Entrepreneurial Initiative Beats Corporate Innovation Process Yet Again. When Will They Ever Learn?

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According to the Wall Street Journal, Altria, maker of Marlboro and other cigarettes, is planning to invest in Juul, maker of a cigarette alternative which vaporizes nicotine-containing liquids. These devices are often called “vapes” and the practice of using them, “vaping”. A company dedicated to addicting people to smoking burning tobacco is now adding to its portfolio a company dedicated to terminating that addiction. At the same time, Altria has made a $1.3 billion investment in Canadian cannabis company Cronos Group, Inc. It will all make for interesting portfolio management.

However, for entrepreneurs, the most important aspect of the investment combination of Juul and Marlboro is what it tells us about innovation and who is capable of delivering it. Altria has been aware for a long time of the evidence that the long term future of the cigarette market is threatened by external trends, including the subjective lifestyle preferences of consumers (and the non-consumers who dislike the “second hand smoke” problem), but also including regulation, taxation and the resultant deterioration in the price-value proposition.

Faced with such negative long term trend signals, the good and wise corporation, prompted by the business school community that has populated the executive ranks in addition to marketing its tools through consulting, seminars and books, initiated an internal innovation process. This produced the idea of so called e-cigarette products, like MarkTen and Green Smoke, devices in which tobacco is heated but not burned, which purportedly makes smoking less risky. The process also produced a device called iQOS, developed in partnership with Philip Morris International, which is a sister company spun out of Altria to sell cigarettes in international countries outside of the glare of the US legal profession and its alliance with state and federal regulators.

Philip Morris International took the lead in marketing iQOS and claimed some early success in Japan, so much so that the company diverted significant resources from conventional cigarettes to the heat-not-burn “breakthrough”. After initial growth, Motley Fool in October 2018 reported “disappointing earnings” at Philip Morris International attributable to a “significant slowdown in the e-cig’s primary market, Japan”. Motley Fool reported some early trial among a younger demographic, but “a wall of resistance among older cigarette smokers”.

It looks as though Altria has seen the warning signs as an indication of failed corporate internal innovation, and has swerved to the alternate lane of acquisition of the innovative ideas of external independent entrepreneurs.

Its investment of $12.8 billion for a 35% stake in Juul Labs Inc suggests a roughly $38 billion valuation, making Juul one of the most valuable private companies. The Juul team has created this much value in about three years, while Altria and Philip Morris international were destroying value in their failed attempts at internal innovation.

The Failure Of Centrally Planned Innovation Processes.

They should have known. Corporate innovation processes are doomed to failure. That’s because innovation is not a process. It can’t be centrally planned by executive wing geniuses, no matter how much they spend on consulting and business school seminars. Innovations like Juul are emergent results of marketplace experimentation by entrepreneurs and consumers. The consumers become dissatisfied with the current set of offerings available to them – that particular phenomenon is strikingly apparent in the cigarette market. They begin to experiment with alternatives – they might try nicotine chewing gum, or patches, or snus (tobacco pouches placed in the mouth) or even iQOS. They are not yet declaring their loyalty to a new solution, but simply looking round at alternatives.

Entrepreneurs are dissatisfied with the supply side of the market. They sense the consumer dissatisfaction and match it with their producer dissatisfaction. They, too, experiment. There have been many such producer experiments in the cigarette market, and Juul is the one that has, for the moment, risen to the top. Why? It’s usually random luck combined with a co-creation collaboration with the consumer – continuously adding and changing features and attributes and measuring consumer response until the best combination emerges. There are so many experiments among so many producers and so many consumers that one combination eventually emerges as the most preferred. The outcome can not be predicted, it can’t be modeled, and it can’t be managed. The genius of the market is that all of the failed experiments result in very small losses and a lot of learning. The one successful experiment eventually incorporates all the learning, attracts a large number of customers, creates a lot of value in a short period of time, and generates a huge amount of economic progress far in excess of the losses from the failures.

The scale and reach of this experimentation, the rapid exchange of knowledge and learning in the network of entrepreneurs and consumers, the flexible adaptiveness that allows for the rapid abandonment of the resources committed to failed paths and the agile transfer of resources to the path of success, can not be matched by a centrally planned corporate innovation process. Decision-making in hierarchical structures can’t reproduce the emergent properties of interconnected knowledge-sharing networks. Processes with their stages and gates can not compete with the spontaneous order of free experimentation. Corporate investment guidelines can not compete with entrepreneurial risk-taking.

