The Innovation Quandary
In one of my previous articles, I discussed how changes at the core lead to variety, which, when met with the corresponding environment, allows the most adapted to survive and thrive. This principle is fundamental to both natural and cultural evolution. In nature, changes occur at the DNA level through random mutations, combinations, and recombinations, giving rise to new phenotypes. Similarly, in socioeconomic life, changes are evident in the way problems are approached and solved. Startups experiment with DNA-like elements, whether in technology, organization, or processes, to generate innovative approaches. But is venturing into new problem-solving methods truly worthwhile? Does innovation pay off? The obvious answer is yes. Who dares to question it? However, the reality is far more nuanced.
As pointed out by Paul Ormerod, most things fail. They are born, they rise, and then they decline. It's the iron law of failure. Yet, life always finds a way through evolution and adaptation, which is its hallmark. No one questions this, as it is as obvious as the sun rising in the east. In business, everyone is chasing the next big innovation, hoping to find a better, smarter, or cheaper solution to problems. But there's a subtle yet significant twist.
When we discuss adaptation and evolution, it's often from an ensemble perspective—a macro view. For instance, a species, which is an ensemble of individuals, can adapt to its changing environment through random genetic mutations that lead to adapted phenotypes. From the species' perspective, the results are evolutionarily positive. However, from an individual standpoint within the species, it's a different story entirely. When the environment changes, most individuals with various phenotypes simply don't survive. Only a few, whose phenotypes happen to fit the environment by chance, thrive and populate the species. Other individuals, despite their "innovative" phenotypes, do not make it. They are the unsung heroes of evolution and adaptation, sacrificing themselves unknowingly for the species' survival.
This parallel can be drawn with business. Innovation greatly benefits the industry, the market, and the economy as a whole. However, for an individual company venturing into innovation, despite its appealing rationale, it's a risky move, given the high failure rate, as exemplified in the startup world. Of course, I'm not referring to large innovative companies like Google and Apple, which drive entire markets. Even Nokia, once a beacon of performance and innovation, couldn't evolve enough to continue thriving in a rapidly changing environment. Who would have questioned the company's strategy at its peak performance? No one did, and the rest was history. Many say that if you don't innovate, you die, but few acknowledge that you can also die while innovating. It's a costly and risky endeavor.
Most companies are small to medium-sized. The question arises: How can the leaders of these companies innovate, knowing the low success rate and the inevitable risk? It's bad news, I know that. What "rational" thinking should guide the decision-making process to commit the already limited resources to innovation? It's a tough question and this is what I term innovation quandary. What benefits the ensemble level isn't easily applicable to an individual. Pursuing innovation that benefits the whole is challenging at the company level.
In his recent book, Andreas Wagner suggests accepting that "every creative product is a ticket to life's grand lottery" and advocates for buying as many tickets as possible. This highlights the concept of ergodicity, which the economy has long assumed: events at the macro level are similar to those at the individual level over time. However, in socioeconomic affairs, things are non-ergodic, as explained earlier. The challenge is how to reduce the ergodicity gap. Big, wealthy companies achieve this by venturing into numerous trials and accepting the high failure rate, but the majority simply can't. Innovation is a numbers game.
The only way I see small companies benefiting from innovation is by being part of an ecosystem, sharing resources, and mitigating risks. There's more to come on this topic.
