What seems to be a pretty thorough study on how incremental and breakthrough innovations have impact on company value and sustained competitiveness has appeared in the Journal of Marketing. Rather than simply looking at top-line contributions they look at three key factors:

1. Effect of breakthrough and incremental innovations on a firms’ normal profits
2. Effect on “economic rents” (profits beyond what’s required to compensate for risk and time value of money)
3. Effect on firm risk

They come to several conclusions that provide quantification of the issue of balancing incremental and breakthrough innovations. First they find that

…few firms can persistently produce a substantial flow of either breakthrough or incremental innovations. For example, only one firm, Procter & Gamble, had an above-average output of breakthrough innovations each year during our sample period.

 They go on to say:

To CEOs and other corporate officers, we note that incremental innovation keeps firms in business, but breakthrough innovation is the key to achieving sustained long-term growth. Our model allows managers to quantify the average NPV of a breakthrough innovation. Specifically, the estimated coefficient…is .000847, which means that, on average, each breakthrough innovation is associated with a 0.847% increase in the market value of the firm’s equity. This increase accounts for all costs (including a normal equity charge) and thus represents pure economic profit. For the typical firm in our sample with an average market value of equity of $4.9 bioonion, [the profits] associated with a single breakthrough innovation is approximately $4.2 million.

Notably, organizational slack is a significant determinant of breakthrough but not of incremental innovation. A possible explanation is that incremental innovation is more likely to be incorporated into a firm’s baseline investment strategy and less likely to depend on uncertain slack resources. In contrast, breakthrough innovation may be viewed as a more opportunistic activity to be undertaken only when greater slack resources are available.

Another possible explanation: Most companies try to make the most of employees’ time, thus taking slack out of the system. What do they get them to focus on? Mostly next-gen or incremental products. So that squeezes the slack out of the system that appears to be a pre-requisite for breakthrough innovation. (Start-ups are 100% focused on breakthrough in most cases, so their slack is entirely taken up by that. Same thing goes for skunkworks.)

This is a dense article with a lot of math in it, and none of the conclusions are particularly surprising. But the detailed quantification provides a perspective on innovation, particularly the balance between incremental and breakthrough innovations, that is valuable. Sure enough, you can’t rely on incremental innovation to keep you competitive - periodic injections of breakthrough innovation are required for survival.

Download it here 

There is an interesting article in the April 2008 Harvard Business Review about how to be a successful services company, and one of the examples they talk about is Progressive Insurance. They talk about the two features of Progressive which are most distinctive and visible - their white vans, and how they list competitor’s rates alongside their own. As the article describes:

When someone insured by Progressive is involved in an auto accident, the company immediately sends out a van to assist that person and to assess the damage on the spot… Customers love this level of responsiveness and give the company high marks for service.

But customers are very price sensitive about auto insurance and so would not pay more for this service in their monthly premiums. So why does Progressive do it? Because it cuts down on fraud. Turns out most insurance fraud happens when people make claims on accidents that never happened or which were staged. This results in expensive legal costs. By dispatching a representative to the scene immediately, Progressive helps prevent this type of fraud, and even discourages it pre-emptively because people will expect a representative to show up and therefore not even attempt fraud.

 

It’s not that Progressive is determined to go one better than rivals to win the business. In fact, Progressive’s is the lowest quote only about half the time. What Progressive does believe is that is quote is the right one given the probability of that person’s getting into an accident - a probability that the insurer is best in class at determining. If indeed its quote is spot-on, then allowing a competitor to insure the customer at a lower rate is doubly effective: It frees Progressive from a money-losing propoition while burdening its competitor with the unprofitable account. Thus a level of service that looks downright altruistic to the customer actually benefits the company.

In other words, potential customers self-select not to use Progressive, but still come away feeling impressed by Progressive’s service and trustworthyness. If at some point in the future when their driving record has improved they may return to Progressive’s site and see that their price has improved, and potentially switch. So it’s a win-win for Progressive and buyers, only Progressive’s competitors lose. The perfect scenario!

