As business environments become more changeable and long-term growth rates decline, companies increasingly need to innovate — across their operations, offerings, and business models. We know the powerful effects of innovation, but what is upstream of innovation? How can we understand and shape the murky mental territory that leads to good ideas: the realm of imagination?

Big businesses often struggle to make use of imagination. They may try to make it a predictable process, and end up with routinization and incrementalism. Or they may treat it like a magical power, celebrated in tales of great innovators, in the hope that good ideas will appear as needed. As companies grow, it becomes harder to be imaginative. Larger companies tend to focus on exploiting what they know and what originally gave them scale. Corporate vitality — the potential for future growth and reinvention — decreases with size (Exhibit 1).^[1]BCG Henderson Institute analysis; https://www.bcg.com/publications/2018/global-landscape-of-corporate-vitality.aspx

Companies must increasingly compete on imagination, but we don’t have a clear idea of how imagination works or how to systematically improve it. How could we cultivate imaginative capacity, rather than leaving it to chance, intuition, or mechanistic processes?

What imagination is

We can see what imagination is by comparing humans and other animals. An animal like a fish lives in the realm of ‘what is’. A goldfish works with just what is in front of it; it has no standpoint to reflect on its situation.^[2]Suddendorf, T, and Dong, A, On the Evolution of Imagination and Design, The Oxford Handbook of the Development of Imagination, 2013; https://www.ncbi.nlm.nih.gov/pubmed/17963565 If a goldfish did have imagination, it could picture a different situation, like being in a larger tank. Holding this mental image in mind, it could look at its current tank, and reflect that not everything is inevitable. Some things are just happenstance, and could be altered.

Imagination is the ability to think counterfactually. Rather than living in the realm of ‘what is’, imagination gives us the ability to explore the realm of ‘what is not’ but could be, enabling us to conceive and create new things and to shape what is (Exhibit 2).

In Exhibit 2, the two boxes on the left side cover the realm of ‘what is the case’, divided into what is inevitable and what is incidental. The two boxes on the right cover ‘what is not’, divided into things that are currently impossible — teleportation, a mind-reading machine, pet dinosaurs — and plausible possibilities. In the center is the ‘window of awareness’ we each have into these areas.

Reading across the boxes, we can see the possibility of a process of inspiration leading to imagination and then to innovation. We get inspired observing anomalies, analogies, and accidents (the yellow lightning bolt). Inspiration feeds our imagination, which pushes us to mentally sketch new possibilities (the arrows expanding the window of awareness). This leads to innovation, which moves things from imaginable to real, often also expanding the boundaries of what is possible (the arrows expanding the space of imaginable possibilities).

Amazon, for example, began with Jeff Bezos reflecting on an anomaly: “The wake-up call was finding this startling statistic that web usage in the spring of 1994 was growing at 2,300 percent a year. You know, things just don’t grow that fast. It’s highly unusual, and that started me thinking, ‘What kind of business plan might make sense in the context of that growth?’”. ^[3]https://www.fundable.com/learn/startup-stories/amazon He began imagining “building an online bookstore with millions of titles — something that simply couldn’t exist in the physical world”, and this mental picture was the basis for his early innovation — an innovation which opened up further imaginable possibilities.^[4]https://www.cnbc.com/2017/10/27/how-amazon-founder-jeff-bezos-went-from-the-son-of-a-teen-mom-to-the-worlds-richest-person.html

How imagination works

Let’s look at how imagination works, starting at the level of an individual. Individual imagination is part of a process involving perception, thinking and taking action (Exhibit 3).

See

Our brains are constantly using sensory input, plus memories and concepts, to create a mental model, like a controlled hallucination of reality.^[5]Friston et al, (2006) ‘A free energy principle for the brain’, Journal of Physiology, see: https://pdfs.semanticscholar.org/651b/5f087a5bb4d8b182902406e64d6cf573f5b3.pdf This is sustained by assumptions — we don’t need to constantly check every aspect of our view of the world. Our brain models the desk in front of us, even though we are not staring at the desk all the time.

A surprise is anything that brings new information to the model, causing us to overturn some assumptions, or adjust the implicit probability we assigned to them. Three types of surprise inspire imagination: anomalies — aspects in our information flow that are out of the ordinary; analogies — similarities we notice between concepts or experiences, which lead us to imagine new possibilities; and accidents — unexpected actions and consequences which draw our attention to something interesting.

