Loonshots

Loonshots Plot Summary

Introduction

Innovation often follows a predictable pattern in organizations: small teams create groundbreaking ideas that are initially embraced, but as companies grow larger, these same organizations begin systematically rejecting the very types of ideas that made them successful. This paradox—where good teams kill great ideas—isn't a matter of changing culture or declining creativity, but rather a fundamental phase transition that occurs in all human organizations. Understanding this pattern reveals why some companies maintain their innovative edge while others lose it, despite having equally talented people. The science of phase transitions provides a powerful framework for understanding and managing innovation. Just as water molecules behave differently when organized as liquid or ice, the same people behave differently in different organizational structures. By applying principles from physics to organizational design, we can create environments where breakthrough ideas—"loonshots"—flourish alongside established businesses. This approach transforms innovation from a mysterious gift possessed by special individuals into a capability that can be systematically developed and maintained through specific structural interventions.

Chapter 1: Phase Transitions: Why Good Teams Kill Great Ideas

Organizations undergo sudden transformations in behavior when they cross certain thresholds in size or structure—a phenomenon directly analogous to phase transitions in physical systems. Just as water suddenly freezes when temperature drops below 32°F, teams suddenly shift from embracing innovation to rejecting it when they exceed a critical size. This organizational phase transition explains a pattern observed across industries and cultures: small teams readily embrace unconventional ideas, while larger organizations systematically reject them despite everyone individually supporting innovation. The transition occurs because individual incentives fundamentally change as organizations grow. In small teams, individuals have significant ownership stakes in outcomes—when a breakthrough succeeds, everyone benefits substantially. This creates powerful incentives to unite around nurturing fragile, early-stage ideas. As organizations grow, individual incentives shift toward career advancement rather than project success. In a company with thousands of employees, even a wildly successful innovation might move the needle by only a tiny percentage, while securing a promotion could increase personal compensation by 30% or more. This shift creates what might be called an "Invisible Axe"—a collective behavior that systematically kills promising but unconventional ideas even when no individual intends this outcome. Mathematical modeling suggests this phase transition typically occurs around a "magic number" of approximately 150 people—remarkably consistent with observations from diverse contexts. Anthropologist Robin Dunbar identified 150 as the maximum effective group size across hunter-gatherer societies. Religious leader Brigham Young organized his followers into companies of approximately 150 during their westward migration. Modern companies like Gore Associates (makers of Gore-Tex) limit facilities to 150 employees before building new locations. The magic number isn't fixed, however. Organizations can adjust it by manipulating key control parameters: increasing equity ownership, widening management spans, improving project-skill fit, and reducing salary growth between hierarchical levels. These adjustments can allow much larger organizations to maintain the innovation-friendly incentives typically found only in small teams. Understanding this phase transition gives leaders powerful tools for designing organizations that nurture breakthrough ideas at any scale. Rather than exhorting employees to "be more innovative," they can engineer systems where innovation becomes the rational choice for individuals.

Chapter 2: Separating Artists and Soldiers: The Bush-Vail Rules

Organizations that consistently produce breakthrough innovations understand the importance of separating their creative forces from their operational teams. This separation isn't about physical distance but about creating distinct environments with different rules, metrics, and expectations. The creative "artists" who generate radical new ideas require freedom, flexibility, and tolerance for failure, while the operational "soldiers" who execute and scale existing products need discipline, efficiency, and consistency. This principle emerged clearly during World War II when Vannevar Bush established the Office of Scientific Research and Development (OSRD). Rather than forcing scientists to work within military hierarchies, Bush created a separate organization where researchers could pursue unconventional ideas without bureaucratic constraints. This separation allowed for the rapid development of radar, proximity fuses, and other technologies that proved decisive in the Allied victory. The same pattern appears in successful innovative companies. Bell Labs, perhaps the most productive research organization in history, maintained clear boundaries between its research division and AT&T's operational units. This separation allowed researchers to pursue fundamental scientific questions while ensuring their discoveries could eventually be translated into practical applications. While separation between creative and operational groups is essential, equally important is maintaining dynamic equilibrium—a continuous, balanced exchange between these distinct phases. Like molecules moving between ice and water at the freezing point, ideas and people must flow freely between the innovation and execution sides of an organization. This equilibrium requires leaders to value both groups equally, establish effective transfer mechanisms between phases, and cultivate project champions who can bridge the divide between artists and soldiers. The most common mistake organizations make is applying the same management approach to both groups. When research teams are subjected to the same controls and metrics as operational units, innovation suffers. Conversely, when operational teams adopt the loose structures of research groups, execution falters. Effective organizations recognize these differences and design their systems accordingly. Organizations need effective systems for managing the transfer of ideas between phases. Rather than having leaders personally decide which projects advance—what might be called the "Moses Trap"—successful innovators establish clear processes for moving ideas from research to development to execution. These processes include appropriate timing and mechanisms for incorporating feedback from operational teams.