The Future Of Innovation Lies With Interconnected Individuals.

The future of innovation lies squarely in the initiatives of the independent, interconnected entrepreneur. As new technologies like A.I. and global idea exchange platforms augment individual capacity, the trend towards individually ideated innovation will accelerate.

This does not mean that corporations will not try to suppress it rather than adopt it. Glaringly, in a follow-up report in the Wall Street Journal, we learned that one of the results of the Altria investment in Juul will be collaboration between the two companies’ regulatory teams. Speaking of cronying up to government regulators, the Altria CEO was quoted as saying, “We have years of experience” in such regulatory negotiating and another spokesperson spoke proudly of Altria’s possession of  “a level of sophistication they (Juul) need”.

This reveals a downside of capitalism. Altria has enough money to invest in Juul Labs, and enough left over to smother it in corporate process and bind it with regulatory collaboration. While there is no inherent objection to scale, it usually brings with it the insidious integration with government that is anathema to further economic progress. Not to worry; the independent entrepreneurial network will nurture new innovations through its experimentation and co-creation activities faster than incumbent corporations can capture the emergent value through M&A.

Here’s How Small Business Will Take Over The Planet.

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Small business generates about 45% of US GDP, provides close to half of the jobs in the US Economy, and, in a typical year, accounts for more than 60% of the new job creation.

That all adds up to big economic impact. And the news is that small business impact is going to get bigger. In fact, small business will grow to dominate and take over the economy as the problems of managing big business compound.

Big Technology Comes To Small Business.

We have become habituated to the idea that big business deploys technology at scale to achieve reach, coverage and efficiency that small business can’t match. Giant telcos have vast, expensive networks; cable companies have their wired infrastructure; amazon has warehouses and airplanes and unlimited computing power. Today, all infrastructure is variable rather than fixed. It can be rented by the minute and on demand, so that small business can use big technology at the time and in the amounts and for the highly targeted purposes it is needed. Big technology can be downloaded from the internet, and economies of scale are no longer the barriers to entry or to efficient operation that they used to be. Flexibility, agility and timeliness are far more important economic attributes for a winning business, and small business has a good shot at not just competitiveness but at superiority on those dimensions.

Science Comes To Small Business.

We may traditionally think of small business as the product of hard work, super-specialization and local relationships rather than as a child of advanced science. Artificial intelligence and adaptive machine learning will change all that. Small businesses will be able to employ the cognitive assistance of software and robotics to personalize and tailor their services for individual consumers. Aestheticians will be able to offer and implement individually tuned facial treatments and cosmetic procedures. Landscapers can design and manage plantings and gardenscapes and irrigation systems customer by customer. Vehicle fleet owners will pick up and deliver at precise times door-to-door for their local and global clientele. Lawyers will have the searchable data from every relevant case, judgment and law text at their disposal with a robot paralegal who is smart and fast and productive: the best in the world at what they do. Personalized medicine can be practiced by the local doctor, and the local dentist will be able to implant the latest in dental construction and architecture into their patient’s mouth at the neighborhood clinic. Rapid prototyping and fast-turnaround micro-testing will be fully available to small businesses and keep them on the leading edge.

New Organizational Forms Favor Small Business.

The age of bureaucratic management is coming to a close. Bureaucracy has always been a problem for business. Big business needs it to exercise control over far flung organizational outposts, over budgets, over project management and resource allocation and HR policies. But bureaucracy slows response times down in an era when agile responsiveness is a requirement to maintain customer loyalty, and it alienates talented employees in an era where individual creativity is becoming the most important tool to manage in-market performance.

The replacement for bureaucratic management is small, agile, customer-obsessed networked teams with unrestricted autonomy for responding to customer requests and marketplace changes. There is no waiting for HQ approval. There’s no actual organizational model – every company is capable at arriving at its own form of organization that works best for its customers in its geography and its business. Therefore this organizational style is not mediated by business school-imposed standards or consultants’ print-outs. As a result, it’s hard for big business to adopt, which is one reason why small business will take the lead in organizational innovation.

Small Business Will Win With Humanity.

It’s remarkable how many people complain about their jobs in large corporation. Gallup’s global survey (2016 edition) on the subject of employee engagement (whether employees find their jobs meaningful and look forward to their work) indicates that only 13% of employees worldwide say they are engaged. The rest actively hate their jobs or merely put up with them. If they can’t engage with their jobs, how can they engage with customers? Gallup calls it an engagement crisis.

