Accidents are the mother of invention

Here’s a nice piece on the invention of the Slurpee (via Marginal Revolution). An excerpt:

Knedlik’s [Dairy Queen] franchise didn’t have a soda fountain, so he began placing shipments of bottled soda in his freezer to keep them cool. On one occasion, he left the sodas in a little too long, and had to apologetically serve them to his customers half-frozen; they were immensely popular.

When people began to show up demanding the beverages, Knedlik realized he had to find a way to scale, and formulated plans to build a machine that could help him do so.

You never know what customers are going to like. Here’s a secret, kids,– they do not teach you how to figure that out in business school. There’s not a formula or process to follow to do it, other than trial-and-error.

I think executives who are trying to find ways to grow their company should consider using more low-cost, trial-and-error discovery .

Innovation Clinic

In a recent issue, Forbes held a valuable camp on innovation.

First, I agree with what Leonard Schleifer, CEO of Regeneron (a drug research company), had to say about innovation in his Entreprenuer Clinic in Forbes.

I believe that companies rot, and they rot from the top down. Too often the keys to the kingdom are given to commercial folks who don’t value long-term research. When you don’t value something, you don’t get good results from it, and the bottom line is that then, all of a sudden, the long term becomes the short term, and you don’t have anything.

“Focus” is a dirty word for us, okay? It’s a big mistake to think that you can pick the very best thing that you should focus on and then ignore all the other things. Wouldn’t it be wonderful if we could pick only the things that work in our business? Amgen’s new CEO, I heard, said they only were going to work on the things that work. Good luck to him. We are just not that smart.

Second, the short description of the article, The Secret to Unleashing Genius, says a lot:

Companies suffer when the boss comes up with all the new ideas. Shrewd leaders build organizations that think for themselves.

I’ve seen my share of executive teams where the long-term turned into the short-term and they didn’t have anything and where they were never willing to admit that they are just not that smart.

I think realizing that, is the key that the “shrewd leaders” understand and why they build organizations that think for themselves.

However, in depressing news, Forbes had this article where Google appears to be headed the other direction in what Larry Page described as “more wood behind fewer arrows”.

Google previously had a rule that you could spend up to 20% of your time on side projects. Now they are pulling that rule back a bit. The author of the piece asks a good question:

Now that Google has put some rules  around “20% time,” the one day a week an employee spends on side projects, people are having a field day forecasting the end of innovation at the company that claims to “use their powers for good, not evil.” To those people, I ask one question: Can a company in today’s highly competitive environment survive if they allow 1/5th of their employees’ time to be devoted to work that has no clear alignment with the company’s strategy?

Her answer: “of course not.”  I think there’s a better answer: Google’s stock price. Apparently it has been working for them, so far. In the words of Leonard Schleifer, ‘good luck to him.’

Update: Brian Carney and Isaac Getz agree with my take on Google’s rule change in the Wall Street Journal.

Good assignment

Here’s a nice assignment (via Instapundit):

If you want to introduce someone to libertarian thinking, encourage them to try this experiment. Spend a few days reading nothing but technology news. Then spend a few days reading nothing but political news. For the first few days they’ll see an exciting world of innovation and creativity where everything is getting better all the time. In the second period they’ll see a miserable world of cynicism and treachery where everything is falling apart. Then ask them to explain the difference.

- Andrew Zalotocky

If you accept this challenge, I’d love to hear your thoughts.

 

A couple thoughts from Thomas Sowell

From Thomas Sowell’s latest Random Thoughts:

Everybody is talking about how we are going to pay for the huge national debt, but nobody seems to be talking about the runaway spending which created that record-breaking debt. In other words, the big spenders get political benefits from handing out goodies, while those who resist giving them more money to spend will be blamed for sending the country off the “fiscal cliff.”

I, too, am amazed at how spending gets a pass, even from folks like Warren Buffett who should know better.

Would Mr. Buffett give such a pass to a manager of one of his businesses who habitually spent 20% to 30% more than he took in and planned to do so as long as possible? In this case, would Mr. Buffett be so eager in volunteering his own income to continue to support such a manager so that manager could carry out his indefinite plan of spending beyond his means?

Here’s another good Thomas Sowell thought:

The more I study the history of intellectuals, the more they seem like a wrecking crew, dismantling civilization bit by bit — replacing what works with what sounds good.

I’ve seen the same with managers of successful businesses. New managers often ignore the actual success of the business they’ve been entrusted to run — what works — and change that business with their own ideas — what sounds good.

The typical outcome of that can be seen with JC Penney of the past year, where the new manager of JC Penney has made major changes to the business that sounded good, but have reduced the stock price by more than 50% against the S&P 500.

