Innovation from the Edge

Innovation from the EdgeSome time ago, Mathew Ingram of Gigaom asked in a post why it is that the NY times and other newspapers don’t create new innovations, like daily deals .

The question inspired an impressive variety of comments, from those who denounced newspapers as “old fashioned” and “change averse” to those who pointed out that a newspaper’s primary mission is journalistic.

Whatever your sentiments about newspapers, clearly the problem isn’t exclusive to them. Why didn’t Yahoo invent the search engine?  Why can’t Google get social media right?  In other words, why do exciting innovations tend to come from the edge rather than from the center? The answer has a lot more to do with ecologies than individuals.

Corporations are not People

Most people assume that large organizations simply don’t want to innovate because they like the status quo.  They are “covering their ass” or defending their turf as if organizations were capable of acting like lazy drunks.

I don’t want to say that doesn’t happen, but if that were so, it would be an easy problem to fix.  A change in management would solve it immediately. However, that doesn’t happen in the real world.  As Jim Collins points out in Good to Great, bringing in a CEO from the outside rarely results in positive change.

An alternative explanation is both more likely and more interesting:  people within organizations pursue worthy individual actions that result in poor global outcomes. Nobel prizewinning economist Thomas Schelling described this effect in regards to racial segregation in Micromotives and Macrobehavior way back in 1978 .

It is a mistake to anthropomorphize organizations.  They are not people nor even individual entities, but populations and different rules apply.  Calling them “fat and lazy” misses that point entirely.

The Innovation Ecosystem

A start-up company, almost by definition, is a small place.  It begins with one individual or a few people of like minds who are reacting to specific signals in the market.  Usually, they find that they were wrong in some way.  Maybe they misinterpreted something or lacked information.  At that point, the company dies or changes direction.

Once the company gains traction, an ecosystem develops around it.  There are customers and employees and suppliers and bloggers and journalists and competitors and…well you get the idea.  This change has serious consequences.  After all, if “New Coke” was a start-up, the issues would have been vastly different.  It might have even succeeded.

Wired founder Kevin Kelly described what happens in his book about how business is increasingly following the principles of biology, Out of Control.  He had this to say:

A change accepted by the genome, and then accepted by the bodily form must be accepted by the population at large… Populations (or demes) exhibit their own cohesive drive toward unity, contributing to an emergent behavior of the whole, as if they were one large homeostatic balanced system.

The same effect is at work in business (even, as TechCrunch recently noted, in tech companies).  Just as we don’t grow gills when dropped in the middle of the ocean and starving dolphins don’t show up at our house when we serve fish for dinner, companies that have evolved to serve one marketplace have difficulty serving another.

As Kelly remarks later in the same book, “The greatest problem looming in evolution theory is unraveling the mystery of why organisms don’t change, because stasis is more common than change yet harder to explain.”

The Cybernetics of Action

A much more viable approach to understanding organizations is to treat them as a set of systems rather than as individuals who want this or do that.  In 1950 Norbert Wiener created an approach to systems theory he called cybernetics, which sought to explain regulation in terms of feedback, both negative and positive.

Our internal biology has thousands of such systems.  Our brain regulates our temperature and our heartbeat, for instance, though negative feedback.  Our cells sometimes go through periods of positive feedback, it’s called a tumor.  The feedback system for populations as a whole is called the Hardy-Weinberg principle.

Thomas Kuhn noticed a feedback system in science as well.  He found that scientists tend to work within certain paradigms that framed problems.  They would continue to do so until a crises forced them to reconsider their assumptions.  Then a new paradigm prevails and we start all over again.

Likewise, Clayton Christensen found that big companies often fail not because they are poorly run, but because they follow well established principles.  They spend heavily in research, listen to customers and employees and are praised for their professional management.  Nevertheless, they find themselves upended by disruptive innovation.

You Can’t Work The Problem By Ignoring It

It should be clear by now why big organizations aren’t good at radical change:  They have an ecosystem to support.  Employees and suppliers need to be paid.  Customers need to be serviced and have their demands met.  Established companies, not unreasonably, continue the behavior that makes these things possible.

Start-ups, on the other hand, can react to small changes in their environment.  They might fail by the hundreds, but one positive mutation can alter the overall ecosystem considerably.  The failures, of course, have little effect.

Unfortunately, most companies choose to deal with the problem by ignoring it.  They vow to be different and more nimble, send employees on “team building” retreats where they climb rocks and run over hot coals.  They try to create urgency, set up brainstorming sessions and institute casual Fridays.  All to no avail.

