Uber Will Lower GDP

Victor Hwang, CEO & Co-Founder of T2 Venture Creation, from Forbes

Here’s some news that might surprise you: Uber will lower America’s gross domestic product .  In fact, it has already started.  The more Uber grows, the worse our GDP will get.  And it’s not just Uber.  Many of its startup cousins—like Lyft, Airbnb, and others—are also guilty of shrinking our economic growth numbers.  The trend is about to become an epidemic.

How could that possibly be, you might ask?  How could new technology that gives us better, higher quality services diminish our economy?  Isn’t innovation supposed to make economies grow bigger and stronger?

This mystery is worth explaining, because the entire world’s GDP is about to start shrinking due to Uber and similar companies.  And it’s going to get significantly worse.  My prediction: within the next decade, this issue will become so problematic that presidents, prime ministers, and others will have no choice but to rethink the way they measure economic vitality.

So what is behind the “mystery of the shrinking GDP”?  Well, the problem is not with Uber, Lyft, or Airbnb.  The problem is not with America.  And the problem is not with GDP per se.  The culprit, in fact, is an invisible one.

Let me explain.  Uber is a high-profile example of the sharing economy, which revolves around the idea of people sharing underutilized resources.  In the case of Uber, it’s about spare passenger seats in cars.  Uber is a mobile app-based ride service, one that has upset many traditional taxi companies by stealing their customers.

The growing success of Uber means that people will get around more efficiently than before.  I’ve used Uber in several cities around the world already, and believe me, it is huge improvement over grabbing a random taxi and hoping for the best. Despite the political resistance that Uber and its cousins are facing in some markets today, they are going to win in the end.  Period.  They’re just vastly better user experiences.  Try them, if you haven’t yet.  You’ll see.

Despite that awesomeness, Uber will lower GDP, because GDP is about measuring production.  The more people use Uber, the less the economy will produce.  Why?  GDP is calculated by measuring (a) spending, (b) earnings, and/or (c) added value.  In the U.S., we calculate with spending.  Other countries use their own methods.  In theory at least, each of the measurements should work out the same.  One way or another, GDP measures things being produced, whether you look at it from the point of the view of the buyer, seller, or maker.

If someone takes an Uber ride instead of a regular cab, what happens?  The customer is spending less, a taxi driver somewhere is losing a customer, the Uber driver is making less than the taxi driver would have, and the customer gets where they want to go in a happier state.  Alternatively, traditional taxi companies may try to compete and start lowering their prices, as they appear to be doing.  Add it all up; you get a smaller number. GDP goes down.

How much will Uber lower America’s GDP?  I did some back-of-the-envelope calculations, based on numbers disclosed so far.  This year, it works out to about half a billion dollars, maybe more.  That’s not much in the big scheme of things.  Yet.  But it’s going to grow, especially as Uber or similar companiesexpand into corporate logistics and transportation.  That’s big money.  And new companies with other “sharing economy” models will launch, grow, and start to eat up our GDP too.

The problem is not that GDP is wrong.  It’s that GDP no longer measures much of the new value being created in our society.  We don’t have a measurement for the efficiency of the system itself.  Current tools, like GDP or inflation, measure what the system produces, not how the system functions.  The U.S. government recently tried to deal with this by adjusting the way it calculates GDP (by measuring R&D expenditures), but that is just trying to measure production of a different sort.

GDP is a useful indicator of economic health when companies are mostly focused on manufacturing things. However, we know today that an economy is not just indicated by the existence of things, like assets or wealth.  It’s also about how those things flow in the system.  And flow is driven by how interconnected people are, and how effectively the system enables connections to become valuable exchanges.  Trust among strangers, connections between diverse parties, mutual collaborations, shared visions, new teams being formed—these qualities drive flow, they lower systemic transaction costs.  That’s what we mean when we talk about ecosystems.

Uber might be helping us solve another puzzle.  It’s what economists call The Nordic Mystery.  For years,economists have struggled to explain the high quality of life in the Nordic countries, especially Denmark and Norway.  (Side note: I actually thought of this column while strolling in Stockholm.)  Despite their lower national GDPs, Nordic people retain high standards of living.  For example, Denmark’s GDP from 1991 to 2014 was only 0.37%.  Nordic countries may produce less, but they are more efficient at utilizing what they have. Nordic culture comes from large, close-knit tribes based on high levels of trust, which lowers the transaction costs for sharing resources.  Traditional Nordic culture might be called “Uber for everything.”

