Rules of Innovation: Where Big Ideas Come From

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Investing in big ideas, innovation and team structure can determine the success of a corporation or organization for years to come. On this week’s episode of World Reimagined, Nasdaq speaks to two best-selling authors – one a physicist-founder of a biotech company and the other a startup founder and entrepreneur – about how to best encourage these scenarios.

How do you find the next big idea — one that will change business or the world? As the main forces of R&D have moved out of government offices and into private businesses, many organizations lack the structure to properly engage them. How can companies encourage innovation and growth in our fast-moving world? What organizational changes can be implemented to create a structure that nurtures sky-high, implausible ideas that challenge conventional wisdom and lead us to our next innovation revolution?

In this episode, Gautam Mukunda speaks with two best-selling authors and entrepreneurs. The physicist founder of a biotech company, Safi Bahcall, and author, investor, and startup CEO, David Kidder describe how to organize your teams and methods for a breakthrough.

Follow @GMukunda on Twitter

Books Referenced in World Reimagined Episode 8:

Loonshots: How to Nurture the Crazy Ideas That Win Wars, Cure Diseases, and Transform Industries, by Safi Bahcall

New to Big: How Companies Can Create Like Entrepreneurs, Invest Like VCs, and Install a Permanent Operating System for Growth, by David Kidder and Christina Wallace

Producing Prosperity: Why America Needs a Manufacturing Renaissance, by Gary P. Pisano and Willy Shih

Leading Without Authority: How the New Power of Co-Elevation Can Break Down Silos, Transform Teams, and Reinvent Collaboration, by Keith Ferrazzi

Nabokov books

Perfectly Reasonable Deviations from the Beaten Track: The Letters of Richard P. Feynman, by Richard P. Feynman, Michelle Feynman

Darwin's Origin of Species: A Biography, by Janet Browne

World Reimagined Guest Information – Rules of Innovation:

Safi Bahcall is a physicist, a former public-company CEO, the founder of a biotechnology company specializing in cancer drugs, and the author of Loonshots: How to Nurture the Crazy Ideas that Win Wars, Cure Diseases, and Transform Industries. An instant WSJ bestseller, Loonshots has been translated into 18 languages; selected as a best business book of the year by Bloomberg, Financial Times, Forbes, Inc., the Washington Post, and others; and recommended by Bill Gates, Daniel Kahneman, Ed Catmull, Gen. Stanley McChrystal, and Malcolm Gladwell. Loonshots was the #1 most recommended book of the year in Bloomberg’s annual survey of CEOs and entrepreneurs.

Safi received his BA summa cum laude from Harvard, completed his Ph.D. in physics at Stanford, and served for three years as a consultant at McKinsey and Company. In 2001, he co-founded Synta Pharmaceuticals. He led the company's IPO and served as its CEO for 13 years. In 2008, he was named E&Y New England Biotechnology Entrepreneur of the Year. In 2011, he worked with President Obama’s council of science advisors (PCAST) on the future of national research. Safi currently advises CEOs and leadership teams on strategy and innovation and is working on his next book. He lives with his wife and two children in Cambridge, MA.

David S. Kidder is an entrepreneur and an angel investor in over 40 companies. He is currently the co-founder and CEO of Bionic, a company that unlocks new growth for the world's most competitive enterprises by leveraging the mindsets and methodologies of venture capital and entrepreneurship. Previously, he served as the co-founder and CEO of venture-backed startups Clickable and co-founded SmartRay Network. A graduate of the Rochester Institute of Technology, he received Ernst and Young's Entrepreneur of the Year Award in 2008. He is the creator and co-author of two-time New York Times bestselling series The Intellectual Devotional, The Startup Playbook and his latest book, New To Big, published in April 2019 with Penguin Random House. David can be found across all social platforms at @davidskidder and at onbionic.com and davidskidder.com.

Transcript

Gautam Mukunda:

How do you find the next big idea? One that will change business or the world. Two bestselling authors and entrepreneurs. The physicist founder of a biotech, and an author, investor and start-up CEO show us how to organize for a breakthrough.

Jack King:

10, nine.

Neil Armstrong:

It's one small step for man.

Nelson Mandela:

The reality can no longer be ignored.

Eleanor Roosevelt:

We stand today at the threshold of a great event.

Nelson Mandela:

That we live in an interdependent world.

Jack King:

Two, one.

Speaker 2:

The World Reimagined with Gautam Mukunda. A leadership podcast for a changing world.

Malala Yousafzai:

I want there to be peace everywhere.

Warren Buffett:

We look for integrity, we look for intelligence and we look for energy.

Audio:

Every country including the United States is going to get impacted.

Speaker 2:

An original podcast from Nasdaq.

