Rethinking "Return on Investment": What We Really Need to Invest In
By Timothy C. Mack
Innovation means more than inventing new products for the world’s growing populations to consume. Innovation also means solving the problems created by consumption. By investing in sustainable innovation and creativity now, we will enhance our future returns.
A leading challenge for the twenty-first century is how to enhance innovation and creativity in the midst of a global recession. While this area of concern might seem to focus largely on technology and business issues, it is also tied to enhancing social development, academic vitality, political stability, and the standard of living worldwide—and doing so sustainably.
By several measures, the health of global business has actually been quite robust in recent years, especially for the largest multinational corporations in areas like energy. Large companies have enough resources to weather the storms of economic, market, and even regulatory reversals. But smaller, more innovative enterprises around the globe are hit much harder by the downturns in the world economy and by diminishing returns on inputs.
We see “diminishing returns” as global economic expansion generates its own dysfunctions. For example, more consumption leads to more waste products, which then lead to negative impacts like pollution and climate change. In another context, we see diminishing returns when we recognize that “working bigger” is not always working smarter, and many view the increasing acquisition of smaller firms by multinational entities as undermining productivity worldwide.
Basic examples of diminishing returns include too much fertilizer on a single field, too much additional seed without more available land to plant it in, and too many added tools without enough added workers or vice versa. In other words, diminished returns result from increasing one factor of economic production without being able to change other parts of an economic system, to keep things in balance.
The global problems we are wrestling with today are largely due to system imbalances of various types, and to the lack of a holistic systems approach overall. We must add creativity and innovation to the economic system, so as to enhance competitiveness system-wide. By innovation, I mean the ability to imagine, reconcile, and combine ideas that will improve economic health and prosperity throughout the world.
The law of diminishing returns suggests that, when complexity and scale increase past a certain point, returns will ultimately plateau and then plummet. This dynamic is often masked by the fog of ever-more-complex partnerships or ever-increasing debt, which necessarily have built-in problems that also tend to build up. These problems in turn create numerous delayed and feedback loops, which alter the ongoing operation of those systems—for better or worse.
For example, one result of large-scale mergers and consolidations is to concentrate risk on a scale never possible before. The underside of this global interconnectedness is that the individual “dominoes” within that system become increasingly aligned. And as in a crowded forest, a single falling tree can bring down far too many others.
Responses to this perceived problem often aim at classic sustainability solutions. I prefer to look at sustainable development in a broader context and to seek solutions not simply for the environment, but for social and political dilemmas, as well.
The term “diminishing returns” does not always imply a negative assessment of past, present, or future return on investment (ROI) strategies. Diminishing returns can affect any investment that involves financial, intellectual, or industrial resources. In what may come to be recognized as a new normal, it also refers to strategies for the future that rethink the traditional concept of ROI and levels of adequacy—that is, rethinking ways to assess systemic balance. To put it more assertively, a total rethinking of return-on-investment strategies could be in order.
An MIT study on innovation notes that, over the past 50 years, the vast majority of innovations have come from small organizations that actually receive little financial support from institutional investors. Accordingly, an increase in early-stage investment in smaller, innovative enterprises might buoy up the ailing global economy. However, due to the risk-averse nature of institutional investor groups, this is not likely to widely occur.
So what are our options? I believe we need to focus on a range of initiatives to promote innovation, including innovation in education and training. This would include education/private sector strategic partnerships that promote creativity and cultivate “a taste for risk.”
Local approaches that adjust for country-by-country variations are frequently more productive than one-size-fits-all policies. In France, local history favors the use of cooperatives (both manufacturing- and services-based) and a focus on improving local production, shortening channels between producer and consumer, and introducing innovation tax credits. This might be termed bringing economic prosperity through rebalancing the economic food chain.
John Holland at the Santa Fe Institute defines the concept of emergence as “much coming from little.” Similarly, as we begin to rethink return on investment, there are three common strategies for attaining much from little. The first approach is to focus on increasing efficiency, ideally producing more with fewer resources. A good example of this is Moore’s law in electronics, where diminishing costs and increasing productivity have gone hand in hand.
A second approach focuses on consistency, which concentrates on improving quality (versus just turning out more of the same product in the same manner) and emphasizes predictability and repeatability.