So what do we do about shrinking GDP?  For starters, we need to start seeing what is currently invisible.  We need a new measurement for the new economy.  Call it a Gross Ecosystem Index perhaps.  This would be a complement to GDP, not a replacement.  And it should be something that helps communities, cities, corporations, and countries get a practical grip on how to maximize their economic potential in the modern era.  By utilizing what they have, better.

Therefore, while Uber and its cousins will lower GDP in the years to come, that’s actually a positive thing.  They will help goods and services flow more efficiently, getting where they need to go at lower cost, with less production required.  Lower GDP shouldn’t worry us, as long as the loss is more than offset by more efficient utilization of what we already have.

And if the taxi drivers are friendlier, I’m all for it.

Victor W. Hwang is CEO of T2 Venture Creation, a Silicon Valley firm that builds startups and designs entrepreneurial ecosystems.  He is primary co-author of The Rainforest: The Secret to Building the Next Silicon Valley.


Rainforest Rev: How An Innocent Contract Can Stifle Entrepreneurship

The Rainforest Revolution
News on growing ecosystems for innovation and entrepreneurship

 

Join us in Silicon Valley on Feb. 17-19, 2015.
Ecosystems are being built everywhere — whether in companies, communities, cities, or countries.  Attend the Global Innovation Summit and and get insights and tools on making ecosystems thrive.  It’s the world’s biggest gathering of “ecosystem builders.”

 

THE BIG PICTURE


 

Death By NDA? How An Innocent Contract Can Stifle Entrepreneurship

Victor Hwang, CEO & Co-Founder of T2 Venture Creation, from Forbes
Interestingly, Silicon Valley’s startup community tends to sign fewer nondisclosure agreements than other places. Too many NDAs indicates a lack of trust in the ecosystem and can do more harm than good. Read more here.

 

Rainforests and Hand Grenades: Incubating Defense Innovation

Defense Entrepreneurs Forum
The Department of Defense’s new “Offset Strategy” for spending must be coupled with an approach that boosts “…rapid technology innovation at scale or what authors Victor Hwang and Greg Horowitt call ‘The Rainforest.’” Read more here.

 

How Being a Good Manager Can Make You a Bad Innovator

Forbes
Companies that want to create innovative products and services must adopt management principles that are frequently seen in start-ups – and that they don’t teach in business school. Read more here.

 

The Evolutionary and Biological Logic of Human Cooperation

Analyse & Kritik
This scholarly paper explains the evolutionary puzzle of human cooperation by maintaining that it isn’t new, it is maladaptive, and it has evolved by individual selection. Read more here.

 

To Get More Entrepreneurs, We Must Create Better Ecosystems

The Huffington Post
A 30-year trend of declining entrepreneurship in the U.S. has been blamed on the recent recession and government regulation, but the real culprit is our antiquated economic model. Read more here.

 

THE LATEST NEWS


 

Inclusive Innovation

Maria Douglass, a friend and collaborator of T2 Venture Creation (blog)
Efforts in India and Malaysia show how the ecosystem theory of innovation can be applied to developing regions. Read more here.

 

Trends IN Entrepreneurship: What is Happening in Indiana

VentureClub of Indiana 
T2 Venture Creation CEO and Co-Founder Victor Hwang’s Rainforest ideas set the tone for this report on the Hoosier State’s innovation economy, which draws from discussions with the players in its entrepreneurial ecosystem. Read more here.

 

Peruvian Scientists Disgruntled with ‘Brain Gain’ Scheme

SciDev.Net
Institutional deficiencies at home hinder scientists returning from an Inter-American Development Bank program that sends Peruvian researchers to partner with foreign universities. Read more here.


Rainforest Rev: Why Do Good Ideas Fail? This Diagram Explains

The Rainforest Revolution
News on growing ecosystems for innovation and entrepreneurship

 

Global Innovation Summit + Week 2015  is coming. The world’s largest gathering of “ecosystem builders” happens in Silicon Valley on Feb. 16-20, 2015.  Early bird 30% discount ends Oct. 31.

