Innotiimi Head Office, Vapaalantie 2 A 13, FIN-01650 Vantaa, Finland

e-mail: firstname.lastname@innotiimi.com www.innotiimi.com

Juhani Lehtonen

On The Black Swan and Radical

Innovation

Ideas from: The Black Swan. The impact of the highly

improbable, Nassim Nicholas Taleb, Allen Lane (Eds.), 2007,

Hardcover, 366 pages, ISBN: 978-0713-99995-2, £20,

Paperback, ISBN 978-0141-03459-1,

1

What is a Black Swan?

• NNT uses the term to illustrate the dangers that arise when we use our limited experience of the world to produce confident assertions about the future or about the world beyond that experience.

• Before Europeans discovered Australia they were convinced that all swans were white. The observation of just one black swan in Australia was sufficient to invalidate a belief that had been based on thousands of years of observations of white swans.

• Unfortunately, after the occurrence of a Black Swan, hindsight bias kicks in, and the event seems, in retrospect, to have been much more predictable than it really was.

2

What is Radical Innovation

• For an invention to be considered radical it has to fulfil three criteria:

• Criterion 1: The invention must be novel: it needs to be dissimilar from prior inventions.

• Criterion 2: The invention must be unique: it needs to be dissimilar from current inventions.

• Criterion 3: The invention must be adopted: it needs to influence the content of future inventions.

• If an invention fulfils criteria 1 and 2, one can ex ante claim that it is a radical invention.

• If it also fulfils criterion 3, one can ex post claim that it is a successful change agent, causing a radical technological change in an industry.

• This probability calculations for radical innovation meets the requirements of “Black Swans”: they are not prdictable

• Can we use this somehow?Kristina B. Dahlin, Dean M. Behrens: When is an invention really radical?

Defining and measuring technological radicalness. Research Policy 34 (2005) 717–737

3

The Efficiency and Innovation Culture

Control &Measurement

Effective ProjectManagement

Improved Hit Rates in

Product LaunchesWell-OiledMachinery

Criticism and Show Stopping

Short-TermResults

Formal Proceduresand ISO Standards

Control & Control & ‘‘EngineeringEngineering’’

Creative andEntrepreneurial

Environment Informal andAd Hoc Decisions

Bold andAudacious

ActionUncertainty

(Chaos)

Long-TermPerspective

PlayfulCulture

Fun and

LaughterGood NPV and

Minimal Risk

Creativity & EntrepreneurshipCreativity & Entrepreneurship

4

What Works Against Radical Innovation in

Established Firms

Conservative StrategyFocus on Competing in Current MarketsLower Gross Margins and Longer Time

Horizons Not Accepted”We are Doing Fine, Why Rock the Boat?”

Core Business OrganizationBudgets Reside within Business Units

Sales Targets & Upgrades Rule”Who Is Going to Fund It?”

Risk Averse CultureRisk Aversity & Intolerance to Failure’Analysis Paralysis’ & Slow Decisions

”It Looks Risky! We Need More Analysis”

Rigid Stage Gate ProcessGantt Charts, ’Slip Rates’ and NPV

Presume PredictabilityPeople are Accountable to Plans”What’s the Plan? Show Me the

Numbers!”

Closed Firm BoundariesLimited Scanning of the Periphery

Intellectual Property isJealously Guarded

”We Do Everything Ourselves!”

Out of Tune with the MarketLimited Market Intelligence

Overconfidence with InternalIdeas and No Proactive Scouting

”We Know Our Customer

Dr. Axel Rosenø: Developing Radical Innovation Capabilities in Established Firms Front End of Innovation Europe. Vienna, 31 January 2008

5

The Challenge of Predictability: Problem of

Inductive Knowledge

100

80

60

40

20

0

160

140

120

1000500 750250

Turkey daily food amount

Thanksgiving

• The history of 1000 days does not tell anything about what’s going to happen next. This naïve projection of future can be applied to everything

When do we know we are not Turkeys?

6

How to Develop Radical Innovation

Capabilities: Prepare for Black Swans?

Dual Strategic Focus• Dedicate Resources to Long-Term Projects• Develop and Communicate Market Vision• Learn to Spot Disruptive Innovation Opportunities

ParallelOrganization

• Give Ventures a Life of Their Own• Set Up New Venture Unit• Create a Radical Innovation Hub

Embrace Risk &Celebrate ’Failure’

• Embrace Risk and Celebrate ’Failure’• Develop Leadership Practices for Creativity• Build a Network of Intrapreneurs

Learning-Based Innovation• Stimulate the Front End of Innovation• Engage in Learning-Based Planning• Evaluate Projects on Vision, Options and Instincts

Dr. Axel Rosenø: Developing Radical Innovation Capabilities in Established Firms Front End of Innovation Europe. Vienna, 31 January 2008

