Platt Perspective on Business and Technology

Innovation, disruptive innovation and market volatility 21: innovative development within the organization and in how it operates

Posted in macroeconomics by Timothy Platt on February 10, 2016

This is my 21st posting to a series on the economics of innovation, and on how change and innovation can be defined and analyzed in economic and related risk management terms (see Macroeconomics and Business, posting 173 and loosely following for Parts 1-5 and Macroeconomics and Business 2, posting 203 and loosely following for Parts 6-20.)

I have been discussing business systems friction in this series, through a succession of installments leading up to here, and particularly from Part 15 on. And as an initial point of orientation for this posting, I repeat a set of details that I have made both there and in other, related series in this blog:

• Real world business and marketplace systems are always at least partly shaped in practice, by communication mismatches and by differences in knowledge and understanding that are available to the various stakeholders involved in them,
• And by delays and uncertainties at all levels in the organization that arise from these information sharing failures.
• That is important; real world business and marketplace systems are shaped very significantly by uncertainty, and by all of the factors just noted in the first bullet point of this set that serve to create it. And those factors collectively comprise business systems friction.
• And the most effective business strategies pursued are generally the ones in play among competing businesses that most accurately predict what the various actors in these systems know and will seek to do. These more competitively effective enterprises are the ones that more accurately and flexibly accommodate the impact of delays and uncertainties that arise between planning and execution on the part of significantly involved stakeholder actors too.

I focused on this complex of issues from a stakeholder perspective from Part 15 through Part 20 and then ended that installment by stating that I would turn next in this series to more directly consider change and innovation per se, and acceptance of and resistance to it. And I added that I would discuss change and innovation in this context by focusing on innovative development within the organization and in how it operates – and in the presence of business systems friction.

I will directly address innovation per se and its issues, as change is planned for and actively pursued in a business, and in light of business systems friction and its complicating impact. But first, I am going to in effect reconsider what friction is, and by exploring a very specific point of observation concerning it and its consequences:

• Not all friction is the same. This is obviously true for its origins in individual businesses and the larger contexts that they operate in. But at least as importantly, and crucially so for this discussion, not all friction is the same for level or type of impact and consequence either.

I will address innovation in this series next, after discussing at least some of these nuanced differences and variations in what friction is, as it would impact upon and shape the innovative process. And as at least a starting point for that, I will focus here on the sometimes seeming-contradictions of where information flow needs to be open and unencumbered, and where it needs to be controlled and even intentionally limited and restricted. And to start that line of discussion, let’s consider business systems and functional areas within them that benefit from or even fundamentally require restrictions in information sharing. And for that, I divide information access partitioning into three basic categories:

1. Operationally and strategically planned and considered information partitioning that is mandated according to generally applicable rules that would apply across wide business contexts, and even to essentially all businesses, at least within a single legal jurisdiction,
2. Operationally and strategically planned and considered information partitioning that would arise as best supporting a specific business or business type and that would be implemented in terms of the specific business model in place, and
3. Ad hoc and unconsidered information partitioning.

If you start with the basic definitional notes from the top of this posting, as to what business systems friction is, it would apply to all three of the number-identified scenarios that I have just listed here. But most readers would see the third of them as most fully and accurately capturing the intent of this definition, and as being behind the designation of friction per se as an efficiency limiting restriction on businesses and their capacity to compete. So let’s consider the first two and how they do or do not affect business effectiveness too. And I begin with the first of them: operationally mandated information access partitioning.

