Book Review: The Rational Optimist

This post is a book review for "The Rational Optimist-Why Prosperity Evolves" by Matt Ridley.

I've been doom and gloom since the financial crisis. This book changed my attitude.

I pulled my money out of the stock market in 2008 and have been on the sidelines until just recently. Pulling my money out when I did turned out to be a very good decision, but I've also lost out on growing my nest-egg because of my future outlook and negative sentiment toward the world-economy before I read this book.

Using history and science, Ridley showed me that the world is not likely to run out of food, urbanization is a good thing, it does make sense to specialize, and global warming (if it is happening) isn't necessarily a bad thing.

The Rational Optimist dispelled my pessimism by putting many of my common-day worries into the context of the evolution of the human social and economic systems. The conversation begins by describing how humanity captures innovation in its "collective brain" and shows how over time the collective continues to make progress and improve humanity's well-being despite all of the scary challenges.

This book convinced me to get back into the markets and I don't think the timing could have been better despite what the gloom-mongers in the media are saying!

The Three Key Reasons to Keep Innovating

Everyone can agree that innovation is import--for every type of organization. I was reading the "Innovator's Solution" the other day and Christensen made an interesting observation in one of his footnotes that I think is worthy of further discussion, which are the three key reasons to keep innovating: to keep investors happy, to keep employees, and to enable the adoption of technology.

First the traditional view: keeping investors happy. I did a hasty search on the web to see what other bloggers are saying about why innovation is important and from what I can tell they give several reasons that support only this one. Frankly, I think growing profitability and market share are what the general population generally thinks about as the ONLY reason to innovate. Out of the three reasons, this one is the only one that is directly measurable--the hard reasoning--but there are two soft reasons which are dependent on this first one.

Innovation is important for keeping employees also. So long as the company is growing the employees will have a sense that there are opportunities for career opportunities. As growth slows the sense that career opportunities lie outside the firm will be perceived more and more frequently. Unfortunately, it will be the top employees that will have the greatest opportunities, which means it is the less capable employees that are left to shoulder the firm's growth.

The third reason to keep innovating is that investment in new technologies becomes more difficult. When the firm stops growing it will have to do more with what its got because it will be less capable to support the capital investment required to bring new technologies into the organizational architecture.

No one needs to be reminded why innovation is important--the idea is intuitive. Nevertheless, as you are looking at new companies to invest in or work for you can ask yourself if the pace of innovation in the firm under inspection can be sustained to keep the top talent AND whether they are able to invest in new innovations. The two soft reasons to innovate support the major reason to innovate and are the key to impacting the fundamental metrics of innovation: product value, costs and the pace of innovation. 

Book Review: Gamestorming by Gray et al.

5 out of 5 Stars


The following is a book review for "Gamestorming: A Playbook for Innovators, Rulebreakers, and Changemakers" by D. Gray, S. Brown and J. Macanufo. This book was written for individuals at all levels of the enterprise to show different collaboration tools for organizations of all types to bring out creative solutions. The book is clearly written, uses clear examples and is well written and organized. 

The authors do an excellent job of providing an introduction and background on the use of brainstorming games, which they call "gamestorming". Chapter 1 describes the objectives of games and suggests a solid approach for the facilitator. Chapter 2 lists the 10 essential components of a game and Chapter 3 discusses some skills required for effective facilitation. These chapters provide a foundation that allows for a rapid understanding of how the games should flow, how to structure the information, and how to ensure good results.

The remaining five chapter discuss a multitude of brainstorming games to solve many of the problems that an organization faces, which are often best solved through a collaborative effort. I've made slight adaptations to these games to suit my own style and solve client problems in a very smooth and professional way. Best wishes on your path to a new type of gaming!

How Product & Service Innovation Works: Disequilibrium, Discovery and Entrepreneurship

Full Speed Ahead
"The only way to beat the competition is to stop trying to beat the competition."1 In Blue Ocean Strategy, the authors describe the insanity of traditional strategic management logic which guides managers to fight head-on battles with competitors; to fight for the same customers; and to take actions that ultimately commoditize products and services. Blue Oceans are lucrative market spaces with a relative absence of direct competition. Although traditional strategic management definitely has its place, they do offer an attractive line of thinking.