Intellectuals often have the same effect on society. For example, they may wish to ‘wage war on poverty’, but they ignore the best anti-poverty mechanism ever — innovationism (what works) — and instead seek to replace it with systems that sound good, but actually encourage poverty.

Value Discovery

Not only does an idea have to create enough value to overcome the opportunity costs faced by customers who decide whether to buy it, it has to be that valuable plus valuable enough to overcome all the mistakes and stupidity of the folks fortunate enough to be there at the inception of the idea.

What if it doesn’t work?

A moderate/liberal, but mostly uninterested in politics, friend of mine recently told me that he may not vote for Obama next week.

Why?

I’ve worked with this friend for years.

One thing I influenced him on over the years was the idea of emergent order. I pointed out that success stories are often a matter of random luck and the best way to ensure a company’s success is to try as many of the happenstance of random luck as possible.

We saw it over and over at our business. Many things that seemed like they should have worked, didn’t. Some things that seemed like they shouldn’t have worked, did. Many of those things were discovered by accident.

I pointed out to him that centralized management and politically powerful constituent groups in the organization stifled the emergent order that is evolutionary, random, experimental discovery. Stifling that process led to lackluster results — unless the company happened to be very lucky.

My friend said health care was the issue that made him reconsider his presidential vote. Obamacare is a centralized system that will stifle discovery and innovation. It doesn’t allow us to experiment with plans B, C, D, etc. if Plan A doesn’t seem to be working. It only allows for us to keep tweaking Plan A — which puts us on the same path as a mature company that can only manage to tweak its core products, rather discover new ones.

My friend has seen Plan A not pan out enough times that he thought Romney’s approach of letting the states experiment seemed to make more sense.

I don’t know if he will follow through, but it’s good to know that I’ve at least caused him to think about it.

Steve Jobs wasn’t even Steve Jobs

I’ve been noodling on a post for a while about the effects Steve Jobs has on the business world. He’s seen as a hero and other leaders want to also be heroes. They love hearing about this guy who was so difficult, meticulous and sort-of command-and-control. It makes them think they can do it too.

But, they usually turn out to be envious goats who take the batta-batta-batta-”iPad”-swing, miss, then get fired.

The leaders of Intuit don’t want to be Steve Jobs. This is from an excellent piece in Forbes about innovation at that company.

Plenty of companies are a religion, where people take their cues from the top. Intuit is a science lab, where anything can be tested and proven incorrect. “When you have only one test, you don’t have entrepreneurs; you have politicians. When you have lots of ideas you have entrepreneurs,” says Cook.

He’s found a kindred spirit in Smith, who became CEO in 2008. “Genius and a thousand helpers are not going to solve the problems of today or tomorrow,” says Smith, 48… “There are very few Steve Jobses out there. We run small teams and lots of rapid experiments. No politics. No PowerPoints.”

I agree. I’ve seen innovation choked by politics in organizations that take their cues from the top. I’ve seen those same organizations languish and go through multiple leaders who all had the same general idea – their idea, whatever that was.

Other ideas could not get the resources even for a small test because those would take resources away from the leader’s idea. Too bad the hit rate for new ideas is so small. That’s the key insight that the leaders either don’t realize or think they can outsmart it. Or they don’t care because they’ll make a decent sum whether they produce or not.

But, I even think the Steve Jobs story as command-and-control genius is overplayed. No doubt the guy was hard-charging genius. But his greatest genius of all was opening his products to benefit from lots of small tests that would come through the iTunes and app communities.

If iPods and iPhones were just music boxes and phones, I would probably have neither. But, along with these devices, Jobs created a wide community to create stuff for them to make them more useful with minimal political drag on which apps and podcasts could be made available.

This resulted in lots of small bets placed by the thousands of developers and podcast creators and that resulted in tons of content and functions that more and more people found useful, even if it was just a handy way to kill time while standing in line at the grocery store or as a pacifier to keep me from saying truthful, but career-limiting, things in business meetings.

I bought my first iPod when I got tired of listening to the few podcasts that I followed on my computer and discovered that listening to those podcasts while exercising and traveling was something I valued. That was a start.

So, now I have both. And since then, I have found many other ways to make them useful — most of which are not produced by Apple. I have three music boxes: my library, Pandora and another app that lets me tune in radio stations. I play Words/Chess with Friends, but with Family. I ask Siri stupid questions and occasionally, it gives me a useful answer. I don’t get lost. And so on.

The key point: It was those many other things that made iPod, iPhones and iPads the success. I don’t believe any of Apple products would have been nearly the success if they only stored music and surfed the web. iPods probably would have been slightly more successful than the Nomad MP3 players if all they did was store and play music.

So, congrats Steve Jobs. You figured out how to make money off Wikipedia’s operation model and Wikipedia itself (another tool I often refer to through my Apple devices) (I wonder if there is a Wikipedia article on that?) and fool most folks into thinking it was all you.

