As someone who has been around organizations for a long time and working with them to create and implement new ideas, I observe that many firms have a difficult time recognizing and putting into place new ways of thinking and doing. My last post on Sergeant Curtis Culin told the story of a young man whose breakthrough idea to put teeth on the bottom of a Sherman Tank may have been a key factor in turning the tide in the Battle of Normandy.
A friend, after reading the post, asked me, "Where do we see the same thing in corporations today?" I began to think about it and I had a hard time coming up with a firm who had taken an entirely new idea, and used it to radically change their approach as Culin's idea had done for the US Army. I then remembered the work of a 22 year old Stanford Graduate named Salar Kamangar, at Google, and another early Googler Eric Veach, who crafted the modified Vicary auction method which drives Google's AdWord pricing.
These two young mathematicians designed a superior method to structure online auctions and ad pricing than any one in the industry had done before. A wonderful Wired article on Googlenomics notes that at the time they implemented this approach, the company had 200 employees and no cash! There are many parts to their innovative method and one of the key dimensions is the idea that any person bidding for an AdWord pays the second highest bidder's bid, plus one penny. So, if I'm willing to pay $7.00, and the next highest bidder is $5.00, I win and pay $5.01 when someone clicks on my ad word. (They also incorporated a measure of quality and supply in their algorithm -- the details of which I will leave to another time.)
This story has been reported in many quarters, and is the stuff of legend. What I find interesting is that Google's management was willing to look for and implement this "better idea". By backing this approach, the two young men were standing against industry practice, and even apart from the other part of Google that was busy selling ads at the top of the page, with a human salesforce, to big advertisers who would pay traditional prices for impressions, in the way of most advertising at that date. Of course, in a short amount of time, AdWords Select, as this innovation was known, soon swamped the other mode of selling ads, and today the vast majority of the $25 billion of revenue GOOG has is from this system.
This ability to take the very best idea and to implement it within an organization seems easy, but it is often difficult. In fact, I'd like to introduce Sviokla's Law of Marketspace Innovation: The more idea based, or abstract an innovation is, the harder it is to implement. For example, I'd argue that Culin's innovation was easier to implement because people could see the results. Kamangar and Veach's innovation took more managerial courage because their approach took a new way of thinking and believing -- which was contrary to conventional wisdom. I predict that as the world gets more and more virtual -- with people buying, selling, and communicating more and more over digital devices including but not limited to computers, cell phones, and netbooks, that the relative value of better ideas will be greater. We see in our own consulting practice that the discipline of behavioral economics can have profound effects on people's buying behavior. In one experiment we recently did for a large travel company, a change in interface design, drawing upon behavioral economics principles created an immediate 2% life in revenue -- with no incremental cost. In other word, 2% pure profit to this multi-billion dollar company. But, in order to implement this idea -- senior management at this firm needed to go against their training in economics, and be willing to believe a new way -- and a new approach. This is not easy.
Those firms that are able to embrace new ways of thinking will be able to garner new opportunities and new value. Given the increasing competition in every category, those companies that can't learn to bring in truly new notions will fall behind. So, my question is, where is your firm? Can it bring in new ideas? Can it truly weigh the value, or are you constrained by traditional thinking? Love to hear your ideas on this and how to fix it.