Innovation Anemia

A problem plaguing many organizations is anemic innovation. That is, they try too few things to stay relevant over the long haul.

This became apparent, over a 3 year period in my career, when a new CEO took over at my then employer. He came from a company with a healthy culture of innovation. Trying lots of things across the organization was in the company’s DNA and had been for decades.

Up to that point in my career, innovation was a top-down, bureaucratic exercise in the companies that I had worked with.

Like previous years, my group presented our plans to the new CEO, hoping to gain approval on one, maybe two of the five things we were presenting.

After our presentation, he sat quietly. We expected the typical deep dive testing the thinking on our assumptions, then the somewhat arbitrary reasoning that would result in green lighting things related to his ‘vision’ and shelving everything else.

We waited.

He said, “Sounds good. What do you want from me?”

We asked, “Well, which one do you think we should try?”

He answered and asked, “You can’t try all of them?”

We were surprised. We didn’t know what to do. We invited him to can some of the projects. “Well, it would take a lot of resources to try all of them.” What were we saying? We had been infected by anemic innovation.

He responded, “How about you try what you can and let me know how it goes?”

That opened the door to 2-3 year period of innovation at our company that was fantastic. We tried a bunch of stuff and learned a bunch of stuff and a lot of good things emerged.

Then, he left. Like his predecessors, he was given a short runway to change the company’s trajectory and what emerged while he was there didn’t take root until after he left. In fact, one of his last acts was to approve a national rollout of the company’s most successful promotion in a generation, that would change the company’s trajectory over the next 3 years. This promotion had a negative cost of client acquisition, which was UNREAL! I had not seen anything like it before or since.

That promotion was a result of one of the things that we tried that previous CEOs would have never allowed because it sounded so nuts. Even I didn’t think it would work, but I was curious to see what would happen. I was proven wrong and glad for it. The story of that promotion, itself, could make an interesting business movie and I’m glad to have been a part of it. It also opened my eyes that things that seem like real stinkers can surprise you, so its best to have an open mind and let results speak for themselves.

Sadly, the innovative CEO received zero credit for it.

His replacement quickly returned the organization to the centralized, top-down innovation of the past. Two other innovations that had emerged from our group untouched by the previous CEO, suddenly came under micromanagement of the new CEO, who spent a good deal of time deciding whether a sign should have a 9 or 12 point starburst on it (answer: nobody noticed either!).

Eventually, the new guy signed his own pink slip by discontinuing his predecessor’s successful promotion. He didn’t like it because it wasn’t his idea and he overestimated how easy it would be to replace a promotion with a negative acquisition cost. Such promotions do not grow on trees, which I hope was printed on his cancellation notice.

For those 2-3 years, work was fun. We spent more time thinking deeply about what customers want, talking to customers face-to-face and finding effective and inventive ways of giving them what they wanted.

When the bureaucrats returned, we spent more time trying to please the bureaucrats’ whims and personal preferences. Customers became afterthought, again. It should surprise nobody which culture results in long-term success.

The really sad thing, the innovative CEO doesn’t know, to this day, what he did for the company. I think the innovative culture was so ingrained with him, that it didn’t seem at all remarkable to him and he never realized what a difference it made.

After living the contrast on a day-to-day basis for years, I can spot this innovation anemia a mile away. It can infect any human organization: companies, charities, churches, educational institutions, clubs, sports teams, you name it.

It’s the simple belief that they need to do the ‘right things’ rather than ‘try a lot of things.’ Organizations run by folks who believe it’s about doing the ‘right things,’ will eventually be displaced by competition or obsolescence, though sometimes they manage to get really, really lucky.

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Particular Circumstances of Time and Place

Quick…Think of a little silicone product that will sell millions.

Anything come to mind? Probably not. Not even for the smartest, most creative folks.

But, it did for a 7-year-old Cassidy, who invented the The Baby Toon teething spoon.

Well, I don’t know for sure if it sold millions, but I think it’s selling quite well and much better than any product I came up with.

I saw it on tonight’s episode of Shark Tank and thought it was good illustration of what economist Frederick Hayek called the Local Knowledge Problem, or the knowledge of particular circumstances of time and place.