Fallacies, Hokum and Contradiction

Commenter breedm asked what I thought of this TED Talk presentation about job creators from Nick Hanauer.

I think it provides some good examples of fallacies, hokum and an argument that contradicts itself.

At the 42 second mark, Hanauer presents this straw man:

…a policymaker who believes that the rich are job creators and therefore should not be taxed will do equally terrible policy  [as an astronomer who believes the Earth is the center of universe] .

The straw man is in bold. I know of no one who believes the rich should not be taxed. Comparing these fictional policymakers to fictional astronomers (that’s hokum) doesn’t make either group any more real.

Right after that, Hanauer enters the wealth discussion “in the middle” by claiming that job creation comes from the people who can afford to buy products, consumers. Without them, “all of those jobs would have evaporated,” claims Hanauer.

David Mamet and Thomas Sowell explain here that the “a priori question left unasked and unanswered” by folks like Hanauer is, where did the wealth of these people who can afford to buy products come from?

Wealth was not “descended from the heavens, like manna, and spread evenly over the ground,” Sowell writes. “It was created by individual expenditure of effort and individual willingness to undertake risk.”

At about the 1:15 mark, Hanauer says something I agree with:

Jobs are a consequence of a circle of life-like feedback loop between customers and businesses.

Sure. Customers buy products they value. Those purchases send signals to businesses about what consumers value and businesses make more of that stuff.

But, as Sowell pointed out, customers had to first acquire enough wealth to purchase these things in the first place.

This was done in the same “circle of life-like feedback loop” that Hanauer mentioned. Consumers acquired their wealth as workers or business owners that produced something of value for others.

Or, they somehow got their hands on a piece of the wealth these folks created. For example, children who spend their parents’ money got their hands on some of the wealth their parents created. Recipients of charity or government transfer payments, get a piece of wealth — either voluntarily or forcefully — from someone else.

But, I disagree with Hanauer’s very next sentence. I also think this sentence contradicts his previous and is the fundamental lapse in Hanauer’s thinking.

And only consumers can set in motion this virtuous cycle of increasing demand and hiring.

It’s not much of a “virtuous cycle” if only one player in that cycle can set it in motion, is it? Again, Hanauer’s basic flaw is not tracing back where those consumers acquired their wealth.

The next few minutes of Hanauer’s speech is filled with hokum. For example, he argues that when business people take credit for creating jobs, it’s like squirrels taking credit for evolution.

I wonder what Nick would say about politicians taking credit for job creation. Either way, it’s a hokum comparison. It’s more like squirrels taking credit for finding a good place to store nuts for the winter. Evolution may have favored the squirrels who do that, but that doesn’t mean that those squirrels aren’t working hard to make sure their families have enough food for the winter.

Hanauer really stretches the straw man and hokum meter at the 4 minute mark, claiming that the word ‘creator’ is an attempt to deify job creators.

It’s a small jump from ‘job creator’ to ‘the Creator’. It was, like, not chosen by accident. When someone like me calls himself a job creator, we’re not just describing how the economy works…we’re making a claim on status and privileges we deserve.

Or, maybe not.

Next, Hanauer claims that the 15% tax rate paid by ‘capitalists’ on dividends and carried interest, compared with the 35% top rate on work, is a privilege and hard to justify without deification.

That’s only if you don’t understand the difference and neglect that the ‘capitalists’, for the most part, had to pay that ’35% top rate’ on the income that was used to acquire the capital that is now producing dividends, as economist Steven Landsburg explains here. Landsburg’s conclusion:

Why is this so terribly hard for so many intelligent people to understand? Here, I think, is why. They see a guy with a million dollar capital gain on his investment, and they forget that in the absence of wage taxes, he’d have invested twice as much and earned a two million dollar capital gain. In that sense, the capital gain is taxed in advance.

Hanauer concludes that a strong middle class is the real driver of job creation and:

…that’s why taxing the rich to pay for investments that benefit all is such a fantastic deal.

Except that kills the consumer-business feedback loop ecosystem that Hanauer praised earlier in his speech, because the “investors” are no longer investors and consumer purchasing signals no longer matter.

That is, “investors” in Hanauer’s model do not have to respond to what consumers want. Investors in the “ecosystem” go out of business when they make something consumers are unwilling to buy, as they should. That’s the feedback part of his consumer-business feedback ecosystem.

When government “investors” (i.e. spenders) make something consumers are unwilling to buy, they don’t necessarily go out of business because the tax dollars are not directly dependent on whether their projects are consumers successes or not.

To sum up, Hanauer first argues that the economy is an emergent order, like evolution, that is not dependent on a centralized investment function. But, then argues that we should centralize it, which removes the emergent order aspect of it.

breedm, Does that help?