No one ever said customers are completely rational. JC Penney learned that on a grand scale in the past year when it failed in its attempt to reinvent the department store by "reeducating" customers to value everyday low pricing. The effort completely missed how much customers emotionally value the perception of getting a discount—even if they pay more to get it.

Certainly it's part of the romantic lore of innovators that they sail boldly out of the box and off the map and out to the stars on a vision customers don't yet share. The digital book reader is a good example. Digital radio is another. These give customers what they've never had before with ease and even delight, and the experience is differentiated beyond a product's attributes and grounded in customer insight. In a new article for their Daily Innovator series in Huffington Post Kevin McDermott, Amy Radin and Daryl Twitchell argue that successful commercial innovations are led by such insights to a vision beyond what the market says it needs to what it values.

Rule one for innovators, the authors argue, is orienting around the behavior of people whose business they want to grow or earn for the first time.

Zappos, for example, reinvented the shoe-buying experience by ignoring the discount strategies that dominate Internet retailing. It fixed on the frustrations of shopping in a brick-and-mortar store and the limitations of online shopping, meeting the desire for the tactile experience of physically browsing while allowing customers to avoid a trip to the mall. This big idea became the entire identity of Zappos and fueled multiple category extensions. Such insight-led innovation is the reverse of Penney's, which put off its core customer without attracting a new one.

If the goal is disruption, the authors argue, don't start by alienating your core customer. In deliberate disruption lies a risk of presumption that may drive away core customers—especially if they don't perceive the transformation as a benefit to them. See, for example, the intermittent blowups among Facebook users in response to "innovations" they perceive as privacy violations.

In observing customer behavior, the authors observe, lies the risk of what psychologists call "selection bias": interpreting data in ways that conform to what we've already determined to believe. Asking questions about the customer—asking questions of the customer—promotes externally driven habits of mind that challenge biases; put another way, it supplements instinct and informs hard-data sources.

The selling of a new idea is, at bottom, a story told to customers. A persuasive story is built on insight into who customers are and how they behave. Orientation to that behavior produces clarity about what the organization wishes to be.

Whatever that is, in the pursuit of innovation disciplined attention to the customer may head off a catastrophic blindsiding.

To read Do Customers Want Your Big Idea?, together with the other entries in the Daily Innovator series, click here.

There's no doubt proximity supports the kind of "randomness in the network" essential to breakthrough thinking. The problem is that the convention of a team of people working in a building together has been blown apart for some time now. And there's no going back.

The reasons are many, including shrinking headcount, real estate costs and the pervasiveness of personal technologies. More important than any of these may be cultural pressures—the search for work/life balance impelled by all sorts of interlocking social changes, for example, or the business need to work with talent from a global pool.

Most of us work best when we feel part of a group. "Group" can be a half dozen people in a conference room or literally thousands of people doing real work in something like IBM's "innovation jams". Whatever the category of collaboration best practice looks surprisingly the same. It begins in the pursuit of clarity about the mission, about expectations and about rewards.

In a new entry in their Daily Innovator series for The Huffington Post Kevin McDermott and his colleagues Amy Radin and Daryl Twitchell argue that distributed teams takes innovative managers into new behavioral areas of collaboration, motivation and recognition.

The HuffPost article appraises the strengths and limitations of specific collaborative technologies, particularly the "social" tools which the authors contend will supplement older technologies like email, which they describe as "an old technology and a bad habit".

Really innovative collaborators are already moving on. In many offices it is now commonplace to keep live video links up all day for no other reason than to allow dispersed colleagues to see who's around. That encourages impromptu chats and brainstorms much as they would happen were people sitting in the same office with no time or distance to bridge.

"Collaboration mediated by technology is a marvelous thing," the authors say, "but its power appears to be in direct proportion to the human connections in the network. That's why a spontaneous phone call so often trumps multiple transactional emails and other tools in expressing ideas fast. It may also be why some of us avoid the telephone and hide instead behind the tools."

