IEX 191: The Power of Cumulative Marginal Innovation

When to go for glory? When to just push for positional advantage?

The Glory Shot vs the Squeeze

Watching Rishi Sunak's campaign brought to mind the travails of another freshly minted leader of south asian origin, from earlier in the summer - one Jaspreet Bumrah. England and India were playing a vestigial cricket test match from an incomplete series from a year ago, which was cut short by Covid. India were ahead 2-1 in the series, and at the time were very much the team to beat. But since then changes in both teams made England the hot favourites going into this test. India managed 416 in the first innings, and England recovered from a poor start to reach 284. India scored 245 in the second innings, setting England a daunting 377 to win. Edgbaston is a ground where the average 4th innings score is 159 and the record for the 4th innings so far was 247. Yet, England won the test comfortably, as India seemed to lose the plot completely. It struck me at the time that the new captain Bumrah, had 2 options. Either he could go for the jugular and try and knock England over. Whereas, given the massive score, and with the series already in India's favour he could simply squeeze the game and let England take the risks. In the event he chose the former, which backfired. This is the same choice we face in any number of competitive work and play situations - do we go for the kill? Or do we play for positional advantage?

When I play badminton, this is a choice I make with every shot. I'm sure you've experienced it if you play tennis, or any racquet sport. Do you try to win the point, or do you go for positional advantage and set up for a more likely winning shot? Going for the win too early carries risk. But of course overplaying has its challenges. The opponent might counter attack, or go for glory himself or herself, or luck may play a part. You can extend this analogy to other sports like football - where a lot of modern coaches consider positional advantage as paramount, and believe that goals and wins will naturally follow if you get that right. But does it extend to areas outside of sport? That's where my observation of Rishi Sunak comes in. Putting aside politics, and party affiliations, purely from a strategy perspective, it appeared to me that Sunak was better served in going for positional advantage rather than the kill. In this context that means rather than aim for the top job at this point, he might have been better served in building up his portfolio of achievements and biding his time for a more opportune moment. As a person in his early 40s, he has time on his side, but in the current debate it seems like he's being forced to take positions which are potentially at odds with his own politics, and ending up harming his chances.

Disruptive vs Marginal Innovation

Does this apply to business, and the realm of business innovation? I've come to believe in recent times that far too much focus is given to disruptive and breakthrough innovations, and not enough to marginal innovations. Disruptive innovations in business are like the glory shot. Marginal innovations are the business equivalent of positional advantage. Little moves that strengthen your position without necessarily changing the world. The thing is, enough of these marginal innovations can add up to significant change. Largely because marginal innovations don't just add, they compound, creating an exponential. The idea of exponential change itself has come to mean a sudden, order-of-magnitude change. But mathematically, exponentials are just the impact of multiple cumulative increases, which might be individually small.

So why do we hunker for the disruptive ideas? Much of it is because of the wealth creation we have witnessed in the world of tech start ups. When you look at Tesla being valued higher than any other car maker, despite selling less than a tenth of the number of cars, or when you see the newest entrants to the unicorn club, you might be justified in believing that the only path to the future is through massively disruptive new products and services. But this is a mirage, for two very big reasons. The first is the rather obvious point that success rates for disruptive ideas are very low and headlines concentrate on the few successes. This is a form of cognitive bias. Because we read about the proliferation of the success stories, we think this must be the norm, and we ignore the very low probabilities at play here - i.e. for each such success, there are hundreds of failures. Second, disruptive ideas are critical to start ups, because it's the only way they can succeed. They are not critical to large organisations. Nor are they always effective. When you're a billion pound business, adding even one percent to your business means 10 million of additional revenue. For a start up, 10 million or revenue may mean a 10x or even 100x increase from a previous year.

So if large organisations could focus themselves on a steady stream of 1% ideas, they would do quite well. To put it another way, any organisation would need to grow cumulatively at 7% to double its revenue in 10 years. That impact turns out very differently for a billion pound business compared to a 100K start up. And the kind of ideas that can give you an annual 7% boost are very different from the blue sky, change-the-world ideas. Much of it might involve tweaks to the customer journey on your website or stores, or your marketing effectiveness, or your retention models. Industry leaders actually have a huge advantage over their peers because a steady stream of such marginal ideas will often keep them at the forefront of the market. If you want another sporting analogy, recall how the already excellent British Cycling team used marginal innovations to dominate the 2012 Olympics.

It’s Not That Simple But It’s Worth It

In reality, most large organisations don't have a consistent and reliable Continuous Marginal Innovations model in place. Culturally, as we've said before we're all tuned to looking for the big disruptive idea. And continuous marginal innovation also requires a discipline, method, and commitment to experimentation that very few companies have. There is a thrill of a great move, a brilliant product, or in a game of badminton a winning shot that comes out of the blue. It's hard to resist the lure of that adrenaline. But it might be smarter to play the percentage game and wait for the right opportunity for the winning shot. Modern chess algorithms score moves by their contribution to winning positions. As Chess AI programs play millions of games against themselves, all those scores add up to create a strong model of generating winning positions. Here’s now companies can build strong experimentation cultures.

In the summer of 2022, Jaspreet Bumrah should have chosen to squeeze the England batting through a conservative field setting and just made it hard for England to score runs. England needed the win. India would have been happy with a draw. The framing was right for the marginal option, but the adrenaline got to Bumrah and his team mates and the paid for the mistake. What kind of choices are you making in your personal and professional lives, every day?

A question for you

Something I’ve been thinking about off and on, for a while - what is the point of education and is it fit for purpose any more? I’m starting to put my thoughts together but if you have a moment - do write back to me - with the answer to this question: What is the purpose of education? Thank you!

Innovation Reading this Fortnight

Technology Futures: Gartners’s Hype Curve for 2022 focuses on 3 areas: expanding reality, accelerated AI automation, and improved tech-delivery methods. (Gartner)

Healthcare: Psychedelics for disorders - this piece argues that the legalisation of psychedelic drugs may pave the way for treatment of a range of disorders - especially for women, who are underserved by medical research. (MIT Technology Review)

Connected Fitness: Despite the well documented challenges of Peloton, the connected fitness market is still growing and attracting investment. (Crunchbase)

Augmented Nurses: The NHS is trialling AR goggles for nurses to help them speed up transcription and admin, so they can spend more time with patients. (NHS)

Virtual Reality: The same edition also lists this story which talks about how virtual reality can have the same impact on the brain and on treating disorders, as psychedelic drugs. (MIT Technology Review)

Art Investment: Fractional ownership is a new idea in Art - would you like to own a tiny bit of a Warhol painting and benefit from its sale in say 10 years? Masterworks is a company that’s betting on this model working. (FT)

School Shootings: depressingly but rather inevitably, the free market sees opportunities in the phenomenon of school shootings. Hardening schools is now a thing. (Bloomberg)

Semiconductors & Moore’s Law: Just when the mood around semiconductor evolution has been dominated by the feeling that we’re at the end of Moore’s Law, it turns out that 3D Stacking of complementary metal-oxide semiconductor (CMOS), or CFET (complementary field-effect transistor) is likely to extend the journey for Moore’s law beyond 2024, with RibbonFET architectures. (IEEE Spectrum)

Government as VC: Scott Galloway argues that the US government has been the most potent VC of the past century but that its investors i.e. the public, are getting a raw deal. Meanwhile private VCs are skimming off the top. (Scott Galloway - No Mercy No Malice)

Thanks for reading. See you again soon!