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 28 April 2014
Monday 21 April 2014
29. Roles of a go-between
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.
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.
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
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
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?
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
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.
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