Rethink

Let’s suppose you receive a surprising piece of information: you reach for your wallet but it is not in your pocket. Your brain will hypothesize about what happened. At the most basic level of thought, it can look at historical data and find patterns. This is how AI currently works. In such a situation, an AI algorithm would effectively ask: ‘what other things have tended to be true, when it is true that my wallet is not in my pocket?’. If it had a large enough data set, say 1000 occasions, it might be able to say: ‘there is a 4% probability it has been stolen, a 63% probability you have left it in a taxi’, etc. You could then act on these newly calculated probabilities.

However, human brains can work at a higher level than just correlating facts. Even if it has never happened before, you can ask: ‘what if my wallet was stolen?’ And you can paint a mental picture of what things would be like if that were the case, sketch another scenario of losing it, and compare the two. Your ability to create this counterfactual sketch is your imaginative capacity.^[6]Judea Pearl (2018), The Book of Why; https://www.quantamagazine.org/to-build-truly-intelligent-machines-teach-them-cause-and-effect-20180515/ It works by elaborating on small starting points, drawing on a rich model of the world — one that includes not just correlations but also causal relationships. This is something that an AI cannot (yet) do. With an understanding of why things are the way they are, we can play with recombining and changing things in ways that still make sense and are possible.

Once the ability to elaborate mentally is unleashed, it can take you much further than just imagining what happened to your wallet: you can imagine ways to help you keep track of your wallet in future or even dream up new services, like a ‘find my iPhone’ tool but for everything in your life. Or you can picture new opportunities for businesses in a cashless and cardless world.

Act

Imagination, the process of elaborating counterfactuals, isn’t just an isolated mental activity. Our thinking leads to action and what we learn from acting can further feed our imagination. This action might comprise communication our ideas; redirecting attention to new objects or signals; moving in the world to change our perspective; or shaping some aspect of the world, by doing an experiment or creating a prototype.

For example, early last century, Charles Merrill revolutionized banking.^[7]Gavetti, G and Menon, A., (2016) Evolution Cum Agency: Toward a Model of Strategic Foresight. Strategy Science 1(3):207–233. https://doi.org/10.1287/stsc.2016.0018His vision began with idea that the methods of retailing could be brought to banks. As he stated: “We must bring Wall Street to Main Street — and we must use the efficient, mass merchandising methods of the chain store to do it”.^[8]http://www.stephenhicks.org/wp-content/uploads/2012/01/forbes-charles-merrill.pdf Because Merrill had worked in the supermarket business, this was a rich analogy for him, and prompted him to ask ‘what if’ questions: What if a bank could offer a range of transparently-priced products, like a supermarket? What if these could be accessible to middle-class Americans? And he also acted: he did customer research (redirecting attention, gaining new perspectives) and tested out his developing ideas, which fed back into his mental model for the bank of the future. His business model was an extraordinary success for Merrill, Lynch & Co., and marked a dividing line between two eras of Wall Street.^[9]Sobel R (2000), Dangerous Dreamers: The Financial Innovators from Charles Merrill to Michael Milken

Imaginative elaboration leads to action, then is further provoked by action. In the early days of Amazon, Bezos sent an email to 1000 customers asking what they would buy online if they could. The lists came back very long and random, covering everything from windshield wipers to groceries. And this prompted Bezos to continue to imagine: “A light kind of went on in my head. You know, people — people will want to use this new-fangled e-commerce way of shopping for everything”.^[10]https://www.cnbc.com/2017/07/27/amazons-jeff-bezos-son-of-a-teen-mom-to-richest-person-in-the-world.html

The social dimension

Imaginative achievements, however, are not just produced by one person. One’s own imagination works in conjunction with the perceptions, imaginations and actions of others, to create the possibility of collective innovation. To the diagram above we can therefore add a social layer. The individual act of imagining is part of a cycle that can span a whole organization or business ecosystem (Exhibit 4).

When individuals communicate (the bottom red box), this enables amplification and collective action. Over time, collective action shapes a set of habits, roles and expectations, the collective mindset, which can become a self-sustaining system (top orange box). These habits and expectations shape what ideas are shared and promoted in the group: collective perception. We experience this as knowing what to avoid and what would ‘go down well’ in certain meetings, and as group pressure to adopt shared ideas — which can be either productive or unproductive depending on how well attuned the organization is to the environment. To close the loop, this group influence partly shapes how individuals see the world: what they notice and find surprising and inspiring — the triggers for individual imagination.