Put the best minds on the task, with the most robust models and market research, and it may never have occurred to them to solve the problem of a teething infant in quite the same way that Cassidy did, at age 7, when she noticed her Mom get scared when her baby sister used a hard plastic spoon to teethe.

Another good example, on the same episode, was with a product named Quevos, a snack food made from egg whites. One of the founders said he was inspired, soon after learning he had Type I diabetes. It occurred to him how much he liked the little crinkly egg white chunks left in the pan after frying an egg.

Mark Cuban agreed, “Those are good!” So did I. But, in all my life it hasn’t occurred to me to make a snack food from it.

But it did to this founder, because of the particular circumstance of time and place. After his diabetes diagnosis, limiting his carb intake was on his mind. He also loved snacks, like chips and didn’t want to give them up. It was that circumstance that provided the inspiration that has escaped billions of the rest of us who have bit into those crunchy, salty fried egg whites and thought, ‘man, that’s good!’

Are you stuck in the +/-5% box?

‘Thinking outside the the box’ is an oldie but goodie. While I’ve known what it means for a long time, a more defined meaning of it recently dawned on me.

I’ve worked with a few mature businesses where management rotates through the same sets of actions, over and over again. Lower price. Raise price. Increase marketing. Decrease marketing. Open more stores. Close stores. Cut costs. Rinse and repeat.

In mature and declining businesses, these actions generally have an impact on sales and the bottom line in the range of plus or minus 5% for a and long-term trends continue after that.

Few seem to notice.

They push these actions as if this time the results will be different than the previous dozen times and they are disappointed when performance comes in-line with those previous tries instead of moving the company into a new growth phase.

They then shake off their disappointment to develop the next plan, which contains more of the same types of actions.

Basic questions like these tend to escape scrutiny:

• Why did the action not drive big growth last time?
• What has changed since then that makes us think the results could be different?
• In the best case scenario, what can we reasonably expect to happen?
• Are there cases of companies being successful with this strategy? If so, why? If not, what makes us think it can work for us?

They escape scrutiny because managers believe it is their job to have the right answers to lead the company to the future and entertaining such questions hints that they don’t.

Give luck a chance

In his book, How Innovation Works, Matt Ridley adeptly captures an idea that I’ve struggled to articulate well:

“Serendipity plays a big part in innovation, which is why liberal economies, with their free-roving experimental opportunities, do so well. They give luck a chance.”

Later, he described how nuclear energy has not advanced nearly as far as other areas, like electronics, because not many folks want to give luck a chance with nuclear since because of the risk.

In a world where improving requires trial-and-error, failure, learning and luck, nuclear energy remains in a state close to where it started because it does not have the luxury of errors and failure.

I’ve witnessed this same limitation in many organizations. Managers of mature companies, for example, too often think their job is to keep the company healthy by using their skill to beat the odds, rather than to play the odds. So, they squelch trial-and-error in the company in favor of their grand plans. They don’t give luck a chance. The thought of admitting that the future of the company depends on a bit of serendipity seems like madness to them.

Sometimes they are lucky to beat the odds, but more often the house wins and they leave the business less healthy than where they started.

Those in charge of US Soccer also do not give luck a chance, while soccer federations in other countries do. I believe that’s the the #1 or #2 reason why U.S. men’s soccer has trouble cracking the top 10 and has to generally rely heavily on dual citizens, that as a product of their dual citizenship spent good chunks of their lives in those soccer environments that do give luck a chance.

A huge eye opener in my early days in soccer was how dual citizens seemed well over-represented at the top of our player pool. That was the first hint something was up and I believe Ridley’s view helps explain why.

How to avoid being primed

When I get stuck at a red light, I grumble to my passengers, ‘I always hit red lights!”

From then on, they will notice when I hit red lights and won’t notice when I make through on green.

By stating that I hit red lights, I primed my passengers to look for evidence to support it. When they see it, they experience confirmation bias and agree. When I make it through, they don’t notice as much or might write it off as being lucky that time.

The trick to priming is to focus you on things that tend to happen naturally with some frequency, so you will notice when they happen.

Most folks get stuck at red lights sometimes. The question shouldn’t be, do I get stuck at red lights? Though, that is the question I primed my passengers to answer.

