Dave Hamel, friend of the show, wrote:

“The problem arises when a company or product has no differentiating feature. If your product is producing websites, then you’re screwed. Sorry but you’re totally hosed because there are lots of places that produce websites. There is a library of software that can produce websites. There is an army of developers in India who will create exactly what they are told.

Many digital marketing agencies are just that, website producers. They may talk about being innovative, and cutting edge but they’re not. Innovation takes risk and “cutting edge” cuts both ways. They have a profit margin to meet or angry share-holders to deal with.”

And he makes valid points.

It’s all about profit. Economics and the LRAS curve teaches us that eventually, at some point, factories will be squeezed to where marginal profit equals marginal costs. The fixed costs are always lost. It’s a very gruesome theory.

It’s been drilled into us, for years: become a commodity, be prepared to make zero margin.

Maciek made the great point that people misread that as: get into management. Fight commodification with management!

We destroyed that false logic already. So now we enter into the question of how to differentiate, and how to differentiate in such a way that productivity gains are evident, and defend margin.

If we accept that innovation is the path to differentiation, then the inherent problems of fostering ‘innovation’ are not unique to digital agencies. There are core problems throughout the American and Canadian economies.

Everybody, in theory and on paper, wants ‘innovation’. How many people really want to take the risks to actually achieve it? What is the social process through which ‘innovation’ happens? What are the design patterns available for ‘innovation’.

Naturally, I’m expecting a deluge from the HBR people, who will drown us all in case studies. And while I am from the actual scientific comparative method, those case studies don’t always fit in with anything that I’d consider ‘science’ at all. Ie. There’s no scientific cohesion or understanding in the literature I’ve read out of that school.

I’m aware of the innovation skunk works, labs, that major corporations have. Get big brains away from the routine and politics of the broader organization, and let them come up with crazy ideas. Interesting model. It’s a Quaternary Sector approach, isn’t?

I’m aware of all sorts of case studies around enterprising managers. The balance between breakers and maintainers and how companies evolve.

I’m acutely aware of Maciek’s sub-point that the big brains don’t want to go to the major corporate ladder, they want to go to the hot startup.

Innovation is risky. But isn’t that the crux? Without risk, there is no reward. There is no margin. If you want to avoid all risk – go produce a commodity.

How do we manage the risk of innovation? What are the best design patterns to foster a culture of innovation? I’m looking for actual criteria here. They can be drawn from the case study literature, but it needs to be put into a framework. An actual, coherent, framework – with an actual comparative method.

That’s how we kill the LRAS curve and grow our way out of this hole. We kill it with fire.