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.