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The Policy Innovator's Dilemma

Friday, April 10, 2015

by Nick Charney RSS / cpsrenewalFacebook / cpsrenewalLinkedIn / Nick Charneytwitter / nickcharneygovloop / nickcharneyGoogle+ / nickcharney

Policy Innovator's Dilemma: TL;DR

I'll put the TL;DR up front for all you who keep score, but I'll elaborate on it afterwards:
The dilemma facing policy innovators is whether or not they ought to focus on delivering the status quo policy interventions faster, better and cheaper, or whether or not they ought to focus on breaking the status quo, re-purposing the pieces, and putting them to new uses.

Preamble

Today's post is basically an appropriation of Clay Christensen's Innovator's Dilemma to the world of public policy; but before I jump into the application of the model/thinking from the former world to the latter, I wanted to outline the dilemma in a bit more detail.


The Innovator's Dilemma: a Recap

NB: this recap is sourced heavily from the discussion guide in the book. If you are already familiar with the Innovator's dilemma you may wish to jump ahead to the next section; that said, what follows below serves as a great refresh.



If you are at all familiar with the literature on innovation you will likely know that Clay Christensen's The Innovator's Dilemma is one of the most — if not the most — important books in the field. If you haven't read the book (See: Monday Book Review: The Innovator's Dilemma by Clay Christensen) I've embedded a short interview above that Christensen did with Harvard Business Review that gives you a sense of how he sees the issue. In the book Christensen asks, 'Why do well-managed companies fail?' and concludes that they often fail because the very management practices that have allowed them to become industry leaders also make it extremely difficult for them to develop the disruptive technologies that ultimately erode the markets in which they are established. He argues that well-managed companies are excellent at developing the sustaining technologies that improve the performance of their products (measured by customers) because their management practices are naturally biased towards:
  • Listening to customers
  • Investing aggressively in technologies that give existing customers what they want
  • Seeking higher margins
  • Targeting larger markets rather than smaller ones

However, disruptive technology is distinctly different from sustaining technology. Disruptive technologies change the value proposition in a given market. When they first appear, they almost always offer lower performance than mainstream customers care about. They are typically cheaper, smaller, simpler, and frequently more convenient to use. Therefore, they open new markets. Typically disruptive technologies – with experience and sufficient investment – will always improve their products’ performance and eventually take over the older markets because deliver sufficient performance blending old attributes with new ones.

The Innovator’s Dilemma describes both the processes through which disruptive technologies supplant older technologies and the powerful forces within well-managed companies that make them unlikely to develop those technologies themselves. Christensen offers outlines four principles of disruptive technology to explain why the management practices that are the most productive for exploiting existing technologies are counterproductive when it comes to developing disruptive ones:
1. Companies Depend on Customers and Investors for Resources - In order to survive, companies must provide customers and investors with the products, services, and profits that they require. The highest performing companies, therefore, have well-developed systems for killing ideas that their customers don’t want. As a result, these companies find it very difficult to invest adequate resources in disruptive technologies—lower-margin opportunities that their customers don’t want—until their customers want them. And by then, it is too late.

2. Small Markets Don’t Solve the Growth Needs of Large Companies - To maintain their share prices and create internal opportunities for their employees, successful companies need to grow. It isn't necessary that they increase their growth rates, but they must maintain them. And as they get larger, they need increasing amounts of new revenue just to maintain the same growth rate. Therefore, it becomes progressively more difficult for them to enter the newer, smaller markets that are destined to become the large markets of the future. To maintain their growth rates, they must focus on large markets.

3. Markets That Don’t Exist Can’t Be Analyzed - Sound market research and good planning followed by execution according to plan are the hallmarks of good management. But companies whose investment processes demand quantification of market size and financial returns before they can enter a market get paralyzed when faced with disruptive technologies because they demand data on markets that don’t yet exist.