The final approach is the path of sufficiency, which involves rethinking the elements involved and often results in less coming to be seen as more. This could include the march of the Green Movement, with its concentration on economy, ecology, and appropriate downsizing. It could also include the industrial ecology movement—a convergent multidisciplinary approach to building integrated and sustainable industrial systems. It includes reinterpreting former waste streams as “repurposed assets” that may be utilized as raw material for an entirely different industry. A recent example is waste carbon or plastic scraps being used in nanotechnology for construction of fullerene nanotubes.
Still another example of Green approaches is resource decoupling. This involves using fewer resources per unit of economic output while also reducing the environmental impacts of resource use and other economic activities. The positive impact of resource decoupling stands in sharp contrast to the ecological degradation and resource scarcities that currently make the problems of failing financial markets and economic recession even worse.
Looking back over the course of the twentieth century, we find that relative resource balances actually remained fairly equitable. For example, while world gross domestic product rose by a factor of 23 between 1901 and 2000, global resource use only rose by a factor of eight. This was partly the result of improved technologies, including those enabling increased energy efficiency. But a balance of this sort seems far less likely for the unfolding twenty-first century.
Looking forward, the UN Environmental Program’s International Resource Panel projects that world consumption of natural resources could triple by 2050, far exceeding sustainable levels. In a 2011 report, the Panel called for the general realization that prosperity and well-being do not depend on consumption of ever-greater amounts of resources. Instead, we need to recognize that the trade off between environmental negatives and economic positives can be avoided. In other words, low-carbon, resource-efficient approaches can stimulate economic growth, increase employment, and reduce poverty, while still keeping the human footprint within sustainable limits.
Of course, successful decoupling will require significant changes in national government policies, corporate behavior worldwide, and the consumption patterns of the global public. It is also clear that any one-size-fits-all approach is unlikely to succeed, given the range of economic levels and diverse national cultures worldwide.
One of the widest extremes between countries and among groups within countries remains the consumption of raw materials: The richest 20% of global population is responsible for 80% or more of consumption, while the poorest 20% consumes closer to 2% of the total. This puts the poorer groups at a disadvantage in the search for the energy resources to support creative activities. New resources can either be found or created, but in the lowest economic ranges, people lack the energy needed for effective search or creative activity. And so these imbalances continue or increase.
Any process that reduces inputs and/or increases outputs will require changes in public policy and public opinion. For this to happen, the training and education needed must be both subtle and sophisticated. The goal is to bring improved resource productivity (e.g., through materials substitution) into balance with the demands of rising affluence. This can only be accomplished with political will and coordination among governments (national and supranational), nongovernmental organizations (with their growing influence), and private industry/corporations.
At times, it seems too much to hope that political influence will ever be spread equitably—or even that enough private citizens will become involved in public policy to substantially affect outcomes. But the expansion of “Occupy ____” movements in the United States and growth of bilateral e-government capabilities worldwide all suggest at least that the number of active stakeholders is likely to continue to increase.
Over the past decade, the concept of hybrid organizations has become more popular, with government, NGOs, and private-sector entities creating new configurations. But progress has been much slower than was initially expected. Those who assume leadership of such hybrid organizations will naturally guide and shape their own agendas, but the real challenge for any organization engaged in boundary spanning is how to get the now-wider range of stakeholders to cooperate in reality versus merely for public relations purposes. Authentic partnerships are long-lasting, because they provide tangible benefits for the majority of those involved.
Enhancing Innovation
Innovation arises from applying creative approaches to problems. This is true across the economic, technological, logistic, political, and social arenas. The most radical and revolutionary technology innovations tend to emerge from formalized R&D, while less-dramatic incremental and pragmatic innovations may emerge from day-to-day operations.
Innovation can be seen as either supply-pushed (based on new technological possibilities) or demand-led (based on social needs and user requirements). But innovation also arises through a complex set of processes that link many different players together. This includes not only developers and users, but also consultancies, standards bodies, governments, and NGOs.
It is tempting to view innovation—particularly technological innovation—as a panacea. This is not always the case. While technological development continues to produce solutions, new problems continue to emerge—global warming and related economic problems, resource depletion, unmanaged waste products of consumption, population growth, and so on.