Mark Ury just alerted me to a post he did on his blog, springboarding off my notion that “the system is the product”. He makes the point that time is an important factor in how systems come to be:

Time determines the success of systems more than any other factor. This can be maddening for strategists and designers slaving away at product, service, hardware, and software ecosystems.

He argues that systems are not so much designed as evolved. This may be a matter of semantics, but I’d argue that while systems do indeed change over time, and there are unexpected mutations caused by hapenstance and the “environment” (the surrounding customers, competitors, culture…), that does not mean design has no role. We have some control of our own destiny, even with complex systems (though perhaps not as much as we like or think). All is not left up to the divine, as it were, and fortune rewards the prepared mind.

Semantics aside, I definitely agree that time is a key factor in system success. I’ve used the phrase “high panic threshold” when it comes to thinking about complex systems problems - you must resist the temptation to prematurely state that you have defined the problem fully. Doing so means you will likely miss out on a key insight into your customers, your competitors or your business, thus losing potential competitive advantage. You must have a high threshold for ambiguity, patience to wait it out.

In the past I’ve written quite a bit about wicked problems. I’m still percolating on that idea, but moving in a somewhat different direction. Why? Because wicked problems are incomplete when applied to the business world because in their classic definition they lack the notion of competition. Wicked problems emerged out of public policy and planning. In that arena there is not competition in the same way there is in business. So you do not have the time pressures to the same degree, and the fear that someone else is going to crack the problem ahead of you and thus gain an advantage.

Competition: The Go-Fast Force 

Competition is fundamental to business. You might think of it as the “go-faster” force that propels the world of business and individual companies forward. This instills a sense of impatience in companies, particularly when dealing with complex, rather abstract systems. Mark hits it on the head:

Most companies don’t have the patience (or the time) for the system to reveal itself. Public companies are focused on three month cycles. Their CEO’s have three-year tenures. Their middle-management has 50% churn. At the other end, startups have no resources. Two-thirds have the wrong-market strategy. Ninety-percent of them fail in three years.

Systems are so rarely produced because they take time and time is one resource companies don’t have. Most die long before the system is revealed.

This is the market equivalent of natural selection.

In this context, time to market comes to the fore. First mover advantage is key. Decisions are made quickly, partial understanding is the rule.

Emergence: The Go-Slow Force

However, as Mark points out, systems take time to understand, to refine. As the wicked problems definition would have it, you have to start making solutions in order to even understand the problem, and the problem definition emerges slowly over time. In other words, wicked problems resist the classic waterfall process of research > synthesize > define > recommend > act . In fact they turn it on its head: It is only by starting to act that you can illuminate the less obvious aspects of the problem, but its those aspects that deliver the competitive advantage for the very reason that they are non-obvious. If you can crack the wicked problem you gain a competitive advantage just because it is so difficult to understand.

So we have a “go-slow” force that is in polar opposition to the go-fast force of competition. I call this force emergence. Instead of time-to-market, time-to-right is the priority in emergence. Having that high panic threshold really comes in handy here, because this can take several years.

Obviously having large monetary resources helps a lot here, as you can afford to make mistakes (up to a point - shareholders and investors often have low panic thresholds). Having said that, start-ups tend to be good sources of illumination of wicked problems as they are laser focused on differentiation from the big-boy incumbents. Rather than complacently thinking they’ve got the problem well bounded, they actively seek out new aspects of it. The resource-constrained nature of start-ups often makes them more efficient at the rapid, iterative prototyping that is at the heart of using solutions to understand the problem (note that “solution” does not have to mean full-blown product on the market).

The Never-Ending Tension

We’ve all experienced the clashing forces of competition and emergence, the tension between going fast and going slow. For many people it sets the daily context of their work life, myself included. All the tools, processes and frameworks that we bring to bear on design challenges (user research, competitive analysis, trend spotting, market analytics, etc.) are fundamentally about trying to resolve this tension, or at least to make it managable.