To return to the Charles Merrill example, his imaginative ideas were developed in communication with others, particularly researcher Ted Braun, and led to collective actions: research, and efforts to engage and change the ideas of an often recalcitrant company.^[11]Gavetti, G and Menon, A., (2016) Evolution Cum Agency: Toward a Model of Strategic Foresight. Strategy Science 1(3):207–233. https://doi.org/10.1287/stsc.2016.0018The imaginative process extended beyond the mind of an individual, as Merrill worked to make his and Braun’s vision come alive in the minds and habits of investors, employees and early adopting customers.

What stops big companies from being imaginative

To turn a company or business ecosystem into an ‘imagination machine’, therefore, we need to not only focus on imaginative individuals, but the entire collective imagination cycle in which individuals are embedded. Looking at the steps in the diagram above, we can identify the points at which collective imagination can fail in big companies.

1. Size leading to less exposure to the outside. This is the failure of the perception boxes in Exhibit 4. Imagination is triggered by surprising information — new patterns of data; a question from a different perspective; interesting encounters that don’t fit within one’s current model of the world. We can think of companies as a sphere: the greater the radius, the lower the ratio of surface area to volume. Larger companies become miniature societies in themselves, with proportionally more people tethered within the society and fewer connecting with the outside world. When there is less exposure to what is surprising and unpredictable, there is less to feed the imagination.

2. A focus on averages rather than exceptions (accidents, anomalies and new analogies). Another bottleneck in perception is the tendency to not pay much attention to outliers. This is partly due to reporting: we report in averages — period average sales figures and performance reviews for example– so that people higher up can get an overall summary picture. This may be an efficient approximation, but it means that anomalies, which may be change signals or sources of inspiration, aren’t often given attention. Leaders might have something to learn from an individual failed or successful sale, which could prompt their imagination. Or in terms of personnel: it is often safer to keep someone around who is predictably ‘pretty good’, rather than people with more erratic profiles who may help prompt the imagination. Organizations tend to reward the predictably average.

3. Mental models become stuck. This is a failure of the middle boxes in Exhibit 4. The mental models of a successful organization tend to become uniform (a downside of over-emphasizing ‘alignment’) and entrenched. For example, an officer in the British army before the Second World War, J. F. C. Fuller, tried to introduce the concept of tank warfare, but because everyone was used to fighting with horses, the idea was dropped.^[12]https://www.ft.com/content/3c1ab748-b09b-11e8-8d14-6f049d06439c He imagined insightfully what warfare could look like with tanks, but it couldn’t be taken up because it didn’t fit with the prevailing way of seeing things. This problem is compounded by a lack of cognitive diversity and a lack of self-awareness of mental models: often the inherited mental model is implicit and treated as common sense or mistaken for objective reality.

4. The tyranny of metrics takes over. Companies often focus on efficiently executing one business model, and its associated targets and metrics become the main ways of judging success. But the dominance of such metrics can come at the expense of seeing possibilities and dabbling with new models. When there is a standard, clear way to measure and reward success, efforts in any other direction can look like failures or a waste of time. We account for the things that are easily accounted for, at the expense of important things that are not, like imagination.

5. Roles become highly specified. This is a failure of the action box in Exhibit 4: in large companies it can make little sense to act outside what you are expected to accomplish. But imagination often works by following up on serendipitous moments, which can lead you far from what you expected you would be doing. The refrigerator, for example, was invented by James Harrison, an Australian working as a self-employed printer in 1854. He noticed that when he used ether to clean the moveable type of the printing press, the metal felt curiously cold afterwards. He realized that the evaporating vapor removed heat from the object, and set about experimenting (in a cave out of town, because the experiments were explosive) — eventually patenting a ‘refrigerating machine’.^[13]Harrison’s birthday, April 17, as celebrated today as International Refrigeration Day. https://dynamicrefrigeration.com.au/blog/james-harrison-ice-machine/ It’s a challenge for large companies to give employees this kind of autonomy to explore.