To read Managing Collaborators No Matter Where They Sit, together with the other entries in the Daily Innovator series, click here.

Big thinker Malcolm Gladwell once remarked that "innovation -- the heart of the knowledge economy -- is fundamentally social." Whatever else you may feel about Gladwell's pronouncements he got that one right.

There is never a shortage of new ideas. But there is always a shortage of great talent to reveal their commercial potential. Lucky for the daily innovator, smart people want to work on promising projects. If they have any kind of career aspirations they understand the need to stay current and be involved in new ventures, even when that means crossing traditional organizational boundaries.

It's a character trait the daily innovator can use to advantage in multiple ways when building a team, as Kevin McDermott and his co-authors Amy Radin and Daryl Twitchell argue in Skunks, Pop-ups and Hybrids.

A cliché of the romantic narrative of innovation is the tale of a small team acting outside an established organizational structure. Skunk works are a form of organizational jujitsu that goes on all the time, especially in large established organizations. Borrowing talent out of operational areas and removing it from the pressure of day-to-day P&L pressure makes sense, in theory. It doesn't add to headcount, it taps the imagination of a cross section of motivated people and it provides business-development experience to junior talent. It leverages the organization, in other words. For the innovation gurus that's a best practice.

But here's the caution: borrowing talent, especially in a short-handed era like ours, makes life harder on colleagues left carrying the burden of day-to-day P&L.

Pop-up teams are an excellent way of luring talented people to a project while (temporarily) forestalling formal negotiations with their bosses. For instance, in almost every organization, design talent is typically in short supply. Instead of asking a designer's boss for 25 percent of their time for the next six months, invite the designer to kibitz as issues related to their expertise pop up. If the spirit grabs them they'll find ways of contributing.

In recent years, the "innovation lab" concept has enjoyed a vogue -- particularly in the United States -- among established companies trying to capture some innovation mojo. The ideal of these hybrid approaches is to focus the genius of small teams while simultaneously exploiting cross-functional talent and maintaining access to the expertise of allies in the core business. To create, in other words, structure amid ambiguity.

Managing hybrid teams is not without its challenges. A bit of infrastructure is usually needed -- the creation of nondisclosure agreements, for instance, and time spent on a well-framed assignment. A leader/coach will probably be needed to guide the hybrid.

Further, how do managers conduct performance reviews in a hybrid team? In a heavily regulated industry, how is compliance assured? What are the metrics for building a business that does not yet exist? These are not minor considerations. But they are known problems susceptible to solution.

To read Skunks, Pop-ups and Hybrids: How to Build a Team of Innovators, together with the other entries in the Daily Innovator series, click here.

The conventional way of looking at any business network—retail, hotel, banking whatever it might be—is through the direct-value lens: How much does it cost to run? In a new essay for Executive Agenda Kevin McDermott and his co-authors in AT Kearney's Paris office contend that networks are a great deal more complicated than that, and managing them requires expansive strategic imagination.

McDermott and his co-authors argue that in the life of every network there are decisive moments: times for development, times for expansion, times for rationalization. At any given moment the measure of "optimal" is a moving target, and where the stress falls depends on the age and type of the network. The tools for doing it are distilled in Kearney's Network Optimization Tools, or KNOTs.

In French the English word "knots" translates as les nœuds, or nodes. It's an apt image for thinking about the symbiosis of the local and the networked—the balance of savoir-faire métier and savoir-faire local, of the collective intelligence of the network and the specific intelligence of the individual node. Think of KNOTs not as a laundry list of best practices used to build an optimal network but as electrons—each one discrete and at the same time interacting around the nucleus.

A national bank develops financial products centrally, but a local branch manager owns the relationship with customers. The national bank maintains good relations with the regulators while the branch manager cultivates the good will of the town mayor.

McDermott and his co-authors—Eric Sauvage, Charles-Etienne Bost and Eric Gervet—see particular application of the KNOTs concept in networked organizations with records of success and a predisposition toward stasis. Breaking that challenge into its interconnected KNOTs keeps the focus on optimizing network value—direct and indirect—and the logic of network evolution.

