4th March 2021 Innovation | Cities
Why organisations prevent innovation; cities are knowledge-mixers
Welcome to Just Two Things, which I try to publish daily, five days a week. Some links may also appear on my blog from time to time. Links to the main articles are in cross-heads as well as the story.
#1: Why organisations prevent innovation
This article by Tim Harford on innovation dates from 2018, but it is terrific. And even better, although it is in the FT, it’s not behind their paywall. In it he draws on various research and some engaging historical examples to suggest that what gets in the way of innovation is organisations. They aren’t up to handling the disruption to the organisation that comes with genuinely different approaches to doing things.
Harford starts with the story of the British army strategist, J F C Fuller, who invented the idea of the blitzkrieg. His plan was to break the German lines and over-run the command posts behind them, so that the Allies could profit from the confusion. The trouble was: this was World War 1, and the Army thought it was a terrible idea. It became “the most famous unused plan in military history”. But Guderian did read Fuller’s book and put the ideas into practice the next time around—for the German army.
(Image: Wikimedia)
There are comparable commercial examples. Xerox never used the ideas generated by Xerox Parc, but Apple did. Kodak had invented a good digital camera long before its competitors, and so on. Sony produced the ‘Memory Stick Walkman’ before Apple developed the iPod.
Although this is a story about disruption, Harford discounts Clayton Christensen’s model of disruptive innovation. The theory, he thinks, requires too many special cases to deal with the anomalies in the actual world of innovation.
Instead, he turns to work done by Rebecca Henderson and Kim Clark, and published in 1990. The barrier to innovation, they argued, was organisational structure:
Dominant organisations are prone to stumble when the new technology requires a new organisational structure. An innovation might be radical but, if it fits the structure that already existed, an incumbent firm has a good chance of carrying its lead from the old world to the new.
In contrast, this is not the case for what Henderson and Clark called “architectural innovation”:
“An architectural innovation is an innovation that changes the relationship between the pieces of the problem,” Henderson tells me. “It can be hard to perceive, because many of the pieces remain the same. But they fit together differently.”
IBM’s struggles with the PC are a case in point. Or to put it the other way around:
“You have to find an organisation that will accept the new bit of technology,” says Andrew Mackay… “The organisational question is deeply unsexy, but it’s fundamental.”
Harford applies this argument to the challenge that solar power represents to an oil company. He worked in Shell’s long-range planning department before becoming a journalist. In 2001 he and his Shell colleagues were discussing the impact of exponentially cheaper solar power. But they couldn’t act on it:
Offshore wind farms play to some oil-company strengths; they know a lot about large metal structures in the North Sea. But solar energy is an architectural innovation. The pieces just don’t fit together like an oil rig or a refinery. As a mass-market, manufactured product it is closer to the skill set of Ikea than Exxon. The implication of Christensen’s theory is that oil companies should have set up solar subsidiaries decades ago. Many of them did, without much success. The implication of Henderson’s theory is that the oil companies are in big trouble.
And three years later, that is exactly what has happened.
#2: Cities are knowledge mixers
Cities create wealth. According to Geoffrey West’s book Scale, a city which is twice the size of another will generate 15% more income per capita. Doubling the density per square mile increases patents per capita increases the number of patents per capita by 20%.
But why? In an intriguing article, Matt Clancy reviews some recent literature and says it comes down to this: cities are knowledge mixers. It’s about the opportunities they afford to meet new people.
Different academics have attempted to assess this using different proxies. Clancy reports on research that uses the mix of technologies in a patent as a way of indicating the level of social exchange:
[W]e can imagine that means there are a lot of people working on different technologies, all milling around in a tightly packed corner of some city… The inventions and patents that emerge from those spontaneous encounters are more likely to reflect unusual combinations of knowledge. And in fact, patents in more dense parts of the country tend to cite more unusual combinations of technology.
Apparently denser, walkable, streets also help, but the effect is minimal. What really helps is that those streets have a decent number of bars and restaurants on them. And a third academic has tested the role of bars in innovation by imagining what happens to patents when bars close down.
Actually, he didn’t have to imagine. The United States conducted a large scale social experiment during the Prohibition era on what happens when bars are closed. Andrews looked at the difference in patenting before and after Prohibition in formerly ‘wet’ counties (with bars) and used the ‘dry’ counties as a control. It turns out that patents did drop in the once ‘wet’ counties—and took three years to recover. Eventually people found other places to do their knowledge-mixing. As Clancy says, this seems just a little bit too cute to be true, but when he dug into the detail he found that he stacked up. For example: patents among people who tended not to frequent bars before Prohibition, such as women and minorities, showed no sign of decline.
(H/t Azeem Azhar’s newsletter)
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