6. Lack of social transmission. Even if individuals are imaginative, there might be problems with the transmission of ideas across a group. One can imagine a company full of people with rich mental models and strong abilities to elaborate imaginatively, but where people don’t work together, or collectively consider new questions and ideas. It’s harder to diffuse ideas and have shared conversations across a larger organization. Communication can be impeded by barriers like a high bar for proposing new ideas and a fear of failure, a lack of incentives to share, and restrictive reporting and communication protocols. Thus the company does not make best use of individual imaginations.

7. Imagination is seen as being only mental. The former CIO of Intuit Roy Rosin noted to the authors that “the best ideas are the ones which have had the most chance to evolve”. A key part of the imaginative process is action taken beyond mere communication: doing research, testing out early stage efforts, scaling an imaginative idea. Without these efforts to shape or ‘prod’ the world, there is no feedback and no surprising data to trigger further elaboration. Self-restriction often follows success: Walmart developed its big box retailer model, then focused on refining it; PayPal went through multiple major pivots but is now exploiting its current, successful model; Twitter (then called Odeo) once gave its employees two weeks to come up with imaginative ideas to transform and save the company, but has now settled into its micro-blogging platform.^[14]https://www.forbes.com/sites/jasonnazar/2013/10/08/14-famous-business-pivots/#788e98235797 Imagination ends up being treated as only a mental act, or a periodic cultural intervention, not a driver of research, speculative experiments, prototyping or continuous transformation. The less effort is put into acting on imaginative suggestions, the less imagination is stimulated, and the more likely we will miss opportunities for innovation and growth.

Building an imagination machine

How could we build an ‘imagination machine’, that is, a business where the imaginations of individuals working together were fully supported by design? We are only just beginning to understand how companies can compete on imagination, but here are some starting points.

Contact with the unknown

The imaginative company would ensure that its members were regularly exposed to the unfamiliar and unknown, and trained to treasure it. This could involve sending staff on short secondments to very different work environments; the executive team spending time in places where their product is unsuccessful or not heard of; and tailoring daily information flows to ensure people are not simply reading business news or their habitual websites, but encountering a variety of imagination-triggering inputs. Such a firm would take the task of delivering personalized, enriching, surprising information to its employees as seriously as it took any other aspect of the business, because it would know that this feeds the imaginative capacity of the company.

• Do you take deliberate steps to expose yourself and your employees to the unfamiliar to create inspiration to enrich their mental models?

Focus on anomalies

The imagination machine would ensure that interesting anomalies were reported alongside averages and expected results. Each executive would perhaps be required to present at least one intriguing, thought-provoking or befuddling thing they encountered in their domain once a week — whether this outlier was a particular person, an unexpected outcome of an experiment, something a group did of their own initiative, or an unusual observation. This would ensure that surprising information was shared rather than pushed aside, with the idea that some of these anomalies would provoke people’s imaginations.

• Does your company focus on anomalies or averages?

Explicit mental models

A company that took imagination seriously would be conscious of how mental models are choices not inevitabilities. Employees would be taught that the brain’s beliefs about reality are merely shifting probabilities, knowing that the collective capacity to entertain alternative views would be aided by this awareness. The company would also articulate and share the core elements of the collective mental model on which the current business model rests. For example, a company could say ‘our business is based on the belief that people will need physical office supplies (we are 95% confident this will remain true for 10 years), and that these will be distributed from factories (we’ve downgraded this to 75% confidence over the last few years)’. Such self-awareness of assumptions and mental models would facilitate the navigation and choice of alternative ones.

• How explicit are the shared assumptions that constitute your business’ collective mental model?
• Are alternative framings of issues, challenges, and facts often discussed and entertained?

Counterfactual as well as factual skills

The imaginative company would focus on cultivating the mental skills underpinning imaginative thinking. This would not mean simply hiring people who presented themselves as creative or have worked in creative industries. Rather it would be about testing for the skills supporting imagination during hiring and promotion decisions — skills which might show up in unexpected people.^[15]On managing talent for a different but related set of mental skills: https://www.bcg.com/en-us/publications/2018/strategy-games-mind.aspx Candidates could be tested on contingent thinking (What are five ‘what if’ questions you would ask in this business situation?); on their analogical ability (What analogies would be appropriate in this case? What is this an example of?); on their ability to elaborate a vague starting point into an interesting proposal; and on the ‘Renaissance-person’ criterion of the depth and breadth of their worldview(s) — the richness of the mental models they would bring to bear.