To read Tied in KNOTs, click here.

There's never been an age when people did not marvel at the pace of change in their lives. If the acceleration of change in our own era is not unprecedented there has certainly been nothing like it for at least a generation.

A.T. Kearney's Global Business Policy Council has developed a measure of volatility—a Turbulence Index—that quantifies just how unpredictable our age has become. In a recent essay with Kevin McDermott of Collective Intelligence, Kearney partners Daniel Mahler and Martin Walker describe the application of the index to the sustained management of volatility.

The Turbulence Index's quantifies what we all know intuitively about the growing influence of externalities on senior executives and the companies they manage. It isn't your imagination: the volatility of external conditions doubled from 1999 to 2011. For strategic planners during those ten years operating environments became twice as difficult to predict, even in the near term.

The Turbulence Index portrays volatility in a basket of externalities including food, foreign-exchange rates, metals, energy and publicly traded shares. The Index does not measure prices. It measures the degree of price movements—their volatility. It offers a foundation for analytics that, if approached systematically, can guide choices about resourcing, investment ideas and talent management in an interwoven world.

McDermott, Mahler and Walker argue that managing turbulence cannot be a one-time, crisis-driven event, even if very few companies understand all their potential turbulence drivers as an interactive system. The Turbulence Index, they contend, is a means for doing exactly that, starting with planning processes by spotlighting vulnerabilities and beginning a rough ranking of possible threats.

By itself the Index won't predict the future or define what to do when the future arrives. But it will help navigate the volatility that looks like likely to be here for a long while to come.

To read Winning in a Turbulent World, click here.

In surprising ways the greatest natural disaster in Japan's history might accelerate the arrival of a new kind of Japanese economy, one tuned to 21st Century needs like food security and the care of ageing populations.

In an article for Executive Agenda, Kevin McDermott and two partners in A.T. Kearney's Tokyo office-Tak Umezawa and Toshifumi Kokubun-describe a blueprint for rebirth for which Kearney's Tokyo began building consensus literally within hours of the 2011 catastrophe.

At the national and local levels but especially in Fukushima prefecture Japan remains preoccupied with emergency aid and rebuilding in the areas most damaged by the March 2011 earthquake and tsunamis. The physical infrastructure is being rebuilt. The economic infrastructure will be rebuilt as well, though in unexpected ways.

The fact is that much of Fukushima's coastal infrastructure is wreckage. The fact is that the prefecture's name is associated with nuclear disaster. But there are other facts that may become platforms for advancing Japan beyond its 20th Century reliance on a manufacturing economy.

The repair of the Fukushima nuclear plant is being accomplished with Japanese technology, and the solutions developed in the course of that work may become a new export industry for Japan. Beyond that, even after the disaster Fukushima owns a set of characteristics that make it an ideal place to develop industries that will be central to Japan in the coming decades, notably in respect to the care of an aging population and to food security.

Nurturing the growth of those sectors must necessarily nourish Japan's nascent potential in renewable energy, healthcare service, facilities management and, believe it or not, tourism.

To read the Executive Agenda article in full, click here.

It seems at times that the gurus of business innovation discuss the subject as a succession of grand themes and big ideas-vision, principals, leadership, culture. Talking about innovation that way can make it hard to know how the day-in, day-out work of building a new business really takes place.

Worse, discussing the subject as a succession of grand ideas can lead to focusing on the perfect over the optimal.

Talking about innovative organizations as ecosystems is cliché and yet the image at least conveys the requirement that a healthy system manifest a multitude of interactions and not a dominating monoculture. Certain companies become characterized by an overdeveloped strength along one dimension-an engineering culture at a car maker, say, or a marketing culture at a cosmetics company. A thriving ecosystem requires organizations to unlearn the reflex to be best in class along one dimension.