Jawaharlal Nehru:

Are we brave enough and wise enough to grasp this opportunity?

Gautam Mukunda:

It's 1961, America is booming on the back of the technological investments made during World War II, like rockets, microwaves, radar and nuclear power. But it's not developing these things in a vacuum, America is deeply engaged in the space race when President John F. Kennedy announces that we will put a man on the moon. You've heard the speech a million times.

John F. Kennedy:

We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard.

Gautam Mukunda:

The Apollo project that emerged from that speech popularized the term moonshot for attempting the seemingly impossible. NASA still does amazing things. Only a few days ago it landed Perseverance on Mars by lowering it from a crane held in the air by rockets. But since 1961 the landscape for taking moonshots has dramatically shifted. As the fruits of Roosevelt's wartime investments flowed through the economy to businesses and consumers, and as innovation has shifted from government entities to private companies, and as America and the world face new challenges that require new investment.

Gautam Mukunda:

Hi, I'm Gautam Mukunda. Moonshots are one type of innovation but many organizations lack the resources or structure to engage in them. In this episode we ask two incredibly gifted entrepreneurs and authors what organizations can do to encourage innovation and growth and we will talk about what this means for governments too.

Gautam Mukunda:

My first guest is Safi Bahcall. Safi is a second generation physicist, the son of two astrophysicists, a biotech entrepreneur, former public company CEO and author of Loonshots. His guide to nurturing the crazy ideas that win wars through diseases and transform industries. I asked him to describe what a loonshot is.

Safi Bahcall:

Well, if you look back in history, the big ideas, the ones that change the course of science or transform industries, they don't arrive with blaring trumpets and red carpets dazzling everybody with their brilliance. They're usually dismissed for years, or sometimes decades and their champions are written off as crazy. Since there wasn't a good word in the English language for that, I made one up, loonshots. The reason it matters is that everybody knows what a moonshot is, with an M. It's about a big goal that you can get really excited about and it traces back to President Kennedy in 1961 when he declared we would put a man on the moon by the end of the decade.

Jack King:

Lift-off. We have a lift-off, 32 minutes past the hour.

Safi Bahcall:

What people often forget or don't realize is that the person who, or the ideas that were responsible for getting us to the moon, was a man named Robert Goddard 40 years' earlier who came up with the idea of liquid fuel jet propulsion, blowing up some gases and some liquids inside a can. When Goddard suggested his ideas, he was ridiculed and that's why the U.S. military neglected those ideas and it was reading Goddard's papers that enabled the German scientists to develop the first jet aircraft, the Messerschmitt 262 and the first missiles, the V1 and the V2 rockets. The allies had no answer for either of those. Fortunately those came a little bit too late in the war to help the Germans.

Safi Bahcall:

But the moral of that story is, to clear moonshots is great, it's fine, but if you want to arrive at that destination you want to nurture those loonshots, those ideas. Especially if you're a CEO, or on a leadership team, or a manager, but even if you're just a solo entrepreneur, you want to discover that crazy idea, that assumption that you had is wrong, you want to discover it yourself, not be surprised reading in the paper when your competitor announces it and you discovered that idea too late when it's a bullet coming to your head.

Gautam Mukunda:

My second guest is David Kidder. An experienced entrepreneur and investor who co-founded Bionics Solutions in 2013 to help companies fuel their own innovative growth. His most recent book, New to Big, tackles the idea of moonshots. So what does David think about Safi's loonshots premise? Or how [inaudible 00:05:35] a company to invest in the seemingly crazy ideas that have the biggest impact?

David Kidder:

Yeah, what I love about loonshots is it really draws a distinction between discovery versus planning, knowable and unknowable and the mindsets of how you look at discovery versus planning is so radically different and the data supports this. We have lots of evidence now and actual data that shows that about 70% of all growth comes from about 7% of capital deployed. Whether it be in absolute dollars or numbers of bets, when we look back to the beginning, it's usually all the unbounded returns come from the fewest number of things that you initially re-enlighted, so to speak. The question is, why did we invest in those things?

Gautam Mukunda:

David founded his company based on his deep understanding of these decisions. Winning investments David says, often share two qualities that his team at Bionic Solutions has identified.

David Kidder:

One is market timing, which is outside forces that you don't control, meets proprietary gift, and the conviction in that timing. Secondly, is non-consensus, you make all of your money with ideas originally with the highest disagreement rate. So conversely when you have consensus that something is a good idea, it's actually a huge disadvantage in going for growth.