Tactical and Strategic Entrepreneurship
If you believe as I do, that the landscape of the industries never really stand still, then you might also believe as I do that businesses have continuous opportunities to discover "blue oceans". Nevertheless, in order to navigate the complexity, managers need special tools to help them detect and harness the opportunities that are out there. Clearly, the best tools for evolving the enterprise's strategies are those that detect disequilibriums, aid the discovery of alternative strategies, and uses entrepreneurial analytics to harness value. In this posting, I'd like to delve into how disequilibrium, discovery, and entrepreneurship are the essential components to innovation.

Disequilibrium
In How Markets Work 2 (the inspiration for this post), Kirzner highlights the importance of disequilibrium to entrepreneurship. Kirzner is a proponent of "Austrian economics", which dismisses the mainstream economics notion of market equilibrium:

The set of assumptions required by mainstream theory to demonstrate how a smoothly operating market might work are far too demanding in terms of the economics systems we know. the empirical unrealism of that theory's assumptions suggests that it conclusively demonstrates that real-world markets should not be able to spontaneously co-ordinate. Thus the obvious co-ordinating properties of real-world markets turn out to be counter-intuitive phenomena crying out even more desperately for an explanation.

Austrian economics places a large emphasis on "entrepreneurial discovery", where decentralized decision makers take advantage of disequilibrium to improve upon that individual's future prospects. Namely, "[m]ovements in prices, production methods, choices of outputs, and resource owner incomes generated by entrepreneurial discovery tend to reveal where current allocation patterns are faulty, and to stimulate changes in the corrective direction." Therefore, when an entrepreneur perceives a disequilibrium he/she will make decisions that ultimately affect the entire market dynamic...., which generates new disequilibriums because ultimately the decisions are made based on imperfect information. Alternatively, this concept of disequilibrium brings light to the fact that opportunities may go unnoticed and therefore ungrasped. Indeed, "Boldness, impulse, and hunch are the raw materials of entrepreneurial success (and failure); they seem to render the possibility of systematic, determinate chains of events unlikely."

Discovery
The tools of discovery are both qualitative and quantitative, where the qualitative tools are akin to maps on a submarine which can be used to plot the general path and the quantitative tools are the sonar devices that help to identify and navigate obstacles along the way. An example of a qualitative tool for discovery is the business model canvas offered up by Osterwalder & Pigneur in Business Model Generation.3  Many manager talk about business models, but have a difficult time explaining their business models in a way that everyone shares the same conception. The business model canvas is a great way to represent business models in a visual way such that all the interactions and implications can be made clear. Indeed, the business model canvas was the inspiration for one of the primary tools used by the Wissmann Group, called the Enterprise Value Map. Another example of a powerful qualitative tool was offered in Blue Ocean Strategy, which is referred to a "value curve". Value curves are a graphical technique for comparing alternative business strategies, which make it clear if the business will be engaging competition directly or if they have a strategy that will guide them towards "blue oceans".

Qualitative methods are definitely useful, especially when it comes to pointing the metaphorical ship in the right direction. Nevertheless, quantitative analytics also have a role to play and with the advent of business intelligence (BI) systems there has never been a better time to integrate them into business management systems. Three examples of quantitative tools that can be used to discover disequilibriums are (1) Demand-Price Analysis, (2) the Direct Value Method, and (3) Attribute Value Curve Analysis.4 Demand-Price (DP) Analysis uses point of purchase data to yield estimate of product value (a metric to estimate the market's average willingness-to-pay for a product). Monitoring product value using this technique can make product managers aware of changes to market tastes, competitor offerings and aid in effective value based pricing. The Direct Value Method (DVM) is a survey based tool that helps identify product changes that could improve product value, which can improve profitability and market share. Attribute Value Curve Analysis examines each product attribute for its ability to impact product value. As consumer's preferences are non-linear over the range of an attribute's performance, sometimes making small improvements to an attribute can make huge impacts on overall product value. The key is to know which knob to turn! (see "Value Driven Product Planning and Systems Engineering" to learn more).