Focusing on the optimal is the practical work of innovators. In an article for A.T. Kearney's Executive Agenda, Kevin McDermott, Christophe Alaux (COO of Accor France) and a trio of Kearney's Paris partners-Eric Sauvage, Thomas Sutter and Charles-Etienne Bost-argue for a conception of innovators as arbitrageurs searching not for 100 percent along one dimension but for the optimum among all dimensions.

McDermott and his co-authors acknowledge that the multifunctional management of innovation is more easily accomplished in small structures, with their limited number of functions staffed by comparatively small numbers of people, all likely sharing a perspective on entrepreneurship. But multifunctional teams are far from unknown in large incumbents.

At Samsung, for instance, collaboration among countless contributors all along the value chain is how the idea of Samsung is made manifest. Or Danone, which assembles senior teams from around the world to manage innovation (and, by the way, to retain top talent). The task for these large companies is to replicate collaborative systems that seem to come naturally to small companies but in a far more complicated environment.

The authors of "Are You Focused on the Perfect Over the Optimal?" describe in practical detail the creation of multifunctional teams for the management of product development. To read the Executive Agenda article in full click here.

The conventions of enterprise management, especially as they affect the commercialization of new ideas, are built to reflect what we've learned from experience. And experience is a great teacher with a really big flaw: it's backward looking.

It's exactly the backward look that can make us blind to opportunities in nontraditional operating environments. Looking forward is no simple task either, especially in this age of permanent uncertainty. One response has been resurgent interest in scenario planning.

Scenario planning is a concept with as many meanings as there are people who practice it. Conventionally, it's used mainly for risk management and risk avoidance. Kevin McDermott of Collective Intelligence and Peter Kennedy of Future Strategy Group, in a much discussed article for InnovationManagement, argue that scenario planning can be lifted out of its conventional uses in risk management and employed instead to spot nontraditional possibilities and avoid "opportunity blindness".

The risk in the conventional approach is that the outcome of scenario-planning may, whatever efforts to the contrary, represent a consensus view developed in an echo chamber of like-minded people asking similar kinds of questions from similar perspectives.

That risk is highest when a single assumption about the future emerges as dominant-especially when the assumption is unconscious or unexpressed. Economic historians refer to these unexpressed assumptions as "path dependence", the backward-looking habit of assuming the future will be a revised edition of the present and that, therefore, what makes sense now will, with some tweaks, make sense later.

A good way of thwarting the tendency to path dependence is to include multiple possible futures in the scenario-planning design. Imagining multiple futures obliges planners to stress test organizational tactics for the likelihood of success or failure in any future, deflecting planners from the best-guess impulse.

McDermott and Kennedy argue that too many organizations won't invest the time required for the multiple futures approach, opting instead for "strategic flexibility," which in practice often falls short of delivering the strategic confidence to act. Strategic confidence is having the conviction to make choices resilient enough to sustain growth and innovation no matter which tomorrow arrives.

To read the essay on opportunity blindness click here.

The romantic conception of innovative people is that their big ideas show up fully imagined: Newton, apple, boink!, theory of gravity. In a recent article for InnovationMangement magazine Kevin McDermott argues that giving birth to ideas, and raising them to be businesses, is a hard work of imagination—a task he calls discernment.

"In the last century," McDermott argues, "it was enough to be better, faster, cheaper. That's what management teams were rewarded for and that's how the dominant economies got that way." A consequence, he contends, "was that for 100 years our organizational culture dictated that the higher one went in authority the further removed from the actual work of that organization one became."

Using examples drawn from his client work McDermott contends that involving senior staff in the communications function deepens the invention process. If he's right it may alter our expectation of what senior managers do in the 21st Century corporation. But making that alteration will place a premium on rigor in explaining themselves.

"By becoming deeply involved in the expression of new ideas," says McDermott, "senior executives become active players in the invention process. They bring a decisive commercial impulse to the shaping of new ideas—an impulse lacking when communications is reduced to 'messaging'. They bring explicit strategic ambition to knowledge transfer and turn ideas into financial models."

To read McDermott's article, "Notes on discernment", click here.