Gautam Mukunda:

David is great at making complex things like manufacturing huge wins into simple ones. Honing your proprietary gifts and waiting for external forces to demand them while being innovative enough that no-one else is cultivating the same idea. On that issue, consensus, one of my friends and mentors, Rakesh Khurana, a professor at Harvard Business School often asks his students, especially those from consulting, "How do you expect to outperform the market, if your advice to companies is to always do what everybody else is doing?" As a former consultant myself I felt that's a huge problem for the industry. We'd go to companies and say "These are best practices, you should adopt them." But, if everyone agrees with your approach, then almost by definition, you can't outperform. This is what Safi is saying too, that you have to do things that seem implausible to the experts in the field. But how can organizations design to nurture the implausible. Safi believes that it has more to do with structure than culture. I asked him to explain.

Safi Bahcall:

Probably actually most of the phone calls that I get are from companies who have a program or a franchise that has gone really well, whether they're in finance or a lot of tech companies or post-IPO unicorn companies and they've gone from 50 to 500, to a few thousand or sometimes tens of thousands of people and it's about, we feel something ossifying and we don't get it. What I talk about, and I think has resonated a lot is instead of this culture, structure. The example I think about or the analogy I make is what happens inside a glass of water?

Gautam Mukunda:

Safi's training as a physicist makes it natural for him to think in terms of phase changes. They're that rare moment in the natural world when various small changes in input can predictably lead to very large changes in outcome. The most familiar example is the way molecules work inside a glass of water.

Safi Bahcall:

When the temperatures are room temperature, all the molecules are wildly sloshing around and they're moving around, and then as you lower the temperature gradually, right at 32 fahrenheit, the behavior of those molecules completely changes.

Gautam Mukunda:

Why does water freeze at 32 degrees fahrenheit? Molecules don't have culture or personality, but their behavior can suddenly shift. Safi visualized people in an organization like molecules of water and argued that the key to understanding their behavior isn't politics or culture, it's structure.

Safi Bahcall:

There's no CEO molecule that's in there that says "Okay everybody, it's 33 fahrenheit, everybody slosh around, wait it's 31, it's time to line up and be rigid." They just do that, and in science that's called a phase transition. You have that same elements of structure inside companies.

David Kidder:

To me then the striking thing is if you localize this phase transition to the size of the organization.

Safi Bahcall:

That's one variable, right. There're two forces inside any organization. One, is acting on any employ. What is that employee's stake in our company? How much does that project contribute to that employee's energy, excitement, your monetary reward? One, is a direct stake in outcome. One, is the perks of rank. As you dial up the structure associated with perks of rank which is what happens inside a big company, you start to shift the balance.

Gautam Mukunda:

Yes, humans are social and political creatures but Safi's model of organizations and phase transition argues that these factors are largely irrelevant. Instead, he's saying, it's not the people, it's how the company structure incentivizes them. In previous episodes, we talked about the fundamental attribution error in psychology and how it dictates that situation trumps personality. Safi's model is another example of this. Do the people in the group get their greatest rewards from their stake in the outcome, or from winning political battles and rising in the organization? These inherently social and political motivations are determined by the structure of the organization. The same way water freezes at 32 degrees fahrenheit because the structure of its molecules requires it to. I asked David if he saw those same two factors as playing such a powerful role in how teams innovate or ossify?

David Kidder:

I'm a huge believer in structure regardless of whether a company desires growth or not, most efficiency driven, short-term-ism driven cultures. I like to refer to them as the big to bigger, really are at war with growth in their incentive as Safi has pointed out. The talent, the structure, the models aren't really designed in any way to create growth as a natural order of their management. And so trying to even do innovation or disruption anywhere inside or near it, is literally a fool's errand.

Gautam Mukunda:

That's what David does at Bionic. He helps companies identify and take the necessary steps to drive innovation and growth. So what are some of those steps?

David Kidder:

In the same way that you have models and structure for managing efficiency and de-risking, right. We actually have a form of management that exists to invest in growth which is venture investing and entrepreneurship. The components of that, to get right are, one is the permission. You have to be able to set up an investment body, we call them growth boards, it can invest in portfolios that frame, not strategy and planning, but the need in the world, the North Star.

David Kidder:

Once that portfolio gets reframed, both the mindset and permission, as I mentioned earlier that non-consensus, high conviction, getting the ability to invest in solutions to those needs as a way of working gets unlocked, because the growth board, the people who actually wear the guns and badges of organization are learning to think different and invest differently in the unknowable.

David Kidder:

Need to understand that stage gate financing, cede A, B, C rounds are actually designed to do that [new debate 00:12:57]. We're looking for the signals that turn into indicators, that turn to metrics over time. The next two pieces critically are the ability for teams to experiment at scale with skill. They're using the science of validation to be able to discover how those needs have changed the world, and honestly what the company's proprietary gift is in solving it.

