Finding the finishing line

Dr Robert Kay details the many decision-making factors that could make or break your attempts at innovation. Zilla Efrat reports.

Fostering innovation involves complex and multi-levelled decision-making and although there is no magic formula for improving the process, looking at what influences it might help.

That was the view expressed by Dr Robert Kay, executive director and co-founder of Incept Labs and an expert in decision-making, when addressing delegates at Company Directors’ national conference on Hamilton Island in May.

Kay identified a host of factors that could either cloud or boost the innovation process. One was your assumptions about the world.

There were, he said, two conflicting world views: “exploit” and “explore”. Developed by Professor James G March from Stanford University, these were in constant tension in most organisations and had to be balanced to ensure long-term organisational resilience.

“Exploit” dealt with production efficiencies today. It involved removing all volatility from the process and assumed a stable operating environment. It was fundamental to organisational survival and fed current profitability. And it operated through deductive reasoning and logic. “All the variables are in front of you. You just have to work through them and come up with a decision,” said Kay.

“Explore” was the opposite. It was about pursuing ad hoc opportunities and required a higher risk appetite and an acceptance of the uncertain. It focused on tomorrow and fed future profitability. “While deductive reasoning helps, it requires intuition,” said Kay. “You don’t have many of the variables in front of you and you can’t measure things in the same way. For example, you don’t know what the return is going to be because you have never sold the product and you don’t know how much it will cost to build because you have never built it before. Most ‘explore’ activities do not occur as ‘business as usual’ because they will be killed off by exploit. If you are going to explore — do something new — you need to recognise that you have a problem in the first place.”

Kay did not advocate one world view over the other. Most businesses needed to have an effective “business as usual” capability — exploit. However, for long-term survival, they also needed the ability to reinvent themselves as markets changed — to explore.

According to Kay, another factor affecting innovative decision-making was experience.

“Most executives don’t have much experience in commercialising products,” he said. “You can get to the top of many organisations without doing any hard-core ‘explore’ because what makes the profit is ‘exploit’. You don’t need to innovate to get there. Some people have also explored and perhaps been punished for it.”

Kay noted that this lack of experience could accentuate our inability to know what we wanted.

“Work done by [Duke University’s Professor] Dan Ariely on preference reversal shows that we don’t have a great deal of clarity of what our preferences are when we are making decisions. We tend to make decisions on the basis of the options put in front of us and if you have no experience, the options in front of you cannot be supplemented with anything.”

Kay added that groups processed information differently to individuals. Indeed, a study by academics Gary Klein and David Snowden in Singapore found that while individuals could identify “weak signals” — or snippets of information that point to change — they did not discuss these with the team as a whole.

“This has a lot to do with our biology and a molecule called dopamine,” said Kay. “It is a neurotransmitter that passes messages to different neurones in the brain and regulates our emotions. Much of what we know about its operation comes from research conducted by a neuroscientist at Cambridge University called Wolfram Schultz. He established that the electrical activity associated with dopamine doesn’t reflect what is occurring to the research subject at the time. It reflects anticipation or a prediction of what the research subject thinks is going to happen based on experience.

“It appears that the brain makes a forecast about what it thinks is going to occur and if that checks out with what actually occurs, there is a release of dopamine. You get a burst of pleasure. If it doesn’t check out, a different signal is sent called the prediction error. It holds back the dopamine release and produces fear or anxiety. It also updates all of your predictions to reflect the new experience. This is an ongoing process which affects how we make decisions.

“In a group situation, you would like to have a productive meeting where you all agree. If it all goes well, it produces more dopamine and you get pleasure out of it. In a group discussion, you are continually updating these predictions based on the experience you have with your other board members. Your predictions may be more or less accurate depending on how much experience you have had with them before and how many decisions you have seen them take.

“When you get a weak signal that you are uncomfortable with, like in Klein and Snowden’s experiment, you immediately start to filter that in terms of how your fellow board members are going to respond. It is totally subconscious. You don’t know you are doing it. But the effect of the dopamine is to reduce weak signal detection when we are in a group environment.”

So, with so many factors clouding our views and decision-making processes, how can directors help foster innovation?

Kay was not overly convinced about the potential effect of his first three suggestions:

• Start reading some books on innovation.
• Quarantine the “explore” in an innovation unit so it doesn’t get “squashed like a bug”, perhaps in a separate company with its own protective funding. If not properly quarantined, it could be the first thing to go when you have your first bad quarter.
• Change the board’s conversation on innovation — for example, appoint someone whose only role is to disagree with everyone.
  But he was absolutely convinced about his fourth suggestion: Have a laser-like focus on what your actual purpose is.

“I am not talking about some frothy mission statement. It is that thing you have to do so the organisation continues to exist. It’s your finishing line. In modern organisations, you manage many finishing lines and most conflict with each other. Some finishing lines are not negotiable (such as the safety of staff), but you have to know which ones are important and when.

“Some of the things we discussed before — such as our lack of preferences and the predictions we make — mean that we are drifting a bit. A finishing line gives you an anchor in the ground. It is a continuous and constant reference point and can potentially last beyond the short tenures of CEOs and boards.

“You have to know what your finishing line is for your customers, employees, suppliers or even the media, when these conflict and which one is more important — the one you will always fall back on to help you make that decision.”

CONFERENCE HIGHLIGHTS
This year’s conference Directorship:14 Igniting the growth agenda attracted 409 delegates and 130 partners. It also drew the greatest percentage of women delegates ever (40 per cent). Dr Robert Kay gained the highest evaluation rating at any Company Directors conference. And, on the social media front, 900 tweets mentioned the conference hashtag.