Big Company Innovation?

The electric light, the telegraph, the telephone, the personal computer, the automobile. All these and more have one thing in common: they were developed by small companies, some by a single individual. In fact the record of true innovation shows that large companies seldom make real breakthrough inventions. While those big organizations often improve on the invention of others they seldom invent anything drastically different from existing products. Why is that?

I believe the short answer is “bureaucracy.” The larger an organization the more bureaucratic it becomes, be it a government or a business. That is probably inevitable, it is not humanly possible to directly manage every employee in a large company. However the executives do want every employee to work in accordance with their ideas. One way to accomplish that (or try to accomplish it) is to write policy statements and hire people to administer those policies. Those people become bureaucrats who see their jobs as administering policy. The policies then begin to take priority over the real goals of the organization.

Consider what happens when such a bureaucrat is faced with a request to try something drastically new. For example suppose an employee of the Smith Corona typewriter company had proposed that the company design and sell personal computers. That proposal would have required approval from layers of bureaucracy. Imagine yourself a manager, an accountant, or a controller asked to pass judgment on such an idea. If you approve it and it fails, you will share the blame. However if the innovation succeeds the credit will all go to the person who proposed it. You stand to gain little or nothing by approving the innovation, but you could lose much. However it costs you nothing to reject it. What will you do?

That in a nutshell is why big organizations are seldom truly innovative. They are infected with bureaucrats whose incentive is to maintain the status quo. They discourage the risk taking required for innovation.

Meanwhile individuals and small groups continue to bless the world with their innovations. Many of today's large technology companies started when some entrepreneur had an idea, then took the risk to pursue his dreams. Google, Amazon, Microsoft and others were started by individuals or small groups who put their own money on the line for their brainchildren. There was no corporate finance department to judge the undertaking as too risky, nor were there any managers to tell them they should concentrate on their jobs instead of those wild ideas. Instead, those innovators were free to pursue their passions, and they succeeded.

“But wait,” you say. “Didn't AT&T (American Telephone and Telegraph Company) come up with a lot of innovations? That was a huge company before the government broke it up, but it was responsible for everything from direct distance dialing to the transistor.”

That is true, AT&T was a very innovative company but how the company accomplished that is instructive. Nearly all those innovations were produced by a small division called Bell Labs (jointly owned with Western Electric). Bell Labs employees were encouraged to take risks, work on long-term projects and even engage in basic research. Employees won six Nobel Prizes for physics, most for work that had no immediate practical application. Long-term results were more useful, including much of the technology behind the computer on which I am writing this.

The Bell Labs secret was that it was almost a separate entity, beyond the reach of bean counters who demand quick results with low risk. The employees could pursue their passions without the pressure for quick commercial success. Other companies have created similar research labs. What they have in common is that creative employees are allowed to pursue their ideas. Those employees can work independently on innovations that may or may not ever succeed. Commercial success, if it comes at all, may be years or even decades in the future.

This is contrary to the normal management mindset which is to plan and control. One management book described business as ballet, not hockey. That meant that managers must plan the details as does a choreographer for a ballet. They must not expect employees to react on the spur of the moment in the manner of a hockey game. That is good advice for managing established enterprises. However such detailed planning and organization is the kiss of death for innovation. Innovation is hockey. The players are turned loose to act as they see fit. And players they are. Such creative people enjoy what they do. The employer's job is to provide them toys for their play, not to direct their actions.

Innovation is a messy process. That is one reason the independent entrepreneur is often more innovative than the highly trained scientist or engineer at a large company. The entrepreneur is playing, doing what he enjoys and such play leads to innovation. At a large company the same person would have his creative juices sucked dry. His play would be seen as a waste of time at best and probably a waste of company resources. Management would label him as a renegade, uncooperative, unwilling to work toward the good of the company.

Likewise in government (the largest bureaucracy in the country), employee creativity is stifled. Most government employees start out with high ideals and a desire to help the country. However they are shoehorned into the system, becoming drones whose job is to carry out policy, not to act in a creative manner.

Any organization that wants creativity must be prepared to put up with the risk, lack of control and general chaos that come with innovation. The organization must allow employees freedom to play and must not punish them for failure of wild ideas. You cannot manage innovation but you can facilitate and allow it.

Creativity is a precocious but unruly child. That child cannot be tamed, but will delight the world with new and useful ideas if allowed to be himself.

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Risk Management?

A few days ago I discussed the problems of crises, how they get our blood flowing and at times divert our attention from more important issues. However there are crises that are both real and urgent. Families may face these with financial problems or sudden health issues. Governments face them when threatened militarily or otherwise. How do we deal with these problems? One field that has developed in recent years is “risk management.” The idea is to manage the risks and thus avoid the crises they may generate. That is a good idea but I dislike the term “risk management,” I think I would prefer to call it “risk preparation.” In most cases we do not manage the risk. What we manage is ourselves.