David Kidder:

What teaches you where truth is in all of this, whether it be science or commercial is, the do versus say. What customers do. Behaviors don't lie so a lot of the classic skill of strategy in a marketplace or ethnography or otherwise, isn't going to tease out something the customer can't speak to because they don't know.

Gautam Mukunda:

David has just listed four qualities that companies need to have in order to achieve market leading growth. A high conviction, non consensus mindset, a portfolio reframed to reflect that mindset, a unique skill that meets a real world need, and the ability to invest through stages. With those four, you can achieve outsize growth on an everyday basis, but, David says, there's also a fifth element.

David Kidder:

How do you operationalize it? How do I get functions who can act entrepreneurially, hold positions that aren't through consensus for a long period of time so that the machine doesn't kill something?

Gautam Mukunda:

The idea of holding unconventional positions reminds me of our last episode on leading with character. Indra Nooyi pivoted Pepsico from sugary drinks to nutritious foods. In our last episode she said.

Indra Nooyi:

Courage is when there's unpopular stance to be taken.

Gautam Mukunda:

Courage, and as evidenced by the Pepsico example, growth as well. David says that companies can pave the way for even more growth by taking even more risks.

David Kidder:

Hard risks today are no longer just launching five big bets a year that are super expensive. Consultant told them that they're launching hundreds. Hundreds and hundreds across the [inaudible 00:14:57] as a way of working. And for some, they've reframed this so they built almost a good bank, bad bank where capital and ideas are flourishing at scale with real investment dollars to go after. So ultimately it's about how do we organize ourself from the top but deep in the organization so we can end the war with growth but manage it at skill?

Gautam Mukunda:

Let's go back to the big picture. Safi and I share a great admiration for Vannevar Bush, an engineer, inventor and science administrator, who, during World War II convinced FDR to authorize a research body that would conduct war time military R&D. This would become the office of scientific research and development. Bush was also instrumental in developing what would become the National Science Foundation.

Safi Bahcall:

I like that story. You take 20 popular histories of World War II. I counted, 19 of them didn't even mention his name. Yet without him, the outcome of the war would almost certainly have been different, which is pretty amazing. At the time people wrote there was the second most important person in the United States after President Franklin Roosevelt was Vannevar Bush for the conduct of the war.

Safi Bahcall:

Unlike so many scientific minds before him who had recognized that the U.S. military was falling far behind its adversary, Nazi Germany, he said, you know what, we don't need to change military culture. Military culture and military systems, and military processes are exactly right for doing a very necessary component of the war. Manufacturing bullets, manufacturing planes, delivering ammunitions and millions of soldiers to four continents around the world. He was absolutely right, he couldn't change that culture and not only that, he didn't want to change that culture.

Safi Bahcall:

What he did, was create a new structure. A new way to accomplish both things. In one case nurture those seemingly crazy ideas that challenge conventional wisdom. In the other case, reduce risk and manufacture reproducibly on time, on budget, on scale. I was on a nuclear submarine about a year ago, meeting with the admiral responsible for transforming the U.S. Navy and we were talking about these ideas and what could be done inside the military and DOD today, and the way I think of it now is if you were on a nuclear submarine, couple hundred miles from shore, deep under water, you don't want to start hearing clanking noises from your nuclear engine. That's the core. At the same time, you don't want to be surprised by a new kind of torpedo, that's the new.

Safi Bahcall:

Either way, you're dead, that's certainly the case for the military. In the private sector it's a matter of P&L but in the military and intel communities it's a matter of life and death, which is why I spend a lot of time with those communities. No-one wants to see our soldiers five years from now or ten years from now on a battlefield surrounded by machine running robots and getting slaughtered. The challenge, the thing that we need to do is understand the balance between the core and the new.

Safi Bahcall:

How to achieve that inside large organizations? That's what I spend a lot of time with and the person who originally figured that out, or seems to have figured that out probably better than anybody else I could think of, and made that happen from scratch was Vannevar Bush. It's also very relevant for businesses because they are trying to do the same. They have a program or a franchise that is run incredibly well, that's their nuclear engine. They need that on time, on budget, on spec consistently to their customers but they don't want to be surprised by the new kind of torpedo.

Gautam Mukunda:

Both Safi and David grapple with the idea that organizations need to be both innovate and successful at mass production. They need to be original and consistent at scale. In the words of the great organizational behavior scholars, Charles O'Reilly and Mike Tushman, they need to be ambidextrous. Able to both explore and exploit but that's really hard. There's a fundamental tension between what it takes to do each of those things well. One of my biggest learnings from organizational behavior research, and underpins many of Clay Christensen's ideas for example, is that most organizations can do, at most, one thing well. But Safi's loonshots require doing these two things that are actually diametrically opposed. I asked David how should companies take on this challenge?

