Innovation

Consumer-centered product design is an emerging best practice in many industries, particularly those characterized by practical products that hold no emotional appeal; or in which competition is based on increasingly less profitable attempts to cut cost or improve performance; or in which once distinctive products are becoming commoditized; or in which there is little room left for product innovation. Among the best practitioners, design is understood to be a core activity conferring competitive advantage by bringing to light the emotional meaning products and services have, or could have, for consumers and extracting the high value of such emotional connections. The authors discuss how companies such as Master Lock, Procter & ; Gamble, BMW and Cambridge SoundWorks have employed design research -- including the use of multidisciplinary teams and a variety of ethnographic and psychophysiological techniques -- to build organizationwide identification with the customers' needs and aspirations, keeping everyone's eyes on the same prize.

The author argues that the dominant challenge for the innovative firm may not be to command marketplace premiums for its innovation, but to strategically identify and opportunistically exploit subsidies for that innovation. For example, Microsoft's final stage of Windows 95 development was effectively subsidized to the tune of $900 million when the company drew upon a highly valuable technical population to test and help improve the quality of its new operating system. An innovation subsidy is the deliberate contributionof a business resource -- money, time, information, expertise, personnel or equipment -- in support of the development of a novel offering with no explicit expectation of a financial return. It is not, however, an outright donation or favor but rather the cost-effective bartering of resources by individuals and institutions that amounts to a gray-market mechanism for mitigating risk. (The article offers other subsidy scenarios referring to Gillette, 3M, IBM. Goldman Sachs and Citigroup.) The core differences in perceived and real risk among economic entities represent the richest source of ideas for opportunistic innovation subsidies. Such scenarios are clearly not merely about money, but about creating and managing relationships that tap the resources of a company's savviest customers. In the management of innovation risk, social capital can be as valuable as financial capital. Seeking out the innovation subsidy challenges firms to rethink the underlying economic relationships between their customers and suppliers.

A robust economy isn’t as far out of reach as some may think.

The conventional planning process does not work for strategic experiments that are truly bleeding edge. Nevertheless, many companies cling to what they know & #8212; planning that holds managers responsible for numbers. But that is not practical for entering completely new territory, when numbers are essentially pulled out of a hat and their underlying assumptions rarely revisited. A better approach to planning comes from researchers at Dartmouth College’s Tuck School of Business. It emphasizes learning instead of numbers, and it draws on in-depth studies of such companies as New York Times Digital, Thomson Corp., Corning and Analog Devices. Their approach, theory-focused planning, diverges from conventional planning in six critical ways. Companies that use it concentrate on a few critical unknowns instead of the usual horde of details in conventional plans; they focus on the theory underlining the predictions rather than the predictions themselves; they look for trends rather than numerical benchmarks; they review the plan often, in response to important new data, instead of annually; in that review, they consider the experiment over time instead of just for the current period; and they emphasize leading indicators rather than financials. Companies still hold managers of strategic experiments responsible for performance, but performance is gauged according to how quickly managers learn from new data. To be successful in uncharted waters, the ability to learn from experience is paramount.

Disruptive innovation has usually been considered by established businesses as an attack that must be met through defensive measures. And indeed, disruptive technologies and business models have toppled many established industry leaders and will likely continue to do so. The real story behind disruptive innovation, however, is not one of destruction, but of its opposite: In every industry changed by disruption, the net effect has been total market growth. Moreover, disruption can be a powerful avenue for growth through new market discovery for incumbents as well as for upstarts. There are several keys to the successful navigation of this growth path. The first is recognizing that disruption is not an immediate phenomenon -- it can take years and even decades before the upstart business encroaches heavily on the established market. The second is finding the new customers who are eager to be served by the disruption. The third key is building an organization that is capable of serving the new customers. The author explains each aspect in detail, drawing on extensive research involving online newspapers, minicomputers, cardiology and semiconductors.

As competition intensifies and profit margins shrink, managers are under overwhelming pressure to create value. Traditional prescriptions such as cost reduction, reengineering and outsourcing, while critically important, cannot solve the problem. The need to innovate is greater than ever, but the focus of innovation must change, say the authors. Managers are discovering that neither value nor innovation can any longer be successfully and sustainably generated through a company-centric, product-and-service-focused prism. By synthesizing societal trends and early experimentation in companies such as General Motors, LEGO and Medtronic, the authors paint a picture of the "next practices" of innovation in which the locus of value creation will inevitably shift from products and services to "experience environments." The intent of experience innovation is not to improve a product or service, per se, but to enable the co-creation of an environment in which personalized, evolvable experiences are the goal, and products and services are a means to that end. Profitable company growth will then result from individual consumers co-creating their own unique value, supported by a network of companies and consumer communities. From that perspective, say the authors, managers must learn to view existing and emerging technologies not as enhancers of products, features and functions, but as facilitators of experiences. They offer examples of how technological capabilities such as miniaturization, networked communication and adaptive learning are fostering experience innovation at companies such as Sony, Apple, Microsoft and TiVo, illustrating their contention that technology will be the key facilitator of the nascent trend toward experience innovation.

Companies are increasingly looking beyond their boundaries for help with innovation -- working with customers, research companies, business partners and universities, and even competitors. They are also expanding the purposes for which they consider external sources appropriate. Businesses today are using external sources for all phases of innovation, from discovery and development to commercialization and even product maintenance. While these changes sound good and are benefiting a great many companies, they add a new layer of complexity to the manager's tasks. And unfortunately, despite the growing acceptance of external innovation, the authors have found that many companies lack a sourcing strategy to guide them in managing it. They often take an ad hoc approach that produces uneven results, the very problem they are trying to avoid. Instead of dealing with external sources one by one and one at a time, companies should systematically examine and rationalize the increasingly important activity of innovation sourcing. The authors explain how companies can organize their use of external sources holistically, using innovation channels just as they manage specific distribution channels to reach end customers.

An overview of new research on innovators’ incentives and the innovation process.

Companies are increasingly rethinking the fundamental ways in which they generate ideas and bring them to market — harnessing external ideas while leveraging their in-house R&;D outside their current operations.