are different levels of novelty: a new selection of subscripts from an existing repertoire, or addition to the repertoire, or a whole new node with its repertoire, or architectural change of script structure. In invention one should also look at the superscript of the user into which the invention has to fit. What changes of that script would the user have to make to adopt the innovation? The more radical that change, the more difficult it will be to have the innovation accepted.

Cognitively, scripts are embodied in neural networks. Gerald Edelman’s ‘neural Darwinism’ seems a viable view of how embodied cognition could work, in terms of neural networks. They arise more or less by chance, in diverse, parallel and sometimes rival networks that compete (hence ‘Darwinism’) for reinforcement, according to the frequency, speed and continuity with which they are triggered, yielding easier passage of the thresholds (synapses) between neurons and a greater density of connections with other neuronal groups. New groups can arise from combinations between existing ones. The simultaneous ‘firing’ of neurons can lead to novel connections: ‘firing yields wiring’.

Monday 3 February 2014


18. Invention

In the preceding item I claimed that exploration should feed on experience from exploitation. The wider question, beyond the present scope of innovation, is:

How does pragmatism work? How do ideas arise and change, from action? In an earlier work Learning and innovation in organizations and economies (2000), I proposed a ‘cycle of discovery’. The basic idea, which accords perfectly with pragmatism, is that knowledge develops by applying existing knowledge to new areas. That yields challenges and insights for change.

In a nutshell, the cycle is as follows. In generalization an existing mental scheme or practice is applied to novel contexts. Generalization is needed for four reasons. First, to escape from the existing order in the present area of practice, which presses for conformity. Think of existing ways of thought, technical and legal standards, distribution channels, consumer practices, worker skills, and forms of organization.

Second, generalization is needed to obtain fresh insights into the limitations of existing practice, which has been moulded to what is required in present conditions, or has itself moulded those conditions.

Third, generalization is needed to create pressure for change for the sake of survival. Often novelty does not arise unless needed for survival. Fourth, it is needed to obtain insight into alternatives, encountered in novel contexts of application.

Generalization can be real, as in a new market for an existing product, a new field of application of a technology, or virtual, as in a computer simulation, laboratory experiment, or a thought experiment.

To survive in the new conditions the scheme is differentiated in an attempt to deal with them. For this one taps from existing repertoires of possibilities and capabilities learned from previous experience. If that does not yield survival, one tries to adopt elements of local practices that appear to be successful where one’s own practice fails, in reciprocation.

This yields hybrids that allow experimentation with novel elements to explore their potential, while maintaining the basic logic or design principles of the old practice. One next obtains insight into the obstacles from the old architecture that prevent the full utilization of the potential that novel elements have now shown. This yields indications for more fundamental changes in the architecture, in accommodation.

Next, the new architecture, with old and new elements, is still tentative, requiring much experimentation and subsidiary changes, and elimination of redundancies and inappropriate leftovers from old practice, in a process of consolidation. There is often competition between alternative designs, which mostly results in a dominant design. And next, to get away from that one again needs generalization, and the circle is closed.

One illustration is the following. Before in the car direction indicators with flashing lights were invented, waving a hand indicated direction, as on a bike. From signs at railways one learned that it could be done better with a mechanical hand, without needing an open top or window. In fact, those indicators at first did have the stylised shape of a little hand. The mechanical hand has all the disadvantages of moving parts: in getting stuck, breakage, stalling, rusting, and maintenance. But when also electrical light was inserted the leap was made to using a flashing light instead of moving parts. To distinguish it from basic lighting it had to flash.

Another illustration is that when in the construction of bridges the move was made from wood to iron, use was at first still made of ‘swallow tail’ connections that make sense for wood but not for iron, which can be welded.

Monday 27 January 2014


17. How to combine exploration and exploitation?

 The challenge is to combine the preservation of structures for exploitation with an allowance for deviations for the sake of experimentation. The difficulty of this depends on how systemic versus stand-alone the architecture for exploitation is (Langlois, 1998)[1].

When highly systemic, the system has many densely connected elements, with narrow tolerances in interfaces. Here, deviations in elements, for the sake of experimentation, would jeopardize the integrity of the system. An example is a refinery. Then, there is a high cost, while the promise of results is highly uncertain.

In stand-alone systems, by contrast, elements are highly autonomous in their exploitation. If, in addition, exploitation itself already requires highly differentiated products for different customers, there is more scope to combine exploitation and exploration. An example is a consultancy firm.

An intermediate case is that of a modular system, where elements are many and mutually connected but self-contained and replaceable, provided that they satisfy the constraints in the system.

In systemic arhitectures, there are several ways of dealing with the problem of combining exploration and exploitation.