Entrepreneurship
Entrepreneurship is about allocating resources in the best way possible to take advantages of perceived disequilibriums in price and supply. Kirzner offers the following key insight to entrepreneurship as it relates to disequilibrium and discovery:

• At any given moment, businesses are likely to be suffering from unawareness of the true plans of other businesses.
• This business awareness may take the form of undue optimism leading to a disequilibrium price for a good that is too high or too low to clear the market. Disequilibrium prices generate direct disappointment of plans. Such disappointments can be expected to alert entrepreneurs to the true temper of the market. Prices that were too high will tend to be lowered; those that were too low will tend to be bid upwards.
• Unawareness may also take the form of undue pessimism. Sellers may underestimate the eagerness of buyers to buy. Buyers may underestimate the eagerness of sellers to sell. Such unawareness leads to more than one price for the same good. Such price differences constitute opportunities for pure profit and therefore attract the attention of entrepreneurs. 
• In the course of the market movements achieved through disequilibrium, not only will resources and product prices be modified, but resources will be shifted continually from less important uses to more important uses; and undiscovered sources of new resources will tend to be discovered.
• In the real world of incessant change in underlying consumer preferences, resource availabilities and technical possibilities, these corrective tendencies may be partly or wholly frustrated or interrupted. In addition, these tendencies, operating in different parts of the ever-changing market may interrupt and confuse each other. 
• The direction of the powerful forces of entrepreneurial discovery will be shaped and moulded by the above-described systematic and corrective processes of error, disappointment, discovery, and surprise.

Here is the key insight as it relates to entrepreneurship:

In order to innovate, the business must offer superior solutions, which are only made possible through superior abilities to detect new ways to harness value.













1. W.C. Kim and R. Mauborgne (2005). Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant. 
2. I.M. Kirzner (2000). How Markets Work: Disequilibrium, Entrepreneurship, and Discovery.
3. A. Osterwalder and Y. Pigneur (2010). Business Model Generation.
4. H. Cook and L. Wissmann (2007). Value Driven Product Planning and Systems Engineering.

Systematic Genesis and Obsolescence-A Product Management Mantra

Product Managers can't sit on their tails even when they believe they're winning the goodwill of the market. In this respect, Product Management might be the second most thankless job in industry after that of an operations manager, where even if you make the production numbers for the month, upper management and executives shift their focus to the next period and cast doubt on the manager's ability to hit the numbers for that period. Both these jobs are a treadmill where accomplishments are made and forgotten.

In the "Building Product Value-Guidance for Product Managers" blog-post I listed several truths of product management and offered a framework of enabling capabilities for building product value. In this post I want to focus on the most basic truth of Product Management:

Truth #1

Product Managers must be willing to cannibalize old products with new products. If managers aren't willing to give up on old products, competitors will make the products obsolete for the manager.

Sustaining and Disruptive Innovations
In product management (products are bundles of goods and services), there are two ways to characterize innovations made to products: sustaining and disruptive [1]. The sustaining innovations utilize a single genetic code for their products to which incremental changes are made to yield performance improvements. Alternatively, disruptive technologies utilize a completely different genetic code that produces a slightly different value proposition to the customers' fundamental needs. Ironically, disruptive technologies often yield products that perform worse, at least in the near-term, to the incumbent products, but over time may actually dethrone those products due to performance/cost advantanges.

Businesses can fail for many reasons, such as poor execution of plans, poor plans, poor leadership, poor processes, and even bad luck. But Christensen [1] showed that businesses can fail even when they do the right things from a traditional management theory standpoint. Many businesses invested aggressively in new technologies, listen to their customers, and did market research only to lose their leadership position to another business that was shrugged off as a niche player. One of the most recent examples of a disruptive business that was shrugged off might be NetFlix, who swiftly dethroned Blockbuster with a new way to deliver home entertainment.