David Kidder:

It's funny because I used to have to make the case for our work Bionic, and our growth OS for years that disruption was real, and it was coming from the outside, it's an outside force and how are you positioning capital and bets into solutions when disruption arrives. And we don't have to make that argument anymore. Everybody understands what it is. They're living it but also they recognize it as a change in behavior in the world and how, whether they know it or not, their solutions need to change to adapt to those behaviors that have been changed as a result of dislocation.

David Kidder:

The thing that I think that is most powerful in all this are the soft things. I like to use the word lenses, and so almost in an alter ego effect, take off the set of lenses that got them to the top of the big to bigger where accumulated knowledge accrues to career and incentive to hold onto old truths, but when you're going after growth, those lenses become the liability, so if you can put new lenses on, what would they be and how would you look at your business?

Gautam Mukunda:

During his career as an entrepreneur and investor, David has spent thousands of hours with other extraordinarily successful entrepreneurs.

David Kidder:

What's interesting is that they all have typically very common lenses and I'll just share a couple of them. The first one is really the idea of proprietary giftedness. What is our impossible to replicate gift, that solving this particular need, no-one else in the world could solve, or leads to extraordinary unfair advantage.

David Kidder:

Other lenses like, are these solutions pain killers and not vitamins? Do we have extreme focus? Does these solutions have an element that truly could be ten times better? Meaning that given enough time and money and capital, these solutions could be impossible to replicate. And lastly, having been an LP and founders fund, as well backed by those leaders, the idea of building things that create permanence in the life of customers. When you change those lenses and you start thinking about needs and problems and not markets, the answers to those questions of what we are investing in, what are we building, are we building something that's creating a future, really come into sharp focus? Because a lot of the decisions they are making are just extremely biased.

David Kidder:

They're really trying to make what they have, work from the inside out for customers, as opposed to solving the new needs with the customers, who are teaching them about themselves and about how to build new growth. You have to really, to your point, you have to lead with questions and not answers. I like to refer to this as you have to break the addiction being right, and really frame this in the same way venture capitalists invest in entrepreneur, right. Their job is to create unfair advantage to the entrepreneur, the entrepreneur is there to bring truth to them, and where there is no longer truth in the room, you can't not only create growth but it's typically the end of the company because the cost barrier is so high that people can't tell anymore.

Gautam Mukunda:

Growth, innovation, ethics, leadership, they all come down to truth. Over and over again this season we've heard leaders talk about the critical importance of knowing the truth, and how hard that can be. Why? I say to my students, so often they make fun of me about it, that the single most powerful force in the universe is the desire to believe what you want to believe. Your brain isn't wired to objectively evaluate evidence and find the truth.

Gautam Mukunda:

Ignoring that tendency is, as Beth Altringer told us two episodes ago, perhaps the most important mistake designers make. Your brain is wired to scan the world to confirm what you already believe. It's trying to trick you. It wants to make you feel right, not be right. That simple fact is what makes the scientific method so powerful. Science is the pursuit of falsification. A good scientist does everything possible to prove herself wrong. It's the opposite of the way most of us think. It's also the only reliable way to discover new truths about the world, instead of just confirming our prior beliefs. Moonshots as Safi describes them, are about creating structures within organizations that allow them to prove the experts wrong, to launch the experiments or products that change the way we think about the world.

Gautam Mukunda:

David's discovery driven planning is similar. Starting with a plan but as you discover new things, your growth OS allows you to capitalize on those things you didn't know, that you didn't know. I asked Safi, the physicist in the conversation if he tried to get people to think about the world that way. To find ways that they are wrong and to disprove themselves. If so, how does he do it?

Safi Bahcall:

The line that I often keep in mind is from Richard Feynman which is be careful about fooling yourself, and remember you are the easiest person to fool.

Gautam Mukunda:

How does this work inside an organization? Safi says it's about bridging the gap between R&D on one side of business and sales and commerce on the other. Maybe you work in a company that has these two separate wings. Maybe you work in a company that has a gap between them. If so you'd have Alfred P. Sloane to thank for it. Sloane is credited with inventing the modern form of the corporation, and he designed this divisional structure on purpose. He created modules that stand alone and taken together, allow corporations to be much larger so you can have organizations of the scale and scope of General Motors, the company he created. But now Safi tells us that gap is where innovation breaks down.

Safi Bahcall:

That model was fine for the twentieth century. There would be some hiccups with that model every now and then but the problem is the friction. And that's the real problem with innovation inside larger companies once they've gotten past the scaling phase where they got product market fit and things are working well and they've scaled it up. The failure point in innovation is almost always in the transfer between these two groups, it's almost never in the supply of new ideas. You put ten people in a room with a stack of Post-Its for an hour, you get a thousand ideas, and some of them will be good. It's never in the supply, it's almost always in the transfer.