Entrepreneurial small businesses operate on empathy. They are tasked with understanding their customers’ needs and responsively designing services that meet those needs and are simpatico with customers’ values and are able to compete with every other offering that’s available. Small businesses depend on their humanity to succeed – their success in matching values with their customers in an extended and deep relationship depends on it. Digital tools can help in tracking the state of the relationship, but it is the subjective, emotional, and idiosyncratic elements in business exchanges that will be the mark of future winners. Big business will find that they can’t be successful on these dimensions.

People Prefer To Deal With Small Businesses.

We live in a time when people’s tolerance for unresponsive, insulated institutions is at a low point. This is true for political institutions like Congress and the Presidency. NPR reports that only 8% of Americans have a great deal of confidence in Congress, 19% in the Presidency, and 22% in the Supreme Court. The number for big business is 12%. If you let people down, and don’t act with humanity, you lose trust. Small business has a much greater incentive than a bureaucratic management team to be human, to engage, to respond and to earn customers’ trust.

In a 2017 Public Affairs Council poll, 41% of respondents expected small business owners to exhibit high honesty and ethical standards and only 5% expected them to have low standards in those departments. For employees of major companies, there was an expectation of high ethical standards among only 18% of respondents, and that number declined to 9% for big company CEO’s.  (Only elected officials in Washington polled lower: 7% of respondents expected high honesty and ethical standards there!)

People prefer to deal with those they know, like and trust. Small business can win big on these three fronts. More and more customers will make the choice to buy from small business, especially now that technology, science, efficiency and organizational effectiveness are no longer reserved to big business.

Don’t Go Left, Don’t Go Right, Go Entrepreneurial.

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Everything has become politicized. Family, sex, gender, education, sport, economics, art, transportation, religion, climate, water, energy – there’s no part of everyday life that politicians have not sullied and made an issue for identity politics, class politics and party politics. They’ll attach the description “racist” or “sexist” or “partisan” to any subject whatsoever.

The left is as bad as the right, and vice versa. Often, it’s hard to discern where one side starts and the other one ends. The mainstream media, exploiting the one-way structure of their communications model (they talk, we are supposed to listen) cheers on this politicization without debating it. In the end, they become confused. Every day I read the Wall Street Journal. The Front Page, US News and World News sections appear to be written by young reporters with little knowledge of grammar and proper sentence structure, but with an infinite repertoire of anti-Trump diatribes that they seem willing to insert in any paragraph, often at the most inappropriate times. The Opinion section appears to be written by aging neo-cons, eager to invade foreign countries, beef up the US Military with taxpayer dollars, and enlarge government scope in all directions. The combination is confusion between the memes of left and right, and the ability to approve of both positions, but not of any alternative position.

For example, William Galston, a WSJ Opinion Section columnist, identifies those of us who do not identify with Republican and Democratic ideologies as “populists” who “undermine freedom the press, weaken constitutional courts, concentrate power in the executive” (Galston is vociferously anti-Trump), and “marginalize groups of citizens based on ethnicity, religion or national origin”. (WSJ online March 17, 2018.)

In other words, you must be left or right, but you mustn’t be anything else, or take any other positions.

There is a different point of view that’s available. Ignore both left and right, and politics in general. Don’t engage in virtue signaling. If you want to achieve a moral goal, if you want to save the world, if you want to achieve something meaningful, be an entrepreneur. Start a business. Use your powers of empathy to figure out how to help others through a commercial offer that brings them a new and better product or service – a better education, better transportation, better cleaning, better grooming, better content to read and watch. Don’t attempt social engineering or global climate engineering or political revolution or institutional reform.

We need people who can imagine a better future in entrepreneurial terms, not political terms. People who can identify how to serve their customers in a better way, and claim the reward of a financial profit for improving their customers’ lives. We need people who take personal, entrepreneurial and commercial risk because they see opportunity and they believe that they can seize it. We need people who will sacrifice in the present, by saving and investing and building a business, in order to succeed in the future. We need people who accept the verdict of the market, and who thrive on the feedback of those who try their services and provide commentary, positive or negative, that can be used in the responsive process of making improvements and doing better and trying harder.

We do not need politicians and bureaucrats who posture and lie about “public service”. They serve no-one but themselves. They are the ones who politicize everything. Entrepreneurs try their best to see what they can achieve. Politicians try their worst to see what they can get away with. We need people who embrace the economic way, and discard the political way.

