A better way to think about innovation

By Luke Heilbuth We must innovate! is a catchphrase of the digital age. In reality, most of us grip limpet-like to the things we know. Humans are creatures of habit, after all. Our inclination is to fear or resent changes that force us to move beyond our comfort zone. This is called the familiarity heuristic in behavioural economics – our tendency to favour the familiar over the unknown. A recent theory in psychology reveals that our brain is also a ‘cognitive miser’ – programmed to shun effortful, sophisticated thinking in favour of less effortful, simple thinking. In other words, our minds have evolved to avoid the difficulty and stress associated with innovative thinking. But what if there was a way to improve the odds? In this article, I’ll outline a way to structure your thinking about innovation. Who knows? It might lead you to the next big thing. Answers shmanswers Remember studying as a kid? Knowing the date of the Bolshevik revolution seemed important. You wouldn’t do well at school unless you memorised a laundry list of information. At university – even during your last job interview – you continued to be judged on your ability to respond to the questions asked of you. But today, learning how to answer by rote isn’t what it used to be. There are two reasons for this. First, the ‘right’ answer to a question often changes as the limits of human knowledge expand. For over a thousand years, people assumed the answer to ‘what are the laws of the universe?’ could be found in the Bible. Newton then formulated his laws of motion, which held sway for three centuries. Einstein developed the general theory of relativity in the mid 20th Century, which now exists in parallel with quantum mechanics. We don’t know what will come next, but we know our understanding is incomplete. Second, basic economic theory holds that scarcity creates value. Thanks to the internet, the answers to most questions are freely available to anyone, in seconds. This trend has only just begun. The artificial intelligence revolution will continue to erode the value of occupations that essentially revolve around collating data to spit out an answer. High-status professions like stock broking, medicine, accounting and the law are all in the firing line. Take accounting. In the very near future, the algorithms of companies like Xero will replace most of the accounting work currently done by humans. If this all sounds concerning, it doesn’t need to be. It just means we have to think more creatively about how businesses stay relevant. One way of doing this is to reduce the premium we place on answers and increase the premium we place on questions. For instance, if the boards of Blockbuster and Kodak had asked more probing questions about the viability of their product, they might have recognised their answers to home entertainment (DVD hire) and preserving family memories (film photography) were at risk of becoming irrelevant. Netflix and the iPhone saw the opportunity that new technology afforded and ate their lunch. Questions = innovation So what’s the solution? To avoid going to the corporate graveyard, businesses need to understand the following insight: Those who ask the right questions transform the world. And every time a true innovator reaches a satisfactory answer, he or she can use it as a stepping-stone to ask a new, better question. story-image_word-doc-01The idea that questions are the best way to develop new understanding comes from the dialectic method – the process of comparing and contrasting competing arguments to reach new insights. There is nothing new here – the idea has been around since Socrates – but it works. Here’s a simple method you can adopt:
  1. Think of an initial question.
  2. Try and answer it using as many falsifiable hypotheses as possible.
  3. Test those hypotheses through observation.
  4. Discard those that fail.
  5. Build on those that show promise by asking better and better questions.
Let’s take Elon Musk as an example. He begins by asking an initial question: How can I accelerate the world’s transition from a mine-and-burn hydrocarbon economy towards a solar-electric economy, for the benefit of shareholders and the environment? After discarding alternative hypotheses, his answer is to focus on electric vehicles (Tesla, Inc), lithium ion battery storage (Tesla Powerwall) and solar energy panels (SolarCity). But there are problems with cost blowouts, delays, and scepticism about whether his new technologies will become widely adopted. So Musk asks a better question: How can I create synergies, lower consumer costs, take advantage of economies of scale, and ensure my technology becomes mainstream? Musk answers by winning shareholder approval to merge Tesla and SolarCity; lobbies for billions in tax credits and government subsidies; builds a massive Gigafactory in Nevada to manufacture lithium ion batteries at scale, builds a massive factory in Buffalo to manufacture solar panels at scale, and gives away Tesla’s patents to competitors for free to guarantee the widespread adoption of electric vehicles. There’s only one Elon Musk. So don’t be discouraged if your initial question doesn’t bear fruit. No transformational idea is born perfect and ready for implementation. It’s a seed that grows best under the care and attention of a highly talented team, so get other people on board early. The trick is to start the process of asking the right question initially and seeing where it leads. As Mark Twain once said: He who asks is a fool for five minutes, but he who does not ask remains a fool forever.