Gautam Mukunda:

In fact this idea that silo organizations struggle to work together goes far beyond innovation. When Stan McChrystal took over American Special Operations in Iraq, for example, he realized that silos were crippling the war effort. He created his team of teams model to allow his special operators to work together far more effectively, and transform their performance in Iraq.

Gautam Mukunda:

When Allan Mulally launched his legendary turnaround of Ford, he took a very similar approach. Transforming Sloan's divisional organizations into tightly integrated ones, organizations that can operate and innovate at the level needed in today's world, is one of the foremost challenges in modern management because in the last ten years Safi and David agree, something has changed. As David was saying earlier, businesses are facing external disruptions with unprecedented frequency. Safi credits cloud services for a lot of this shift.

Safi Bahcall:

I would say number one, cloud services reduced a ton of cost and investment cost that you need to enter new market, social, same thing on the marketing side, and access to capital. The combination of those three has rapidly increased the pace and scale of innovation and how fast new entrants come into markets.

Gautam Mukunda:

So what does this mean for a company that still operates according to the gold model? R&D on one side, marketing and sales on the other.

Safi Bahcall:

You need to create a new group with a new set of skillsets that's totally focused on winning the internal battles on that transfer. People on the core side might have as their fifth or tenth or fifteenth priority to try some new idea, let's say the sales guy or commercial lead, but in reality the sales guy or the commercial lead what they love to do is talk to customers and make sales. They know that they need 15 calls an hour, they get three closed, to get three leads, to get one closed deal, and that's what pays the rent, that's what pays their kids tuition.

Safi Bahcall:

When Alice from the R&D group comes in to talk to them and has got, look at my 97 page PowerPoint with this awesome new idea, the last thing they want to do is deal with it. Their goal is, how do I get Alice away from my desk as fast as possible so I can get back to talking to customers? That's a problem, that's where innovation dies, why? Alice gets demotivated, she goes up, she stops suggesting new ideas even if the guy, Bob in sales looks at Alice's ideas, his goal is, let me find as fast as possible the five reasons I will never use it so I can get back to making sales calls.

Safi Bahcall:

By the way, speaking of structure, when he goes for his review with his manager six months later, is that manager going to ask him, how much time did you spend with R&D folks with Alice testing out their new ideas? Of course not, his discussion with his manager six months later is about what was your numbers? That's the structure problem and that's the failure problem and that's really the old model of the organization not working.

Gautam Mukunda:

To solve this problem Safi proposes creating a team of translators that can work between the core business and the innovation side.

Safi Bahcall:

They had the skills of the mediator, meaning they understand horizontal influence, how to get nerds to do what they would like the nerds to do and keep them motivated. How to get commercial folks to do what they would like them to do and keep them motivated. Even though neither side reports to them, and it's incredibly important inside the organization that that group, that new group be [inaudible 00:29:23] be neutral. Not reporting to side A, not reporting to side B because they need to be mediators, they need to be bilingual translators, they need to be trained in how to conduct rapid experiments far faster than the usual agile prototyping stuff. The one I like the most is pretotyping, a better [inaudible 00:29:44] from Google has become a good friend about how do you test a hypothesis in one day and $100?

Gautam Mukunda:

Sloane's twentieth century model is not allowing innovation as fast as our distributed new technologies require it. One response is to reintegrate companies. Tesla is an example. Elon Musk, puts his engineers and R&D people on the factory floor. He wants them to work surrounded by the assembly lines because innovation requires constant close contact with the people doing the manufacturing. Musk's intuition is backed by the research of my friends and colleagues Gary Pisano and Willy Shih in their book Producing Prosperity. They demonstrated that the strategy of outsourcing manufacturing but attempting to preserve innovation is profoundly dangerous. The two are in fact closely related, and companies that don't manufacture will usually soon find themselves struggling to innovate as well. I asked David if integration was important to him?

David Kidder:

Very much so. The growth board to me is where the permission lives and the incentive gets changed to value the experiment, to value the new oxygen so to speak than the existing oxygen they're breathing economically. To change the way [inaudible 00:30:54] are paid, is one of the most important things you can do so that some portion of their output, whether it be measured in dollars or impact, they get paid to create new growth.