The Lodestar Collaborative has launched its Resilient Governancetm initiative with a suite of tools to help organizations sustain growth while managing the inevitability of surprise.

The partners in the Lodestar JV—Board Advisory Services, Collective Intelligence and the Futures Strategy Group—are currently in conversation with organizations whom the partners describe as "sick of cost cutting and eager to talk about growth."

"The forces of change affecting individual businesses are so much larger than the general economy," said Anne Simmons, CEO of Board Advisory Services. "Near-term economic conditions have to be managed, of course, but so do regulatory change, political movements and all kinds of global trends that shape the operating environment. But those conditions are evolving all the time," says Simmons, "often in ways no one sees coming."

Lodestar's Resilient Governance process begins with an outside-in assessment of where an organization sees itself relative to the forces for change gathering on its horizon—market risk, financial uncertainty, the talent pipeline, among other forces. The hinge of the Resilient Governance process is Lodestar's distinctive scenario-planning approach, which gives clients powerful insights into alternative business environments.

"The objective is to help clients imagine their businesses in a variety of operating environments," explained Peter Kennedy of the Futures Strategy Group, "not to bet on a most-likely future. We've found it a powerful way of creating and stress testing the resiliency of business plans."

The work has profound implications for an organization's governance processes, said Kennedy, from leadership development to enterprise-risk management to innovation strategy.

"What we've noticed in our client work," said Kevin McDermott of Collective Intelligence, "is that executives naturally pursue order but they can be so absorbed in the capable day-to-day running of a business that they don't lift their gaze up over the horizon—what we've termed 'the tyranny of the present'."

The tyranny of the present, McDermott argues, can obscure dangers that may result from the choices senior executives make today, producing deplorable surprises in the future—and not necessarily the long-term future.

To help clients manage near-term uncertainty the Lodestar partners have devised customizable scenarios that depict distinct—yet plausible—recession-recovery conditions for 2010 to 2012.

"The short-term scenarios help executives identify resilient courses of action that anticipate change and disruption," said Peter Kennedy. "They prepare clients to implement contingent actions in anticipation of future shocks so they're ready to thrive in whatever future arrives, good or bad."

In September Collective Intelligence again teamed with Futures Strategy Group and Board Advisory Services for part two of a scenario-planning event hosted by the Institute for Internal Auditors in New York.

Building on the introductory session conducted for the IIA last January, the three firms took IIA members through a multi-scenario analysis to help them think practically about nontraditional risks in a range of business environments.

Participants in the September event spent the bulk of the day in structured breakout groups brainstorming around richly imagined "worlds"—scenarios, that is, for 2025. The product of their work was a reimagined audit function appropriate to each scenario. A plenary session at the end of the day compared ideas from multiple scenarios, and left only the strongest, most versatile ideas standing. Participants went home with real-world recommendations for their organizations.

Participant feedback was overwhelmingly positive. Said one IIA member, there was profit in "looking into the future first, then back to the present to come up with strategies. It was a lot of fun, as well as an education. The speakers were excellent."

Participants were engaged by "the whole concept of contemplating different and even hard-to-imagine scenarios." In particular, "ideas related to managing the workforce of a future world that works remotely—and how to influence management—were enlightening." That sentiment was echoed by another participant who remarked that "everything discussed was so relevant to the real world... It forced the participants to really think in a short period of time." Said another, the day was "an opportunity to think intellectually and creatively about our collective future. Very thought provoking."

Kevin McDermott, the founder of Collective Intelligence, served double duty as the day's luncheon speaker. He addressed the day's main theme that traditional controls are insufficient for managing non-traditional risk.

"Our big idea," McDermott told the group, "is that for managing non-traditional risks traditional control functions may well create a false sense of rigor. Historically they've been designed to measure the present and make choices about the future by making reference to the past. That might not work in the face of a Category 5 hurricane that blows up unexpectedly from over the horizon—which happens all the time."

It's great to have new ideas, McDermott argued, but an organization needs the strategic confidence to privilege some ideas above others.