New technologies can only do so much to forge solutions or drive needed change: Building electric cars will not reduce pollution if no one buys them or if no network of convenient recharging stations exists to keep them running. Therefore, government regulation, marketplace dynamics, and public willingness to change their behaviors are also integral parts of the innovation formula. South Korea, for example, is currently building a smart grid that is expected to support 30,000 electric vehicle charging stations by 2030. Focused applications appear to be the most productive approach: Correctly identify a problem, then solve it.
Much successful innovation occurs at the boundaries of organizations and industries, where legacy restrictions are fewer and the problems and needs of users can be linked with the potential of technologies in a creative process that challenges both. In such networks of innovation, communities of users can help further develop technologies and reinvent their social meaning with tools like open-source software.
Innovation in Education and Learning
The goal must be to develop changes that are both relevant and valuable to users. One example of this process in action is to develop learning/lesson plans that are custom-tailored according to the abilities of individual students and responsive to stakeholder input. An articulate voice for individualization is Ben Bloom, who divides educational skill sets into cognitive, affective, and psychomotor skills: i.e., mind, heart, and body. Men, he says, learn better by doing; women, through dialogue.
Will schools ever embrace these opportunities for learning and innovation? Classroom productivity has not always risen with increased online learning, but computer games do teach skills—especially analytical thinking, team building, multitasking, and problem solving under stress—which are not often learned in the classroom. There is general agreement that the social dimension of learning is beneficial because learning in a social context is usually faster, with longer retention. The challenge is how to build a working hybrid that solves problems without creating new ones.
One move in this direction is to assess social network technology in light of clear quantitative and qualitative educational outcomes, rather than worrying about potential classroom disruption. Another is to support child-guided learning, where kids and adults work side by side as peers to solve (for example) a local real-world environmental problem. Using this problem-solution approach, many school-based community environmental programs are student run: Students choose projects and do most or all of the work. In such a setting, even mistakes become good opportunities to learn and to improve the process of finding a viable solution.
Innovation and Learning in Communities
Besides creative education techniques, another innovation-friendly concept is that of Living Systems, as described by James Grier Miller in the late 1970s. Countries, societies, and even super-national organizations such as the European Union can also be much more organically interactive, given the opportunity. This principle can also be applied to mechanical systems—such as those that convert matter to energy and vice versa—as well as to information-transmission and exchange systems. In this context, information means “options to choose among” (such as signals, symbols, messages, or patterns) that can be transmitted or responded to.
One major unresolved question in this approach involves responses to subjective phenomena; e.g., different interpretations of the same structures by subjective viewers. These kinds of value differentiations are common in systemic behavior (in politics for instance), and the issues involved are anything but trivial. The goal is to build successful harmonious systems, not conflict-ridden or disruptive ones. To quote Frijof Capra, “In the end, aggressors always destroy themselves, making way for others who know how to cooperate and get along. It is much less a competitive struggle for survival than a triumph of cooperation and creativity.”
Karen Hawley Miles, executive director and founder of Education Resource Strategies and author of The Strategic School, asserts the need for leading indicators of performance versus lagging ones in order to identify and act quickly to support and change failing undertakings. But the most critical question is what changes to make in order to produce positive differences. In terms of appropriate educations tools, a significant complication arises from the wide range of individual learning styles.
Howard Gardener has identified seven distinct types of intelligence: linguistic, musical, logical-mathematical, spatial, bodily kinesthetic, interpersonal, and intrapersonal. Digital tools and gaming software can help make self-paced and self-styled learning in many of these areas possible, because gaming’s flexibility tends to enhance this range of styles rather than ignore or combat them. But the once almost universal “precision” learning approach, built upon rote memorization and tests based upon the premise that there is only one “right answer” to a given problem, remains dominant. A more organic understanding of the learning process and a broader acceptance of the idea that different solutions are appropriate in different situations will be needed if we are ever to achieve the ideal of “educating one student at a time.”
Regulatory structures guiding education still lean toward the one-size-fits-all model, leaving many hopeful innovators trapped within networks of inflexible requirements. Continuing to focus on standard outputs rather than the quality of inputs tends to reward compliance more than success in process change.
The marketplace—the ultimate customer for individual education—could help reform such measures of output by encouraging more customization to fit locale, resources, culture, and community needs. Techniques such as scenario building, which effectively illustrate the consequences of failure to change where change is needed, can have a powerful effect by building the relevant political will within the community in question.