 

WE ARE HIRING!


Sponsorship Sales Manager

Seeking ambitious, motivated salesperson. Responsible for executing on sales opportunities as well as generating leads for The Global Innovation Summit + Week. Please contact info@t2vc.com.

 

THE BIG PICTURE


 

Why Do Good Ideas Fail? This Diagram Explains

Victor Hwang, CEO & Co-Founder of T2 Venture Creation, from Forbes
The “Rainforest curve” model helps explain how management strategy can overcome the current stalemate between rational systems based on quantifiable analysis, and the growing force of innovation, which relies on human creativity and intuition. Read more here.

 

Sowing the Seeds of Resilience

Alistair Brett, The Innovation Rainforest blog
Innovation ecosystems can use the adaptable human element of complex systems to defend against intrinsically hazardous threats, striving toward the ideal of rapid self-organization, responsiveness, and resilience. Read more here.

 

New Ways To Evaluate Innovative Ventures

MIT Sloan Management Review 
To increase innovation, companies need systems that encourage experimental strategies and experiential learning. Read more here.

 

At Work: The Clock Hurts Your Creativity

The Wall Street Journal
The presence of a clock affects human behaviors in many ways, none of which help creativity, including the tendency to organize tasks based on “clock time” instead of completing those tasks in “event time.” Read more here.

 

Nordic Magic and the Paradox of Asocial Sociability

Social Evolution Forum
Government policies that emphasize solidarity and cooperation have helped make the Nordic states economically successful. Read more here.

 

THE LATEST NEWS


 

The Most Innovative Cities in America

CNN Money
This list of municipalities that come out on top in the innovation game has many of the usual suspects, and some unexpected underdogs. Read more here.

 

L.A. Story: Santa Monica Takes the Startup World by Storm

The Huffington Post
A lively culture, plenty of sunshine, and a supportive tech environment help the area known as Silicon Beach nab a huge slice of L.A.’s startup scene. Read more here.

 

Why This VC Is So Bullish About Portland’s Red-hot Startup Scene

GeekWire
Diane Fraiman of Voyager Capital explains why Portland, Oregon has become one of the best places in the world to start a company. Read more here.

 

CALENDAR OF EVENTS


 

2014 Cleantech Open Western Region Awards and Innovation Showcase

Friday, October 17, from 8am to 4pm
This invitation-only event in Fremont, California is the culmination of the western region accelerator program. Hear from industry thought leaders on the latest in cleantech, as Greg Horowitt of T2VC will be a keynote speaker.  See the eight category finalists pitch and join us as we announce the Final Four who will each win $20,000 in cash and services.  They will go on to compete at the Global Forum event for the $200,000 grand prize package. Register now! Seats are limited.


We are hiring! Seeking a Sponsorship Sales Manager

Sponsorship Sales Manager Needed

The Global Innovation Summit + Week (www.innosummit.com) is seeking an ambitious, motivated and conscientious applicant for the position of Sponsorship Sales Manager (SSM). The SSM will be responsible for executing on sales opportunities and generating new leads for the Global Innovation Summit +Week.

The “Global Innovation Summit” is the world’s largest conference and the premier gathering place devoted to the acceleration of the innovation ecosystems.  Last year’s sold out event drew over 400 delegates from 50 countries and from multiple sectors.  With increased capacity, we project a 500-person sell out in 2015. The next event occurs in San Jose, California, February 17-19, 2015

The “Global Innovation Week” is the world’s largest celebration of innovation ecosystems.  It surrounds the Global Innovation Summit, with more than 30 partner events.  It exists to welcome the world to Silicon Valley, and engage diverse audiences in multiple activities offered by numerous partners, all devoted to spreading the magic of Silicon Valley and the practice of innovation ecosystem building. The Week is expected to draw thousands of participants across Silicon Valley. The next event occurs in San Jose, California, February 16-20, 2015

If you are interested in joining Silicon Valley’s leading innovation ecosystem firm, please contact us at: info@t2vc.com.

Position Requirements:

·        Strong experience in sales, preferably in the sale of sponsorships.

·        Deep sense of integrity.  You have a passion for innovation, economic well-being, and working in a firm that seeks to impact the world.

·        Attention to details.  You can convert abstract ideas into detailed implementation.