Chapter 3: False Fails: Distinguishing Genuine Failures from Hidden Opportunities

When promising ideas fail in early tests, most organizations abandon them permanently. But history's greatest innovations often emerged from what appeared to be definitive failures. These "False Fails" occur when valid ideas produce negative results due to flaws in experimental design or implementation rather than flaws in the core concept. Consider the case of statins, now the most successful class of drugs in pharmaceutical history. When Japanese researcher Akira Endo first discovered compounds that could lower cholesterol in 1973, his experiments in rats showed no effect. The pharmaceutical giant Merck later tried the compounds in dogs with similar disappointing results. These apparent failures nearly killed the entire project. Only later did researchers discover that rats and dogs process cholesterol differently than humans—the experiments were flawed, not the concept. Similarly, social networks appeared to be a failed concept after Friendster's collapse. The platform grew rapidly but crashed under technical limitations. When Facebook emerged years later, most investors dismissed it as "another Friendster"—a False Fail interpretation that caused them to miss one of history's greatest investment opportunities. The pattern extends across industries. James Bond films were initially rejected by major studios as "too British." The first Star Wars script was passed over by nearly every Hollywood studio. Cholesterol-lowering drugs were dismissed as a tiny market opportunity before statins became blockbusters. In each case, early rejection was based on flawed evaluation rather than flawed ideas. Successful innovators develop systematic approaches to distinguish between genuine failures and False Fails. They ask: "What would have to be true for this apparently failed idea to actually work?" They conduct careful post-mortems of failed projects, examining not just what failed but why. They listen to criticism with genuine curiosity rather than defensiveness. Organizations that nurture breakthrough ideas understand that innovation requires surviving what Judah Folkman called the "Three Deaths"—repeated failures and rejections that would kill most projects. By recognizing False Fails and persisting through these deaths, they create environments where seemingly crazy ideas can mature into transformative innovations.

Chapter 4: P-Type vs. S-Type Loonshots: Two Paths to Breakthrough Innovation

Innovation comes in two distinct flavors, each requiring different nurturing approaches. P-type loonshots (product or technology breakthroughs) introduce entirely new technologies or products that transform what's possible. S-type loonshots (strategy breakthroughs) represent novel business models or approaches that change how existing technologies reach customers. P-type innovations capture our imagination—the transistor, the first instant camera, gene therapy. They typically emerge from research labs and require substantial technical expertise to evaluate. Their development paths tend to be non-linear, with unexpected applications often proving more valuable than the original concept. The transistor, for instance, was initially developed to improve telephone switching but eventually transformed virtually every aspect of modern life. S-type innovations receive less attention but can be equally transformative. American Airlines' development of computerized reservation systems, frequent flyer programs, and yield management transformed the airline industry without requiring new aircraft technology. Similarly, Netflix's original DVD-by-mail model represented an S-type innovation that disrupted Blockbuster before the company pivoted to streaming. Organizations typically develop strengths in one type of innovation while neglecting the other. Technology companies excel at P-type breakthroughs but miss S-type opportunities. Service companies spot S-type openings but overlook technological possibilities. The most successful innovators nurture both types, recognizing their complementary nature and different development patterns. This distinction explains why established companies often miss disruptive innovations. When Microsoft dominated desktop computing, it focused exclusively on P-type improvements to Windows and Office while missing the S-type opportunity of search advertising that Google captured. Similarly, Polaroid excelled at P-type camera innovations but missed the S-type shift to digital photography despite having developed much of the underlying technology. Successful organizations actively "watch their blind side," ensuring they remain receptive to both types of breakthroughs rather than focusing exclusively on their traditional strengths. The most valuable innovations often combine both types—new technologies enabling new business models, or strategic insights driving technological development. By nurturing both P-type and S-type loonshots, organizations develop the ambidexterity needed to navigate industry transformations rather than being destroyed by them.

Chapter 5: The Moses Trap: How Visionary Leaders Block Innovation

When visionary founders or CEOs personally control which ideas receive support, organizations fall into what can be called the "Moses Trap." The pattern appears repeatedly across industries: a brilliant leader who previously championed breakthrough innovations becomes the primary obstacle to future breakthroughs. Edwin Land, founder of Polaroid and inventor of instant photography, exemplifies this pattern. After decades of remarkable innovations, Land became fixated on Polavision—an instant movie system that would prove technically impressive but commercially disastrous. Despite mounting evidence of market disinterest, Land poured half a billion dollars into the project, dismissing concerns from colleagues. When Polavision failed catastrophically, Land was forced to resign from the company he built. Juan Trippe followed a similar trajectory at Pan American Airways. After pioneering international air travel with flying boats, then jet service with the Boeing 707, Trippe became obsessed with the Boeing 747. He ordered a fleet far larger than market demand justified, saddling Pan Am with unsustainable debt. Meanwhile, he ignored emerging strategic innovations like computerized reservation systems and frequent flyer programs that competitors used to capture Pan Am's market share. The early career of Steve Jobs demonstrates the same pattern. At Apple, Jobs disparaged the Apple II team (which generated most company revenue) as "bozos" while focusing exclusively on the Macintosh. After leaving Apple, he repeated the pattern at NeXT, creating an aesthetically beautiful but commercially impractical computer that nearly bankrupted the company. The Moses Trap occurs because visionary leaders typically excel at one type of innovation—usually product breakthroughs—while dismissing other types. They create cultures where ideas advance only at their personal approval, rather than through systematic evaluation. As their companies grow, they lose touch with changing market conditions but retain absolute decision authority. Organizations escape this trap by implementing the principle of separating innovation nurturing from innovation selection. They create systems where multiple paths exist for ideas to receive support, rather than funneling all decisions through a single visionary. They establish objective criteria for evaluating both P-type and S-type innovations. Most importantly, they shift from a "Moses mindset" where leaders command loonshots into existence to a "gardener mindset" where leaders create conditions for innovations to emerge organically.