David Kidder:

When you change those incentives, that permission at the top, I think that's fundamentally when the oil gets moved around the whole machine. What's interesting, when you can have a growth board that has a CEO and PNL leaders on it and R&D on it, those are the keys guns and badges so to speak, when they realize whether they are investing ideas in the core or solutions to new problems, or new solutions to existing problems, whether they're in the core or they're outside the core, as a new group, a disruptor [you would say 00:31:36] they may be all solving the same problem but the permissions are different. So it's no longer a conflict if I'm a P&L leader that I'm incentivizing innovation or growth and down the hall is a disruptor group solving the same problem but they have different permissions, they're using new technologies. I'm no longer competing for the same dollars because I'm trying to win the same problem.

Gautam Mukunda:

Safi and David are brilliant organizational thinkers and in this conversation we've learned that organizations can enable innovation by creating a team of mediators that can translate between R&D, and marketing and sales - Safi's idea. Or creating a growth board that changes the permission structure at the top - Davids. But what if the organization in question is not a company? What if it's a country?

Gautam Mukunda:

In the model of government funded scientific research, that Vannevar Bush designed under FDR, the United States invented the modern technological state in the 1940s but in the years since then innovative power has shifted from government to private businesses. The first space race was between NASA, which Bush helped create, and the Soviet Union. Today's space race is between Jeff Bezos and Elon Musk. We have billionaires with rival space programs. We are in a moment of great crisis where we need moonshots and loonshots to spawn innovations that will have broad societal benefits. To respond to new variants of the Coronavirus, to rebuild the economy after this pandemic year. To invent carbon, capture and storage super efficient batteries and renewable sources of energy that will mitigate climate change. To do things we've never even thought of and the returns for that kind of investment in science technology are measurable in dollars and cents.

Gautam Mukunda:

Research by [Renine 00:33:22] Griffith suggests that the ROI from basic biological research is between 20% and 60% per year. There is no better way for a country to invest in its future than to spend on basic science. Something that the United States has been starving for generations, but we are also in a moment of great flux and great opportunity. What can the United States do right now to spur innovation and growth? I asked my guests what they saw as the roles of government and private business in fueling innovations for broader social good.

Safi Bahcall:

Eighty years' ago the vast majority of important breakthrough research was occurring inside federal agencies because corporate research was just not that well developed yet, there wasn't yet a technology industry. As you know, things like the transistor would have never happened, the electronics age, much of the early PC industry, 3D graphics, GPS, the internet, were all, certainly the biotechnology industry for example, they were all things that emerged out of federal research projects. Google search engine was supported by the National Science Foundation.

Safi Bahcall:

Well, fast forward eighty years later today, the vast majority of important research especially on technologies like AI, artificial intelligence, are happening outside of federal agencies, inside companies like Google or Microsoft or InVideo, Amazon, Facebook, Apple so what do we do in this very different world in terms of federal decisions or basic science and helping the private sector? This is well known to people who work in science policy or have thought about policy really understand R&D but maybe not so well known let's say in libertarian circles where they mistakenly think the whole Adam Smith idea of just leave free markets alone and do nothing, and we'll be fine. Well that's in fact not, as you know Gautam, that's not what Adam Smith wrote. Adam Smith understood that there's certain instances in which markets will fail.

Safi Bahcall:

They will fail society because there are certain investments that favor everybody but not any one entity alone. Take GPS, it didn't make any sense for any company to build a system of GPS satellites but it made sense for federal government to invest in that. Let's take the biotechnology industry which sells roughly a third of a trillion dollars ever year with protein engineered, genetically engineered drugs is so important for everything that we're doing for fighting COVID.

Safi Bahcall:

Well go back thirty or forty years' ago, no one company could have possibly invested in developing genetic engineering technology because it made no sense. You can't go to your shareholders, your board is a CEO and say let's put a billion dollars into this crazy set of ideas that may never work and if they work it will pay off ten or twenty years' from now. No company correctly could have ever done that in a free market. So there are certain things that you want federal agencies to do because they help everybody overall.

Gautam Mukunda:

And we've seen this kind of federal investment pay off. In 2009, President Obama made unprecedented investments in green energy as a way of rebuilding an economy crushed by the housing market crash and global financial crisis. Everyone remembers Solyndra, the solar power company that took $500,000,000.00 in federal money from that stimulus and soon filed for bankruptcy. Few people remember that Tesla benefited from that stimulus as well, allowing it to transform the global automotive industry. In fact, the biggest problem with that federal program wasn't Solyndra, it was that almost every one of its other investments paid off. It was too conservative, not too reckless. But it goes back to that statistic David quoted that 70% of investments come from 7% of capital deployed. What that means is, failure is required if you want to fuel innovative growth. If failure is not an option, growth isn't either. I asked Safi what the federal government should be thinking about as it writes big checks now.

Safi Bahcall:

Well some of our federal research agencies have gotten very large, and we've already talked about what happens structurally when you grow very large which is that you can go through a phase transition which you become conservative.

David Kidder:

NIH is truly the largest research agency in the world.