6 Reasons Why Individualism Is The Best Social System For Everyone.

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In his 12 Rules For Life, Dr. Jordan Peterson observes that our current world is “dividing and polarizing and drifting towards chaos”. He advises that, to avoid catastrophe, we each bring forward the truth as we see it, and reveal it for others to see, so that we can find common ground and proceed together. This is the paradox of Individualism. It is the only way to find common ground.

1 Everyone Follows Their Own Individual Conscience.

Individualists avoid the lure of collectives, who cloak their vice in expressions of virtue, promising to protect your interests, when, really, they have only their special interests in mind. Individualists divorce themselves from government, school districts, political parties, unions, identity groups, organized religion, and any collective that requires an individual to align his or her thinking with that of the group. It doesn’t mean that we refuse to pay taxes or fail to stop at red lights or keep our children out of school. It does mean that we examine our own conscience to find the truth as we see it, not as groupthink tells us to see it.

2 All property is private property, so I know what’s mine and respect what’s yours.

Following your conscience is philosophy of individual life. Private property is economics, which Ludwig von Mises described as the philosophy of human life and action, the essential part of civilization. Civilization requires just a few general rules to make it work. Don’t kill, don’t steal, don’t initiate violence against a fellow human being. Distinguishing between what’s mine and what’s yours, and thereby differentiating our spheres of individual responsibility, is one of those standing rules to live by, expressed in private property and property rights.

3 Everyone is free to try their best, to see what they can achieve.

When we know what is ours individually, including our body and mind as well as our private property, we can orient ourselves properly and set ourselves towards success. It turns out that in a free market based on property rights, success is tied to serving others. We succeed via empathy with others’ needs, and taking action to address those needs with our services. We try to find a different and better way to deliver our services via what Adam Smith called the division of labor and David Hume called the partition of employments. We all find our specialty and our niche. We cultivate unique knowledge. We do what we do better than anyone else can do it. We take pride in our differentiation, and meaning in the responsibility of developing it.

4 Each individual contribution is tested and corrected by others.

How do we know if our efforts to serve others actually create value in those others’ eyes? We get market feedback. Others tell us, by buying or not buying, demonstrating customer loyalty or not, paying the price we ask or bargaining it down. The feedback can take different forms – attendance at our church, likes on our Facebook page, invitations to social events. All of this feedback falls under the heading of testing and correcting our best efforts. Individualists embrace the data; we’re glad the market is free enough to provide it. We use it as a means to improve and to help us reach our goal. If we are not able to get individual feedback – if the data that’s reaching us is filtered through someone else’s lens, or is “positioned” to us by some collective ideology – we are not fully participating and we are unable to achieve our highest purpose and meaning.

5 No-one is qualified to pass final judgment on others’ capacities or what they can do.

Should we all be equal? Certainly not in what we can achieve, because, in the division of labor, we each want to demonstrate that we can provide better service to others and be worthy of our hire. This is how individuals find their own level. To quote Dr. Jordan Peterson again, there is “a brutal principle of unequal distribution” anywhere that creative production is required. A handful of authors sell all the books. Four classical composers (Bach, Beethoven, Mozart and Tchaikovsky) wrote virtually all the music played by modern orchestras. Equality of outcomes is not available to us. But each of us can strive to be the best at what we do, to contribute as much as we can to the need of all others, and thereby achieve as much as we can, without anyone else telling us when to stop, or how far we can go. Individualism is opposed to all privilege, and on all limits to what able individuals can achieve.

6 The individual’s reward corresponds to the value of the service rendered to others.

When market feedback indicates approval of the individual’s efforts, it’s a signal for further entrepreneurial action. Do more, reach more customers, treat more patients, raise more money for your non-profit, add new features to make the service even better. If the signal remains strong, keep adding. That signal is profit, both monetary and psychic. If the marketplace perceives a continuing value in the entrepreneur’s service offering, there’s potential for a long-lasting profit stream. Most of that profit is typically ploughed into further investment to enhance service quality; or, alternatively, competitors invest in new improvements. In all cases, the customer – and society – wins.

Individualism does not refer to the existence of isolated or self-contained or selfish individuals. Social order is the result of individual actions, because each of us follows incentives to contribute as much as possible to the needs of others. The way we take part in the more extended and complex social process is through the market for our services. Individualism is an entrepreneurial order that creates a thriving society for all.