Systematic Genesis and Obsolescence

Businesses that were able succeed in the face of disruptive innovations did several things right [1]:

1. They funded disruptive technology projects when they could align customers with the innovations.
2. They scaled disruptive innovation projects so that staff could get excited and demonstrate small wins.
3. They planned to fail early and inexpensively and made it organizationally acceptable to do so.
4. They developed new markets for their technology rather than go head to head with sustaining technologies.

One of the best examples of success through cannibalization is how Hewlett-Packard developed and introduced ink-jet technology. In the mid-1980's the laser jet technology dethroned the dot-matrix printers and HP developed the leading market position. Even though ink-jet printers were slower, resolution poorer, and the cost per page was higher; evidence was there that the printers themselves were cheaper to manufacture. To investigate the opportunity, HP created a separate organization to take responsibility for making ink-jet printers a successful business opportunity. Now HP is the major player in the ink-jet printer market.

Avoiding the Innovator's Dilemma

The Innovator's Dilemma, as put by Christensen [1], is that "logical, competent decisions of management that are critical to the success of their companies are also the reasons why they lose their positions of leadership."So should product managers throw their hands up in the air and regress to a shoot-from-the-hip management style? My position is that the innovator's dilemma doesn't have to be a dilemma at all because those "logical and competent decisions" would have been dismissed with the proper use of Value Driven Product Management tools.

Value Driven Product Management (VDPM) is the organization, coordination, and execution of activities focused on growing the net-value of products. One of the core enabling capabilities of VDPM is the ability to quantify the critical value metrics as depicted in the chart below as they are the key to managing the fundamental metrics of product value, product cost, and pace of innovation.

VDPM advocates the planned obsolescence of products by including disruptive technological innovation in the product plan. As shown in the figure below, net-value improvements begins with innovations that lead to product performance improvements that yield product value gains. Although searching for process innovations should always be sought to reduce costs, they generally lag the product performance curves. Nevertheless, when net-product value improvements are coming primarily from process innovations, businesses should begin investing in projects to identify new product architectures that have the potential to produce either more net-value (as shown in the figure) or to add a product to the portfolio that addresses an underdeveloped market.

VDPM tools are used to measure the fundamental metrics of product value, product cost, and pace of innovation. All three metrics can be shown in the S-curve figure above and can be used for predicting product obsolesce and the need for a new technological architecture (sometimes referred to as a platform). The VDPM not only measure the current state, but can be used to detect product value opportunities and forecast market performance (predictive analytics) to make sure incremental profit is not left on the table.



[1] Christensen, C.M. (1997). The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail. Harvard Business School Press. Boston, MA.

Building Product Value-Guidance for Product Managers

In life we talk about building personal wealth. In business we talk about building shareholder value. It's time for product managers to start talking about how to build product value. Value Driven Product Management (VDPM) is the organization, coordination, and execution of activities focused on growing the net value of products and just like there are principles for growing wealth and shareholder value, there are principles for growing product value. In this post I offer a framework for understanding the essence of VDPM.

The Value Driven Product Management Pyramid

I recently reread "Building Wealth" where L. Thurow lists what he believes to be the truisms that provide the foundation for societies, companies, and individuals to build wealth. I couldn't help but see the parallels between building individual/social wealth and building product value. I looked at Thurow's  truisms through the Value Driven Product Management lens and found that much of the framework and principles apply to improving the value of products.

There is an unfinished pyramid on the pack of the dollar bill with a glowing eye at the top. The symbol was placed there by President Roosevelt in 1935 to represent economic strength and durability during a time when America's wealth was anything but that. The unfinished pyramid symbolizes the possibilities of the future and the glimmering eye represents the ability to see what must be done next.

Here are the layers of the Product/Service Value Pyramid

The Eye: Value Driven Product Management

Social and Environmental Consciousness

Value Driven Decision Approach

Product Value Advocates

Innovation and Knowledge Management Systems

Value Driven Culture

Base of Pyramid: Value Delivery Systems

Before we get into the layers themselves, there are a few truths that we posit from the beginning:

Truth #1

Product Managers must be willing to cannibalize old products with new products. If managers aren't willing to give up on old products, competitors will make the products obsolete for the manager.

