Entropy and Innovation

Entropy is the tendency of nature to dissolve differences. Imagine placing two stones next to one another in a closed, insulated box. One stone is 200 degrees and the other is 0. After some period of time you open the box and both stones are now 100 degrees (ignoring the effects of whatever temperature the inside of the box was at the start of the experiment). This tendency to take structure and order and dismantle it into either randomness or uniformity is one of the key laws of thermodynamics.

Until the two stones have reached the same temperature, I can use the temperature difference to drive an engine of some sort. I can direct the flow of the heat from the one stone through a device that uses the cold from the other stone as a mechanism to "draw" the heat through it, giving up some heat in the process and driving whatever the device is.

This law appears metaphorically in the business world as well. If one company comes out with a certain product, it's guaranteed that sooner or later another company will come out with a similar product. At that point price competition will begin and the profit margins of both products will be worn down until they are commodities with tiny margins. At this point there is little difference between them, and no value is created. If a service company comes out with a new offering, its competitors will work to match its character and flavor (if not its substance) so that the buyer will be able to take advantage of a competitive situation.

The entire organizational process from supply chain through operations to marketing, sales, delivery and service is entropic. Even though we focus on it intently, the best it can do over time is run down to a low margin, par situation in the competitive marketplace.

Several mechanisms can be put in place to fight against this dispersive tendency. They can create the phenomenon of negentropy. Life, for example, is negentropic. Life over successive generations can evolve more complexity and differentiation, swimming upstream against the pull of uniformity. Companies need to find ways to bring this innate property of life into their organizations in more than just an ad-hoc way.

Strategy Formation
One of the oldest tools at a company's disposal, strategy allows the company to look at the playing field differently and either change the field, the rules or the game itself. The ultimate objective is to create greenfield marketspace because the margins are greatest where there is little or no competition (real or perceived in the customer's mind).

Brand
In the old days it used to be called marketing and advertising but nowadays branding has the capability to create a differentiation in the customer's mind that may or may not actually exist in reality. The hope is that the customer generates an affinity that marries his self image with that of the brand, thus reducing the barriers to purchasing while at the same time raising barriers to choosing similar products or services from competitors.

Quality
The performance of the product or service can be improved without design modifications that would imply starting from scratch. At the same time, the economy of production can be improved and the increased efficiency can add to the margin of a product in commoditization by carving out space below the price point. The whole quality and process impovement movements of the last 60 years showed us how to do this clearly in manufacturing; less clearly in services where the relationship and not the process is king.

Intellectual Property
IP in the forms of copyrighting, trademarking and patenting is a method for erecting barriers against competition and the erosion of margin on each dollar of sales. I tend to think of IP as a life extender but not as a negentropic generator. But that's probably a personal bias. I see IP today as a tool gone haywire. Taken to an extreme, it inhibits the fight against entropy because the barriers it sets up make it more difficult for ideas to move across the intellectual spectrum. Some of the things that the patent office allows seem ridiculous. Nevertheless, despite the desire of some organizations to use patents to hedge their companies about with nice, thorny, protective barriers, I believe that the thickening hedges will only spur other companies to find ways to work around them (or countries to simply ignore them). IP is too much of a defensive tool to ultimately succeed. Offensive tools are required for the sustained success of companies.

Innovation and R&D
Ultimately a species can only improve so much in its niche. Once the niche itself starts to change too much, new species must evolve. Innovation is the process by which a company remakes its products and services. In so doing it will likely have to remake itself. That means its systems, organizational structure, and policies (its rules of the game). The tendency of companies to shy away from such transformation is why most companies battle it out by trying to just run their operations engine faster, throwing in a bit of process improvement for spice or building IP hedges to extend the runtime of their products. In the process they generate so much heat and friction trying to drive new performance out of an old engine that they burn up their people, their systems and their structures. But ultimately buggy whips will go by the wayside and most of the companies that made them will either fade away into a dying industry's entropy or be absorbed into other operations for pennies on the dollar. Because the creation of an innovation culture takes time, there is a point of no return for organizations that ignore transformation.

So there you have it. Pick your tools. There are probably others, but these are the big ones. Usually a mix of several is wise, or the sequential use of one then another as the current situation calls for.