Each Of Us Can Drive Towards Lifetime Sustained Peak Performance – Like Tom Brady

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In his book The TB12 Method, Tom Brady lays out a system to achieve a lifetime of sustained peak performance. He might seem to us like a special case. After all, he is an elite athlete with over 20 years of high achievement from his years as a college quarterback at Michigan to his tenure with the New England Patriots in the NFL. His results have been superior and sustained over time. For example, he is the NFL quarterback with the most Super Bowl victories and the most Super Bowl appearances.

In his book, Brady describes an approach to lifetime peak performance that is built on attitude rather than rare skills, and “can benefit anybody who is committed, open-minded and disciplined”. The benefits include living “a vital, active and energetic life off the field as well”. He describes the TB12 method as “common sense principles”.

As individuals, and particularly in our entrepreneurial mode, each of us can take on the challenge of lifetime peak performance. Circumstances change, new challenges present themselves, and we all age, but we are all able to strive for peak performance over an extended period of time. Brady’s ideas and attitude are available to all.

Commitment.

Commitment to peak performance is the first step. As we say in our 10-Point Manifesto For Individualism, everyone is free to try their best, to see what they can achieve.

Discipline.

Once you make the commitment, devise a plan and stick to it. That doesn’t mean the plan never changes; in fact the opposite, because new learning brings new understanding and insights. But you stick to the habits and behaviors you need to maintain to implement your plan every day. For Brady, that might be the exercise room and the skill exercises he needs to repeat and repeat for peak performance, but also the nutrition habits, hydration habits, proper rest and many more elements of everyday discipline.

Self-Directed Learning, Training and Preparation.

Much of the TB12 Method book focuses on what Brady has learned about optimal muscle conditioning, the best ways for him to train (which might be different for him than for other individuals, and different than for other positions on the team), and the best choices to make in a wide range of fields that contribute to performance. He has eagerly sought new knowledge that’s relevant to his current goals, and applies that knowledge in training and preparing for games. There may be little time to think when faced with unanticipated developments in a game situation, so learning and training and preparation are needed to lock-in the muscle memory and habits of mind that govern performance under stress.

Collaboration.

Brady works with a subject matter expert, Alex Guerrero. Guerrero has his own set of knowledge, based on research and experimentation with elite athletes to develop the best ways of keeping them fit for their specific athletic activities and helping them to recover from injury or, better still, prevent injury. None of us can hope for peak performance unless we collaborate with others. Each node in a partnership or network brings unique knowledge and capabilities. Our job as a peak performer is to recruit and nurture the best network, to give as much as we get, and to earn the privilege of working collaboratively with others who represent excellence in their own specialty.

Team Role.

Brady plays at peak performance in a very special role that is deemed to be key to team performance. Nevertheless, there is no peak individual performance without peak team performance. Brady knows his team role, and while he often chooses a different training regimen from, say, a defensive lineman, he is always highly focused on how the team does what they do together. He has had many teammates in a long career, but only one professional team. Knowing your role, and helping teammates understand their roles, and integrating all roles in pursuit of a single shared goal, is a big part of the high-achievement individual’s skill set. It’s important to know and apply what’s unique about yourself, and equally important to know how to blend into a team.

Sweat The Details.

Brady spends an extended amount of time in his book explaining the contribution of detailed decisions, habits and practices to sustained peak performance. He covers nutrition (what to eat, in what proportions and ratios, and what not to eat), hydration (how it’s an amplifier of daily vitality), and supplementation (smart use of selected supplements to completely meet your individual nutritional needs). He takes a comprehensive view of personal performance and makes sure no detail is left unattended. You can do the same for your life, your work, your family commitments and every other aspect of your performance.

Re-centering, Rest And Recovery.

One of the 12 sections of the TB12 method focuses on mindset, centering, brain exercises and rest and recovery (especially sleep). Brady even provides advice on room temperature for sleeping, and the role of a clean bedroom and a good mattress. “I like the idea of my body working for me during the night. I’m getting the edge (on my opponents) even when I am sleeping.”

Peak Performance For Longer Than You Believed Possible.

Tom Brady is creating a brand built around the promise of sustained peak performance, and about each of us becoming the best version of ourself. The answer is in our hands, he tells us.

What if we had a President whose brand was built around the promise of being the best person he could, and helping all Americans to be the most productive they could be, and helping the country to achieve peak performance, focusing on the most important contributory factors and eschewing the political distractions that get in the way and make us despise our government? What if any politician were to build such a brand and make such a commitment? It would be nice if one of them read Tom Brady’s book and reflected on the difference between personal peak performance and political performance.