There was a pretty good article a few days back in the NY Times about the rather obscure topic of business processes and process innovation. It was entitled “The Unsung Heroes Who Move Products Forward” and argues that while the final products sold to end users may get all the glory, it’s invisible process innovations behind the scenes that are largely responsible for their success. (Thanks to the NY Times now making everything free, it’s easy for anyone to check out.)

Process innovations like Google’s computer network are often invisible to the public, and impossible to duplicate by rivals. Yet successful companies realize that maintaining competitive advantage depends heavily on sustaining process innovations. Great process innovators often support basic research in relevant fields, maintain complete control over the creation of every aspect of a product and refuse to rely on outside suppliers for important components. Certainly, there are exceptions to these patterns, but even companies like Apple that buy essential processes on the open market nevertheless invest in gaining a working knowledge of the technologies and an understanding of their future arc.

Processes should be considered core competencies, along with IP on technology. If anything they are even harder to replicate.

I was was doing some reading on the concept of core competencies a little while back, as originally formulated by Gary Hamel and C.K. Prahalad, and there was an interesting shading to the concept that I hadn’t heard before; that is that core competencies should be hidden from the competition even if the end results are not. A lot of companies talk about their core competencies, but in many cases they are things which are quite obvious and not that unique to them. Instead, Prahalad and Hamel pose a more specific definition for core competencies:

The diversified corporation is a large tree. The trunk and major limbs are core products, the smaller brances are business units; the leaves, flowers, and fruit are end products. The root system that provides nourishment, sustencance, and stability is the core competence. You can miss the strength of competitors by looking only at their end products, in the same way you miss the strength of a tree if you look only at its leaves.

(C.K. Prahalad and Gary Hamel, “The Core Competence of the Corporation.” Harvard Business Review, May-June 1990, p82)

Hidden core competencies allow companies to diversify into new, unpredictable and seemingly disconnected categories, much as Google and Apple have been doing. As descried in the Times article, it’s the marshalling of processes and knowledge that allows firms to create great new products, not just as lucky breaks but over and over again. And because these competencies are hidden (as the roots of a tree are invisible under ground), they are extremely difficult for competitors to replicate, and tends to force them into constant catch-up mode.

Related past articles:

• Google’s Labs
  
• Logical Yet Unpredictable
• Wicked Problems
  

Mark Dziersk of laga has written an article in Fast Company entitled “Design meet Business: ‘Business, this is… Design’” intended to help business people get more acquainted with the value and process of design. It’s a good goal — design and business each need to do a better job of understanding the other — but Dziersk sets a tone that is unfortunately condescending toward business, and follows it up with too many stereotypes and some rather odd suggestions on how business people can get more in touch with their creative side.

Dziersk starts out by stating that:

As an accomplished businessperson you probably know a lot about strategy and little about creativity. Creativity is the key to innovation. And, if innovation is (as testified almost everywhere these days) the Midas touch for business today, understanding creativity involves a lot more than orchestrating regimented processes.

Leaving aside the notion that creativity is, in itself, sufficient for innovation (ignoring critical factors like execution, brand fit, feasibility, etc.), this statement is on its face condescending to “business people”. The assumption that business people who are successful know little about how to be creative may be true in many cases, but I’ve met plenty who are highly creative and able to think in fresh new ways.

Dziersk then posits strategy as the opposite of creativity (at least I think he is, the language is a bit vague):

Most businesses are run by adding columns of numbers, and led by financially motivated business managers armed with…. strategies. If creativity is the fuel that brings innovation to life, then strategy is the mirror equivalent for business.

And then leaves it at that, without expanding on the thought. Anyone who knows anything about strategy knows full well that it cannot be done by rote processes. To be done effectively it has to be creative, because it requires thinking in new directions and making well-informed intuitive leaps about the future state of the business, the competition, and customers in a few years time. Innovations and strategies have to be matched together like peas in a pod, or you end up with cool innovations that the company can’t make work in the market, or business goals which are not backed up by products on the shelves.