The simple fact is that organizations, to paraphrase Kevin Kelly, follow their own cohesive drive toward unity. In other words, they tend to be very good at what they focus on doing and not very good at other things.

Competing With The Edge

So what’s a lumbering dinosaur to do?  Despite the hubbub that goes on all the time in the media, large companies are much more likely to survive and prosper than they are to die out. (That’s why it makes such big news when they do falter).

Here are some time-tested strategies that incumbents at the center employ to compete with the innovators on the edge:

Acquire: One obvious approach is to leverage their most prominent asset: their size. Silicon Valley stalwarts such as Microsoft, Cisco and Google make dozens of acquisitions every year.  Ad agency giants have employed a similar strategy in recent years.  While digital may own the future, the bulk of the money remains decidedly analog.

There are, of course, pitfalls.  As I pointed out in an earlier post, large media companies have been extremely poor investors.

Partnerships and Minority Stakes: An alternative to making acquisitions is to form partnerships and take minority stakes.  This has become standard practice in the pharmaceutical industry.  There’s less upside, but also less risk and, most of all, it sidesteps the problem of executives screwing up a business they don’t have the first idea how to run.

Skunk Works: In his book, The Innovator’s Dilemma, Clayton Christensen points to a third way:  creating a separate division that lies outside the corporate ecosystem.  This is easier said than done, but IBM’s success with creating the PC shows that it’s possible, albeit difficult.

CEO Led Transformation: The last strategy for competing with the edge is also the most difficult:  CEO led transformation.  Contrary to what many think, even powerful chief executives don’t rule by fiat.  As I wrote in an earlier post, it’s the lunatics that run the asylum and if the rank and file aren’t on board, an initiative is more likely to do harm then good.

That doesn’t mean that it can’t be done.  Bill Gates was famously able to turn the Microsoft ship on a dime when the Internet emerged back in 1995.  However, even after having accurately identified the problem and successfully implemented a solution, he still got an anti-trust suit for his trouble.

Contrary to what many seem to think, radical innovation doesn’t come in glaring headlines (by that time it’s usually too late) , but rather in the form of postcards from the edge.  Moreover, at any one time there are thousands of them, creating more noise than signal.  The only true solution is not a change in mentality, but a change in ecology.

note: I’m grateful to Brian Sweeney of SweeneyVesty for introducing me to the concept of “the edge.”  You can visit his website about his native New Zealand and

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5 Principles of InnovationGreg Satell a consultant who concentrates on media, marketing and innovation. Check out at his site, Digital Tonto and follow him on twitter @digitaltonto

Greg Satell




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No Comments

  1. John Hagel on August 21, 2012 at 7:29 pm

    Greg – Glad to see you are paying attention to the edge as a fertile ground for innovation – that is why the research center that I run is called the Center for the Edge. I am curious if you have read The Power of Pull where we explore both the many different meanings of edges (all relevant to the topic of innovation) as well as approaches to tapping into the power of edges.

    There is also the interesting question of differentiating between edges and fringes that I explored in this blog post

    I’d be curious about your thoughts on all of this.

  2. Greg Satell on August 21, 2012 at 9:03 pm

    Hi John,

    Thanks for you comment and thanks supporting my blog, Digital Tonto., which you have tweeted on occasion. Also, thank you for alerting me to the article in HBR. It’s very interesting and I intend to give it some thought.

    I read your book a few years ago and have read your edge reports since then, which are always intriguing. I do have a problem with your assessment of the importance of the Return on Assets, which is more a function of increased leverage than management efficiency (I would agree that increased leverage is also a problem, but it is a very different problem).

    What’s really important is return on equity. If I can increase my return on equity by borrowing more, that’s a better return on my investment even if it means that there is a lower return on the total capital invested. It’s my money that I care about. Moreover, I don’t think that ROA is a problem for anybody else either because:

    1. If people consider me worthy enough to lend money to me, I assume that they feel that it is a profitable transaction.

    2. Interest rates have been trending lower for the past few decades, which would in itself lower return on invested capital, but is generally a good thing.

    I realize that you have said that you believe that ROE has fallen as well, but looking at the data, I don’t see any sustained trend.

    Of course, none of this has any bearing on your advice, which is always insightful and informative.

    btw. I recently posted about an innovation matrix that I developed. I’d be interested to know what you think. You can find it here:



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