·        You have strong interpersonal and communication skills (both verbal and written).

·        Experienced in using and/or implementing sales management and tracking software

·        Preference for working in a collegial team environment, while individually responsible for specific deliverables.

·        You have an entrepreneurial mindset, an open mind when facing complex and unexpected situations.  You are willing to “roll up the sleeves” to try creative and flexible solutions. You take leadership in dynamic situations.

·        College degree preferred.

·        Bonus: You are experienced in basic web design, social media, and electronic lists.

·        Familiarity with, or ability to become familiar with, “The Rainforest” and the principles upon which innovation ecosystem theory is based.  See www.therainforestbook.com.

·        You will be based in Silicon Valley.

Position Details:

·        This is initially a fully commission-based position.

·        Sales targets will be established in collaboration with management.

·        The Sponsorship Sales Manager will report to both the President and Chief Executive Officer of T2 Venture Creation, the parent company of the Global Innovation Summit + Week.

T2 Venture Creation

T2VC (www.t2vc.com) is a Silicon Valley innovation design firm.  We help cities, communities, companies, and countries accelerate innovation and entrepreneurship at scale.  T2VC is a pioneer in innovation ecosystem building, through publishing books and blogs, hosting a major global conference, and running various engagements for governments, corporations, and development institutions in multiple countries.


Rainforest Rev: Innovation Is The Driver of Everything

The Rainforest Revolution
News on growing ecosystems for innovation and entrepreneurship

 

Global Innovation Summit + Week 2015  is coming. The world’s largest gathering of “ecosystem builders” happens in Silicon Valley on Feb. 16-20, 2015.  Early bird 30% discount ends Oct. 31.

 

THE BIG PICTURE


 

How Innovation Can Lead To Life Purpose

Henry Doss, Chief Strategy Officer of T2 Venture Creation, from Forbes
An interview with Philip Hardin, CEO of YouScience, which has created an innovative method of helping students find their life (and work) purpose. Read more here.

 

Human Energy – Driver of Everything

Franchise for Humanity
A fascinating presentation by Ade Mabogunje, T2VC’s Co-Creator of Rainforest Architects and Professor at Stanford University, addressing a range of issues on the development of human culture’s innovation mindscape. Read more here.

 

Capturing Change in Science, Technology, and Innovation: Improving Indicators to Inform Policy

The National Academies Press
A data-rich paper assessing the state of U.S. science and technology indicators that are used to shape public policy, including research and development expenditures and innovation in the corporate sector. Read more here.

 

5 Key Themes Emerging From the ‘New Science of Cities’

CityLab
The ideas that journalist and author Jane Jacob published about American cities in the early 1960s are influencing today’s most innovative urban theorists. Read more here.

 

Entrepreneurs Anonymous

The Economist
Would-be entrepreneurs with romantic visions of glamorous success need a reality check to understand what a risky and demanding challenge lays ahead of them. Read more here.

 

THE LATEST NEWS


 

Commentary: How D.C. Quietly Became One Of The Best Places To Build A Start-up

The Washington Post
Washington D.C.’s diversity, culture, talent and capital are helping local entrepreneurs resist the pull of Silicon Valley. Read more here.

 

ACE, Formerly a Singapore Government-led Entrepreneurship Entity, Now in Startup Mode

Tech in Asia
Contrary to its image as a government obsessed with control, Singapore has allowed a collaboration project that supports entrepreneurs to split-off and privatize. Read more here.

 

3 Reasons Why Seattle Is the Next Big Startup Hub

The Wall Street Journal
The Pacific Northwest’s largest city is a “mega-talented hub for innovation” that has a fully networked startup community, an abundance of high-tech jobs, and a host of promising second-wave start-ups. Read more here.

 

CALENDAR OF EVENTS


 

Biomedical Entrepreneurship: A Roadmap to the Future

Monday and Tuesday, October 13 and 14
UC Berkeley Entrepreneurship Symposium will bring together thought leaders from industry, academia, and government to frame key challenges, advance new opportunities, and promote the biomedical industry by increasing technology transfer and entrepreneurship. Greg Horowitt of T2VC is a featured speaker.