• Do ‘what if’ questions routinely get shot down with a ‘that’s not the case’ type of response?
• Does your company assess, hire for, and cultivate counterfactual thinking?
• How often do you try to think of and learn from analogies?

Playfulness

An imagination machine would also understand and cultivate playfulness: improvised, imaginative exploration. Play involves testing out things that one can do easily but might not have thought to try yet, without much premeditation.^[16]https://www.bcg.com/en-us/publications/2018/playful-corporation.aspx Play can be mental (throwing around ideas) and physical (trying things out). To return to J. F. C. Fuller and the British army, the military might have said ‘sure, let’s try training with some tanks, why not?’ This could be the precursor to a more serious experiment, but nonetheless a useful first step in trying out an idea. A company fostering playfulness would appreciate randomness and messiness as much as order, allowing people to tinker and customize, suggest idiosyncratic ideas in meetings, try out modifications to processes, and be forgiven for trying new things without permission. Allowing low-cost action and feedback is key to support the cycle of imagination.

• Would you describe your company as playful? What would be different if it was?
• Is there a balance of messiness and order in your company?

Open competition of ideas

An imaginative company would also foster the expression and competition ideas. This could be done in informal ways, with the CEO regularly soliciting ideas from her team, or more formally in firm-wide competitions. Employees could regularly be asked provoking questions, and prizes offered for the most stimulating responses. The strategy team could also share stories and historical examples reminding people just how weird things felt at the point when they were completely new (fridges, staplers, printed books, gunpowder, cars) which now seem unexceptional. Recognizing how odd new things once seemed can help encourage consideration of interesting but unusual and untested ideas.

• Are employees encouraged to generate and propose imaginative ideas?
• What challenges or opportunities in your company or in the world could be the basis for running a competition of ideas from across the firm?

Cognitive diversity

Whether imagination works well is tied to how uniform and rigid our collective world view is. One reason Polaroid was unable to take advantage of digital cameras is that the company was dominated by chemists. Some employees could imagine the future of digital cameras, but they failed to persuade the leadership.^[17]http://www.people.hbs.edu/mtripsas/articles/Tripsas&Gavetti2000.pdf This was a failure of cognitive diversity in the executive team, limiting imagination. Diversity is aided but not limited to deploying people with different backgrounds — it can also be achieved by individuals who are able to change vantage points, who have absorbed multiple different worldviews and perspectives across their life.^[18]https://www.bcg.com/en-us/publications/2018/how-diverse-leadership-teams-boost-innovation.aspx Cognitive diversity requires people who think in different ways, supported by an environment conductive to a competition of ideas.

• Does your executive team have individuals who think in and are encouraged to think in different ways?
• Do discussions typically navigate contradictory viewpoints?
• Do you measure and cultivate cognitive diversity?

Evolving routines and models

Over time, the patterns of collective action in a company shape the dominant set of mental habits, roles and expectations, which can become a self-sustaining system. The imagination machine is able to avoid such entrenchment by allowing routines and models to continuously evolve. Rather than being ‘self-protecting’, it becomes a ‘self-tuning’ company, evolving and refining practices based on data and imagination.^[19]https://www.bcg.com/en-us/publications/2015/business-unit-strategy-growth-self-tuning-enterprise.aspx This may involve giving up on the vision that processes can or should be completely optimized for efficiency or perfectly uniform. Sometimes it is more important to pre-empt change: to allow something to change for the sake of freeing up room for subsequent innovations.^[20]https://www.bcg.com/en-us/publications/2018/preemptive-transformation-fix-it-before-it-breaks.aspx Even if a routine is good in itself, there is an opportunity cost in allowing paths to become trenches, and imagination to become sidelined.

• How often have the processes you are part of been reimagined?
• Is your company set up to evolve its ways of working?
• How hard is it to change entrenched ways of doing things?

The idea that entrepreneurs imagine new businesses and big companies focus only on managing established ones at scale, is falling apart. All companies, large ones included, face increasingly unpredictable environments and the prospect of stagnation or disruption if they do not continuously innovate. Fortunately, business environments are increasingly malleable, and offer many as yet unimagined opportunities to create and capture value, if we can first imagine them. As well as competing on efficiency, we must increasingly compete on imagination. We need to get serious about understanding this capacity, how it works individually and collectively, and how to deploy it reliably and powerfully, especially in large businesses which have been successful through one way of doing and seeing things.