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Think all innovation is good for your company? Think again.

by E. Ted Prince        

To address industry decline, newspapers need to understand how financial styles impact innovation and just who the right innovators are. What the industry needs is “marketmakers.” What’s that? Read on.

Click the image to view a larger versionMost industries that are becoming obsolete don’t know it until it’s too late. The good news is that newspapers know this. The bad news is that they are still suffering from the innovation errors made by almost all industries that are going out of business.
This article will explain these errors, namely:
  • That innovation is a different thing from creativity.
  • That no innovation happens without innovators.
  • That most innovations actually hasten the decline of a mature company or product.
  • That declining industries usually reject the very people they need to break out of the obsolescence trap.
Financial style and innovation: Surely there’s no relationship?
Innovation and financial style sound like polar opposites right? One appears to be about flinty-eyed, financial decision-making and the other about creativity and intellectual expansiveness. 
But actually that’s not true. They are just two sides of the same coin.
Each of us has a personal preference regarding how much we like change vs. the status quo. Behavioural economists call this the status quo (SQ) bias. If it is high, I don’t like things to change, even if I have the intellectual agility to envision change. If the status quo bias is low, I like change. 
When I am successful at transforming things like products and services, I add a lot of commercial value – we call this the value-added behavioural driver. My gross margin will be high relative to my competitors. So actually, this behavioural preference has a direct impact on how innovative I will be and how this will reflect in my financial decisions and outcomes — or my financial style.
Likewise, each of us has a preference about how much we like to control events. Behavioural economists call this the illusion of control (IC) bias since usually we think we can control things -- even if we can’t. 
This is the basis of the resource utilisation driver. This bias exists independent of external factors. If I have a high IC bias, I will tend to be a big spender; if low, then frugal. So this also reflects in my financial style, independent of my intelligence or external circumstances.
For a given level of value adding (VA), someone with a high IC bias will not make as much money (because expenses are high relative to gross margin). So the combination of these two cognitive biases results in characteristic financial styles and financial outcomes. 
In this approach, financial style is simply an amalgam of my value-adding and resource utilisation behaviours. If my VA behaviours are higher than my resource utilisation behaviours, I will create capital. If VA behaviorus aren’t as strong as resource utilisation behaviours, I will consume capital. 
So this combination of innovation and resource utilisation behaviors will determine whether I create or consume capital and make or lose money. This is depicted in the diagram showing the nine financial signatures that result from combining these two biases.
We can apply financial signatures to famous newspaper figures. Rupert Murdoch is an arbitrageur/marketmaker. Robert Maxwell was a conglomerator. Arianna Huffington is a profitmaker. Randolph Hearst was a venture capitalist. Katherine Graham was a profitmaker. 
Notice that all of these were in the high, value-adding innovator category except Maxwell – that is, they were all innovators.
In sum, financial style has everything to do with innovation. But not just with innovation; also with whether or not my innovative behaviours will create or consume capital, or make or lose money. 
That’s where things get really interesting.
There is no innovation without innovators
Many newspapers facing an end-of-life scenario are firing up innovation projects. You know, the ones promoted by Harvard, numerous innovation gurus, and the like. 
The common denominator of these projects is that they aim to strengthen the creative juices of their employees and staffs in an effort to come up with out-of-the-box ideas that will get them out of their predicament. The most common such projects are those to set up digital properties, possibly behind a paywall or with numerous variations on this theme.
There’s only one problem with this, but it’s a fatal one. That is that increasingly, we are realising that creativity and innovation are totally different things. As in: Microsoft didn’t invent DOS; it copied it. Apple didn’t invent its graphical user interface; it copied it, too. 
Most companies we cite as examples of innovation didn’t actually invent the innovations themselves. They copied them.
I don’t say that to deprecate their effort. I say it to point out that their real genius and value wasn’t that they invented something new. It was that they were able to recognise the value of something and then stick with the hard task of priming demand where it didn’t exist before, and then getting it to market, against very long odds. 
In this emerging view, there is very little creativity in innovation, but, as the saying goes, there is a lot of perspiration. Innovation is not primarily the act of creation, although creativity may or may not be involved. Innovation is primarily an act of execution that requires courage, determination, and persistence against all the odds. 
Innovation often involves a contrary disposition that will fight to achieve a goal even when others see it as being stupid or crazy. In fact, this emerging view sees too much creativity as being the enemy of innovation because it stimulates the overproduction of ideas rather than focusing on the infinitely more difficult and lengthy task of executing something with market-transforming potential.
But people who create and people who execute with a lot of perspiration are different animals. We will show how different below. 
Suffice it to say that most newspapers — like most declining industries facing the same conundrum — are trying to create their way out of the problem rather than to innovate their way out of it. That, in itself, is not a problem, except that the people they are getting to do this are not the same type of people who innovate their way out of this apparent dead end.
