Dispatches from the Frontier

Companies Don't Innovate; Markets Do

Companies are temporary organizations whose function is to  exploit opportunities identified yesterday from the trading and recombination of ideas.

The evidence...shows that while there is a tremendous amount of innovation and change in the economy at the level of markets, there is much less change at the level of individual companies...change in the economy is driven more by the entry and exit of firms than by the adaptation of individual companies...It is this dynamic pattern of entry and exit that explains [a] somewhat paradoxical finding that as a group, the long-term survivors in the S&P 500 underperform the average.  It is the constant entry of newcomers that keeps the average up.

Though they may start out full of entrepreneurial zeal, once firms or bureaucracies grow large, they become risk-averse to the point of Luddism.

Look under the hood of what seems to be a successful, monolithic large corporation, and you are likely to discover an engine composed of a portfolio of relatively independent market experiments.  In all but the rarest circumstances, the fruits of past success attract bureaucrats, sybarites, and other parasites who ultimately cause irreversible stagnation.  Notwithstanding large or otherwise established firms attempts to embrace and apply the logic of Open Innovation, very few (if any) have been able to do so.  Ultimately, companies' hierarchical command-and-control structures inhibit substantive adaptation.

The more I think about it, the term Open Innovation is redundant.  Innovation is inherently open.  Without the exchange of ideas and trade, there is no innovation.  To the degree that a company becomes insulated from the market, it loses it's capacity to participate in the process of innovation.  As firms grow, bureaucracy replaces the market, and organizational pacing slows.  That may not be a terrible thing in a slowly changing environment, but it hinders direct participation in the nurturing of successful innovations.

Start-ups are fraught with risk (but so are established businesses).  Nevertheless, they remain the most likely conduits for nurturing prospective innovations.  Over the last several years, my colleagues and I have attempted to be a conduit between individual inventors and established, branded consumer products companies.  However, the most promising path to successful commercialization is via companies we created (e.g. TrashCo with the support of WM, an industry outsider) or facilitated (e.g. Mopion).

The Origin of Wealth
The Origin and Evolution of New Businesses
The Rational Optimist
Why Most Things Fail
How Breakthroughs Happen

The Evolution of Prosperity

I'm convinced that the evolutionary algorithm (variety, selection, and replication) is fundamental to our understanding of human prosperity.  Critically, we must maintain a competitive willingness and ability to engage in trade.  As Matt Ridley wrote recently:

Prosperity consists of getting more and more narrow in what you make and more diverse in what you buy.  Self-sufficiency--subsistence--is poverty.

I suspect the greatest risk to the continued prosperity of the United States may well be self-inflicted.  That is, our fear of the risks inherent in interacting with "outsiders" could lead to the false sense of security imparted by relative isolation  (see North Korea).  As Andy Hargadon notes:

We can talk all we want about corporate cultures, garage start-ups, and our legacy of innovation but if history tells us anything, it's that nothing endures.  Moving forward, our ability to innovate hinges on how we choose to tolerate, assimilate, and build on the ideas of others--and how we manage the intolerance of others threatened by this process.