 

2014 Cleantech Open Western Region Awards and Innovation Showcase

Friday, October 17, from 8am to 4pm
This invitation-only event in Fremont, California is the culmination of the western region accelerator program. Hear from industry thought leaders on the latest in cleantech, as Greg Horowitt of T2VC will be a keynote speaker.  See the eight category finalists pitch and join us as we announce the Final Four who will each win $20,000 in cash and services.  They will go on to compete at the Global Forum event for the $200,000 grand prize package. Register now! Seats are limited.

 

WE ARE HIRING!


 

Sponsorship Sales Manager

The Global Innovation Summit + Week (www.innosummit.com) is seeking an ambitious, motivated, conscientious, and diligent applicant for the position of Sponsorship Sales Manager (SSM). The SSM will be responsible for executing on sales opportunities and leads, as well as generating leads, for The Global Innovation Summit + Week.

This position is initially all commission-based.  Based on success over the coming year, however, this position offers room to grow.  If you are interested in joining Silicon Valley’s leading innovation ecosystem consulting practice, please contact us at info@t2vc.com.


Sowing the Seeds of Resilience

“All of the interesting systems (e.g. transportation, healthcare, power generation) are inherently and unavoidably hazardous by their own nature. The frequency of hazard exposure can sometimes be changed but the processes involved in the system are themselves intrinsically and irreducibly hazardous. It is the presence of these hazards that drives the creation of defenses against hazard that characterize these systems.” How Complex Systems Fail: Being a Short Treatise on the Nature of Failure; How Failure is Evaluated; How Failure is Attributed to Proximate Cause; and the Resulting New Understanding of Patient Safety. Richard I. Cook, MD (2000).

“Inside of Utopia, all the seeds of ambition, of faction, are rooted out with all the other vices…. The union of the citizens being thus highly consolidated within, excellence and energy institutions defend the republic against the dangers from without.” Utopia, Sir Thomas More (1516).

In the August blog of this series, Agile Type 1 and Agile Type 2 innovation ecosystems were postulated. Agile Type 1 were imagined as ideal ecosystems in which a rapid flow (or ‘diffusion’ to use a more traditional term) of ideas, solutions, knowledge, and so forth occurs through a system and its networks. Agile Type 1 ecosystems will be capable of rapid self-organization, be highly responsive to system environment changes, and respond efficiently to errors and external shocks. It was also suggested that Agile Type 2 innovation ecosystems can be defined as being more vulnerable than the ideal Agile Type 1, but much closer to reality.

Dr. Richard Cook is a physician at the University of Chicago’s Cognitive Technologies Laboratory http://www.ctlab.org/ who has analyzed and written extensively about the failure of complex systems. Let’s look into D. Cook’s research from How Complex Systems Fail, cited on the Cognitive Technologies Laboratory website, to see what this tells us about Agile Type 2 innovation ecosystems and about how we should build innovation ecosystems which will withstand all the ills that complex adaptive systems are heir to.

First, we have to accept that complex systems are intrinsically hazardous systems and, as noted in the quote above, “It is the presence of these hazards that drives the creation of defenses against hazard that characterize these systems” – that is the emergence in complex systems of defenses against failure. In innovation ecosystems such defenses might be culture, knowledge, trust, diversity and openness, and various forms of physical and intellectual resources and capacity.

This brings to mind Ashby’s Law, also known as the Law of Requisite Variety, which states “the variety in the (network) control system must be equal to or larger than the variety of the perturbations in the system in order to achieve control.” In other words, if you are being attacked having many options is an effective strategy to manage the threat – as US President Kennedy proposed in his 1961 flexible defense policy. Conversely, tightly controlled (not so agile) systems designed to operate efficiently under prevailing conditions, with too many strong links and too few weak ones, reduce communications and become unresponsive to external shocks leading to instability or even collapse. Again showing the value of perturbations. However, it’s worth remembering that it is also a feature of complex systems that small changes may give rise to disproportionally large consequences.

In fact, perturbations are necessary for ecosystem networks to survive. We may think of this as an innovative ecosystem needing a constant flow of energy throughout its networks. Networks with many weak links allow perturbations to be dissipated and the system remains intact. Incidentally, in our September Blog investigations were cited indicating that the speed at which an innovation moves through a network increases when there are a “greater number of errors, experimentation, or unobserved payoff shocks in the system” (also called noise or variability). More about this next month.