The question should be, do I get stuck at red lights more than anybody else?

Soccer Pro/rel FAQ

I often see discussions about pro/rel in soccer fizzle on the following questions, without good answers, I thought I would try to provide some good answers.

What is promotional/relegation?

It’s also known as an ‘open pyramid’ system. It has been used by soccer-loving countries since near the beginning of soccer as a sport, as a way to organize the competition.

It’s a club-centric system, rather than a league-centric system. That means that the soccer federation organizes the competition more like a Battle of the Bands than the WWE.

In Battle of the Bands, the organizers try to take all comers into the competition and let their musical talents decide how far they go.

The WWE controls the competition, the characters, the story lines and the matches.

In countries that use an open-pyramid, you can start a soccer club and enter a team from the club into the pyramid, probably somewhere down on the 5th or 6th tier of the pyramid. You don’t have to pay exorbitant franchise fees to join the league or meet any particular high hurdles, like have an enormous stadium for an unproven product, or be somewhere where a lot of people happen to live.

Your club can win its way up the pyramid (promotion) based on results. If it doesn’t do so well, it might be relegated to the next lower level where the level of competition might be more fitting.

This is how the youth soccer leagues in my area work. In any one age group, there might be a 100 teams. Those are split into divisions and the top 1-2 teams from each division are generally promoted up the next season and the bottom 1-2 teams are relegated down, with the idea of finding fitting competition along the way. Over time, this results in the best teams being in the first division and makes that division the most competitive.

Pro/rel became standard that was adopted by the world governing body of soccer, FIFA. In fact, FIFA, which charters (i.e. gives power to each nation’s soccer federation), requires that the federation maintain an open pyramid of competition. This is actually job #2 of a FIFA chartered federation, right behind organizing the country’s national teams for the international competition.

However, FIFA has granted a few exceptions, including to the U.S., for not following its charter.

Who would invest in a team that could be relegated?

To me, that’s like asking, who would invest in a restaurant since it might go bust? It turns out, quite a few folks.

But, we don’t have to draw an analogy to restaurants to imagine what might happen. A lot of countries around the world already have open pyramids with pro/rel, so we can just look to them. They have no shortage of investors in their top 3 levels and a number of Americans have invested in clubs in clubs in those countries, as well.

So, if you wonder who would invest in teams that have a chance of being relegated, just ask Americans Stan Kroenke, Stu Holden (MLS Commentator) and Ryan Reynolds why they did, rather than assume nobody would.

How do we protect the investments of the owners of the current MLS teams?

It sems like this has become a more legit question over the last few years as franchise fees to buy into the MLS have gone up to $200-300 million. While I’m no fan of ‘protecting billionaires,’ I do recognize that they paid those fees for a certain set of terms — to have a club in the MLS.

Now, I also think we should recognized that they didn’t pay those high fees only for the MLS team. Packaged with their MLS franchise ownership is a share of the 2026 World Cup TV revenue, too, along with other TV revenue from international games played in the U.S. I think it’s possible that most of the $200 – $300 million they paid was for that (through their part ownership in Soccer United Marketing). If that’s true, then the real value of the MLS team that came packaged with a share of the World Cup TV rights is de minimis and no protection is needed. Just make sure they still get their share of the those World Cup fees.

If it’s not true, I would appreciate if someone set me straight on that.

But, I also think there’s a case to be made that if MLS teams were converted to true clubs, rather than franchises, and placed in an open pyramid, the financial upside would be orders of magnitude better than the current path, with minimal downside risk.

Here’s why I’m not convinced the current path will work:

The high valuations of sports teams is driven mostly by the value of their TV contracts and MLS shows no sign of being able to draw much more of TV audience than figure skating or the Little League World Series.

I think there’s good reason for that. It’s mediocre soccer, by design (i.e. outwardly rigged via roster controls to even competition across teams to make for closer games, prevent powerhouse teams and to keep the players from gaining too much power over their salary).

While MLS is fun for locals to sit in stands for game ambiance and drink beer, it’s not all that interesting to watch on TV when you can just as easily watch the best players in the world in European leagues playing in games with consequences.