Truth #2

Product Managers can attain high profit margins and large rates-of-return by exploiting product value disequilibriums that result from technological innovations, under-serviced markets, and evolving social trends. All other prospective product management actions yield marginal results with a low rate-of-return.

With these fundamental truths in place let's look at each of the pyramid layers to see what other truths we can find that can help product managers attain the top of the pyramid.

The Base: Value Delivery Systems

Every organization has a way of doing things. The small business will likely have the efficiency and style of the business owner. The larger organization is build upon legacy processes, methods, and culture. If we think about these characteristics as "business genes", we might say that businesses are predisposed to have certain strengths and weaknesses that are very dependent upon their market. If the business moves to a new market, some strengths might become weaknesses, and visa-versa.

Truth #3

Every organization has a genetic code for delivering their products and services. The secret to success is finding markets where the products' strengths make them exotic and where weaknesses are irrelevant.

Value Driven Culture

There is no shortage of literature that talks about continuous improvement. Lot's of business say that it is part of their culture and in the drinking water. The major distinction of a value driven culture is that continuous improvement activities are not pursued based on perception, but because there is strong evidence that the actions will have a direct impact on the customer's willingness-to-pay (product value) and/or reducing costs to yield a positive change in the net-value of a product offering.

If an action reduces cost, but also reduces the customer's perception of value by more than the cost savings the result is a negative net-value change, which results in less profitability because prices must drop to yield the same demand and results in customers seeking out other alternatives for the same price.

Truth #4

There is no institutional substitute for individuals who know how to grow customer value (see figure below), which is done by improving willingness-to-pay metrics (product value) and/or reducing costs to yield a positive net-value change.

Innovation and Knowledge Management Systems

An innovation in the truest sense is an artifact or concept that is new to the world and improves upon a legacy artifact or concept by either improving performance (think product value) or reducing cost (think product cost). Innovations can come about by accident or systematic discovery, but in nearly all cases they come about through the use and/or the application of knowledge. Businesses need systems to keep track of lessons learned and accumulated knowledge whose immediate implications may not always be clear to ensure the wheel doesn't need to be continuously reinvented.

Truth #5

Innovative ideas come from both knowledge and creativity. Any organization that values structure, policies, and rules above all else will not be creative, but without the right degree of order, innovative ideas and knowledge vanish. 

Product Value Advocates

"There are more cowboys in Detroit than all of Texas!" This is what one automotive industry expert had to say about the cavalier style of auto executive decision making throughout the last several decades. The data were there to suggest that reliability and fuel economy were becoming ever increasingly important in the decision calculus of auto consumers, but because auto companies lacked the proper analytical tools to sense and assign the proper level of sensitivity for these automotive attributes the opportunity was lost.

There are many studies that suggest that people often fall into decision traps because of our limited working memory, limited abilities in cognitive reflectiveness, and limited abilities related to comprehending the true probabilities of uncertain events. When decisions get complicated and we don't have a decision framework we use over-simplistic decision heuristics. Sometimes the result of these poor decisions yield a good result, but what we really want is a good decision based on a framework that gives clarity of action.

Although analytical tools have their place in decision making, the use of intuition is critical to check assumptions. If the analytical tools are to be trusted (and used) by decision makers, models must be transparent so they can be checked with intuition. Balancing analytics with intuition is the job of a skilled analyst who has the proper analytical tools and a solid understanding of decision analysis. I like to call these individuals Value Advocates because they can use their specialized knowledge to detect and communicate value improvement opportunities in a credible way.

Truth #6

Use intuition AND analytical tools to make good value driven decisions because either used alone can be very risky. Product Management teams need both experienced managers to provide intuition and value advocates who know the analytical value tools to reduce risk and provide clarity of action.

Value Driven Decision Approach

A decision is an irrevocable allocation of resources. You don't actually decide to buy a pair of shoes until you pass money to the shoe store. You don't actually decide to go on vacation until you're on the airplane and past the point of no return even though you've purchased the ticket-you could change your ticket to make a trip for reasons other than vacation.