4. Technology Supply May Not Equal Market Demand - Although disruptive technologies can initially be used only in small markets, they eventually become competitive in mainstream markets. This is because the pace of technological progress often exceeds the rate of improvement that mainstream customers want or can absorb. As a result, the products that are currently in the mainstream eventually will overshoot the performance that mainstream markets demand, while the disruptive technologies that underperform relative to customer expectations in the mainstream market today may become directly competitive tomorrow. Once two or more products are offering adequate performance, customers will find other criteria for choosing. These criteria tend to move toward reliability, convenience, and price, all of which are areas in which the newer technologies often have advantages.
Christensen argues that managers frequently make the mistake of trying to fight or overcome the principles above rather than harnessing them. According to Christensen, applying the traditional management practices that lead to success with sustaining technologies always leads to failure with disruptive technologies. Specifically, he advises managers faced with disruptive technologies to:
  • Give responsibility for disruptive technologies to organizations whose customers need them so that resources will flow to them; 
  • Set up a separate organization small enough to get excited by small gains; 
  • Plan for failure. Don’t bet all your resources on being right the first time. Think of your initial efforts at commercializing a disruptive technology as learning opportunities. Make revisions as you gather data; and 
  • Don't count on breakthroughs. Move ahead early and find the market for the current attributes of the technology. You will find it outside the current mainstream market. You will also find that the attributes that make disruptive technologies unattractive to mainstream markets are the attributes on which the new markets will be built.

The Policy Innovator's Dilemma: an Introduction

NB: There's a lot of overlap between this section and the section above; I literally cut and paste it and then re-wrote it so as to apply the Innovator's Dilemma to the policy domain. I've couched my terms in probabilities given that this is a thought experiment.

The question here may be different – in this case its 'Why do well-managed bureaucracies fail?' – but the resulting logic likely still applies: the very management practices that create the stability of bureaucracy also make it extremely difficult to develop the disruptive policy innovations that would ultimately erode the policy domains in which they are firmly established. Well-managed bureaucracies are probably good at developing the sustaining innovations that improve the performance of their policies or related services (measured by constituents) because their management practices are biased towards:
  • Listening to constituents
  • Investing aggressively in policies that give existing client-segments what they want
  • Seeking lower costs
  • Pursuing increasingly complex policy options rather than simple ones
Like technology, disruptive policy innovation is likely distinctly different from sustaining policy innovation. Disruptive policy innovations ought to change the value proposition in a given policy domain. When they first appear, they should almost always offer lower performance than mainstream constituents care about. Typically we could expect them to be cheaper, smaller, simpler, and frequently more convenient to use. They are likely to create new conditions within the policy domain. We can expect them to – with experience and sufficient investment – continue to improve their performance over time and eventually spill over in other, more established policy domains by blending old attributes with new ones.

The Policy Innovator’s Dilemma then describes both the processes through which disruptive policy innovations supplant older policy approaches and the powerful forces within bureaucracies that make them unlikely to develop those policies themselves. If all the above is true, then the four principles of disruptive policy innovation might look something like this:
1. Bureaucracies Depend on Constituents and Stakeholders for Resources - In order to survive, bureaucracies must provide constituents and stakeholders with the policies, services, and outcomes that they require. The highest performing government departments, therefore, have well-developed systems for killing ideas that their traditional constituents don’t want. As a result, these companies find it very difficult to invest adequate resources in disruptive policy innovations – lower-impact opportunities that their constituents don’t want – until their constituents want them. And by then, it is too late.

2. Simple Policy Options Don’t Solve the Needs of Complex Bureaucracies - To maintain their influence and create opportunities for their employees, successful bureaucracies need to grow. It isn't necessary that they increase their growth rates, but they must maintain them. And as bureaucracies get larger, they need increasing complexity to justify their growth rates. Therefore, it becomes progressively more difficult for them to enter the newer, smaller policy domains that are destined to become the large policy domains of the future. To maintain their growth rates, they must focus on policy domains that are 'du jour' not those that are of 'l'avenir'.

3. Policy Options That Don’t Exist Can’t Be Analyzed - Sound policy research, good planning and execution according to plan are the hallmarks of good public management. But governments whose investment processes demand the strict quantification of a given policy intervention and its projected impact before it can be tested are paralyzed when faced with disruptive policy innovations because they demand data on policy interventions that don’t yet exist.