Open Innovation• Import Ideas From the Outside• Export Ideas To the Outside• Collaborate with Partners

Customer OrientedInnovation

• Drive Strategic Innovation Around• Customers’ Value Activities• Segment Markets in Insightful Ways• Identify and Address Unmet and Unspoken Customer Needs

7

Why: Because of Mediokristan and

Extrimistan

• Radical innovation capability is about preparing the organization for possibilities that are not anticipated and can not be projected

8

Mediokristan and Extrimistan

MediokristanMediokristan

• Winners get a small segment of the total pie

• Subject to gravity

• Total is not determined by a single instance or observation

• Tyranny of the collective

• Events are distributed according to the “bell curve”

ExtrimistanExtrimistan

• Winner-take-almost-all effects

• There are no physical constraints to what the number can be

• Total will be determined by a small number of extreme events

• Tyranny of the accidental

• The distribution is either Mandelbrotian “gray” Swans or totally intracable Black Swans

• My view: Radical innovation happens in extrimistan!

9

How to Succeed with Radical Innovation:

Make Extrimistan a Possibility

• Options mentality and Experimental processes appear to be strong risk management by-learning practices that promote RI success measured in any manner• Project and portfolio evaluation and ongoing oversight using an options orientation is

strongly and directed related to RI success. This relationship is strong under all levels of industry clockspeed for all measures of RI success except Legitimacy. There, the relationship between options orientation and legitimacy is even stronger when industry clockspeed is high. It may be that RI oversight boards are more credible when they use processes that recognize that, since futures are unpredictable, funding incrementally may save money in the long run.

• Experimental processes have strongly significant direct impacts on all indicators of RI success. These hold regardless of industry clockspeed, indicating the universality of experimental processes as a learning based risk management too.

• The development of dynamic capabilities for managing highly uncertain phenomena such as radical innovation includes a risk management-by learning capability.

O'Connor, G. C., et al., Risk management through learning: Management practices for radical innovation success, Journal of High Technology Management Research (2008)

10

Examples of Extrimistan

• Facebook

• Mark Zuckerberg founded Facebook while still a student at Harvard University. Website membership was initially limited to Harvard students, but was expanded to other colleges in the Ivy League

• It later expanded further to include any university student, then high school students, and, finally, to anyone aged 13 and over

• The website currently has more than 100 million active users worldwide

• Facebook received its first investment of US$500,000 in June 2004 from PayPal co-founder Peter Thiel

• Microsoft announced on October 24, 2007 that it purchased a 1.6% share of Facebook for $246 million

• On November 30, 2007, Hong Kong billionaire Li Ka-shing invested $60 million in Facebook

• Technically speaking, we already know the company is worth about $15 billion (IPO in 2009-2010?)

11

Examples of Extrimistan

• Shuji Nakamura and the blue leds• For two decades, researchers working for the biggest players in the

electronics industry, from RCA and Hewlett-Packard to Matsushita and Sony, tried their hands at the blue laser diode and failed. Nakamura, a self-described country boy, did it while working for Nichia Chemical Industries Ltd. in Tokushima, Japan.

• Analysts estimate that those companies, along with a couple dozen universities, spent roughly $1 billion in pursuit of blue-light devices since the 1960s.

• Engineers wanted blue and true green because with those colors, along with the red they already had, they could build fabulous things, such as a a white-light-emitting device as much as 12 times more efficient and 12 times longer-lasting than an ordinary lightbulb.

• "If I had gone to a big company, it would have been very difficult for me to do research freely," he says in retrospect. "At a big company, say Sony, there are very, very good researchers. So I would have had to ask them what I could do."

12

Joke

A man was driving along a freeway when he noticed a chicken running along side his car. He was amazed to see the chicken keeping up with him because he was doing 50 MPH. He accelerated to 60 and the chicken stayed right next to him. He speeded up to 75 MPH and the chicken passed him up. The man noticed the chicken had three legs.

So, he followed the chicken down a road and ended up at a farm. He got out of his car and saw that all the chickens had three legs.

He asked the farmer "What's up with these chickens?“

The farmer said "Well, everybody likes chicken legs. I bred a three legged bird. I'm going to be a millionaire."

The man asked him how they tasted.

The farmer said "Don't know, haven't caught one yet.”

• We run into not anticipated issues with Radical Inventions (Invention ≠ Innovation)

• We need to use this unanticipated to create the innovation out of the invention!

Innotiimi Head Office, Vapaalantie 2 A 13, FIN-01650 Vantaa, Finland

e-mail: firstname.lastname@innotiimi.com www.innotiimi.com

Juhani Lehtonen

Let’s keep on developing! ☺

Actually Company Radical Innovation Development is about Anticipating Grey Swans.

I’d be happy to discuss more:

Juhani.lehtonen@innotiimi.com