• Operationally mandated information access partitioning, at least in principle impacts evenly on essentially every business that competes for market share in some single business sector and marketplace, and in the same way. So none of these businesses are likely to face special and more individualized costs or restrictions from its imposition.
• Friction becomes a significant factor in determining competitive strength and business agility when its impact can be limited, or allowed to simply grow, and when it rests unevenly on the businesses competing in a marketplace.
• Think of basic information flow-limiting requirements as mandated by law, as a source of working examples here. And to cite a well known example of that type, essentially every business that operates in the United States, Canada, the European Union and a wide range of other countries and international accords is required to safeguard the personally identifiable information of its customers, and limit its accessibility. In principle, more open use of this information trove might enable new and more effective marketing approaches, among other things, and the capture of larger market shares. But if no businesses can used their customer information in this way then none of them can capture special advantage from avoiding this particular information-specific form of friction.

And with that noted, I turn to consider the second of these business friction categories: more individually characterized and accepted strategically planned information access partitioning.

• In this case, a business chooses to selectively, strategically limit and control its information flow, and both for what is shared and for who gets to enter these conversations.
• Protection of proprietary information, in its many forms is probably the single most commonly considered requirement that would drive the intentional acceptance and support of this type of business friction within an organization.
• And in this, proprietary information can span a range of information types and contexts that is as wide-ranging as the business involved and all of its systems. To cite a few possibilities here, consider proprietary information regarding new products under development and marketing campaigns that are still in the planning stage for promoting them. And this type of information access partitioning can be just as important for safeguarding confidential details as to new and emerging business development options, such as consideration of a possible business acquisition, or the opening of a new manufacturing plant, or the signing of a major new contract with a new large-scale wholesale distributor that is still in negotiations. But businesses also just as carefully safeguard salary and compensation information, as to what they pay to whom for work done. They tend to see this particular information access control as essential if they are to effectively negotiate salary and benefits with new hires and when considering promotions. And they in fact can come to safeguard and partition off a seemingly open-ended array of other types of information as well.
• And with that, I return to the third numbered information partitioning definition that I raised above. Momentum, and simply replicating the same actions and decisions in new contexts because they have always been done “that way” would shift information access partitioning, and certainly as a cumulative overall process, from fitting the second strategically planned definitional form, to fitting the third ad hoc form. So selectively, strategically limiting and controlling a business’ information flow has to be a dynamic, ongoing process, and not one that comes to run on momentum and precedence and without ongoing reconsideration as to validity and need.

Up to here I have focused more on points of difference and distinction. But both of the first two information flow partitioning categories as listed above: operationally mandated, and strategically planned information access partitioning have to be grounded in solidly considered operational and strategic planning and execution. So to bring a measure of unity into this discussion for them, in both of those categories a decision as to whether a particular information flow restriction makes competitive sense or not depends on whether it would satisfy a single, same decision point criterion:

• Would it be more costly to create and maintain an information flow barrier or partition, or to allow free and open access to this information?

Here, total overall costs have to include both immediate and long-term direct costs, and also indirect costs such as acceptance of risk and its expenses. And to take that out of the abstract, let’s consider a very real-world working example from the first two of the above discussed categories:

• Businesses comply with confidentiality laws regarding customer information because it is too likely they would be caught if they violated those laws and because the costs of doing so would be so high. The “in the news” examples of what has happened to businesses that have been caught violating consumer confidentiality laws have been very telling as cautionary warnings, and not just when it comes to individual customer information from within a business’ own country where they are headquartered and incorporated. Even businesses that are located in countries that do not have such laws have to comply with them when selling and when seeking to sell to customers in nations that do have them.
• And to cite an example from the more business-individualized category here, there are reasons why only six people know the full proprietary formula for Coca Cola. Critical proprietary business information can be the life’s blood of an enterprise as a competitive concern.

The examples and scenarios that I have been citing here in this posting have all involved in-house business processes, as areas where innovative change might or might not make sense and where friction would shape those decisions. I am going to expand my focus beyond the walls of the individual business in my next installment to this series, to consider innovation as it can arise at the supply chain and business-to-business collaboration level. And after that I will consider market-facing and market-supportive business processes and practices, and how they can facilitate the marketing and sale of product and service innovation. Meanwhile, you can find this and related postings at Macroeconomics and Business and its Page 2 continuation.

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