MLS is betting that fans will become more interested in their WWE-style rigged entertainment, so their league can be like the NFL, MLB and NBA and pull in 10-20x more revenue from TV than they do from the stands. But, given the previous paragraph, I think that’s a long shot. I think it works for the NFL, MLB and NBA because they do not have competition elsewhere in the world with better players.

Would the NFL be as popular if there was a football league in Europe that made NFL talent look like Division 2 college players? No.

Here’s why I think pro/rel has a better shot at increasing value:

Under pro/rel, I think there’s a shot for MLS teams to become worth 5-10x what they are currently, for 2nd division teams to become worth what top MLS squads are worth and 3rd division teams to become worth what bottom MLS teams are worth.

So, even if your team is relegated, it will be worth about as much as it is today.

How?

This would eliminate the roster controls that seek to even the competition and give owners the freedom to pay better players and put together better teams. Better soccer is what what draws a TV audience.

But, won’t that just lead to powerhouses?

Sure. And it works in Europe! For every critic of powerhouse teams, I bet there are 3 or 4 fans walking around somewhere in the world wearing a Manchester United or Barcelona jersey.

I would say that it not only works, it is KEY to unlocking those TV $s. Few people beyond the locals will ever care about whether mediocre team A or B wins the MLS cup. That’s just not an interesting enough story line.

They do care if powerhouse team A and powerhouse team B, with 20 years each of powerhousy-ness behind them, are duking it out. That increases the appeal of the story line by orders of magnitudes, well beyond their official geographic borders. Even the critics of powerhouse teams will tune in. Even the power house haters will tune in, hoping to see the powerhouse get knocked off.

But, won’t that just lead to an arms race to buy the best players money can buy and put a lot of marginal teams out of business?

Maybe. But, if they are marginal, they were probably going out of business soon anyway. And, that opens the door for other investors to come in and give it a go.

But teams would go bust if they are relegated!

Maybe, maybe not. It happens in pro/rel leagues, but I believe that the value of 2nd tier teams in an open pyramid will be much higher than 2nd tier teams in a closed-league (see above), not only in club value, but in interest they receive with ticket sales and TV viewing.

It becomes that much more interesting when the best teams can earn their way to the next level with their play, than to watch teams forever stuck in a meaningless 2nd division.

How does pro/rel work better at finding the best players for the US National Team than our current system?

When pro/rel is mentioned, many folks only see the tip of the iceberg: what pro/rel does at the top. They only see that the bottom teams in the top division go down and the top teams from the 2nd division go up. They don’t see how this might change how things work all the way to grassroots.

But, pro/rel, or an open pyramid, changes the incentives through to grassroots soccer. Currently, youth clubs depend on parents’ checkbooks, i.e. ‘pay-to-play’. This model is even criticized by pro/rel opponents who fail to see how pro/rel is the best antidote to this.

How? It changes the incentives for clubs from attracting parents to finding diamonds in the rough and polishing them for the next level.

Currently, the main financial incentive for a club is to attract more parents. This leads to the the ‘everyone is elite’ ‘pay-to-play’ expensive system that we have.

Pro/rel open clubs to new sources of revenue.

They can make money by ‘selling players’. That means that when they have a player under contract that a team further up the pyramid wants, they sell that contract to that team for a profit.

To sell a player, a club must have the player under contract. That means the club must have a first “pro” team, even if the pros are only making $20/game. That first team would compete on a low level of the country’s open pyramid. It would be similar to high school varsity, college or club academy teams, except that simply being in the local conference, it’s in the local corner of the nationwide pyramid.

Next question is, where do these clubs get the money to put their first team players under contract? Believe it or not, from ticket, merch and concession sales, in addition to selling player’s contracts and receiving solidarity payments and training comp when those players are traded in the future.

Next question is, who is going to buy these tickets and watch the first team? We don’t have the fan base, like soccer loving countries.

True. We don’t have a fan base willing to buy tickets to watch random folks they don’t know play soccer just for the sake of watching soccer, but neither do folks in soccer-loving countries.

This is where we get stuck in our status quo bias of the concept of what a team is. In our world, it’s just a group of players, a coach, a uniform, a venue and tickets sold.

In an open pyramid, a club is more than that. I go into more detail in this post where I make the case that 90% of the benefits from an open pyramid come from the incentives that change at the grassroots level.