Tapping the Creativity of the Neglected 80%

By Chris Ihrig

December 15th, 2014

The Pareto Principle famously dictates that companies derive 80% of their value from just 20% of their products, customers, or ideas. Because of high transaction costs, the long tail of that curve—that 80% of uncertain value generators—cannot be explored. So in the name of company focus, the tail gets lopped off, segmented away, or reengineered out of existence. Potentially profitable innovations dies with it.

Organizations that reduce transaction costs can embrace the rejected 80%. They can respond to weak market signals, tap small segments, and experiment with unlikely combinations of technologies. They can place a hundred small bets instead of a few big ones.

For example, Detroit considered hybrid vehicles to be an uninteresting intermediate product: U.S. auto executives preferred so-far-unfulfilled research on fuel cell technology. Meanwhile, Toyota was building the Prius. The hybrid is now in its second generation, and Toyota expects to sell 300,000 worldwide this year. Toyota’s low transaction costs and penchant for small-scale collaborations helped it keep open 80 discrete options for the hybrid engine until just six months before delivering a final design. Conventional automakers would have needed to freeze those design variables at least two years earlier.

It is in the interstices [small spaces] of the human network—rather than in the minds of a few wunderkinder—that real innovations are born. And so it is transaction costs that constrain innovation by constraining opportunities to share different and conflicting ideas, skills, and prejudices.

“Detroit people are far more talented than people at Toyota,” remarks Toyota president Fujio Cho, with excessive modesty. “But we take averagely talented people and make them work as spectacular teams.” The network, in other words, is the innovator.

Excerpts from “Collaboration Rules,” by Philip Evans and Bob Wolf, Harvard Business Review, July-August 2005.