Safi Bahcall:

Right, so that is a big challenge now it's not an insurmountable challenge. Amazon is a very large company but still does some amazingly innovative things. Same with Google, same with Facebook, same with the number of companies that we can talk about. There are ways that you want to apply those ideas to federal research agencies to get them to encourage more loonshots and to combat some of the natural things that happen as you grow.

Gautam Mukunda:

I put the question to David as well.

David Kidder:

These recovery bills in the trillions, obviously they're reinforcing institutions they're supporting industry's economies but they're also just, they're underwriting time, right. A lot of time and the question is where is that time going to go. If we do this wrong it will systemically accrue, we already have probably a couple of years of lost time but you could lose a generation and there's huge risks to that.

Gautam Mukunda:

I asked my guests what book they would recommend to all of our listeners.

David Kidder:

A friend of mine, Keith Ferrazzi wrote a book just recently called Leading Without Authority and the idea of co-elevating and how do you get people who are responsible, you have the badge without the gun in these environments to actually lead and how can you use co-elevation to do that. We need organizations that can elevate and lead without direct line authority and that book describes how to co-elevate and co-motivate when you're not in the room with all of the tools but you have all the responsibility to move a team forward.

Gautam Mukunda:

Great, and Safi.

Safi Bahcall:

Can I answer the person question and book question together because I've been so influenced by a number of books and authors, but I'm deep on the next research project and the thing that's really helped me both in the previous book that I wrote and the current research project is the power of focus and the power of play. Play is especially important and not so well appreciated in business but that really is where you come up with new ideas. Three books I would recommend Nabokov, Feynman and Darwin. I have them here on my bookshelf, I have a collection of Nabokov's books. I just read and re-read Nobokov all the time. Unlike so many authors, he just played, he didn't write for big meaning or as a polemic to try to influence people. He loved playing.

Safi Bahcall:

A second book I would recommend is Feynman's letters, Perfectly Reasonable Deviations. That's how Feynman got a lot of his ideas and his creativity is just by playing. The third one, I'm in the middle of Janet Brown's biography of Darwin, she's a wonderful historian but the Origin of Species, she has a short book on the Origin of Species which is the origin of the origin.

Gautam Mukunda:

Excellent, and David you'll get the final question. Who's the one person you've gotten to know who you most admire and why?

David Kidder:

I love beth Comstock. Beth Comstock is the former vice chair at General Electric. She's one of the most honest operators I've ever known in the business world and despite the outcome of GE and her work there for 25 years, I still think she's probably one of the most original creators and embracers of outside forces I've ever been close to really. Her work, despite not getting inside Safi, you nailed why the company didn't evolve, which is transfer. And so many places, for so long with her work, it just never got inside. She is one of the greatest and one of the most original thinkers and I would say just honored to know her and admire her work.

Gautam Mukunda:

When Vannevar Bush walked into FDR's office, he changed the course of our technological lives. Look around you. Your personal computer, your phone, GPS, microwaves, the internet, all of these were seated by loonshots that were flowed in response to World War II and of course he also helped save the world. Not bad for one meeting. The advances in technology borne from his approach are still rippling through our society and economy.

Gautam Mukunda:

Think cloud computing or 5G. These advances in turn, continue to bear down on companies and organizations, requiring them to innovate faster than ever before. Meanwhile the locus of R&D has moved out of government offices and into private businesses and that might be a huge problem because private businesses have real difficulty investing in basic research. Basic science is the classic public good. It produces vast returns, but a single company can't capture them unless it's a monopoly.

Gautam Mukunda:

Markets vastly under invest in public goods, particularly basic science. Correcting that sort of failure is what government is for. Is the United States government going to start making investments in basic science that will change the world again? Are the trillion Dollar enterprises that now dominate the American economy going to step up? Or are we going to continue to starve basic science and let countries more willing to invest in it, reap the benefits?

Gautam Mukunda:

The COVID-19 pandemic is not just allowing us to take advantage of previous investments and science and medicine, it's an opportunity to spurn new investments in science by the government and in the private sector. It's an opportunity to manage those investments in a new way that's also an old way. The way Vannevar Bush created to win the second world war. Done right, our new wave of loonshots can help save us from pandemics and climate change. They can create opportunities we can't even imagine yet, but only if we take advantage of today's opportunities. We can build our own future but we have to choose to do so. What future are you building towards?

Gautam Mukunda:

Let us know by emailing worldreimagined@nasdaq.com or find me on Twitter @gmukunda.

Narrator:

World Reimaged with Gautam Mukunda a leadership podcast for a changing world. An original podcast from Nasdaq. Visit the World Reimagined website at nasdaq.com/world-reimagined-podcast.