The investment case for sustainability

By Luke Heilbuth We all know sustainability is good for the environment and our community. But did you know that sustainable companies also enjoy increased profitability, higher investment returns, and find it easier to attract talent? In the following infographic, BWD explains the investment case for sustainability.

View the infographic

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PROFIT

Sustainability increases profit Sustainability expert Freya Williams reveals that at least ten companies generate a billion dollars or more in annual revenue from products or services that have sustainability or social good at their core. These green giants, which include Ikea, Tesla, Toyota and Nike, view sustainability as a core component of their business strategy. The proof is in the numbers: the share prices of green giants are outperforming conventional equivalents by 11.7 percent a year.

Boosts investment returns Sustainable investing is growing like a weed, with assets under management reaching $8.72 trillion in 2017. A Harvard study in 2016 reveals that firms which perform strongly on sustainability issues most relevant to their business hugely outperform competitors with poor ratings on the same issues. The trend is only set to grow: millennials are twice as likely to commit to an investment that targets environmental or social outcomes.

Protects against recession A Harvard Business Review study found that in the Great Recession of 2008, US companies committed to sustainability achieved “above average performance” in financial markets, translating to an average of $650 million in incremental market capitalisation. Firms with strong corporate social responsibility reputations also experience “no meaningful declines in share price compared to their industry peers during crises.” Alternatively, companies with poor CSR reputations decline by “2.4-3 percent; a market capitalization loss of $378 million per firm”.

PROCESS

Drives innovation Ecovative is a New York-based manufacturer that combines agricultural waste with mycelium (the root structure of mushrooms) to create an ingenious replacement to plastic packaging and other synthetic materials. Its mushroom-based offering is cost competitive, completely renewable, naturally fire resistant and easy to design and mould. Fortune 500 companies, international mills and furniture makers use it as an alternative to conventional, petroleum-based materials.

Encourages long-term thinking Sustainable businesses understand that social and environmental risks like climate change and land degradation reveal themselves over a long timeframe. That’s why companies like Mars, Unilever and Kraft invest in Rainforest Alliance certification to help preserve the agricultural produce they need to remain profitable in the decades ahead.

Increases operating efficiency One third of all food produced for human consumption isn’t eaten, and restaurants are some of the worst offenders. Winnow, a London-based start-up, has developed smart meter software that records how much and what kind of food is being thrown in the bin. The very act of recording spoilage encourages chefs to improve their production process. Winnow claims 200 kitchens have reduced food waste by half since using the smart meter, saving tens of thousands of pounds in the process.

PEOPLE

Builds partnerships Unlike many of its competitors, New Britain Palm Oil avoids chopping down Papua New Guinean rainforests to plant crops. Instead, it leases fields from local farmers, reducing poverty and building long-term community trust. The company also boasts a fully traceable supply chain, which allows it to charge a premium for its sustainably sourced products. By contrast, almost $25 billion in mining projects in Peru were stalled by conflict between local communities and big miners in 2015.

Attracts talent Unilever’s sustainable living brands portfolio, which includes Dove and Ben & Jerry’s, is growing 30 percent faster than the rest of the business. Unilever also uses its sustainability credentials to attract and retain talent. A company spokesperson claimed that “we are in LinkedIn’s top three most sought-after employers globally and 50 per cent of graduates cite our sustainability credentials as the main reason for wishing to join us”.