Most risks just are, we can do little or nothing about them. The drunk or careless driver who shares the road with us; the dangerous curve on that road; the susceptibility of our bodies to certain illnesses; the risk of a layoff at work – all are beyond our control and we cannot manage them. However we can manage ourselves. We can drive defensively; we can take care of our health; and we can be prepared to change jobs or live on savings if necessary. We face many other risks, most of which we cannot control, but we can control how we prepare for and respond to them. With preparation, what might have been a crisis becomes only a nuisance or sometimes even an opportunity.

I know, some of you are thinking that this is just semantics. I disagree. What we call something affects how we think about it. If we think in terms of managing risk, the focus is on external factors that we probably cannot control. However if we think in terms of our own action we will focus on what we can do. That is much more likely to result in effective action.

So how do we manage ourselves and prepare for risk? The first step is to understand, as well as we can, what risks we face. That understanding should go beyond a simple list to include probabilities and consequences. This is related to a blog I published earlier about probability, expectation and utility. The risks of most concern are those with a high probability of costing us dearly.

As an example, consider what happens when I go rock climbing – yes I'm silly enough to do that. If I'm three feet off the ground, the consequences of a fall are minimal. Unless I plan to go higher I probably won't bother with a rope, even if the probability of a fall is high. However if I'm 100 feet off the deck things get a bit more interesting. Even if a fall is unlikely I'll probably be tied into a rope.

Step one in risk preparation is to know the risks, how likely they are to materialize, and the possible consequences. That tells us which risks are worth our attention.

Second, we need to determine what we can control and what we can't. I cannot control the hand and foot holds on that rock face, nor can I control the possibility of falling rock. I can pick my route though, and that may avoid some problems. Likewise in life there are risks within our control and some that are not. Even if we cannot control the drunk who may share the road with us, we can control how, when and where we drive. We cannot control the genes we inherited from our parents but we can control the way we eat and the exercise we get. We cannot control an employer's financial situation but we can control our preparation in case of a layoff.

Third, we should decide how to prepare for those risks. In some cases we can reduce or eliminate the risk. When I was a young man on the dairy farm, being kicked by a cow was always a risk, but usually not a high risk. However there was one cow that would fight and kick through the entire milking process. It took several men to control her and she still sometimes managed to kick one of us. My father finally decided that he could manage that risk very well. In fact he eliminated it completely. That cow never kicked anyone again and there was a bit more hamburger on the market.

Of course it is not usually practical to eliminate risks so we just decide how we will prepare for them. I could forgo rock climbing and thus eliminate that risk to myself, but at the cost of the enjoyment that sport provides. Instead I can take other measures. I can learn how to climb better, thus reducing my risk of a fall. And of course a properly used rope doesn't reduce the chance of a fall but does greatly reduce the adverse consequences. I can also look at things like weather and maybe climb tomorrow instead of today if an electrical storm threatens.

Likewise in life we can look at things like driving defensively and even not driving at dangerous times, like New Year's Eve when more people are likely to be drunk. Such actions reduce the likelihood that we will encounter the risk, even though that risk is still there. We can take measures to reduce adverse consequences. My climbing rope is one of those “consequence-reducing measures,” but so are things like insurance, diversified investments, and home smoke detectors.

On the national scene as well, there are risks we can and cannot control. Our ability to control the fanatic wing of Islam is limited to say the least but we can try to keep its operatives out of our country. We can also try to eradicate them in their strongholds though that is difficult and the outcome is uncertain. However in my opinion we as a nation have yet to make the effort to really understand this risk. Too many people think of those fanatics as simply another enemy, failing to recognize just how implacable they are. The fact that they produce people willing to kill themselves in order to hurt us should tell us something about them. Sadly we may not want to recognize what it tells us, but recognize it we must. It should motivate a study of those fanatics, their motives, methods, and weaknesses. Sadly, I’ve yet to see much understanding at that level even in our national leaders.

Once we understand the fanatics we can think about how to try to eliminate them and how to reduce their ability to harm. However any strategy not based on a sound understanding of the problem is doomed to failure. We cannot manage the fanatics. They manage themselves so we must likewise manage ourselves. We must use our strengths and shore up our weaknesses to stop them. However a full treatise on that subject is beyond the scope of this blog so let’s return to the general subject of dealing with risk.

To summarize:

There are some risks we can change or eliminate. If the risk is serious enough, we should do that.

Most risks are beyond our control so we must find other means to deal with them.

We usually don’t manage risk, we manage ourselves. We decide which risks are in our control and how to control them. For other significant risks we decide how to protect ourselves or how to reduce the damage they can do. We do this keeping in mind our abilities and how much it is worth to ameliorate each risk.

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