Dr. Cook also suggests that “Human practitioners are the adaptable element of complex systems” in optimizing the system’s productive capacity and reducing vulnerability to failure. We know that a feature of complex systems is adaptability. Adaptation may be catalyzed by early detection of changes in system performance and the provision of new paths to recover from perturbations and shocks; as we have seen, the presence of weak links helps here. Adaptation allows systems to be more resilient (the ability to bounce back) from internal confusion or external disturbances, subject to the always present constraints of finite time and resources.

We will end this month with another finding from Dr. Cook’s investigations into accidents varying from aircraft crashes to errors in hospital patient care, namely “Hindsight biases post-accident assessments of human performance.” This means that when the outcome of some event, or more likely a series of events, leading to an accident or, for ecosystems, a collapse due to shocks, is known, then an after-the-event analysis is frequently inaccurate or misleading. Knowledge of the outcome reduces our ability to re-create stories from the viewpoint of those involved. For example, we might say of some event “surely they should have known that such and such a policy would lead to problems.” Several of the Blogs in this series have promoted the learning benefits of extracting re-usable knowledge components from descriptive cases, i.e. stories. So how could hindsight bias, in constructing an ex post facto narrative, affect the learning value of these re-usable knowledge facets? I’m not sure. It’s worth thinking about, perhaps in the context of previous discussions in these Blogs of causality.

We can all think of many system examples of hazards and resilience ranging from the disintegration of Communism in Europe to companies which were ill prepared for technological change, such as Kodak’s slow response to digital photography. Cities and regions – clearly complex systems – have experienced the consequences of Ashby’s Law where a major local employer or even an entire industry has declined, reduced employment due to improved production technologies, or moved elsewhere. Even Thomas More’s Utopia might have eventually collapsed from a lack of weak links and consequent poor resiliency – if not from boredom.

Next time: Is noise good for us?

All blogs in this series can be found at http://innovationrainforest.com/author/alistair2013/


Why Do Good Ideas Fail? This Diagram Explains

Victor Hwang, CEO & Co-Founder of T2 Venture Creation, from Social Evolution Forum

Management thinking is in a rut. This is a harsh thing to say, but it must be said. Despite all the great brainpower being applied, the field of management is failing to provide the empirical, grounded, actionable guidance that organizations require in today’s economy.

Most of what passes for novel thinking in management now is merely the slapping of new labels onto old ideas. Or worse, faddish exhortations. Yes, there continue to be huge numbers of business books and articles published every year. Some of them are interesting. Some of them add incremental value. Most of them, however, are neither interesting nor add great value. And none of them has truly shaped the industry profoundly, the way that Michael Porter or W. Edwards Deming accomplished decades ago.

So why is this? Have all great management concepts already been discovered? Has business strategy become commoditized forever?

The rut is not the fault of management thinking itself. It’s deeper than that. In fact, the failure of management thinking cuts to the heart of what we humans understand—or fail to understand—of our own economic lives. Through my work with numerous organizations—small and large, private and public, for-profit and non-profit—I’ve arrived at some perhaps surprising conclusions.

What we have not fully captured—as a human species—is the systemic process by which we turn ideas into useful things. On one hand, the traditional techniques of business administration have provided managers tools for analytical strategy and rigorously quantified decision-making. On the other, businesses today are creating so much real-world value by turning decentralized ideas into innovative products and services, based on fuzzy notions like culture and creativity. You can think of it as a clash between two opposing worldviews. The battle might be described as rigor versus intuition. Hard versus soft. Or even numbers versus people.

This is not a new phenomenon.  Walter Kiechel, author of Lords of Strategy: The Secret Intellectual History of the New Corporate World, puts it in historical context:

“There are observers who maintain that much of what goes on in business organizations comes down to a struggle between those who see the enterprise largely through the lens of the numbers—sales figures, costs, budgets—and those who focus instead primarily on people, their energies, ambitions, and limitations. A gross oversimplification, of course, but one that approximates the argument between the two schools of strategy…. What we would be looking for in an alternative to the strategy model—a unified theory of management, if you will—would be a construct addressing each of the issues a company faces in dealing with people: how they were to be selected, trained, disciplined, compensated, motivated, managed, and led…”

We can readily understand numbers, but we struggle mightily to understand people. In other words, the soft stuff is hard .