Dziersk next turns his gaze to designers:

The truth is, very few designers understand strategy, much less leverage it in their work. But the design world is trying, and making inroads. Design strategy means thinking beyond a specific project deliverable. It means drilling down the longer-term goals of both the brand and R&D that affect how products or services are brought to market. This is new territory for design, demonstrating business and brand leadership by creating and manifesting strategies.

I think this would come as a surprise to many designers, including some of the most famous: Eames, Sotsass, Loewy, Starck and Sapper to name a few. The company where I work, frog design, has had a modern day strategy practice for almost ten years now, but even back in the early 80’s when we were working for clients like Apple we were frequently thinking beyond a single product, including establishing what is arguably the first rigorous design language system for Apple, with project Snow White. I think actually a lot of designers are pretty strategic thinkers, but they are often poor at pulling their methodology out to make it explicit, it often remains implicit. Designers then seem like intuition-driven black boxes, when in fact they are often thinking quite holistically.

Speaking of which:

If you are more methodology-skilled (business) than experience-motivated (design), one tip might be to imbed yourself in a creative endeavor, no matter how difficult it might be for you or your psyche. Any class on drawing, dance, poetry or weaving will open a window into the creative process, and open possibilities to embrace ambiguity, which is usually a necessary to go to original places.

I don’t know where to even start with this one. First, it’s again condescending to businesspeople. Second, it’s condescending to designers, implying that they have no methodology and that user experience somehow emerges out of a nebulous fog without rhyme or reason. And speaking of rhyme, I can’t believe he is seriously suggesting taking a poetry or weaving class as a way of understanding how creativity gets applied by designers in pursuit of business challenges. This is just infuriating. Yes design is creative, and art is creative, but that does not mean that by studying art one understands the design process. They are two disciplines with very different goals, tools, and, yes, methodologies.

Dziersk continues with a discussion of “DNA”

What is DNA? A complete understanding of a company, a product, or brand’s DNA is the key to nourishing design that is directed. DNA construction articulates this thinking… A well-constructed DNA helps us understand the consumers’ emotional underpinnings of the visual and experiential interaction with a product or brand. The strength of the DNA is that it’s a free-standing storytelling device that guides a portfolio of future, disparate agencies to a confluence of media points and pipeline ideas. Alternately, it becomes an effective tool that designers can use to defend the relevance and resonance of their work and ideas.

At the core of every go-to-market effort is a strategy based around the DNA of the consumers’ experience and interaction with the device, package or service. This important strategic tool is developed by a combination of consumer insights, brand, R&D, and manufacturing requirements — all summarized in a meaningful way.

Sounds very important. Unfortunately, he never actually defines DNA and says what it consists of. He only talks about how it gets articulated and how designers use espresso as a means of helping propel thinking about it.

I’m going to call it quits at this point, though there are a number of other ambiguities, stereotypes and non-sequitors in the second half of the article, including a particularly galling remark that “For designers, attention spans are short, and gray copy is the kiss of death.” Can we get beyond this please?

Suffice it to say that I’m surprised that Mark Dziersk wrote this - he’s a smart guy, he’s been around the ID block for a long time, and the firm he used to have a leadership position at, Herbst Lazar Bell, has been working the design + strategy angle for a while now. But articles like this, as well intentioned as they are, don’t really help the cause, and in fact may set it back by talking down to the audience — the same people, by the way, who pay designers’ bills and whose approval is required for good design to move forward to market.

(The picture up top is of Mike Meyer’s character Dieter from the Sprockets segment on Saturday Night Live, by the way, not a picture of Dziersk! He references Dieter in the article as the stereotype of what a designer looks like, I suppose a “Now is the time when we design” type of thing. Well worth a bit of nostalgia whether you’ve seen Sprockets or not.)