Enhances consumer trust Trust isn’t intangible. It’s a key indicator that can deliver a sustained commercial advantage. Advocacy group Trust Across America has developed a model for identifying America’s most trustworthy companies. From 2013 to 2016, trustworthy companies produced a 16.7 percent annualised return versus 9.5 percent for the S&P500 over the same period.

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How do I make my business more sustainable?

You can bring sustainability into your business operations in one of two ways.

Boot strappers are practical, preferring to work incrementally. You begin by making a series of small changes to reduce waste and increase efficiency. These changes lead to cost savings over time, which are used to finance more expensive technology and R&D. Eventually, your business model is transformed: you’ve become a sustainability powerhouse without ever taking a big risk. Example: Toyota.

Pioneers are dreamers. You’re willing to adopt a transformative business model with sustainability at its centre, even if up-front costs are high and you face no social pressure to be more sustainable. When you succeed, your advantages as first-mover compound, potentially setting up an enduring, competitive advantage. Example: Tesla.

Would you like to create a more sustainable brand?

BWD is a B Corp-certified advisory firm with expertise in sustainability strategy and communications. Email us at: luke@bwdcreative.com.au

Technology is changing the world: what it means for you

By Luke Heilbuth Here’s a thought: in the not too distant future, your Kindle could have face-recognition sensors that record what makes you laugh, cry or frown. Amazon will then sell you stuff based on your reactions. Your books will be reading you, even as you read them. bwd-bcorp-presentation-1_the-point-pg2 Welcome to the digital age, where big data, analytics and algorithms know you better than you know yourself. While machine learning has made our lives more convenient, experts are divided on whether advances in technology will be good for us over the longer term. Some futurists worry that super-intelligent machines could discard us altogether one day. Others think a hi-tech nirvana awaits, where artificial intelligence will solve all our problems, even death. President Eisenhower once said that pessimism never won any battle, so I’ll side with the optimists for now. My focus is on the ideas of the American economist, Jeremy Rifkin. If he’s right, the way we do business, organise government, educate our children and interact with each other is about to change, and for the better. In this article, I’ll explain:
  • why the Internet of Things is changing everything
  • how technology is disrupting capitalism
  • why the sharing economy is booming
  • what questions you should be asking to prepare for the future.
bwd-bcorp-presentation-1_the-point-pg4The third industrial revolution In his thinking about the future of technology, Rifkin noticed that the really big economic shifts in history have one thing in common: breakthroughs in energy, communications and transport technologies at around the same time. During the first industrial revolution in 19th Century Britain, advances in steam technology led to the invention of the steam-powered printer and the steam locomotive, which in turn led to the creation of the mass media and the railways. These breakthroughs were also underpinned by a new energy source in cheap coal. In the second industrial revolution in the 20th Century United States, electricity led to the development of the telephone, radio and television. A new kind of energy, cheap Texas crude, spurred the invention of a new form of transport: motor vehicles powered by the internal combustion engine. bwd-bcorp-presentation-1_the-point-pg6An even more seismic revolution is now underway. The convergence of renewable (especially solar) energy, the communications internet and self-driving electric vehicles is giving rise to a technology platform called the Internet of Things: the embedding of computing devices into everyday objects which send and receive data through the internet. Over 20 billion devices already link farms, mines, the electricity grid, production lines, transport networks, warehouses and recycling systems to the internet. By 2030, Cisco predicts up to 500 billion devices will be connected. The key takeout is that every part of our economic and social system will soon be linked via sensors and software to the IoT platform. The implications are staggering. Everything is about to change. The paradox of capitalism Even capitalism. It turns out Marx was (partly) right. Capitalism contains the seeds of its own decline – if not demise. But it isn’t the exploitation of workers. It’s extreme productivity. Put another way, capitalism has become too good at what it does. The problem revolves around an idea called zero marginal cost: the price at which an additional unit can be produced without an increase in the total cost of