"Strategic confidence," said McDermott, "is not perfect knowledge. It's confidence that an organization can respond to dramatic change in its operating environment that it could not have predicted by extrapolating from the past."

Collective Intelligence founder Kevin McDermott addressed the 8th International Conference on Knowledge, Culture and Change in Organisations on August 6th. His subject: what's gone wrong with knowledge management and how to fix it.

The Conference, an annual summit on social and economic change, was held at Cambridge University. Collective Intelligence is not a knowledge-management consultancy but KM is among the firm's core capabilities.

"For a while now," says McDermott, "I've noticed that in client conversations I am careful to avoid speaking the words 'knowledge management'. I can never be sure if the people I'm talking to didn't invest lots of money building 'knowledge capability' and now wish they hadn't."

McDermott had three large points to make. One, talk about "knowledge management" is nearly always talk about technology; the knowledge-creation ROI is assumed. Two, knowledge mangers overestimate the market's desire for social-networking tools. Three, the user experience doesn't appear to matter much.

What these have in common, McDermott argued, is a failure to make explicit the link between an organization's strategy and what it spends on knowledge management.

McDermott told the conference that in the past decade organizations, especially big organizations, set out to build knowledge-management "systems" at a moment in time when managers were spellbound by information technologies. IT, he contended, "promised—well, promised everything. The consequence has been that big-company KM systems often became elaborated data-mining processes."

Making the business case has been tough for KM advocates. McDermott thinks that's because the discipline has so often had only generally defined links to strategy. Knowledge managers, he believes, can take lessons from established corporate-control functions like audit and compliance.

"A control function," says McDermott, "is, at bottom, an intelligence-gathering job, one in which practitioners are—or should be—constantly asking themselves, 'Am I looking at the right things? Am I asking rich questions?'"

Making explicit the why behind collecting a byte of data—to act with strategic intent—is what McDermott calls the "the intelligence agenda", a to-do list naming where an organization needs to be smart if it is to attain its objectives.

"The intelligence agenda," McDermott told the Cambridge conference, "is the business case for knowledge management."

Five years ago the Sarbanes-Oxley Act set in motion a string of unintended consequences for public companies. Among them: internal auditors are acquiring extraordinary opportunity to participate in the strategic direction of their organizations. And it is now evident to auditors that conventional risk and compliance models will be insufficient for managing the nontraditional risks guaranteed to characterize the next 15 years.

On January 11th, 2008 Collective Intelligence combined with The Futures Strategy Group and Board Advisory Services in an unprecedented one-day session hosted by the Institute of Internal Auditors at Madison Square Garden in New York. Attendees learned to cultivate a clear line of sight on the cross impacts of multiple categories of risk from anywhere in their organizations—a horizontal view of decision making intended to tear down the walls between siloed functions.

The intense one-day event was framed by an adaptation of the alternative-futures planning model created by the Futures Strategy Group. Collective Intelligence, a frequent partner of FSG, helped lead participants through the scenario-planning work and provided the practical tools of capturing organizational knowledge and putting it to work. Throughout the day Board Advisory Services, which built its reputation on a horizontal view of risk management, kept the expert audience on track toward an integrated view of governance, risk and compliance in a post-SOX world.

"Our deliverable today," CI's Kevin McDermott told the crowd in his introductory remarks, "is not interesting conversation. If that's all you get we've failed. Our deliverable is to send you out of here with an altered idea of your jobs, your organizations and the strategic choices before you."

The attendees were enthusiastic in their response. Here's just some of what they had to say afterward:

"Forward thinking is a necessary competency. Not only thinking of current risk, but risk that may arise in the future... The breakout groups offered a different perception of risk... The concept of thinking of all disciplines that impact risk fro consideration in the thought process... The set up of this workshop requires full engagement, interaction... It made me think globally... Learning how to apply current issues and demographics, etc to strategic planning... The scenario breakout was far more interesting than what I expected. I enjoyed the interaction of my peers and the guidance provided by Kevin McDermott."

For more on the application of futures-strategy to non-traditional risk click here.