Chapter 6: Magic Numbers: When Organizations Shift from Ideas to Politics

As organizations grow, they inevitably reach a critical threshold—a "magic number"—where their internal dynamics fundamentally change. Below this threshold, employees focus primarily on developing and implementing ideas. Above it, they increasingly focus on career advancement and internal politics. This transition isn't due to cultural deterioration but represents a predictable phase transition driven by organizational physics. The magic number isn't fixed but depends on several key parameters. The most important is the equity fraction—the portion of compensation tied to overall company success rather than individual advancement. Organizations with higher equity fractions maintain their innovative capacity at larger sizes because employees remain focused on collective outcomes rather than personal promotion. Management span—the number of people reporting to each manager—also significantly impacts the magic number. Wider spans reduce opportunities for micromanagement and political maneuvering while encouraging peer-to-peer problem solving. Google famously experimented with extremely wide management spans to maintain its innovative culture as it grew. Project-skill fit represents another crucial factor. When employees are well-matched to their projects—challenged but not overwhelmed—they focus on the work itself rather than political advancement. Organizations that actively monitor and optimize this fit maintain higher magic numbers. The middle management layers prove particularly vulnerable to political dynamics. Middle managers face unique pressures, caught between senior leadership expectations and frontline realities. Their compensation structures often incentivize empire-building rather than innovation support. Successful organizations recognize this vulnerability and design specific interventions to "fix the middle," aligning middle management incentives with innovation goals. Understanding these parameters allows leaders to consciously "raise the magic number," expanding the size at which their organizations can maintain their innovative capacity. Rather than accepting politics as inevitable in large organizations, they can design systems that preserve the focus on ideas even as they scale.

Chapter 7: Structure Trumps Culture: Designing Systems for Sustainable Innovation

The conventional wisdom about innovation emphasizes cultural factors—hiring creative people, encouraging risk-taking, celebrating failure. While these cultural elements matter, they prove far less important than structural factors in determining an organization's innovative capacity. Structure—the systems, incentives, and processes that shape behavior—creates culture, not the other way around. This insight explains why innovation initiatives focused primarily on cultural change often fail. Companies launch innovation labs, creativity workshops, and failure celebrations without addressing the underlying structural elements that determine whether breakthrough ideas survive. These efforts may generate initial enthusiasm but rarely produce sustainable results. The structural approach to innovation provides a more reliable path. By implementing the principles of phase separation, dynamic equilibrium, and raising the magic number, organizations create environments where innovation naturally flourishes. The resulting culture emerges from these structures rather than requiring constant exhortation and reinforcement. This perspective also explains why innovation capacity often deteriorates as startups grow. The structural parameters that naturally exist in small companies—high equity fractions, wide management spans, strong project-skill fit—gradually shift as organizations scale. Without conscious attention to these parameters, the magic number remains fixed while the organization grows beyond it, leading to the familiar pattern of declining innovation. The good news is that understanding these structural principles allows leaders to design organizations that maintain their innovative capacity at any scale. Rather than accepting the conventional wisdom that bureaucracy inevitably stifles creativity as companies grow, they can implement specific interventions to raise their magic number and preserve their ability to nurture breakthrough ideas. This structural approach also transcends the false dichotomy between innovation and execution. Organizations don't need to choose between being creative and being disciplined—they need to create appropriate structures for each function and maintain dynamic equilibrium between them. The most successful innovators excel at both discovering new possibilities and reliably delivering on them.

Summary

The ability to consistently nurture breakthrough innovations—loonshots—represents a capability that can be systematically developed rather than a mysterious cultural attribute. By implementing specific structural principles—separating creative and operational functions, maintaining dynamic equilibrium between them, understanding both product and strategy innovations, raising the organizational magic number, and cultivating system mindset—leaders can create environments where fragile ideas survive long enough to transform industries. These principles apply across sectors, from corporations to government agencies to scientific institutions. They explain why certain organizations consistently produce world-changing innovations while others with equally talented people struggle to move beyond incremental improvements. Most importantly, they offer practical guidance for leaders seeking to enhance their organization's innovative capacity without sacrificing operational excellence. By focusing on structure rather than exhortation, organizations can develop sustainable innovation capabilities that persist through leadership changes, market shifts, and organizational growth.

About Author

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Safi Bahcall

Safi R. Bahcall is an American physicist, technologist, business executive, and author.

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