Logically, one option is to separate them in time, focusing first on exploration, then on exploitation, and back again. That goes back to the old idea of some ‘life cycle’. Life cycles of products and technologies have shortened, and different products in a portfolio will be in different stages of their cycles. In case of products in the same stage of a cycle, it would require something like a pulsating organization, with alternating large and small cognitive distance, order and chaos. It is hard to do this other than by engaging and disengaging people with different skills and mentalities, which is problematic. And then, with such discontinuity of staff, how would novelty be rooted in experience with what went on before?

A second possibility is to separate them in place. One classic form is the one indicated earlier, in a split between production and development, with the problem of combining the two in one structure and culture. To make exploitation receptive to exploration, and to root exploration in exploitation, one may rotate staff between the two functions, and hire people who have the ability to cope with that.

It would help to engage generalists, i.e. people with a wide scope of knowledge and capability, and a large absorptive capacity, so that they can maintain understanding between them even under changing logics or frameworks, and can quickly shift between those.   

Another option is to specialize in one or the other, in different organizations, with a linkage between them in an alliance or other form of collaboration. But here also there would need to be some interchange or rotation of staff between the two, or versatile bounday spanners to mediate between the two.

There would also need to be investment in mutual understanding, cognitively and morally (concerning modes of conduct). Such investments are largely relation-specific, in the sense discussed in item 7, which would require a certain stability and duration of the relationship.

A classic example is that of small biotech firms that engage in the exploration of novel active substances, diagnostics or production technologies, whose results are hived over to large pharmaceutical companies with the stability, size and resources needed for exploitation, in carrying a new medicine through the lengthy process of regulatory approval, and large scale production, promotion and delivery in markets.

The need to engage in specific investments for mutual understanding and cooperation raises issues of dependence and power. In an asymmetric relationship between small firms for exploration and large firms for exploitation the smaller firm would have to beware of the risks of one-sided dependence. This may be, and often is, compensated by the small firm being uniquely capable in exploration, to provide countervailing power. I will expand on problems of collaboration in later items of this blog. 
 


[1] Langlois, R.N. 1998. ‘Personal capitalism as charismatic authority: The organi­zational economics of a Weberian concept’, Industrial and Corporate Change, 7/1, 195-214.
 

Sunday 19 January 2014


16. Exploration and exploitation

 In the innovation literature there is a well-known distinction between radical and incremental innovation, which is similar to the distinctions between disruptive or competence- destroying innovation and competence-saving innovation, and between exploration and exploitation. In the literature on learning there is a related distinction between second and first order learning. I consider all these distinctions to be synonymous, and here I choose the exploration/exploitation terminology, which was introduced by James March (1991)[1].

In exploitation, existing fundamental mental, technological, commercial and organizational frameworks, logics, architectures or competencies are preserved. It is aimed at improved efficiency, fine-tuning, or optimization. Learning is first order. In exploration, by contrast, the fundamental frameworks etc. are broken, lifted, or replaced. It is aimed at new functions, new ways to perform existing functions, new products and processes, new forms of organization, new roles, new designs, logics and architectures. Learning is second order.

In the past, whether the challenge lay in exploitation or exploration depended on the life cycle of the industry. In the initial phase of take-off the emphasis lies on exploration, where the focus lies on technical and commercial viability, and the struggle for a dominant design. Later, in the growth and stabilization, after the establishment of a dominant design, the emphasis lies on exploitation, and the focus shifts to efficient production and distribution, and competition on price.

The problem for organizations now is this. In present times they must achieve, simultaneously, some combination of exploitation, needed to survive in the short term, and exploration to survive in the long term, in what has been called (with a rather ugly term) ambidexterity (‘combining both hands’). However, combination of the two in one organization is difficult because they have different requirements. Exploitation requires stability of basic logics, architecture, linkages, focus, meanings, roles, competencies etc. while exploration requires that they be opened up or loosened for change. How can one combine the two? They entail different mentalities, cultures, and structures.

In the terminology of the preceding item in this blog, exploitation requires a relatively small cognitive distance, with shared ideas on priorities, positioning in markets, ways of doing things, skills, knowledge, technology, and ways of dealing with each other, while exploration requires more scope for variety, for cognitive distance, difference of view, novel meanings of established concepts. How can one combine order and chaos?

The problem is manifest in tensions between departments of production and departments of R&D and marketing. R&D and marketing people chide production management for conservatism and lack of appreciation for novel technical or commercial opportunities. Production people chide R&D and marketing for having no sense of how things are made.

An crucial complication is that the two need to be connected not only to carry on the operational process of innovation, with exploitation following upon exploration, but also vice versa, with exploration feeding upon the insights gained from exploitation.

Note that this is particularly salient from the perspective of philosophical pragmatism that I employ in this blog, according to which ideas arise from experience in practice.


[1] March, J. (1991). ‘Exploration and exploitation in organizational learning’, Organi­zation Science, 2/1, 101-123.