Most “innovation” actually hastens existing decline
In our explanation of financial styles, we showed that value-adding behaviours are an integral component. And in these financial styles, resource utilisation behaviors are, too. In the diagram, we depicted nine financial styles. Of these, three are innovator behaviours. 
That means there are three types of behaviours that are associated with innovation: the marketmaker, the profitmaker, and the venture capitalist. Each of these is innovative, but each has a different level of resource utilisation. 
  1. Marketmaker: Drives innovation based on a frugal approach. 
  2. Profitmaker: Drives innovation based on a moderate level of resource utilisation that allows them to make money and create capital, albeit not at the level of the market maker. 
  3. Venture capitalist: Drives innovation but with a relatively high level of resource utilisation. Venture capitalists are the most common form of innovator. Their financial styles only rarely allow them to create capital and make money with their innovations. In the vast majority of cases, they will lose money and consume capital.
 We should note that there may be no presumption that someone who has a Ph.D or comes from a research background will be an innovator. In fact, these very backgrounds may strongly militate against this. 
However, often companies hire Ph.Ds for their research departments and view them as being innovative. Newspapers that want to innovate should not assume that if they hire a Ph.D or a researcher in anything that it will automatically help their innovation efforts; it might, but it is unlikely.
In our programmes assessing executives for innovator behaviours, we have found that around 15% of all them were in the high value-adding category; that is, they were innovators. 
However of this total, only around 3% were marketmakers, that is, innovators whose outcomes were highly capital creating. Another 4% were profitmakers, innovators whose financial style led them to create capital, but moderately so. The third type, the venture capitalist, is the most common type of innovator, at around 8% of all those assessed. However this type only occasionally creates capital, and the vast majority consume it.
This means two things:
  • If a company tries to identify innovators, at best it has a 15% chance of doing so. 
  • And even if a company does happen to identify innovators, the ones that it is most likely to identify will be those that consume capital. That is, they are indeed  innovators, but in the vast majority of cases their innovations fail and consume a lot of capital. 
 That’s why we say that most innovations actually hasten the decline of a company or a product. Even if a company successfully finds innovators – and most don’t – the vast majority of their innovations will fail. The capital consumed in those failures thus hastens the end for the company.
Paywalls anyone?
The takeaways:
  • It’s hard to identify innovators.
  • Usually you will end up getting creators, not innovators.
  • Most of the innovators you identify will fail in their innovations and consume capital — sometimes a lot.
  • Those failed innovations accelerate the process of decline.
Companies usually reject the very innovators they need 
The innovators who are the most successful and create the most capital are the marketmakers. They are high value-adding and frugal. 
They are also very different in many ways. They are fiercely independent, determined, and focused. They usually don’t care what other people think. They often have poor interpersonal skills, are very direct and blunt, and usually work badly in teams. 
Companies usually view marketmakers as being misfits, unhelpful, bad team players, weird, and even a little crazy. Often their views are seen as being uncalled-for and unpopular. They often have no qualifications in the area in which they are working and are seen as being either amateurs or uneducated, so their views are not accorded any respect. A high proportion of them have apparent educational difficulties or handicaps, and they are sometimes dyslexic. 
Consequently, marketmakers are usually disliked by their peers and often rejected by them. Even if they are not rejected, they will usually shut off if they feel ignored. Typically marketmakers leave large companies and go out on their own out of sheer frustration with their work environment.
These are the people you really need. They are the innovators who will make money for you. If your innovators don’t make you feel bad, if they don’t feel like misfits, they are almost certainly not money-making marketmakers.
As products and companies mature and become later-stage and then obsolete, their value-adding behaviour declines and they become less and less attractive to innovators. But innovation is not a matter of raw intelligence. 
Companies in this category are well aware that their products and services are becoming dated and maybe obsolete, so they step up what they see as being innovation efforts. But these are usually more creative than innovative. 
At the same time, however, they are becoming less and less attractive to innovators and they are actively rejecting the best innovators, namely marketmakers. This is the situation in which newspapers find themselves today. As a result, most are doomed to fail, regardless of the sincerity of their efforts. 
So what should a newspaper do to innovate successfully?
The main advice of this article is that in order to innovate, newspapers need to find the right people, i.e. innovators. It’s not enough or even useful to just introduce the commonly recommended innovation processes. If it were, most innovation projects would succeed and we all know from research (notably by Booz Allen Hamilton) that most innovation efforts fail. 
Once you find the right people, you will have to treat them well, a difficult task because these are difficult people. They will probably be difficult to work with, poor team players, know little or nothing about newspapers, and need to be protected because they will be very unpopular. 
In sum: 
  • Hire people from outside the industry, preferably with no background in newspapers.
  • Seriously consider bright people with no formal educational qualifications or university degree.
  • Identify and hire people with marketmaker financial signatures.
  • Treat marketmakers differently than other employees – e.g., spin off a new company that provides them with equity.

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