TWO NEW IDEAS ON INNOVATION

First, a brief re-cap of this process model, for those who haven’t read my paper on the subject:

1. The Innovation Team’s Role: Make innovation the primary job of your innovation team. Even in a small business, that should be at least one person with a strong outside advisory team. Creative minds are often very entrepreneurial, and flourish when they are focused, free from bureaucracy, and have some skin in the game. But make sure the innovation team understands your business’ drivers so its ideas make sense for your business, given its objectives and its competencies.
2. Continuous Environmental Scanning: Equip the team to draw on, and continuously scan for ideas, a broad range of industry, economic, demographic and customer knowledge, problems and trends, not limited just to your industry and its players. Often the best ideas come from applying an idea from a completely different industry, or from science, or from nature, to your industry and its problems. The automotive carburetor was adapted from a device used in agricultural irrigation, for example. Peter Drucker suggests 7 primary ‘sources’ for that environmental scan: Unexpected occurrences, incongruities between public perception and reality, process weaknesses and needs, industry and market changes, demographic changes, changes to buyers’ and consumers’ attitudes, tastes and priorities, and new scientific and business knowledge. And don’t forget to factor in where the economy is going. Have the team develop brief Future State scenarios to provide management with a context to understand why you think the ideas you’ve pulled from your scan could be important to your business.
3. Drawing on Pathfinder Customers and Employees: Use ‘pathfinder’ customers on your advisory team — the select few existing customers who always seem to be a step ahead of the pack, open to new ideas, but solidly aware of marketplace realities. But don’t ignore employees either, especially those that work on the front lines and spend the most ‘face time’ with customers, competitors, suppliers, regulators, and other outsiders with a stake in your business’ success.
4. The ‘Think the Customer Ahead’ Process: Learn the process of ‘thinking the customer ahead’. Through scenarios, iterative ‘what if’ exercises, future state visioning and other practices, help your customers imagine where their own business will be and could be three or five years from now, and hence what they might want to buy from you by that time to stay ahead of their competition. The output of all of this should be a Change Vision, explaining how the team foresees the company’s business environment changing, and a Portfolio of Ideas and Insights that will help the company navigate that change powerfully.
5. Qualifying Ideas: Customer enthusiasm is a necessary, but not sufficient, condition for pushing forward with a new idea. Consider also: Deliverability (can you economically and competently make it and deliver it to the customer), quality assurance (can you make it well), sourcing of materials, strategic ‘fit’ with your other products, your company’s image and your corporate ‘culture’, the ‘packagability’ of the product (is it easy to explain, distribute and use), possible alternatives, and possible conflicts (competing with your customers, regulatory hurdles, cannibalizing your other products etc.). Some wonderful ideas have crashed and burned for reasons that had nothing to do with market acceptance.
6. Testing and Experimenting: There’s no such thing as too much testing. Small, continuous testing of every aspect of your innovations — checking and rechecking the market, product quality, timing, ease-of-use, perceived value, life cycle, competitors’ offerings, and many other things will allow you to ‘fail fast and fail early’, so that the probability of a successful launch is maximized.
7. Avoiding Landmines: Companies often invest too much in incremental improvement and not enough in true innovation. Investment in innovation is often misdirected into unsuccessful and unproductive projects. Companies frequently let fatally flawed ideas drag on too long before killing them. Innovation budgets are sometimes directed not to the most promising projects, but to the ones with key sponsorship. Often, innovations are not properly prioritized, and resource allocation doesn’t match priority even when they are. Enthusiasts often overestimate how much of an existing product’s market they can capture from competitors, underestimate the costs of sustaining market share for the product in years after the initial launch, think too ‘short-term’, or fail to treat every new product launch as unique, requiring a different approach and sustenance.

And even when they do the appropriate testing and experimentation, and avoid the landmines, some companies just don’t have the skill to successfully commercialize a new product, process or technology — Business 101. And it’s the company that actually implements the new idea successfully, not the one that does all the hard, creative work above, that makes all the money from the idea. The value isn’t realized until customers actually start paying (enthusiastically) for the innovation.

Here are the two new ideas that I now need to bake into this innovation process model:

What Customers Really Value:

Rob Paterson has pointed out that, according to Reed’s Law, value, in the eyes of customers, no longer comes from standalone products. Much more value comes from the ‘wraparound’ service provided over the life cycle of those products, and even more value can come from a community or facilitated network of other users of those products. So, to use Rob’s example, when I buy a lawn tractor it’s not the piece of machinery I value, it’s its lawn-cutting functionality, its value-in-use. Same is true for cars, computers, and just about everything else. Companies have started to realize this, which is why they have split off the cost of service (the warrantee) from that of the product, lowered the price of the product and raised the price of extended warrantees. But customers don’t see them as separate, they see them as one thing, so they often decline the extended warrantee but still get angry with the supplier when the product breaks down and they now have to pay again for what they have already (in their minds) paid for — lawn-cutting functionality.