production. Until recently, no-one thought about the possibility of technology becoming so advanced that marginal costs would be reduced to near zero, making goods and services almost free and abundant after fixed costs are taken into account. bwd-bcorp-presentation-1_the-point-pg8This can be tricky, so I’ll explain with a practical example. Remember 1999? It was a good year for movies, with The Matrix, American Beauty and Fight Club tearing up the box office. But the performances of Keanu, Kevin and Brad weren’t the most important things in the entertainment industry. The guy we should have been watching was an 18-year-old insomniac called Shawn Fanning. In a mad dash of creativity, Fanning stayed up for 60 hours straight writing source code for his file-sharing website. Napster created a digital network that allowed millions to share music for free, devastating the profits of the music industry. This same phenomenon soon bulldozed the business models of the movie companies, print newspapers, television and book publishing. Over three billion consumers now produce and share their own music, videos, pictures and ideas on their smart phones and computers, nearly for free, bypassing traditional sources of news and entertainment altogether. An even more extraordinary thing is now happening. Zero marginal cost is crossing over from the digital world to disrupt the business models of industries in the real world, like manufacturing, energy and education. bwd-bcorp-presentation-1_the-point-pg9 As Rifkin notes, enthusiasts in garages around the world are making products using 3D printers, recycled plastic and open-sourced software. Millions of households are producing and storing their own renewable energy, even selling it back into the grid. And more than six million of us are heading online to enrol for free in university courses taught by some of the finest professors in the world. The collaborative commons If a 3D printer can create almost anything for little cost, where is the status in owning a cupboard full of possessions? The economic system best suited for a connected world, where many goods and services are almost free, is the collaborative commons: a digital version of the sharing economy used in most hunter-gatherer societies. A move towards a more socially responsible economy is already in train, as the Internet of Things creates greater opportunities for collaboration and inclusion. Rifkin points to the growing use of social media to share ideas and information, and the use of cooperatives to share cars, homes, tools and toys. As machines take more human jobs in manufacturing, retail and transport, new employment opportunities will also lie primarily in the collaborative commons. Jobs that strengthen social capital like education, health, child care, environmental protection, and care for the elderly will increase in popularity and status. bwd-bcorp-presentation-1_the-point-pg11 So what of capitalism itself? I suspect Rifkin pushes the implications of the sharing economy’s growth too far. I doubt the capitalist system will be relegated to the role of “niche player” as he suggests. But his most important insight is correct: zero marginal cost will continue to strangle top-down, vertically integrated business models that previously enjoyed fat margins and significant pricing power. Remember the Kindle example I used at the start of this article? The most successful businesses in future will be aggregators of data like Amazon, Apple, Netflix, Google and Xero, which make profits by hoarding our personal information to offer us ever more tailored goods and services. The digital age is already raising difficult questions about how technology is shaping our lives. I’m not sure if Rifkin is right, but I hope he is. A world based around community, sustainability and material abundance sounds pretty good to me. A practical take-away To help digest these ideas – and to move them from the theoretical to something useful – here’s a list of questions you should be asking to prepare for the future:
  1. How will you transition from industrial age technologies, like television and oil, to digital age technologies, like electric cars and renewables?
  1. How will you adapt your business model to take advantage of the Internet of Things? In a connected world, your opportunities are bigger than you realise. But so are your threats.
  1. Does your organisation understand the danger posed by zero-marginal cost? If relevant, are you investing in transitioning your business to an aggregator model?
  1. Have you invested in your social license to operate? Social media and greater environmental awareness means unethical or irresponsible behaviour can do permanent damage to a business.
  1. Have you thought about how to benefit from the growth of the sharing economy? Can you collaborate with likeminded partners to share opportunities and build social capital?
  Interested in knowing more? Contact me at luke@bwdcreative.com.au to learn how the experts at BWD can help.