We make decisions every day ranging from what to wear to work to what home to purchase. Whatever the decision, it is clear that the level of consideration that a decision warrants is based upon the level of risk associated with that irrevocable allocation of resources. Will your taste in fashion change after you purchase the shoes? Would you rather spend your money on a new pair of skis rather than go on vacation to the Caribbean? In our personal lives there is no escaping the results of our decisions and therefore we are very careful when making big decisions-those that require a significant amount of our resources.

When it comes to product management, the level of decision analysis should also be directly related to the level of resources to be allocated. While working for a manufacturer of specialized aircraft I often heard complaints from managers that information gathering for decision analysis was "too much work", but if you asked the executives whose careers depended on flawless strategic decision making, their response would be, "That's the way its must be!"

Truth #7

Managers who are interested in building value into their products and services will use Value Driven Decision Analysis. Managers who are on rotation, have plans to move on after decisions are made, or who don't have a true stake are more comfortable making decisions with a limited level of consideration.


Social and Environmental Consciousness
Now more than ever, companies are being held accountable. This accountability is directly related to the ability of stakeholders to organize and get messages out when companies take actions that negatively impact society and the environment-even if these results were unintended or unknown.

In the past it took investigative reporting to get the word out, but with the advent of social networks and media, the message gets out and the implications to the business can be swift and unforgiving.

Truth #8
Negative social and environmental externalities must be understood and quantified when possible so they can be included in the product planning decision calculus. Failure to do so leaves the business open to legal liabilities, political controversy, and societal backlash.

The Glowing Eye: Value Driven Product Management

It should be clear that Value Driven Product Management (VDPM) is more than just a few neat ideas, its more than neat analytical tools, and it applies to all types of products and services. Indeed, to be a value driven product management requires that several modern day management principles be interwoven into the culture and organization. Specifically, VDPM is the organization, coordination, and execution of activities focused on growing the net value of products. 

One of the core enabling capabilities of VDPM is the ability to quantify the critical value metrics as depicted in the chart below as they are the key to managing the fundamental metrics of product value, product cost, and pace of innovation.

What I've offered in this post is not meant to be all inclusive of what VDPM is supposed to be, but simply a framework for understanding the essence of VDPM.

Value Driven Six Sigma-So What's New?

Traditional Six Sigma Mantra
Six Sigma has always been about reducing variation. Traditional Six Sigma strove to reduce process variation and its success at doing so has been well documented. Traditional Design for Six Sigma (DFSS) strove to utilize quality tools in the design processes to yield products that meet customer expectations. DFSS successes have been less prevalent, which might be the case because it can be more difficult to quantify and demonstrate veritable results.

Criticisms of Traditional Six Sigma
The critics of traditional six sigma often cry: sure you've reduced process errors, but how has that influenced the customer perceptions of product/service value? Sometimes the influence on customer perceptions are direct as in the case of reductions in call center wait times or paper work cycle time (which makes the organization more responsive to customer requests), but is the customer really receiving more value when callers are routed through a complex call filtering system for the sole purpose of reducing variation of in-call handing times?

Then there's DFSS, with tools such as the Voice of the Customer (VOC), Quality Function Deployment (QFD), Analytical Hierarchical Process (AHP), etc. Well...., these tools as proposed and traditionally used are good in theory, but..., well..., they're difficult to use in practice and often collapse under their own weight, which ends up forcing managers to shoot from the hip anyway.

Value Driven Six Sigma
The mantra of Value Driven Product Management is to use product value, product cost, and pace of innovation to guide variation reduction decision making. Value Driven Six Sigma and Value Driven DFSS looks at variation reduction through a new lens: reduce process and product variation so long as the result is positive net-value creation. The net-value of any product management decision is the change in product value minus the change in product cost. The third fundamental metric of product management is pace of innovation, which is a measure of how fast the product/process changes can be made.

Further Reading:
Design for Six Sigma as Strategic Experimentation