Here’s a simple diagram I’ve created. It attempts to incorporate the two clashing worldviews and explain how they interrelate. It’s my own unified theory of management to show why so many good ideas fail to grow, why old businesses often die, and why certain businesses can thrive.

Rainforest Curve 2

I call this diagram the Rainforest Curve. As ideas grow into products, from left to right, their beneficial value to someone increases. That’s the upward curve extending from the bottom left to the top right. The process of value creation is driven by positive-sum behaviors, like collaboration, team-building, and shared risk-taking. Think of the passion that a startup team invests in building their company. You see this behavior manifested in real life by entrepreneurs, designers, inventors, artists, researchers, and innovators. As ideas grow, however, they cross a downward-sloping cost curve, which exerts real-world constraints. Those constraints include capital limitations, finite labor, or scarce resources. The cost curve is driven by zero-sum behaviors, like competition and squeezing out inefficiencies. Reducing the cost curve is what originally gave birth to the field of business strategy, as Kiechel chronicles.

The intersection, where the curves meet, is like an invisible brick wall. Most new ideas, great breakthroughs, and startup companies die on the left. Most aging institutions, corporations, and governments die on the right. The crossover is the hardest part.

Why is the crossover so difficult?  The reason is that, as I’ve written previously, culture in business is primarily the clash between two opposing social contracts . One social contract is based on values of production, with its zero-sum norms. The other is based on values of innovation, with its positive-sum norms. Both social contracts are legitimate in their own ways, but they are completely opposite in effect. If we write the social contracts down, making the implicit explicit, here is what they look like:

Rules of the Rainforest
(positive-sum norms for innovation)

Break rules and dream
Open doors and listen
Trust and be trusted
Seek fairness, not advantage
Experiment & iterate together
Err, fail, and persist
Pay it forward

Rules of the Plantation
(zero-sum norms for production)

Excel at your job
Be loyal to your team
Work with those you can depend on
Seek a competitive edge
Do the job right the first time
Strive for perfection
Return favors

Each of the two columns above is a sound worldview. They are valid in their own right. However, upon reflection, you realize that the two columns are perfectly opposed, item by item. And they lead to opposite results. The rules on the right side lead to productivity, efficiency, and predictability. The rules on the left side lead to creativity, serendipity, and uncertainty. Neither set of rules is wrong. The opposite of “trust” is not simply “distrust.” The opposite of “excel” is not simply “do a bad job.” People tend to see their own value choices as positive, not negative.

We can simplify these opposing social contracts even more, reducing them to the essential values being expressed. Each value below correlates to the corresponding rule above.

Values of Innovation

1. Openness
2. Diversity
3. Serendipity
4. Fairness
5. Experimentation
6. Play
7. Giving

Values of Production

1. Excellence
2. Loyalty
3. Dependability
4. Success
5. Quality
6. Precision
7. Reciprocity

Successful companies must exist in both worlds—innovation and production—simultaneously. That’s hard to do. Innovators on the left often think of managers on the right as cold-hearted and lacking in vision. Managers on the right often think of innovators on the left as frivolous and impractical. But in reality, both sides need each other. Ideas that live only on the left side are stillborn. Institutions that get stuck on the right side become dinosaurs.

Good ideas fail because they cannot cross the cultural barrier between innovation and production. Silicon Valley’s success, arguably, comes from embracing of the duality of both mindsets. For example, venture capitalists in the Valley must deal with hard numbers, but they’re also open to the idea that the next billionaire is a college dropout wearing a hoodie. You never know the next Zuckerberg, so keep your mind open. Put it another way: how well do your suits and hoodies get along? That’s dualistic thinking.

So what’s the future of management thinking? Despite recent history, I have faith that a revolution in management thinking is coming soon. Looking at the broader trend lines, we are starting to see the innovation cycle as a whole system, to understand the normative behaviors that undergird this cycle, and to construct practical tools to measure and accelerate the curve as ideas grow into reality. That’s good news. Stay tuned, folks.

Victor W. Hwang is CEO of T2 Venture Creation, a Silicon Valley firm that designs the ecosystems to foster entrepreneurial innovation. He is primary co-author of The Rainforest: The Secret to Building the Next Silicon Valley.


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