We have seen this approach to community innovation succeed: The Mont Fleur scenario-planning project (under Adam Kahane) in South Africa helped to end apartheid through a public win-win process, largely by illustrating the alternatives. This does not imply that scenarios are a magic technique that always works. As James Ogilvy says in Facing the Fold: Essays on Scenario Planning, “There are no guarantees. Contrary to the creationists, happy endings are not foreordained. The best of intentions can yield unintended consequences. For any single actor, tribe, species or company, there is always the distinct possibility of tragedy, defeat, extinction, or bankruptcy.”
Innovation for Improving The World
While emerging strategies and the wonders of technology always arouse intellectual interest, the more critical question is how technology actually changes our lives (for better or worse) and how we might better prepare for these changes. For example, much has been made of the impact of smart technologies on health, through such mechanisms as telemedicine, and on the lives of senior citizens, through concepts like aging in place. Both health maintenance and independent living would be enabled by wearable monitoring equipment and by enhanced automation of household tasks (such as cleaning and garbage disposal).
In addition, household appliances will soon be designed with the ability to offer advice and protection to those who use them. For example:
Smart refrigerators will be able to aid in meal planning by keeping track of what specific foods are on hand, their nutritive value, and taste combinations. Accordingly, they will be able to suggest menus based on available raw materials.
Smart bathrooms, already undergoing medical testing/assessment, could feature chemical-sensing toilets and floors that measure weight, body mass, and skin temperature, as well as monitor for falls, etc.
Smart medicine dispensers with packaging that can “recognize” contents and know a patient’s medical needs could automatically sound an alarm to help guard against accidental overdose and/or prevent harmful drug interactions.
Technology applications like these not only affect health, but also could significantly enhance the economic vitality of less-developed countries. Already, poor and developing countries are acquiring hand-held communications equipment at four times the rate of developed countries. Such devices support the growth of financial services without banks in countries like Ecuador and Kenya. Smart cash transfer also makes crowd sourcing for paid micro-tasks possible and can thus generate tracking data to reveal patterns of credit-card use.
Consider the growth of wired smart cities like London, Singapore, and Stockholm, where smart tech is helping to address such challenges as traffic congestion, mass transit, water use grids, crime map networks, etc. It is projected that, by 2020, a global broadband network with sufficient levels of penetration will be in place to bring Paul David’s productivity paradox into play. David predicts that, once a certain level of adoption is achieved, a new technology begins to generate increases in its own productivity at an expanding rate.
At that point, David believes, a sea change in the impact of smart technology will occur, one consequence of which will be the fully measured society. “The Internet of Things” will consist of an almost planet-wide sensor network constantly monitoring local changes in light, temperature, humidity, pathogens, pesticides, and many other aspects of society and the environment. Such constant sampling and testing could generate a host of health and behavior-changing knowledge.
Also, look for the coming “bodnet,” or Internet of bodies, for bio platforms will surely be part of the network. Possibilities include storing data with your thumb, such as Sparsh (MIT Media Lab), and the use of biochips printed on plastic wrap utilizing blood and memristors (tiny two-terminal variable resistors that will be able to store data far more efficiently than today’s computer hard drives), thus further narrowing the gap between machines and humans.
Even epidemiological behavior such as the spread of influenza may be identified and tracked, based on movement and communications patterns using smartphone info. In addition, social behavior trends such as obesity can become more predictable from mining data on travel and eating behavior available through smart technologies—especially since obesity often seems to behave like a communicable disease. Smartphone applications already provide analytical tools that make it possible to perform sonograms or analyze biochemical blood work from a remote location. Accordingly, public health, urban planning, and marketing strategies can all be informed and guided by smart tech’s use of information.
This can even make it possible to track behavioral indicators of growing mental illness, or identify leading influencers in any social network. Thus, we could follow the spread of ideas, including political ones; we would monitor the spread of memes the way we monitor the spread of a disease today.
The question here is how much information is too much to understand and whether that knowledge will be used wisely. Can the government or private sector be relied upon to make appropriate use of this highly personal information? Only time will tell, but we can hope that the beneficial aspects outweigh the detrimental ones.
The bottom line is that, while there are many indicators of diminishing productivity through business consolidation and the reduction of innovation, there are just as many pointing to expanded technological problem solving and enhanced positive capabilities. The creative impulse is still strong in the human spirit, and we can expect to see problems solved and new mountains climbed far into the future.
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