4. The Supply of Policy Innovation May Not Equal Demand - Although disruptive policy innovation can initially be used only in small policy domains, it eventually becomes competitive in mainstream policy domains. This is because the pace of progress often exceeds the rate of improvement that traditional constituents want or can absorb. As a result, the policies that are currently in the mainstream eventually overshoot the performance that mainstream constituents demand, while the disruptive policy innovations that underperform relative to mainstream constituent expectations may become directly competitive tomorrow. Once two or more policy interventions offer adequate performance, constituents will find other criteria for choosing. These criteria tend to move toward reliability, convenience, and transaction cost, all of which are areas in which the newer policy option has advantages.
It follows then that bureaucrats are likely to frequently make the mistake of trying to fight or overcome the principles above rather than harnessing them and apply traditional management practices that lead create the conditions that foster sustaining policy innovations but lead to failure with respect to disruptive policy innovations. Given all of the above, what advice could be given to decision makers within the policy context? Perhaps:
  • Give responsibility for disruptive policy innovations to organizations whose constituents need them so that resources will flow to them; 
  • Set up separate organizations small enough to get excited by small gains; 
  • Plan for failure. Don’t bet all your resources on being right the first time. Think of your initial efforts at testing a disruptive policy option as a learning opportunity. Make revisions as you gather data; and 
  • Don't count on breakthroughs. Move ahead early and find the policy domain for the current attributes of the innovation. You will find it outside the current mainstream policy environment. You will also find that the attributes that make disruptive policy innovations unattractive to mainstream markets are the attributes on which the new markets will be built.
Policy Innovator's Dilemma: Origins

When I first started thinking about whether or not I could apply Christensen's thinking to the world of policy I re-wrote two critical paragraphs from Christensen's book (found on p.98); here's the original text:
“The reason [why great companies failed] is that good management itself was the root cause. Managers played the game the way it’s supposed to be played. The very decision-making and resource allocation processes that are key to the success of established companies are the very processes that reject disruptive technologies: listening to customers; tracking competitors actions carefully; and investing resources to design and build higher-performance, higher-quality products that will yield greater profit. These are the reasons why great firms stumbled or failed when confronted with disruptive technology change.

Successful companies want their resources to be focused on activities that address customers’ needs, that promise higher profits, that are technologically feasible, and that help them play in substantial markets. Yet, to expect the processes that accomplish those things also to do something like nurturing disruptive technologies – to focus resources on proposals that customers reject, that offer lower profit, that underperform existing technologies and can only be sold in insignificant markets– is akin to flapping one’s arms with wings strapped to them in an attempt to fly. Such expectations involve fighting some fundamental tendencies about the way successful organizations work and about how their performance is evaluated.”
Here's my comparative re-write (click to enlarge):



And finally, here's a clean, text-based version:

“The reason [governments failed] is that bureaucracy itself was the root cause. Bureaucrats played the game the way it’s supposed to be played. The very decision-making and resource allocation processes that are key to the success of established hierarchies are the very processes that reject disruptive ideas: listening to constituents; tracking outputs carefully; and investing resources to design and build higher-performance, higher-quality delivery mechanisms that will yield greater results. These are the reasons why governments stumbled or failed when confronted with disruptive technology change.

Successful governments want their resources to be focused on activities that address constituents’ needs, that promise greater outputs, that are feasible, and that help them play a substantial role. Yet, to expect the processes that accomplish those things also to do something like nurturing disruptive ideas – to focus resources on proposals that constituents reject, that offer less output, that underperform existing delivery vehicles and can only be administered to insignificant markets– is akin to flapping one’s arms with wings strapped to them in an attempt to fly. Such expectations involve fighting some fundamental tendencies about the way successful organizations work and about how their performance is evaluated.”


Policy Innovator's Dilemma: In Plain English

Again, paraphrasing Christensen (this time from the video embedded above):
The policy innovator's dilemma is that in every department or agency every day, every year, people are going into senior management's office, knocking on the door saying "I've got a new policy idea" and some of those entail improving existing policy interventions that governments could deliver better to their existing constituent base. A disruptive policy innovation generally has to cause you to go after new policy areas, people who aren't your constituents and the policy intervention you want to bring to them is something that is so simple to administer that your current constituents can't use it (or worse are offended by it because they've built infrastructure around the old policy regime, think regulatory capture). And so the choice that the policy innovator has to make is whether or not the department or agency should improve existing policy interventions that can be better administered to the existing constituent base or should the department or agency make less refined and/or technocratic policy interventions that could radically change the shape of the policy domain, potentially alienate their existing constituent base and erode their current relationships. Given the choice, what should departments and agencies do?
And that my friends, really is the policy innovator's dilemma.