Innovative companies need to think about this carefully, because the vast majority of large companies these days are reducing the quality of both their products and their wrap-around services (by offshoring and other cost-cutting techniques) in the obsessive pursuit of lowest possible cost. While this has the Wal-Mart Dilemma effect of reducing consumer buying power (because it produces fewer, lower-quality, lower-paying domestic jobs) and hence ‘locking in’ consumers to lower quality products with poorer service, eventually this race-to-the-bottom will reach an equilibrium point at which the consumer will simply stop buying and start saving until he can afford a higher-priced, much-higher-value product with excellent (and long) life-time service. Reed’s Law will kick in, and the big, cheap (in every sense of the word) producers will have discounted themselves out of the market. The innovative company should see this as a huge evolving opportunity, and design a product/service ‘offering’ that provides the greatest possible life-time value at an affordable (not the lowest) price. What’s especially interesting is that customers know that high-value service cannot be outsourced (see my Dell story for an explanation of the internal distrust and finger-pointing that outsourcing inevitably produces) or offshored (no matter how competent they are, people in India can’t give me good service simply because they’re not here looking at the product that doesn’t work).

The second part of Reed’s Law relates to creating communities around a product/service offering. The best-known example of this is eBay, which really has no product, but offers a series of auction services, and facilitates a whole series of communities around those services. These communities provide value quite apart from anything that eBay itself ‘does’, by helping and otherwise associating with each other. Meetup does the same thing. So innovative companies need to think as well about how they can create and facilitate communities of customers and of other stakeholders around their products and services. Those communities could meet either online or face-to-face. What’s especially interesting is that sometimes communities work best when the actual supplier of the product or service around which the community is focused, stay out of the way of community activities. This is a lesson some professional service firms have learned when they tried to set up Entrepreneurial Associations of their customers — they work best peer-to-peer, with the service firm merely providing the directory and contact information, and trusting their customers not to say bad things about them ‘behind their backs’. This is an important lesson for all network coordinators — let the community self-organize, and help without being prescriptive or interventionist in that process.

The Wisdom of Crowds:

James Surowiecki’s remarkable book The Wisdom of Crowds has caused me to re-think many of my ideas, and one of those ideas is the value and importance of experts. The concept of ‘pathfinder’ customers outlined above assumes that, to some extent, these ahead-of-the-curve customers are experts in their business and hence can provide expertise to your business above and beyond what the ‘average’ customer can offer. Surowiecki provides compelling evidence that experts are prone to overconfidence in their predictions and are not nearly as good at making predictions as larger numbers of ‘ordinary’ people reasonably informed and engaged in the issue. He would suggest, I think, that ‘pathfinder’ customers could well lead your company down the wrong path. What is needed, he argues, is a mechanism to capture the collective wisdom of a sizeable (the larger the better) group of intellectually diverse, independent, decentralized (i.e. each having access to unique, special knowledge) customers. He also argues that the process of bringing together groups of people to exchange and build on each others’ ideas (as in Focus Groups and ‘Thinking the Customer Ahead’ sessions), while valuable in some contexts, can actually be worse than simply independently polling the group, because of the propensity of groups to ‘Groupthink’ — to prematurely discount ‘minority’ views, and to self-censor radical thoughts and ideas. I’ll have much more to say about The Wisdom of Crowds in an upcoming article. But it is clear that innovative companies need a mechanism to objectively capture customers’ and employees’ collective wisdom, not just the ideas of an elite few creative forward-thinkers.

So here’s a first stab at how these two new ideas could be shoe-horned into the above process model:

• 2A Holistically Creating Service and User Community Enhancements: Increasingly, customers see most products as commodities that provide, in themselves, little value. They place much higher value on services that provide the complete functionality of the product over its life-cycle. When they buy a furnace or a space-heater, what they want, expect, and value, is 20 years of reliable warmth, not an appliance. No matter what they paid for the appliance, they will be unhappy if they don’t get reliable warmth, and happy if they do. The key for innovative customers is to create the best possible ‘reliable warmth’ experience for customers over a reasonable life-cycle at an affordable price. Great value can also be produced by facilitating the creation of self-managed communities of customers and other stakeholders of your company, as eBay and Meetup have shown. Consider how such groups, under your stewardship, could be valuable to each other. What is the value of affinity of your customers? Could they compare competing energy prices for furnace fuel? Could they come up with an improved space-heater design? Could they develop add-ons that would make the furnace more efficient, or more durable, or more useful?
• 4A Polling the Collective Wisdom of Stakeholders: Develop a mechanism to poll a significant cross-section of affected stakeholders before you implement any innovation or major decision, or simply to get their collective assessment of where your market is headed. Provided the group polled is independent, diverse, and each member is able to access unique knowledge, and provided also they are reasonably informed and engaged on the issues you are asking about, there is substantial evidence that the ‘collective wisdom’ of such a group will be more reliable and accurate than any expert assessment you might draw on.

And here’s what the revised process model would look like: