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Copyright

Copyright2014NathanFurrandJeffDyerAllrightsreservedNopartofthispublicationmaybereproduced,storedinorintroducedintoaretrievalsystem,ortransmitted,inanyform,orbyanymeans(electronic,mechanical,photocopying,recording,orotherwise),withoutthepriorpermissionofthepublisher.Requestsforpermissionshouldbedirectedtopermissions@hbsp.harvard.edu,ormailedtoPermissions,HarvardBusinessSchoolPublishing,60HarvardWay,Boston,Massachusetts02163.

FirsteBookEdition:July2014

ISBN:978-1-62527-146-4

Contents

Copyright

Foreword

Introduction

1TheInnovator’sMethod

2LeadershipintheAgeofUncertainty

3Insight:SavorSurprises

4Problem:DiscovertheJob-to-Be-Done

5Solution:PrototypetheMinimum“Awesome”Product

6BusinessModel:ValidatetheGo-to-MarketStrategy

7MasterthePivot

8ScaleIt

9MakingtheInnovator’sMethodWorkforYou

Conclusion:TurnUncertaintyintoOpportunity

Appendix:AnOverviewoftheInnovator’sMethod

Notes

Acknowledgments

AbouttheAuthors

Foreword

Atsomepointsoon,pleasetakeatripphysicallyorvirtuallytoNewYorkCity,HongKong,Singapore,andDubai.InNewYork,gototheintersectionof6thAvenueand57thStreetandstartwalkingsouth,awayfromCentralPark.OntheleftsideyouwillseeRockefellerCenter—asetofskyscrapersthatwerebuiltinthe1930s.Thenlooktoyourright,whereyouwillseeasetofevenbiggerskyscrapersdesignedandbuiltinthe1960s.Thesearemassesofrectanglesandrightanglesreachingintothesky,differentiatedonlybythetypeofsidingthatwasusedandwhethertheyhadsixtyorseventystories.

ThengotoHongKong,Singapore,andDubaiandcontrasttheirskylineswiththoseontheAvenueoftheAmericasinNewYork.Mostskyscrapersinthesecitiesthathavebeenbuiltinthelastfifteenyearsareuniquetotheworld.Mostareveryattractive—andsomearetrulystunning.Thecurves,angles,accents,andstatementsareuniquetoeachbuilding.Whathaschanged?Havethearchitectssimplybecomemoredaringandcreative?ArethearchitectsinthosecitiessimplybetteratdesignthanAmericanarchitects?

Theanswer:No.Rather,thesoftwarethatarchitectshavebeenusinginHongKong,Singapore,andDubai—andaroundtheworld—hasbecomesosophisticatedthatifanarchitectchangesanangle,adjuststheweight-bearingoranewcurveinanH-beam,oraddsanewtypeofweldtobeusedinanornamentjuttingoutonthe23rdfloor,thesoftwareautomaticallyrecalculatesthedesignofeveryotherpiece,showingwhateachoneneedstodoandwhereitmustbeplacedtoaccountforinterdependenciesmandatedbytheunusualelementofeachpiece.Thesoftware’spowertocalculatealltheinterdependenciesamongtheelementsofthesemassiveskyscrapershasyieldedasetofrulesthatsay“Ifthis,thenthat.”Theserulesarenotofthesortthatsay“Don’tdothis,becausewehavenoideawhatwillhappen.”Therulesofcausalityactuallyemancipateartistryindesign.

Thereasonwhyskyscrapersdesignedin1960shadsolittledifferentiationisthattherewaslittlelatitudeforcreativity:anythingthatwasnotastandardstraightbeamora90-degreeanglewasriskyandvery,verycostly.Eventhebest

straightbeamora90-degreeanglewasriskyandvery,verycostly.Eventhebestarchitectsstruggledtocomeupwithalltheadjustmentstheyneededtoimplementelsewhereinthestructuretoaccountforanythingthatwasunusual.

Sohowdoesthisrelatetomanagement?Historically,managementisabout“straightlines”and“rightangles.”Thetoolsoftraditionalbusinessplanning—the“software”—thatmanagersusetodayhavehelpedthemperfecttheartofanalyzing,planning,andexecutingwhentheproblemisstandardandtheinterdependenciesareknown.Butinnovationisaboutuncertaintyandnonstandardprocesses—“curves”and“weirdangles”—andthemanagementliteratureandthetoolsweusehavenotyetcaughtupwiththenewkindsofproblemsthatmanagersandinnovatorsface.New“software”isneeded—anewsetofguidelinesandrules—thatmanagerscanuseforfacinghighuncertaintyproblems.

Furthermore,althoughmostcompaniesarelacedthroughoutwithinterdependencies,mostexecutivesactuallyknowlittleofwhattheyareorhowtheyinteract.Someinteractionsinacompanyarestatic,occurringatagivenpointintime.Othersaredynamic,doingtheirworkovertime.Thereasonwhymanyexecutivesandemployeesadheretostandardprocessesisthatchangesininterdependentprocessesaretime-consuming,risky,andcostly.Standardprocessesmitigateinnovation,butmanymanagersinstinctivelyoptforlessinnovationnonethelessintheirquestfororder.

Executivesfacetheseparadoxesinpartbecausesofewresearchersofbusinesshaveachievedthecomparableexquisiteunderstandingofbusinessinterdependenciesthatsoftwarehasbroughttoarchitecture.Manymoreofusmustfollowtheleadofthesefew,becausetheimpacttheseresearchershavehadonunderstandingsystemicinterdependenciesofprocessesandorganizationalstructurehasbeenprofound.Forexample,StevenSpearandKentBowenconductedaremarkablestudyoftheToyotaProductionSystem,examiningthecompleteprocessofproductioninindustriesfromhealthcaretoaluminum.Fromthisdeepunderstandingtheywereabletodistillfourrulesformanaging(summarizedintheHBRarticle“DecodingtheDNAoftheToyotaProductionSystem”)thatwentbeyondwhatpriorresearchershadtriedtodescribeinsimplisticterms.Similarly,inTheAnatomyofPeace,TerryWarnerandhiscolleaguesattheArbingerInstitutechronicledtheinterdependentprocessbywhichconflictiscreatedandresolved.EdgarScheinstudiedfrombeginningtoendtheprocessthroughwhichcultureiscreatedandresistschange,summarizedinhisbookOrganizationalCultureandLeadership.Andfinally,ChetHuberwroteDetour:MyUnexpected,Amazing,LifeChangingJourneywithOnStar.

AstheinnovatorwhobuiltthisverysuccessfulcompanywithinGeneralMotors,Huberexplainsthestaticanddynamicinterdependencieswithinthecompany.Huberdidwhatnobodythoughtwaspossible,becauseheinfactdistilledfromhisownexperienceandtheresearchofafewothersasetofrules:“Ifthis,thenthat.”

Iowemuchtotheseandafewotherresearchersandwriterswhohavetaughtmetorelishratherthanretreatfromthestudyanduseofinterdependenciesinbusinessandacademia,inchurch,andinmyfamily.

AndforthisreasonIthankProfessorsDyerandFurr.WithTheInnovator’sMethod,theyarethefirstresearchersIamawareofwhohaveattemptedtochronicletheprocessofinnovationfrombeginningtoend—layingoutthestaticanddynamicinterdependenciesthathistoricallyhavemadeinnovationsohard.Ifonefacesahighuncertaintyproblem,thenthetoolsofleanstart-upanddesignthinkingtheydescribearevaluableinnovationtools.They,alongwithmanyothers,arehelpingtobuildthemanagementequivalentofthesoftwarearchitectsusetodaytocreateamazingnewstructures.

Withmygratitude,

ClaytonM.ChristensenProfessor,HarvardBusinessSchool

Introduction

Asasuccessfulscaledcompany,youcannotruntheshipthewayyouusedto.You’llget

runoverbyaswarmofstart-ups.

—ScottCook,FounderandChairmanoftheExecutiveCommittee,Intuit

HAVEYOUEVERcomeupwithanideaforanewproductorservicethatyouthoughtwouldbeverycool,butdidn’ttakeanyactionbecauseyouthoughtitwouldbetoorisky?Ormaybeyoujustdidn’tknowhowtotakethenextstep?Oratwork,haveyouhadwhatyouthoughtcouldbeabigideaforyourcompany—perhapschangingthewayyoudevelopordistributeaproduct,providecustomerservice,orhireortrainyouremployees?Thefactis,mostofushavethesekindsofideasatonetimeoranother.Butneitherwe,norourcompanies,areverygoodattakingadvantageofthem.Why?Becausetypicallythereissignificantuncertaintyaroundwhethertheseideaswillwork.Theyarerisky.Andmostindividuals—andespeciallycompanies—areprogrammedtoavoidrisk.Butwhatifyoucouldtakemuchoftheriskoutofit?Whatifyouknewaprocesstoquicklytestandvalidatewhethertheideahadmerit?

Thekeymessageinthisbookisthatnewtoolsandperspectivesforvalidatingbigideascharacterizedbyhighuncertaintyareemerginginmanydisparatefields.Whetheryoucallitleanstart-up,designthinking,oragilesoftwaredevelopment,thesenewmethodsarerevolutionizingthewaymanagerssuccessfullycreate,refine,andbringnewideastomarket.Theseandothertoolshelpentrepreneurs,designers,andsoftwaredevelopersloweruncertaintyandriskthroughcheapandrapidexperimentation.

Tohelpmanagersapplythesenewpracticesinsideestablishedcompanies,weofferanewmethodformanaginginnovationthatwecalltheinnovator’s

method:anend-to-endprocessforcreating,refining,andbringingideastomarket.Drawingonourresearchofhundredsofestablishedcompaniesandstart-ups,weshowyouwhenandhowtoapplytheinnovator’smethod,takingyoustep-by-stepthroughthesenewpractices.Weanswersuchquestionsas:Howdoweknowwhetherthisideaisworthpursuing?Havewefoundtherightsolution?Whatisthebestbusinessmodelforthisnewoffering?Wefocusonthe“how”—howtotest,validate,andcommercializeideasusingthebesttoolsfromleanstart-up,designthinking,andsimilartechniquesusedbyafewcorporationsandmostsuccessfulstart-ups.Weacknowledgethattheinnovationprocessismessyandunpredictable—andnoprocesscanfullyremovetheuncertainty.Butthesetoolscanbeappliedtocreatenewinnovationsforcustomersorsolveinternalproblemsthathaveanelementofuncertainty,whetherinHR,finance,oranotherarea.

Let’sstartwithastory.

RenttheRunway

In2008,JennHyman,asecond-yearMBAstudentatHarvardBusinessSchool,spentThanksgivingatherhomeinNewYork.Duringhervisit,Hymannoticedhersister,Becky—anaccessoriesbuyeratBloomingdale’s—strugglingtodecidewhattoweartoanupcomingwedding.“Beckydesperatelywantedtobuya$1,500Marchesadress,”saidHyman.“Shefeltcompelledtobuyanewdress—becausesheknewphotoswouldsoonappearonFacebookandshedidn’twanttobeseentwiceinthesameoutfit.”1Asshewatchedhersisterwrestlewiththecostofthedress,hersister’semotionwasacluetoanimportantjob-to-be-doneforyoungwomen:helpingthemfeelspecialandconfident.Hymanrealizedthatotherfashion-orientedyoungwomenmighthaveasimilarchallenge,anobservationbackedupbyheryearsspentbuildingaweddingeventbusinessatStarwoodhotelsandworkinginmarketingandsalesatWedding.com.Hyman’sinsightledhertohypothesizeapotentialsolution:insteadofpurchasingdesignerdresses,womenmightprefertheoptionofrentingdesignerdressesonlineforspecialoccasions.

Likemanygiftedyoungindividuals—buddingentrepreneursandtalentedyoungmanagers—Hymanhadusedherpowersofobservationtogenerateapotentiallyvaluablebusinessidea.Butwhatshouldshedonext?

Popquiz:imagineshecametoyou.Whatwouldyouadvise?Formostbusinessprofessorsandexecutives,theanswerwouldbe,“Writeabusinessplan.”Theplanwouldidentifythecustomerneed,describetheproductorservice,estimatethesizeofthemarket,andestimatetherevenuesandprofitsbasedonprojectionsofpricing,costs,andunitvolumegrowth.Afterall,withoutthistypeofanalysis,howcanweknowwhetheranideaisworthyofinvestment?Indeed,Hymanreceivedjustthistypeofadvice.Shedidn’tdoit.

Instead,HymanrecruitedclassmateJennyFleisstohelphertesttheirproposedsolution.HymanandFleisssetupanexperimenttoanswertwokeyquestions:

1. Willmiddle-toupper-classyoungwomenrentadesignerdressifitisavailableatone-tenththeretailprice?

2. Willwomenwhorentdressesreturnthemingoodcondition?

ThenHymanandFleissborrowedorbought130dressesfromdesignerslikeDianevonFurstenberg,CalvinKlein,andHalstonandsetupanexperimenttorentdressestoHarvardundergrads.Theyadvertisedaroundcampus,renteda

rentdressestoHarvardundergrads.Theyadvertisedaroundcampus,rentedalocation,andinvitedyoungwomen.Theexperimentansweredbothquestions.Ofthe140womenwhocameintoviewthedresses,35percentendeduprentingone,and51of53mailedthembackingoodcondition(theothertwohadstainsthatwereeasilyremoved).Thisexperimentresolvedsomeoftheuncertaintyreflectedinthetwoquestionsitwasdesignedtoanswer.

Butwouldwomenrentdressestheycouldn’ttryon?Toanswerthatquestion,HymanandFleisssetupanotherexperiment,thistimeontheYalecampus,allowingwomentoseethedressesbeforerentingbutnotallowingthemtotrythemon.Inthesecondtrialtheyhadmoredressoptions,becausethefirstpilotrevealedthatmanywomendidn’trentbecausetheycouldn’tfindanoptiontheyliked.TheYalepilotshowedtwothings:womenwouldrentdresseswhentheycouldn’ttrythemon,andthepercentageofwomenwhorentedincreasedtomorethan55percentbecausetheyhadmoreoptions.

NowHymanandFleisswerereadytotestthebigidea:Wouldwomenrentdressestheycouldnotphysicallysee?TheentrepreneurstookphotosofeachdressandranatestinNewYork,whereonethousandwomeninthetargetaudienceweregiventheoptiontorentadressfromPDFphotos.Thefinalexperimentshowedthatroughly5percentofwomenlookingforspecialoccasiondresseswerewillingtotrytheservice—enoughtodemonstratetheviabilityofrentinghighfashionovertheweb.

SoHymanandFleissgathereddataonwhetherdesignerswouldgofortheirideaandwhethertheycouldusedesigners’websitesastheirrentalchannel.Lessthantwoweeksafterconceivingtheidea,thetwowomencold-calledDianevonFurstenberg,aninfluentialfashiondesignerandpresidentoftheCouncilofFashionDesignersofAmerica.TheinitialideaHymanproposedtovonFurstenbergwastosetuparentaloptiononthewebsitesofexistingdesigners.Hyman’sstart-upwouldtakecareoffulfillment—takingtheorder,shippingthedress,anddry-cleaningthereturns.VonFurstenbergwasintriguedbytheideaandhelpedHymanandFleisssetupmeetingswithmorethantwentydesigners.

Theinitialresponsefrommostdesignerswasextremelynegative.“Weweregoingtodesignersaskingtobuytheirinventorysowecouldrentitatthesametimeit’savailableatSaksFifthAvenueandNiemenMarcusfor10percentoftheretailprice,”saidHyman.“Inthefirstmeetingstheirresponsewasbasically,‘overmydeadbody.’”2Designerswereworriedaboutcannibalization.Rentingdressesinsteadofsellingthemseemedlikeabadidea.

HymanandFleissrealizedthattomaketheirideawork,theywouldneedto

HymanandFleissrealizedthattomaketheirideawork,theywouldneedtohavetheirownwebsiteandinventory.SotheideaofRenttheRunway—usingtheNetflixmodeltorentawidevarietyofhigh-fashiondressesfrommultipledesigners—wasborn.

NowthatHymanandFleisshadresolvedconcernsaboutwhethertherewouldbedemandfortheirproduct—andwhattheirinitialsolutionmightlooklike—theywerereadytolaunch.Butthechangeinbusinessmodelmeanttheyneededcapitaltopurchaseinventory.Thetypicaladvicewhenyou’regoingforcapitalistomakesureyouhaveatop-notchbusinessplanandgetcapitalascheaplyaspossible.Theydidn’tdoit.

Instead,astheytooktheideatopotentialinvestors(includingBainCapital,whichendedupfinancingtheirfirstround),theystillhadnoformalwrittenbusinessplan.Whenaskedwhy,Hymanreplied,“We’reanti-businessplanpeople.Wethinkthatsomanypeoplejustsitaroundalldayandstrategizebuttheydon’tact.”Fleissconcurred,saying,“Wehadabiasforaction,notbusinessplanning.”Infact,onereasonHymanandFleisschoseBainCapital,eventhoughitwasn’tnecessarilythecheapestcapital,wastheattitudeofpartnerScottFriend.“Hesharedourcommitmenttolearningbydoing,”saidFleiss.3

Withcapitalinhand,thetwowomenwerereadytobuildtheteam.Thetypicaladviceistohireexpertstoheadeachfunctionalarea,perhapssomeonewhocanleveragesignificantcorporateexperiencetotaketheteamtothenextlevel.Theydidn’tdoit.

Instead,Hymantookonmarketing,andFleisstookonfinance.Theythenlookedforindividualshavingbroadskillswhocouldweardifferenthats.“HavingJennserveasCMOandmeasCFOistypicalofourfluidapproachtoallocatingresponsibilities,”saidFleiss.“Weneedmanagerswhocanweardifferenthats.Welearnedaboutthevalueofall-aroundathleteswhenLarajoinedonanunpaidtrialbasistohelpwithourcollegemarkettests.AlthoughshehadyearsofexperienceatCoach,shewasn’tafraidtomovedressracks.Brooke,ourdirectorofcustomerinsight,hashadseveraldifferentrolesbutshe’sneverworriedaboutthetitle...Wemakeheavyuseofunpaidinternshipstotestwhetheremployeeshavethesamehungryjack-of-all-tradesattitude.”4

Withasmallteaminplace,thetypicaladvicewouldbetocarefullydevelopaflawlesswebsiteandservicewithbroadappeal,addingfeaturesthatmightattractawidersetofcustomers.Theydidn’tdoit.

Instead,RenttheRunwayquicklylaunchedabetaversionofitsserviceforfivethousandinvitedmembersonNovember2,2009.RTRstartedwitheight

hundreddressesfromthirtydesigners—arelativelysmallinventory.“Wefollowedtheminimumviableproductapproach,”saidFleiss.“Attheoutsetwejustwantedtoprovidethecapabilitytorentdresses.Nothingfancy.”ButwiththehelpofaNewYorkTimesarticletitled“ANetflixModelforHauteCouture,”initialdemandforthesmallinventoryprovedalmostoverwhelming.5

Nowwithprovendemandandincreasingcustomerfeedbackonhowtoimprovetheservice,RTRwaspreparedtoinvestinacompletesolution.Overtheensuingmonths,asdemandcontinuedtoincrease,itexpandeditsinventorytomorethanthirtythousanddresseswithhelpfroma$30millionroundoffinancing.“Ourrevenuegrowthisamazing,”HymantoldusattheendofRTR’sfirstyear.“Thisisadreamcometrue.”Butamorevisiblesignofsuccess,perhaps,isthat“itsinventorydressed85percentoftheladieswhoattendedPresidentObama’ssecondinauguration.”6

LessonsforManagers:HowtoTurnUncertaintyintoOpportunity

RenttheRunway’sstoryprovidesawindowintotheinnovator’smethod.Inanutshell,it’saprocessbywhichsuccessfulinnovatorsmanagetheuncertaintyofinnovation—aprocesstotestandvalidateacreativeinsightbeforewastingresourcesbuildingandlaunchingaproductcustomersdon’tactuallywant.We’vefoundthatthismethodiswidelyusedbythemostsuccessfulinnovatorsinstart-upsaswellasestablishedcompanies.

Themethoddoesn’tincludewritingabusinessplan.HymanandFleissrefusedtowriteoneeventhoughvirtuallyeverybusinessschoolholds“businessplan”competitionsfor“start-up”ideaslikeRenttheRunway.Whydomanagementexpertscallforwritingabusinessplan?Therecommendationcomesfromtraditionalmanagementtheorythatwasdevelopedtosolveacertaintypeofproblem:establishedfirmsattemptingtooptimizeunderconditionsofrelativecertainty.Indeedacloserlookatmanyofourmanagementpractices—suchasstrategicplanning,theprecursortobusinessplanning—revealsthatmanyofourfamiliarmanagementpracticeswereoriginallydesignedtocapturevalueunderconditionsofrelativecertainty.However,mostnewbusinessideas(insideoroutsidethecorporation)arecharacterizedbyacompletelydifferentsetofconditions:uncertainty.Forexample,howcouldHymanpossiblyknowwhatthedemandforrenteddesignerdresseswouldbe?

Increasinglyevidencesuggeststhatourfamiliarmanagementtechniquesworkpoorlywhenappliedtothecontextofuncertainty.Forexample,researchshowsthatunderconditionsofuncertainty,planningsimplydoesnotwork.7Mostofthetimeitwastestimeandresourcesasyouconjureevidencethatyourhypothesis—thatis,yourguess—isright;itdoesnotresolvetheuncertainty.Inourexample,insteadofwritingaplan,Hymandesignedasetofexperimentstotesttheleap-of-faithassumptionsbehindherbigidea.Eachexperimentwasdesignedtotestspecificassumptions,answeringspecificquestionstoresolvetheuncertaintiessurroundingheridea.

TheseexperimentshelpedHymanandFleiss“nailit”—ourtermfordeeplyunderstandingtheuncertaintyandresolvingitwell.Forexample,thefirstRTRexperimentswerefocusedonresolvingdemanduncertainty:WereHymanandFleissreallyundertakingaproblemworthsolving?Theinitialexperimentsshowedthattherewasdefinitelyademandforrentingdesignerdresses.Therightdesignerdressforabigsocialeventnailedthejob-to-be-done:makinga

rightdesignerdressforabigsocialeventnailedthejob-to-be-done:makingawomanfeelspecial,confident,anddesirable.

Buttheseexperimentsdidn’tshowwhetherrentingovertheinternetwasaviablesolution.Totestthisassumption,Hymandidn’twastetimeandresourcesbuildingawebsite.Instead,shecreatedasimplesubstitute,orminimumviableprototype:PDFpicturesthatshesenttopotentialcustomersinNewYork.Thisexperimentprovidedcrucialdataonwhatcustomerswanted,andfromtheresheiteratedfromtheminimumviablesolutiontobecomeanawesomesolution,whereRTRfashionadviserstalktocustomers“likeawomanmighttalktohergirlfriend,”suggestingshoes,accessories,and,whenneeded,shippingtwodresssizesinsteadofonetomakesurethedressfit.

OnlyafterRTRnailedtheproblemandsolutionwasittimetofigureoutthebusinessmodeltoensurethatthego-to-marketstrategywouldwork.Validatingthebusinessmodelinvolvesexperimentingtofigureouthowtocommunicatewithyourcustomersandcapturevaluefromthem—developingtherightpricingmodeltogeneraterevenuestreamsthatwillcovertheoperationalactivities(coststructure)andthekeyresourcesandcapabilitiesthefirmwillneedtodeliverthesolutiontocustomers.Hyman’sinitialhypothesisaboutthechanneltothecustomer—designerwebsites—turnedouttobewrong.Apivot—whichwedefineaschangingakeyelementoftheproblem,solution,orbusinessmodel—wasnecessary.RTRpivotedfromabusinessmodelasafulfillmentpartnerforexistingdesignerstoaNetflix-likebusinessmodel.

Althoughthispivotturnedouttobecritical,theNetflixbusinessmodeldidn’texactlyworkeither.ItneededtobeadaptedtofitRTRclients’needs.Netflixcustomersdon’tneedadviserstohelpclientschooseaproduct,butRTRrealizedthatitssuccessdependedontheeffectivenessoffashionadviserstocoachclients.Moreover,Netflixdoesn’trentamovieforaspecificnight—andifthemoviedoesn’tarriveasexpected,theserviceisn’tafailureforcustomers.SoRTRsearchedforanotherapproach,findingananalogyintheairlines’modelofsellingaproduct(reservingaseat)foraparticulartimeandplace;RTRadapteditsbusinessmodelaccordingly.

FIGUREI-1

Theinnovator’smethod

TheRTRexperienceillustratesthe“how-to”oftheinnovator’smethod:aseriesofexperimentationcyclesthatresolvetheuncertaintiesaroundtheproblemyou’retryingtosolve,thesolutionyoupropose,andthebusinessmodeltotakeyoursolutiontomarket.Wedescribethismethodinafewsteps—insight,problem,solution,andbusinessmodel—duringwhichyourcoretasksaretosavorsurprises(insight),discoverjobs-to-be-done(problem),prototypetheminimumawesomeproduct(solution),andvalidateyourgo-to-marketstrategy(businessmodel)(seefigureI-1).Naturally,inaworldofuncertainty,fewthingsarelinear.Butwedescribetheinnovator’smethodasalinearprocesstosimplifyacomplexprocessandatotherpointsinthebooktrytodescribehowthe“steps”mayoverlaporberecursive.

SourcesoftheInnovator’sMethod

Weconductedseveraloverlappingresearchprojectstounderstandhowinnovatorssuccessfullybringtheirideastomarket.ThisresearchstartswithTheInnovator’sDilemma,whichfirstcalledforadifferentwayofmanaginginnovation,andthenTheInnovator’sDNA,whichidentifiedthefivediscoveryskillsofdisruptiveinnovatorsthathelpthemgenerateinsights.8AlthoughTheInnovator’sDNAprovidesadviceonhowtogenerateinnovativeideas,afteryou’vegeneratedanideaforanewproduct,process,orservice,whatisthenextstep?Howdoyouknowwhethertheideaisworthpursuing?Howdoyouknowwhetheryou’vefoundaproblemworthsolving?Howwillyouknowifyou’venailedasolutiontothatproblem?Inshort,whatarethetoolstotest,validate,andcommercializenewideas?

Toanswerthesequestions,wereviewedandsynthesizedemergingperspectivesfromotherdisciplinesaboutmanaginguncertainty.We’renotthefirsttoidentifytheneedforanewwaytomanagetheuncertaintyofinnovation.Eachmajordiscipline,uponencounteringuncertainty,hasdevelopeditsownanswer,includingengineering(designthinking),computerscience(agilesoftware),entrepreneurship(leanstart-up),physics(activelearning),themilitary(adaptivearmy),andsoon.Eachperspectiveoffersvaluableinsightsandvaluablecontributionsthatwehavesynthesizedhere.Youmayrecognizeelementsoftheinnovator’smethodinotherbooks,suchasbooksondesignthinking(TimBrown’sChangebyDesign,RogerMartin’sTheDesignofBusiness),start-ups(suchasEricRies’sLeanStartup,SteveBlank’sStartupOwnersManual,andAlexOsterwalder’sBusinessModelGeneration),innovation(suchasChristensen’sInnovator’sDilemma,ShonaL.BrownandKathleenM.Eisenhardt’sCompetingontheEdge,BobSutton’sWeirdIdeasthatWork,orRitaGuntherMcGrathandIanC.MacMillan’sDiscovery-DrivenPlanning)oragilesoftware(suchasJeffSutherlandandKenSchwaber’sTheScrumGuideorKennethS.Rubin’sEssentialScrum).Werespectandrecommendtheseauthorstoyoufortheirthoughtfulcontributions.

Evenwithvaluableinsightsfromtheirdisciplines,thesebooksoftencoveronlyapartoftheinnovationprocess.Inthisbook,wepullthepiecestogethertoprovideaholisticmodel—startingwithgeneratinganinsight,thenmovingtodeeplyunderstandingthecustomerproblem,rapidlyprototypingyourwaytoanawesomesolution,andfinallyaligningthebusinessmodelwiththesolutionbeforescalingit.AsshowninfigureI-2,designthinkingisexceptionalin

helpingpeopleunderstandacustomerproblem,butitdoesn’taddresstheneedtofindtherightbusinessmodel.Leanstart-upexcelsatprototypingthesolutiontoaproblembutoftenprovideslittleguidanceongeneratingideasordeterminingwhetheryou’vefoundaproblemworthsolving.Booksonbusinessmodelsprovideexcellenttoolsforfiguringoutotherelementsofthebusinessmodelbutdonotaddressgeneratingbigideasorhowtodeeplyunderstandacustomerproblem.Ourholisticmodelhelpstakeyouthroughthestepsrequiredtonailabusinessmodelbeforescalingit.Andbecausemostbooksfocusonentrepreneurialstart-ups,theydon’ttakeyouthroughthecrucialstepofhowtoadapttheseprinciplesforalargecompanysetting.

FIGUREI-2

Themethodindetail

Tounderstandhowmanagersappliedandadaptedtheseprinciplesinestablishedcompanies,weconductedextensiveresearch—bothqualitativeand

establishedcompanies,weconductedextensiveresearch—bothqualitativeandquantitative—withhundredsofcompaniestounderstandwhatmanagersdotobringtheirideastomarket.Westudiedsuccessfulaswellasunsuccessfulcompaniestodiscoverthedifferencesbetweensuccessandfailure.Thesecompaniesfallintofourcategories:

EstablishedcompaniesthatmaintainedtheirinnovationcapabilitiesafterfoundingEstablishedcompaniesthathadlost(orwerelosing)theirinnovationcapabilitiesbutthenreignitedthemSuccessfulandfailedinnovationinitiativesinnewventuresSuccessfulandfailedinnovationinitiativesinestablishedcompanies

Althoughwedonotdescribeallthecompaniesinthisbook,tableI-1providesasampleofthosethatfallintothefirstthreecategories.Thesecompaniesrepresentmostofthecasestudiesweuseinthebook.

TABLEI-1

Samplecompanies

Establishedcompaniesthatmaintaininnovation

Establishedcompaniesthathavereignitedinnovation

Startupinnovators

Amazon Intuit RenttheRunway

Salesforce.com HindustanUnilever Qualtrics

Google Procter&Gamble MotiveCommunications

ValveSoftware Mondelez GitHub

Regeneron BancoDavivienda Asana

Starbucks Godrej&Boyce Chegg

Starbucks Godrej&BoyceManufacturing

Chegg

W.L.Gore AT&T UltimateArena/Xfire

IDEO Cemex BigIdeaGroup

Somecompanies,suchasAmazon,Google,andValveSoftware,havedonearemarkablejobofinstitutionalizingtheentrepreneurialmanagementprinciplesonwhichtheywerefounded.Forexample,undertheleadershipofJeffBezos,Amazonhassustainedanextraordinaryinnovationtrackrecordsinceitsfoundingin1996.Indeed,thecompanyhasmaintainedaninnovationpremium(IP)thathasaveraged73percent.9(WeintroducedthismetricinTheInnovator’sDNAanduseittoranktheForbeslistofmostinnovativecompanies.)Amazon’sIPmeansthatinvestorsarewillingtopayapremiumforitsstockthatis73percenthigherthanthenetpresentvalueofcashflowsfromitsexistingbusinesses.Amazon’sIPhasbeenthehighestofanycompanyintheworldduringthepastfifteenyears.10

Othercompanies,suchasIntuit,Procter&Gamble,andHindustanUnilever,representinnovationturnaroundstories.Afteryearsofstablebutuninspiringinnovationperformance,thesefirmsappliedtacticswedescribetodramaticallyboostinnovation.Othercompaniesarestart-ups,suchasRenttheRunway,Qualtrics,andMotiveCommunications,thatproviderichinsightintotheprocess.Finally,somecompaniestriedtobringtechniqueslikeleanstart-upinsidetheircompaniesbutfailed.Theireffortsteachusaboutthechallengesofsuchattempts.

DoestheInnovator’sMethodMakeaDifference?

Westartedthisresearchbyasking,“Whatprocessesdosuccessfulinnovatorsusetovalidatetheirideasandbringthemtomarket?”Despiteourclaimsofsuccess,youmayaskyourself,Doestheinnovator’smethodmakeadifference?Perhapsthemosttellingevidencecomesfromtheestablishedcompanieswestudiedthatboostedtheirinnovationperformanceafteradoptingelementsofthemethod.Amongthepubliclytradedcompanieswedescribeinthisbook,weobservedthatthreetofiveyearsafteradoptingkeyelements,theirIPsincreasedbyanaverageof57percent(seetableI-2).

TABLEI-2

GrowthinIPafteruseoftheinnovator’smethod

Company Innovationpremiumbeforea

Innovationpremiumafterb

Percentageincrease

Additionalvaluetomarketcapc

Intuit 20% 29% 45% $1.8billion

HindustanUnilever

51% 61% 17% $2.0billion

Mondelez 17% 31% 78% $8.3billion

Procter&Gamble

18% 36% 95% $40.5billion

Godrej 40% 60% 50% $0.9billion

AT&T –13% 6% n/a $35.8billion

a.All“before”IPpercentagesaretakenbetween2006and2008beforethecompanyinitiatedprogramsthatincludedimportantelementsoftheinnovator’smethod(exceptProcter&Gamble’s,whichisfrom2000,theyearA.G.LafleybecameCEO).

b.All“after”IPsarefrom2013.

c.CalculatedasthedifferenceinIPmultipliedbythecompany’s2013marketcap.

Althoughitalwaystakestimeforinnovationstobearfruit,thesenumbersareaccompaniedbygrowthinrevenue,profit,andgeneralexcitementatthecompaniesinvolved.Forexample,HindustanUnileverincreaseditsrevenueby40percentinasingleyear;Intuitmultiplieditsrevenuefromsuccessfulnewproductstenfoldoverthreeyears;MondelezChinawasfailingbutturneditselfintoasuccessful$1billionbusiness;Godrejcreatedanewcategoryofconsumerproductssoldthroughanentirelynewdistributionchannel;Procter&Gamblecreatedseveralmultibillion-dollarbusinesses;andAT&TturnedanegativeIPintoapositiveone(investorsinthemid-2000swereexpectingAT&T’scurrentbusinessestoshrink,buttheynowexpectthemtoachievegrowth).

WhoNeedsTheInnovator’sMethod?

Anyonewantingtoinnovateorfacingproblemscharacterizedbyuncertaintyneedstounderstandwhenandhowtoapplytheinnovator’smethodtoincreasetheirchancesofsuccess.Weenvisionthreeprimaryaudiencesforthisbook:

Managersfromanyfunctionordivisionwhowanttoinnovateorsolveproblemscharacterizedbyuncertainty,butdon’tknowthestepsorfeelfrustratedbytheimpedimentsLeaderswhofacethechallengesofdeclininggrowth,theneedtosustainexistinggrowth,orthedifficultyofretainingtalentedmanagerswhomayleaveforstart-upsEntrepreneurs,manyofwhommayhavebeenfrustratedmanagers,whowanttomaximizetheirchancesofsuccess

Althoughtheideasinthisbookclearlyapplytomanagers,leaders,andentrepreneurs,theyarerelevanttoanyonetryingtosolveacomplexproblem—someonetryingtoreinventeducation,improvepoliticaldecisionmaking,orevensolveachallengingfamilyproblem.Forexample,wethinkUSgovernmentofficialswouldbemoreeffectiveiftheywoulddesignexperimentsandruntheminparalleltoseewhattheycouldlearnbeforerollingoutapolicytotheentirecountry.(Infact,Chinahasbeensuccessfullysettingpolicythroughexperimentsandiscurrentlyrunning,inparallel,sevenexperimentstodeterminethebestwaytocontrolairpollution.)Ultimately,ourgoalistoteachyouabouttheprinciplesthatyoucanusetosolveanychallengingproblem.

Thebigideathatdifferentiatesthisbookisthatuncertaintyrequiresanewsetofmanagementprinciples.Whiletraditionalmanagementworkswellforproblemsofrelativecertainty,itworkspoorlyforproblemscharacterizedbyuncertainty.Byusingthetoolsdescribedhere,youwilllearnhowtocreativelysolvehigh-uncertaintyproblems.Youwilllearnhowtotransformanideaintoareality.Thisknowledgeisvaluableforleadersandmanagersinlargeorganizationsaswellasbuddingentrepreneurs.Foranyonewhohasthought,“Iwonderwhetherthisideacouldwork?”buthasn’tknownhowtotakethenextstep,TheInnovator’sMethodisyouroperatingmanual.

1

TheInnovator’sMethod

HowdoweturnIntuitintoaneight-thousand-personstart-up?That’swhatwearetryingtodo.

—BradSmith,CEO,Intuit

IN2008,INTUITcelebrateditstwenty-fifthanniversaryandnamedBradSmithasCEO.FoundedbyScottCook,Intuit—makerofsuccessfulfinancialsoftwarepackageslikeQuicken,QuickBooks,andTurboTax—hadachievedremarkablesuccess,growingrevenuestomorethan$3billionandcreatingamarketvalueof$10.2billion.ButCookandSmithwereworried.Intuithadseeminglyreachedaperformanceplateau,anditsmarketvaluehadbeguntofall.Annualrevenuegrowthhaddroppedinhalf,from15percent(1998–2003)to8percent(2004–2008),andannualincomegrowthhadslowedevenmoredramatically,from31percentto6percent.Notsurprisingly,Intuit’sannualmarketvaluegrowthhadtakenahitaswell,droppingfrom14percentto5percent.

Worse,afterstudyingIntuit’snewproductlaunchesoverthepriordecade,Cookdiscoveredthatfewerthan10percentcouldbecalledsuccessfulfromarevenueandprofitperspective.Meanwhile,Intuit’snetpromoterscore(NPS),ameasureofwhethercustomerslikeaproductenoughtopromoteittofriendsandcolleagues,hadflattened.1Finally,thecompany’sinnovationpremium(IP),ameasureofstockpricepremiumpaidbyinvestorsbecauseofexpectationsoffuturegrowththroughinnovation,haddroppedfrom57percentin2000to20percentin2008.2Aftertwenty-fiveyears,byeverymeasure,itseemedasifthecompanyhadreachedthetelltalelimitoftheS-curve:Intuitwasmovingfromgrowthtomaturity,withthethreatoffailurenotfarbehind.

CookandSmithdidn’twantthattohappen.Butwhatcouldtheydo?

TheInnovationCrisis:UnprecedentedUncertainty

Intuitwasexperiencingwhathappenstomostsuccessfulstart-upsastheygrowintolarge,establishedcorporations:executionbecomesthehighestpriorityastheyscalethebusinesstomeetthedemandsofexistingcustomers.Overtime,thefocusonexecutioncrowdsoutinnovation.IntuitwaslosingtheabilitytoperformwhatPeterDruckercalledmanagement’sfundamentaltask:“tocreateacustomer.”3Ironically,ascompaniesfocusoncapturingvaluefromcustomers,theyoftenlosetheabilitytocreatecustomers.

Andsomethingmorehadchanged.It’saclichétosaythattheworldismoreuncertainthaneverbefore,butfewpeoplerealizetheextentoftheincreaseinuncertaintyoverthepastthirtyyears.Moreimportant,theydon’tunderstandthatgreateruncertaintyhascreatedtheneedtochangethewaymostorganizationsaremanaged.Thechallengeofcreatingacustomerismorecomplexanduncertainthaneverbefore.Here’swhy.

Therearetwotypesofuncertaintythatinfluenceafirm’sabilitytocreateacustomer:demanduncertainty(willcustomersbuyit?)andtechnologicaluncertainty(canwemakeadesirablesolution?).*Uncertaintyarisesfromtheunknownsassociatedwithsolvinganyproblem,whicharesometimescalled“unknownunknowns,”suchashiddencustomerpreferencesorundiscoveredelementsofatechnicalsolution.

Themoreunknownsthereareaboutcustomerpreferencesandbehavior,thegreaterthedemanduncertainty.Forexample,whenJennHymanofRenttheRunwaycameupwiththeideatorentdesignerdressesovertheinternet,demanduncertaintywashighbecausenooneelsewasofferingthisservice.4Incontrast,whenSamsungandSonyweredecidingwhethertolaunchLEDTVs,whichofferedbetterpicturequalityatroughlythesamepriceasplasmaTVs,therewasloweruncertaintyaboutdemandbecausecustomerswerealreadybuyingTVs.

Technologicaluncertaintyresultsfromuncertaintyregardingthetechnologiesthatmightemergeorneedtobecreatedforanewsolutiontoemerge.Forexample,awidevarietyofcleantechnologies(includingwind,solar,andhydrogen)arevyingtopowervehiclesandcitiesatthesametimethatawidevarietyofmedicaltechnologies(chemical,biotechnological,genomic,androbotic)arebeingdevelopedtotreatdiseases.Astheoverallrateofinventionacrossindustriesincreases,sodoestechnologicaluncertainty.

TobetterunderstandtheuncertaintyfacingfirmslikeIntuit,westudiedthedepthanddegreeoftheshiftindemandandtechnologicaluncertainty.First,welookedatmultiplemeasuresoftherateoftechnologicalchange.Onemeasureistherateofinventionpatenting(seefigure1-1).

Thisisanimperfectmeasure,butclearlyitreflectsastrikingincreaseintherateofinventioninthepasttwentyyears.5Notsurprisingly,therehasbeenasimilarlydramaticincreaseintotalR&Dspending.

Asnewtechnologiesemerge,companiesarerising,andfalling,atamuchfasterpacethaneverbefore.Thisphenomenonisamplifiedbyincreasinglyfasterchangesincustomers’demandsforanewmixofproductsandservices.Forexample,considerhowquicklyentertainmentpreferenceshavechanged.Formorethanthreedecades—between1950and1980—weaccessedTVshowsandmoviesprimarilythroughthreenetworks(ABC,NBC,CBS)oratmovietheaters.ThenwiththeadventoftheVCR,we’veprogressedtowatchingmoviesonourhomeTVscreensviavideocassettesandthenDVDs,towatchingthemonourcomputers,thenonourlaptops,thenontablets,andnowonourphones,mostlyviainternetstreaming.WhentheDVDemerged,itwasadoptedmorequicklythananypreviousconsumerelectronicdevicesellingjustoverthreehundredthousandunitsinthefirstyear—untiltheiPad,whichsoldthreemillionunitsinitsfirsteightydays.6Inshort,customerpreferencesarenotonlychangingbutalsochangingatanacceleratingpace.

FIGURE1-1

TotalUSpatentapplications

Source:USPatentandTrademarkOffice,“U.S.PatentStatisticsChart,CalendarYears1963–2012,”http://www.uspto.gov/web/offices/ac/ido/oeip/taf/us_stat.htm.

AcloserlookatdemanduncertaintyamongtheFortune500underscoresthispattern.Thechurnamongthishighest-echelongroupincreasedsignificantlybetween1950and2010(seefigure1-2):in1960,twenty-sevenfirmsmovedinandoutoftheFortune500peryear,butnowthechurnhasincreasedtothirty-sevenfirms—analmost40percentincrease.ThismeansthattheaveragefirmnowstaysintheFortune500forsevenyears,comparedwithtwelveyearsintherecentpast.Otheracademicstudiesconfirmthatcompetitiveadvantagehasbecomehardertosustainoverabroadrangeofhigh-andlow-techindustries.7

FIGURE1-2

AverageannualFortune500turnover

Source:CompuStat,2013.

It’snotanexaggerationtosaythatasecondIndustrialRevolutionhasoccurred,arevolutionfueledbynewtechnologiesandcustomersandaccompaniedbyradicaluncertainty.Companiesdon’tholdontocustomersaslongastheyusedto,andnewtechnologiesandcompetitorsareemergingfasterthaneverbefore.

Whatdrivesthesedramaticincreasesinuncertainty?Therearemanyreasons,buttwodisruptivetechnologieshaveplayedacrucialrole:personalcomputingandtheinternet.AnotherkeyistheemergenceofcapitalismincountriessuchasChina,India,Russia,andBrazil.

Personalcomputinghasplacedpowerfulanalyticaltoolsintothehandsofeveryonehavingthemotivationtomasterthem.Ithasdemocratizedanddecentralizedcomplexproblemsolving.Similarly,theinternethashadaprofoundeffectasalow-costmarketinganddistributionchannelforanyonewantingtosellaproduct.Thismeansthatmorenewproductscanbelaunchedtoalargeraudience,andfaster,thaneverbefore.

Finally,asChina,India,Russia,andBrazilhavejoinedtheglobaleconomy,theyhaveexpandedthepoolofpotentialentrepreneursby2.5billionpeople.

theyhaveexpandedthepoolofpotentialentrepreneursby2.5billionpeople.Thesenewentrepreneursenjoylowertechnicalbarrierstoentry(withopensourcesoftware,programmingplatforms,andcloudtechnologies),lowercapitalbarriers(withthegrowthofventurecapital,angelfunding,andcrowd-funding),lowerproductionbarriers(withtheadoptionof3-Dprintersandglobalsuppliers),andlowerdistributionandmarketingbarriers(withtheinternetandtheemergenceofdirectshippingandsocialmedia).Asaresult,therearesimplymorecompetitorsthaneverbefore.

Thesechangeshaveincreaseduncertaintytoatippingpoint—athresholdwherethetraditionalwaysweorganizedandmanagedcorporationswillnolongerworktosustaingrowthinthefuture.Thisisespeciallytrueofcompaniesintheindustrieshavingthehighestuncertainty,suchascomputersoftwareandmedicalequipment(see“HowMuchUncertaintyDoYouFace?”).Infact,thecomputersoftwareindustry—whereIntuitcompetes—isatthehighendoftheuncertaintyspectrum,withvolatilerevenues,heavyR&Dspending,andnewentrantsemergingatanunprecedentedrate.Intuit’sScottCookwasawareofthedifficultyofpredictingandmeetingcustomerdemand.That’swhymanyofthecompany’snewproductshadflopped.HehadalsoseennewcompetitorscomealongtoattackIntuitinnewways,withdifferenttechnologiesandbusinessmodels.Herealizedthatheneededtofigureoutanewwaytomanageinthehighlyvolatilecomputersoftwareindustryifhehopedtocompetewiththestart-ups.Here’swheretheIntuitstorygetsinteresting.

HowMuchUncertaintyDoYouFace?

Noteveryonefacesthesamelevelsofuncertainty.Someindustrieshavegreaterinherentdemandortechnologicaluncertainty.Considerthe2×2matrixshowninfigure1-3.Thehorizontalaxisplotseachindustrybasedontechnologicaluncertainty,measuredastheaverageR&Dexpendituresasapercentageofsalesintheindustryoverthepasttenyears.Theverticalaxisplotseachindustry’sdemanduncertainty,measuredasanequalweightingofindustryrevenuevolatility,orchange,overthepasttenyearsandpercentageoffirmsintheindustrythatenteredorexitedoverthepasttenyears.Althoughtheseareimperfectmeasures,theyidentifytheindustriesfacingthehighest,andlowestbaselinelevelsofuncertainty(seefigure1-4).

FIGURE1-3

Demandandtechnologicaluncertaintybyindustry(2002–2011)

Source:Compustat,2013.

Note:Quadrantsdrawnatmedianvalues:(1.4,67.5).

Note:Beer&liquor,insurance,utilities,preciousmetalsdisplayedatdemanduncertainty=30forvisualpurposes.Truedemanduncertaintyvaluesare28.9,14.4,21.6,respectively.

Wheredoesyourindustrysit?Doyoufacehighorlowuncertainty?Asyoucansee,someindustriesfacelowuncertainty;examplesincludeprovidersofpersonalservices,suchashairstylinganddrycleaning,whohaveusedsimilartechnologiestoprovidesolutionsforwell-known

demands.Bycontrast,inthelower-rightquadrantinfigure1-3areindustriesthatfacelowerdemanduncertaintybuthightechnologicaluncertainty.Forexample,aircraftmakerscangenerallypredictthedemandforaircraftproduction.Thechallengetheyfaceistechnologicaluncertainty;BoeingandAirbusspendlargesumsdevelopingadvancednewaircraftliketheBoeing787andtheAirbusA350.

FIGURE1-4

Industriesrankedbylevelofuncertainty

Intheupper-leftquadrantareindustriesthatfacehighdemanduncertaintybutlowtechnologicaluncertainty.Forexample,restaurantsandhotelsoftenhavedifficultypredictingdemandfortheirservices,becausemanyfactorsinfluencewhether,when,andwherepeopleeatoutortravel.However,thetechnologiesofofferingfoodorlodginghavenotchangedmuchovertheyears.

changedmuchovertheyears.

Finally,industriesintheupper-rightquadrant—suchassoftware,pharmaceuticals,andmedicalequipment—facehighuncertaintyinbothdemandandtechnology.Forexample,whowouldhavepredictedthatmedicalrobotswouldperformsurgeries?WhenIntuitiveSurgicallaunchedtheDaVinciSystemmedicalrobot—whichallowssurgeonstooperateusing3-Dvisualizationandfourroboticarms—thecompanyfacedsignificanttechnicalaswellasdemanduncertainty.

Ouranalysissuggeststhat,onaverage,thetoptenmostuncertainindustriesrequiregreaterinnovationmanagementskillsthanthebottomten.However,evenifyourindustryprovidescluesaboutaverageuncertainty,everyproblemischaracterizedbyitsownlevelofuncertainty.Forexample,althoughWebvanwasafoodretailerinanindustrywithrelativelylowuncertainty,itsonlineplatformofhomedeliveryfacedbothhighdemanduncertainty(willcustomersbuygroceriesonline?)andhightechnologicaluncertainty(canwefulfillordersinacost-effectiveway?).Demanduncertaintywashigh,becausethecompanyhadfewfactsaboutdemandandmanyassumptions.Thesamewastrueoftechnologicaluncertainty;ithadmanyassumptionsaboutwhichfulfillmenttechnologieswouldworkbest.

Theratioofassumptionstofactsequalsyouruncertaintyratio.Ifyourproblemischaracterizedbyalowuncertaintyratio,youcanprobablyapplytraditionalmanagement.Ifyouhaveahighuncertaintyratio,thenTheInnovator’sMethodshouldguideyou.UnfortunatelyforWebvan’sinvestors,thecompanywasnotsuccessfulinexperimentingtoresolveitshigh-uncertaintyproblemsbeforeafull-scalelaunch—$500million—thatproveddisastrous.

ANewWaytoManage:Intuit’sTransformation

ThestoryofIntuit’sjourneygivesmanagersanarchetypeforanewwayofmanaginginahigh-uncertaintyindustry.Intuit’stransformationarguablybeganin2004withitsadoptionofthenetpromoterscore.NPSisbasedonasinglequestionposedtocustomers:Howlikelyareyou,onascaleof0(notatalllikely)to10(extremelylikely),torecommendthisproductorservicetoacolleagueorfriend?Aproduct’sNPSisthepercentageofpromoters(thosewhoscorethemselves9or10)minusthepercentageofdetractors(scores0–6).8

Netpromoterscore=%promotersminus%detractors

Historically,Intuitproductshaddominatedtheirmarketsbybeingsignificantlyeasiertousethancompetitors’.Butsooncompetitorswerecatchingup,soIntuitlaunchedanefforttoimproveeaseofuseandNPS.Itspentevenmoretimewithcustomers,observeddetractors,andredesignedproducts.“Weputabigfocusonmakingourproductseasiertouse,”saysKaarenHanson,designvice-president.“Andwhenthiscompanydecidestogoaftersomething,wedoit.Sowepulledthelever.”Butthesetraditionalmanagementmovesfailedtomovethemeter.“Ournetpromoterscoresdidn’tbudge,”Hansonsays.“Anditdidn’tresultinabigjumpinsales,whichiswhatweexpected.Wepulledthedamnlever,andnothinghappened.”9

Inotherareasofthecompany,customerresponsetonewproductswasespeciallydisappointing.“Wewerehumbledwhenwelookedbackattenyearsofinnovation,”saysCEOBradSmith,whotookoverforSteveBennettin2008.“We’dlaunchedfifty-fourproducts,andfewerthanfivehadachievedanycommercialsuccess,measuredbyrevenueorprofit.Andwewerebadatshuttingdownthefailures.Whenwedid,wegotlabeledasnotbeingpatientenough.”10

DesignforDelightIntuit’sleadersknewtheyneededtofigureoutwhatwouldmovecustomersanddiscoverhowtoimprovethesuccessrateofnewproducts.Soateamwaspulledtogether.“Wewentouttounderstandwhatwasbeyondease,”saysHanson.“Andwelookedatalotoftheusualsuspects.WelookedatNike,welookedattheWHotels,welookedatHarley-Davidson,andwelookedatApple.Younameit,weprobablylookedatthem.”11TheIntuitteamrealizedthatthemostsuccessfulcompaniesdidn’tjustofferproductsthatwereeasiertouse;theyofferedproductsthatdelightedcustomers.

Productsthatdelightcustomersdotheunexpected.Theysolveaproblemcustomersdidn’tknowtheyhad,ortheyevokeapositiveemotion.Buthowdoesacompanycreateproductsthatdelightcustomers?

Theteamdiscoveredthatdesignthinkingofferedcriticalnewtoolsnotintheirfamiliarmanagementtoolset.CookhadthebenefitofsittingontheboardofProcter&GambleandsawupclosehowP&Gincorporatedtechniqueslikedesignthinkingintoproductdevelopment.Drawingondesignthinkingprinciples,Cook,Hanson,andherteamcreatedatrainingprogramcalledDesignforDelight(D4D),aprogramintendedtotransformIntuitintoadesign-driveninnovationmachine.Intuit’sD4Dinitiativewasbasedonsearchingforabigunmetcustomerneedandthenapplyingthreeprinciples.

Gaindeepcustomerempathy.Understandcustomersbetterthantheyunderstandthemselves.Gobroadtogonarrow.Generatelotsofsolutionsbeforewinnowingthelist.Experimentrapidlywithcustomers.Seekfeedbackearlyandoften.

HansonrealizedthattoinfuseD4DprinciplesintotheDNAofalleightthousandemployees,sheneededtogettopmanagementonboard.Tojump-starttheprocess,HansonandCookhelpedplanatwo-dayoffsiteforIntuit’stopthreehundredmanagers.Atfirstthegrouppaidpoliteattention,butastheaudienceplowedthroughafive-hourPowerPointpresentation,Cooksawthatthedesignthinkingapproachwasfallingflat.ButthenAlexKazaks,ayoungassociateprofessoratStanford,ledtheteaminauniqueparticipatoryexercise:Kazaksaskedeachpersontodesign,andprototype,awalletforthepersonnexttohim.Asthemanagersworkedthroughthedesignchallenge,creatingprototypes,gettingfeedback,andredesigning,thehands-onexperiencehelpedthemseethevalueofdesignthinkingasatooltodiscoveranddeeplyunderstandcustomer

valueofdesignthinkingasatooltodiscoveranddeeplyunderstandcustomerneedstocreatenewvalue.

Hansonthenorganizedaseriesofdesignforums,typicallyattendedbyroughlythreethousandemployees,toteachpeoplethekeyprinciplesandletthempracticeD4D.However,afterseveralforumsandahugeeffort,Hansondiscoveredadisappointingfact:thecompanywasn’tchangingenoughtoproducedifferentresults.“Wedidthisforaboutayear,”saysHanson,“andwhatIwashearinginthehallways—thatmademefeelabsolutelynauseous—wasthat‘designfordelight’isthisflavorofthemonth.Thiswasverydisheartening,becauseweactuallyhadseniorleadersinvolvedandengaged.Asitturnsout,seniorleadersarenotenough.”12

InnovationCatalystsand“LeanStartIn”WorkshopsStructuralchangeswereneededdeepinsideIntuit.HansonandherteambeganthinkingabouthowtocreatedeeperexpertiseinD4D.IfshecouldcreateD4Dcoaches—whatIntuitnowcalls“innovationcatalysts”—shethoughttheycouldcoachteamsapplyingD4Dintheireverydaywork.13Sosheselectednineindividualsfromavarietyofbusinessunitsandfields—design,research,andproductmanagement—tobecomethenewD4Dexperts.

TheinnovationcatalystswerechargedwithassistingprojectteamstogivethemtheconfidencetousetheD4Dplaybook.Hansonaskedthecatalyststospend25percentoftheirtimeon“big-payoffprojects.”Why?Hansonknewthatwithoutavisiblewin,theprogramwouldfadequickly.Asthefirstfewsuccessestrickledin,thedemandforexperthelpgrew.Overthenextfewyears,Hanson’steamrecruitedandtrainedanadditionaltwohundredinnovationcatalysts,whospentroughly10percentoftheirtimecoachingteams.

AsIntuitrolledouttheD4Dprogram,thecatalystsfoundthatdesignthinkingprovidedhighlyusefultoolsforgainingdeepcustomerempathy.Butitdidn’thavegreattoolsfortestingpotentialsolutionsoncecustomerpainpointswerediscovered.Cookandhisteambecamefamiliarwithleanexperimentation,ideaspopularizedbyEricRiesinTheLeanStartupandbySteveBlankinFourStepstotheEpiphany.Thetoolsofleanexperimentationwerewellsuitedtotestaleap-of-faithassumption,atermusedatIntuittorefertoahypothesisbeingtestedthroughexperiment.

SoIntuitbeganrunning“leanstartin”workshops.Employeeteamsbroughtanideatomeetabigunmetcustomerneed,andintwodaystheteamwentthroughtheentirecycleofidentifyingacustomerpainpoint,prototypingasolution,andtestingwithcustomers.14Theseworkshopshavebecomeausefulvehiclefordevelopingandprototypingnewideas.Indeed,thecombinationofforums,workshops,andcatalystshasnotonlyhelpedeveryoneatIntuitunderstandthenewD4Dplaybookbutalsoprovideddeepexpertisetosuccessfullyexecutetheplays.

ImplementingtheInnovator’sMethod

WhatexactlywashappeninginsideIntuit?Asmanagerswereadoptingideasfromdesignthinkingandleanstart-up,theywerelearninghowtosystematicallyexperimenttheirwaytosuccess.Moreover,theybegantocreatestart-upteamsthroughoutthecompanythatusedasimilarprocesstothatusedbystart-upstobringnewproductstomarket.

AsweobservedwhatwashappeningatIntuit—andwhathappenedatotherinnovativecorporationsandstart-ups—werealizedthatthesecompanieswereusingasimilarprocessfortestingandvalidatingideas.Thisprocess,whatwecalltheinnovator’smethod,consistsoffourstepstosolvehigh-uncertaintyproblemsandturninsightintoasuccessfulinnovation(seefigure1-5).

Step1.Insight:savorsurprises.Leveragethebehaviorsidentifiedinourearlierbook,TheInnovator’sDNA—questioning,observing,networking,andexperimenting—tosearchbroadlyforinsightsaboutproblemsworthsolving.

Step2.Problem:discoverthejob-to-be-done.Ratherthanstartingwithsolutions,startbyexploringthecustomers’needorproblem—thefunctional,social,andemotionaljob-to-be-done—tobesureyou’regoingafteraproblemworthsolving.

Step3.Solution:prototypetheminimumawesomeproduct.Insteadofdevelopingfull-scaleproducts,leveragetheoreticalandvirtualprototypesofmultiplesolutiondimensions.Theniterateoneachsolutiontodevelopaminimumviableprototypeandeventuallyaminimumawesomeproduct.

Step4.Businessmodel:validatethego-to-marketstrategy.Onceyou’venailedthesolution,you’rereadytovalidatetheothercomponentsofthebusinessmodel,includingthepricingstrategy,thecustomeracquisitionstrategy,andthecoststructurestrategy.

FIGURE1-5

Theinnovator’smethod

Eachstepinthemethodiscriticalandinvolvesanexperimentationlooptotestleap-of-faithassumptionsinarepeated“hypothesis,test,learn”loop.15Let’sreturntoIntuitandseehowithasappliedtheinnovator’smethod.

Insight:SavorSurprisesTheinnovator’smethodstartswithgeneratinginsightsintopotentialcustomerproblemsbylookingforsurprisesorotherclues,suchassymptomsofaproblem.Weusethewordprobleminterchangeablytomeananeedorproblemthatcanexistforexternalcustomersorinternalusers.(Forexample,atIntuit,halftheprojectsaretargetedatsolvinganunmetcustomerneed;theotherhalftargetinternalneeds,suchasdevelopingbettertechnologytoolstoservecustomersorcreatingabetterworkingenvironment.)Theinsightcancomefromanyone,andthatexplainswhyIntuitgives10percentunstructuredtimetoeveryemployeetogenerateideasandparticipateinastart-upteam.Inaconveniencesample,wefoundthatinsightsweredevelopedmostoftenthroughuserorcustomerobservationsandthroughconversationswithcustomers,Intuitemployees,andvariousindividualsoutsideIntuit.

Insightsoftenstartwhenyounoticeasymptomorasurprise,whichprovidesthecluestoanopportunity.Forexample,Intuit’sBarathKadabaandDeepaBachu(aninnovationcatalyst)werelookingforopportunitiestocreatenewbusinessestoimprovethefinanciallivesofthe1.2billionresidentsofIndia.Afterinitialobservationsandanalysis,BachuandateamofthreeotherpeopledecidedtoexploretheneedsofIndia’s150millionfarmers,alargesegmentofpotentialcustomerswithmanychallenges.

Theteamspentthreeweeksfollowingfarmers—inthefields,intheirvillages,andatthemarketswheretheysoldtheirproduce.Astheywatched,theyweresurprisedattheincrediblechallengesfarmershadsellingtheirproduceatagoodprice.Astheylistenedtofarmerscomplain,worry,andoftenlosemoney,theyhadthecluesofapotentialproblemtosolve.Furthermore,theteamwassurprisedbythepowerfulroleplayedbymiddlemeninthemarket,whohadnoincentivetoprovidefarmerswithaccurateinformationonsupplyanddemand.Thesesymptomsandsurprisespointedtoapotentialopportunity.IftheproblemwasasseriousasBachuthoughtitwas,andifIntuitcouldcomeupwithasolutionthatwouldtranslateintohigherpricesforfarmers,BachuknewitcouldbeabigopportunityforIntuit.16

Problem:DiscovertheJob-to-Be-DoneManagerstendtostartbybuildingsolutions,butweemphasizetheneedtofirstdeeplyunderstandtheproblem.Keepinmindthat“problem”maymeaneitheracustomer’spainoracustomer’sdesire,suchasadesireforconnection,expression,fulfillment,andthelike.Atthecoreyouaretryingtodiscoverthefunctional,social,andemotionalelementsofthejob-to-be-done—theneedforwhichcustomersmightpurchaseyourproduct.Forexample,althoughaBMWmaydoasimilarfunctionaljobasanothercar(transport),aBMWcanalsoaccomplishimportantsocialjobs(prestige,status)oremotionaljobs(feels“cool”)thatmaybeoverlookedatfirstblush.

AtIntuit,teamsfollowuponaninsightintoanunmetcustomerneedbyusingatechniquecalledpain-storming.AccordingtoRachelEvans,oneoftheinnovationcatalystswhodevelopedit,“Thepurposeofapain-stormistogetcrisponwhatwethinktheproblemissowecantestourhypotheses.”

Pain-storminginvolvescreatingacustomer’s“journeyline”tounderstandhowcustomersnowcompleteataskandidentifytheirmainpainpoints(andemotions)alongtheway.Theteamthenconductsaroot-causeanalysistounderstandthecausesofthebiggestpainpoints.Ofcourse,itdoesn’tworkifteammembersjustsitintheirofficesandimaginewhatcustomersmightwant.Instead,Intuit’steammembersdirectlyobserveandtalktocustomersintheirofficesorhomes.AsCEOSmithtoldus,“Towalkamileinyourcustomer’sshoes,youhavetotakeyourownshoesofffirst.”17Inshort,youmust“bethecustomer.”

AsBachuandherteamspentweekslivingwith,observing,andtalkingtofarmersandmiddlemeninsevenagriculturalmarkets,shelearnedfirsthandaboutthepainfarmersfeltwhenfacedwithadecisiontosellperishablecrops,whosepricesmightfluctuateasmuchas50percentinasingleday.Theteamvalidatedtheirinitialobservationthatthefarmershadnoinformationonsupplyordemandtoguidethem,resultinginspoilageorsuboptimalprices.Theyalsovalidatedthefactthatfarmerswereoftenexploitedbythemiddlemen,whohadanincentivetominimizemarketpricetransparency.Astheteammembersgainedconfidencethattheyhadidentifiedanimportantproblemworthsolving,theytranslatedtheproblemintoavisionstatementforthecustomer:“10percenthigherpricesforfarmers.”Drawingontheinsightsintothecausesofthefarmers’problem—andusingthevisionstatementasaguide—theteamthenwasreadytofocusitsenergiesondevelopingasolution.

Solution:PrototypetheMinimumAwesomeProductAfteridentifyingacustomerproblemworthsolving,mostmanagersunleashtheproductdevelopmentteamtobuildafull-featured,error-freeproducttoattractasmanycustomersaspossible.Althoughthisapproachmakessenseinfamiliarmarkets,itisthewrongthingtodowhenyoufaceuncertainty.Instead,managersshouldsearchbroadlyforavarietyofsolutionsandthenuseaseriesoffourprototypestoconvergeonthesolutionthatbestsolvesthejob-to-be-done(theoreticalprototype,virtualprototype,minimumviableprototype,andminimumawesomeproduct).

Althoughrapidprototypesmayseemlikeoldnews,thereisasubtleprocesstoleveragingprototypesintherightwaytorapidlyvalidateyourhypotheses.Intheearlydays,althoughIntuitadoptedtheideaofrapidprototypingtotestsolutions,theyfounditledtoprematuredevelopment,ashigh-potentialsolutionswerequicklythrownintoIntuit’straditionalsoftwaredevelopmentprocess.Thisprocessoftenyieldedlongdevelopmentcyclesanddisappointingresults.Intuit’sleaderssoonrealizedthatthebetterwaytogainmomentumwastofaketheproductinordertogetsomethingintousers’handsmorequickly.Thisvirtualprototype,aswewouldcallit,allowedtheIntuitteamtoquicklytestmany,manysolutionswithcustomerstodetermineiftheyhadanypotential.

Forexample,theMobileBazaarteam(Intuit’snamefortheteamsearchingforasolutiontothefarmers’pricingproblem)experimentedwithseveralsimpleprototypestotestpotentialsolutions.OneprototypewasaneBay-likeauctionwherethefarmerscouldauctiontheirproductsdirectlytobuyers.However,initialtestsofvirtualprototypes,drawninPowerPoint,suggestedsuchasystemwouldbecomplexforfarmerstosetupanduse(mostofthemwerenotwelleducated,nordidtheyhaveexperiencewithcomputers).

Theteamobserved,however,thatallthefarmershadcellphonesandknewhowtosendandreceivetextmessages.Sotheteamtestedvirtualprototypes,andthenaminimumviableprototype,ofasolutionthatinvolvedgatheringinformationonpricesthatbuyersandmiddlemenwerepreparedtopay;thisinformationwasthensenttofarmersinrealtimethroughtextmessages.Farmersthenwouldusethatinformationtodecidewhen,andtowhom,theywouldsell.Theteam“fakedtheback-end”byhavingthreeteammembersmanuallysendtextmessagestofarmerstoseehowtheyresponded.Farmerresponsetothissolutionwasextremelypositive.Withinoneyear,MobileBazaarhad180,000farmersubscribers,andtestsshowedthatfarmers’priceshadincreasedanaverageof16percent.

averageof16percent.

Inadditiontodemonstratingtheuseofspecificprototypes,theMobileBazaarexampledemonstratesamoregeneralprincipleoftheinnovator’smethod:“gobroadtogonarrow.”AtIntuit,teamsapplythisprinciplebygeneratingasmanysolutionsaspossibleduringwhatthecompanycallsa“solution-jam”beforereducingtheconceptstoashortlistforprototyping.Afterselectingatleastthreesolutions,theteaminitiatesa“codejam,”withthegoalofcreatingaworkingsoftwareprototypeofeachsolutionthatisn’tperfectbutisgoodenoughtotestwithcustomers.Inthisway,Intuitprogressesfrompain-stormingtoacustomer-testedprototypewithinfourweeks,therebyenablingrapidexperimentationwithcustomersnumeroustimesbeforethesolutionisputintosoftwaredevelopment.

However,aswewillargue,trulydelightingcustomerscomesfromtheunexpected:itcomesfromunderstandingaprobleminawaythatothershaven’tandthengoingbeyondcustomers’expectationsinprovidingasolution.Therefore,theultimategoalofthisstageoftheprocessistocreateaminimumawesomeproduct—onethatremains“uncomfortablynarrow”infeaturesetbutisawesomeatwhatitdoes.18

BusinessModel:ValidatetheGo-to-MarketStrategyAtIntuit,KaarenHansonargues,“Untilyou’vefiguredouthowtodelightacustomer,don’teventhinkaboutthebusinessmodel.”19Butonceyou’vediscoveredasolutioncustomerswant,you’rereadytofigureoutthebestwaytogetyoursolutionintothehandsofcustomersatapricethatgeneratestherevenuescalledforinyourstrategy.However,althoughmostmanagersassumetheyunderstandhowtogetproductstomarket,manycompanieshavekilledtheirnewproductsbyforcingthemintoexistingbusinessmodels.Forexample,managersoftenusethesamedistributionchannels,asimilarmarketingstrategy,asimilarpricingstrategy,andsoon,astheyuseforexistingproducts.Butevenwheninnovationsappearsimilar,theyoftenrequiretheirownuniquebusinessmodels.Properlyaligningthebusinessmodelinvolvesdiscoveringandvalidatingyourgo-to-marketstrategydirectlywithyourcustomers.Thisprocessrequiresvalidatinghowtoacquireandinfluencecustomers,howtosetprice,andwhichresourceswillberequiredtodeliveryoursolutiontothemarket.

Intuitcurrentlymanagesthisprocessbydividinginnovationintogroups.Innovationsrelatedtoitscorefinancialsoftwareproducts(Quicken,QuickBooks,andTurboTax)arelabeled“Horizon1”(H1)productsandgenerallyborrowtheexistingbusinessmodel.Butproductsonlypartiallyrelatedtothecorearelabeled“Horizon2”(H2),andneworunrelatedproductsarelabeled“Horizon3”(H3).ThenewH3andH2products,inparticular,requirerapidexperimentationtotestassumptionsaboutthenewbusinessmodel.Furthermore,H3productsrequireauniquesetofmetricstomeasureprogressinnailingthenewbusinessmodel.Ratherthanmeasurefinancialperformance,suchasROIorcontributiontotop-linerevenue,Intuitstartsbymeasuringwhatitcallsthe“lovemetrics”(seechapter8).Thepointisthatyoucan’tassumethatnewsolutionswillworkwithyourexistingbusinessmodel.

MobileBazaartypifiesanH3business,andtheteamisstillintheprocessofexperimentingwiththebusinessmodel.UnlikeQuickenorTurboTax,theMobileBazaardistributionchanneltocustomerswilloperateviacellphones(aswillalldigitalmarketing),andpricingmustalsobedifferent(likelythroughsubscriptionora“free”advertisingsupportedorfreemiummodel).IntuithasnotattemptedtoscaleMobileBazaaratthispoint,becauseithasnotyetvalidatedaprofitablebusinessmodel.

ANewStyleofLeadershipCorporationsaredesignedforexecution,notinnovation.Butasuncertaintyincreasesintheworldaroundus,thewaywemanagehastochangetomeetthesecircumstances.Toapplytheinnovator’smethodrequiresanewstyleofleadership.Intheageofuncertainty,leadersarenolongerchiefdecisionmakers.Instead,they’rechiefexperimenterswhoformulatehypotheseswiththeirteam,conductexperiments,andletthedataspeakforthemselves.“Wewantourleaderstobecoachesandfacilitators,notdecisionmakers,”saysCook.“Theexperimentsthattheteamrunsshouldprovidethedatatohelptheteammakedecisionssotheleaderdoesn’thaveto.”20

Thusthemanager’sroleshiftstocoachandfacilitatorof“fastandfrugal”experiments.Ifthemanager,oranyoneelseontheteam,says,“IthinkweshoulddoX”or“IbelieveX,”thatstatementistranslatedintoaleap-of-faithassumption,andthenextquestionshouldalwaysbe,“What’sthefastestwaytorunanexperimenttohelpusknowwhetherweshoulddoX?”21“Withournewfocusonexperimentation,ourleadersshouldstoptryingtobeJobsorBezosandpredictthefuture,”saysCEOSmith.“Ourleadersshouldnurtureinnovationwhereveritcomesfrom.Withleanexperimentation,employeescancometoleadersandhavetheboldnesstosay,‘I’vegotanidea,andhere’stheproof.’”22

Sowithineachofthefirstfewsteps(problem,solution,andbusinessmodel),Intuitteamsfollowthisprocess:(1)writingdownthemostimportantleap-of-faithassumption,(2)designinganexperimenttotestit,(3)conductingtheexperimenttoprovidetheanswer,andthen(4)loopingbacktofigureoutthenextleap-of-faithassumptionthattheteamneedstoanswer.

Leadershavetowalkthetalk.Keydecisionstheywanttomakeshouldbetestedasleap-of-faithassumptions.Remember,inhighuncertainty,anythingyoubelievetobetrueisonlyyourbestguess.Whatisyourleap-of-faithassumption?

Intuit’sResults

HowhasIntuit’sapplicationoftheideaswedescribehereaffectedinnovationatthecompany?First,Intuithasbecomeanexperimentationmachine.In2006theTurboTaxunitranonlyonecustomerexperiment;in2012itranmorethansixhundred,andby2013ithadrunalmost2,500customerexperimentsinasingleyear.Notsurprisingly,thisincreaseinmarketexperimentshasproducedaplethoraofsuccessfulnewproducts.Mobileappshaveincreasedfromzeroin2008tofiftyin2013,includingtheverysuccessfulSnapTaxapp,whichgenerated350,000downloadsinitsfirstthreeweeks.

Buttheproofisinthefinancialpudding.In2010Intuitgenerated$10millioninrevenuesfromproductslaunchedinthepriorthreeyears.Thatnumberjumpedtenfold—to$100million—by2012,andthecompanyexpectstoearnmuchmoreasthesenascentbusinessesmature.23Perhapsmoreimportant,Intuit’sproductlaunchesandproductimprovementsarebeingwellreceivedbythemarket,andprofitsareupconsiderably.Operatingincomehasmorethandoubled,from7percentannualgrowthfrom2004to2008to15percentannualgrowthfrom2008to2012.

AndinvestorshaverewardedIntuit.Itsmarketcapjumpedfrom$10billionin2008to$17billionin2013—a70percentincrease(forcomparisonIntuit’smarketcapincreasedonlyfrom$9to$10billionfrom2003to2008).Moreover,Intuit’sinnovationpremiumhasjumpedfrom20percentin2008to30percentin2012—a33percentincrease.Intuitisonceagainacting,andperforming,likeaninnovativecompanyand,somemightsay,likeastart-up(see“IsYourCompanyanEight-Thousand-PersonStart-Up?”).

IsYourCompanyanEight-Thousand-PersonStart-Up?

Ifyou’reworkinginalargerorganization,youmaywonder,Whatdoesthisstart-upstuffhavetodowithme?Althoughwedescribebothstart-upsandestablishedcompanies,theissueisn’tthesizeofthecompany.Theissueisthetypeofproblemyoufaceandhowyouaresolvingit:uncertaintyrequiresadifferentmanagementapproachthatiscriticalforeitherentrepreneurialorcorporatestart-ups.However,becausestart-upsoftenspendtheirtimesolvinghigh-uncertaintyproblems,youmayincorrectlyassociatetheinnovator’smethodwithstart-upsratherthanwiththetypeofproblem.

withthetypeofproblem.

Wedefineastart-upasdoesEricRiesinTheLeanStartup:as“atemporaryorganizationdesignedtosearchforabusinessmodelunderconditionsofextremeuncertainty.”24Thedefinitionincludesthreeimportantdimensions.First,anyone(orteam)whoiscreatinganewproduct,service,process,orbusiness—nomatterthesizeofthecompany—isthefounderofastart-up.Thedefinitionincludescorporateandentrepreneurialstart-ups.

Second,astart-uphasaspecialpurposeandstructure;it’satemporaryorganizationfocusedonsearchingforaproblem,asolution,andabusinessmodel.Third,thefoundersaretryingtolaunchsomethingnewunderconditionsofuncertainty.Itisn’tclearwhethertherewillbedemandforthenewproduct(demanduncertainty)orwhetherthetechnologicalsolutionswillworkasdesired(technologicaluncertainty).Ifyou’reastart-upfounder(managerorentrepreneur),youshouldapplythismethodtoavoidthenumber1pitfallthatkillsstart-ups:scalingthebusinessbeforeyou’venailedit.

Similarly,wedefine“customer”asanyonewithaproblemorneed,whetherinsideoroutsidetheorganization.Youcanapplytheinnovator’smethodtosolveproblemswithsomeuncertaintyinsideyourorganization,whetherinIT,HR,orfinance.WendyCastleman,anIntuitinnovationcatalyst,recalledsuchaprocessforaninternalcustomer.AnemployeeinITobservedthatbillingagentstookfifteenminutestoanswercustomerquestions.Thissparkofaninsightandfurtherobservationidentifiedthecoreproblem:billingagentshadtolookacrossmultiplesystemstoidentifythevariouscomponentsofacustomerbill.Soshedesignedaseriesofexperiments,testingdifferentprototypedapproachestosolutionsforagents,ultimatelyfindinganewtoolthatdecreasedcalltimesfromfifteenminutestothree!

Usingasimilarapproach,Intuit’sFull-ServicePayrollteamwantedtoseewhethertheycouldimprovethecustomerexperienceofcallinginforsupport.Oneideawastoanswerthephoneinamorepersonalway.Insteadofsaying,“WhatisyourEINnumber?”theyhypothesizedthattheywouldgethighercustomersatisfactionbybeginningwith,“HowcanIhelpyoutoday?”Theytrieditwithoneagent,andtheresultswerestunning.Theagent’sNPSscoresjumpedmorethan20points,wellbeyondtherestoftheteam(orherpriorscores).Theyquicklyrolledoutthechangetotherestoftheteam,andtheexperimentultimatelyledtoa

thechangetotherestoftheteam,andtheexperimentultimatelyledtoa21-pointincreaseintheirNPSscores.Thepoint?Theinnovator’smethodworksforinternalaswellasexternalcustomers.

AGuidetoThisBook

Inthischapterwe’veexaminedhowanestablishedorganizationcanimplementthekeystepsintheinnovator’smethod,andwe’veintroducedleadershipprinciplesthatenablethemethodtoflourish.Nowyou’lltakeadeepdiveintotheleadershipprinciplesthatwillhelpyouapplythemethodaswellaseachstepofthemethod.Ratherthangiveyoutheoryandletyoufigureouthowtoimplementit,wefocusongivingyouboththebigidea(whyto)andthetoolsandtestswe’veseensuccessfulinnovatorsuse(howto).(SeeappendixAforasummaryofthemodelandthetoolsandtestsdiscussedineachchapter.Seewww.theinnovatorsmethod.comforfurthertoolsandtips.)Here’sanoverviewofthechapterstocome.

Inchapter2,weexplainwhybeingagoodmanagercanmakeyouabadinnovator.Wedescribehowyourrolechangeswhenyou’remanagingforinnovationinahigh-uncertaintyenvironment.Chapter3discusseshowmanagersgenerateinsights—theseedsofinnovation—byapplyingfivekeyskills(questioning,observing,experimenting,networking,andassociating)andbysearchingbroadlytounderstandthejob-to-be-done.Theninchapter4you’lllearnhowtodeterminewhetheryourinsightrepresentsaproblemworthsolving.Discoveringthejob-to-be-done(functional,social,andemotionaljob)isthecriticalfirststep,andonethat’softenoverlooked.Thischapterhastestsfordeterminingwhetheryou’vediscoveredaworthwhileproblem.

Inchapter5you’llfindtoolstohelpyoubroadenandthennarrowyoursolutionideasasyouuseprogressivelydetailedprototypestodiscoveranawesomesolution.Onceyou’vegeneratedasolutiontoaworthwhilecustomerproblem,you’rereadytofigureoutyourgo-to-marketstrategy.Inchapter6weintroducethebusinessmodelsnapshot,whichpinpointssixcomponentsofyourbusinessmodelthatyouneedtoidentifybeforefullylaunchingyourproduct.Theseincludevalue(yourvaluepropositionandpricingstrategy),customeracquisition(customerrelationshipsandchannels),andcoststructure(activitiesandresources).

Thegreatbenefitoftheinnovator’smethodisthatitgivesyouthetoolsyouneedtoresolveuncertainty;itteachesyouhowtoexperimenttoansweryourquestionsandthenpivotwhennecessary.Butbecauseyoufaceuncertainty,yourchancesofguessingrightonthefirsttryarenearlyzero;thismeansthatchanges—pivotsanditerations—arecritical.Inchapter7werevealcrucialprinciplesformasteringthepivot.

Onceyou’veturnedmanyofyourhypothesesintofacts,youcanscaleyourideatoreachabroadermarket.Buttheprocessthathelpedyounailthebusinessmodeldoesn’thelpyouscaleit.Nowit’stimetoreapplytraditionalmanagementwhilekeepingyourabilitytotesttheremaininguncertainties.Inchapter8weexplaintheoftenoverlookedartandscienceofscaling.

Lastly,noteveryonehassupportfromthetopmanagementteam,andattimesyoumayfindyourselftheonlybelieverinyouridea.Inchapter9weaddresshowtoadaptthemethodtoworkforyouindividuallyandforateam,oruseittoigniteinnovationintheorganizationmorebroadly.Wealsoexplainhowtoadaptthemethodbasedonwhetheryou’repursuingdisruptiveorincrementalinnovations.

Intheconclusionchapter,wetellthestoryofhowRegeneron,anestablishedcorporationinatechnicallycomplexindustry,usedtheideasinthisbooktobecomeoneoftheworld’sleadingbiotechnologycompanies.Usingthisexample,wediscussthefutureofmanagementandcompetitiveadvantage.

Atectonicshifthasexponentiallyincreasedtheleveloftechnologicalanddemanduncertaintyfacedbycompanies.Evenestablishedorganizationsneedtobegoodatsolvinghigh-uncertaintyproblems—thekindsofproblemstheyhavetendedtoleavetostart-ups.Theneedformanaginguncertaintyisaseriouschallenge,becauseestablishedorganizationsmustexecuteunderanexistingbusinessmodeltomeettheneedsofexistingcustomers.Asaresult,theytypicallyadoptmanagementpracticesthatruncountertomanagingforinnovation.

ButIntuit,anddozensofothercompanieswestudied,haveshownthatit’spossibletoreconceptualizetheroleofmanagementandtocreateprocessesandinfrastructuretoradicallydecentralizetheprocessofideagenerationandassessment.Whenanyoneinanorganizationisencouragedtobethefounderofastart-up(anewproduct,anewservice,anewprocess)andknowshowtodoit,itunleashesthekindofcreativeenergythatcancounter,orevenembraceandexploit,uncertainty.

Thatdoesn’tmeanthattheinnovationprocessiseasyandclean.Inpracticeinnovationisalwaysmessyandrecursive.Thereareoftenpolitics,contradictions,andsetbacks.Butwiththatcaveat,wehavetriedtosimplifythemesstoclearlyexplainthemostcommonstepsandtoolsweobservedsuccessfulinnovatorsuse.Wedescribetheinnovator’smethodintermsoffourcommonelements(insight,problem,solution,andbusinessmodel)tohelpyouclearly

elements(insight,problem,solution,andbusinessmodel)tohelpyouclearlygraspandunderstandthem.Althoughwegenerallyobservedthatsuccessfulinnovationsstartwithaninsightintoabigproblemandthenprogressthroughthestepswedescribe,inpractice,thesestepsoftenoverlapeachother,orsometimesoccurinaslightlydifferentorder—thatisthenatureofdealingwithanuncertainworld.Ultimatelyeachelementoftheinnovator’smethodismoreimportantthantheorder,asisunderstandingthekeytoolsandtacticstoturnyourideasintoinnovations.Asyouencounterthesechallengesandconfusions,embracethemaspartofuncertainty,rememberingthatalthoughuncertaintycanbefrustrating,itisalsothesourcecreativity,innovation,andnewgrowth.Theinnovator’smethodisyourguidetohelpyourecognizewhattodowhen.

*Thereisathirdtypeofuncertaintycalledenvironmentaluncertainty,whichreferstotheuncertaintyofthemacroeconomicenvironmentandgovernmentpolicy;butdemandandtechnologicaluncertaintyaremoredirectlyrelevanttocreatingacustomer.

2

LeadershipintheAgeofUncertainty

WhenMBAscometouswehavetofundamentallyretrainthem—nothingtheylearnedwillhelpthemsucceedatinnovation.

—ScottCook,FounderandChairmanoftheExecutiveCommittee,Intuit

ABOVE,WEQUOTEScottCookcriticizingtraditionalmanagementtraining.Ishesimplybeinginflammatory?Perhaps.Butmanyotherinnovativeleadershavealsocriticizedtraditionalmanagementtraining.Forexample,ElonMusk,founderofTesla,SpaceX,andPayPal,arguedthat“Asmuchaspossible,avoidhiringMBAs.MBAprogramsdon’tteachpeoplehowtocreatecompanies...Atmycompanies,ourpositionisthatwehiresomeoneinspiteofanMBA,notbecauseofone.”1Whileweallrecognizethatmanagementtraininghasimmensevalue,whydosomeleadersofinnovativecompaniesoffersuchharshcriticisms?Here’sourexplanationofwherewehavemadeawrongturnwhenitcomestoinnovation.

In1911FrederickTaylorwrotethelandmarkbookPrinciplesofScientificManagement.IthadsuchapowerfulimpactontheemergingindustrialcorporationsofthetwentiethcenturythatitearnedTaylorthetitle“fatherofscientificmanagement.”Taylor’smanagementprinciplesweretaughtatthenew,emergingbusinessschoolsofthedayandappliedatrisingindustrialpowerssuchasFordMotorCompanyandGeneralElectric.Indeed,HenryFord,AlfredSloan,andothercorporatelegendslookedtoscientificmanagementastheirmanagementtextbook,andTaylor’sinfluenceisstillfeltinbusinessschoolsworldwide.

WhatwereTaylor’sprinciplesofscientificmanagement?First,herecommendedthatworkbecarefullyplannedandbrokenintoseparatetasks.Theideawasthatmanagerscouldanalyzethetasksofproduction—forexample,

throughtimeandmotionstudies—todeterminethefastestandmostcost-effectivewaytocompletethem.Thenthemanager’sjobwastomakesurethetaskwasstandardizedasmuchaspossibleandthatworkersfollowedtheprescribedprocess.Taylorarguedthattaskspecializationwascriticalbecauseitofferednumerousbenefits—forexample,allowingforclearresponsibilityandaccountability.Italsoenabledmanagerstomatchworkerskillswiththetask,therebyfacilitatingadivisionoflabor.2

Theseprinciples—taskspecialization,workstandardization,accountability,anddivisionoflabor—quicklyspreadthroughoutUSindustry.Taylor’sideasgreatlysimplifiedthejobofmanagingthecomplextasksoftheemergingindustrialcorporations.Moreover,hisprinciples—whenappliedeffectively—hadapowerfulpositiveimpactontheperformanceofthelargecompaniesofhisday.WeseeTaylor’shandiworkeverywhere.Everylargecompanyisbrokenintofunctionsfortaskspecialization—R&D,procurement,operations,marketing,HR,andfinance.Everylargeorganizationseemstostrivefordivisionoflabor,standardizationofwork,accountability,andthepursuitofbestpractices.

ButeventhoughTaylor’sprincipleshavedonemuchgood,there’soneproblem:they’reexactlythewrongprescriptionformanaginginnovation.They’regreatprinciplesforefficientlyperformingtaskstosustainacustomer,buttheyworkpoorlyforguidingworktocreateacustomer(PeterDrucker’s“centralpurpose”ofbusinessandtheclearfocusofstart-ups).3Theyturnindividualsintogoodmanagers(ofexecution)butbadinnovators.

Howdoesithappen?Considertaskspecializationanddivisionoflabor.Specializationmakessensewhenaproblemiswelldefinedandcharacterizedbylowuncertainty—thekindsofproblemscompaniestypicallyfaceastheymoveupthefamousS-curvefromgrowthtomaturity(seefigure2-1).Let’ssayacompanyneedstoproduceathousandwidgetsatthelowestpossiblecost,andtorespondtofivethousanddailyservicecalls.Thecompanyknowsroughlyhowmanywidgetstoproduceandhowmanycallstoservice;itneedstofigureoutthemostefficientwaytodoit.Becausethesetasksarequitedifferent,thecompanydividesthemintoseparatefunctionsandhiresexpertsinoperationsorservicetoperformthetasks.Managersareheldaccountablebasedonperformancemetrics—say,costperunitproducedorratingsofcustomersatisfactionwithservicecalls.Managersquicklylearnthevalueofhiringanddevelopingspecialistswithdeepexpertise(asopposedtogeneralistswithbroadexpertise),becausetheproblemsarewellenoughdefinedthatit’seasytomatch

aspecialistwiththeproblem.Thesetacticsareinfacttherightonesformanyproblemsthatmanagersface,andapplyingthemissimplygoodmanagement.

FIGURE2-1

TheS-curveandtherightstyleofmanagement

Unfortunately,thisisthewrongapproachwhenyou’retryingtosolvehigh-uncertaintyproblems,thekindacompanyorstart-upfacesattheintroductionandgrowthstagesoftheS-curve(see“SloanVersusDurant:AContrastinManagementStyles”).Whenyoufacehighuncertaintyabouthowtocreateacustomer,youaren’tsurewhattypeofexpertisewillbemostvaluable.Soyouwantpeoplewhohavebroadexpertise,thekindofpeoplewhocanseetheproblem,andpossiblesolution,fromvariousangles.That’swhythepracticesthatmakesomeoneagoodmanagercanberoadblocksineffortstoigniteinsightsandbringnewideastomarket.

SloanversusDurant:AContrastinManagementStyles

AlfredSloanisknownasthefatherofthemoderncorporation,havingtransformedGeneralMotorsintothemodelcorporationofhiserabyintroducingprinciplessuchasspecializedmanagementroles,decentralizedorganization,andcostaccounting.Sloan’sideasondividingtasksintomanageablechunksledhimtobreakGMintodivisions(Cadillac,Buick,Chevy,Pontiac),eachfocusedonadifferentcustomersegment.4Sloan’smanagementprinciples—alongwiththoseofcontemporarieslikeTayloraswellasHenryFord,whopioneeredmassproductiontechniques—contributedmuchtotheearlydevelopmentofmanagementtheoryandpractice.

Sloan’sinfluenceisevidenttodayinthenumberofinstitutionsthatbearhisnameandthenumberofbusinessschoolsthatteachhisideas.ButSloan’ssuccessandinfluenceonmanagementoverlookaninterestingquestion:WheredidGeneralMotorscomefrom?Indeed,SloantookthereinsofGMonlyafteritwasgeneratingnearly$4billionininflation-adjustedrevenues.

Infact,GMwasfoundedbyBillyDurant,acreativeentrepreneurwhomademillionsinthehorse-and-buggyindustrybeforestartingGM.DurantwasanexperimenterwhopioneeredproductsinbothindustriesandgrewGMuntiltheboardofdirectors,recognizingthathewasatalentedentrepreneurbutapoormanager,replacedhim.DurantthencofoundedChevrolet,eventuallyrepurchasedcontrolofGM,andranthefirmuntiltheboardremovedhimasecondtimeandreplacedhimwithSloan.5ThatSloanissowellknown,andDurantsolittleknown,isintriguing.WhatwereDurant’smanagementtheories?WhydidtheyworkintheearlydaysbutfailasGMbecamealargecorporation?

Theanswerissimple:managementtheorywasdevelopedtosolvethelarge-companymanagementproblemandnottheinnovationproblem.TheformeremergedduringtheIndustrialRevolution,whentheeconomywastransformedfromsmallworkshopstolargebusinessesofunprecedentedscale,producingthingslikeoil,textiles,autos,andrailways.Tomakethetrainsrunontimeandincreasetheproductionofautos,theselargecorporationsrequiredanewprofession:management.Theyneededmanagerstoplan,coordinate,rationalize,andoptimizetheoperationsoflarge,complexorganizations.Businessschoolsemergedto

operationsoflarge,complexorganizations.Businessschoolsemergedtotrainthisnewcadreofmanagerstobeeffectiveatresolvingtheproblemsfacedbylargecorporations,suchas“Whatnewfeaturesshouldweadd?”or“Howcanwelowercostsby5percent?”Thesearelow-uncertaintyproblemscallingforincrementalchangestoexistingproductsorprocesses.

Incontrast,moststart-uporcorporateentrepreneursaretryingtolaunchnewproductsthathavedisruptivepotential.Theyfacehigh-uncertaintyproblemssuchas“Willconsumerswanttouseapersonalcomputer(ademandproblemfacedbyApple),andcanwemakeiteasyenoughforchildrentouse(atechnologyproblem)?”Or,“Willpeoplebuyproductsovertheinternet(ademandproblemfacedbyAmazon.com),andcanweprovidefulfillmentinalow-costandreliableway(atechnologyproblemfacedbyAmazon.com)?”“Willpeoplemakepaymentsovertheinternet(ademandproblemfacedbyPayPal),andcanourtechnologyprovidethemtheeaseofuseandsecuritytheyneed?”

Althoughthesefirmssuccessfullysolvedsomehigh-uncertaintyproblems,businesshistoryislitteredwithfailures—inmanycases,becausetheyappliedthewrongtheory:theyfollowedbusiness-schoolmanagementtheory(designedforlow-uncertaintyproblems),andnotinnovation-schoolmanagementtheory(necessaryforhigh-uncertaintyproblems).

FourKeyRolesoftheLeader

Toapplytheinnovator’smethod,establishedcompaniesmustmakeacriticaltransitionfromtheirnaturaltendencytorelyexclusivelyontraditionalmanagementtoapplyingentrepreneurialmanagementwhenfacingtheuncertaintyofinnovation.We’veidentifiedfourkeyrolesthatleadersmustfulfilliftheyhopetoturntheirorganizationsintosuccessfulinnovators,composedofteamsthatinnovatelikeanetworkofstart-ups.Theserolesarecriticaltoensurethattheinnovator’smethodisincorporatedintothecompany’sprocessesandtheday-to-daybehaviorsofemployees.

First,andmostimportant,theleadermustbecomethechiefexperimenterandnotthechiefdecisionmaker.Asshowninfigure2-2,theotherthreerolessupport,andenable,thechiefexperimenterrole.Thesecondroleistosetthegrandchallenge—notonlytoinspireotherstopursueanopportunitybutalsotochallengetheorganizationtobreakfreeofTaylor’sprinciplesofscientificmanagement.

Third,theleadermustbuildbroadanddeepexpertiseintheinnovator’smethod,whichisneededtoensurethattheorganizationhasthecapabilitytogenerateinsights,discoverproblemsworthsolving,andrapidlyprototypesolutions.Thefourthroleoftheleaderistoremovebarrierstochangeandinstallsystemstofacilitatethefastexperimentsrequiredtotesttheteam’shypotheses—andresolvetheuncertainties—ateachstep.

FIGURE2-2

Bethechiefexperimenter

BetheChiefExperimenter

Intraditionalmanagement,managersaredecisionmakers.Youanalyzeinformationandmakedecisionsthatwillaffectthefutureofyourorganization.Inaway,you’retryingtopredictthefuture,andpositionthecompanytosucceed.Formanymanagers,decisionmakingistheessenceofwhatitmeanstobeamanager.

Butwhenyou’reactingunderuncertainty,theavailableinformationistooscarce,orevenabsent,foryoutopredictthefuturewithanyconfidence.Thebestyoucandoisguess,andyoumaybewrongmoreoftenthanyou’reright.Butifyouaren’tmakingdecisions,whatisyourroleasaleaderofinnovativeteams?

Theinnovator’smethodenablesyoutomakeeffectivedecisionsaboutthefuture—butyoumustfirstdefineanewroleforyourself.Youmustlearnanewwaytoberight.ForIntuit’sScottCookandBradSmith,it’softenamatterofreprogrammingnewhires.“Unfortunately,youknowhowbigcompaniesandhierarchiesmakedecisions,”saysCook.“Theytendtorelyonpolitics,PowerPoint,andpersuasion.”

Sotofixthat,you’vegottochangehowandwheredecisionsaremade...enablingdecisionstobemadebythebestideayoucanvalidateinthemarket.Thismeansmovingdecisionsfrombossesvotingtheiropinions,toenablingandmeasuringcustomersvotingwiththeirfeet.Thisgoesagainstwhatpeoplehavebeentaughtinbusinessschool.Mostleadersinbusinesshavebeensuccessfulbecauseofanalysis.Theyseethemselvesasdecisionmakersandtheirjobistodogreatplanningandanalysis.That’sthekindofchangethatwearetryingtocreateatIntuit.6

Ratherthanbecominggreatplannersandpowerdecisionmakers,thecompany’snewleadersaretaughttochampionexperiments.Similarly,atGoogle,foundersLarryPageandSergeyBrinhavealwayssupportedthenotionthatdecisionsshouldbemadebyrichdatafromexperiments—somuchsothatin2002theyexperimentedwithacompletelyflatorganization,eliminatingengineeringmanagers.Thatexperimentlastedonlyafewmonths,untiltoomanypeoplewentdirectlytoPagewithquestionsaboutexpensereportsandinterpersonalandcareerissues.7ButthephilosophythateventopGoogleexecutivesmustbacktheirideaswithdataliveson.Toillustrate,inoneinstance

LarryPageandMarissaMayer(formerVPatGooglewhoisnowCEOatYahoo!)supportedtheideatodevelopamassivedigitalarchiveofbooks.Butratherthansimplyusetheirpositionstomakethedecisiontoproceed,thetwowentsofarastoclampathree-hundred-pagebooktoapieceofplywood,manuallyphotographeachofitspages,andruntheimagesthroughcharacterrecognitionsoftware,alltoestablishthatitwouldtakeonlyfortyminutestodigitizeabook.

Howdochiefexperimentersdifferfromdecision-makingmanagers?Theyfocusonthreethings:

Formingleap-of-faithassumptionswiththeirteamRapidlytestingthoseassumptionsthroughexperiments(mostlywithcustomers)Lettingthedata(mostlyfromcustomers)makethedecisions

Asaleader,youdon’thavetodoeverythingyourself:instead,decisionsmovedownwardinthehierarchytosmallteams,wheredatarevealswhatthedecisionshouldbe—orwhatthenextexperimentshouldbe.SaysCook,“[IntuitCEO]BradSmithandIhavechangedthequestionsthatweask.Weusedtoaskthingslike,‘Well,what’syouranswer,andwhat’syouranalysisbehindit?’Andnowweask,‘OK,what’sthefastestwaytogetanexperimenttotestthatidea?’”8

JeffBezosofAmazonmanagesinasimilarstyleusingsimilarquestions.Afewyearsago,Bezoschargedateamwithanalyzingthesupplychaintocomeupwithrecommendationsforanoveralldesignofthecompany’slogistics.Thegoalwastoensurethatfulfillmentcouldbedonefastandeconomically.Asoneteammemberrecalls,“Whenwepresentedouranalysis,whileallotherexecutiveswerehappywithit,Jeffwasnot.Heinsistedonbeingmorerigorousandenvisionedeverybodyinthecompanymakingdecisionsbasedonsimulationoutputs.Soateamwasformedtobuildsupportingsupplychainsimulations—simulationsthatallowedustoseetheresultsofdifferentkindsofdecisions.Thesesimulationtoolsarenowcurrentlyusedthroughoutthecompanytomakedecisions.”9ThesimulationsallowedBezostoexperimentunderuncertaintybeforebuildingsolutions.

ThisleadershipstyleisworkingatAmazon,Google,andIntuitbecausetheleaderwalksthetalk.SaysCook,“BradandIhavetolivebythesamerules.Soweendupaskingourselvesquestionslike,‘Ihavegotafundamentalbeliefofwhatweshoulddo.Now,whataretheleap-of-faithassumptionsonwhichitis

based?Andhowarewegoingtotesttheleap-of-faithassumptionsthatarecrucialtomybeliefs?’Weneedtodothisjustlikewewoulddoforanyoneelse...Experimentswillbenothingbutwindowdressinguntilyouchangewhoandhowdecisionsaremade.”10Soakeystepinbecomingagreatleaderofinnovationistochangehowdecisionsaremade—andthatstartswithyou.

SettheGrandChallenge

Inanowfamous1979visittoXeroxPaloAltoResearchCenter(PARC)inCalifornia,SteveJobsrecalledseeingaroughgraphicaluserinterface.“Itwasincomplete,someofitwasn’tevenright,butthegermoftheideawasthere,”hesaid.“Withintenminutes,itwassoobviousthateverycomputerwouldworkthiswaysomeday.”11JobsthentookhisengineeringteamonatourofPARC—andreturnedtoApplefocusedondevelopingapersonalcomputerthatincorporated,andimprovedon,thePARCtechnologies.

Jobsassembledateamofbrilliantengineers,gavethemtheneededresources,andinfusedtheMacintoshteamwithavisionofcreatingtheworld’seasiest-to-usepersonalcomputer.That’swhataninnovativeleaderdoes.Incontrast,theexecutiveteamatXeroxlackedthediscoveryskillsnecessarytoexploittechnologiesdevelopedintheirowncompany.AsPARCscientistLarryTeslerobserved,“Afteranhourlookingatdemosthey[JobsandAppleprogrammers]understoodourtechnologyandwhatitmeantmorethananyXeroxexecutiveunderstoodafteryearsofshowingittothem.”JobsagreedwithTesler,saying,“Basicallytheywerecopierheadsthatjusthadnoclueaboutacomputerorwhatitcoulddo.Andsotheyjustgrabbeddefeatfromthegreatestvictoryinthecomputerindustry.Xeroxcouldhaveownedtheentirecomputerindustrytoday.”12

Yearslater,whenApplewasconsideringofferingaportablemusicdevice,Jobsandhisleadershipteamsetthevisionwiththetagline“1,000songsinyourpocket.”That’swhythefirstiPodwasthesizeitwas—smallenoughtofitinapocket.TheseexamplesillustrateonereasonSteveJobswasagreatleaderofinnovation:hehadanoseforopportunity,andhesetthegrandchallenge.Youdon’thavetobeSteveJobsintermsofidentifyingtherightopportunity,butyoudohavetosetthegrandchallengeforyourteam.

Todothat,saysIntuit’sCook,“Leadersshouldaskquestionslikethese:‘Whatisthemostimportantproblem,thebiggestpainpoint,thatwecansolve?Howdoesthecustomermeasurethegain?Howcanwemovetheneedlethemostforthecustomer?’”13Youdon’tnecessarilyhavetoarticulatethesolution(forexample,thenumberofsongsonadevice),butyouneedtopushpeopletosearchforopportunities.Forexample,whenIntuitconsideredtheIndianmarketasanopportunity,AlexLintner,theexecutiveoverseeingIntuit’sIndianoperations,askedhisteamto“createnewbusinessesthatwillimprovethe

financiallivesofIndians.”ThisgrandchallengeledtheMobileBazaarteamtoidentifyanopportunityforthe150millionfarmersinIndiatoimprovetheirfinanciallivesbygettingbetterprices.TheIntuitteamthensoughttocreateaproductthatwoulddothat.

Anotherdimensionofsettingthegrandchallengemaybeevenmoreimportant:givingtheteamandorganizationpermissiontobreakfreeoftraditionalmanagementanduseentrepreneurialmanagement.Thisisextremelydifficult.Ifyou’relikemostpeople,whenyoustartedkindergartenyouwereassignedadeskandgivenclearinstructionsonwhattodoandhowtodoit.Mostofushavebeeninthoseassigneddeskseversince,completingourassignedtasks.Tobreakthatpattern,leadersmustsetadifferentgrandchallengefortheorganization,sayingsomethinglike,“Iexpectyoutogofigureoutwhereyourdeskshouldbe,anddiscoverwhichassignmentswillcreatethemostvalueforcustomers.”

AtValveSoftware,amultibillion-dollarcompanythathasalreadyrevolutionizedthevideogamingindustry,founderGabeNewellsetsaradicalvisiontoruthlesslypursuecustomervalue.Toenableemployeestodothat,hehastorndownallthebureaucracy.14Heinstructseverynewhire,“Yourdeskhaswheels.Yourjobistofigureoutwhereyoucreatethemostvalueforcustomers,andmoveitthere.”Valve’sleadersarguethatasacompanyValvehas“spentthelastdecadegoingoutofitswaytorecruitthemostintelligent,innovative,talentedpeopleonEarth;tellingthemtositatadeskanddowhatthey’retoldobliterates99percentoftheirvalue.”15Recentinnovationsincludecreatingtheplatformonwhich80percentofallPCgamesaresoldandmakingthefirstforayintothevideogameconsolemarketbyanewcompanyinmorethanadecade.

Similarly,Amazon’sBezosusestheslogan“It’sStillDayOne”toremindemployeesthatAmazonisstillastart-up—andthereislotsofrunwayahead.It’ssuchacentralmotivatingideathatBezosnamedoneofthecompany’sbuildingsDayOne.AskedwhenAmazonwillreach“DayTwo,”Bezosresponded,“DayTwowillbewhentherateofchangeslows...Andthat’sthesenseinwhichIbelieveit’sstillDayOne,andthatit’searlyintheday.Ifanything,therateofchangeisaccelerating.”16AkeyroleforBezosistosetthegrandchallengeforAmazon:tobehavelikeastart-up.

BuildBroadandDeepExpertise

WhenRicardodosSantosjoinedQualcomm,aFortune100manufacturerofsemiconductorsusedinwirelessdevices,hewasconfidenthecouldtransformthecompany’sfailing“ideamanagementprogram”(effectivelyasuggestionbox)intoacorporation-wideinnovationprogram.DosSantoshadthesupportofavisionaryCEO,amandatetocreatedisruptivenewproducts,andthefreedomtodesignasweepingprogramtokick-startnewideas.Becauseprioreffortshadflailed,dosSantossearchedforwaystoteachpeoplehowtotransformtheirideasintoexperimentstotesttheirvaliditybutwiththecaveatthattheprogramhadtobeintegratedwithexistingbusinessunitswherepeoplecontinueworkingfull-timeontheircurrentprojects.

DosSantosbuiltathree-phaseprogramcalledVentureFest.Inthefirstphase,employeessubmittedideas,whichwerethenreducedtothetwentybestideasbasedonpeerreview.ThenVentureFesttraineestookpartinathree-month,part-timebootcamp,wheretheytestedtheirideaswithcustomersanddevelopedprototypes.Inthefinalphase,theypresentedtheirideastotopexecutivesinacompetitionforfunding,afterwhichtheyattemptedtoconvinceanexistingbusinessunittoadoptthenewidea.GenerallyVentureFestwasasuccess,withideassubmittedincreasingfromeighty-twointhefirstyeartomorethanfivehundredfiveyearslater.Moreover,VentureFestparticipantsidentifiedmanypotentialbreakthroughideas.

ButalthoughVentureFestfosteredsometrulytransformationideas,afeworganizationmembersoutsidetheprogrambegantoquestion,andevenattack,theprogram.Somemanagersweren’thappyreleasingsomeoftheirbestpeopletoworkonprojectsnotundertheircontrol.Andfromamoretraditionalmanagementperspective,theVentureFestprojectsseemedtooopen,fluid,andflexible,clashingwithQualcomm’srational,deadline-drivenculture.Perhapsmoredangerously,someR&Dmanagers,manyofwhomfelttheyownedinnovation,arguedthattheemergingnewideasfelloutsidethescopeofexistingR&Dprogramsordidn’thaveasmuchintellectualpropertyasusual.DespitethebestintentionsofmanyinsideQualcomm,VentureFestencounteredthekindofallergicreactiontoimplementinginnovationthatwehaveobservedatmanyothercompaniesthatexcelatexecution.Afterfiveturbulentandexcitingyears,VentureFestwasquietlyfoldedintoR&D.17

BuildBroadExpertiseTheQualcommexperienceissimilartothoseinmanyorganizationsthattryto“doinnovation”bycreatingpocketsofentrepreneurialmanagementandexperimentationexpertisewithoutgeneratingbroadawarenessoftheprocessesandgoalsassociatedwithsuccessfulprograms.Thislackofunderstandingandappreciationforgoalsandmethodscanleadoutsiderstomisinterprettheinnovator’smethodsaswellasitsoutput.DosSantosrecallsthatQualcommmadegreatstridesinignitingnewideasonthe“sell”side(theinnovators)andincreasedthestart-upspiritinthecompanyoverall.Butifheweretodoitagain,hewouldfocusononemorecrucialgoal:educatingthe“buyside”—therestoftheorganization—“sothatwecouldallbeusingthesamelanguageandmatchdiscoveryefforts.”18

Thegreatertheawarenessandappreciationinyourorganizationthatinnovationrequiresadifferentsetofmanagementtools,theeasieritwillbetoapplytheinnovator’smethod.Wearen’tsayingthateveryoneneedsdeepexpertiseintheseprinciples,butsimplythateveryoneneedssometrainingtounderstandthatmanaginguncertaintyrequiresadifferentapproach.Ofcourse,ifyourorganizationfacesgreateruncertainty,youmaychoosetoextensivelytraineveryone.AtIntuit,CookandSmithmakesureallnewhiresaretrainedindesignfordelightprinciples,completingaweeklongdesigntrainingprogramwithinthefirstthreemonths.Thegoalisnottomakeeveryoneanexpertbuttomakesureeveryoneunderstandsleanexperimentationprinciplesandknowsthestepsforgeneratinginsightsandnailingtheproblemandsolution.Employeesgainacommonlanguagetodescribetheeffortstobringnewideastomarket.Havingthelanguagetoexplainyouractionsgivespeopleimmensepowerinovercomingtheinertiathatoftenimpedeschange.Inourinterviewswithdozensofinnovators,theyoftencitedthecommonlanguageasoneofthemostimportantreasonsfortrainingeveryone.

Butthere’sanotherreasonsmartleaderswanteveryonetounderstandtheinnovator’smethod:itgeneratesideas.Almosteverystudyshowsthatsearchingbroadlyisthebestwaytouncovernovelideasthatareworthpursuing.

BuildDeepExpertiseBuildingbroadunderstandingisnecessarybutnotsufficient.It’salsocriticaltobuilddeepexpertisewithinyourorganization.We’veseenitdoneeffectivelyinacoupleofways.

OneoptionistocreatealaborSWATteamthatappliestheinnovator’smethodtonewideas.Inadditiontorelevantengineeringandtechnologyexperts,thelabhasexpertsindesignthinkingandleanexperimentation.Forexample,AT&T—notknownforinnovationinthepasttwentyyears—recentlycreatedfivelabs(AT&Tcallsthem“foundries”),eachemployingfortytofiftyinterdisciplinaryexperts.Theirtask:testingnewinsightsgeneratedinsideandoutsideAT&T.Thefoundrieshousemarketingexpertsfromthebusinessunits,expertsintelecommunicationstechnologies,andexpertsindesignthinking.What’smore,AT&Thasinvitedstart-upsandestablishedcompaniesfrommanyindustriestoparticipateinrapidlydevelopingandexperimentingwithnewtechnologies.Eachnewideaisrunthroughatwelve-weekproject,whereateamappliesthekindsoftoolswedescribeinthisbooktoproducevirtualorphysicalprototypes.

Wheredotheideasoriginate?AteamofseniorleadersacrossAT&Tselectsideasfromthreesources:

AninternalideaboardcalledTheInnovationProgram(orTIP),whereideasarepostedandvotedonA“fastpitch”program,whereindividualsandcompanies,mostofthemfromoutsideAT&T(suppliers,start-ups),maketen-minutepitchestokeyAT&TdecisionmakersThebusinessunits,whereleadmarketingexecutiveswhoareassignedtothefoundryfull-timearechargedwithpollingtheirbusinessunitsfornewideas

Eachofthemostpromisingideasisfunneledtoateamofexperts—aSWATteam—thatapplieselementsoftheinnovator’smethodtogenerateaprototype.

AlthoughAT&Thasbeenatthisforlessthanfiveyears,thefoundriesarecreditedwithdevelopingideasthathavehelpedpushthecompany’sinnovationpremiumfromminus13percentinthemid-2000stoalmost10percenttoday.“Asthefoundrieshaveprovedtheirvalue,we’renowusingthetermfoundryasaverb,”saysJohnDonovan,SEVPofAT&Ttechnologyandnetwork

operations.“We’veprovenwegetfromprototypetoproductthreetimesfaster.”19Othercompanieshavedevelopedsimilarlabsandcreditthemwithincreasingtheirinnovationoutput,includingHyattHotelsandHallmarkaswellaslesser-knowncompanieslikeBancoDavivienda,aleadingbankinLatinAmerica.

Asecondoptionistobuildexpertiseinagreatmanyindividualswhoassiststart-upteams.Asdescribedinchapter1,Intuithastrainedmorethantwohundredinnovationcatalysts(see“WhyDesignersExcel:Synthesis”).Eachyear,anadditionaltwentytothirtypeopleareselectedtojointhem.Manycatalystsaretrainedaspartofateamselectedtoattenda“LeanStartIn”workshop.Employeeteamsbringanideaforasignificantunmetcustomerneed,andintwodaystheteamgoesthroughtheentirecycleofvalidatingacustomerpain,prototypingasolution,andtestingitwithcustomers.BenBlank,afounderoftheworkshops,proudlyhighlightsthatmanyIntuitemployeeshavebeenkickedoutofHomeDepotstoresorremovedfromtheCaltrainwhiletestingideaswithcustomers.20MorethantwelvehundredIntuitemployeeshavebeenthroughLeanStartInworkshops,buildingdeepexpertiseintheinnovator’smethodthroughouttheorganization.

WhyDesignersExcel:Synthesis

Ifexperimentationandanalysisarekey,whydoesIntuittrainemployeesindesignthinking?Atthecore,designthinkingteachespeoplehowtoobservetheworld,makeaguess,andthen,throughartandscience,combinedisparatepiecesinawaythatcreatesvalue—inotherwords,tosynthesize.Whereasanalysisbreaksthingsintotheircomponentparts,synthesisidentifiestheconnectionbetweenaproblemandasolution,therebyidentifyinganopportunity.AsRogerMartinwritesinTheDesignofBusiness,synthesisisthemarriageofintuitionandanalysis.21

StanfordUniversitycreatedanentireinterdisciplinaryd.schooltoteachtheseprinciples.Intuit,whichborrowsheavilyfromStanford’sd.school,teachesitsemployeesaboutdesignasacomplementtotheanalysisembeddedinleanexperimentation,because,asDesignVPKaarenHansonargues,“Thewinningcompaniesinthefuturewillbe‘design-driven’—becauseoftheimportance(andrarity)ofsynthesiscapabilities...Ialsosuspectthat‘winning’willcomefrombeingclever

aboutwhotoputintowhatpositions(versusassuminganyonecangointoanypositionandplaywell).”22Hanson’spointunderscoreswhywebelievetheinnovator’smethodhasuniqueimportanceforleaders,managers,andentrepreneurs.Eachdisciplinehasdevelopeditsownapproachtomanaginguncertaintyandinnovation(designthinkingisengineering’sapproach),andeachoffersvaluableinsightsintopartsoftheprocess.Inthisbookwe’vesynthesizedthesesimilar,butdifferent,perspectivestoprovideyouanend-to-endguidetotheentireprocess,fromideatocommercialsuccess.

RemoveBarriersandSupportExperiments

Yourfinalroleistoremoveobstaclestoexperimentationandprovidethetoolspeopleneedtoaccelerateexperiments.Whatarethekeybarriers,andwhatkindsoftoolsareneeded?Let’stakealookatwhatwefoundwhenweintervieweddozensofindividualsinlargeorganizations.

AllocateTimeforInnovationWe’veoftenaskedpeoplewhoworkforlargecompanies,“Whatpreventsyoufrommovingmorenewideastomarket?”Themostcommonanswer?“Ijustdon’thavetime.Ihavetoomuchonmyplate.”That’swhatit’sliketoworkinlargeorganizationsdesignedtoexecuteroutinetasksandprocesses.Goodmanagersworktoremoveallslackinthesystemsothathumanresources(indeed,allresources)arefullyutilized.

Butinnovationtakestime.We’veseencompaniesspecify10percentunstructuredtimeforeveryemployee(Intuit),20percentprojecttimeforengineers(Google),and,attheextremeend,asmuchas100percentself-definedtime(ValveSoftware).AccordingtoValve’semployeehandbook,“We’veheardthatothercompanieshavepeopleallocateapercentageoftheirtimetoself-directedprojects.AtValve,thatpercentageis100.SinceValveisflat,peopledon’tjoinprojectsbecausethey’retoldto.Instead,you’lldecidewhattoworkonafteraskingyourselftherightquestions.Employeesvoteonprojectswiththeirfeet.Strongprojectsareonesinwhichpeoplecanseedemonstratedvalue;theystaffupeasily.”23

Althoughmanycompanieshaveinnovationbootcampsorotherinnovationevents,fewprovideongoingtimedevotedtogeneratingandtestingideas—eventhoughitcanmakeasignificantdifference.Howmuchtimecompaniesallocatedependsonthelevelofuncertaintytheyfaceandtheimportanceofinnovation(forexample,Valvecompetesinahigh-uncertaintymarketandbelievesitcreatesallitsvaluethroughcustomer-focusedinnovation).Timehasthepowertoletpeopleexplorenewideasthatmaynotmakesenseatfirst;butthegreaterthevariationinnewideasyoutest,thehighertheprobabilitythatsomewillprovevaluable.Infact,Google’s“20percent”projectshaveproducedhitssuchasGmail,GoogleAdSense,andGoogleDocs.OneseniorexecutiveestimatedthatroughlyhalfofGoogle’snewproductsaregeneratedinthisway.24Suchprojectsaccountformorethan25percentofrevenues.25Sadly,likeothermaturingcompanies,Googlerecentlyputconstraintsontheprogram,amovethatmanyobserverspredictwillshrinkitsinnovationpipeline.However,GoogleappearstobepouringsignificantresourcesintoitsGoogleXlabwithprojectslikeGoogleGlass,GoogleExpress,GoogleLoon,andGoogleSelf-Driving.JustasGoogleisdoingwithGoogleX,somecompanies,suchasAmazon,identifyopportunitiesandformteamstogeneratesolutionstothechallengesofuncertainty.Innovationtimeisexplicitlybuiltin.

Nomatterhowit’sdone,leadersmustmakesurethatemployeesaregiventhetime—andtheexpectation—toconceiveandtestnewideas.Ithelpsifleaderssetanexample.Facebook’sMarkZuckerbergtriestospendfivehoursadayonproductdevelopment,andScottCookatIntuittriestospendonedayaweekparticipatingoninnovationprojectteams.RyanSmith,CEOofabillion-dollarsurveycompanycalledQualtrics,toldus,“Everyleaderisaplayerandacoach.Youhavetogetintothetrenchesifyouwanttoinnovate.”26

ProvideCustomers,Specialists,andToolsAnotherobstacleforstart-upteamsisalackoftools.Forexample,teamsneedtorunexperimentswithpotentialcustomersiftheyhopetodiscoverthejob-to-be-doneandthennailthesolution.Providingquickandeasyaccesstovarioustypesofcustomerscanfacilitaterapidexperimentation.

Amazonprovidesemployeesalistofcustomers(andmerchants)withwhichtheycanquicklytestnewideas.Intuitinvitescustomerstoitsheadquartersonedayaweekforexperiments.Italsoprovidesalistofnearbycustomerswhohaveagreedtoacceptvisits.Theseactionshavedoubledteams’face-to-faceinteractionswithcustomers.27NumerouspeopletoldusthatuntilIntuitstartedregularlybringingcustomersintoheadquarters,theydidn’trealizehoweasilytheycouldtestsolutionswiththem.

Tohelpstart-upteamsgenerateabroadlistofsolutions,Intuitdevelopedatechnologypalette.Thecompanyidentifiedandhiredexpertsintechnologiesrelatedtomobiledevices,socialmedia,userinteraction,collaboration,data,andthelike.Theseexpertsarevaluableforbroadeningsolutionsearches,andtheyhelpteamsidentifywhatistechnologicallyfeasible.

Google’sleadersalsoprovidetoolsforrapidprototyping,suchasdigitaltoolsformakingprototypesandmock-upsaswellasflexiblecodestructuresforrapidlyprototypingsoftware.GoogleX’s“designkitchen”wascreatedtobuildsimpleprototypesforbigideas.LocatedinabuildingnexttoGoogleX’smainoffices,thedesignkitchenisalarge-scalefabricationshopfilledwith3Dprinters,high-endlathes,andothersophisticatedprototypingmachinery.Thesetoolscanhaveaprofoundimpactontheproductivityofstart-upteams.

RemoveOrganizationalBarriersForemployeesatcompaniesthathaveossifiedaroundexecution,experimentingfeelsrisky,unnatural,evenagainstthe(unwritten)rules.Andbecauseofthedivisionoflaborandaccountability,employeesneedleaders’permissiontotestideasthatgobeyondthescopeoftheirbusinessunits.

AtValveSoftware,leadersprovidepermissioninaradicalway:therearevirtuallynomanagersorformaltitlesamongthesoftwaredesigners.28“Everyoneisadesigner,”accordingtotheemployeehandbook.“Everyonecanquestioneachother’swork.Anyonecanrecruitsomeoneontohisorherproject.”29Notsurprisingly,Valve’sapproachtominimizingobstaclesfreesemployeestopursueanystart-upideathatintereststhem.

Largecompaniesalsotrytoprotectbrandimageandlimittheliabilitiesofmarketexperiments.Insuchcompanies,howdoleadersgiveemployeespermissiontotakerisksandfreelyrunexperiments?AtIntuit,thelegalteamhasassembledalistofguidelines;ifyoufollowthem,you’refreetoexperimentwithoutaskingpermission.Forexample,youdon’tneedpermissionwhentheseconditionsaremet.

Testers(customers)understandthey’reparticipatinginresearch.Theexperimentdoesnotinvolvemorethanthirtythousandtestersovertwomonths.Theexperimentislabeled“IntuitLabs”tosignaltotestersthatitisanexperiment.Theprototypedoesnotactuallycompletetransactionsorcollectuserdata.Intuit’sdatastewardshipprinciplesapply.Participantslearnaboutthepilotviacommunicationtothegeneralpublic(andnottargetedtogovernmentemployeesoragencies).Testersmaybegivenasmalltoken,ifapplicable,fortheirtime.Intuitdoesacompletepatentbrainstormbeforeresultsoftheexperimentaresharedpublicly.30

Theseguidelinesserveasasignaltoemployees:“Weexpectyoutorunexperiments!Don’taskforpermission,justdoit!”

TheI-SchoolLeadershipCurriculum

Ifyouattendbusinessschool,youtakeclassesinfinance,accounting,operations,organizationalbehavior,andsimilartopics,allofthemdrawingheavilyonthelogicintroducedbyFrederickTaylor.Rarelydoyouhaveaclassonproductdevelopmentortheinnovator’smethodasacorecourse(althoughmanyforward-lookingprofessorsteachsomeoftheseprinciples,mostlyinelectivecourses).Inmostbusinessschools,leadershipisseenasthesetofskillsneededtomanagematureorganizationsfocusedonexecutingunderconditionsoflowuncertainty.

Butwhenyoufaceuncertainty,youneedadifferentsetofmanagementprinciples.Someoftheseprinciplesaretaughtindesignschools,ledbyStanford’sd.school.Butwethinkthatbeyondd.schoolsweneedaninnovationschool—curriculumconnectedtoB-schoolsthatteachesinnovationleadershipacrossallofanorganization’smainfunctions.AnI-school,incontrastwiththeB-school,woulddealwiththeemergingscienceofmanaginguncertainty.EntrepreneurialleadershipfallsundertheumbrellaoftheI-school,asdoeachoftheotherfunctionalareas,whichyoualsomustmanagedifferentlywhenyoufaceuncertainty.Figure2-3showsthedifferences.

FIGURE2-3

Differencesbetweentheinnovationandbusinessschool

Forexample,inB-school,whenyoustudymarketing,youtypicallylearntheimportanceofbuildingandprotectingyourbrand,ordoingquantitativeanalysistoidentifycustomersegmentsandgetcustomerfeedback.ButinanI-schoolwearguethatyoushouldinitiallyignoreyourbrandandobtainallcustomerfeedbackthroughdirectinteraction,observation,orinterviews.What’smore,ratherthanemphasizebuildingbrandsbysatisfyingabroadrangeofcustomersthroughperfectedproducts,I-schoolemphasizestheneedtotestlow-fidelityprototypeswithsmallgroupsofcustomers,embracingerrorsasopportunitiestolearn.

InB-school,whenyoulearnfinanceyou’retaughtaboutmarginalcostlogic:theimportanceofleveragingpriorfixed-costinvestmentswithnewinitiatives.Butthisapproachbiasesyoutowardincrementalinnovationefforts.InI-schoolyoulearnaboutthedangersofmarginalcostlogicandotherfinancialtools.31Inaworldofuncertainty,leveraginginvestmentscanoftenbeabadpractice,becauseitmayleadtobuildingaworkaroundsolutioninsteadofonethatnailsthejob-to-be-done.

Wearen’tsayingthatoneapproachisgoodandtheotherisbad.Botharegood.ThekeytomanagementsuccessistorecognizewhentoapplyamorefamiliarB-schoolapproachandwhentoapplyI-schoolthinking—adecisionthatrestsprimarilyonthedegreeofuncertainty.Whenuncertaintyishigh,applyanI-schoolapproach.Whentheuncertaintyhasbeenresolved,useaB-schoolapproach.Afterall,there’snoreasontowastetimerunninganexperimentwhenthereisalowprobabilitythatyourchoiceofactioniswrong.

Thatbeingsaid,inourdiscussionswithexecutivesweseearapidlyincreasingneedforanI-schoolmanagementapproach.AsIntuit’sCookobserves,“Weneedtousethesenewleadershippracticesinourcorebusiness,becausewefacesomuchuncertaintyandneedtocontinuetoreinventourselves.”32Forthoseofyoureadingthiswithabusinessdegree,wehavetwoquestions:HowmanyA/Bexperimentsdidyouruninyourclassesbeforegettingabusinessdegree?Howmanyprototypesdidyoubuild?Formostofyoutheansweris:zero.That’sgottochange.

The“I-school”labeldescribesagroupofemergingpracticesformanaginguncertainty,especiallyinstart-ups.Butinthefuture,asuncertaintycontinuestogrow,wewillseechangesinhowweorganizeandmanageallbusinesses.Asthescienceofmanaginguncertaintydevelops,theI-schoolapproachwillneedtobetaughtside-by-sidewithtraditionalmanagementdisciplinesinB-schools.

3

Insight:SavorSurprises

Ifyouwanttoinnovate,savorthesurprises.Toooftenweoverlookthesurprises.

—KimClark,FormerDeanofHarvardBusinessSchool

FORTENYEARS(2000–2010)HindustanUnilever(HUL),subsidiaryofoneoftheworld’sleadingconsumergoodscompanies,experienceddecliningrevenuegrowth,aflatstockprice,andafallingmarketshare.Effortstoimproveexecutionandefficiencyledtoincreasedmarginsbutlittlegrowthandevenlessinnovation.Fewnewideasbubbledup,andeventhefewthatdidseemedto

struggleanddisappear.AsCEONitinParanjpeandthemanagementteamwrestledtofindwaystoturnthecompanyaround,theyhypothesizedthattheonlywaytosavethecompanywastogeneratenewideasandinsights.Buthowcoulditgeneratenewideasaftertenyearsofthestatusquo?

Fortunately,Paranjperecognizedthatwhenyou’reintheroutineofdoingyourcurrentjobwell,you’renotlikelytohaveepiphanies.Sotochangecourse,themanagementteamdecidedthatthecompanyneededtobetterunderstandtheircustomers’needsandchallenges.In2010Paranjpelaunchedathree-phaseinitiativecalledProjectBushfire,withthegoalofgettingeveryemployee—morethanfifteenthousandpeopleinIndiaalone—tovisitcustomersintheirworkplacesandhomes.

Inthefirstphase,HULlaunchedaninternalcampaigntocreateawareness,sendinge-mailsandhangingpostersasking,“Whenwasthelasttimeyoureallylistenedtothecustomer?”Paranjpealsoe-mailedemployeestoexplaintheprogramandtoaskforideas,addingthathewouldrespondpersonallytoeveryidea.Butevenwiththisappeal,skepticismremainedhigh.Inthehalls,peoplewhisperedthattheprojectwasa“flavoroftheseason.”1

Inphasetwo,theteamselectedhundredsofsitesacrossIndiaformanagerstovisitandthenrequiredthemtoreserveadateandtimethroughanonlinesystem.Althoughthetopmanagementteammadeashowoflogginginonthefirstday,resistancebegantomount,withhundredsofrequeststobeexcused.Onefactorymanagerargued,“Myjobistomaximizetheproductioninthefactoryeveryday.IamconvincedthatmyabsencefromthefactoryforanentiredaywillresultinagreaterlossfortheorganizationthananyobservationorinsightImighthavefrommeetingcustomers,whomeetwithoursalesandbrandmanagersquiteregularly.”2Despitetheprotests,Paranjpeheldfirm,requiring100percentparticipation(hehadassistantscallandassignrecalcitrantmanagerstoobservationsites).

Fortheobservations,managersweresenttoshadowafrontlinesalesperson,meetconsumersintheirhomes,orvisitshopsandaskquestions.Eachmanagerwasgivenasheetwithquestionssuchas,“WhatdidIseethatconfirmedwhatIalreadyknow?”and“WhatdidIseethatwastotallyunexpectedorsurprising?”Thegoalwastocapturetheinformationinacentraldatabase.

Then,asmanagersvisitedthefieldinphasethree,theirearlyobservationsprovedtransformational:somehadnevermetcustomersbeforeandweresurprisedtoseetheissuestheystruggledwith.Othershadsuchlimitedinteractionwiththerealproblemsoftheircustomersthattheyhadoverlooked

interactionwiththerealproblemsoftheircustomersthattheyhadoverlookedmanyopportunities.Asthestoriespouredin(theBushfireteammadeitapointtoquicklysharesuccessstories),therecalcitrantattitudeamongmanymanagersbegantochange.Justasimportant,ideas—smallandlarge—begantoflowin.

Someoftheinsightspromptedsmallerinitiatives.Forexample,whenParanjpehimselfstoodonthesalesfloordiscussingthenewSoyadrinkwithcustomers,awomanaskedwhya“health”drinkcontainedsugar.AtthatmomenttheCEOrealizedtheteamhadoverlookedacriticalfactorinthewaymostcustomersevaluatehealthproducts.Otherinsightshadgreaterimpact.Forexample,onemanagerwassurprisedtofindthatShaktiAmmas,womenwhosoldHULproductsinruralareas,couldn’tsellother,noncompetingproducts.ThisledtoanexpansioninwhattheAmmassell,includingtelecommandbankingservicesfromotherproviders,aswellasnewHULproducts,suchasalow-costwaterpurificationsystemcalledPureit.Yetotherinsightsledtothecompany’sexpansionintofivethousandadditionalretailoutletsandtheadoptionofazero-inventorymodel.

OtherchangeshadadeeperimpactonHUL’sculture.Forexample,theprojectrefocusedHULongeneratinginsightsfromcustomersatalllevelsoftheorganization.Everymemberofthemanagementteamspendsatleasttwohourseverytwoweeksinteractingwithcustomers,andmanagersareexpectedtovisitatleastfivecustomerspermonth.Inaddition,HULcapturesinsightsdifferentlythaninthepast:whenanideaisproposed,amemberofthemanagementcommitteeacknowledgesit,andwhenideasgointopilottesting,thepersonwhogeneratedtheideaisacknowledgedandinvitedtoparticipate.

TherewardsfortheseeffortshaveshownupinHUL’sfinancialperformance.Afteradecadeofaflatstockprice,in2012sharesclimbed34percent(doubletheSensexindex),andsalesspiked40percent.3Moreover,HUL’sinnovationpremiumclimbedto44percent,makingitthetop-rankedconsumergoodscompany(andnumbertwelveoverall)onthe2012Forbeslistoftheworld’smostinnovativecompanies.

Generatinginsightsrepresentsthefirststepinourend-to-endinnovationprocess.Inthischapter,weshowthatinsightsarenottheresultofmagicorofsimplyhiring“creative”people.Rather,theyresultfrombehaviorsorprocessesyoucanapply.You’lllearnhowsuccessfulcompaniesgenerateinsightsandhowtoeffectivelycaptureandselectthem.

FourKeyActionsThatGenerateInsights

Innovationsareonlyvaluableiftheysolveproblems.Sothefirststepistogenerateaninsightaboutaproblemworthsolving.Theinsightcouldbefindingaproblemthatothershavemissedorperhapsuncoveringapotentialnewsolutiontoawell-understoodproblem.We’vefoundthatthecatalystforaninsightisa“surprise.”Asurpriseisthecluethatyou’velearnedsomethingnewthatmightbeavaluableinsight—becauseifyouaresurprisedthenothersmaybeaswell.Forexample,whenIntuit’sMobileBazaarteamwaswatchingfarmersconducttheirbusiness,theyweresurprisedtofindthatcroppricescouldfluctuatebyasmuchas50percentinasingleday.Thiswasasymptomofaproblemthatfarmerswerefacingintheirattempttogetfairpricesfortheircrops.Similarly,whenMichaelDellhadpurchasedallofthecomponentstobuildaPCinhisdormroom,hewassurprisedtodiscoverthattheycostonly$600or$700whenanIBMPCwassellingfor$2,500.Delltoldusthissurpriseraisedaquestion:“WhydoesitcostfivetimesmoretobuyaPCinthestorethanthepartscost?”4Intuit’sScottCookteachesemployeesatIntuitto“savorsurprises”andsaysthat“atIntuitweteachourpeopletoaskthesetwoquestions:Whatissurprising?Whatisdifferentfromwhatyouexpected?Thatiswheretruelearningandinnovationstarts.”5

Ourearlierbook,TheInnovator’sDNA,explainshowgreatinnovatorsuncoversurprisesandgeneratenewinsights.6Itdescribesfourbehaviorsthatprovokeassociationalthinking:theabilitytoconnectseeminglyunrelatedinformationorideasandputthemtogetherinnewways—forexample,crossingakayakwithasurfboardtocomeupwiththeideaforapaddleboard.Associationalthinkinghappensasthebraintriestosynthesizeandmakesenseofinformationgleanedfromquestioning,observing,networking,andexperimenting.Asfigure3-1shows,thefourkeyactionsofquestioning,observing,networking,andexperimentingarethekeytotriggeringnewinsightsthroughassociationalthinking.

FIGURE3-1

Theinnovator’sDNAbehaviors

First,peoplegenerateinsightsthroughquestioning,constantlychallengingthestatusquowith“why”and“whynot”questionstoturnthingsupside-down.Theyoftenask“whatif”questionstoenvisionadifferentfuture.Questioninggivesyouthefueltopowernewassociationsandinsights.

HindustanUnilever’sBushfireprojectisanexcellentexample.TheHULteammembersstartedwithalistofquestionsastheywentoutintothefield,including“Whatsurprisesyou?”and“WhatshouldHULbedoingthattheyarenotdoing?”Thesequestionsoftenactedasacatalyst.ThemanagerofanHULfactoryinMangaloreaskedwhyhecouldn’tbuyHULproductsatthelocalstore.Theobservationwasasymptomofproblemsinthedistributionnetworkthat,afterstudy,ledthecompanytoexpandintonewretailoutlets.Questionshelpyouseethingsinanewlightandopennewavenuesandpossibilities.

Second,managersgarnernewideasbyobservingtheenvironmentasiftheywereanthropologists.Theygetoutoftheircubiclestocloselywatchtheworldaroundthem—especiallycustomers,products,services,andprocesses—tospark

aroundthem—especiallycustomers,products,services,andprocesses—tosparkuniquewaysofdoingthings.Forexample,anHULmanagerobservedthatashopkeeperdidn’thaveinventoryeventhoughthedistributorhadalargestockpile.Theobservationhelpedthemanagerimproveinventorybyadoptingaretail-drivenmodel:shopkeeperordersaresentdirectlytoHUL,andHULshipstherequiredproducttodistributors,eliminatingstagnantinventoryandimprovingfulfillmentfortheretailer.Anddon’tunderestimatethevalueofsmall,unexpectedideas.Forexample,onemanager,anexpertinproductpackaging,recalledhissurpriseatseeingacustomerreengineeringTetraPakstohangthemfromtheceiling,increasingtheirvisibilitytopassingcustomers.

Third,thesuccessfulinnovatorswestudiedexcelatnetworking,talkingwithpeopletofind—orsparkanewwaytosolve—perplexingproblems.Theyregularlytalkwithpeoplewhodon’tlook,act,or(mostimportantly)thinkastheydo.Insteadofnetworkingsimplytogainresources,theyinteractwithdiversepeopletogetnewideas.AlthoughtheHULinitiativestartedwithfieldvisits,asmanagersmetwithpeopleoutsidetheirdiscipline,theyestablishednewrelationshipsthatledtonewideas;forexample,themanagersinmarketingandsalesrealizedthatasupplychainmanagercouldsolveasalesproblem.Asonemanagerputit,“YouwouldbemakingahugemistakebyassumingthataPh.D.inOrganicChemistryhasnovaluetoaddtothesellingprocesswiredintoatabletPC.”7Anothernoted,“Acoupleofyearsago,abrandmanagerwouldn’tbecaughtdeadaskinghisfinancecounterpartforanopiniononapieceofadvertising.Today,itiscommon.”8

Fourth,yougenerateinsightsbyconstantlyexperimenting.Innovatorstryoutnewexperienceswherevertheygo.Theytakeapartproductsorprocessestoseehowthingswork—andhowtoimprovethem.Moreover,asyou’llseeinchapter5,theyrapidlypilotorprototypevarioussolutionstofindonethatworks.Forexample,whenanHULfactorymanagervisitedashopkeeper,hewasamazedtohearaboutamyriadofproblemsthatcouldhavebeenresolvedbycallingthefactory’spublishedhelplinenumber.Sothemanagertriedanexperiment:heprintedthehelplinenumberontheoutsideofeverybox.Immediately,thenumberofcallsincreaseddramatically,andthenumberoflong-termissuesplummeted.

Westudiedasampleoffoundersandleadersofcompaniesthatenjoyahighinnovationpremium(thoserankedinourForbeslist).Wefoundthattheyspend31percentoftheirtimeengagedinthefourdiscoverybehaviorsinpursuitofnewinsights.Incontrast,leadersofcompanieshavingalowIPspentonly15percentoftheirtimethusengaged.

Whatkindsofthingscanleadersdotofacilitatetheprocess?Andhowcantheymakesurethatinsightsarecapturedandthebestonesareselectedtobeputthroughtheinnovator’smethod?

SearchBroadly

Asyouengageinthefourbehaviors,it’scrucialtosearchbroadly:lookforideasacrosscountries,industries,companies,technologies,functions,andsoon.Einsteincalledthis“combinatorialplay.”Abroadsearchleadstovariationintheknowledgeyougain—andthatleadstomorecombinatorialthoughttrials,increasingtheoddsofdiscoveringaninsight.Andwe’vefoundthatpeoplewhosearchedbroadlyaremuchmorelikelytohaveanepiphany—aninsightthatseemstocomefromnowhere.

Amazon’sJeffBezosisanexcellentexample.Beforedecidingtosellbooksovertheinternet,Bezosresearchedthetoptwentymailorderproducts.Hehypothesizedthatpeoplewouldbuystandardproducts(thosethatvarylittle)viatheweb.Tohissurprise,books—certainlystandard—weren’tinthetoptwentyproducts.Thenhediscoveredwhy:thereweresomanybooksinprintthatnoonecatalogcouldcoverthemall.Itwouldbehugeandexpensivetomail.AsBezossawit,theinternetwastheidealvehicleforofferingsuchacatalog.

Althoughrootedinbooksandpositionedasaleadingbookretailer,Amazonhasatrackrecordofsearchingbroadlyfornewbusinessideas.Ithasexpandedintoawidevarietyofproductsandservices,fromelectronicreadersandtablets(withtheKindle)tocloudcomputingservices(AmazonEC2)tovideostreamingservices(throughAmazonPrime)todailygrocerydelivery(AmazonFresh).Amazonhasrecentlymovedintomerchantlending(AmazonLending)andreportedlyisconsideringenteringcategoriessuchassmartphonesandTVset-topboxes.

BezosencouragesemployeestosearchbroadlydespitecriticismthatAmazonisnotfocusedenough.“Everynewbusinesswe’veeverengagedinhasinitiallybeenseenasadistractionbypeopleexternally,andsometimeseveninternally,”saysBezos.“They’llsay,‘Whyareyouexpandingintomediaproducts?Whyareyougoinginternational?Whyareyouenteringthemarketplacebusinesswiththird-partysellers?’We’regettingitnowwithournewinfrastructurewebservices.‘Whytakeonthesenewdevelopercustomers?’”9Bezosaddsthatmostcompanies’bigerrorshavebeenactsofomissionandnotactsofcommission:“It’stheoppositeofstickingtoyourknitting.It’swhenyoushouldn’thavestucktoyourknittingandyoudid,”hesays.“It’sveryfuntohaveaculturewherepeoplearewillingtotaketheseleaps.It’stheoppositeofthe‘institutionalno.’It’stheinstitutionalyes.PeopleatAmazonsay,‘We’regoingtofigureouthow

todothis.’”10

Mostpeoplenaturallysearchnarrowly,becausethey’retoldtoleveragetheirexpertise.Althoughthisstrategymakessenseforexpandingintoknownterritory,itlimitsyoutoonlyincrementalinsights.Searchingbroadlymightincludeexploringnewindustriesforyourproduct,takingapartproductsfromdifferentindustries,oraskingyourselfchallengingquestionsthatforceyoutolookelsewhere(“Howwouldwemakemoneynextyearifwewerelegallyprohibitedfromsellinganyofourcurrentproductstoourexistingcustomers?”).Searchingbroadlyfornewknowledgeornewpossibilitiesgreatlyincreasestheprobabilityofuncoveringabreakthroughinsight.

CapturetheInsight

Inthepastfewdecades,manycompanieshaveinitiatedprocessestocapturenewideas,suchasidearepositoriesandknowledgedatabases,butmanyofthemareglorifiedsuggestionboxesthatsimplydonotwork.Successfullycapturingideasisacriticalpartofinnovation,andmanagersneedtousetherighttoolsandtherightprocess.

ApopularprocesswestudiedistheAmericanIdolmodel.Youchallengeemployeestosubmitideastobescreenedandselectedbyapanelofjudges.Forexample,GoogleholdsanInnovator’sChallengefourtimesayear.Employeessubmitideasfortopmanagementreview;winningideasreceivetheresourcestobepushedforward(wediscussselectingideasinthenextsection).MarissaMayer(formerdirectorofconsumerproductsatGoogleandnowCEOofYahoo!)championedregularbrainstormingsessionsduringwhichengineershadtenminutestopitchtheirideastoMayerandagroupofasmanyasonehundredothers.Thegoalofthesesessionswasnotonlytocapturetheinsightbutalsotobuildontheinitialideawithatleastonenewcomplementaryidea.

Asecondapproachistouseadigitalcollaborationplatform,sometimescalledanideamanagementsystem.Googlereferstoitsplatformasanideaboard,atIntuitit’scalledBrainstorm,andatAT&Tit’scalledTIP.Manycompanies,suchasCiscoServices,sourcefromanoutsidecompanylikeBrightidea(SpigotandAHHHAareotherpopulartools).Thesetoolsallowemployees(oroutsiders)topost,view,sort,andfilterideas;voteandprovidefeedback;anduseothersocialnetworkingfeatureslikenotificationsandtagging.Thesetoolsusecrowd-sourcing(outsourcingtaskstoindividualsororganizations)toencourage,refine,andadvanceideasinwaysthatastatic,centrallycontrolledsuggestionboxcannot.

Thatbeingsaid,youmustovercomechallengestoencourageemployeestoparticipate.AtIntuit,useoftheBrainstormplatformisrobustbecauseit’sembeddedintheculture,butit’sstillnecessaryforinnovationcatalyststopulloutpromisingideastonurtureandchampion.Othercompanies,suchasCiscoandQualcomm,createengagementbyusingabatch-typeprocesstofocuseveryone’sattentionontheideaplatformsatparticulartimes.Yetothercompanies,suchasHUL,assignteamstorespondtoanddevelopeachidea.Thelessonistomarrycrowdengagementwithencouragementandcultivationfromatrainedteam.

AT&T’sTIPisthelargestideaboardwe’veseen,withmorethanhalfofAT&T’stwohundredthousandemployeesparticipating.Ithelpsturnthecompany’stypicalinnovationweakness—avastemployeebase—intoastrength.It’segalitarian;frontlineemployeesparticipateinearlystageswithavoiceequaltothoseofseniormanagers.Theonlineplatformallowsemployeesworldwidetovote,comment,andcollaborateonideas.Attheendofadesignatedtimeperiod,calleda“season”(àlaAmericanIdol),thetopideasareevaluatedby“angels,”agroupofhigh-levelexecutives,whothenselectideastobepresentedinalivepitchsession.Chosenideasreceiveseedfunding.Selectedprojectsaremanagedbyinnovationchampions:employeeswhoactas“CEOs”ofeachproject.Theyshepherdtheideathroughtheproof-of-conceptphaseandreceiveadditionalfundingifabusinessunitwillmatchtheinvestmentforasecondround.

Toillustrate,acall-centeremployeewholostaclosefriendinanaccidentcausedbyadistracteddriverconceivedofanapptohelppreventtextingwhiledriving.WithinoneweekofpostingherideaonTIP,peerswereprovidinghelpfulguidanceonimprovingandimplementingit.Ultimately,shewasaskedtopresentherideatoAT&Tleadership,includingCEORandallStephenson.ExecutivesprovidedfundingandmovedtheideatoanAT&Tfoundry,TIP’sincubationprocess,whereaprototypewasdevelopedandeventuallyreleasedtothemarket.DubbedDriveMode,theapphasbeendownloadedhundredsofthousandsoftimesandwasacornerstoneofAT&T’s“ItCanWait”publicservicecampaign.

Somecompaniesalsosetupadatabasetocaptureideas.Forexample,HULenteredalltheBushfirefieldobservationsintoadatabase.Tokeeptheideasalive,itdidtwothings:itpromisedtorespondtoeveryidea,anditassignedmanagerstoprobethedatabase,findstrongideas,andthenpushthemforwardwithparticipationoftheoriginator.

Somecompaniessetupprocessestocaptureinsightsfromoutsidethecompany.Forexample,Procter&Gamblehasdeployedseventy“technologyentrepreneurs,”whospendalltheirtimesearchingfornewideasthatwillmakeadifferenceforP&G.Theseseniorpeoplehelpidentifykeycustomerneedsandwritethetechnologybriefsthatdefinetheproblemsthecompanyistryingtosolve.Theycreateexternalconnectionsby,forexample,meetingwithuniversityandindustryresearchers,andtheycombineaggressiveminingofthescientificliterature,patentdatabases,andotherdatasourceswithphysicalprospectingforideas—say,surveyingstoreshelvesinRomeorattendingproductandtechnologyfairs.Itwasatechnologyentrepreneur,exploringalocalmarketin

Japan,whodiscoveredwhatultimatelybecametheMr.CleanMagicEraser.P&G’stechnologyentrepreneursworkoutofsixConnectandDevelophubsinChina,India,Japan,WesternEurope,LatinAmerica,andtheUnitedStates.Todate,theyhaveidentifiedmorethantenthousandproducts,productideas,andpromisingtechnologies.11

SelecttheInsight

RecentlytheeditorsatBudgetTravelermagazinehadagreatideatogeneratenewmaterial:Whynotcrowd-sourceanentireissuefromreaders?Theysentoutacallforsubmissionsandreceivedmorethan2,800,includingmorethanfivehundredforasinglepieceon“50ReasonsYouLoveNewYork.”Althoughtheprojectgeneratednewmaterial,theeditorsnowfacedamonumentaltask:Howtosortthroughalmostthreethousandsubmissionsandthen,forthosechosen,reworkandeditthemtofitintoanarticle.Intheend,editorErikTorkellsreflectedonthebittersweetexperience,saying,“Let’sbeperfectlyclear,makingthisissuewasneithercheapnoreasy.”12

Leadersatlargecompaniescancreatesimilarproblemswhentheysucceedatinspiring—andcapturing—insightsbuthavebrokenmechanismsforwinnowingthemtothosethataremostpromising.Tosolvetheproblem,mostcompaniesfallbackonfamiliartechniques,usuallyacompetitionresemblingabusinessplancontest,judgedbyseniorexecutives.Unfortunately,thisapproachmaynotworkwell.Recallourearlierdiscussionoftheproblemsofleadersmakingdecisionsunderhighuncertainty.We’vefoundthatleadersaremoresuccessfulatselectinginsightsfortheirorganizationstofurtherexplorebyusingeithera“votetest”ora“prooftest.”

VoteTestHowcouldBudgetTravelerhavesolveditseditorialproblem?Whatiftheeditorshadusedtheirreaderstobothsourceandevaluatethematerial?Peoplebothinsideandoutsideyourorganizationcanbevaluableforselectinginsightsthroughaformofcrowd-sourcingwecall“crowd-voting.”OneexampleisThreadless,anonlinecommunityofartistsandane-commercewebsite.ThreadlessenlistsitscustomersinamembercommunitytosubmitideasforT-shirtslogansanddesigns,tappingintonewartistsandgeneratingideaswithouttheneedtohireprofessionaldesigners.Justasimportant,Threadlessusescrowd-voting(bycustomersanddesigners)toselectwhichdesignstotaketomarket.Byusingthecrowd,Threadlesscanbetterpredictwhicht-shirtswillsell.Ithasdevelopedanenviabletrackrecordofneverhavingproducedaflop;everyt-shirteverproducedhassoldout.

Crowd-votingworkswellwhenyouuseacrowdtoevaluateanofferingorpredictuncertainevents.However,useitwithcautionifyou’retryingtopredictcomplex,technical,orradicalproblemsorsolutions.Inthesecases,expertisematters,andhands-onusecanbeamoreviablepredictorthanopinions.

Asanalternative,youcancreateasystemforchoosinginsightsbasedonwhethertheadvocatecangetotherstovolunteertimetopursueit.Thisiswhatfoundersofstart-upsmustdo.Similarly,GoogleandValveSoftware,amongothers,challengeemployeestorecruitothercolleaguestousetheirself-directedtimeontheemployee’sproject.Compellingideasareselectedforfurtherdevelopmentbecausetheydrawvolunteerresources(See“HowtoMakeInnovationTimeWork”).

HowtoMakeInnovationTimeWork

ResearchersaskedstudentsatYaletodosomethingfortheirownbenefit:gettetanusshots.Toonegroup,theresearchersgavethetimeandlocationfortheshotsandthentriedtoscarethemintoattending.Totheothergroup,theygavethesameinformationbutaddedamaptothebuilding.Allthestudentswerefamiliarwithcampus,butwhentheyreceivedamaptheirattendancejumpedfrom3percentto28percent.Evenforstudentswhoknewwhattodo,providingahelpfultoolincreasedparticipation.13Similarly,givingyourteammemberstimeto

innovatewillbemoreeffectiveifyouprovidea“map”touseit.

Forexample,whenJeffZiaswasputinchargeofunstructuredtimeatIntuit,henoticedthatfewpeopleusedit.Tocreateamap,hestartedbyencouragingpeopletomarktheircalendarswiththedaystheywoulduseunstructuredtime.Thisactincreasedemployeeengagement20percent.ThenZiasrecruitedvolunteerstosharebestpracticesandchampioninnovationtime.

Evenso,Ziasfoundthatpeopledidn’tknowhowtousethetime.Sohecreatedaseriesof“hack-a-thons”:fortwenty-fourtoforty-eighthours,peopleblockedouteverythingelseandfocusedoninnovation.Atfirst,employeesgottogetherin“ideajams”andbrainstormedproblemsandproducts.Morethanadozenproducts,includingTurboTaxontheiPad,cameoutoftheearlyideajams.ThenZiascreatedapipelineofincreasinglyspecificjams:“painjams”tofindproblemsworthsolving,“solutionjams”tobrainstormsolutions,and“codejams”todevelopprototypesortryvariationstoexistingproducts.

ZiasarguesthatmuchofIntuit’ssuccessinnewproductscanbetracedtoanoverallincreaseintheuseofunstructuredtime.Butthegreaterbenefitmaybeitsroleasamythbuster.Sixyearsago,Intuitwasperceivedas“anold,slowcompany,”andpeoplesaiditwastoohardtobeinnovativeandagile.Theideajamsandcodejamsbustedthosemythsbytellingemployees,“Goahead—justhackthat.”14

Evenmoreradically,ValveSoftwarehascreatedaninternalmarketforideas—atruenetworkofstart-ups—byrequiringthatthegeneratorsofinsightsrecruitothers.FromValve’semployeehandbook:

SinceValveisflat,peopledon’tjoinprojectsbecausethey’retoldto.Instead,you’lldecidewhattoworkon.Employeesvoteonprojectswiththeirfeet(ordeskwheels).Strongprojectsareonesinwhichpeoplecanseedemonstratedvalue;theystaffupeasily.Thismeansthereareanynumberofinternalrecruitingeffortsconstantlyunderway.Peoplearegoingtowantyoutoworkwiththemontheirprojects,andthey’lltryhardtogetyoutodoso.Butthedecisionisgoingtobeuptoyou...

There’snorulebookforchoosingaprojectortaskatValve.Butit’susefultoanswerquestionslikethese:Ofalltheprojectscurrentlyunderway,

what’sthemostvaluablethingIcanbeworkingon?Whichprojectwillhavethehighestdirectimpactonourcustomers?15

Thisapproachisunusual.AsValveemployeePaulKirschbaum(aformerAmazonemployee)observes,“It’sdifferentatValve.Youhavetofigureoutwheretoallocateyourtime—whichprojectsyouthinkwillcreatethemostvalue.Andifyouwanttopursueanidea,you’vegottoconvinceothersthatit’sworthpursuing.Nomanageristellingyouwhattodo.Ideasdrawresourcesifothersthinktheyhavemerit.”16Thefreedomtochooseiscriticalforinnovationsuccess,becauseresearchshowsthatcreativeideascomefromfolkswhoareintrinsicallymotivatedtogenerateandpursuethoseideas.17

Thisapproachalsohasthebenefitofcreatinganenvironmentwherefolksarehappyandmotivatedbecausetheyworkonthingstheycareabout.“Wewantinnovators,andthatmeansmaintaininganenvironmentwherethey’llflourish,”sayValve’sleadersintheemployeehandbook.“That’swhyValveisflat.It’sourshorthandwayofsayingthatwedon’thaveanymanagement,andnobody‘reportsto’anybodyelse.Wedohaveafounder/president,butevenheisn’tyourmanager.Thiscompanyisyourstosteer...Youhavethepowertogreen-lightprojects.”18That’sapowerfulvotetestforanorganizationtousetoselectideastoworkon.

ProofTestItispossiblethatindividuals(orteams)whoarepassionateaboutanideabutlackthe“votes”maybeontosomething.Howdoyousortthemoutfromthepassionateindividualswholackvotesbecausetheirideaisbad?Givethemthetoolswedescribe,andaskthemtorunaquickexperiment.Iftheinsighthasmerit,they’llreturnwithdata—theproof—thattheideaisworthfurtherexploration.Forexample,whenPaulBuchheit,anengineeratGoogle,cameupwiththeideaforasystemthatwouldreadkeywordsdistilledfromyourGmailmessageandautomaticallyfindarelatedadtodisplaynexttoit,MarissaMayertoldhimtodroptheidea.“Iwaslike,‘Paul,Paul,Paul—adsarenevergoingtowork,’”MayersaidinaStanfordUniversitypodcast.“We’llnevermakeanymoney,orwe’regoingtotargettheadsattheire-mail,whichisjustgoingtobecreepyandweird.Peoplearegoingtothinktherearepeopleherereadingtheire-mailsandpickingouttheadsandit’sgoingtobeterrible.”19LuckilyforBuchheit,empiricalresultstrumpopinionsinGoogle’sculture.SoevenafterMayermadehimpromisenottobuildaprototype,hestayedupallnightandbuiltoneanyway,gamblingthatitwouldproveMayerwrong.Hereleasedtheprototypeofhissystem,calledAdSense,at7a.m.rightbeforeMayercametowork.WhenMayerfirstsawtheprototype,shewasannoyed.ButwhenshecheckedherGmailshesawtherewasane-mailfromafriendwhoinvitedhertogohiking—andnexttoit,anadforhikingboots.Anothere-mailwasaboutAlGorevisitingStanfordUniversityforaspeech—andnexttoitwasanadforbooksaboutAlGore.MayergrudginglyadmittedthatAdSensewasmoreuseful,entertaining,andrelevantthansheimagined.20Moreimportantly,thedatafromtheprototypewonout.(Buchheit’sprototypeledtoadditionalprototypes,andAdSensewasadaptedtoidentifyadvertisingopportunitiesthroughkeywordsearches,websitecontent,andbrowsingthatledto$10billioninannualrevenues.)Infact,GoogleCEOEricSchmidtwouldoftenadviseGooglerstoget“100happyusersinsideofGoogle”asproofofconceptbeforelaunchingaproducttothemarket.

Insimilarfashion,Regeneron,anemergingbiotechstar,hasachievedalofty63percentinnovationpremium(number4onourmostrecentForbeslistofmostinnovativecompanies)byplacingmanysmallbetsinlotsofplaces—andlettingtheexperimentsrevealwhichideasarebest.AccordingtoaForbesanalysisof220drugsapprovedoverthepastdecadeforpubliclytradedcompanies,thecompaniesthatinventedthreeormoremedicinesspentanaverageof$4.3billioninR&Dperdrug.Regeneron’scostperdrug?Only$736

million.Settingcriteriaforsuccessandthenlettingfastandfrugalexperimentsshowwhichbetstomakeisafarbetterwaythanhavingseniormanagerspicktheinsightstotestanddevelop.AccordingtoRegeneronCEOLeonardSchleifer,havingleaderspicktheideastofocusonisabadidea.“‘Focus’isadirtywordforus,OK?It’sabigmistaketothinkthatyoucanpicktheverybestthingthatyoushouldfocusonandthenignorealltheotherthings.”21Thepoint:pickingwinnersunderconditionsofhighuncertaintyisextraordinarilydifficult:letexperimentsvalidatethebestinsightstopursue.

WatchOut:InnovatorsInnovate,CustomersValidate

Mostofyourinsightsintoproblemstobesolvedwillcomefromwatchingandinteractingwithcustomersandothers.Butdon’tfallintothetrapofaskingyourcustomerstoinnovateforyou.Inlaterchaptersweemphasizetheimportanceofaskingforfeedback,butdon’texpectthemtotellyouwhattheinnovationshouldbe.Customershaveahardtimeimaginingthefutureorresolvingcontradictorydemands.Forexample,whencustomerstoldKimberly-Clarktheydidn’twanttheirtoilet-trainedchildrentoweardiapersbuttheyalsodidn’twantthemtowetthebed,thosesamecustomerscouldn’timaginethesolution:disposableunderwearwiththeabsorbentfeaturesofadiaper(calledPull-Ups,theybecameamultimillion-dollarcategory).Toavoidthistrap,aswewillteachinthenextchapter,focusonthecustomer’sjob-to-be-done,comeupwithavarietyofprototypedsolutions,andthen,usingtoolsoftheinnovator’smethod,relyoncustomerstovalidatethesolution.

TheInsightBusiness

Youcannotexpecttoseeafloodofinsightsbydoingthesamethingsyou’vedoneinthepast.Butyoucangeneratemanynewinsightsbychangingwhatyoudo.Questioning,observing,networking,andexperimentingwillincreasetheprobabilitythatyouwilllearnsomethingnewthatwillsurpriseyou.Savorthosesurprises.Theymightbethecatalysttosomethingbig.

Letusaddthatyoucannotignitemoreinsightsbyjustthrowingmoneyatpeople.Counterintuitively,someofthemostsuccessfulinnovatorswestudiedofferedalmostnomonetaryrewardsforinnovation.Whydidpeopleparticipate?It’sbecausemanypeople,oncetheygetatasteofit,findinnovationthemostfulfillingactivityintheirlives.Peopletypicallywanttobeacknowledgedandwanttobeapartoftakingtheirinsightsforwardandturningthemintorealbusinesses,includingtakingtimeofftopushtheideaforward(manycompaniesweobservedofferthreetotwelvemonthsofsabbaticalfororiginatorsofthemostpromisingideas).Youshouldn’tforgettorewardpeople,andit’sagoodideatoprovidefinancialparticipationtoretainyourbestinnovators.Butultimately,givingpeoplethetimeandopportunitytopursuetheirideasmaybethemostimportantthingyoucanoffer.Andchangingyourbehaviorinsimpleandeasywayscanmakeallthedifferenceinhelpingtriggerinsightsthatcanmakeadifference.

4

Problem:DiscovertheJob-to-Be-Done

Noproblem,noopportunity.Noonewillpayyoutosolveanonproblem.

—VinodKhosla,Founder,SunMicrosystemsandKhoslaVentures

WHENMIKEMAPLESJR.,anexperiencedexecutivewhohadworkedintelecommunications,decidedtostartanewventurewithsomecolleagues,theproblemwasthattheydidn’tknowwhattypeofventuretostart.SoMaplesandhisteammadeanunusualagreement:theywouldnotstartbuildinganythinguntiltheyfoundaproblemthatwasworthsolving.Maplesandhisfriendsbeganmeetingseveraltimesaweektodiscussproblemstheyhadseen.Then,thenduringtheweektheymetindividuallywithpeopleintheindustrytotesttheirideas.Althoughthegroupgeneratedmanyinterestinginsights,Maplesandhis

teamkeptpushing,recallingthattheywerelookingforaproblemsobigthat“youneededatourniquet,oryouweregoingtodie.”1

Eventually,theteamfocusedontheproblemoftherapidlyexpandinghelpdesk,a$70billionproblembleedingtheITindustrydry.Researchrevealedthatassoftwaresolutionshadbecomemorecomplex,thehelpdeskrequiredincreasinglyknowledgeablestafftoresolvecustomers’technicalchallenges.Helpdeskfunctionsthenconsumed80percentofMicrosoft’sheadcount,andgrowing.Notsurprisingly,severalcompanieshaddevelopedsolutions,usuallyknowledgedatabasesofanswerstofrequentlyaskedquestions.

Maples’steammembersfeltthatthey,too,shoulddevelopaknowledgedatabase—butitwouldneedtobeabettersolutionthancompetitiveproducts.Butbecausetheyhadcommittedtodeeplyunderstandingtheproblemfirst,theyagreedtodevoteseriousefforttoobservingthechallengesofthehelpdesk.

Sotheteamwentintothecallcentersandobservedtechnicians,timingcallswithstopwatchesandrecordingthecontent.Theyalsosatdownwithtechnicians,managers,andexecutivestodiscussandunderstandtheproblem.Theydiscoveredsomethingshocking:only25percentofthetimeonacallwasspentactuallyresolvingtheproblem.Upto75percentwasspentgatheringcustomerinformation,confirmingwhethercustomershadasupportplan,anddiagnosingsimpleitemssuchastheoperatingsystem;knowledgedatabasesweretacklingonly25percentoftheproblem.Ifthegroupcouldautomatethesimplertasks,itcouldsolveaproblemconsumingmorethanhalftheproductivityofa$70billionindustry.Usingthisdeepinsightintotheproblem,MaplesandhiscolleagueslaunchedMotiveCommunications,acompanythatreachedamultibillion-dollarmarketcapitalizationbyprovidingabettersolutiontotherealproblem.2

Maples’sexperiencereinforcestheimportanceofdeeplyunderstandingtheproblembeforetryingtosolveit.Althoughsuchanobservationmayseemobvious,infact,mostmanagersactuallystartwiththesolutionfirst,beforeensuringthatthey’vediscoveredaproblemworthsolving.Asaresult,althoughtheydevelophighlyinnovativesolutions,theproductorservicefailsbecausetheydevelopedasolutionthatnoonewantstobuy.Therefore,themostimportantthingyoucandonextintheinnovationprocessistostartbydeeplyunderstandingtheproblemyouaresolving—thejob-to-be-done.

DeeplyUnderstandtheJob-to-Be-Done

ClaytonChristensenarguesthatcustomers—peopleandcompanies—have“jobs”thatariseregularlyandneedtogetdone.Whencustomersbecomeawareofajob,theylookaroundforaproductorservicetheycanhiretohelpthemgetthejobdone.Aswell-knownmarketingprofessorTheodoreLevittonceobserved,“Peopledon’twanttobuyaquarter-inchdrill.Theywantaquarter-inchhole!”3

Forexample,customersmaypurchaseanironandironingboardtohelpthemremovewrinklesfromclothes.Buttheydon’treallywantanironandironingboard.Theyreallywantwrinkle-freeclothing.Byunderstandingwhatthejobis,youcangeneratevariousinsightsabouttheproblemorsolution.Insteadofthinkingaboutwaystoimprovetheironorironingboard,youmightconsidercreatingawrinkle-releasesprayforclothes,orperhapsaproducttobeusedinthedryer,muchasafabricsoftenersheetisused.Orperhapsyoucoulddevelopaproducttobeattachedtoawasher—orputinashower—tosteamoutwrinkles.We’vefoundthatsteppingbacktodeeplyunderstandthejob-to-be-doneisausefultechnique,notonlyforspawningideasbutalsoforlayingthefoundationtonailtheproblemandsolution.

Furthermore,itisimportanttorecognizethateveryjobhasafunctional,asocial,andanemotionaldimension—andtheimportanceoftheseelementsvariesfromjobtojob.Forexample,“IneedtofeellikeIbelongtoanelite,exclusivegroup”isajobforwhichluxurybrandproductssuchasGucciandVersacearehired.Inthiscase,thefunctionaldimensionofthejobisn’tnearlyasimportantasitssocialandemotionaldimensions.Incontrast,ifyouwanttohireadeliverytruckyou’reprobablyfocusingonfunctionalelements,suchasthesizeofthetruckoreaseofloading.Butevenwhenajoblookspurelyfunctional,payattentiontohiddenemotionalorsocialdimensions.Forexample,eventhoughaHarley-Davidsonishighlyfunctional,manypeoplechooseitforsocialreasons;theywanttojointheHarleyOwnersGroupandbepartofaclubthatridesmotorcyclestogether.Understandingthefunctional,social,andemotionaldimensionsofajobisthemostcriticalelementofreallynailingtheproblemyouaretryingtosolveandsettingyourselfupforasuccessfulinnovation.Itwillleadyoutosolutionsthatyoumayneverhaveconsideredbutthatwillbemuchmoresuccessful.

Anotherwayofthinkingaboutthejob-to-be-doneistoaskyourself,Whatoutcomesdomycustomerswant?AnthonyUlwickdescribestheeffortsof

outcomesdomycustomerswant?AnthonyUlwickdescribestheeffortsofCordis,astrugglingmedicaldevicemanufacturer,togainafootholdinthemarketforproductsrelatedtoangioplasty(aheartprocedureinwhichdoctorsthreadadevicethroughanarterytoreachtheheart,wheretheyinflateaballoontoplaceastent,reducingblockageinacompromisedheartartery).Intheefforttoimprovetheirfortunes,UlwickhelpedtheCordisteamshifttheirfocusfromfeaturestooutcomes.Interviewersapproachedasampleofcustomers(surgeonsandnurses)andaskedthemtotalkthroughanangioplastyfrombeginningtoend.Asthecustomerstalked,theCordisteamaskedthemwhattheywouldlike,ideally,withoutfocusingonexistingsolutions.Thentheytranslatedthosedesiresintooutcomes.

Forexample,whensurgeonssaidtheywantedasmoothballoon,interviewersaskedwhy;thesurgeonswantedtoavoidaccidentallycuttingabloodvessel.Sotheteamtranslatedthisdescriptionintotheoutcome(thejob-to-be-done).Theythencomparedallthejobstobedoneintheprocedureanddevelopedahypothesisofthebiggestunmetneed(themostimportantoutcomeshavingtheleastsatisfaction):minimizingrecurrenceofarteryblockage,whichwasrated9.5outof10onimportance,but3.2onsatisfaction.Theythenredesignedthestenttoaccomplishthatjob.Withinoneyear,Cordisincreaseditsmarketsharefromlessthan1percenttomorethan10percent.4

Inyoursearchforjobstobedone,itisworthrememberingthatnotalljobsarecreatedequal.Theworldisfullofopportunities;theonlyrealquestioniswhichonesareworthsolving.Sohowdoyouknowifit’sworthsolving?Searchforwhatwecallamonetizablejob:asignificantneedorproblemforalargegroupofcustomerswho:(1)havemoneyand(2)willreadilypayyoutosolveit.Toomanyinnovatorshavechasedveryintriguingjobsbutforveryfewcustomersorforcustomerswhodon’thavemoneyoraren’twillingtopay!Forexample,whilemanyelementaryschoolshaveamultitudeofjobstosolve,theyareoftensobudgetconstrainedthattheycannotpaytosolvethosejobs,unlessyoucanfindawaytoalsosolvetheirbudgetconstraintatthesametime.

Asyouthinkaboutdifferentmonetizablejobs,alsoconsiderthatoccasionallytherecanbemultiplecustomersforasinglejob.Foranyparticularjobtheremaybeuptothreecustomers:theeconomiccustomer(thepersonwhopaysforit),thetechnicalcustomer(thepersonwhoinstallsthesolution),andtheendcustomer(thepersonwhousesthesolution).Naturallyyouwanttounderstandthejobstobedoneforeachcustomertypetoavoidsolvingonecustomer’sjobwhilecreatingaproblemforanothercustomer.Forexample,ifyousolveahealthcareproblemforaconsumer(endcustomer)butinsurersoradministrators(economiccustomer)refusetopay,youcan’tactuallytacklethejob.So

(economiccustomer)refusetopay,youcan’tactuallytacklethejob.Sorememberthatyoumayneedtofindcreativewaystosolvethejob-to-be-doneformultiplecustomers.

Lastlywerecommendthatyousearchforamonetizablejobtocustomers’problemsthatcanbedescribedintermsofsharkbites—andnotmosquitobites.Manyofusarebotheredbymosquitobites,butwerarelybuytheanti-itchcream.Wejustlivewithit.Butifasharkbitesyou,thenyouwillpayanyamountofmoneytosolvethatpain—immediately.Yourgoalshouldbetolookforsharkbitesthatyoucansolve—thekindsofproblemsorneedsthatkeepyourcustomersawakeatnight,consumetheirtime,engagethemdeeply,orcausethemstress.

Whenwearetalkaboutsharkbites,we’rereferringmoretothedegreeofcustomeremotionandengagementthanthesizeofthemarket.Ofcourse,youwanttosolveaproblemwithbigmarkets,butoftenthemarketsfornewideasareverysmallatthebeginning.Oneofthebiggesttrapsmanagersfallintoisshootingdownnewprojectsbecausethey’retoosmalltosatisfythegrowthneedsoflargecorporations.Butseedsaresmallbeforetheybecometrees—andtheytaketimetomature.Forthatreason,eventhoughyoumaybeencouragedtostartbysizingthemarket,weencourageyoutopaymoreattentiontotheemotionofyourcustomers.Strongemotionoftenleadstoattractivemarkets.Forthatreason,don’tbefooled.Somethingsthatmayappeartobeamosquitobitemaybeaseriouscustomerneedworthsolving(see“IsInstagramaSharkBiteoraMosquitoBite?”).

IsInstagramaMosquitoBiteoraSharkBite?

Tofindamonetizablejob,youcanfocusonwhatcausesyourcustomersstress,whatkeepsthemawakeatnight,wheretheyspendtheirtime,orwhattheyhatetodo:thingswemightlabelproblems.Butwhataboutsimplepleasures?Althoughweusethelanguageof“problems”inthechapter,manyimportantjobsareactuallyneedsorpleasuressoughtbycustomers.Whenyouexplorecustomerneeds,justthinkcarefullyaboutthedifferencebetweennicetohaveandneedtohave.

Manyofthethingsweseeassimplepleasuresactuallysolveadeephumanneed.PsychologistAbrahamMaslowidentifiedahierarchyofhumanneeds,arguingthatbeyondourbasicneedsforfoodandshelter,wehaveintensedesiresforbelonging,love,friendship,andfeelingimportant.Oncethoseneedsaremet,wehaveaneedforself-fulfillment,

important.Oncethoseneedsaremet,wehaveaneedforself-fulfillment,includingtheneedtocreateandexperiencenewthings.Ifyoucansolveoneoftheseneeds,somethingthatlookslikeasimplepleasuremayactuallybesolvingabigunmetneed.

ConsiderInstagram,thephoto-sharingapplicationforsmartphones.WhatproblemisInstagramsolving?Thinkofthisquestionintermsofnicetohaveandneedtohave.Instagramsolvesadeephumanneedforself-expression,socialconnection,andprominence.Butthat’snotall:thekickeristhatitsolvesthisneedbetterthanpriorsolutions.Forexample,internetblogstookoffbecausethey,too,solvedadeepsocialneedforself-expressionandprominence.Theproblemwithblogsisthatwritingthemtakesagreatdealoftime.Twittersolvedthisproblembyreducingpoststo140characters,allowingpeopletosharetheirthoughtsandachievesocialprominencemorequicklyandwithlesswork.Nowconsiderthesaying,“Apictureisworthathousandwords.”Insomeways,Instagramallowsuserstoshareathousandwordswithonlyafewclicksand,ontopofthat,receivesocialfeedback.

Asyoulookforjobs,sometimesprovidingasimplepleasuremaybesolvinganimportantcustomerproblem,definedbroadly.Tofindneeds,youcanalsoexplorewhatcustomerslove,want,andfeelcompelledtodo.Onlycustomerscanrevealwhat’simportant.Whatlookssmallinitiallycansometimesbebig.Evenmosquitobitescanbeseriousproblems,especiallyiftheycarrymalaria.

ThreeToolstoFindtheMonetizableJob

Toreallydiscoverthejob-to-be-done,don’tcountontraditionalmarketingstudies,analystreports,newsarticles,surveys,orevenfocusgroups.Thatmaysoundheretical,butinouropeningexample,ifMapleshadreliedonananalystreportoranewsarticle,hewouldneverhavediscoveredthejob-to-be-done.Evenifhehadrunasurvey,hewouldn’thaveaskedtherightquestions.Clearlythesefamiliartoolshavevalueunderconditionsofcertainty,buttheyfailwhenyoufaceuncertainty.SomuchsothatGianfrancoZaccai,thedesignerbehindP&G’sbillion-dollarSwifferproduct,said,“Inmy40yearsworkingindesignandinnovation,alongsidesomeofthemostbrilliantmindsinthebusiness,Ihaveneverseeninnovationcomeoutofafocusgroup.Letmeputitmorestrongly:focusgroupskillinnovation.”5Thesetoolsfailbecauseyoucan’tgetdeepenoughtoobserverealcustomerproblems.Forthisreasonweintroduceadifferentsetoftoolstodiscoverthejob-to-be-done.

Pain-StormingInchapter1wedescribehowIntuitstartedusing“pain-storming”toensurethattheteamhadnailedacustomer’sbiggestpainpointsbeforejumpingtobuildingsolutions.Thepurposeofpain-stormingistogainclarityonwhatyouthinktheproblemissothatyoucantestyourhypotheses.We’vefoundthateffectivepain-storminginvolvesfivesteps.

Step1:Generateaproblemhypothesisidentifyingthecustomerandthejob-to-be-done.

Step2:Createajourney-lineforthecustomerandidentifypainpointsandemotions.

Step3:Selectthebiggestpainpoints,andconductaroot-causeanalysis.

Step4:Pickarootcausethatyouthinkismostimportanttocustomers.

Step5:Identifyassumptionsbehindtherootcause,andthentestthemwithcustomers.

Let’slookateachstep.First,youcreateaproblemhypothesisofthecustomerandthejob-to-be-done.Thisinvolvesidentifyingwhatyouthinkisanimportantproblemforaspecifictypeofcustomer.Forexample,MotiveCommunications’problemhypothesiswasthatitcouldreducethetime(andcosts)ofhelpdeskstosolvecustomers’technicalproblemsatlargesoftwarecompanieslikeMicrosoft.Toidentifyacustomersegmentforyourproject,writedownatleastthreeidentifyingcharacteristics(forexample,largesoftwarecompanies,withlargenumbersofunsophisticatedcustomers,thathavelargecustomersupportbudgets,whowantareputationforgoodservice).Thesearedescriptorsofthetypesofcustomerswiththesamejob-to-be-done(see“DevelopaCustomerProfiletoSegmentCustomers”).Itmaybehelpfultofillinthefollowingtemplatefromtheperspectiveofthecustomer.

Iam_____________(customer,withatleastthreecharacteristics)

Iamtryingto_____________(outcome/jobtryingtosolve)

But_____________(problemIamfacing)

Because_____________(thedeeperrootcauseforwhytheproblemishappening)

DevelopaCustomerProfiletoSegmentCustomers

Toeffectivelynailtheproblem,ithelpstobuildaprofileforeachcustomerwithadifferentjob-to-be-done.Groupingcustomersbasedonsharedneedsorproblemsisafamiliarmarketingtoolcalledcustomersegmentation.Butincontrasttomorefamiliarcustomersegmentation,thepurposeofcustomerprofilesistobuildadeeplyempathetic,intimateportraitofcustomersandthejobstheystruggletoaccomplish.

Tobuildcustomerprofiles,youmightstartbyfirstsegmentingcustomersbythejob-to-be-done,ratherthanmorefamiliarmetricslikeageorincome.Thejobisthecriticalunitofanalysis,andyourcustomerprofileshouldaimtodescribeyourinitialhypothesisabouttheemotionsaroundthejobandhowcustomerscurrentlysolveit.Thentestyourhypothesisbyobservingcustomerstounderstandtheirmotivations(likes,dislikes,aspirations),behaviors(howtheyspendtheirtime;howtheypurchasenewproductsorservices),demographics(income,industry,age,education,andavailablebudget),and,mostimportant,howtheycurrentlythinkaboutandsolvethejob-to-be-done.

Aftertheseobservations,youwillseetheworldinanewwayandwillneedtorecreateanewsetofcustomerprofilesbasedonyourobservations.Eachcustomerprofileshouldbedividedbythejob-to-be-done,anddescribealltheelementsabove(emotions,currentsolutions,etc.)forthatparticularjob.Thisprofilewillprovideyouthemapofwhatproblemtosolveandhowtosolveit.Butitwillalsoprovideyourteamfocusandmotivation,helpingyouavoidthetrapoftryingtosolveeveryjob,andindoingso,solvingnobody’s.Toillustratethisdanger,inonehumorousexample,thetelevisionshowTheSimpsonsfeaturedthemaincharacter,HomerSimpson,askingcustomerswhattheymostwantedinacar.Homerthenbuildsacarthatincludeseveryfeatureforeverycustomerdesire,suchas“powerlikeagorilla,yetsoftandyieldinglikeaNerfball.”Notsurprisinglythecarfailsinthemarket,because,intryingtosolveeverycustomer’sproblem,thecaractuallysolvesnoone’sproblems.Thehumorhelpsusseetheabsurdityoftryingtoserveeverycustomerneed,butitisinspiredbyrealevents.ThefailedFordEdselandPontiacStingerweredesignedtoservetoomanycustomerneeds(seefigure4-1).

FIGURE4-1

TheFordEdselandPontiacStinger

Source:Time.comandCarstyling.ru.

Step2istocreateacustomerjourney-line:anin-depthvisualportraitinwhichyouidentifypainpointstounderstandhowyourcustomersdothejobtodayandhowtheyfeelwhiledoingit.Visuallymapoutthestepscustomerstaketoachieveanoutcome.Ithelpstoassignacustomeremotiontoeachsteptoidentifyhowthecustomerisfeeling.Forexample,MotiveCommunicationsfirsthadtounderstandthejourneytakenbydeskworkers,includingthetediousprocessofidentifyingacustomer’ssoftwareversion.Youmaychoosetodevelopamoresimplified“storyboard”aftercompletingyourjourney-linetoshareatalatertimewithcustomersfortheirfeedback.

Thethirdstepistoselectthebiggestpainpointanddoaroot-causeanalysis(seefigure4-2).It’shelpfultoapplya“fivewhys”questioningprocess(developedbyTaiichiOhno,fatheroftheToyotaproductionsystem).Inmostcases,we’vefoundthatasking“Whydoesthishappen?”threetimes(goingdownthreelevels)issufficient.AstheMotiveCommunicationsteamobservedpeopleworkingatthehelpdesk,theymeasuredthetimetakenbyeachstep.Theythenbrokeouteachstepasacontributortotheoveralltime,andcost,requiredtoserveacustomer,asking,Whydoesthishappen?Theythusfoundoutwhythetechnicianshadtogatherthecustomerinformation,whytheyhadtoverifyasupportplan,whytheyhadtosearchcertainknowledgedatabases,andsoon.Youcanbrainstormthisinformationashypothesestobetestedlater,butultimatelyyouwillneedtogatheritthroughobservation(aswedescribeinthenextsection).

FIGURE4-2

Root-causeanalysis

Thefourthstepistopickarootcausetoexploreingreaterdepthbecauseyouthinkit’sacriticalreasonforthecustomer’sproblem.Asyoudeveloparoot-causetree(themapofrootcausesuncoveredbyasking“Why”multipletimes)forvariousproblems,youmayseethataparticularrootcauseshowsupinmultipleplaces.Thisindicatesanimportantrootcausetoexplore.Ifyouincludecustomersinyourpain-stormingsession,theycanalsohelpyouidentifywhichrootcausesaremostimportant—andwhy.

Step5istocreatealistofquestionsabout(orassumptionsbehind)therootcause—questionsyouneedtoanswerthroughcustomerexperiments.Youcanusethequestion-stormingtechniquetodevelopthekeyquestions,alongwiththecustomeractivitiesorexperimentsthatwillanswerthequestionsandvalidateyourassumptions.6MotiveCommunicationsusedhelpdeskobservationsandstopwatchestoanswertheirkeyquestions.

Intuitexcelsatpain-storming,andwe’veseenothercompaniesusevariationsontheprocesswe’vejustoutlined.Forexample,MondelezInternational(Kraft)hasasitededicatedtothisprocess,calledtheFlyGarage,whereparticipantsgenerateinsightsintoproblemsandthentesttheseinsightswithcustomers.To

generateinsightsintoproblemsandthentesttheseinsightswithcustomers.Tofindaproblemworthsolving,youmustinvolvecustomers.

EthnographytoExploreAssumptionsSittinginanair-conditionedconferenceroomoverlookingthesprawlingcityofBogotá,theexecutivesatBancoDaviviendabecameconvincedthey’ddiscoveredabigproblemworthsolving.AlthoughBancoDaviviendadominatedtheColombianbankingmarket,almosthalfthepopulationhadnobankaccount.Executivesrealizedthatiftherewasawaytotapintothismarketofnonusers,theycoulddramaticallygrowtheirmarketshareandhelptheColombianpeopleatthebottomoftheincomepyramid.

Theyformedacross-disciplinaryteamtodevelopanofferingthatwouldappealtononusers—astreamlined,easy-to-useversionofexistingbankaccounts.Afterseveralmonthsofhardworkthebanklaunchedthenewproduct,andtheoptimisticteamcelebrated.Despiteaggressivepromotion,however,fewcustomersadoptedthenewaccounts.Evenafterseveralmonths,theteamsawlittlegrowth,andbyyear-endtheyconcludedthattheprojecthadfailed.

Asteammembersanalyzedtheinitialfailure,theycametorealizethatalthoughtheyhadcommissionedamarketstudyandtalkedtoafewcustomers,theyhadn’tunderstoodthejobstobedoneforthe“unbanked.”Rather,theyhadlettheirknowledgeofexistingcustomersandsolutionsdistorttheirunderstandingoftheproblem.Sotheteamdecidedtotryadifferentapproach:togothemselvesintopoorneighborhoodstointeractwith,andcreateprofilesof,thetargetcustomers.Theyspentweekslivinginvariousneighborhoodsastheyobservedpeople’sdailyactivities.Saidoneteammember,“Wedecidedtogooutandtrytounderstandwhatpeoplewanted,notbyaskingdirectly‘whatdoyouwant,’butbytryingtounderstandhowpeoplebehaveinreallifewithoutanykindofprejudice.”7

Theteamdevelopedcustomerprofiles(asdescribedinthesidebar)ofdifferenttargetcustomersandthejob-to-be-done,alongwiththeirmotivations,behaviors,andothercharacteristics.Forexample,theteamdevelopedthefollowingprofilefor“Martha.”

Marthaisoneofthe3millionlow-incomesubsidybeneficiariesinColombia.Shewakesupat2a.m.togetreadytomakethelineatthebankat3a.m.inordertocashouthersubsidy.Shewaitsinlinefromfivetosixhourstofinallygetherturn,andcashthemoney.Then,sheusesthecashtosendadomesticremittance,payinga10percentfeefortheservice.Inordertopayherutilitybills,shewillthenmovetoa“districtcollectionscenter”

whereshewillwaitinlineforanothertwohourstogetthepaymentdone.Theremainingcashwillstay“underthemattress”becauseshehasn’thadtheopportunitytoopenasavingsaccountduetothedistanceshelivesfromthebankandthehighcostsitwillrepresenttoher.8

Bybuildingthesecustomerprofiles,theteamatBancoDaviviendaquicklyidentifiedtherootcauseofthefailureoftheminibankaccount:itdidn’tdirectlysolveanyofMartha’sbiggestproblems.Infact,Martha’smainjob-to-be-donewassimplyreceivingmoneyandmakingpayments.NowthattheteamdeeplyunderstoodMartha’sproblems,theywereabletoimaginearadicallydifferentsolution:amobilewalletthatwouldallowMarthatomakeandreceivepaymentsfrommerchantsdirectlyusinganaccountservedbyamobilephone.Thisaccount,unburdenedwithunneededfeatureslikeanATMcard,wouldallowMarthatodoeverythingbyphone(includingcreatetheaccount)withouteverhavingtovisitabranch.Eventuallythe“Martha”solutionthattheteamdevelopedwasadoptedbyhundredsofthousandsofusers.TheproductwasthenlaunchedinseveralothercountriestargetedtocustomerslikeMartha.

TheBancoDaviviendateamleveragedthenumber1toolfortestingandvalidatingtherootcausesofcustomers’problems:ethnography.Thistechnique,whichwemightmoredescriptivelycall“flyonthewall”becausethat’showyoudoit,requiresthatyougetdeepintothelivesofyourcustomersbywatchingthemintheirnaturalhabitat.Youaren’ttryingtosellyoursolutionorpushyouragenda.Instead,you’retryingtodeeplyunderstandtheiractivities,likes,dislikes,aspirations,challenges,andsoon(see“WhattoLookForasaFly-on-the-Wall”).Then,usingthisdata,youbuildsynthesizedprofilesofaprototypicalcustomer—includinghisorherjob-to-be-doneandwayssheorhecurrentlysolvesit.Youdevelopprofilesforeachcustomersegmentandthenusethemtocrystallizethebiggestproblemyoucansolveforeachprofile.

Youcantakefly-on-the-wallfurtherbyactuallydoingthejobyourcustomersaretryingtodo,ratherthanjustwatching,throughwhatwecallroleplayresearch.Thisrequires,asIntuitCEOBradSmithsuggests,thatyou“bethecustomer.”Insteadofwatching,trytodothejobswiththecurrentsolutionswhetherthatberidingindeliverytrucksorbalancingfinancesusingsoftware.Westronglyrecommendthispowerfulformofcustomerresearch,becauseyouoftengetthemostaccurateandsurprisinginsightsfromlivingthelivesofyourcustomers.

WhattoLookForasaFlyontheWall

WhattoLookForasaFlyontheWall

Whatareyoulookingforwhenyouaretryingtofindmonetizablejobs?Startbylookingforobstaclesthatgetinthewayofthejobsyourcustomersaretryingtodo.Lookforareaswherecustomersarespendinglotsoftime(timesinks)eveniftheydon’trealizeit,workaroundstheymayhavedevelopedtosolveaproblem,orthingsthatignitetheiremotions.Cussing,crying,wastedhours,abandonedactivities,orfigurative“ducttape”wherecustomersjustmakeitworkaregreatsignsthatcustomersarestrugglingtodothejob.Youmightalsolookbeyondtheobstaclestotheenablersthatfacilitatesomethingcustomerswant.Lookforhowpeoplespendtheirtimeexpressingthemselves,connectingtoothers,orcreatingshortcuts.Peopleinvesttimetosolveneedsandyoumayfindabetterwaytomeetthatneed.Lastly,don’tforgettocloselyexaminenonusersaswellasextremeusers.Althoughitcanseemcounter-intuitivetheseuserscanhelpyouunderstandtheproblemmoreclearlythanmainstreamusers.Mostofall,lookforsurprises.It’seasytooverlookthem,becauseourmindstrytoconformwhatweseetofitourpreexistingbeliefs.Butsurprisesprovidethecluesandbreadcrumbstotherealjob-to-be-done.

“Advice”InterviewsAfasttechniquefordevelopingyourinitialproblemhypothesisistointerviewcustomersusingwhatwecallthe“advice”interview.Startbyidentifyingapotentialsampleofcustomersthatyouthinkhaveasimilarjobtodo.Whenyouaskforinterviews(viae-mailorcoldcall),alwaysaskforadviceaboutaspecificcustomerproblem.Adviceisthemagicword.Infact,youmaywanttomentionthatyouaren’tsellinganything,justtoputpotentialcustomersatease.Thenletthemknowyouwanttogettheirfeedbackonaproblemyou’retryingtosolve.Yourgoalistolistenandlearn.

Onceyouhaveinterviewsarranged,wesuggestyouaskthreequestionsandthenlisten,listen,listen.Thesequestionsareasfollows.

1. Quicklyandclearlydescribetheproblemyousee.Describingtheproblemwillmakecustomersconfidentthatyouknowsomethingandwillserveasananchoringpointtotheconversation.Don’tgotopotentialcustomerswithablanksheetandexpectsomethingtohappen.

2. Ask,“Doyoufacethissamechallenge,too,oradifferentchallenge?Tellmeaboutit.”Thisgivesyouachancetofindoutwhethercustomersreallyhavetheproblemyouhypothesized.Iftheydon’t,youcanexplorewhatchallengestheyreallyface.

3. Ask,“Wouldsomethinglikethissolvethatproblem?”andthendescribeyourtheoreticalprototype(seechapter5).Atthisstageyoushouldn’tbecometoosolution-focused,butdiscussingapotentialsolutionwillhelpyougetbetterfeedbackontheproblem.Customersreacttotheconcrete,nottheabstract.Soyoumightthinkaboutbringingadrawing,storyboard,orPowerPointslidetohelpthemvisualizeasolution.Thiswillhelpthemtalkaboutwhythesolutionmight,ormightnot,worktosolvetheirproblem.

Afterfivetoteninterviews,patternsandtrendswillbegintoemerge,whichwillallowyoutotestyourhypothesisandchangeaccordingly.

HaveYouNailedtheProblem?TwoTests

WhenZipDxdemonstrateditsnewteleconferencingsolution,observersweresurprisedbythecrystal-clearaudiocomingfromtheconference-callspeaker.Thenewsolution,whichZipDxdescribedas“broadbandaudio,”workedseamlesslywithavailablePolycomphonesandrequiredlittlesetuptoachievesimilarcallquality.Despitethepositivereactions,however,ZipDxcouldn’tseemtocloseanydeals.Potentialcustomersseemedinterestedbutnotenoughtoplaceanorder.

Likemostinnovators,theZipDxteamfeltconfidentthatithadfoundapainpoint:thepooraudioofconferencecalls.Buthaditreallynailedthecustomerproblem?Whenourteamwascalledintohelpclosesales,weaskedtheZipDxteammemberswhatcustomerproblemstheyfelttheyweresolving.Mostanswersinvolvedvagueresponsesaboutthepooraudioqualityofconferencecallsprojectedinatypicalconferenceroom.Butwhenpushed,theteamadmittedthatproblemidentificationhadcomemorefromtheZipDxteamthanfromcustomers.Thisledustobelievethattheyhadbuiltasolutionbeforecreatingacustomerprofileandidentifyingthejob-to-be-done.

BecauseZipDxhadalreadydevelopedasolution,itfacedmoreconstraintsthanifithadinvestigatedcustomerproblemsfirst.SoourteamworkedwithZipDxtouseitsexistingcustomerknowledgetopain-stormafewhypothesesaboutthetypesofcustomerswhomighthaveaproblemrelatedtotheZipDxsolution.Theycameupwiththreecustomerprofilegroups:(1)Polycomphoneresellers(theoriginalhypothesizedcustomer),(2)voiceoverinternetprotocol(VOIP)serviceproviders,and(3)companiesattemptingtocapturebridgingrevenues.Theteamthenidentifiednineteencustomersbyname(roughlysixineachprofilegroup)andcold-calledthem,leavingavoicemailabouttheproblemZipDxbelieveditwassolving.Sometimestheyleftasecondmessage.Thentheywaitedtoseewhocalledback.Onlyfivecustomerscalledback.Buttheyhadreturnedthecoldcallofano-namecompanywithanunknownproduct.Whowerethesepeople,andwhydidtheycallback?

Asitturnedout,fourofthefiveVOIPserviceproviderstheycontactedreturnedthecall.WhentheZipDxteammembersdescribedtheproblemandthesolution(usingtheadvice-seekinginterview)andthenlistened,theresultsstunnedthem.VOIPserviceprovidersactuallydidn’tcareverymuchaboutaudioquality—whatZipDxthoughtwasthekeyfeature.Instead,theystruggledtodifferentiatethemselveswithreliable,easy-to-useconference-callsoftwarefeatures.Asitturnsout,theZipDxsoftwarethataccompaniedthe“broadband

features.Asitturnsout,theZipDxsoftwarethataccompaniedthe“broadbandaudio”hadotherattractivefeaturesthatalloweduserstoschedule,join,andmanageconferencecallsfarbetterthanmostsolutionsonthemarket.ThesefeaturessolvedtheVOIPproviders’mostimportantjob-to-be-done.

Usingthisdeeperunderstandingofthespecificproblemsofaspecifictargetcustomer,theteamquicklyrefineditssolutionandthemessagingtothattargetcustomer.TheCEOthentargetedkeylargecustomerswiththatprofile.Withinthreedaysheclosedthelargestdealincompanyhistory.ZipDxwasonitswaytonailingacustomerproblem.9

Howdoyouknowwhenyouhavenailedaproblemworthsolving?Werecommendtwotests:thecold-calltestandthesmoketest.Inbothtests,themeasureofwhetheryouhavefoundajob-to-be-doneisifcustomersgiveyoutheirtime.

TheCold-CallTestOneofthebesttestsofwhetheryou’vediscoveredamonetizablejobiswhetherpotentialcustomersreceivingacoldcall(ore-mail)willgiveyoutheirtime.Youstartbyidentifyingyourhypothesizedcustomersegmentsandtheirjob-to-be-done.Thenyoureachouttoeachcustomergroupviaphoneore-mail(it’sOKatthisstagetouseyourcontacts),brieflydescribetheproblem,andaskfortheiradviceonyourtheoreticalprototype.

Thenobservewhocallsback,whytheycallback,andwhattheysay.Initialcall-backratestendtobelow(lessthan10percent),butwe’veseensomecompaniesachievecall-backratesashighas50percentwhenthey’vehitonamonetizablejob.Yourfinalgoalistoachieveasignificantleapinthecall-backrate.Whenpeopledonotreturnyourcallore-mail,itmaybethatyouhaven’tclearlydescribedtheproblemorhaven’tdescribedaproblemtheycareabout.It’salsopossibleyoucontactedthewrongcustomerprofileortargetgroup,oryoucontactedthemataninopportunetime.

Asyouworkyourwaytowarda50percentcall-backrate,youneedtoaskyourself,Whoreturnedthecall(versusthosewhodidnot),andwhy?(Ifyou’redoingbusiness-to-consumere-mails,you’llachievelowerrates,socomparetothebenchmarkresponseratesforthatchannel.)ForZipDxmostofthehypothesizedcustomergroupsdidnotcallback.Forthesegroups,thecompanyneedstoworkthroughfriendstogetcontactswiththesecustomersandseewheretheywentwrong.However,foronecustomergroup,theVOIPsellers,nearly75percentcalledback—anextraordinarilyhighrate.Theinformationfromthesecustomershelpedthecompanyunderstandtherealproblemitwassolving.

Naturallyyoumayhavetoadjustthethresholddependingonyourcontext.Forexample,B2Ce-mailreturnratestendtobemuchlower(weallgetalotofe-mail).Butaskyourselfwhetheryou’reclearlyandconciselydescribingtheproblem.Whatarethecharacteristicsofthepeoplewhoareresponding?Remember,therealtestthatyouarediscoveringaproblemworthsolvingiswhetherpeoplearegivingyoutheirtime.Thepercentageofpeoplegivingyoutimeshouldincreasewhenyouhavediscoveredamonetizablejob.

TheSmokeTestSmoketestswerefirstusedinthe1800sbyplumbers,whopushedsmokethroughasystemtodiscoverleaks.Theideaofasmoketestprovedsousefulthattheideaspreadtoengineering,instruments,andinformationtechnology,amongothers,asawaytotestforcriticalflaws.We’veborrowedtheconceptasawaytotestforwhetheryou’vediscoveredaproblemworthsolving.Ratherthanusesmokebombs,weuseabitmoresmokeandmirrorstotestwhethercustomerscare.

Toperformasmoketest,createawebsite,advertisement,phonenumber,orotherchannelthatdescribestheproblem,theoreticalsolution,andprovidesanoptionto“learnmore,”“buynow,”“reservenow,”orsomeothercalltoaction.Findawaytogetyoursmoketestinfrontofcustomers,perhapsbyusingGoogleAdWords,aprintadvertisement,aposteratatradeshow,oranothervenuewhereyoususpectcustomerswillseethecalltoaction.

Whencustomersactivate(click,call,etc.)thecalltoaction,theydon’tactuallygettobuyaproduct,buttheyeffectivelyidentifythemselvesashavinganinterestintheproblemyouareinvestigating.Youcanthenfollow-uptolearnmoreaboutthemandwhytheytooktheaction.Thetestitselflooksattheresponserate(theconversionrateonthecalltoaction),withanythinghigherthan5percentsuggestingthatyou’veidentifiedarealproblemworthsolving(althoughyourearlyeffortswon’tachievenearlythisrate).Butpeople’swillingnesstospendtimewithyouandtheirgeneralexcitementaboutapotentialsolutionwillbethekeyindicators.

Youcaneasilyusethesmoketestforsoftwareoronlineproducts,butyoucanalsouseitforotherservicesandproducts.Forexample,oneofourstudentswantedtostartafoodtruck,thelatestrageinmobilecuisine.Afterlearningabouttheregulations,includingneedinganinspectedcommissary,hewonderedwhethertheremightbeabusinessopportunitytohelpwould-beentrepreneursjumpthislegalhurdle.Ratherthanwriteabusinessplanorrentacommissary,weencouragedhimtoconductasmoketest.Soheplacedanadinthelocalnewspaper:“Wanttostartafoodtruck?Wecanhelp.E-mailorcall...”Thatwasit.Withinonedayourstudentreceivedthreecalls,andbytheendoftheweekhadreceivedmorethanadozene-mails.Perhapsmoresurprising,inconversationswiththesecustomers,helearnedthatpeoplewantingtostartfoodtrucksdidn’tneedhishelpfindingacommissaryorjumpingthroughthelegalhurdles.Instead,hefoundthatthecriticalobstaclewasaffordable,lease-basedaccesstothetruckitself.Hissmoketestwaskeytodiscoveringtheproblemand

accesstothetruckitself.Hissmoketestwaskeytodiscoveringtheproblemandtheopportunity.

DevelopaVisionoftheCustomerProblemYouWillSolve

Lastly,writingaclearstatementofyourvisionofthecustomerproblemcanserveasaguideandananchorasyoubegintosearchfortherightsolution.Itcanalsohelpunifyyourteamandyourorganizationaroundthebigproblemyou’resolving.Avisiontemplatehelpsyoudevelopthearticulationofyourvision.Touseit(seefigure4-3),assemblethedatayou’vegathered,usingthetoolsdescribedinthischapter,tofilloutthetemplatefromlefttoright.

FIGURE4-3

Visiontemplate

First,identifywhothecustomeris—andwhothecustomerisnot.Useyourcustomerprofilestodefineanarrowcustomersegmentforwhichyouwillsolve

customerprofilestodefineanarrowcustomersegmentforwhichyouwillsolveabigproblem.Second,describethisbigproblem—themostcriticaljob-to-be-done—thatyouhopetoaddress,withsupportingdataandinsightsaboutthatproblem.Third,createashort,focusedvisionstatementforthejobyouwilldo,withsupportingdata.

ConsiderthedevelopmentofAmazonLending.Asdescribedinchapter2,JeffBezoshassethimselfupasAmazon’schiefexperimenterandhasvocalizedthegrandchallenge.Asaresult,everyoneinthecompanyrecognizestheimportanceofsearchingforandgeneratinginsights.Forexample,everyspring,thecompanysetsasidetimewhenanyemployeecanproposenewideasforcustomerproblemstosolve.Onenewbusiness,describedintheWallStreetJournal,isAmazonLending.10Theoriginalideacamefromthefrontline:customerservicerepresentativesassistingsmallmerchantsnoticedacommontheme:smallmerchantscomplainedabouttheircapitalconstraintsleadingtoearlystockouts.ThediscussionofthispotentialproblemmadeitallthewaytoBezos,whoaskedasmallteamtoexploretheproblem.

Theteamstartedbyexaminingthecustomerfeedbackandthentalkingwithcustomers.Whileasageneralrule,“wealwaysputourselvesintheshoesofcustomers,”anotherobservernotedthat“Theteam’sgoalwastounderstandthebiggestcustomerneedthatwasnotbeingmet.Oncetheyconfirmedtheirbeliefregardingwhatcustomerswanted,thentheythoughtabouthowtheycouldimplementasolutiontosolvetheirchallengethatwillworkforAmazon.”Toexploretheneed,theteamconductedadviceinterviewsandalsoemployedethnography:“Theywouldcallupsmallmerchantsandask,‘Hey,wouldyoubewillingtospendanhourwithussowecouldgetyouradvice?’SincesomeofthemarehereinSeattle,theywouldgovisitthemandseewhattheyweredoingandtalktothem.”11

Usingthedatafrominterviewsandobservations,theteamthendevelopedcustomerprofilesandmadealistofproblemsfacedbythem.Teammembersnoticedthatmanysmallmerchantsfacedstockoutsbecausetheylackedcapital.Brick-and-mortarmerchantsoftencanborrowcapitalforinventoryusingtheirstorebuildingsascollateral,butonlinemerchantsdon’thavethesekindsofassetsandsocannoteasilyaccesstraditionalbanklinesofcredit.Othercreditoptionsaretypicallycomplex,andthepaperworkcanbeoverwhelming.Someofthesemerchants,whichtheAmazonteamlabeled“curators,”carrieduniqueitemsthatbroadenedtheAmazon.comproductcatalog.Bycontrast,othermerchants,labeled“resellers”bytheteam,focusedonidentifyingalow-costsourceofcommonitemsandthenprovidingtheselower-costoptionsfor

Amazon.combuyers.Thesedifferentmerchantgroupshadsomeneedsthatweresimilar,andothersthatweredifferent.

RecognizingthatAmazoncouldnotsolveeverycustomerproblem,theteamwantedtofocusonaspecificcustomergroup.Basedonthesizeoftheproblem,theteamdecidedthetargetcustomerwasnotlow-volumemerchants(includingcurators)andlow-volumeresellers.Rather,itwashigh-volumeresellersthatrepeatedlystockedout.Theirbiggestproblemwaslimited(orhardtoaccess)capitalforshort-terminventoryfinancing,astheteamlearnedfromcustomerinterviewsandobservationsandbyexaminingdataonhowoftenthesecustomerslostsalesbecauseofstockouts.Havingcreatedaclearproblemstatement,theteamthenmovedtocreatingavisionofthejob-to-be-done:quick,easy-to-accessinventoryfinancing(seefigure4-4).

FIGURE4-4

AmazonLendingvisiontemplate

Withtheclarityandenergyofthisvisionstatement,theteammovedtothenextstage:prototypingthesolution.Itstartedbybrainstormingawidevarietyofpotentialsolutions,includinglinesofcredit,loans,privatelabelcards,andsoon.Then,afterexploringthechallenges,andlegallimitations,ofeachsolution,theteamwentbacktocustomerswithaseriesofprototypes.Theteamstartedwiththeoreticalprototypestoquicklygetinitialcustomerreactions,thenvirtualprototypesmockedupinAmazon’sweblab,andfinallyminimumviableprototypestestedwithactualcustomers(wediscussthesetoolsinchapter5).Witheachtest,theteamdiscoveredmanysurprisesaboutthefeaturescustomerswantedmost(forexample,customerswantedfinancingonlyforfourtosixmonthsandnotafewyears;furthermore,mostcustomersstruggledinitiallytounderstandtheprogramandthetruecostoflending).

Ultimatelytheteamiterated,tested,andvalidatedaninvitation-basedloanprograminwhichAmazonusesexistingdatatopreapproveloansandeliminatethetediouspaperworkofatypicalloan.Afterreceivingtheinvitation,amerchantcanquicklyaccepttheloanandhavefundstransferredtoitsaccountwithonlyafewclicks.Althoughwecannotrevealspecificperformancefigures,thenewbusinesshasprovidedasignificantliftinsalestoresellers(andtransactionfeestoAmazon),andtheteamhasdiscoveredasolutionandbusinessmodel(discussedinchapter6)thathasallowedittooperateasaprofitable,independentbusinessunitwithinAmazon.

Havingnailedtheproblemandsolutionfortheoriginalcustomergroup,theteamisnowworkingtonailthebiggestproblemforadifferentcustomersegment,beginningwiththevisionstatement.“Rightnowtheteamisexploringanothergroupofcustomers,”saidanotherobserver.“ButIcantellyoutheyhaven’ttouchedthesolutionyet,notuntiltheygetmorefeedbackfromcustomerstomakesuretheyaregoingdowntherightroadfirst.”12ThisAmazonLendingteamunderstandstheimportanceofdeeplyunderstandingthebiggestproblemforaspecificcustomersegmentbeforespendingtimedevelopingasolution.

WatchOut:Incremental,UrgentProblemsCreateLimitedGrowth

Largecompaniesfallintotrapswhenitcomestofindingjobstobedone.Theirexistingcustomersoftencometothemwithincrementalproblemsrelatedtotheircoreactivities.Theywantfewerdefects,anewfeature,fasterservice,lowerprice,andsoon.There’salwayssomethingmore

fasterservice,lowerprice,andsoon.There’salwayssomethingmorethatcustomerswant—andit’salwaysurgent.Solargecompanies—inanattempttoberesponsive—trytolistentocustomersandendupsolvingtheirincrementalproblems.Thiscreatesadilemma:Shouldyoufocusonsolvingtheurgentproblemsofyourexistingcustomers?Orshouldyoutrytosolveaproblemfornoncustomersthatcouldcreategrowthinthefuture?Wealltendtochoosetheurgentovertheimportant.

Thisisabigwatchout.It’snotthattheurgentproblemsofexistingcustomersaren’timportant,butsolvingtheseconcernsusuallygivesyoulessbangforthebuckthanbringinganewsolutiontonewcustomers(orevenanewsolutiontoexistingcustomers).It’samatterofdiminishingreturns:afteryou’vesolvedthemostimportantproblemthataffectsthegreatestnumberofexistingcustomers,youthenworkonsolvingaproblemforasmallersetofcustomers.Soyoumustcarefullyconsiderthecriteriayouuseinselectingproblems.Disruptiveinnovationprojectsmustbeintheinnovationprojectportfolio—andthatmeanstryingtosolvetheproblemsofnoncustomers.Unfortunately,it’shardforprospectivecustomerstotellyouthattheirproblemisurgent,too.

FirstThingsFirst

Althoughitmayfeel“slower”tostartwiththecustomerproblemratherthanthesolution,yousavetimebydeeplyunderstandingthecustomer’sjob-to-be-done.Youavoidwastingresourcesinpursuitofasolutionthatdoesn’tsolveamonetizablejob.Yourfirsttaskasamanageristodeeplyunderstandcustomersandtheproblemsyou’retryingtosolveforthem.Youcannotaskcustomerswhatinnovationstheywant,orrelyontheirfeaturerequests.Insteadyouhavetoobservetheirjobstobedone,proposeasolution,andthenwatchtheirreaction.Asweliketosay,innovatorsinnovate,customersvalidate,andnottheotherwayaround.

5

Solution:PrototypetheMinimum“Awesome”Product

Ifyoucanincreasethenumberofexperimentsyoutryfrom100to1,000,youdramaticallyincreasetheinnovationsyouproduce.

—JeffBezos,CEO,Amazon.com

INCHAPTER4WEdescribehowBancoDavivienda(BD)tried—andfailed—toreachthelarge“unbanked”populationinColombiabycreatingsimplebankaccountswithlowerfees.Afteritsinitial,solution-firstapproachfailed,thebanksentteamsintopoorneighborhoodstounderstandtheproblemthrough

ethnography.Thisfly-on-the-wallapproachgavemanagersadeepunderstandingofthejob-to-be-doneandavisionofwhatthesolutionwouldhavetodoforcustomers.Buthowdidtheyactuallydevelopasolution?

Togetoutsidethebox,theBDteamtriedsomeunusualthings.First,theteammemberslistedthekeyelementsofabankaccount,suchasbranches,accounts,debitcards,forms,signatures,paper,fees,andsoon.Thentheysubtractedoneitematatimeandasked,“Canwebuildabusinessaroundthisoneitem?”1Initiallymostteammembersscoffed.Howcouldyoubuildasolutionusingonlyoneelement?Butwhentheysuspendedtheirdisbelief,theyrealizedthat,fortheunbanked,asimplesolutiontoaspecificproblemmightbethebestapproach.Duringtheirfieldresearch,teamsnotedthatvirtuallyeveryone,includingtheunbanked,hadcellphones.Sotheteamstudiedwirelessserviceprovidersandfoundthatsomecompanieshaddevelopedproductsthattheunbankedwouldpayfor,suchasvirallyadoptedgamesorajokeoftheday.Theteamalsobeganlookingatotherindustries,suchasinternetretailers,toseehowtheyprovidedsolutionsthroughmobilephonestoalower-incomecustomersegment.Lastly,theteamobservedfinancialinstitutionsinAsia,Africa,andotherareasofLatinAmericatoseehowothersweresolvingsimilarproblems.

Asmentionedearlier,eventuallytheBDteamtestedamobilephonewalletthatcustomerscouldusetodoonething:receiveandmakepayments.Thenewsolutionstrippedawaytraditionalelementssuchasapplicationforms,debitcards,andsoon.Customersdidn’thavetocomeintoabranchtosigndocumentsorpresentpersonalID;everythingcouldbedoneonthemobileplatform.Toovercomecomplianceandregulationissues,BancoDaviviendaborrowedemergingbig-datatechniquestoanalyzetypicalbehaviorsforsimilarcustomergroupsandmonitororrejectatypicalusage.

Whentheteamhitasubstantialroadblock—howtoletcustomerswithdrawcashwithoutaddinganexpensiveandcumbersomeATMcardprogram—thebanktriedsomethinghighlyunusualinbankingbutcommonamonginternetretailers:aone-timepassword,which,inthiscase,letcustomerswithdrawcashfromanyATM.BancoDavivienda’ssolutionproducedsignificantgrowth,withBDquicklyenrollingmorethanamillionusersinvariouscountries.2

Solution-StormingtoGenerateSolutionOptions

Todevelopitsnovelsolution,theteamatBancoDaviviendausedatoolwecallsolution-storming(brainstormingmultiplesolutionoptions)tohelpitsearchbroadlyforsolutionsbeforeusingcustomerteststohelpitnarrowtheoptionstoasinglesolution.Goingbroadinthesearchforasolutionisafoundationalprincipleforsolution-storming—andforinnovationgenerally.Itleadstomoreoptionsandcombinations,andthatinturnleadstonovelsolutions.Forexample,mostpeoplecreditHenryFordwithdevelopingthemodernproductionline—aninventionthatallowedhimtomaketheautomobileaffordable.FordradicallytransformedtheautoindustryandAmericanlife.Howdidhedoit?

Weseetheproductionlineasa“solution,”butFordactuallydevelopeditbysearchingbroadly,borrowingideassuchasinterchangeableparts(usedinsewingmachines,firearms,andwatches);continuous-flowmanufacturing(usedinprocessingflour,canningfood,andmakingcigarettes);andassembly-linetechniques(usedinmeat-packingplantsandbreweries).3Insimilarfashion,theBDteamgeneratedsolutionoptionsbyfirstsearchingbroadly,inpartbyobservingpracticesinotherindustriesandothercountries.

StartingSolution-Storming

Startyoursolution-stormwithaproblemandcustomervisionstatementliketheonedescribedinchapter4.Aswithallkindsofbrainstorming,akeyprincipleofsuccessfulsolution-stormingisthatyoudon’tshutdownanyproposedsolutionorsolutionprocesstooearly.

RecallthatBancoDaviviendawasskepticalthatsubtractingtheelementsofafamiliarsolutionwouldwork.Wecantopthat:weoncehadaparticipantinasolution-stormforLeatherman,amanufacturerofmultitoolsandpocketknives,proposeshippingalivemonkeywitheachtooltoassembletheproduct.Ittookallwecouldmustertonotshutdownthatideaimmediately.Butthentheideaturnedouttobepivotalinhelpingtheteamdiscoverasuper-simpleassembly—oneevenamonkeycoulddoeasily.

Tohelpyoubrainstormsolutions,wesuggestyouchoosefromamenuoftechniques(seefigure5-1).Youwon’tuseallthesetechniquesatonce;instead,thinkofthemaschoicesoroptions.

Analogs:CloseandFarAwayThinkaboutthepossiblesolutionsaroundyouonaspectrumfromthosethatareclosetoyourindustrytothosethatarefarfromyourindustry.Closesttoyou,checktoseewhetheroneofyourcustomershasalreadydevelopedaworkaround.Usually,thesemake-dosolutionsareheldtogetherbyfigurativeducttape,buttheyprovideinsightsintowaysyoucouldsolvetheproblem.Forexample,oneentrepreneurweinterviewedinitiallyfeltdiscouragedwhenhediscoveredapotentialcustomerhadalreadydevelopedaworkaroundtosolvetheproblem.Butthenhelicensedthesolutionforasmallroyaltyandusedittobuildasolutionandcompanythateventuallyreachedamarketvalueofwelloverabilliondollars.

Lookforanalogsandcomplementstoyourexistingsolutionsthatcansuggestalternativesolutions(beawarethattheremaybenovelsolutionsinadjacentindustries).Forexample,onefuelcellcompanywestudiedborrowednewspaperprintingtechniquestoprintfuelcellmembranes.Theseexamplesofborrowingdemonstratethepowerofanalogsofwhattodoorwhatnottodo.Forexample,RenttheRunwayborrowedanalogsfromNetflixandfromairlinereservationsystems,andBancoDaviviendaborrowedanalogsfrominternetretailersandfinancialinstitutionsinotheremergingmarkets.

FIGURE5-1

Toolsforsolution-storming

Elements:PartsandWholesConsidersolutionsintermsofpartsandwholes.Atoneendofthespectrum,aswithBancoDavivienda,subtractoneelementofanexistingsolutionandtrytobuildonitastheessentialcomponent.Orconsiderhowyoucouldswapinorswapoutpartsofasolution,astheiPoddidbyswappinginthemovementofacombinationlocktosearchrapidlyforsongs.Alsothinkabouthowyoucouldmultiply,divide,orunifyfeatures.Intheclassicexample,Gillettemultipliedthebladesinarazortocreateanewsolution.Oryoucanconsiderstealingtheentiresolutionfromanothercompanybyaskingyourselfquestionslike,“HowwouldAmazon(orApple,orDisney,or...)solvethis?”

Observables:VisibleandInvisibleThinkaboutsolutionsthatmightbenearbybutdifficulttosee.Forexample,othersmayhavetriedandfailedtocreatethesolutionyouseek.Whatcanyoulearnfromsearchingthegraveyardofpriorfailures?Next,considerunrelatedmarketsordisciplinestoborrowanideathatcouldtransformyourindustry.Forexample,ideasfrombiology(suchasfitnesslandscapesortheprocessofvariation,selection,andretention)havechangedhowwethinkaboutstrategyandchange.Andlookforwaystobreaktheconventionalwisdomofyourindustry.Forexample,IKEAbroketheconventionthatfurniturehadtocomeassembledandtherebyrevolutionizeditsindustry.Lastly,daydreamaboutthefuturebyignoringthecurrenttechnologicallimitationsyouseeandimaginewhattheperfectsolutionmightlooklike.Forexample,whatwouldtheperfectportablemusicdevicelooklike?TheiPodisagreatsolution,butperhapsabettersolutionwouldbetoallowcustomerstospeakthesongtheywanttolistento,say“play,”andthenhearitinstereosound.Howmightyoumakesomethinglikethathappen?Examining“awesome”newproductsisanactivitythatmightinspireyoutoimaginenovelsolutions.

SelectingSolutionstoPrototype

Afteryou’vegeneratedarangeofsolutionoptions,you’rereadytoselectthemostpromisingideastotestwithcustomers.RecallIntuit’sexperiencefromchapter1:whentheteamvotedonthe“best”ideas,theytendedtopickthosethatwereeasiesttounderstandandimplement.WendyCastleman,theinnovationcatalystcommunityleaderatIntuit,comments:

Projectteamshadtrulymastered“goingbroad”;theyweregoodatgeneratinglotsandlotsofideas...Butteamsdidabadjobofpickingthebestideastoworkonbecauseourselectioncriteriaweregenerallyfaulty.Theproblemstemmedfromtheteamvotingonideas,aclassicdesignthinkingapproach...Theideaswiththemostvotesgetexploredfurther.Butitturnsoutthatpeopleoftenvoteforwhatiseasytoimplementandfamiliar,andthatrarelyyieldsideasthatwillsurpriseanddelightcustomers.4

BasedonourobservationsatIntuitandothercompanies,werecommendyoupostthesolutionoptionsonthewallandusethefollowingprocess.First,thinkofthedifferentthemesorcharacteristicsrepresentedamongthesolutions,suchas“easeofuse”or“highperformance.”Thenselectanoptionfromeachthemetoexploresothatyoucanobservehowcustomersrespond.

Second,definetheproposedsolutionsalongadimensionorspectrum.Forexample,onespectrummightinvolverankingsolutionsfromlowtohighondimensionssuchas“gamechanging,”“bold/risky,”“mosteasilyattainable,”“technicaldifficultytodeliver.”Thenselectsolutionstotestatdifferentendsofthespectrum.Thisapproachwillhelpyoutogobroadinthesolutionsyoutest.

Third,onceyou’veselectedsolutionstotest,writedownyourleap-of-faithassumptionsorlistthemasquestionstobeanswered.Thenprioritizetheassumptionsbasedonthosethatyouthinkaremostimportanttovalidateinorderforasolutiontosucceed.Forexample,whentheBancoDaviviendateamwasbrainstormingsolutionsfortheunbanked,theywantedtotestwhethercustomerswouldsignupforbankaccountsthroughtheirsmartphoneswithoutvisitingabranchorspeakingtoaperson.Itwascriticaltotestthisassumptionfortargetcustomers,whodidn’thavethetimeormeanstogettoabranch.Oncethecriticalassumptionshavebeenmadeexplicit,theteamcandesignexperiments(useprototypes)totestthem.

FourKindsofPrototypes

Inasemisecretlocation,theGoogleXlabhasbeenexploringcrazynewtechnologiessuchasflyingwindturbinesandwifiballoons.Thesearethekindsoftechnologies,giventheleveloftechnicalanddemandrisk,thatmostcompaniesdon’tevenconsider.Thefirstproduct,GoogleGlass,begantorolloutinearly2012,withcustomerslininguptopay$1,500totryabetaversion.AlthoughthesuccessofGoogleGlassisanythingbutassured,theproductdevelopmentprocessofferslessonsonprototypes.

TheGoogleGlassteamoriginatedwithaprojectbyUniversityofWashingtonprofessorBabakParviz.5Althoughinitiallyaninterestingtechnology,itbecameaninterestingsolutionwhentheteamnoticedaproblem:Howofteninsocialinteractionspeople“checkout”tochecktheirsmartphones.TheGoogleXteamasked,“Whatifyoucouldusethistechnologytostayengagedwiththeworldaroundyouwhilealsousingtheinternet?”Atthesametime,youcanimaginetheimmensityofthetechnicalchallenges:Howcouldyouallowsomeonetoconnecttotheinternetusingalightweight,touchlessdevice?Giventhetechnicalrisk,askyourself,Howlongshouldittaketheteamtocreatethefirstfullyoperational,wearableprototypethatprojectsliveimagesfromtheinternet?Ready?Ittookoneday.

Inarecentpresentation,TomChi,headofexperienceatGoogleX,describedhowtheteamcreatedandtestedthefirstprototype.Howdidtheydoit?Checkouttheimageinfigure5-2.

FIGURE5-2

GoogleGlassfirstprototype

Aftercreatingawearabledevice,Chiandtheteamneededawaytonavigateit.Ifyou’veseenthemovieMinorityReport,youprobablyrememberTomCruisemovinghishandsintheairtomanipulatethecomputer.TheGoogleXteamalsosawthemovieandasked,“Whynottryit?”Anyguessesastohowlongittooktoprototypethemotiondetectionsystem?Ready?Aboutforty-fiveminutes.Chiandtheteamalloweduserstomanipulatethedevicebyattachingborrowedheadbands(wornaroundthewrist)toaclickingdevice(madefromapencil,abinderclip,achopstick,andamouse)viaatautfishingline(runoverthebackofawhiteboard)sothatanymovementbytheuserputtensiononthelineandclickedthedevice(seefigure5-3).

FIGURE5-3

GoogleGlassnavigationprototype

RightawaytheteamlearnedthateventhoughitworkedforTomCruise,itlookedandfeltstrangeinpractice,sotheyexperimentedwithotherapproaches.Despitewhatatfirstappearedtobeaseriesofdeadends,eachrapidprototypehelpedtheteamnaildownthefinalnavigationsystem.Andwhatabouttheglassesthemselves?Althoughiteasilycouldbeoverlooked,peoplehatetowearheavyglassesthatpressdownontheirnose.Sowhatshouldyoudoabouttheweight?Chiandhisteamstartedprototypingusingclaytoweightdifferentpartsoftheglassesanddiscoveredthatputtingtheweightbehindtheearswasquitetolerable(seefigure5-4).6

FIGURE5-4

PrototypingGoogleGlassweightdistribution

TheGoogleGlassexperienceshowshowquicklyacompanycanmoveindevelopingprototypes,whetherhardware,software,orservices.AndGoogleGlassisnotanoutlier.GmailandAdSense(Google’scontent-targetedadvertisementproductthathasmadebillions)wereeachprototypedinaday.7Indeed,wehavefoundthatatcompanieslikeGoogle,Intuit,andValve,itistypicaltobuildaprototypeintwenty-fourtoforty-eighthours.

Althoughmanypeoplehaveheardaboutprototypes,fewpeopleunderstandthevarioustypesorknowhowtousethemproperly.Managersoftengowrongbyforgettingthateveryprototypeshouldansweraspecificquestionorbyputtingmoreeffortintotheprototypethanisjustified,simplybecausebuildingstufffeelslikeprogress.

Basedonourresearchandpractice,werecommendfourtypesofprototypes.Heretheyare,inorderfromthesimplest—withthefastestlearningcycle—tothemostelaborate,andthusslowerlearningcycles:

mostelaborate,andthusslowerlearningcycles:

TheoreticalprototypeVirtualprototypeMinimumviableprototypeMinimumawesomeproduct

TheoreticalPrototypesThenumber1thingyoucandotoavoidthetrapofbuildingproductscustomersdon’twantistonotbuildanything.We’renotadvocatinginaction.ButweareadvocatingatheoreticalprototypeasatooltohelpyousurvivetheearlydaysofinnovationambiguitywithoutfallingintotheFieldofDreamstrap(the“builditandtheywillcome”mythportrayedinthefilm).Atheoreticalprototypeexpressesyourideaasawell-structuredmentalimageinwhichyououtlinethegeneralshapeofthesolution,butnotthespecifics.Anexampleofatheoreticalprototypemightbetoaskcustomers,“Ifyoucouldcheckonyourhousevisuallyfromyoursmartphone,wouldyouwantto?”

Thebeautyofatheoreticalprototypeisthatit’sfastandcheap.Youcantestdozenswithinaweek.Forexample,AT&Trecentlyheldaseriesofworkshopswiththemembersofitsleadershipteamtobuildtheirinnovationskillsandconsiderwaystoimprovecustomerservice.Theattendeestookfifteenminutestosolution-stormpilotsorexperimentstotestnewwaysofdeliveringtheindustry’shighest-qualitycustomerexperience.Theseweresimpletheoreticalprototypes,suchastestingawayforcustomerstowalkintoanAT&Tstoreandmakepurchaseswithoutneedingtointeractwithahuman.Thesesessionsledtothetestingofanumberofvirtualandminimumviableprototypesduringthenexttwelvemonths.

Bycontrastwe’vewatchedmanyteamsdiveintobuildingproductsbasedontheirintuitionalonebeforethey’veeventestedwhetheranyonecaredaboutthesolution.Infact,thebiggestproblemformostcorporationsisthatwhentheydoaprototype,theydoitinacomplicated,expensiveway,usinglotsof3-Dmodelingandothertechniquesthatareinappropriateatsuchanearlystage.Atheoreticalprototypegivesyouacheapandeasywayto“test”andadaptsolutionconceptswithcustomers.Generallywhenyoutalktocustomersaboutthejobstobedone,youwilluseatheoreticalprototype(orsometimesahyperrapidvirtualprototype)asastrawmanfortheconversation.Atthepointwhenyou’regettingenthusiastic,positiveresponsestoyourtheoreticalprototypefrompotentialcustomers,you’rereadytocreateavirtualprototype.

VirtualPrototypesSeveraldecadesago,IBMwantedtotestanunusualsolutiontoacommoncustomerproblem:transformingspokenwordsintotype.Ateamofcomputerscientistsandexecutivesenvisionedhighlysophisticatedvoicerecognitionsoftwarethatwouldtransformdictationintotext.Inadditiontothecoresoftware,thesolutionwouldrequirehigh-qualitymicrophonesandanadaptivealgorithmtoparsedifferencesindialectanddiction.Althoughthetechnicalriskseemedhigh,theteambelievedthatifitcouldovercomethetechnicalchallenges,itwouldsolveahugecustomerproblem.

Butbeforeitmadeabiginvestment,howcouldIBMtestwhethercustomerscaredaboutthesolution?Ataminimum,itseemsthatsomeprimitivebetasoftwarewouldbeneededtotestwhetherthesolutionwouldbeworthbuilding.Instead,theIBMteamhungasheetacrossaroom,and,whenthecustomerspoke,ahiddentypistontheothersideofthesheetcapturedwhatwassaidandprojecteditonacomputerscreenforthecustomertosee.EssentiallyIBM“pretended”tohavethesolutiontoanswerthequestion,“Docustomerscare?”8LikeIBMandtheGoogleGlassteam,mostsuccessfulmanagersusevirtualprototypes(VPs)—“pretend-otypes”—toanswerkeyquestionswhileavoidingthecostsofdevelopingexpensive,unwantedsolutions.

TodevelopaVP,askyourselfasimplequestion:IfIhadtosellthesolutiontoday,howcouldIfakeitinawaythatfeelsrealistic?Theanswershouldbeagoodguideforwhatyoucoulddevelopandhowfast.OurfavoriteVPsusePowerPoint,sketches,off-the-shelfcomponents,orothermock-uptools.Forexample,PowerPointcanmimicsoftwarebycreatinginvisibleclick-throughhotspotstoquicklysimulatewhatmighttakemonthsindevelopment.Similarly,KaiserPermanentefakedvariousserviceinnovationsthroughacombinationofstoryboardsandrehearsedservicesimulations.Oneobserversaid,“There’ssomethingmagicalaboutlow-fidelitywaysoftryingsomethingout.Itautomaticallyallowspeopletofeelliketheycanputtheirfingerprintonit.Themorepolished,themorepeoplefeellikeit’salreadydone.”9

Whatevertoolyouuse—includingadvancedtoolslike3-Dprinters,video,orflashdemos—rememberthatallprototypesshouldbedesignedtoanswerspecificquestions.YourVPwilllikelybeanimperfectrepresentationoftheproduct,butthegoalistostartansweringyourkeyquestions,orhypotheses,aboutwhatcustomerswant.Bydoingonlytheminimumtogetfeedbackonthemostrelevantuncertaintyyouface,youspeedupyourlearningandpreserve

yourflexibility.Theabilitytolearnquicklythroughprototypes(especiallyVPs)maybeyourmostimportantadvantageoverslowerrivals.Inthewordsofoneinnovator,“Achessnovicecandefeatamasterifmovingtwiceeachround.”10

MinimumViablePrototypesWhensomeoneatsocialgaminggiantZyngahasanideaforanewgame,noonestartstheprocessbybuildingthegame.Instead,theteammembersboiltheideadowntofivewordsandperformasmoketest,asdescribedinchapter4,toseewhetherthereisanycustomerinterest.Forexample,supposesomeonehasanideaforagameaboutrunningahospital.Shewouldputupalow-costadonahigh-trafficwebpagethatsimplysays,“Everfantasizeaboutrunningahospital?”Theuserswhoclickonthelinkreceiveabriefdescriptionofthetheoreticalprototypeandaretoldtheywillreceiveane-mailwhendevelopmentiscomplete.

Iftheadproducesenoughresponse,Zyngadesignersthenspendaweekorlessbuildingaminimal,stripped-downversionandlaunchittothee-maillist.Thentheyseewhattheycanlearnaboutthesolution:Howmanyuserssignup,howlongtheyplay,whatfeaturestheylike,whattheyhate,andsoon.11Thisone-weektest,orwhathasbeencalledaminimumviableprototype(MVP),helpsthemlearncruciallessonsaboutwhatcustomersactuallywantandguidesthemindecidingwhethertoperformanotheriterationorgoexploredifferentideas.

Aminimumviableproducthasbeendefinedasaproducthavingtheminimumfeaturesetrequiredtoworkasastand-aloneproductwhilestillsolvinga“core”problem(weusethewordprototyperatherthanproductasusedbyEricRiesinTheLeanStartup,toemphasizethatyourobjectiveistotestyourassumptionsratherthanbuildaproduct).12YoubuildanMVPtorapidlytestwhichfeaturesaremostlikelytodrivecustomerpurchases.It’slikeanexerciseinarchery:yourgoalistohitthebull’s-eyefeaturesthatdrivepurchasesandputotherfeaturesonthebackburner.Why?It’seasytobeswampedwithfeatureideasthatcouldaddvalue.Addingfeaturesfeelsasifitwillincreasethechancescustomerswillliketheproduct,butactuallyitcandecreasecustomers’abilitytorecognizehowyoursolutionsolvestheirproblem(see“Don’tForgettoGoNarrow”).Worse,youwastetimebuildingfeaturesthatdon’tmotivatecustomerstopurchase.Youmaynotfullyidentifythebull’s-eyeinthebeginning,sousetheVPsandMVPstoidentifythosefeaturesthatmattermosttocustomers.Atfirst,theprocessmayfeelhaphazardandrandom.ButrememberthatyoucanusemanyMVPstotestminimalfeaturesets,asquicklyasyoucan,togetmultiplepointsofusefulfeedbackfromtargetcustomers.

Don’tForgettoGoNarrow

WhenthecofoundersofaneducationalsoftwarecompanyfirstmetwiththechieftechnologyofficerattheUniversityofSouthernCalifornia,hisfeedbackontheirbetaproductseemedfairlypositive.Earlierconversationswithotherfacultyanduniversityofficershadestablishedasignificantproblemwithexistinglearningmanagementsoftware.Buttogetasenseofhowwelltheyweresolvingtheproblem,membersoftheteamshowedtheCTOtheirminimumviableprototype:essentiallyaninexpensiveflash-basedversionofthesoftwarethathighlightedthetoptwentyfeaturestheybelievedwouldbemostvaluableforeducators.Thentheyaskedacriticalquestion:“Howmuchwouldyoubewillingtopayforasolutionlikethis?”DespitetheCTO’searlyenthusiasm,hisresponse—$2,500peryear—dimmedtheirhopesofbuildingasustainablebusiness.

Butbeforeleavingtheroom,theytriedatoolwerecommendcalledthe$100R&Dgame.13Youaskcustomerstoallocate$100ofanR&Dbudgettothefeaturestheymostwant.Whenthedevelopersaskedthisquestion,theyweresurprisedthattheCTOallocated$80toasimpledrag-and-dropfeatureandthensplittheremaining$20betweentwootherfeatures,apatternrepeatedinvisitstootheruniversities.

Usingthisdata,theteamcraftedanewflashprototypeandreturnedtothefirstCTO,thistimewithaminimumviableprototypethatcontainedonlythreefeatures,themostprominentbeingthedrag-and-dropfeature.WhatdoesyourintuitiontellyouabouthowtheCTOrespondedtothestripped-downprototype?InfacttheCTOlikedtheproductmoreandofferedtolicensetheproductfor$12,500peryear.Byfocusingontheminimumfeatureset,theteamsoldanearlyproductwithonlyone-tenththefeaturesforfivetimestheoriginalexpectedprice.14Throughoutthebookweemphasizetheimportanceofdivergingandgoingbroadfirst,butasyoudevelopMVPs,don’tforgettoconvergeandgonarrowtoreallynailthesolution.

Inaddition,ratherthanaddmanyfeaturestoasingleprototype,it’sagoodideatodevelopseveralprototypesthatemphasizedifferentkeyfeatures,andseehowcustomersreact(see“Won’tanMVPHurtMyBrand?”).Eventestingasolutionmissingthekeyfeaturehaspower.Remember,thegoalistolearn,and

it’seasiertolearnwhenyou’retestingfewerdimensionsinasingleMVP.Oneteamweworkedwithtestedamedicaldevicelackingthekeyfeaturetheyfeltaddedvalue(whichwasalsoslowingFDAapproval)anddiscoveredanentirelynewmarketthatdidn’tactuallywantthat“critical”feature.

Won’tanMVPHurtMyBrand?

Somefolksareconcernedthatofferingalow-fidelityMVPtothemarketmightdamagethecompany’sbrand.Forproductsinmaturecategorieswherecustomershaveadevelopedunderstandingoftheproductandclearexpectations(conditionsofloweruncertainty),it’struethatMVPscanbedangerousbecausecustomerswilldemandwhatGeoffreyMoorecalls“thewholeproductsolution.”15Butwhencompanieslaunchnewproductsthatarenotwellunderstood,they’reoftenadoptedfirstbyinnovatorswhohavelowerexpectationsandaremoreforgivingofanMVP.Therefore,whenyoutestyourMVPwithasampleofcustomers,youcangetawaywithaminimalprototype.Ofcourse,youwillbeembarrassedaboutit.Infact,asEricRiesargues,ifyou’renotembarrassed,you’vedonetoomuchwork.Youdidn’tdevelopanMVP.

Tohelpallaythisconcern,werecommendseveraltactics.First,createaseparatebrandorsub-brandthatclearlycommunicatesthepreliminarystatusoftheproduct.Forexample,IntuitlaunchesallMVPswiththe“IntuitLabs”brand,andGoogleuses“GoogleLabs.”

Second,fliptheliabilityoftestinganMVPonitsheadbyprovidinghigherlevelsofserviceandsatisfactionfortheMVPtest.Forexample,whenSamsunglaunchedanexperimentalrefrigeratorinSouthernCalifornia,itofferedcustomersahotlinewithwhite-gloveservice(thecompanywouldreplacethefridgeandallitscontentswithintwenty-fourhoursifsomethingwentwrong).Anacquaintanceactuallyparticipatedinthisexperiment,andhisfridgehadaproblem.Hetoldus,“TheyrespondedsowelltomyproblemthatI’monlygoingtobuySamsungproductsfromhereonout.”16

Andremember,youaretestingtheMVPwithasampleofcustomersandnottheentirepopulation.Youmaythinkofasampleintermsoflimitedgeography(e.g.,aparticulartown),typeofcustomer(e.g.,earlyadopters),oralimitednumberofcustomers.

MinimumAwesomeProductsOnceyouhaveaminimumviableprototypeandhavevalidatedyourcoreassumptions,yournextstepistodevelopsomethingthatcustomerscannotresist,somethingthatcustomerslove,somethingawesome.Wefirstheardthetermminimumawesomeproduct(MAP)whilespendinganafternoonobservingIntuit’sgloballybroadcasttrainingsessionforalltheproductdesigners,developers,anduser-interfacearchitectsinthecompany.Thetrainingwasfocusedonasingleissue:Whatis“awesome”?

Intuithadpresentedleanstart-uptraining,andeveryonewasfamiliarwiththeconceptofaminimumviableproduct.However,founderScottCookwasuncomfortablewithsomeaspectsoftheconcept.“Whenyousay‘minimumviableproduct,’engineersnaturallyfocusonthewordproduct.Sotheywanttojumptobuildingaproduct,”saysCook.“Attheearlystagesofanewproductidea,wewantourengineerstojustbeexperimenting,answeringtheirleap-of-faithhypotheses.”17WeagreewithCook,andthat’swhyweprefertosubstitutethewordprototypeforproductinouruseofthetermminimumviableprototype.ButoncetheMVPhasrevealedwhichfeaturesaremostlikelytodriveacustomerpurchase,it’stimetogobeyondviableandreachforawesome.

Thegoalofaminimumawesomeproductistodeliverasolutionthatissoextraordinaryonthemostimportantdimensionthatitinspirespositiveemotioninyourcustomers.AsScottCookexplains,“Youdon’twanttobeviableinthedimensionthatmatters—youwanttobeawesomeinthedimensionthatmatters,allwhilemaintaininganuncomfortablynarrowfocus.”Inotherwords,youwanttoidentifytheminimumfeaturesetpossibleandthenrelentlesslyfocusonmakingyoursolutionawesomeonthosedimensions.Butwhatisawesome?Andhowdoyougetthere?

Customersdescribeproductsasawesomewhentheyinspirepositiveemotions,suchascreatingdeepsatisfaction,calminganxiety,orgivingconfidence.Often“awesome”solutionsdounexpectedthingsthatinspirepositiveemotion.Whenaproductorservicesurprisesyoubydoingsomethingyoudidn’texpect—somethingyoumaynothaveeventhoughtwaspossible—itcanevokepositiveemotionandpromptyoutosay,“Thatisawesome!”

Applehasoftenachievedawesomenessinthisway.WhenthefirstiPodlaunched,customerssaid,“Wow!IcanreallycarrymywholelibraryofsongswithmeeverywhereIgo.Thatisawesome.”WhenthefirstiPhonelaunched,manycustomerssaid,“Wow!Icandothis(listentomusic,takeaphoto,findan

manycustomerssaid,“Wow!Icandothis(listentomusic,takeaphoto,findanaddress,etc.)onmyphone.That’scool.”SteveJobswasknowntosaythatApple’sjobwasnottogivecustomerswhattheywanted.Itwastogivethemwhattheydidn’tknowtheywanted(orneeded).That’swhenyouevokepositiveemotion.

Ofcourse,that’sahighhurdle.Whatiftheproductjustnailsthejob-to-be-doneperfectlybutdoesn’tdoitinanunexpectedway?Forexample,Dysonvacuumsaretoutedashaving“twicethesuctionofanyothervacuum.”Canbettersuctionreallycreatepositiveemotion?Theanswer:absolutely.Butthesolutionmustbenoticeablybetterthanalternativesolutions(andofcourse,thecustomermustcareaboutsuction).Thesolutionevokespositiveemotionsbecausethecustomerissurprisedbyhowmuchbettertheofferingisthancompetitiveofferings.

Toillustrate,IntuitidentifiedwhatitthoughtwasaproblemforalargegroupofAmericans:simpletaxfilersstrugglingtofillouttheircomplicatedtaxforms.OnethingIntuitlearnedfromearlyexperiments—usingtheoreticalandvirtualprototypes—wasthatsimplefilersoftenhadtroublefiguringoutwhichinformationfromtheirW-2statementtoplugintotheirtaxform.(Fortipsongettingthemostfromyourexperiments,see“HowtoRunaGoodExperiment.”)SotheIntuitdesignerstestedanMVPthatletfilerstakeaphotooftheirW-2formwiththeircellphoneorcameraanduploadittotheircomputer;thenthesoftwarepulledthedatafromtheW-2intotherightlocationonthetaxform.Testsshowedthatfilerslovedtheideaoftakingthephotoandhavingthedatamagicallyappearattherightlocation.Buttheydidn’tliketheensuingstepsofuploadingittotheircomputer,becauseitwasbothtime-consumingandcomplex.“Whycan’tIjusttakethepictureoftheW-2andfinishmytaxesonmyphone?”manyasked.

Intuitlistened,creatingaprototypethattooktheW-2photo,pluggedthedataintoataxapp,andquicklycompletedthetaxes(afteraskingtheuserafewbasicquestions)onthesmartphone.Thisdramaticallycutthetimeandcomplexityoftaxpreparationforthesimplefiler.Initialtestsrevealedthattheapp,dubbedSnapTax,letsimplefilerstakethephotoandfinishandfiletheirtaxesinlessthantenminutes(somethingIntuittoutedinads).Thatwasunexpected.Anditevokedstrongpositiveemotionalresponsesfromusers.OneearlyuserofSnapTaxgaveitafive-starrating,gushingthatitwassoeasytouseheliterallycompletedhistaxesduringaValentine’sDaydate.Thecoupleweresohappytobefinishedwiththeirtaxestheyhadoneoftheirbestdatesever.Canyouimagineataxpreparationproductinspiringthatkindofaresponsefromauser?

Todevelopaminimumawesomeproduct,Intuitfocusedonsimplefilers(some59millionpeople),identifiedthekeypainpoints,andthenpersistedinsearchingforasolutiontothatpaininanunexpectedlyeasyway.Ofcourse,minimumawesomeproductsstartoutassatisfactoryMVPs.Infact,withthefirstsmartphoneversionofSnapTax,morethan90percentofusersabandonedtheappafterthreetouchesonthephone.Why?Itwasbecause“thefirstscreensrequiredpeopletocreateanaccountwithname,password,etcetera,”saysSnapTaxproductdevelopmentheadAmirEftekhari.“Butusersjustwantedtocheckouttheapptoseehowitworked.Theydidn’twanttocreateanaccount.”18SoIntuitredesignedtheappsothatwithinthreetouches,userscouldseethethreestepstocompletetheirtaxesandcaptureaphotooftheirW-2tostarttheprocess.Accountsetup,andpayment,wasn’tnecessaryuntiltheuserwasreadytofile—butthatwastypicallywithintenminutes.ThepointisthatyouusetheMVPstoquicklyimprovethosedimensionsofyoursolutionthatcaninspireemotion—andturnyourMVPintoanMAP—aMinimumAwesomeProduct.

Asyourefineyourprototype,rememberthatyourcustomersarehiringyoursolutiontodoajobforthem—andthateveryjobhasfunctional,social,andemotionaldimensions.Yoursolutionmayinspireawesomebydoingtheunexpectedonanyofthesethreedimensionsofthejob.Butbeware:itcanbedifficulttobeawesometoeveryone.Stay“uncomfortablynarrow”asyoubuildyourminimumawesomeproduct.

HowtoRunaGoodExperiment

Mostpeoplebelievetheyunderstandexperimenting,butwhenweteachexecutivesandstudents,90percentofthetimetheygetitwrongatfirst.Whatarethemistakestheymake?

Nohypothesisormetrics.Don’tconductanexperimentwithoutaclearhypothesisorwithoutdefininghowyouwillmeasurewhatyoulearn.Wrongtools.Don’trelyonfocusgroups.Theytendtogetstuckingroupthink.Andavoidstartingwithsurveys.Youdon’tyetknowwhatquestionstoask.Badsamples.Makesureyoutalktoarelevantsampleofcustomers.Oftenexperimenterspickthewrongpeople(forconvenience),or

theytalktoeveryone(thepopulation).Also,don’treformulateyoursolutionbetweeneveryconversation;waitforapatterntoemerge,andthenreformulate.

Incontrast,goodexperimentstestthemostimportantassumptionsquickly,reliably,andaffordablyonarelevantcustomersample.Andtheymeasuretheresults.ConsiderthefollowingsimpleexperimentatIntuit.Thefinanceoperationsteamwantedtoretainsmall-businesssubscriptioncustomerswhosecreditcardswereabouttoexpire.Ithadbeensendinge-mailstothesecustomers,butalargepercentagedidn’trespondandwhencreditcardslapsed,theincomestreamfromacustomerwastypicallylost.Sotheteam,lookingforabetterway,wantedtoverifythatcustomerswerereceivingthee-mailsandwhetherthee-mailswereeffectiveattriggeringaresponse.“Theideawastocallcustomerstoseeiftheyhadreceivedourcommunicationandgetthemtotakeactionimmediately,insteadofputtingitoff—small-businesspeoplearebusyfolkswhoforgetaboutthingsthataren’turgent,”saidWendyCastleman,anIntuitinnovationcatalyst.Sotheteamrananexperimenttotestthehypothesisthatmanycustomersweren’tgettingIntuit’se-mail.Whenteammemberscalledadozencustomersselectedbecausetheyrepresenteddifferentcustomersegments,theydiscoveredthataboutaquarterhadanoutdatede-mailaddressandweren’tgettingthee-mails.Othersdidn’tfeeltheurgencywithanemailcommunication.Theteamthentriedanotherexperiment:theyhiredasmallteamoftempworkerstocallbusinessesastheircreditcardscamedueforrenewal.Thenewcommunicationprocessresultedinmorethan$8millioninrecoveredrevenuesinFY2013.

Thisexperimentquicklytestedaclearhypothesis,usingcustomerbehaviorasthedata,withclearmetricsofsuccess.Althoughthisexperimentworkedout,Intuithasconductedhundredsofexperimentsinwhichtheteamquicklylearnedwhatdoesn’tworkandwhy,andpivotedtoexploreotherideas.

HaveYouNailedtheSolution?ThreeTests

UsingvirtualprototypesandMVPscanbeanilluminatingbutambiguousprocess.Howdoyouknowifyouhaveit“right,”thekindofsolutionwherepeoplesay,“Wow,theyreallynailedit”?Thereareafewtestswerecommendthatyoucanuseto“nailit,thenscaleit”ratherthantheotherwayaround.

TheWowTestIfyou’reintheearlydaysoftheoreticalorvirtualprototypes,werecommendthewowtesttomeasurehowexcitedcustomersareaboutyoursolution.Thewowtesthastwoparts.First,qualitatively,whenyoushowcustomersyourprototype,canyouseetheirenthusiasm,oraretheyonlybeingpolite?Ifyoucan’tseetheenthusiasmintheirfacesorhearitintheirvoices,thenyouprobablyneedtomakeachange.

Second,quantitatively,askcustomers,onascaleof1to10,howexcitedwouldyoufeeltoownthesolution(10being“extremelyexcited”andthey’rereadytobuythesolution,and1beingnotatallexcited)?Youshouldbeaimingtoimprovethewowscoreovertime,shootingforanaveragegreaterthan7.Anythingsignificantlylowerthan7maysuggestcustomersareonlybeingpoliteandyouneedrethinkyoursolution.19

TheNPSTestOnceyouhaveanMVPorMAPthatcustomerscanstartusing,youcanapplythepromotertest.Thereareafewvariantsonthistest,ourfavoritebeingthenetpromoterscore(NPS).RecallthatNPSisbasedonasinglequestion:howlikelyareyou,onascaleof1(notatalllikely)to10(extremelylikely),torecommendthisproductorservicetoacolleagueorfriend?“Promoters”answer9or10,“passives”answer7or8,and“detractors”answerfrom1to6.Acompany’s(orproduct’s)NPSisthepercentageofpromotersminusthepercentageofdetractors(seefigure5-5).

FIGURE5-5

Netpromoterscore

Yourultimategoalistoscore9orhigherwithyourcorecustomergroup.Butyouwon’tstartthere,sodon’tgetdiscouraged.Instead,usetheprototypeswe’vediscussedtoiteratethere.When80percentormoreofyourcorecustomersrateasolution9or10andyouraverageNPSishigherthan60percent,thenyou’venotonlynailedthesolutionbutalsocreatedevangelistsforyourproduct.Notice,too,thatwesaid“core”customergroup,andnotallyourcustomers:oneofyour

too,thatwesaid“core”customergroup,andnotallyourcustomers:oneofyourgreatestchallengesistostaynarrowlyfocusedonacustomergroup.Tencustomersmayaskyoufordozensoffeaturesthatcanpullyouinmultipledirections.Asmentionedearlier,ifyoutrytopleaseeveryone,youwillnevernailthesolutionorturnyourcustomersintoevangelists.Asyougetfeedbackonyourprototypes,lookforthethemesthatsegmentcustomersintogroupsbasedonthefunctional,social,andemotionaldimensionsofthejob-to-be-done,andthenremovesomecustomersfromyourfocus(tellyourselfyou’llservethemlater).Forexample,whenGoogleengineerPaulBuchheitwasbuildingaprototypeofGmailhewastoldtofindonehundred“happy”users.“Iwaslike,‘Oh,that’seasy,Googlehaslikethousandsofemployees,’”saidBuchheit.

Butitturnsoutthathappinessisareallyhighbar,andtogetpeopletosaythey’rehappyisactuallysortofchallenging.Weliterallydiditoneuseratatime.Wewouldgotopeopleandask,“Okay,what’sitgoingtotaketomakeyouhappy?”Andinsomecasestheywouldaskforsomethingreallyhard,andwe’dbelike,“Okay,well,you’renotgoingtobehappywithGmail,quitepossiblyever.”Butwithotherpeopleitturnedouttherewouldbesomethingreallysmallwecoulddoandthenthey’dbehappy.Sowe’ddothereallyeasythingsuntilwegot100peoplewhowerehappy.And100doesn’tsoundlikealotbutitturnsoutpeopleareprettysimilartoeachothersoifyoucanmake100happy,youcanusuallymakemore[happy].20

Sostartbyshootingfora9or10NPSscorewithtenpeople,andthenyoucanthinkaboutprogressingtothehundredth.21

ThePaymentTestTheultimatetestofwhetheryou’venailedthesolutionisthatpeoplewillpayyouforit.Understandably,somemanagersmaybeafraidtoaskthehardquestionsaboutwhethercustomers(orendusers)willpay.Butdelayingthequestiondelaysdiscoveryofwhetheryouhaveaviablesolution.We’veseenmanyinstanceswhenpotentialcustomersrespondedenthusiasticallytoprototypes,butwhenitcametimetoopentheirwallets,theylosttheirenthusiasm.Inothercases,we’veseencustomersprepayforaproductthatdoesn’tyetexist.Inoneofourfavoriteexamples,Coin(asinglecarddevicethatstoresmultiplecreditcards)presoldmillionsofcardsthatweren’tdelivereduntilayearlater.Intruth,itsstoryisnothingspecial:crowd-funding—whichresultedinmorethan$5billionintransactionsin2013—employsaformofthepaymenttestinwhichfundersprepayforanitem.22

Atthecore,thepaymenttestinvolvesaskingcustomerstopayforyoursolution,whetherornotyouactuallycollectthemoney.InmostcasesyouconductthepaymenttestduringtheMVPstageorlater.Duringthetest,youneedtogetacrediblecommitmentfromcustomers.Justaskingcustomerswhethertheywillpayyieldsweakresults.Actualbehaviorcounts.Forexample,Intuitgivestestersofitsprototypestheopportunitytopreorderorpurchaseusingacreditcard.Aftertestersenterthefirstfournumbers,amessagepopsupsayingtheircontactinformationhasbeenregisteredandthey’llbecontactedtopurchasetheproductafterithaspassedfinaltesting.

Atthispoint,weshouldclarifyacriticalpoint:wearenotaskingyoutogooutandsell.Althoughthatmaysoundcontradictory,sellingoftenreinforcesaone-waycommunicationpatternthatshutsdownyouropennesstofeedback.Rather,whenyouconductthepaymenttest,keepinmindyou’reactuallyseekingcustomers’feedback.Ifyourcustomerprepays,wonderful!Butifcustomershesitateorstall,thenviewthatasagoodoutcome,too:itgivesyoutheopportunitytodirectlyaskcustomerswhatisstillmissingfromthesolution.

Don’twaittoolongtoapplythepaymenttest,becauseit’stheultimatetestofwhetheryoursolutiondoesthejob.We’veheardtoomanystoriesfrommanagerswhodelayedthepaymenttest,onlytorealizemuchlaterthattheirsolutionwasneitherviablenorawesome.

ASolutionProcessTemplate

Tomaptheprocessyou’llusetonailthesolution,considerapplyingthesolutionprocesstemplateshowninfigure5-6.Thetemplatereflectstheapproachwe’vesuggested,startingwithasolution-stormthatgeneratesawiderangeofsolutions.Thenselectseveralsolutionoptionstorapidlytestwithcustomersusingtheoreticalprototypes.Thenusethewowtesttoidentifywhichsolutionsattractthemostattention.Next,developatleastthreevirtualprototypesthatembodydifferentaspectsofthesolution,andtestthemwithcustomers.Eventuallyyouwillconvergetoonevirtualprototypeusingthetestsdescribedhere,andyoucandevelopitintoaminimumviableprototype.OnceyoureachtheMVPstage,youshouldusetheNPSorpaymenttesttodeterminewhichkeyfeaturestohighlightandperfectasyouiterateyourwaytoaminimumawesomeproduct.

FIGURE5-6

Solutionprocesstemplate

WatchOut:Don’tGetTrappedbyYourCapabilities

Largecompaniesdevelopcorecompetenciesthatarekeytotheirsuccess.Andexecutivesareoftenencouragedtosticktotheirknitting—toapplythecompetenciesthatgotthecompanytowhereitisnow.Butlargecompaniesthatsticktotheirknittingfaceabigwatchout.Althoughthereareahandfulofcompaniesthathavestrayedfromtheircorecompetenciesandfailed,therearemountainsofcasesinwhichcompanies,intimesofuncertainty,stucktotheirknittingandmissedahugeopportunityorwerekilledbyinnovation.

Goingbeyondyourcurrentcompetenciesisimportantforanotherreason:peopletypicallydevelopnewsolutionsbycombiningtechnologiesandideasfromdifferentfields.Thismeansthatabroadsearchtypicallyoutperformsanarrowsearchingeneratingsolutions.Whileitfeelsmoreefficienttosearchnarrowlywithinthecompany,ittendstoresultinincrementalsolutionsthatdon’tdelightcustomers.

tendstoresultinincrementalsolutionsthatdon’tdelightcustomers.Searchingabroadrangeoftechnologiesandfirms(possiblythroughalliances)iscriticalforlargecompaniesiftheyhopetosolvenewproblemsandenternewmarkets.Amazonisoneofthefewlargecompaniesweknowthathasdevelopedabroadrangeoftechnologiesinternally—andwithotherfirmsinpartnership—thatitdrawsontogeneratesolutionstohelpitenternewbusinesses.

GettingtoAwesome

Some90percentofinitialproposalsdon’tnailthesolutiontoasignificantproblem.Thisexplainswhyit’sfollytostartbybuildingaproductorservicebeforeyou’vediscoveredhowitfallsshort.Italsoexplainswhyit’simportanttoknowhowtotestmanyoptionsbyusingprototypes.Adoptingsolution-stormingandprototypingwillminimizeyourinvestment,accelerateyourlearning,andallowyoutotesttheassumptionsthatcankillyouridea.Weencourageyoutousethecycleofsearchingbroadlyandthencreatingtheoretical,virtual,andminimumviableprototypes,alongwithaminimumawesomeproduct,totestyourhypothesesandanswercrucialquestions.Remembertodesignyourprototypestoanswerspecificquestionsandtouseclearmetricstoassessthem.Embracethefreedomofusingprototypestovalidateyoursolutionasthekeytosuccessunderconditionsofuncertainty.

6

BusinessModel:ValidatetheGo-to-MarketStrategy

Thescaleandspeedatwhichinnovativebusinessmodelsaretransformingindustrylandscapestodayisunprecedented.

—AlexanderOsterwalderandYvesPigneur,BusinessModelGeneration

GODREJ&BOYCEMANUFACTURINGisa115-year-oldcompanythatsellsconsumergoodsinIndia,mostnotablyhouseholdappliances.Foryearsitsucceededbybringingtechnologiesdevelopedabroad,suchasrefrigeration,to

thewealthiestsegmentofthepopulation.Butaslow-costcompetitorsfromelsewhereinAsiaenteredIndia,Godrej’smarketsharebegantoeroderapidly.Ascompanyleaderslookedforwaystorespond,theydiscoveredasurprisethathadthekernelofaproblemworthsolving:80percentofIndianhouseholdslackrefrigeration.AsacompanyrunformorethanacenturyaccordingtothebestB-schoolthinking,itimmediatelyleapttodevelopingsolutions.AsNavrozeGodrej,directorofspecialprojects,recalls,“Weimaginedwewouldbemakingashrunken-downversionofarefrigerator.Makeitsmaller,makeitcheaper.Andwehadpreconceivednotionsofhowtobuildabrandthatresonatedwiththeseusersthroughbigpromotionsandfancyadcampaigns”(seefigure6-1).1

FIGURE6-1

Initialrefrigerationvision

Source:“ChotuKool:AnInnosightImpactStory,”Innosight,2013.

TheGodrejteam,withthehelpofInnosight(aninnovationconsultingfirmcofoundedbyClaytonChristensen),quicklylearnedtheerrorofasolution-firstapproachandinsteaddecidedtofirsttrytounderstandtheproblem.Tostart,teammemberstraveledalloverIndiaandwereshockedbyhowwrongtheirinitialguesshadbeen.AsNavrozeGodrejrecalled,itwasa“longandfascinatingjourney.Weweresurprisedbymanythings,wewereshockedbymanythings.”2AstheytalkedtocustomerstheyrealizedthatwomenmanaginghouseholdsinruralIndiafacedmanychallenges.Onewasthattheycouldnotstorefood,sotheyhadtobuyandprepareiteveryday,somethingthatwastime-consumingandexpensive.Moreover,mostpotentialcustomershadintermittentpower,andthatwouldruleoutastandardrefrigeratorliketheyinitiallyimagined.Furthermore,iftherefrigeratorbrokedown,thecostofrepairwouldlikelybeprohibitive,becausetherewerefewlocalrepairshopsorservicers,especiallyinruralareas.AsNavrozeGodrejrecalled,“[W]ithallthisinformationwerealizedouroriginalhypothesiswasquitewrong.Weknewwecouldn’tjustrepackageandreconfigureanexistingrefrigeratorandjustpassthatoff.”3

Basedontheirunderstandingofthecustomers’jobstobedone,theteamdecidedtotackletheproblemsfacedbylower-incomewomen.Astheyexploredsolutions,theytestedanumberofvirtualprototypesandminimumviableprototypesanddiscoveredthecrucialfeaturesforanysolution.Forexample,thecustomergrouptheyweretargetingneededmuchlessspacethanthatfoundinatraditionalrefrigerator.Thetargetcustomersimplycouldn’taffordtobuy,andstore,largeamountsoffood.Theyalsolearnedthattherefrigeratorneededabatterytooperateduringpoweroutages,andgiventhe90degreeorhigherheatinsomeregionsofIndia,itwouldbecriticaltominimizecoolinglosswhenthedoorwasopened.

Sotheteamiteratedtoasolutionmoreakintoacooler:thechotuKoolopenedatthetop,preventingcoldairloss,andcooledbyusingsolid-statethermoelectrictechnologyratherthanthefamiliarrefrigeratorcoolant.Furthermore,theyplacedallcomponents,includingthebattery,inthelidsothattheycouldeasilyberemovedforservicing(seefigure6-2).

FIGURE6-2

PrototypesofthechotuKool

Source:“ChotuKool:AnInnosightImpactStory,”Innosight,2013;andG.Sunderraman,“ChotuKool:InnovatingattheBottomofthePyramid,”JapanInternationalCooperationAgency,2010.

Becausetheteamappearedtohavenailedtheproblemandsolution,mostcompanieswouldassumeithadsucceededandwouldassimilatetheproductintoitsexistingbusinessmodel—itsapproachtocommunicatingwithandcapturingvaluefromcustomers.Unfortunately,suchanassumptionoftenkillsinnovations.Forexample,Godrejoriginallyassumedthatitcouldsimply“launchtheproductthewayweusedtowithabigadvertisingcampaign.”4Butasteammemberstalkedtocustomers,theyrealizedthatfortheirwomencustomers,theirlocalcommunityandsupportgroupsplayedamuchmorepowerfulroleintheirpurchasingdecisions.IfthechotuKoolteamwastosucceedinconvincingwomentobuytheproduct,itneededtofindouthowtocommunicatewiththesewomen.

Theteamconductedanumberofbusinessmodelexperiments.Inonetestofthebusinessmodel,it“launched”thenewchotuKool(whichmeans“littlecool”inHindi)atavillagefairattendedbymorethansixhundredwomenandthelocalsupportgroups.Itwasinthediscussionsatthefairthattheteamdiscoveredhowbesttocommunicatewiththiscustomersegment(whichmessage,whichchannels).Theyalsodiscoveredthat,giventhelowhouseholdincomesamongtheirtargetcustomers,thepriceofchotuKoolwouldprobablyneedtobelessthan$50USD—andeventhenalargepercentagewouldneedfinancing.

Thispricingconstraintmeantthatthetraditionalappliancesupplychain(whichhadbeenoperatingforfiftyyears)didnotworkwellfordistributingalow-cost,low-marginproducttocustomersinruralareashavingfewappliancestores.Theteamexperimentedwithseveralapproaches,talkingtoasmanypeopleandexpertsaspossibletofindwaystosolvetheproblem.Finally,the

peopleandexpertsaspossibletofindwaystosolvetheproblem.Finally,theteamhadabreakthroughwhenG.Sunderraman,GodrejvicepresidentandleaderofthechotuKoolproject,satnexttoauniversityvicechancelloronanairplane.AsSunderramantalkedtothevicechancelloraboutobtainingapplicationformsforhisyoungestson,theuniversityofficialpointedoutthatSunderramancouldgettheformsatanypostoffice.Thenextday,whenSunderramanwenttothepostofficeandaskedfortheforms(whichthepostofficeofferedforafee),whatsurprisedhimwasthehelpfulclerk,whothenpromotedseveralotheruniversitiesandtheiraccompanyingapplicationforms.

ItdawnedonSunderramanthatthepostoffice—whichhadofficesineveryareaofruralIndia—mightbeanidealdistributionchannelforchotuKool.Infurtherdiscussionsinthefield,theGodrejteamalsolearnedaboutthecentralimportanceofthepostofficerinruralvillages,wherethepostalrepresentativeistreatedlikeatrustedfriendandmayevenbeinvitedintothehousefortea.Atthismomenttheteamrealizedthatitcouldeffectivelyturnpostalofficersintothesaleschannelandleveragethepostofficetocreateanentirelynewdistributionchain,which,incombinationwithanovelmicrofinancingscheme,wouldallowGodrejtodistribute,sell,andmakemoneyfromchotuKool,allwhileimprovingthelivesoflocalvillagers.5

ThechotuKoolstoryshowsthatevenafternailingtheproblemandthesolution,theteam’sjobwasnotfinished.Theyhadtodevelopthebusinessmodelthatwouldallowthemtosuccessfullytakethesolutiontomarket.Inthischapterwewillfocusonhowtovalidatetheuniquego-to-marketstrategyforyourinnovationprojects.

ValidateEachComponentoftheBusinessModel

Thetermbusinessmodelreferstoafirm’soverallstrategyfordeliveringvalueto—andcapturingvaluefrom—customers.Themostimportantdimensionofabusinessmodelisthesolution—thevalueproposition—thatafirmofferstoatargetsegmentofcustomers.Onceyou’venailedthesolutiontoanimportantproblemforaparticulargroupofcustomers,you’rereadytotestandvalidatetheothercriticalcomponentsofabusinessmodeltobuildaneffective,data-drivengo-to-marketstrategy.

Severaltoolsareavailabletohelpyouthinkthroughthedimensionsofabusinessmodel.OneofourfavoritesistheBusinessModelCanvastemplate,developedbyAlexOsterwalderandYvesPigneur.Thetemplateshowsninebusinessmodelscomponents,startingwiththevalueproposition.Wehighlyrecommendtheseauthors’excellentbookBusinessModelGenerationforadeeperexploration.6Fromourexperienceandresearchwe’veidentifiedsixbusinessmodelcomponents—asubsetofthetemplate—thatyouneedtovalidatewhenyou’retakingyourvaluepropositiontomarket.Werefertothisasabusinessmodelsnapshot(seefigure6-3).

FIGURE6-3

Businessmodelsnapshot

Thesixcomponentsofthebusinessmodelsnapshotareasfollows.

1. Valueproposition(solution).Whatisthesolutionthatyou’reofferingtoprovidevaluetoyourtargetcustomersegment?(Thevaluepropositionemergesfromyourearliereffortstonailtheproblemandsolution.)

2. Pricingstrategy.Howshouldyoupriceyoursolutiontooptimizerevenuestreamsandgenerateprofits?Howmucharecustomerswillingtopay?Howdotheyprefertopay?

3. Customeracquisition:relationships.Howcanyoucommunicatewithandconvinceyourtargetcustomersthattheyneedyoursolution?

4. Customeracquisition:channels.Howdoyoumakeiteasyforcustomerstoaccessyoursolution?Throughwhichchannelsdoyourtargetcustomersmostwanttobereached?

5. Coststructure:activities.Whatkeyactivitiesdoyou,oryourpartners,needtoperformwellinordertodeliveryoursolution?

6. Coststructure:resources.Whatresourcesorassetsaremostcriticalfordeliveringyoursolution?

Fortunately,onceyou’vedevelopedanawesomesolution,youknowthevaluepropositionyouwanttooffer.Nowyou’rereadytoexploreandvalidatethe

propositionyouwanttooffer.Nowyou’rereadytoexploreandvalidatetheotherfivecomponents.Werecommendstartingwithpricingstrategysothatyoucanfigureoutyourcustomers’willingnesstopayandthekindsofrevenuestreamsyouwilllikelygeneratetocoveryourcosts.

Thenextstepistofigureoutyourcustomeracquisitionandeducationstrategyandthechannelsyouwilluse.Succeedinghererequiresadeepunderstandingofthecustomerconsumptionchain(describedlater).Thenyouturntofiguringoutwhichactivitiesaremostcritical.Theseactivitiesmaybeconductedinternallyorwithpartners.Youalsoneedtodeterminewhichresources(assetssuchasbrands,patents,installedbase,physicallocations,plantandequipment,etc.)aremostimportantandhowyoucaneffectivelyaccessorbuildthem.

TheemergentchotuKoolbusinessmodelsnapshotwouldlooksomethinglikefigure6-4.ThechotuKoolproductrequiredadifferentbusinessmodelbecauseittargetedanewcustomer—low-incomewomen—withavaluepropositionthatsolvedasignificantproblem.Thisnewbusinessmodeldemandedalowprice,paideitheratpurchaseorunderamicrofinancedpaymentplan.Italsorequirednewcustomeracquisition,usingwomenasacommunicationchannelandthepostofficeasadistributionandcommunicationchannel.Finally,itrequirednewactivities(low-costmanufacturing)andresources(solid-statethermoelectriccoolingandbatteries).ThecompletedbusinessmodelsnapshotdescribeshowchotuKoolcreatesandcapturesvalue.

FIGURE6-4

ChotuKoolbusinessmodelsnapshot

Tounderscoretheimportanceofvalidatingeachofyourassumptionswithcustomersinaworldofuncertainty,inlaunchingthechotuKool,theteamactuallydiscoveredanewcustomersegment:vendorsofitemslikecoldsodaorchocolateinhotclimates.Manysaleshaveshiftedtothisnewcustomersegment.Servingthesecustomersusessomeofthesameresourcesbutrequiresanewapproachtocustomeracquisition.

Thebusinessmodelsnapshotisatemplatetocaptureyourhypotheses:whatyoubelievetobetrueaboutthebusinessmodel.Writingdownyourhypothesesatthebeginning,asatanyotherstageoftheinnovator’smethod,willhelpyoufocusonaskingtherightquestions,runningtherighttests,andrecognizingwhetheryou’vevalidatedtheassumption.YourgoalshouldbeavalidatedbusinessmodelsnapshotlikethechotuKoolexample.

NailYourPricingStrategy

Werecentlyadvisedateamthatwasdevelopingwirelesspulseoximetrysocks,whichallowparentstomonitortheirinfant’sbreathingduringthenightinhopesofpreventingtragedieslikesuddeninfantdeathsyndrome.Theteammembersfollowedourprocesstoidentifytheproblem,firstinterviewingandobservingnursesandmotherstounderstandtheproblemandthenusingasmoketesttogaugecustomerinterest.Inthesmoketest,theteampostedavideoonitswebsitedescribinghowtheproduct—whichdidn’tyetexist—workedtoseewhethercustomerscaredabouttheidea.Byaccident,thesmoketestgeneratednationalmediacoverage,alongwithe-mailsfrommorethanfivehundredparentsaskingtobuytheproductimmediately.Convincedithadfoundaproblemworthsolving,theteamstartedprototypingsolutions,firstusingtheoreticalprototypestodiscusswithexpertsandcustomers,thenusingvirtualprototypes—simpledrawingsoftheproduct—toshowparentsastheycameoutofstoreslikeBabies’RUs,andthenfinallyminimumviableprototypesthattheytestedwithinfantsandparents.

Astheteammembersgainedconfidencethattheywereconvergingonasolution,theyasked,“Whatpricecanweconsistentlycharge?”Asafirststep,theysentasurveyaskingpotentialcustomershowmuchtheywouldbewillingtopay.Surveysarenottheidealwaytofigureouthowtopriceaproduct,becausebuyerstypicallydon’ttellthetruthabouttheirwillingnesstopay.Becauseyou’refacinguncertainty,thesooneryoucanobservecustomerbehaviors,thebetter.Thatbeingsaid,whatpeoplesaytheywillpaygivesyouastartingpointforyourpricinghypothesis,andyoucanlaterobservetheirbehavior.Forthepulseoximetrysocks,mostsurveyrespondentsstatedtheywouldexpecttopayaround$100.

Unfortunately,giventheestimatedcostsofproductionandthemarginrequiredbywholesalersandretailers,thatpricewouldleavelittleroomtoproducethedeviceataprofit.Ratherthangiveup,wesuggestedtheteamlookatcustomers’actions,ratherthantheirwords,comparingwhattheyactuallypayforaproductthatsolvesasimilarproblem.SotheteammembersdrovetothenearestBabies‘RUsandcheckedthepricesonbabymonitors,findingthatmostwerepricedhigherthan$200.Furthermore,whentheyaskedthestoreclerkswhichproductssoldinhighestvolume,theclerksreportedthatmostparentsboughtthemoreexpensivemonitors.Intrigued,theteamthencalledthirty-oneotherstoresaroundthenationandfoundthesamething:mostparentsboughtthemoreexpensivebabymonitors.

moreexpensivebabymonitors.

Usingtheinformationfromthesurveyandthepricecomparisonofclosesubstitutes,theteamthenconductedapaymenttestexperiment.Onitswebsiteitlistedthebabymonitoratdifferentprices(startingwithhigherpricesandthenmovingtolowerprices)anddisplayeda“BuyNow”button.Whencustomersselectedthebutton,theyweretoldtheywouldbeputonapreorderlistandnotifiedwhentheproductbecameavailable.Usingdatafromthispaymenttest,theteamestimatedthepriceelasticityofdemand(howthenumberofpurchaseschangesasthepricechanges)byobservingcustomers’actions—theiractualpurchasebehavior.Theteamlearnedthatapricearound$200wouldmaximizerevenuestreamswhileleavingplentyofmarginforprofit.

ThePriceSensitivityMeterToolTheteamroughlyfollowedaprocessthatwerecommendfortestingyourpricinghypothesis.Thefirststepistolookatthepriceofcurrentsolutionsthataretheclosestsubstitutesforyours.Potentialcustomerswillusethosesolutionsaspricereferencepoints,andyoucanusethesepricesasareferencepointforyourinitialpricinghypothesis.

Second,createapricesensitivitymeter(PSM)usingacustomersurveytofurtherrefineyourinitialpricinghypothesis.DevelopedbyDutcheconomistPetervanWestendorp,aPSMletsyouestimateoptimalpricingbysurveyingtargetcustomers.WesuggestasimplifiedversionofthetraditionalPSMapproachthatinvolvestwoprice-relatedquestions:

1. Atwhatpricewouldyouconsidertheproducttobesoexpensivethatyouwouldnotconsiderbuyingit?(Tooexpensive)

2. Atwhatpricewouldyouconsidertheproducttobepricedsolowthatyouwouldfeelthequalitycouldn’tbeverygood?(Toocheap)

Thestandardmethodrequiresthatthepercentageofrespondentsindicatingaspecificpriceis“tooexpensive”or“toocheap”areplottedascumulativefrequencies.Figure6-5showsaPSManalysisfortheinnovator’sDNAself-assessment,anassessmentofanindividual’sinnovationandexecutionskillsthatwasdevelopedbyJeffDyerandHalGregersen.7Yougraphthe“tooexpensive”linebyplottingthepercentageofrespondentswhosaidaparticularpricewastooexpensive.The“toocheap”frequencyisplottedstartingat100percentofthosewhofindaparticularpricetoocheapandtheneventuallygoingdowntozeroathigherprices.Theintersectionofthetwolinesrevealstheoptimalpricepoint(OPP).Thisistheprice(inthiscase,$44)atwhichthenumberofconsumerswhoratedtheproducttooexpensiveequalsthenumberratingittoocheap.Itistheequilibriumpricebetweencustomers’notbuyingtheproductanddoubtingitsquality.

FIGURE6-5

Pricesensitivitymeter

ThebottomlineisthataPSManalysiscangiveyouareasonablerangeofpricestotestwithyourpaymenttestandaproxyforyourultimategoal:discoveringthedemandcurvewhereyoucangarnerthegreatestrevenueandprofit.Inthecaseoftheinnovator’sDNAassessment,theestimatedoptimalpricingwas$44.Althoughthisexampleisforproduct-basedpricing,itcanbedoneforsubscriptionpricing,licensing,upsells,andsoon.8

Onceyouhaveareasonablerangeofprices,youconductapaymenttesttovalidateyourhypothesis.Thepulseoximetryteamconductedapaymenttestthroughitswebsite,butitalsotestedsimplybystandingoutsideBabies‘RUswithpicturesoftheproduct,includingprices,andaskedcustomerswhethertheywouldpreorder.Ifyoudothiswiththreesetsofonehundredrandomlyselectedtargetcustomersusingthreepricepoints,youwillhavethedatatoestimatehowdemandwillchangeatdifferentpricepoints,whateconomistscallthepriceelasticityofdemand.Asyouconductthetest,considertheadvantagesofstartingwithapricehigherthantheOPPandthengraduallymovetotestapricelowerthantheOPP.

Asyouapplythepricingtool,rememberyou’retryingtodiscoverthepriceatwhichyoucancreatearepeatablebusinessmodel,whichrequiresapriceatwhichyoucanmakeprofit(andleaveextramargininthatpricefortheinevitableerrors).Sotrytogetasenseforwhatyourcostswillbeatdifferentlevelsofdemand.Butthepointofthetoolistofindanaccuratewaytodevelop

levelsofdemand.Butthepointofthetoolistofindanaccuratewaytodevelopandthentestanappropriatepricinghypothesis.

NailCustomerAcquisition

ScottCookgeneratedtheinsightforQuicken,Intuit’sfirstproduct,whilesittingathiskitchentablewhilehiswifecomplainedaboutthehassleofmanuallykeepingtrackoftheirfinances.(ThetableisnowatIntuit’sheadquarters,andCookregularlysitstheretomeetwithemployees.)Withaninsightintoapotentialproblem,Cookspentthenextseveralmonthsexploringtheproblembydiscussinghishypothesiswithpotentialusers.

Whenhebecameconvincedthateasingthetasksofbillpaymentandpersonalfinancewasabigproblemtosolve,hepartneredwithTomLeFevretodevelopasolution.Theduodidanexcellentjoboftestingmultipleprototypeswithcustomerstonailthesolution.Forexample,CookfamouslyluggedacomputertoameetingoftheJuniorLeagueofPaloAltoandchallengedtheparticipants,manyofwhomhadneverusedacomputer,towriteacheckinlessthanfifteenminutesusinghisprototypesoftware.SomeusersweresounfamiliarwithcomputersthattheyhadtobetoldwheretofindtheEnterkey.ButwheneventheseuserswereabletoprintacheckusingQuicken,Cookfelthehadnailedthesolutionandwasreadytotakeittomarket.

Atthetime,consumersoftwarewassoldprimarilyinlargeretailoutletslikeCompUSA,andthetypicalcustomeracquisitionstrategywastomountabigadvertisingcampaign.Withthistypicalmodelinmind,CookwenttoventurecapitalistsinSiliconValleytoraisemoney.Tohissurprise,theventurecapitaliststurnedhimdown.EventhoughinitialtestsshowedthatQuickenwasfareasiertousethanotherfinancialsoftwaresolutions,thedoubterspointedoutthatQuickenwouldbetheforty-thirdfinancialsoftwarepackageinacrowdedmarket.

Notdissuaded,Cookapproachedretailoutletsdirectly.Herecallstheominousfeelingasheapproachedthedoorofonestoreandnoticedalargebinofsoftwaretitlesmarked“90%Off”justoutsidethedoor.WhenheaskedtheretailertosellQuicken,themanagersimplypointedtothediscountbinandsaid,“ThesewerethetitlesIdecidedtosell.”9Increasinglydesperate,CooktriedtostirupPRforthenewPC-basedsoftwareandsucceededingeneratingseveralarticles,butfewsalesresulted.Finally,ascompanyfundsdwindled,inabidtosellsomesoftwareCookapproachedafriendatWellsFargoaboutsellingQuickeninitsbranches.Althoughthisdidgeneratesomesales,itwasnotenoughtocovercosts,andsoonIntuit’sCFOapproachedCookwiththebad

news:theyhadlessthan$100inthebank.Itwasover.

Cookreturnedalltheofficefurnitureand,fordesks,usedpiecesofplywoodontopofstackedcopiesofQuicken.Whenthelandlordbegannosingaround,askingwhytheydidn’thavefurniture,Cookdodgedthequestion,sayingtheywereredecorating.Cookthentried,andfailed,toplaceQuickeninmoreretailbankswhileLeFevreracedtocodeanApple-basedversionofthesoftwareinhopesofsellingafewmorecopies.Theendofthecompanyseemedimminent.

Thenasurprisingthinghappened:whentheApplesoftwarehittheWellsFargobranches,Cookstartedtogetphonecallsfromcustomerswantingtobuythesoftware.Surprised,heaskedhowtheyfoundoutaboutit,andcallersrepliedtheyhadreadaboutitinamagazinefeaturingnewApplesoftwaretitles.Callbycall,CookpiecedtogetherwhatheandLeFevrehadmissed:althoughtheyhadputagooddealofeffortintopromotingthePC-basedversion,mostPCcustomersusedtheircomputersintheirbusinesses.Incontrast,peoplewhowantedpersonalfinancesoftwareusedApplecomputersathome.Furthermore,theseusersfoundoutabout,andwereinfluencedtopurchase,newsoftwarebasedonreviewsinafewkeysoftwaremagazines.

Withthisdeeperunderstandingofcustomersandtheirpreferredwaytolearnaboutandpurchasesoftware,Cookscrapedtogether$125,000andranabigadvertisingcampaignintheApplesoftwaremagazineshistargetcustomersread.Thephonessoonrangoffthehook,andQuickenquicklybecamethenumber1personalfinancialsoftwareintheUnitedStates.10

TheConsumptionChainToolIntuit’sexperienceisnotunusual.LikeIntuit,manycompaniesdevelopaninnovativesolutiontoanimportantproblem,buttheyhaveahardtimecommunicatinganddistributingthesolutiontocustomers.Becauseestablishedcompaniesalreadyhaveafamiliarbusinessmodel,theyoftenfailtorealizethat,foraninnovativeproduct,theyoftenneedadifferentbusinessmodel—onethatincludesnewwaystocommunicatewithcustomers.

It’scriticaltodeveloparelationshipwith,andachannelto,customers.Successusuallyrequirestestinganumberofmessages,atdifferentpointsintheconsumptionchain,withdifferentchanneloptions.Channeloptionsincludeadirect-to-customerwebsiteorasalesforce,distributors(suchaspharmaceuticaldistributorMcKesson),focusedretailers(WellsFargo,BestBuy,Zappos),massmerchandiseretailers(Walmart,Amazon),originalequipmentmanufacturers(suchasGeneralMotors),orvalueaddedresellers(e.g.,systemintegratorslikeIBMandAccenture).FortunatelyforIntuit,Cookwaspersistentinexperimentingwithdifferentchannelsanddifferentcustomeracquisitionstrategies.Hisinitialguessesaboutthebestchanneltothecustomerwerewrong—anditalmostkilledthecompany.Butashecontinuedtotestchanneloptions,hedevelopedadeeperunderstandingofhowcustomersfindoutabout,decidetouse,andpurchasepersonalfinancesoftware.

Atoolthatcanbeextremelyhelpfulforunderstandingyourtargetcustomeranddevelopingacustomeracquisitionstrategyistheconsumptionchain—atermpopularizedbyIanMacMillanandRitaMcGrath.11Theconsumptionchainistheseriesofstepsthroughwhichcustomerspassfromthetimetheyfirstbecomeawareofaneedforyoursolution,toevaluatingyoursolution(relativetoothers),topurchasing,using,andevenstayingconnectedtoit(see“TenQuestionstoAskabouttheConsumptionChain”).Productsorservicesmayhavesomewhatdifferentconsumptionchains,somewithmoreorlesssteps,12butingeneralfivesteps(awareness,evaluation,purchase,use,andconnection)arecommontoallconsumptionchains(seefigure6-6).

FIGURE6-6

Theconsumptionchain

TenQuestionstoAskabouttheConsumptionChain

Tohelpyouunderstandthefactorsthatinfluencecustomeracquisition,herearetenquestionsyoushouldask.

Awareness

1.Howdocustomersbecomeawareofaneedforyourproductorservice?Isthereawaytomakeiteasierormoreconvenientforthemtofindyouroffering?

Evaluation

2.Whatisyourproductreallyusedfor?Whatjobisthecustomerhiringyourproducttodo?

3.Whatdoesthecustomerultimatelyconsiderthemostimportantfeatureswhenmakingafinalproductselection?(Iftheyhad100pointstoallocateacrossallthefeaturestheyconsiderimportant,howwouldtheyallocatethem?)

4.Whichinfluencers(referencecustomers,critics,experts,press,media,peers,directreferrals)aremostlikelytoinfluencethecustomer’sevaluationofyourproduct?

Purchase

5.Howdoconsumersorderandpurchaseyourproduct?Isthereawayyoucanmakeiteasier,lesscostly,ormoreconvenienttobuy?Howisyourproductdelivered?Canyoudoitfaster,cheaper,orinadifferentway?

Use

6.Whatfrustrationsdoyourcustomershavewhentryingtouseyourproduct?Dotheyuseyourproductinwaysyoudidn’texpect?

7.Whatdocustomersneedhelpwithwhentheyusetheproduct?

8.Docustomersdothingsthathurtthelongevityorreliabilityofyourproduct?

9.Howisyourproductrepaired,serviced,disposedof?Arethereopportunitiestomakethiseasierormoreconvenient(orteachthecustomerhowtousetheproductsothatitrequireslessmaintenance,ordoself-maintenance)?

Connection

10.Howmightcustomersconnecttoandpromoteyourproduct?Howcouldyouleveragecustomers’connectionstoeachothertoinfluencepartsoftheconsumptionchainforyourcustomersandnoncustomers?

ScottCook’sexperiencewithcustomeracquisitionatIntuitillustratestheimportanceofunderstandinghowtargetcustomersbecomeawareofandevaluatenewproducts,whichliesattheheartofyouruniquego-to-marketstrategyforyourinnovation.JustgettingQuickenintovariouschannelswasn’tenough.Theconsumptionchainremindsyouthatyoufirstneedtogenerateawarenessandfavorableevaluationbeforeyouwillacquireasinglecustomer(see“TheCustomerInfluencePyramid”formoreabouthowtocreateawareness,andpositiveevaluation,ofyourproductthroughinfluencers).

Evenifyouhavetherightchannel,itcanbechallengingtocreateawareness,positiveevaluation,andpurchase.ConsiderMerck,whichlaunchedanewserotoninreuptakeinhibitor(SSRI),anantidepressant.Inthecrowdedmarket,thenewdrug,althoughperformingessentiallythesametaskasProzacviathesamechemicalmechanism,faredpoorly,andinitialrevenuesweredisappointing.Merckreturnedtothedrawingboardtoexplorethecustomerneedfromtheperspectiveofphysicianswhoprescribetheproductaswellasconsumerswhofeltdepressed,worried,oranxious.Throughextensiveinterviewswithphysiciansandcustomers,thecompanylearnedthatbeforethedecisiontoprescribeorpurchase,physiciansaswellasconsumersassociatedcertainproductswithcertainlabels.Forexample,Prozacwascloselyassociatedwiththe“depression”label.Asaresult,whenpatientscameintotheofficecomplainingofdepression,physiciansoftenintuitivelyleapedtoprescribingProzac(inpartbecausepatientsrequesteditbasedontherecommendationsoffriendsandfamily).

Inresearchingtheconsumptionchain,thecompanyalsodiscoveredthatmany

Inresearchingtheconsumptionchain,thecompanyalsodiscoveredthatmanyconsumerssoughtphysicianassistanceforanxiety,ratherthandepression.AlthoughSSRIsalsohelptreatanxiety,theresearchrevealedthatthe“anxiety”labelwasnotclearlyassociatedwithanyoneparticularproduct.Merckregroupedaroundthe“anxiety”label,launchinganewmarketingandsalescampaigndescribingtheproductasthe“new”anxietysolution.Usingthesamechannels,butadifferentcommunicationstrategywiththecustomer,salesleaptfromtensofmillionstobillionsofdollars.

What’smore,sometimesyoucan’tuseanexistingdistributionchannel.Youneedtocreateanewone,asGodrejdidforchotuKool.ButnotethatGodrejdidn’tcreatethedistributionchannelfromscratch.Instead,itpiggybackedontheactivitiesandresourcesoftheIndianpostoffice.Inothercases,companieshavebuilttheirowndistributionchannels.Forexample,Cemexdidthisinthelate1990swhenitdiscoveredthatitsdistributorswerenoteffectivelymeetingtheneedsofitspoorestcustomers.Afteradoptingaradicalapproachtounderstandingcustomers—literallylivingwiththepoorestcustomersforseveralmonths—theCemexteamrealizedthatcustomersdidn’treallywantthesolutionithadbeenselling:bagsofcement.Insteadtheywantedhousesbuiltwithcement,whichCemexdistributorseithercouldnotordidnotwanttoprovide(manydistributorsactuallyengagedincorruptpracticesthatdamagedproductquality).TheCemexteamdevelopeditsowndistributionchannelstodelivercement,advice,andfinancingtocustomers—productsandservicesthatallowedcustomerstodothejobofbuildingahouse.Inthisway,Cemexachievedsignificantgrowthinwhathadappearedtobeanunattractivemarket.

TheCustomerInfluencePyramid

Mostmanagerswhohaveamarketingbackgroundunderstandthatwerarelydirectlyinfluencecustomers;theirpurchasedecisionsareinfluencedbymanyotherforces.Thecustomerinfluencepyramidcomplementstheconsumptionchainbymappinginfluenceforces.

FIGURE6-7

Customerinfluencepyramid

Theforcesclosesttothecompanyrepresentthoseyouhavemostcontrolover,andthoseclosesttothecustomerrepresentforcesthathavethemostinfluenceoverthecustomerpurchasedecision.Atthelevelclosesttoyou,partnersincludechannelpartners,resellers,andcomplementorsthatsitonyoursideofthetableandattempttoselltocustomers.Althoughyouhavegreaterinfluenceovertheirmessage,themessagetypicallyhaslessimpactoncustomerpurchasescomparedwithotherinfluences.Forexample,GodrejcouldhaveworkedwithappliancestoresaspartnersinsellingchotuKool,andtogethertheycouldhave

storesaspartnersinsellingchotuKool,andtogethertheycouldhavemarketedthebenefitsoftheproducttocustomers,butthislikelywouldhavebeenlesseffectivethangettingrespectedwomentobeadvocates.

Next,asacompanyyoumayconstructmarketingmessagesintheformofadvertising,promotions,andsocialmediablasts,buttheytypicallyhaveamodestinfluenceonthecustomerpurchasedecision.Wecannotcoverthescienceofoptimizingthesecampaigns,anditmaybeirrelevant;whenyoufaceuncertainty,thekeyideaistounderstandwhatyourcustomerspayattentiontoandtheelementsofthejob-to-be-done(social,emotional,functional,etc.)thattheywanttoaccomplish.Usingthesetwoelementsyoucandesignacustomeracquisitionstrategythatworksbecauseyoutargetthecustomer’sjob-to-be-doneinthechannelstheypayattentionto.

Influencerscanprofoundlyshapecustomerdecisions.Influencersfallintofourcategories:expertssuchasproductreviewers,thoughtleaders,orproductevaluators;peerssuchasbloggers,customerreviews,andforumdiscussions;mediaandpress,whoseattentionshapescustomerperception;andreferencecustomers,whocreatelegitimacyandcomfortwithyoursolutionincustomers’minds.ForGodrej,thekeyinfluencersprovedtobeprominentwomeninthelocalcommunity—sociallycentralindividuals.Forothercompanies,theseinfluencersmaybeonlineorintherealworld.Forexample,SkullCandymadeasuccessfulbusinessofbrandingheadphonesandthensponsoringextremeathletestowearthem,therebyinfluencingothercustomerstobuythem.Understandingandmanagingyourinfluencerscanbekeystosuccess.

Everyoneunderstandsthatword-of-mouthrecommendationsfromsomeoneyouknowandtrusthavethegreatestinfluenceonindividualpurchasedecisions.Havingasolutionthatdelightscustomersisthebestwaytogetword-of-mouthreferrals.Butyoushouldexploredifferentwaystocreatewordofmouthusingtheprincipleswe’vediscussed.Forexample,Dropboxreliedonanintuitivebutultimatelycostlyapproachtoacquireearlycustomers,payingalmost$300onAdWordstocapturesubscribers,whoultimatelypaidonly$100inannualfees.AsDropboxexperimented,itdiscovereditcouldmoreeffectivelyacquirecustomersbyofferingcurrentusersfreestoragespacetoinvitenewusers,apromotionthatcostpenniesonthedollarwhileincreasingtheviralityofthesolution.

Asyoutrytoacquirecustomers,payattentiontoyourcustomer

Asyoutrytoacquirecustomers,payattentiontoyourcustomeracquisitioncosts.Asarule,customeracquisitioncostsshouldbelessthanone-thirdofcustomers’lifetimevalue,leavingplentyofroomfortheinevitablyinaccurateassumptionsonemakesunderuncertainty.Asyourinnovationmatures,youcanmovefromsimplemetricssuchascustomeracquisitioncostsorviralitytoanoptimizationapproach,measuringthefunnelofcustomeracquisition,activation,retention,referral,andrevenue.

CostStructure:KeyActivitiesandResourcesOnceyou’vefiguredoutyourvalueproposition(solution),pricingstrategy,andcustomeracquisitionstrategy,you’reclosinginonascalablebusinessmodel.Thefinalchallengeistodeterminetherightcoststructure—thekeyactivitiesandresources—fordeliveringyoursolution.Keyactivitiesarethoseprocessesthefirmoritspartnersmustengageintooperatesuccessfully—fromsoftwaredesigntomanufacturingtoproductdeliveryorservice.Thesearetheactivitiesthataremostcriticaltodeliveringyourvalueproposition.Keyresourcesarethoseassetsthataremostimportanttoyourvalueproposition.Theycouldbephysicalresources(land,plants,equipment),intellectualresources(brands,patents,databases),humanresources(scientists,engineers,salespeople),orfinancialresources.Understandingyourcoststructureiscritical,becauseifyoucan’tfigureouthowtodeliveryoursolutionatacostthatislowerthanthecustomer’swillingnesstopay,thenyouaren’treadytolaunchandscaleyourproduct.

Webvan,anonlinegrocery-deliverystart-up,representsaspectacularcautionarytale,havingrackeduplossesofalmostabilliondollarsbeforeflamingoutafterthedot-comcrash.TheWebvanteamassumedtherewasprovendemandforgrocerydelivery,sotheWebvanteam’splanwastoreplacetheexpensivebrick-and-mortargroceryretailerswithcentralizeddistributioncentersthatdeliveredgroceriestothecustomer’sdoor.Thecompanyspentabilliondollarsdevelopingthedistributioncentersandnetworks,onlytodiscoverthatithadmadecriticaluntestedassumptions.Forexample,itassumedthattheaveragecustomerorderwouldbe$100andthatitwouldgenerateenoughorderstooperateitsexpensivedistributioncentersatfullcapacitywithinthreemonthsofopening.Butdemandturnedouttobemuchlower,ordersweremuchsmaller($81onaverage),andtherealkiller—delivery—endedupcostingabout$27perorder.Intheend,executingontheplanratherthantestingtheoverlookeduncertaintieskilledWebvan.

HowcouldWebvanhavetestedtheuncertaintiesaboutcustomerdemandandthecostofdeliverywithoutinvestingthemoney?Theanswer:borrow,defer,orpretendratherthanbuildtheresources.Webvancouldhavepartneredwithlocalgrocerystorestodothedistributionasitfiguredouttheactualsizesofcustomerorders(therebyvalidatingdemand).Itcouldhaveexperimentedwithvariouswaystomostefficientlypickanddelivercustomerorders,therebylearningaboutthechallengesofdeliveringicecreamona100-degreedayduringrushhour.Attheveryleast,itwouldhavelearnedthetruecostofdelivery.Byleveragingthe

theveryleast,itwouldhavelearnedthetruecostofdelivery.Byleveragingtheactivitiesandresourcesofotherfirmstoexperimentwiththecoststructure—essentiallymakingallofitscostsvariableinsteadoffixed—Webvancouldhaveresolvedkeyuncertaintiesaboutthecoststructurebeforemakinghugefixed-costinvestments.

Webvandidn’tfigureout,untilafteritspentthemoneyonexpensiveresources,thatitscoststructurewastoohighforcustomerdemandandwillingnesstopay.It’sinterestingthatAmazon.comhasrecentlymovedintogrocerydeliverywiththeAmazonFreshserviceintheSeattlearea.Atthispointitappearstobealimitedexperiment.ButAmazon,asthelargestonlineretailer,hasnowhadyearsofexperienceintheactivitiesoffulfillment:managingthesupplychain,usingrobotics,pickinginventory,packingproducts,andshipping.AmazonunderstandstheactivitiesrequiredtobesuccessfulatgrocerydeliveryinawaythatWebvancouldnot.

Moreover,AmazonhascriticalresourcesthatWebvandidn’thave,includinglargefulfillmentdistributionfacilities,equipment,atrustedbrand,andemployeeswhohavedeepknowledgeofthetechnologiesthatarecriticaltoeffectivefulfillment.Ithasevenexperimentedwithdeliveringproductsviadrones.Evenwithallthisgoingforit,Amazonisexperimentingwiththebusinessmodel(inparticular,theactivitiesandresourcesrequiredforefficientgrocerydelivery)beforeafull-scalelaunch.Ifanyonecanmakeitasuccess,weexpectAmazonFreshtohaveaseriouschance.

StayVariable,StayFlexibleOneofthefirststepstowardnailingyourcoststructureistomakealistofthekeyactivitiesandresourcesandestimatethecostofeach.Traditionalmanagementthinkingwouldthenencourageyoutoloweryourper-unitcostsbyinvestinginfixedcosts(investmentssuchasbuyingcustominjectionmolds,buildingaproprietarybackend,orpurchasingequipment).Butfixedcostsrequiremoreup-frontcapitalandarenaturallysensitivetovolume,andthatmakessuchinvestmentsmoredangerousunderconditionsofuncertainty.Wehaveseenmanyfailedinnovatorsmakeseeminglylogicalfixed-costinvestmentswiththeirpreciouscapital,onlytodiscoverdemandwaslowerthanexpected.Hence,westronglyrecommendflippingtraditionalfinanciallogiconitshead:takeanyfixedcost,andturnitintoavariablecostasyouexperiment.

Forexample,anacquaintancewantedtolaunchasnackbusiness,butratherthanbuykitchenequipmentheleasedakitchenatarestaurantduringtheoff-hours.Onlyafterbuildingasignificantrevenuestream—whenhehadenoughsales—didhebuildamultimillion-dollarfactory,withcash,fornationwideexpansionofthebusiness.Asyou’retestingyourbusinessmodel,ifyouhavetolosesomemoneyoneachunitsoldtopreserveyourflexibility,itwillbeworthitintheshortterm.Theseareinvestmentsinlearning.Tojudgewhentoaccepthighervariablecosts,recallthatthegreatertheuncertainty,thegreaterthevalueoftheflexibility.

Asageneralprinciple,borrow,defer,orpretendwhereveryoucan.Today,mostofthecapital-intensiveequipmentorserviceresourcesthatcompaniesformerlyownedandpaidforhavebecomeeasytoaccessthroughoutsourcing.Forexample,companiesthatneedcomputingandservercapacitycanbuyprocessingpowerandstorageinthecloudfromcompanieslikeAmazonratherthansetupserversthemselves.ManufacturingthatusedtobecapitalintensivecannowbeoutsourcedonasmallscaletolocalflexiblemanufacturersoronalargescaletoAsia.ITandservicescanbeoutsourcedtoIndia,withanequallysignificantreductionincost.

Thetrickistodefercostswhileyouresolvetheuncertaintyaboutwhichactivitiesandresourcesaremostcriticaltodeliveringyoursolutiontocustomers.Ratherthaninvestinfacilities,equipment,leases,rentals,salaries,oranyotherexpense,deferitaslongaspossible.Useeveryfreetool(e.g.,GoogleDocs,Skype,Quora)thatyoucanfind.Alsoconsideroutsourcing,crowd-sourcing,opensourcing,licensing,orsubstitutingsomecomponentofthesolutionratherthandevelopingityourself.

thandevelopingityourself.

PuttingthePiecesTogether:BusinessModelSnapshotTemplateExample

Foranexampleofhowtocaptureyourinitialhypothesesaboutyourbusinessmodelandthenrecordyourvalidatedhypotheses,seethebeforeandaftersnapshotsforthechotuKoolbusinessmodel.Figure6-8capturesthestartinghypothesesforthechotuKool,withthevalueproposition(andresultingresourcesandactivities)beingfairlyclearlydefinedbutwiththepricingandcustomeracquisitionelementsbeinguncertainandinneedofvalidation.

FIGURE6-8

ChotuKoolbusinessmodelsnapshothypotheses

AsthechotuKoolteamtestedandvalidatedelementsofthebusinessmodel,

theywereabletoeventuallyvalidatetheirgo-to-marketstrategy.Figure6-9showsthebusinessmodelthateventuallyemergedfromtheexperimentationandvalidationprocess.Notably,evenatthelatestageofdiscoveringthebusinessmodel,thechotuKoolteamdiscoveredsurprisestowhichtheyhadtoadjust.MostnotablythechotuKoolhasturnedouttobeaperfectsolutionforkioskvendorsbecauseofitsextendedcoolingtime,whichcanbesupplementedwithacarbatteryandisnowbeingsoldthroughNGOpartnerslikeDharmaLife,whichempowersfledglingentrepreneurstodeliverproductsthatimprovethequalityoflifeinruralIndia.

FIGURE6-9

ChotuKoolbusinessmodelsnapshotpostvalidation

WatchOut:Don’tLetYourBusinessModelKillInnovation

Largecompaniesloveitwhentheycansellanewvaluepropositionto(a)thesamecustomer,(b)usingthesamepricingstrategy,(c)throughthesamedistributionchannel,(d)usingthesamemarketingmessagesandprocess,(e)leveragingtheactivities,capabilities,andresourcestheyalreadyhave.Inotherwords,companiesalwayswanttodotheefficientthing.Theywanttotakeanynewsolutionandapplythesamebusinessmodel,preferablyintheirexistingbusinessunits.

Thereasonisthatbigcompaniesaredesignedforexecution,notsearchingfornewopportunities.Thisisabigproblemforinnovation,andhere’swhy.First,itmeanscompaniesoftenrefusetoconsiderdevelopingasolutionthatdoesn’tfittheexistingbusinessmodel—andthismeanstheymissmanynewgrowthopportunities.

Second,mostbusinessmodelshaveinterdependenciesamongelements,andsoifyouchangeoneortwo,youoftenmustmakechangestootherelements.Forexample,whenNetflixfirstshippedDVDsbymailtocustomerstheyiterativelydiscoveredandthenoptimizedtheirbusinessmodel.Inparticular,NetflixacquiredresourcessuchasdistributionwarehousesandspecializedsortingequipmentanddevelopedcapabilitiesforefficientlyacquiringandallocatingDVDinventory.Whenvideoondemand(VOD)firstemerged,NetflixexperimentedwithVODasanadd-on,andsoondiscoveredthetechnologyhadgreatercapabilityanddemandthaninitiallypredicted.Butthenewsolutionalsorequireddifferentresources:distributionwarehouseswereworthlessinaVODworldasweremanyoftheirpriorcapabilities.ToNetflix’scredit,theexecutivesrecognizedthisandtriedtocreatespaceforanewbusinessmodelwhentheytriedtosplitoffmailorderDVDsintheQwiksterbusiness.Bytryingtoorganizationallydividethosetwobusinessmodelsintoseparatebusinesses,theyinitiallyconfusedandupsetmanycustomers.Althoughtheyperhapscouldhavehandledthedivisionbetter(Netflix’sstockpricedroppedfromover$300to$50),inthelongrunseparatingthebusinesseshasproducedsomeadvantagesofbeingabletofocusandalignthebusinessmodelstofitdifferentcustomerprofiles.Todayover75percentofNetflix’sbusinessisVODandtheirstockpriceisover$300.Bycontrast,Blockbuster,whoignoredDVDsbymailandVODforalongtimebecauseitconflictedwiththeirbusinessmodeleventuallywentbankrupt.

Largecompaniesprefertoleverageratherthanbuild,butthatisabigwatchout.AscompanieslikeGodrej,Intuit,Cemex,andothershave

watchout.AscompanieslikeGodrej,Intuit,Cemex,andothershavediscovered,therightbusinessmodelforaninnovationcanbemuchdifferentfromwhatyouexpected—anddifferentfromyourexistingbusinessmodel.Tryingtoforcedisruptiveinnovationsintotheexistingbusinessmodelwillalmostcertainlydestroythem.Don’tbeafraidtomakeroomfornewbusinessmodelsbycreatingnewbusinessunitsorbyspinningofforevencreatingaseparatebusinessunitthatincubatesnewbusinessmodelsthemselves.

MakingItPay

It’scrucialtonailthesixcomponentsofthebusinessmodelsnapshotbeforeyou’rereadytofullyscale.Aswitheachphaseoftheinnovator’smethod,nailingthebusinessmodeldependsongeneratingexplicithypotheses,inthiscaseabouttheoptimalpricingstrategy,customeracquisitionstrategy(customerrelationshipsandchannels),andcoststructure(activitiesandresources),andthentestingthembyconductingexperimentswithcustomers.Therearemanywaystotakeyoursolutiontomarket,souseyourbusinessmodelexplorationtotestvariouscombinationsofapproaches.Weprovidemoretips,templates,andtoolsonlineatwww.theinnovatorsmethod.comtohelpyouinthisprocess.

7

MasterthePivot

I’msogladyoumadethismistake.BecauseIwanttorunacompanywherewearemovingtooquicklyanddoingtoomuch,notbeingtoocautious...Ifwe

don’thaveanyofthesemistakes,we’renottakingenoughrisk.

—LarryPage,GoogleCEO,toaGoogleexecutivewhomadeamultimillion-dollarblunder

MAXLEVCHIN,COFOUNDERofPayPal,majoredincomputerscienceduringcollege,wherehedevelopedanintenseinterestinsecurityandencryptiontechnology.Soonthereafter,LevchinwroteasoftwarepackagerunningonaPalmPilottoreplacethehandfulsofpassword-generatingdevicesthatITadministratorscarriedaround(oneforeachsecurecomputerorsystem).Afterreceivinghundredsofdownloadsandofferstodevelopmorefeaturesforpay,LevchinmovedtoSiliconValleytopursuehisemergingdreamofstartingacompanyofferingcompactsecuritysoftware.

Shortlyafterarriving,hedroppedinonanencryptiontechnologylectureatStanfordUniversity.Onlysixpeoplewerethere,soitwasn’thardtostartaconversationwithPeterThiel,ahedgefundmanagerwhowasinterestedinusingencryptiontechnologytosecurefinancialtransactions.ThetwoimmediatelyhititoffandsoonstartedacompanybasedonsecuritysoftwareforhandhelddeviceslikethePalmPilot.

AsLevchinandThieldiscussedwhatsecurityproductwouldhavethebiggestimpact,theydecidedtocreatesecuritysoftwarethatwouldallowcorporationstosecurelyaccesstheirITsystems.Butratherthandevelopprogramsthemselves,theybegandevelopingsecuritysoftwarelibrariestobelicensedbythecomingwaveofsoftwaredevelopers.Levchinrecallsthinking,“‘Anyminutenow,there’llbemillionsofpeoplebeggingforsecurityontheirhandhelddevices.’

[But]itjustwasn’thappening.”1Sotheteammadeamajorchange—apivot.Inthesecondversionofthecompany,theyofferedtodevelopthesecuritysoftwarethemselvesforcorporatecustomers.Unfortunately,despiteinitialcustomerenthusiasm,nopayingcustomersmaterialized.Sotheychangedcourseyetagain.Theyattemptedtoattractconsumersbyofferinganelectronicwalletthatwouldstorecreditcardnumbersandpasswords.Unfortunately,theelectronicwalletlargelysolvedanonproblem,becausepullingoutaphysicalwalletwasasimple(andoftennecessary)substitute.

Thisledtoafourthmajorchangeinstrategy,withtheteamtryingadifferentsolutiontoadifferentproblem:providesoftwarethatwouldallowaPalmPilottostoremoneythatcouldbeelectronicallybeamedfromonePalmPilottoanother.Thisbusinessideacaughttheattentionofleadingventurecapital(VC)companiesinSiliconValley,leadingtoPayPal’sfirstroundoffinancing.AtBuck’s,afavoriterestaurantformanyVCs,PayPal’sinvestorsshowedupwith$4.5millionpreloadedonaPalmPilot,whichtheybeamedtoLevchinandThiel’sPalmPilot.PayPalseemedtobeonitsway.

PayPal’sinitialgrowthwasrapid,withdownloadsreachingthreehundredperday,butquicklyleveledoffbecauseitwaslimitedbytheroughlythreemillionhandheldPDAusersintheUnitedStates.AsLevchinandThielconsideredoptionstoexpandthecustomerbase,theyobservedthatmanycustomerswantedtosynctheirPalmPilotstotheircomputersandsendmoneythroughtheinternettoothershavingcomputersandPalmPilots.“Wecameupwiththeideaofattachingmoneytoane-mail,”Thielrecalls.“Sincetherewere120millione-mailusersintheUnitedStates,thismadeitmuchmoreviral.Youdidn’thavetomeetface-to-face.”2Totesttheidea,theteamsetupawebsiteversionofPayPalthatincludedademoallowinguserstosendmoneyattachedtoane-mail.DespitetryingtousethewebsitetopushdownloadsonthetechnicallysophisticatedPalmPilotsoftware,byearly2000theteamnoticedalargeamountoftrafficfromanunexpectedsource:usersfromasitecalledeBaybeganrequestinguseofthePayPallogo.

Atfirst,thePayPalteamfeltthateBaysellerswerescatteredanddisreputableandsopushedback.AsLevchinrecalls,“Forawhilewewerefighting,toothandnail,crazyeBaypeople:‘Goaway,wedon’twantyou.’”3Butaswebsitetrafficcontinuedtogrow,theteambegantoaskthemselves,“Whatiftheseareourrealusers?”

Theteamthenmadeitsfifthmajorchange:forthenextyearitfocusedonthewebsite,iteratinglikecrazytoimprovethesite.Thenumberofusersexploded.Sotheteammadeperhapsitssixthmajorchange:althoughthePalmPilotversion

Sotheteammadeperhapsitssixthmajorchange:althoughthePalmPilotversionsoftwarehadattractedtwelvethousandusers,thewebsitehadattracted1.5millionusers,sotheteamshutdownthePalmPilotsoftwareandbecamethecompanyweknowasPayPal,whichwasacquiredafewyearslaterbyeBayfor$1.5billion.

Lookingbackonhisexperience,Levchinrecallsthat“thecompanywasreallynotfoundedtodopaymentsatall.”4EventhoughLevchinmaybeoneofthemorefamousandwealthyentrepreneursintheworld,hisinnovationstartedwithafaultyguess—infact,atleastfourmajorinaccurateguesses.Andheisnotalone,asevidencedbysomeoftheotherpillarsofthemoderneconomy.Microsoftstartedbysellingprogrammingcompilersandnotoperatingsystems.Symantecdevelopedartificialintelligenceproductsandnotantivirussoftware.Beyondtechnologybusinesses,themakersofListerinetriedtosellitashospitalantiseptic,floorcleaner,shampoo,andaftershavebeforefinallysucceedingasamouthwash,andPlay-Dohwasoriginallysoldaswallpapercleanerbeforebecomingoneofthemostwidelyrecognizedtoysofalltime.

Unfortunately,findingoutthatyou’rewrongistheverythingmostcorporationsandmostmanagerstrytoavoid—fervently.Insideandoutsidecorporations,failuresareoftenperceivedasamistakeontheinnovator’spartfornotbeingsmartenoughtoforeseetheproblem.Butthisisexactlythewrongattitude.Noonecanforeseetheproblemwhenyoufaceuncertainty.It’sallaguess,andthere’sonlyonewaytodiscoverwhetherit’srightorwrong:bytestingitinthemarket.Butbecauseofourperceptions,mostmanagersfeelthepressuretoavoidmistakes,andsotheyeitherdonotinnovateortrytomaketheirfirstguesswork,somethingyouknowbynowisnearlyimpossible.Indeedrecentresearchconfirmsthatbecausemanymanagersareafraidofmakingmistakes,establishedcompaniesalmostalwaysdelayuntiltheymisstheopportunityratherthanpursueanopportunityanddiscovertheywerewrong.5

Ourstudyofsuccessfulinnovatorstellsusthis:youshouldexpecttobewrongmuchofthetimewhenyouoperateunderuncertainty.Thatisafundamentalpartoftheprocessandcompletelyacceptable.Theonlyfailureisnotfailureitself,butfailuretolearnquicklyenoughthatyouwerewrong.

Whenyoudofindoutthatyouwerewrong,youwillneedtochange—orpivot.Manypeopleunderstandthebasicideaofmakingachange,butoneofthebigchallengesfacinganyinnovatorisknowingwhentopivotversuswhentopersist.

WhatIsaPivot?

Thewordpivothasrecentlybeenpopularizedamongentrepreneursintheleanstart-upmovementtomeanaspecifictypeofchange:asinbasketball,topivotmeanstoadjustorchangedirectionwhilekeepingonefootplanted.6Thewordhelpsyourememberthatyoushouldacceptchangeasarealityofdealingwithuncertainty,butwhenyoudochange,keeponefootplantedbyusingwhatyou’velearnedratherthanthrowingitaway.Inpivoting,youchangeonedimensionofyouridea.Theideaistodiscovernewinsightsthatyouwouldnothaveseenifyouhadchangedmultipledimensionsatonce.

Thatsaid,forusthetermpivotdoesn’tmeanmakingminorchangestooptimizeyoursolutionorrefineyourdistributionstrategy;thatisiteration.Youiterateafterthedatasuggeststhatyou’veprettywellvalidatedaproblem,solution,orbusinessmodel.Incontrast,youpivotwhenyoustillhaven’tnailedtheproblem,solution,orbusinessmodelsothatyoucantryanew,morepromisingapproach.

Insomeinstancesyouwanttopivottoanewproblem,becausethedatafromyourexperimentsandprototypesrevealsthattheproblemmaynotbeworthsolvingorisbeyondyourskills.PayPal’searlychanges—fromsecuritysoftwaretoanelectronicwalletandfinallytofinancialtransactions—werepivotstoanewproblem.LevchinandThieldiscoveredfromearlyprototypesthatthecustomerpainwasn’tsignificantenoughorthemarketwasjusttoosmall.

Youmightalsopivotontherightsolution.PayPal’sshiftfromPalmPilot-basedtoe-mail-basedfinancialtransactionswasasolutionpivot.Thecompanywassolvingasimilarcustomerproblembutinadifferentway.Soonthereafter,theyachieved“pivottakeoff”(wedescribethisshortly)withthePalmPilotproduct,andthatconfirmeditwastargetingaproblemworthsolving.Butthenewcomputer-basedsolutionopenedthedoortomanymorecustomers—anyonewithaccesstoacomputer,asopposedtoanyonewithaPalmPilot.Thechangeinsolutionalsoledtosomechangesinthebusinessmodel—notably,targetcustomersanddistributionchannel.ThePalmPilotsolutionwastargetedtohigher-incomebusinessindividualsandrequireddistributionthroughPalmPilots—preferablyhavingthesoftwarepreloaded.Incontrast,thecomputer-basedsolutionwastargetedprimarilyatonlinesellersandbuyers,suchasusersofeBay.Thisshiftrequiredadifferentdistributionstrategy,withafocusononlinebuyingandsellingsites.

Youmaywanttopivottoanewproblem,anewsolution(andnewcustomersegments),oroneofthekeyelementsofyourbusinessmodel:pricingstrategy,customeracquisitionstrategy(customerrelationshipsorchannels),orcoststructure(activitiesorresources).Becauseoftheinterdependenciesbetweeneachofthesestepsintheinnovator’smethod,aproblempivotleadstochangesinthesolutionandbusinessmodel(exceptinthecasewhenyoutryasolutionforoneproblemandfinditactuallysolvesadifferentproblem).Asolutionpivotoftenleadstochangesindifferentcomponentsofthebusinessmodel.Finally,apivotinonecomponentofthebusinessmodeloftenleadstochangesinothercomponentsofthebusinessmodelbecauseoftheinterdependenciesbetweencomponents.

Don’tbeafraidofsuchchanges.Instead,recognizethatthegoalofpivotingistoengageinsystematicsearchandexperimentationasyoutestvariousconfigurationsofproblems,solutions,andbusinessmodelsthatmightprovevaluable.

UnderstandingWhenandHowtoPivot

Pivotingisapowerfulandliberatingidea.It’sliberatingtorecognizethatnohumanbeingcanguesscorrectlywhenyoufaceuncertainty,andthatpartoftheprocessismakingchangestoadjusttotheseinevitableerrors.Butbeyondbeingaliberatingidea,theabilitytorecognizewhenandhowtopivotisacriticalcapability.

Thatbeingsaid,theliteraturereflectsalimitedunderstandingofwaystoharnessthistooleffectively.Tobetteraddressthisgap,weconductedatwo-partresearchproject.7Ourresearchsuggeststhat,onaverage,changehasasignificantbenefitbyallowingmanagerstoadjustassumptionsthatproveincorrect.Atthesametime,pivotinghasitsdangers.Forexample,sometimespeople“overpivot,”failingtonoticekeycluesaboutavaluableopportunity.Inothercases,companies“underpivot,”holdingontoolongtoanideainsearchofthosesamekeyclues.Or,inastrangelycounterintuitiveway,innovatorsmaybeparalyzedbyconstantlyaskingthemselveswhethertheyshouldchange.Tohelpyouavoidsuchtraps,let’slookatemergingrulesofthumbforwhenandhowtopivot.

PivotCyclesOurprojectfollowedtencompaniestoobservetheirinnovationprocess.Inonecase,wespokewithDan(afictitiousname),leaderofaninnovationteamassignedtodevelopnewsoftwaretohelpcorporateteamsimprovetaskcoordination.Duringourbimonthlyinterviews,Danagonizedoverthedirectionoftheproject.Heunderstoodtheimportanceofpivoting,andeachmonthhemadeachangeortwoonsomedimensionofthecustomerproblem,solution,orbusinessmodel.Eachmonththecustomerengagementmetricseitherdidn’timproveorimprovedonlymodestly.Danagonizedovereachchange.Heaskedus,“AmIdoingtherightthing,orshouldIjusttrysomethingcompletelynew?”

Fromourvantagepoint,Danwasmakingseveralmistakes.First,hewasn’tclearaboutwhichassumptionhewastesting.Withoutahypothesis,itwashardtotellwhethertheideawassucceedingorfailing.Dantendedtopulltheplugandmakeachangebeforereallyunderstandingwhetherhishypothesiswastrueorfalse,becausehehadn’tdevelopedaclearhypothesis.Incontrast,mostmanagerswhofailtodevelopaclearhypothesisoftenhavetheoppositeproblem:theypersistforever,becausetheyneveractuallyrealizethattheirhypothesiswasprovenfalse.ThisiswhyIntuitexecutivesBradSmithandScottCookinsistthatnoexperimentstartuntilthereisanumericalhypothesis;inthisway,theycantellwhetherthehypothesiswasproventrueorfalse.

Dan’ssecondmistakewasthathewaschangingtoomanythingstooquickly,andthusitwasn’tclearwhathehadactuallylearned.Thepivotsanditerationsfeltgood,becausehefelthewastakingaction,andinsomeinstanceshesawincrementalimprovements.Butbecausehedidn’thaveadeliberateapproachforwhenandhowtopivot,heoverreactedtoeachpieceofcustomerfeedbackbeforehehadachancetolearnwhatcustomersweretellinghim.

Tomakemattersworse,Danexpendedagreatdealofmentalenergybyconstantlyaskinghimself,“ShouldIpivot?”Likeanydecisionthatisoveranalyzed,thechangedecisioncanparalyzeacompanythatisconstantlyasking,“Shouldwechange?”Companiesthatarestuckinthismodewasteprecioustime.Inaddition,theindecisionamplifiesthetendencytoabandonanideatooearlybyleadingcompaniestooverreacttothefirstbitofnegativecustomerfeedback(andtherewillalwaysbesome)—orunderreactbecausetheycan’tmakethedecisiontochangecourse(aclassicchallengeintheearlystagesofdesign).

Howcanyouovercomepivotparalysiswhileavoidingchangingtooearlyortoolate?Thesolution:usetime-bounddeadlinesframedtoanswerthemost

toolate?Thesolution:usetime-bounddeadlinesframedtoanswerthemostimportantquestionsyouface.AlessonwelearnfromPayPal’sexperienceistheneedtosetpivotcycles—typically,two-tothree-monthcyclesduringwhichyouconductexperimentstoanswerkeyquestionsaboutaproblem,solution,orbusinessmodel.Thecyclesshouldbestructuredtogiveenoughtimefortestingandgoingdeep,butalsobeshortenoughtoforcerapiddevelopment.Attheendofacycle,youassesstheanswerstoyourkeyquestionsandthendecidewhethertomakeachange.

Asarule,pivotcycledeadlinesoftwotothreemonthsorlessappeartoworkbest(sometimestheymaybemuchshorter).Althoughpivotcyclesmayappearsimilartoothertypesofdeadlines,suchasacorporateproductdevelopmentdeadline,apivotcycleisbrieferandmoreintense.Mostproductdevelopmentprocessesrangefromtwelvetothirty-sixmonths,whereaswearguethatyoushouldcramagreatdealofthatprocessintoatwo-monthwindowdesignedtoansweraspecificsetofquestions.Thismeansthatasateamyouwillworkwiththekindofintensityandfocusfoundinstart-upsandthatwhateveryoudowillnotbeperfect(youwillhavetousevirtualprototypesorotherrapidexperiments).Butthebrevityofthetimelinecangiveyouthefocustoworkintenselyandnotgetboggeddown.

LevchinandThiel’sexperiencelaunchingPayPalisinstructive.Intwoyearstheymadeatleastfivemajorchanges.Thismeanstheytriedtestingadifferentsolutioneverytwotofourmonthstoseewhetheritgottractionwithusers.However,afterroughlythreemonthswithoutgettingtraction,theydidn’tjustcontinuetorefinetheproduct.Instead,theyshiftedtoadifferentproblemorsolution.Thechangesstillinvolvedsoftwaresecurity,buttheywerefocusedondifferentproblemsordifferentsolutions.

LikePayPal,establishedcompaniesthatchangeeffectivelyusepivotcycles.Forexample,MondelezInternational(Kraft)giveseachinnovationprojectatwo-tothree-monthdevelopmentperiodandthenforcesathirty-day“goorno-go”decisionperiod.AT&T’sinnovationlabsusetwelve-weekprojectcyclestotestanideabeforemovingtoadecisiontopivotorpersist.Amazontypicallyusessix-monthtimeframesbutexpectstomakemajorchangestoboththeproblemandthesolutionduringthattime(averagethree-monthpivotorpersist).AtIntuit,mostprojectshaveathree-monthdeadline,afterwhichtheyfaceapivot-or-persistdecision.

PivotTestingDuringpivotcycles,howdoyoudeterminewhetheryoushouldchange?RecallDan,wholedthetaskcoordinationproductteamandstruggledwithconstantlymakingsmalliterationswithoutfeelinghehaddiscoveredwhathiscustomersreallywanted.Danalsofellintoadifferenttrap,onethatweobservedamongmanyothermanagerswestudied:applyingonlyonetestingmodetotrytounderstandthecoreproblem.

Therearethreetestingmodesbasedonmodesoflearningunderuncertainty:abductive,inductive,anddeductivelogic.Abductivelearningistheprocessofmakingaguess,usuallybasedonyourintuition—forexample,youhaveaguessabouttheproductorservicecustomerswant,andyoudevelopyourguessbybuildingaproductratherthantestingwhethercustomerswantit.Inductivelearningistheprocessofdevelopingatheory,usuallybasedonyourguess,usingqualitativemethodssuchasfly-on-the-wallorinterviews—forexample,youtalktocustomersinface-to-faceinterviewsabouttheproblemstheyhave.Finally,deductivelearningistheprocessoftestingatheory,usuallyusingquantitativemethods,toprovewhetheryourtheoryiscorrect—forexample,youbelieveanimprovementtoawebsitemightincreasesales,andyouusethequantitativeevidencefromaparalleltestoftwoversions(calledanA/Btest)toprovideevidenceaboutwhichwebsiteversionincreasessales.

We’veobservedmanymanagersmistakenlyoperateinasinglemode.Forexample,Danwasaddictedtothedeductivemode,usingquantitativetoolssuchasusersurveysandA/Btestingtomeasurehisprogress.Suchdeductivetoolsareattractivebecausetheyletyoutestyourassumptionsquantitativelyandobtainastatisticalmeasure.Danusedtheseteststodeterminewhetherheshouldmakeachange;thenhemadethechange,sawasmallimprovement,andrepeatedthecycle.Butwheredidthetheoryabouttheproblem,solution,andbusinessmodelcomefrominthefirstplace?HowdoweevenknowwhetherDanhadtherighttheory—therightassumptions?AlthoughDanusedquantitativetoolseffectively,heusedonlyonemethodtotesthisassumptions.

Inourresearch,lesseffectivemanagerstendedtorelyononemethodtotesttheirideas,particularlyquantitativetoolssuchassurveys.Thiswasparticularlytrueformanagersinestablishedcompanies,whereharddataandnumbersaremorerespectedthanqualitativeobservations.Butthesedeductivetoolsareappropriateonlytotestatheoryorassumptionandnottodevelopatheoryinthefirstplace.Foramanagerrunninganexistingbusiness,stickingtoquantitativetoolscanmakesense,becausethetheoryisalreadywellestablishedand

toolscanmakesense,becausethetheoryisalreadywellestablishedandmanagersaremakingrefinementsunderconditionsofrelativecertainty.Butforhigh-uncertaintyprojects,stickingtoonemodehasseriousliabilities.Themostimportantisthatyoudon’tdeeplyunderstandthetheoryyou’retestingorknowtherightquestionstoask.

Incontrast,effectivemanagerscycledbetweentheavailablemodes.Theystartedwithaguess(abductive),testedtheguessqualitativelytodevelopatheory(usingtechniqueslikefly-on-the-wall,interviews,etc.;thisisinductivelearning),andthentestedthetheorymorequantitatively(usingsurveys,A/Btesting,etc.;thisisdeductive).Ifatanypointtheydiscoveredtheywerewrong,theyreturnedtoanearlierpoint.Althoughitmaysoundobvious,aremarkablenumberofmanagersgotstuckinonetypeoflearning,mostoftendeductiveorabductive.Innovatorswhoengagedinthecompletecycle,ratherthansticktoasinglemode,provedtheirassumptionstrueorfalsemonthsearlierthanthosewhodidnot.

Asyouenterapivotcycle,takestockofwhereyoustandinrelationtonailingtheproblem,solution,orbusinessmodel.Don’tleaptosurveysfirst,butinsteadmakesureyouunderstandyourhypothesis;thentestyourhypothesisqualitativelytobuildyourtheorytoexplainwhatisgoingon,andthenengagewithyourcustomersusingquantitativetools.

BroadversusNarrowPivotsOftenmanagersaskus,“shouldwefocusearlyorstaybroad?”RecallthatDan’steamwaschangingoften,butthesewerenarrowpivots(oriterations)aroundtheproblemandsolutionithadidentifiedearlyon,ratherthanbroadpivotsdesignedtocastawidenetforproblemsandsolutions(see“PivotingSequentiallyVersusinParallel”).

Intheearlystagesofsolvingahigh-uncertaintyproblemyouneedtogobroadbeforeyougonarrow.Inabroadpivot,youchangetheproblemorpainpointyou’retryingtosolve;changethetechnologyorapproachyou’reusingtosolvetheproblem;or,whenyougettothebusinessmodelstage,youcompletelychangedistributionchannelsorpricingstrategy—perhapsgoingfromper-unitpricingtosubscriptionpricing.Dan’steamfocusedonaparticularapproach—aparticularsoftwaretool—tosolvetheproblemofcoordinatingteamtasks.Each“pivot”wasreallyasmalliterationfromtheinitialapproach.Theteamwouldhavebeenbetteroffmakingbroaderchangeseverytwotothreemonthsandthennarrowerchangesduringthepivotcycleinsearchofwhatwecallpivottakeoff,asdiscussedinthefollowingsection.

PivotingSequentiallyVersusinParallel

Focushasimmensepowerandplaysacriticalroleintheinnovator’smethod.Youneedtofocusontheprecisecustomerproblem,ontheminimumfeaturesthatdriveapurchase,andontherightbusinessmodel.Butsomewhatcounterintuitively,atthestartofeachphase,youneedtolookverybroadlybeforeyoufocus.Inthischapterweimplythatbroadpivotsoccursequentiallyasyoutestoneideaandthenmovetothenext.Butyourexplorationandpivotscanalsooccurinparallel—andprobablyshouldwhenbothuncertaintyandcomplexityareparticularlyhigh.

Forexample,whenSonywantedtodevelophigh-powerrechargeablebatteries,ittookaverydifferentapproachtomanagingtechnicaluncertainty.Atthetime,nickelseemedtheonlysafesolutioncomparedwithothercompoundshavingahighenergydensity,suchaslithium—anelementthatexplodedoncontactwithwater.Intheracetodevelopasolution,SanyoandMatsushita(Panasonic)focusedsolelyonthesafer,butlower-energy-density,nickel-basedrechargeables.

ButSonydecidedtotakealeapintotheuncertaintyofsimultaneously

ButSonydecidedtotakealeapintotheuncertaintyofsimultaneouslydevelopinglithiumbatteries.Insteadofworkingonasinglelithiumsolution,Sonyfundedsixseparateprojects,eachworkingonavariationofthesolution.Furthermore,insteadoffollowingthetypicallongdevelopmentdeadlinesatSony,managersmetwiththeteamseverymonthtoassessprogress,makechanges(pivot),andrapidlyrespondtoobstacles.Eachprojectpivotedsequentially,andthevariousprojectswerepivotinginparallel.Intheend,oneprojectteamfoundthecombinationoflithium-basedmaterialsthatbecametheworldstandardlithium-ionbatteries.

Sony’suniqueapproachhelpeditresolvethetechnicaluncertaintyfasterthanitscompetitors,whicheventuallywereforcedtofollowsuit,butnotbeforecedingafour-yearheadstartandmanyvaluablepatentstoSony.Similarly,atthestartofeachphaseoftheinnovator’smethod,youmightalsoconsiderexploringinparallel,searchingformultiplepains,solutions,orbusinessmodelsbeforepivotingtoasingle,focusedoption.

PivotTakeoffShouldpivotcyclesgoonendlessly?Whendoyouknowwhetheryou’vearrived,andhowdoyougetthere?Theanswer:lookforpivottakeoff.Pivottakeoffoccurswhen,aftermakingachange,youseeasignificantchangeinthetrajectoryofcustomerinterest(seefigure7-1).Forexample,recallthatPayPalmadeseveralsignificantalterations,withonlymoderateinterest,untilafterthefourthchangetothePalmPilotmoney-transfersolution.Thissolutionledtoadramaticincreaseinthecustomerengagementmetrics,andthismeansthatpotentialcustomersweremuchmorelikelytogivethecompanytime(thetimetest)andmoney(thepaymenttest)andtopromotetheproducttoafriend(thepromotertest).Thisledtoamuchfasterrateofusageandadoptionamonguserscomparedwithearliersolutions.Moreover,whenPayPalmadethefifthchangetothewebsitethatallowede-mailmoneytransfers,itsawyetanotherleapincustomerinterestandadoption,andthissignaledthattheteamhadnailedasolutionforagreatmanypeople.

FIGURE7-1

Pivottakeoff

Althoughweencourageyoutoembracepivoting,ultimatelywhatyou’relookingforispivottakeoff.Itindicatesthateitheryou’vefoundaproblemworthsolving(thelevelofcustomerinterestincreasessignificantly)orthesolutionyou’recurrentlytestingisatleastdoingareasonablejobofsolvingtheproblem(thelevelofcommitmentorpaymentincreasesmarkedly).Formoreaboutmeasuringyourresults,see“UseMultiple,RobustMetricsforPivotTakeoff.”Asarule,pivottakeofftypicallyoccurssomewherebetweenthethirdandseventhpivotformostinnovations—althoughitmaytakelongerformoreradicalprojects.

Incontrast,ifyourpivotsseemtoyieldonlysmallimprovementsordecreasingreturnsforeachchange,youmaybehittingthelimitofwhat’spossiblewithyourcurrentapproach.Everycircumstanceisdifferent,souseyourjudgment.Ifyoudon’tachievepivottakeoffaftersixorsevenmajorpivotsovertwelvetoeighteenmonths,itmaybetimetoabandonyourproblemandsolutioninsearchofsomethingentirelynew.

UseMultiple,RobustMetricsforPivotTakeoff

Asanexperiencedinnovatorwhohaddevelopedproductsandservicesworthmorethanabilliondollars,MikeCassidyhadlotsofexperienceinsearchingforpivottakeoff.Hisnewproject,UltimateArena,whichallowedvideogameplayerstocompeteforacashpot,appearedtobedoingwell.ThenumberofregistereduserscontinuedtogrowasadvertisingandPReffortsdroveuserstotheservice.Giventhegrowthinusageandadoption,itappearedthatCassidy’steamhadachievedpivottakeoff.

ButsomethingtroubledCassidyashelookedatothermeasuresofcustomerengagement.Whenhecheckeduserengagementovertime,hefoundthatmostusersplayedafewtimesandthenneverreturned.Toexplorewhy,hepersonallycalledtheseusersanddiscoveredaproblem:althoughpeopleweregenerallywillingtolosemoneyamongfriends,asduringapokergame,theydidn’tlikelosingmoneytostrangersonline,againstwhomtheyfeltoutmatched.Evenwithpositivegrowthinthenumberofusers,withoutasetofreturningusers,Cassidyknewthatovertimetheservicewouldrunoutofnewusers.

Hefirsttriedsomeminorpivots—changingtherankingsystemfor

Hefirsttriedsomeminorpivots—changingtherankingsystemforgroupingplayersforcompetitionandadjustingthefeescharged—toseewhethereitherchangewouldkeepuserscomingback.Butintheend,thedatawonout.Withadvertising,theservicecontinuedtoattractnewusers,buttheotherpivottakeoffmetrics—returnusers,netpromoterscore—didn’tvalidatethetakeoffasrobust.Alargerpivotwasnecessary.

Afteradditionalobservationsandconversationswithcustomerswho’dlefttheservice,Cassidydiscoveredthatwhatmostcustomersreallywantedwasawaytoconnectandplaygameswiththeirfriendsonline.SoCassidychangedtheproducttoaninstantmessagingservicethatallowedgamerstoconnectwithfriendsandthenportintotheirfavoritegametogether.Thenewsolutionachievedpivottakeoffasmeasurednotonlybythenumberofregisteredusersbutalsowithreturnusers,netpromoterscore,andultimatelyrevenues.Infact,thenewsolutiongrewlikecrazy,eventuallybecomingamajornewinitiativeinsideVivendi’sportfolioofproducts.ButCassidymightnothaveachievedsuchsuccessifhehadpaidattentiononlytothesinglepivottakeoffmetricofgrowthinthenumberofregisteredusers.

Havingmultipletypesofpivottakeoffmetricshelpsyoumakethetoughdecisionsaboutwhethertochange.Werecommendpayingparticularattentiontogrowthinusers/trials,netpromoterscore,orgrowthinuserswhopassthepaymenttest.However,thedatashouldbeappropriateforthepivot.ItmaybeXnumberofinterviewswithYnegativestatements,oritmaybethepercentageofuserswhodidnotuseyoursolutionagain.Althoughwe’veprovidedoptionsforcustomerengagementmetricsthatindicatepivottakeoff,youmustfigureoutwhatmetricsprovidearobust(reliable)measureofwhetheryou’venailedtheproblem,solution,andbusinessmodelforyourtargetcustomers.

MountainsversusHills:KeepPivoting

Onceyou’veachievedpivottakeoff,youshouldfocusonmaximizingit.Afterall,you’regainingtractionwithasolutionthat’sworking.However,takeoffdoesn’tmeanyoushouldquitpivotingaltogether.Instead,youcanmovetonarrowerpivotsanditerationsasyousearchforanevenhighertrajectoryofcustomerinterestandadoption.Rememberthatthefirstuptickmaybeonlythestartofpivottakeoff,ashappenedwithPayPal’sPalmPilotapplication.Asyoufocus,takecaretolookupperiodicallyandaskyourself,“Isthereanotherchangewecouldmakethatcouldincreaseourtrajectoryevenmore?”Neverbeafraidtousethetoolsyou’vegainedtoexplorenewopportunitiesthatyoumaynothavepreviouslyobserved.

ConsiderthecaseofAardvark,acompanywhosesocialsearchenginealloweduserstopostquestionstotheirsocialnetworkratherthanconductaninternetsearch.Thefoundersbelievedthatsomequestions—forexample,askingforrecommendationsforamovingcompany—mightbebetteransweredbypeopleyouknowthanbyagenericsearchrequest.Atthestart,thefoundersdidanexcellentjobofusingthetoolswedescribetotestmultiplesolutionsinsearchofpivottakeoff.Forexample,althoughmostofusmightstartsuchacompanybyfirstdevelopingthesoftware,insteadtheteamcreatedaminimumviableprototypethatreliedonAmazon’sMechanicalTurk(anonlineoutsourcingservice)to“fake”thefunctionalityofthesoftwarebyhavingpeoplemanuallytypeanswerstoquestionsratherthanuseasoftwarealgorithm.

Althoughitwasn’tperfect,Aardvarkwasabletotestmanyaspectsofthesolutionbyfakingitandquicklyiteratedtoafullyfunctioningsolutionthatachievedpivottakeoff(basedongrowthincustomersatisfactionandusage).AsAardvark’ssocialsearchsolutionreachedonehundredthousandcustomers,thecustomeradoptionmetricscontinuedtoimprove,andincreasinglynarrowiterationsofthesolutionledtoincrementalimprovementsincustomerengagement.

Allseemedtobeontrack,exceptforarecurringnuisance.CustomerscontinuallyrequestedtwofeaturesthatAardvarkhadnotdeveloped:asearchabledatabaseofpreviouslyansweredquestions,andalistofquestionsausercouldanswer.Althoughthefeatureswouldbeeasyenoughtodeveloporevenfake,theAardvarkteamresisted,becauseitcontradictedtheteam’svisionofsocialsearches.IndeedtheteamarguedthatsuchfeatureswouldturnAardvarkintoaversionofYahoo!Answersorasimilarservice.Because

customerengagementcontinuedtoimprove,theAardvarkteamdecidedtostayfocusedonitscurrentsolutionandvision.8

Aardvark’sstoryhasahappyending—atleastforthefoundersandtheteam.AardvarkwasacquiredbyGooglefor$50millionin2010.However,itmighthavebeenanevenhappierending.WhileAardvarkcontinuedtoiteratearounditssolution,anothercompany,Quora,designedaproductfocusedpreciselyonthefeaturesmostrequestedbyAardvark’scustomers:searchablepreviouslyansweredquestions.TheyearafterAardvarkwasacquiredbyGoogle,Quorareportedlyreachedavaluationofmorethan$1billion.(Asasidenote,theendingwasn’tsohappy,becauseGoogleshutdowntheAardvarkservicelessthanayearafteracquiringit.)

ThesadthingforAardvarkisthat,givenitsremarkableskillsatrapidlytestingassumptions,itcouldhaveeasilytestedtheproductthatQuorasucceededwith—butitwouldhaverequiredquicklytestinganewsolutioninparallelwiththeexistingsolution,onethatwasnotaniterationoftheexistingproduct.ThisiswhatSonydidasitsearchedformultiplesolutionstothebatteryproblem.ForAardvark,itwouldhaverepresentedaparallelpivot,althoughnotamassivechange.Ofcourse,whetherAardvarkcouldhavesucceededinlaunchingaproductlikeQuora’sisspeculation.ButcomparingAardvark’sapproachafterachievingpivottakeoffwithPayPal’sisinstructive.

Aardvarkfellintoatrapwe’venoticedamongmanyotherteams—whatwecalliteratingaroundahillwhenapivotmayleadyoutoanearbymountainpeak.Ifyouthinkaboutalandscapeasametaphorforthedistributionofopportunities,thenflatlandsorvalleysrepresentnoopportunities,hillsrepresentsmallopportunities,andmountainsrepresentlargeopportunities.Researchershavelongobservedthatcompaniesoftengettrappedonasmallerhillandfailtoseethenearbybiggermountainsofopportunity.

Inourresearchweobservedthatsometeamsaresoexcitedaboutachievingpivottakeoffthattheyfeelthey’vefoundthesolution.Afterall,itfeelsgreattofindahillwhenyou’vebeeninavalley.Moreover,refinementsthroughsmalleriterationswillleadtosmallstepsupthehill,andthatfeelslikeprogress.Thechallengeistorememberthatthereareoftenmountainsnearby,perhapsnextdoor.ForAardvark,thatmountainwascalledQuora.ForPayPal,thatmountainwasconductingfinancialtransactionsviae-mailinsteadofbyPalmPilot.

Ofcourse,whenyouachievepivottakeoff,youdon’thavetoabandonthehillormountainyou’vefound(see“PopularityVersusCustomer-DrivenPivots.”

PayPaldidn’tabandonitsPalmPilotproductwhenitlauncheditscomputer-basedproduct.Instead,usethetoolswe’vedescribedheretotestemergingopportunities.Yourinitialpivottakeoffmaybeastepping-stonetoanevenbiggeropportunity.

PopularityversusCustomer-DrivenPivots

Whatshouldyoudowhensomeonepowerful,influential,ortalentedtellsyoutochangecourse,butthedatasuggestssomethingelse?ASwedishcompanywestudiedexperiencedthiswhenitbegantodevelopasolutionanalogoustoMicrosoftOfficebutforadvertisingagencies—atoolthatwouldassistthemindevelopingthenextwaveofdynamicadvertising.Afterworkingwithseveralglobalagenciesformonthstodefinetheproblemandsolution,thecompanywasinvitedtoTechCrunch50,aconferenceforthemostinnovativecompaniesoftheyear.

Butwhentheteampresentedtothepanelofjudges,anextremelysuccessfulindividual,comparabletotheBillGatesofentrepreneurship,begantocriticizetheapproach,sayingthecompanyshouldnotbothertotargetadvertisingagencies;itwasawasteoftime.TheSwedishteammembersearnestlydebated:shouldtheypivotanddosomethingdifferent?Butintheend,theywentbacktothedatafromcustomers.Ultimatelythedataprovedcorrect,andtheteamevolvedtobecomeworldrenownedforitsprowessinadvertisinganalytics.

Wearealleasilyinfluencedbyhigh-statusindividuals—anexecutive,anentrepreneur,amentor,oraninvestorwhomaybeknownforexpertise,intellect,orpastsuccesses.Sometimesthesepeoplearecorrectintheiradvice,andtheyshouldbelistenedto.Butyouneedtoaskwhethertheyfittheprofileofortrulyunderstandyourcustomer.Inmanycasestheyarenotyourtargetcustomer—sowhatevertheysayneedstobemeasuredagainstthedatabeforeyoumakethepotentialmistakeofapopularitypivot.Ifyouneedtogathernewdata,doso.Butdon’tpivotjusttobepopular.Aswe’vesaidbefore,innovatorsinnovate,customersvalidate.

RighttoBeWrong

Pivotsareanessentialpartofeverystageoftheinnovator’smethod.Youshouldexpecttobewrongandfocusinsteadonlearningasquicklyaspossibleandthenchangingwhenyoudiscoverthataguesswaswrong.Pivotsliberateyoutochangemistakenassumptions,andthey’reapowerfultoolinyourinnovationtoolkit.

Likeanytool,pivotingneedstobeusedcorrectly.Setshortpivotcyclesthatcreateurgencytoexploreyourkeyassumptions.Relyonthesecyclesaskeydecisionpointsratherthangetmiredinanendlessdebateaboutwhethertochange.Usethecycletoidentifythekeythemes,ratherthantherandomdatapoints,thatcandrivethedecisiontomodifyyourapproach.Usemultipleapproachestotestyourassumptions,includingabductive,inductive,anddeductiveapproaches.Furthermore,trysearchingvariousproblemsorsolutionsinparallelduringtheearlystages—whenuncertaintyisespeciallyhigh.Thekeyistobesuretoexplorebroadlybeforegoingnarrow.

Onceyou’veachievedpivottakeoff,itcanbetemptingtokeepyourheaddownandmakeincrementalchangesandimprovements.Butdon’tforgettoliftyoureyesoccasionallyandaskwhetherthere’samountainofopportunitynearbythatyou’remissing.Knowingwhenandhowtochangeismoreartthanscience—butusingtheguidelineswe’veofferedwillhelpyoumasterthepivot.

8

ScaleIt

Assoonasyoustarttoscale,everythingisgoingtochange.Everything.

—RyanSmith,CEOofQualtrics

IMAGINEHOWEXCITEDyouwillbeafteryou’vehaveappliedtheinnovator’smethodtonailtheproblem,solution,andbusinessmodelandyoustarttogeneraterevenue.Peoplearoundyouareexcited,andtheycanseethatyourprojecthasbeguntosucceed.Butnowyoufaceanewchallenge:scalingyourfledglinginnovation.Inastrangelyparadoxicalway,ifyou’reparticularlyadeptatapplyingtheinnovator’smethod,youmayfacegreatdifficultiesinmakingthetransitiontoscaling.Recallinchapter2wearguethatbeingagoodmanagercanmakeyouabadinnovator.Whenitcomestoscaling,theoppositecanalsobetrue:beingagoodinnovatorcanmakeyouabadmanager.

ConsiderthecaseofLewCirne,whofoundedWilyTechnologiestoautomatethecomplextaskofdiagnosingsoftwareflaws.CirnehadtheinitialinsightwhiledrivingalongHighway17betweenPaloAltoandSantaCruz,California,feelingfrustratedabouthisownchallengesinmanagingthegrowingcomplexityofsoftwareprojects.Earlydiscussionswithpotentialcustomersconfirmedthatotherdevelopersfacedsimilarproblems.

Cirnedidanexcellentjobofprototypingaminimumawesomeproduct,identifyingtherightbusinessmodel,buildingtheteam,andselflesslysacrificingforthenewbusiness.Usingthekindsoftoolsdescribedinthisbook,Cirnesuccessfullyclosedinitialcustomersalesthatestablishedamultimillion-dollarrevenuestreamandraisedalmost$40millioninventurecapital.Everythingseemedtobegoingwell,andCirnefeltthathehaddoneagreatjobasfounderandCEO.Soimaginehissurprisewhentheboardofdirectorsreplacedhim.

WhydidtheboardreplaceCirnewhenhehadaccomplishedsomuch?He

WhydidtheboardreplaceCirnewhenhehadaccomplishedsomuch?Heacknowledgedthathehadnotdoneeverythingperfectlyinrecentdays.Forexample,astheteamgrewbeyondtwenty-fivepeople,communicationhadbecomemoredifficult,andtherehadbeenanumberofcommunicationfumbles.Decisionmakinghadalsobecomeslowandchallenging:theconsensusdecision-makingprocessCirnefavoredintheearlydaysboggeddowntheprocessoftakingaction.Inaddition,Cirnefoundheneededtorepeatedlystepintohelpclosesalescallsasthesalesforcestruggled.Asaresult,Cirne’sinvestorsaskedtobringinseniorexecutivesasadvisersontheoperationalissuesthatwereslowinggrowth.WhentheinvestorseventuallyaskedCirnetostepaside,hewonderedwhathecouldhavedonetoshowthathecouldmanagethecompanyasitgrew.

Infact,Cirne’sstoryiscommon.Multiplestudiesconfirmthatamajorityoffoundersarekickedoutofthecompaniestheycreate,andoftenjustatthemomentwhenrevenuesareskyrocketing.1Why?

Althoughitmayseemcounterintuitive,foundersareoftenremovedforasimplereason:theyaren’twellequippedtomakethetransitionfromdiscoveringthebusinessmodeltoscalingit.Thistransitionisachallengingmanagementproblem,andhere’swhy.Asyouapplytheinnovator’smethodtorapidlyresolvetheuncertaintiesunderlyingyourproject,hypotheseswillbecomefacts,unknownswillbecomeknowns,anduncertaintieswillbecomecertainties.Asuncertaintiesdecline,thereasonsforapplyingentrepreneurialmanagementbegintodisappear.Youentertheterritorywheretraditionalmanagementprinciplesfocusedonoptimizingandcapturingvaluearemoreappropriate.

Asyoumovefrominnovatingtoexecuting,yourprojectpassesthroughatransitionalphasewhenneitherentrepreneurialmanagementnortraditionalmanagementaloneisentirelyappropriate(seefigure8-1).Thisisthetimetolearnhowtoeffectivelyblendthetwomanagementpracticesasyoutransitiontoamaturegrowthbusiness.

FIGURE8-1

Thetransitionalphase

Bringinganinnovationfromastart-uptoabillion-dollarbusinesscanbecomparedtothehumanlifecycle:childhood,adolescence,andadulthood.IntheMiddleAges,peopletreatedchildrenaslittleadults,butnowwerecognizethatchildrenaredifferentfromadults:theyrequiredifferenttraining,expectations,andevendifferentmedicinethanadults.Inasense,start-ups,whetherinsideoroutsidethecorporation,arelikechildren:theyrequireadifferentsetofmanagementtechniquesthanamaturebusiness(weusethetermstart-upheretorefertoyourinnovationprojectwhetheryou’repursuingitinsideoroutsideacorporation).Butjustaschildrendonotimmediatelybecomeadults,astheinnovationtakesoffandstartstoscale,yourinnovationdoesnotimmediatelybecomeamaturebusinessthatyoucanmanageusingtraditionalpractices.Instead,thenewproductpassesthroughaseriesofadolescenttransitionsteps.Justasteenagersareneitherchildrennoradultsbutratherauniqueblendofthetwo,effectivescalingrequiresauniqueblendofentrepreneurialandtraditionalmanagement.

Whenandhowshouldyoumakethistransitiontoscaling?First,wehelpyourecognizesomeofthekeyinflectionpointsthatindicatewhenit’stimetoscalethebusiness.Thenwediscusshowtomakethistransitionintermsofmarket,process,andteamactivities.Weaddresshowtomanagethefollowingkeychanges:

changes:

Marketscaling.Recognizewhentomovefromaminimumawesomeproducttoawhole-productsolutionandhowtocreatethelegitimacytomakethetransitionfromearlyadopterstomainstreamcustomers.Processscaling.Understandhowtoshifteffectivelyfromdiscoveryprocessestoexecutionprocessesdesignedtoefficientlydeliverthewhole-productsolutionwithoutprematurelydestroyingyourinnovationcapabilities.Teamscaling.Identifyhowtogettherightpeoplewiththerightskillsforscalingthecompanyinplacewhileassigningnewrolestopeoplewhocannot,orwillnot,adapt.

Finally,weintroduceyoutoascalingtoolusedbymanyofthemostsuccessfulmanagerswhohavescaledideasfromsmallteamstoeffectivebillion-dollarbusinesses.

RecognizeWhentoScale

Qualtrics,anonlinesurveycompany,recentlygrabbedheadlinesasanovernightsuccess:afterrejectinga$500millionacquisitionoffer,itraised$100millioninfundingandreportedlyisvaluedatmorethan$1billionasitgrowsatbreakneckspeed.Inreflectingonhisexperience,CEOandfounderRyanSmithsaysthatthecompanyis“anovernightsuccess...tenyearsinthemaking.”2Smithadoptedthetitleofoneofourearlierbooks,NailItThenScaleIt,asthemantraforhiscompany.3

SmithemphasizesthatQualtricsspenttenyearsnailingtheproblem,solution,andbusinessmodelbeforeraisingmillionsinventurecapitaltoscalethebusiness.Hearguesthatalthoughitmayseemsloweratfirsttoproceedthroughthephasesofdeeplyunderstandingthejob-to-be-done,prototypingnumeroussolutions,andthenvalidatingyourbusinessmodelbeforeyouinvesttoscaleit,thisprocesssavedthecompanyfromfailuremanytimes.ButSmithalsoacknowledgesthatonceyoustarttoscale,“everythingisgoingtochange.”AskedhowherecognizedwhenQualtricsneededtoshift,hisanswerreflectssomethingwe’veheardfromothermanagersofgrowingcompanies:whenyoufeelthepain,thenyouknowyou’vehitaninflectionpointthatdemandsachange.Butwhatdoesthatmean?

Asarule,you’vehitaninflectionpointwhenyouseethesametypesofproblemscroppinguprepeatedly.Itbecomesevidentwhenthepercentageoftimeyouspendsolvingthesameproblembecomesdisproportionatetothecostofroutinizingtheproblem.Thepaincausedbyabrokenprocessisasymptomoftheneededshiftfromentrepreneurialtotraditionalmanagement.

Forexample,considerthesalesprocessforacompanyoveritslifecycle:intheearlydaysthefoundingteamclosesmostsales,and,becausetheproductandbusinessmodelarestillinflux,itmakeslittlesensetocreatearoutinizedsalestemplate.Butasnewsalespeopleareadded,problemsemerge:theystrugglewithhowtosell,whattosell(makinginconsistentpromisestocustomersthatrequirecustomization),orhowtoclosethesale(callingonthefoundertoclosedeals).Astheseproblemsmultiplyandconsumemoretime,it’sasuresignthattheinnovationhashitaninflectionpoint.Youneedtodevelopastandardsalesprocesstemplate,basedonastandardizedsetofproducts,withastandardizedsetofcustomerpromises,alltrackedinasystemlinkedtoeachsalesperson.

Ofcourse,youstillneedroomforflexibility—forentrepreneurialmanagement—becauseatthisearlystage,youmaystilldiscovernew

management—becauseatthisearlystage,youmaystilldiscovernewuncertainties.That’swhythechallengeofscalingistobalanceentrepreneurialandtraditionalmanagement.

We’venoticedtwootherindicatorsthatyou’vehitaninflectionpointandit’stimetoscale:solutionstandardizationandteamgrowth.Whileusingtheinnovator’smethod,youwillpivotfrequently,buteventuallyyoushouldachievepivottakeoff.Teamprioritieswillshiftfromdiscoveringwhatcustomerswant,toimprovingthefeaturesyouoffer,tostandardizingthefeaturescustomerswant.Companiesthathavehitthisinflectionpointoftendescribethefeelingofhavinga“haphazard”or“bag-of-bolts”solutionthat’salwaysbreaking.Thus,theyfeeltheneedto“redesign”or“rewrite”theproducttomakeitmoreefficientormorereliable.Forexample,Qualtricsrewrotethecoresoftwarecodethreetimesastheymatured.Thisshifttostandardizingthesolutionrepresentsakeyinflectionpointbecause,ratherthanaskwhatcustomerswant,managersmustask,“Howdowedeliverthissolutionreliablyandrepeatedlyatlowcost?”

Tomakethischangeeffectively,managersoftenmustchangetheirproductdevelopmentprocessesfromsearch(pivotingonfeatures)toexecution(standardizingfeatures)andtheirresourcesfromflexible(variabilizedcosts,flexiblepeoplewhocansearch,multipurposetools)tofixed(fixedcostsspreadoveralargenumberofunits,expertswhocancreatebettersolutions).

Asecondinflectionpointoccursastheteamgrows.Researchsuggeststhatearly-stageteamsaremostefficientwithfourtoeightpeopleandbecomeunwieldyattentotwelvepeople.We’veobservedthatwhenastart-upgrowstoemploymorethantwenty-fivepeople,ithaslikelyhitascalinginflectionpoint.Previously,everyonekneweachotherwellandcommunicatedinformally,butnowcommunicationstartsfailingandcoordinationbecomesaheadache,withballsbeingdropped.Todealwiththisinflectionpoint,managersmustestablishformalcommunicationprocessesandcoordinationtools(describedinmoredetaillaterinthechapter).Companiesmustrespondtothisinflectionpointbybecomingmoreformal,withsetmeetingtimes,trackedinformationsystems,andstandardreportingthatwaspreviouslyabsent.

ScaletheMarket

Asstart-upsbegintoscale,theyoftenexperienceinitialgrowthfollowedbystagnation,asituationthatperplexesthefoundingteam.Whywouldsalesstagnatejustastheteamstartstoimprovetheproduct?TheanswerhassomethingtodowiththecornfieldsofIowa.Asachildinthe1930s,EverettRogerswatchedasdroughtdecimatedthecornfields,includinghisfather’scrops.Butnotallthecornwasdestroyed.Afewyearsearlier,drought-resistantseeds(whichalsoproduceda20percentto25percenthigheryield)hadhitthemarket.Althoughsomefarmersquicklyadoptedthehigher-pricedseed,otherswaiteduntil,convincedbythedroughtof1936,mostfarmersfinallyadoptedthenewseed.

WatchingthefamilycornfieldsdieraisedimportantquestionsforRogersabouthowinnovationsgetadopted.Whyhadittakensolongforsomefarmerstoadopttheseed?Whydoesn’teveryoneadoptaninnovationatthesametime?InhislaterworkDiffusionofInnovations,Rogerssynthesizedhundredsofstudies,includingthestudiesabouttheadoptionofhybridcornseed,andconcludedthatthepeoplewhoadoptanyinnovationfallintodifferentcategories,withdifferentneedsandpreferences,whichaffectwhenandhowtheyadopttheinnovation.4

Rogersarguedthatforanyinnovation,thegroupshecalledthe“innovators”and“earlyadopters”arethefirsttoadoptbecausetheyhaveahigherrisktoleranceandliketotrynewthingstostayonthecuttingedge.Asaresult,thesecustomersarewillingtooverlookweaknessesinapotentialinnovationinthequestforanadvantage.Incontrast,thegroupshelabeled“earlymajority”and“latemajority”havedifferentpreferences.Forthemostpart,theywanttobesafe(e.g.,theydon’twanttogetfiredfortryinganuntestedidea)andsowaittoadoptaninnovation(seefigure8-2).

FIGURE8-2

Thetechnologyadoptionlifecycle

Source:adaptedfromEverettM.Rogers,DiffusionofInnovations(NewYork:FreePress,1962).

Thisdifferenceledalaterauthor,GeoffreyMoore,toarguethatcompaniesfaceasignificantchallengein“crossingthechasm”fromtheearlycustomergroupstothelatercustomergroups,becausethesegroupswantdifferentthingsthatinnovatorshaveahardtimesatisfying(seefigure8-3).5Whereasearlyadoptersarewillingtotrysomethingentirelynewthatmaynotworkperfectly,theearlyandlatemajoritydon’twantaminimumviableproduct:theywanta“wholeproductsolution,”meaningafull-featured,functional,error-freesolution.

FIGURE8-3

Thechasmintheinnovationadoptionlifecycle

Source:adaptedfromGeoffreyMoore,CrossingtheChasm(NewYork:HarperBusiness,2006).

Teamsoftenstumblebecausetheydon’tunderstandtheinnovationadoptionlifecycle.Aswe’vediscussed,mostofushavetheintuitionthatweneedtobuildwholeproductsthathavebroadappealandareerror-freeinordertobesuccessful.Althoughthisintuitionhasanelementoftruth—itholdsfortheearlyandlatemajority—atthebeginningofyourprojectyoucanwasteagreatdealoftimeandresourcestryingtoperfectyourproductbasedonuntestedassumptions.That’swhyweemphasizetheimportanceofusingvirtualprototypesoranMVPtotestthekeyassumptionswithtargetcustomers.Atfirstyoumayhaveresistedthisadvicebecauseitseemedcounterintuitive,butitwasrootedinthefactthatearlyadoptersaremoreforgivingofweaknesses.Thus,youcanusethemasasoundingboardtovalidateyourkeyassumptions.Thenyoucanusetheminimumawesomeproducttohelpyoutocrossthechasmtoyourfirstearlymajoritycustomersonyourwaytodevelopingthewhole-product(error-free)solutionthatsolvesthecustomerneedrobustlyforabroadarrayofcustomers(seefigure8-4).

FIGURE8-4

MVPversuswhole-productsolution

Source:adaptedfromGeoffreyMoore,CrossingtheChasm(NewYork:HarperBusiness,2006).

Asyouscale,youmustalsoadoptthetacticstocrossthechasm.6Todothis,Moorearguesthatyouneedtodeeplyunderstandwhyaparticulargroupofcustomersisattractedtoyoursolutionandthenfocusyourresourcesonthatsinglecustomerniche.Yourobjectiveistoeffectivelycommunicateyourmessageandcreateenoughlegitimacyinthemindsofafewreferencecustomers(amongtheearlymajority)sothattheyfeelsafeenoughtoadoptyourproduct.Theseearlymajorityreferencecustomersserveastouchpoints,convincingotherlike-mindedcustomerstotryyourproduct.Afterconqueringonecustomerniche,youcanmovetoasecondnicheandthenathird.

Beyondcreatingahighlyreliablewhole-productsolution,youcanapplyseveraltacticstocreatethelegitimacynecessarytoreachthemainstreammarket.Thesetacticsincludeadoptinganalogiesortemplatesfromotherindustriestoincreasefamiliaritywithyoursolution,definingtheindustryaroundthecompany,orcreatingstoriesoradvertisingtoreinforcethenotionthatthecompanyisaleaderintheproductcategory.

Forexample,afterAmazon.comvalidateditsinitialinsightsaroundthebusinessmodelforsellingbooksonline,itfacedasignificantchallenge:althoughearlyadoptersandinnovatorswerewillingtobuyfromAmazon,buyinganythingonlinewasunfamiliartomostpeople,includingtheearlymajority.Toenhancelegitimacy,Amazonusedanumberoftactics.First,itusedanalogiesfromoff-lineretail,suchasshoppingcartsandcheckout,tomakethe

sitefeelfamiliarandsafe.

Amazonalsosignaledleadershipbystrategicallytargetingafewdistantcustomerssothatitcouldclaimitwasshippingproductstoforty-fivecountriesandfiftystates.Similarly,theonlineretailerdefineditselfastheindustryleader,claimingtobe“Earth’sBiggestBookstore”;thatwastrueingeographicscopeorproductbreadth,althoughactualrevenuesweretiny.AndAmazonaggressivelydistributedstoriesaboutextraordinarycustomerservice(forexample,storiesofCEOJeffBezosorotherAmazonemployeesobsessivelyworkingtosatisfycustomerrequests).

Together,thesetacticsworkedwelltocreatesufficientlegitimacyinthemindsoftheearlymajoritytouseAmazon.comandthenspreadtheirexperiencebywordofmouth.7Then,havingconqueredthebookscategory,Amazonrolledintootheronlineproductcategories.

ScaletheProcess

Inscalingaproduct,amajortaskistodevelop,andthenstandardize,acompany’sprocessestodeliveritswhole-productsolutiontothemarket.ThismeansadoptingakeyprincipleadvocatedbyFrederickTaylorthatwerejectedatthebeginningoftheprocess:taskstandardizationandworkerspecialization.We’vefoundthatstart-upmanagerswhoaresuccessfulatscalingfollowasimplepatternastheyintroducescalable,standardizedprocessestotheorganization.

1. Listallthetaskstobedonetoeffectivelyexecuteyourbusinessmodel,andassigneachtasktoanindividual.

2. Haveeachteammemberwriteajobdescriptionforthetasksheisassigned.Thenreviewthemtogethersothateveryonecanagreeonhowthetasksaretobedone.Thisalsohelpseveryoneunderstandwhowearswhichhats.

3. Createavisualmapofallthecriticalprocesses,notingthelinkagesandrelationships.Thisdiagramwillhelpyouensurethatsomeonehasresponsibilityforallthekeyprocessesandhandoffs.Ifyoudon’twritedownandmaketheprocessesvisualandexplicit,mostofthevaluable,tacitknowledgetheteamhasgainedwillbelost.

4. Finally,linkthetasksandprocessestoperformancemetrics,andassignaccountabilityforthosemetricstospecificindividuals.

Eachofthesestepswillhelpyoucreatestandardizedandrepeatableprocesses.

TransparentlyCommunicatetheTransitionThebestwaywe’vediscoveredtomanagethetransitionistoemploypurposeful,transparentcommunication.Duringtheearlydaysofaproject,communicationhappensnaturallyandinformallybecausetheteamisusuallysmallandinclosephysicalproximity.Butastheprojectscales,teamleadersoftenstruggletorecognizetheimportanceofinstitutingaformal,transparentcommunicationstructure.Butthisstructuresupportsthreecriticalthings:

CommunicationofthenewlyadoptedexecutionprocessesandactivitiesDiscussionofcommonmistakesinadoptingthenewprocess,allowingtheteamtounlearnoldhabitsandlearnnewonesAcknowledgmentofthetensioninherentinblendingexperimentationandplanning,lettingteammembersseewheretoapplyentrepreneurialmanagementandwheretoapplytraditionalmanagement

QualtricsfounderRyanSmithsaidthatintheearlydaysthecompanywasrelativelyeasytomanage:therewerefewemployees,fewcustomers,andfewmetrics(mainlyacoupleoflovemetrics).ButasQualtricsstartedtoscale,keepingtrackofeverythingbecameincreasinglydifficult.Thefoundersstruggledwithhowtomanagethecompany.Ontheonehand,Qualtricsfacedthesamekindsofproblemsforwhichbusinessschoolswerecreated:itneededtomakethetrainsrunontimeandoptimizeitsoperations.Ontheotherhand,asexecutivesofayoungcompanyfacingsomeremaininguncertainty,thefounderssensedthattheyfacedsignificantdangersinbecomingtoofocusedonexecution.

Astheystruggledtobridgetheteenageyears,theyadoptedacultureoftransparency.AsSmithobserves,“Youcan’tchangethewaypeoplethink.Youcanonlyshapehowtheenvironmentaffectstheirdecisions.Ithastobepeergroupdriven,andwedothatwithtotal,100percenttransparency.”8Qualtricsusedacombinationofmeetings—suchasall-handsmeetings,skip-levelmeetings,anddailysyncs—tocommunicatenewprocesses,commonmistakes,andwaystobalancethetensionbetweendiscoveryandexecution(see“CommunicatingtoShapeProcessandCulture”).Forexample,atQualtricsemployeesholdall-handsmeetingseveryFriday.Keythingshappen:afterthestandardannouncements,theyhighlightsalestoemphasizethecontinuedcentralityofthepaymenttest.Theyalsodiscussnewexecutionprocessesandexplainhowtobestimplementthem.Theycalloutmistakes,withanawardforthebestmistake;thentheybreakdownwaystosolvetheproblemforfuture

reference.Finally,theyoftentalkaboutsituationswherethey’restillindiscoverymode(e.g.,openingtheofficeinIrelandoradoptingthenew360-degreefeedbacktool)aswellassituationswherethey’retransitioningtoexecutionmode.Thisleveloftransparencyhashelpedtheorganizationalmembersmakesenseofandadapttorapidchanges.

CommunicatingtoShapeProcessandCulture

Amongtheinnovativeventuresweobserved,communicationalwaysplayedamajorroleinsurvivingandprosperingduringscaling.Similarly,transparencyspeedslearningandtransition.Herearefourtypesofmeetingsweobservedinventuresthatarescalingsuccessfully.

All-handsmeetings.Thesefamiliarmeetingsarevital.Thebestoneshavethreecomponents:leadershighlightingthekeypriorities,smallerteamsreportingwhatthey’reworkingon,andeveryonediscussingkeychallengesandemergingsolutions.

Dailysyncmeetings.Teamsorleadershiphaveastand-upmeetingoflessthanfifteenminutesinthemorningtoidentifythekeyprioritiesandthenashortend-of-daycheck-intomeasureprogress.

Skip-levelmeetings.Thefrontlineoftenhasthebestinformationaboutkeychallenges.Skip-levelmeetingsletmanagersgetdeepintoateamonthefrontline,ratherthanhearaboutitsecondhand.AtIntuit,ScottCookregularlyskipsdirectlyintoaninnovationteam.

Outsidermeetings.Inascalingventure,youcan’tknoweverything.Don’tbeshyaboutlearningasmuchasyoucanfromoutsiders.Meetwiththemindividuallyorasacompany,andtheninterprettheiradviceinthecontextoftheproblemsyou’retryingtosolve.

MeasureYourProgressBychangingwhattheymeasure,growingcompaniesemphasizeandencourageachangeinactivities.RecallIntuit’sthreedesignationsforinnovationprojects:H1,H2,andH3,indicatingincreasingdegreesofinnovation.IncontrasttoH1efforts(incrementalinnovationsthatimprovecore,existingbusinesses),thekeymetricsforH3businessesarelovemetrics(customeractivationrates,customerusagerates,netpromoterscore),measuringwhetheryou’vesolvedasignificantproblem.H2businesses,inouranalogy,areteenagers,andthemetricsstarttoshift.InadditiontoNPS,theinnovationismeasuredbymarketormargingrowthastheteambuildsoutthebusinessmodel.

Basedonourobservationswithothercompanies,threecategoriesofmetricsareappropriateforthethreephasesofgrowth.Lovemetrics(includingmeasuringtime,enthusiasm,recommendations[NPS],andpayment)areappropriateduringstart-up.Growthmetricsareappropriatefortheadolescentscalingperiod,whenyou’retryingtodeterminewhetheryou’redeliveringasolutionreliablywithincreasingeconomiesofscale.Growthmetricsincludedetailedmeasuresofusers(suchascustomeracquisition,activation,advocacy,retention,andreferral)andrevenues.Youmightalsoaddmeasuresthatcapturetheefficiencyofyourprocesses,suchascountsofdefects,successfuldelivery,andsoon.

Marketpowermetricsareappropriateforamaturestageofthebusiness,whenyouwanttopayattentiontomeasuresofmarketdominancesuchasmarketshare,returnonassetsorinvestedcapital,andotherfamiliaraccountingmeasuresbywhichwejudgematurebusinesses.

ScaletheTeam

Duringstart-upyourteamshouldlargelycomprisepeoplewhoaregoodatgeneratinginsightsusingthefivediscoveryskills—questioning,observing,networking,experimenting,andassociating—describedinchapter3.ThesefolksgenerallyhaveaT-shapedexpertiseprofile,meaningtheypossessdeepexpertiseinaparticularfield(softwareengineering,anthropology,marketing,biology,etc.)butalsodemonstrateabreadthofknowledgeinmanyfields.Thisknowledgeprofilehelpsthemgeneratenewinsights,becausetheycanseeproblemsandsolutionsfrommanyangles.However,asyoustarttoscale,youneedmoreI-shapedpeople—peoplewhohaveaspecificexpertiseandexcelatapplyingthatexpertisetosolveroutineproblemsinthatfield.

Asyoubuildouttheteamduringthegrowthphase,it’susefultothinkaboutbalancingyourmixofinnovators(T-shaped)andexperts(I-shaped).Asyouhitscalinginflectionpointsthatdemandexecution,youshouldaddmoreI-shapedpeopleandpossiblyreplacesomeoftheoriginalT-shapedpeople.Forexample,theBigIdeaGroup,whichusesanAmericanIdolmodeltogetnewproductideasfromanetworkofinventors,carefullymanagesitsmixofT-shapedandI-shapedpeople.Duringthefirstphaseofdevelopingnewproductideas,thecompanyusesaselectionpanelwithan80/20mixofinnovation/executionpeopletomeetwithinventors.Onceapromisingideahasbeenselectedforfurtherdevelopment,ateamwitha50/50mixrefinesandtestsitwithprototypes.Finally,whentheproducthasbeenprovenandisreadytoscale,theBigIdeaGroupmovestoa20/80balanceduringtheexecutionphase.

Ourexperiencesuggeststhatasthedemandsgrowfromanever-increasingcustomerbase,youwilllongforpeoplewhocanexecute.Infact,CoreyWride,thefounderofMovieMouth,makerofacutting-edgesoftwaretoolforteachingEnglish,toldus,“RightnowIjustwantpeoplewhowillbelikevendingmachines:Iwanttoputacoininandhavethemspitoutmyrequestwithoutchangingittoomuch.WhatImostneednowisbetterexecution.”9

Asageneralrule,onlyabouthalfoftheoriginalinnovationteamcanmakethetransitiontoscalingandexecution.Youmaylosepeopleyoudon’twanttolose.AftereBayacquiredPayPalfor$1.5billion,MegWhitman,CEOofeBay,wenttotheofficeofPayPalcofounderPeterThieltodiscussplanstogrowPayPal.“Inoticedtherewereplaneticketssittingonhisdesk,”recallsWhitman.“HesaidhewasofftoSaudiArabia.Hewasreadyforanewadventureand

wasn’tinterestedinscalingPayPal.Someentrepreneursfundamentallydon’tlikebeingincompanieswithmorethanaboutthirtytofortypeople.”10ThielwentontousehisentrepreneurialmanagementskillstocofoundPalantirTechnologies(basedontechnologydevelopedatPayPaltodetectfraudulentactivity)andbecomethefirstoutsideinvestorinFacebook.Althoughit’snotclearwhatcontributionsThielmighthavemadehadhestayedwitheBay,beawarethatduringscalingyouwanttoretainmanyofthetalentedpeoplewhohelpedyounailthebusinessmodel.Thismaymeanyouhavetofindnewopportunitiesforthem.

Forexample,Craigslist,foundedbyCraigNewmark,usedextensiveroundsofcocreationwithcustomerstoiteratetooneoftheleadingclassifiedswebsitesintheworld:“Mostofwhatwedoisbasedonwhatpeopleinthecommunitysuggest...Peoplesuggeststufftous,wedowhatmakessense,andthenweaskformorefeedback.”11Forexample,whenCraigsliststartedtobefloodedbyspamadsfromemployersandbrokers,thecommunitysuggestedasolution:chargetheseusersfees.

Butasthecompanyscaled,Newmarkstruggledwiththemanagementofthelargercompany.Fortunately,hehadtheforesighttorecognizehewasn’twellequippedtomanagealargeorganizationandbroughtinsomeoneelsewhocould.“Jim[Buckmaster]isamuchbetterCEO.Andmyskillsarenotmanagementskills,”saysNewmark.“However,I’mareallygoodcustomer-servicerepresentative.”12ThetransitiontoaCEOwhohadexperiencerunningalargerorganizationwasbetterforCraigslistandbetterforNewmark.What’smore,Newmarkmovedtoapositionwherehecouldstilladdvalueratherthanmovingtoadifferentcompany.

UseaScalingTool:V2MOM

Everycompanywestudiedstruggledtomanagethechangesdemandedbyscaling.Infact,everymanagerwestudiedwhohadsuccessfullyscaledaninnovationprojectusedatooltohelpintheprocess.OurfavoriteapproachwasdevelopedbyMarcBenioff,chairmanandCEOofSalesforce.com.Thistoolhasprovedsovaluablethattheleadershipteamcontinuestouseittoadapttotherapidlychangingenvironment.13

ThisscalingtoolemergedfromBenioff’sfrustrationsasamanageratOracleduringthescalingstage.Benioffrecalls,“Ipersonallylackedthetoolstospelloutwhatweneededtodoandasimpleprocesstocommunicateit.TheproblemonlyincreasedastheteamsthatIwasmanagingincreased.”14WhenBeniofflaterfacedthesamechallengesscalingSalesforce.com,herecallsfeelingfrustratedwiththeexistingapproaches,suchastraditionalbudget-basedplanning,keyperformanceindicators,andcriticalsuccessfactors.Beniofftalkedtoleadership,personaldevelopment,andspiritualgurusandeventuallydevelopedatoolthatSalesforce.comlabeledV2MOM.Thistool“hasbeenusedtoguideeverydecisionatSalesforce.com—fromthosewemadein1999tothedecisionswemaketodayasthelargesthigh-techemployerinSanFrancisco,”saysBenioff.“Itisthecorewaywerunourbusiness;itallowsustodefineourgoalsandorganizeaprincipledwaytoexecutethem.”15

TheV2MOMacronymstandsforvision(whereyouwanttogo),values(whatthingsareimportanttoyou),methods(whatyou’regoingtodotogetthere),obstacles(whatcouldpreventyoufrombeingsuccessful),andmeasures(howyouknowwhetheryou’resuccessful).“AV2MOMisthestrategicplanforthecompany.Itcanbethestrategicplanforadepartment,itcanbethestrategicplanforaperson’scareer,itcanbethestrategicplanforaproject,justaframeworktogetyourthoughtsdown,”saysJimCavalieri,SVPinchargeoftheV2MOMprocess.“It’sreallyusedtosetthedirectionforthecompanyforthenexttwelvemonths.”16

EveryAugust,Benioffsketchesoutthevisionandvaluesprioritiesforthecomingyear,whichheshareswiththetoppeopleintheexecutiveteam(seefigure8-5foranexample).Theexecutiveteamthendefinesthreevaluesthatsupportthevision,andthenthreeorfourprioritizedmethodstosupporteachvalue.So,forexample,ifSalesforce.comhadavalueof“growth,”itwouldsupportthiswithaboutthreeprioritizedmethodstosupportandgenerategrowth,

suchasspecificproductplansarounditscloudservices.Inaddition,theteamidentifiesobstaclestoimplementingeachmethod,aswellasmeasuresthatindicatewhetherthemethodismakingprogresstowardachievingthevalueandvision.

FIGURE8-5

Salesforce.com’sfirstV2MOM

Source:MarcBenioff,“HowtoCreateAlignmentwithinYourCompanyinOrdertoSucceed,”Salesforce.comblog,April9,2013.

Thentheexecutiveteamholdsameetingwiththedistributedseniormanagementteammembers(currentlyaboutsevenhundredpeople),whoprovidefeedbackontheproposedV2MOMinsmallgroupsandviaChatter,aninternalsocialnetworkingtool.LeadersareaskedfortheirtopfiverecommendationsaswellasthetopfivemistakesinthecurrentV2MOM.Then,afterintegratingthisfeedbackbymakingchangestotheV2MOM,eachmemberoftheseniormanagementteamisassignedonemethodforwhichshehasoperationalresponsibility—andforwhichshewillhavemeasuresofsuccess.Finally,thenewV2MOMisannouncedtoeveryoneinsideSalesforce.comatthebeginningofthefiscalyearinearlyFebruary,andeachgroupisexpectedtocreateitsownpersonalizedV2MOMthatfeedsintothelargerV2MOM.

BeyondthespecificsofhowSalesforce.comconstructsaV2MOM,considerthestepsoftheprocessatahigherlevelofabstraction.Thereisaninitialperiodofdefinitionofwhattoachieveandhowtoachieveit,followedbyseveralroundsoffeedback,firstwithseniormanagersandthenwithothermanagers.Usingthisfeedback,Salesforce.comadaptsitsV2MOMandthendelegatesresponsibilityforasinglemethodtoeachindividual.Next,itdisseminatestheV2MOMandasksgroupstopersonalizethemethod.Last,thecompanymeasuresitsprogressandassesseswhetheritisachievingitsgoals.BenioffarguesthattheV2MOMprocess“worksespeciallywellforafast-pacedenvironment.Itischallengingforeverycompanytofindawaytomaintainacohesivedirectionagainstabackdropthatisconstantlychanging,butV2MOMisthegluethatbindsustogether.”

Amazon.comusesasimilarstrategicplanningprocessbutcomplementsitwithaseparateloopfocusedonidentifyingnewideasthatcanbeusedtorestarttheinnovator’smethodonanewproject.Duringthisprocessinthespring,anyonecanproposeanideaintheformofaone-pagepressrelease,datedinthefuture,thatdescribeshisvisionofwhathewouldliketodo,completewithfakecustomerquotes.Thesepressreleasesaredistributed,andiftheygarnerenoughattention,asmallteamisformedtotestandvalidatetheideausingaprocesssimilartotheinnovator’smethod.ThissecondloopcreatesspaceforAmazontoinitiatenewprojectsasitexecutesandscalestheexistingbusinesses.

ToconstructyourownV2MOM,askyourselfthekeyquestionsshowninfigure8-6.

FIGURE8-6

ConstructingyourownV2MOM

TheChasmAwaits

Ifyouforgeteverythingelseaboutthischapter,remembertwothings.First,theprocessyouusedtonailtheinsight,problem,solution,andbusinessmodelwon’thelpyouscalethebusiness.Youneedtostartincorporatingtraditionalmanagementprinciples.Second,youcan’tjustfliptheswitchbetweenentrepreneurialandtraditionalmanagement.Youmustslowlyblendtraditionalmanagementintoentrepreneurialmanagementasyouscalethemarket,process,andteam.Asyougoforward,you’llalwaysfacesomeuncertainty.Inthesesituations,youcanapplytheprinciplesandtoolswe’vediscussedtoquicklyresolvethenewuncertaintiesyouface.Finally,evenasyouscalethebusiness,neverstoptalkingtocustomers.Youmaydiscoveranuncertainty—andanopportunity—you’vepreviouslyoverlooked.

WatchOut:TimingCounts

Entrepreneurstypicallystrugglebecausetheyrelyonentrepreneurialmanagementfortoolong,failingtointroducetraditionalmanagementtechniquesquicklyenoughtomeetthedemandsofanever-growing—andincreasinglydemanding—customerbase.Theresult:communicationsnafus,decision-makingflaws,andprocessbreakdowns.Incontrast,managersinestablishedcompaniestypicallyhaveahardtimeapplyingtheinnovator’smethod,butoncetheyfindabusinessmodelthatworks,theysometimesapplytraditionalmanagementtooquickly,killingentrepreneurialmanagementprematurely.Thecorporateparentsqueezesthelifeoutofapromisingnewproject(oftenanacquisition),killingtheinnovationanddrivingawaytheinnovators.

Neitherapproachworkswell,becausescalingisnotaboutentrepreneurialortraditionalmanagementalone.Rather,it’saboutblendingthetwoduringatransitionfromthestart-uptothegrowthphase.

9

MakingtheInnovator’sMethodWorkforYou

INCHAPTER1WEexplainhowIntuitintroducedtheinnovator’smethodfromthetopdown,withsupportfromtheCEOandasweeping,companywideprogramaimedattrainingeveryemployee.Fewofusaresolucky.Ifyourtopmanagementteamdoesnotsupportorisnotawareoftheideasintheinnovator’smethod,whatshouldyoudo?Howcanyoumaketheseideasworkforyou,yourteam,oryourorganization?

Theansweristoadaptthemethodtoyourcircumstances,particularlyifyou’reactingalone,leadingateam,ortryingtoigniteinnovationinyourorganization.Ifyou’repursuingmoreradicalinnovationversusmoreincrementalinnovation,italsocallsforspecialadaptation.

ApplyingtheInnovator’sMethodonYourOwn

Whatifyouworkinanenvironmentthatmaynotbeconduciveto,ormayevenbehostileto,theinnovator’smethod?Evenwhencompaniesclaimtheywanttobringnewideastothemarketplace,theymayreallyrewardexecution,leavinglittleroomforinnovation.Orleadersmaybeaversetomakingmistakesorsimplymaynotseetheneedforinnovation,eveniftheworldaroundthemischangingrapidly.Intheseenvironments,canyouapplywhatyou’velearnedinthisbook?

Evenifyou’retheonlyonewhohasreadandbelievesintheinnovator’smethod,youcanapplytheseprinciplestotransformyourcareerandyourlife.Remember,thekeyprinciplesaretoidentifytheuncertaintiessurroundinganinsightandlearnaboutthemasquicklyaspossibleinalow-cost,reliablemanner.Thegoalistoturnuncertainties—statedasleapoffaithassumptions—intofacts.Onethingyouhaveinyourfavoristhatmostmanagershateuncertaintyandlovefactsalmostasmuchastheylovesavingtimeandmoney.Youcanusethesetendenciestoyouradvantagebyleveragingthepowerofquestionstosneakilyproposearapidexperimenttotestakeyassumption—butinlanguageacceptabletomoretraditionalmanagement.

Forexample,asateammember,ifsomeoneproposesanideaandyouspotuncertainty,youcansay,“That’sagreatidea.Whatarethekeyassumptionsthatmustbetrueforthatideatocreatevalueforus?Iwonderwhetherthere’sawaytorunaquickexperimenttogetsomedatatovalidatethoseassumptions.”Ifyouneedbackup,youcanusewordslikemarkettestorusethescientificmethodtovalidate.Thesetermssoundfamiliarandpalatabletomostmanagers,althoughyounowhaveanewanddifferentappreciationofthem.Oryoumightrefertoaprestigiousinnovator,suchasAmazon.com,andtalkabouthowthiscompanymighttestthenewidea.

Thebasicformulaforintroducingtheinnovator’smethodtoyourorganizationin“stealthmode”hasthreeparts,forwhichwecreatedtheacronymVIPtohelpyourememberthesteps.

1. Value.Weareallnaturallydefensiveofourideas.Toputpeopleatease,startbyshowingthatyouvaluetheiridea.

2. Investigate.Investigatetheproposedideabyaskingquestionstounearththeleap-of-faithassumptionsbehindtheidea.Whatmustbetrueforthevaluetoberealized?

3. Propose.Proposeawaytoconductarapidexperimenttovalidatethekeyassumptions;ifpossible,cloakyoursuggestioninfamiliarlanguage.Appealtothenaturaldesirestosavemoneyortimeortoavoidembarrassment.

Formerstudentsofourswhoaremanagersandexecutivesinestablishedcompanieshaveappliedtheinnovator’smethodbuthavedoneitinstealthmode.Forexample,oneformerstudent,Anne(notherrealname),hadjuststartedworkingatAmericanExpress.Inameetingsheattended,agroupproposedanewproductthatwouldincorporatedataandrecommendationsfromcustomers’socialnetworkstohelpcustomersmanagetheirfinancesandmakebetterspendingchoices.Therewereanumberofpassionateadvocatesintheroom,andtheyproposedstartingproductdevelopmentimmediately;theyassumedtheyhadsufficientknowledgeofcustomersfelttheurgencyandofacompanywideinnovationimperative.

ButAnnecouldseethefallacyofstartingproductdevelopmentbasedononlyaguess;howevershedidn’twanttostickherneckout,especiallyasanewemployee.Sosheappliedthemethodwediscussed,handlingthenewideawithcarebyfirstvaluingtheeffort.Sherecallssaying,“Thislooksreallyexcitingandcouldhaveanincredibleimpact.I’msohappytobeinaplacewherenewideaslikethesearegettingdiscussed.”Thenshestartedthesecondsteptoinvestigate,butinthespiritofbuildingontheinnovation,bysaying,“Iknowthatsocialisahugenewspacewithsomuchpossibility,andthereissomuchtofigureoutstill,andI’mwonderinghowwecouldmakethisprojecttrulyamazingbyquicklyfiguringoutthekeyfeaturesthatcustomersreallywant.Ithinkwehaveagoodideaofwhattheyare,butifwecouldquicklytestthoseassumptions,wecouldmakethisabillion-dollarbusiness.”

Thenshemixedinanappealtoaprominentcompanytodrivehomeheridea:“I’mwonderingifwecouldsavetimeandmoneybydoingsomerapid,in-the-fieldexperimentstounderstandexactlywhatcustomersarelookingforsowecanbuildthosefeaturesfromthestart.IknowIntuitdidasimilarthingwhentheydevelopedQuickBooksSimpleStart,livinginthefieldwithcustomersandusingtheprototypeproductsthemselves[anexamplefromclass].Theyusedthedatafromtheirfieldresearchtocreateablockbusterproduct.”Noticethatshedidn’tcriticizetheproject;instead,shesubtlysuggestedawaytoquicklyrunexperimentsaboutthekeyuncertainties.Shecouldletthedatafromthefieldreshapeordestroytheproject.

TherewasasilenceintheroomafterAnnespoke.Shebegantogetnervous.

TherewasasilenceintheroomafterAnnespoke.Shebegantogetnervous.Afterwhatseemedalongpause,aseniormanagerspokeup,praisingAnne’sgreatideatosavetimeandmoneyonthenewproject.Severalotherschimedin,andacolleaguecameuptoherafterwardandmentionedhowimpressedhewaswithher.Overtime,peoplestartedtolookatAnnewithnewrespect,andsomerequestedherhelponnewideastheywereconsidering.

Anne’sexperienceillustrateshowyoucanstillapplytheprinciplesoftheinnovator’smethodevenwhenthey’renotwidelyunderstoodorexplicitlysupportedbyyourorganization.Othersmaynotalwaysacceptyourproposals,butovertime,ifyousuggestexperimentstotestkeyassumptionsinapositivespirit,youwillgainareputationasacarefulthinker.

Moreover,youcanapplythesesameideastoyourownlife,thinkingthroughhowyoumightdesignexperimentstotestkeyassumptionsaboutactionsyoushouldtake.Forexample,ratherthanquittingyourjobtojumpintoanewcareer,findawaytobeinvolvedinthenewoccupationforafewhoursamonthoverthecourseofayeartoexplorehowmuchyoulikeit.Webothdidthisinmakingourcareerdecisionsaswevoluntarilyparticipatedinmultipleresearchprojectsbeforejumpingfromconsultingtoacademia.Ifyoufeelyouwanttochangethenatureofyourrelationshipwithaparticularfamilymemberorfriend,writedownyourassumptionsregardingthekeyrelationshipproblems,anddesignanexperimenttotestanapproachforimprovingtherelationship.Wheneveryoufaceaprobleminlifecharacterizedbyuncertainty,trydeeplyinvestigatingtheproblem,andthenconsidervariousexperimentstotestasolution.

ApplyingtheInnovator’sMethodinaTeam

In1983,whiletravelingintheUnitedStateswithaToshibaR&Dteam,TetsuyaMizoguchihadtheideaforthefirstlaptop.HavingobservedthatJapaneseworkersoftenlivedandworkedinsmallspacesthatdiscouragedtheuseoflargedesktopcomputers,Mizoguchicametobelievethatasmallerlaptopcouldbecomeahugesuccessbyallowingcomputeruseatworkandathome.

ButToshibahadalreadytriedtoenterthemainframemarketandfailedtobeatoutIBM.Itspersonalcomputerentryalsofailed,largelybecauseitwasnotcompatiblewiththeIBMandNECstandardsthateventuallyemerged.SowhenMizoguchipresentedtheideaforalaptoptotheexecutiveteam,hewasquicklydenied.Theexecutivestoldhimthattheywereconsideringexitingthecomputerbusinessaltogetherandsodidnotwanttocommitfundstonewprojects.WhenMizoguchicontinuedtopush,arguinghecouldfindthefunds,theexecutivesclaimedthatanengineeringshortagemeanttheycouldn’tdivertanyengineerstohigh-riskprojects.Despitethesedenials,sensingtheeminentopportunity,MizoguchisecretlyassignedtenengineerstothelaptopprojectattheOmefactory,twenty-fivemilesfromheadquarters.

Mizoguchididn’thavetheinnovator’smethodframework,butheappliedmanyoftheprinciplestomanagethelargerisksinherentinpioneeringanewproductcategory.Forexample,hedesignedafive-stagedevelopmentprocessthatstartedmuchaswewouldhaveprescribed,firsttryingtounderstandtheproblembyobservingcomputerusersaswellasdealersandthentryingtonailthesolutionusingaseriesofprototypes.Furthermore,Mizoguchipushedforrapiditerationstowardanawesomeproduct.Forexample,afterseveralroundsofrapiditerationduringwhichtheengineersfelttheyhadreachedthelimitofwhattheycouldfitintoasmalllaptopcase,Mizoguchirippedthecoverofftheprototype,pouredaglassofwaterintothecase,andthenheldtheruinedprototypeupside-down.Asafewdropsofwaterfelltothetable,Mizoguchishouted,“See,thereissomespaceleft!”1

WhenMizoguchi’steamfinishedaprototypethathefeltwasreadytosharewiththeexecutiveteam,theydeniedhimthechancetosellitinJapan.Fortunately,AtsutoshiNishida,aseniorvicepresidentofToshibaEurope,offeredtosellthelaptopinhisterritory—quicklysellingthousandsofunits.Withthisnewevidence,centraladministrationswiftlychangedtheirminds,andtheToshibalaptopwaslaunchedworldwide,achieving38percentmarketshareinEuropeand46percentmarketshareinJapanby1988.Mizoguchi’sstory

inEuropeand46percentmarketshareinJapanby1988.Mizoguchi’sstoryshowsthatit’spossibletoapplyrapidexperimentationmethodsonnewideasinyourteam,evenifyoudon’thavetop-levelsupport.Butyouhavetodosowithsmallwinsandwithsupportingdata.

Sometimesthebottom-upapproachofapplyingtheinnovator’smethodmustbekeptsecret,particularlyforlargeorcontroversialprojects,aswasthecaseforMizoguchi.Inthesecircumstances,pursuingaprojectinsecretrequiresachampionwhohasenoughresourcestosheltertheproject(andawillingnesstotakerisks,suchaslosingherjob).Forthelaptopproject,MizoguchihadthesupportofMasaichiKoga,generalmanagerofthecomputerbusinessdivision.Later,Mizoguchirepeatedthissameprocess,himselfshelteringthedevelopmentofthefirstnotebookcomputer,aprojectalsorejectedbycorporateheadquarters.Furthermore,theseprojectsmustbefastandfrugal,beingrevealedonlywhenthereisadequateproofoftheconcepttoconvincetherestofthecompany.IntheToshibacase,theteamrevealedtheprojectaftertherewasasolidprototype,butperhapsthiswastooearly:theexecutiveteamacceptedtheprojectonlyafterithaddemonstratedsales.

Inaddition,theseprojectsareoftenbestlocatedawayfromheadquarterstoavoiddistractionsordistortionsfromtheexistingwayofdoingbusiness.LiketheToshibaproject,dozensofothersecretprojectshavelivedoutsidecorporateheadquarters,includingIBM’ssuccessfulPCexperiment,whichoperatedoutofFlorida,farawayfromIBM’sNewYorkheadquarters.

Butyoudon’tneedtopursueaninnovationasradicalasMizoguchi’slaptopinordertoapplytheinnovator’smethodtotheproblemsyourteamfaces.Thekeyistoeducateyourteamregardingtheprocessandthengeneratepotentialinnovationinsights,pickingoneortwototest(see“TakingaPagefromAgile”).Consideritanexperimenttoseewhatyoulearn.Ifyou’reinthemiddleofaproblem-solvingorproductdevelopmentprocess,askyourselfwhetheryou’venailedtheproblemandyou’reusingfastandfrugalexperimentstotestvarioussolutionswithcustomers.Trytokeepwhateveryoudosimple,inexpensive,andfocusedonlearningandaction.

TakingaPagefromAgile

Someofthebestthinkingabouthowtoapplytheinnovator’smethodasateamcomesfromtheworldofsoftware.Becausesoftwaredevelopmentteamsoftenfacehighuncertainty,anumberofpractitioners(Jeff

Sutherland,KenSchwaber,andKenRubin,tonameafew)developedtheconceptofascrumasabetterwaytoorganizeateamforinnovationanddevelopment.Ascrum,aconceptthatcomesfromrugby,istheformationthatallowstheteamtorestartafterstopping.Severalusefulideasfromthescrummayhelpyouleadyourteam.

Insoftwaredevelopment,everyagilescrumteamhasthreecomponents:aproductowner,ascrummaster,andadevelopmentteam.Theproductownersetstheproductvisionandrequirements,thescrummastercoachestheteam,andtheteamself-organizestoaccomplishthetasks.Beyondsoftware,considertheimportanceofascrummastertohelpingateamapplytheinnovator’smethod.Thescrummasterhasseveralimportantroles,eachoneessential:coach,helpingtheteammemberslearnthemethod;processleader,helpingtheteamapplythemethod;changemanagementcounselor,helpingteammembersadapttoanewprocess;andchampion,protectingteammembersfromoutsidedemandsandremovingbarriers.Similarly,asateammemberyouneedtorealizeyourroleinself-organizingandapplyingtheprocesstoyourwork.

Second,everyscrumteamfollowsaninternalprocessofdefiningaproductbacklog,executingasprint,andreviewingthesprint.Theproductbacklogisalistofpendingactivitiesprioritizedbythosemostcriticaltosuccess.Thesprintinvolvesplanninghowthework(experiment)occurswithinashorttimeframe(betweenoneweekandonemonth),andthesprintreviewfocusesonreviewingtheproduct(completedworkintheformofshippableproducts)andprocess(howwellthesprintworked).

Thescrumprocesshasseveralvaluablelessons.Forstarters,thinkofyourteam’sbacklogastheprioritizedlistofthemostimportantassumptionsyouface.Theconceptofasprintsuggeststheimportanceofidentifyingthetaskstotestthosecriticalquestions,timeboxing(scheduling)thesetaskstogofast,andthenadaptingquicklyasyoudiscoverthefacts.Andscrumteamsengageinadailyfifteen-minutereview,whentheysynchronizeandadapttheiractivitiestoproduceafinishedoutcomeattheendofthesprint.Afterthesprint,theteammembersassesswhatworkedandwhattheycouldhavedonebetter.

Youcouldapplythedailyprocessofthescrumtoanystageoftheinnovator’smethod.Asthescrummaster,youcouldcoachyourteam

throughthedefinitionofaseriesofsprintstotackleyourbacklogquicklyandeffectively,allwhilelearninghowtoimprovetheprocess.Formoredetail,werecommendKenRubin’sEssentialScrum:APracticalGuidetotheMostPopularAgileProcess(NewYork:Addison-Wesley,2012).

IgnitingInnovationfromWithinUsingtheInnovator’sMethod

Whatifyourorganizationisfocusedonexecutionbutwouldliketoigniteinnovationfromwithin?Werecommendapplyingtheinnovator’smethoditselftotheproblemofbuildinginnovationcapabilities.Nowthatyouunderstandtheneedtodevelopinnovationcapabilities,followtheprocesswehavedescribed:assembleasmallteam,reachouttoearlyadoptersinsideyourcompanytounderstandtheirproblems,useprototypestotestyoursolutionsasquicklyandinexpensivelyaspossible,andthenfindtherightbusinessmodelforinnovationinsideyourorganization.

ConsiderhowKateO’KeeffeappliedthemethodtobuildinnovationcapabilitiesatCiscoServices,amajorbusinessunitwithinCiscoemployingmorethanthirteenthousandpeopleanddeliveringalmostone-quarterofCisco’srevenue.AlthoughCiscoServiceshadmadeeffortstoencourageinnovation,forthemostparttheywereadhoceffortsacrossalarge,diverse,andfragmentedorganization.SowhenJoePinto,aseniorvicepresidentinCisco’sTechnicalServicesgroup,encouragedO’KeeffetodevelopCisco’sinnovationcapabilities,theprojectwasdauntingbyeverymeasure.Moreover,shewouldhavetodoitwithoutmuchbudget,credibility,orinfrastructure.Facedwiththischallenge,O’Keeffesaid,“Ineededtostartsmall,demonstrateproofpoints,andearnorganizationalsupportorganically.”2

O’KeeffebeganbyassemblingasmallteamcomposedofT-shapedpeople(peoplewithbreadthacrossmanydisciplinesanddepthinsomedisciplines)whowerepassionateaboutinnovationandwillingtovoluntarilyhelphertesttheirassumptionsaboutignitinginnovation.Includedwereanexperiencedfacilitator,aserialentrepreneur,anexpertinorganizationalbehavior,andanexpertinsixsigmaandproductmanagement.TheteamcalleditselftheServicesInnovationCentertocreateearlylegitimacyandconnecttoinfluentialpartsoftheorganization,forexample,engagingexecutivessuchasCarlosPignataro,aCiscoDistinguishedEngineerwhobroughtthemembersofthatcommunitywithhim.

Then,muchaswehavedescribed,theteamsetaboutunderstandingthejob-to-be-done.Todoso,theteamreachedouttoearlyadopters(peopleinsidethecompanywhowantedmoreinnovation)tounderstandtheproblemstheyweretryingtosolve.O’Keeffedescribedthisprocess:“Wehaveareallydifferent

model.It’saclient(customer)model,meaningwedefinewhatwedoaroundwhatourcustomers(managersandexecutives)needtoinnovate.”3Aspartoftheprocess,theServicesInnovationteamdiscoveredthatdifferentcustomerswanteddifferentthings.Somewantedhelpgeneratingnewinsights,otherswantedhelpassessinganddevelopingtheirinnovationcapabilities,andstillothersneededexperimentationtoolsandinstructionsforhowtoinnovate.

Withaclearerpictureofthejob-to-be-done,O’Keeffeandherteamcouldstarttoprototypesolutionsforafocusedsetofcustomers.Ratherthanwastingresourcesbuildingfull-featuredsolutionstoeveryproblematonce,O’Keeffeandherteamprototypedsolutionsoneatatime.Forexample,inoneearlyefforttheServicesInnovationteamdevelopedarapidprototypeofanideadayandanideateatimethatspreadvirallythroughoutthecompany.

Inalaterexample,severalseniorleadersexpressedadesiretoexplorenewbusinessmodelsandmarketsforexistingtechnologies(thefunctionaljob)whilealsoinspiringemployeestoinnovate(emotionaljob).Withthese“jobs”inmind,theServicesInnovationteamprototypedapotentialsolution:a“LaunchPad”eventthattheypitchedtoParveshSeth,theseniorvicepresidentofAdvancedServices,whoagreedtoconductapilotprogram.Withthisvalidationfromaninternalcustomer(similartoapaymenttestwithanexternalcustomer),theCenterassembledteamsofsixpeoplefromacrosstheCiscoServicesbusinesses,groupedaroundnineglobalregions.Eachteamworkedtogenerateinsights,explorethejob-to-be-donewithcustomers,andthenrapidlyprototypepotentialsolutions.Thentheteamsconvergedinfrontofacombinedliveandvirtualaudienceofseniorexecutivestodescribetheproblemandtheirmostpromisingprototype.Althougharapidexperiment,theLaunchPadprovedasuccess,creatinga$9millionimpactandinspiringtheexcitementexecutivesweresearchingfor.InthewordsofRosetteNguyen,oneparticipant,“Thiswasanincredibleexperience—whatwelearnedfromtheprocess,thenetworkswebuilt,andtheexposurewereceivedwasincredible.IhaveeverythingIneedtodrivegreaterinnovationinthefuture.”4Butjustasimportant,italsoledtoinnovation:thewinningteamdevelopedaservicesdashboardforhealthcarethatonecustomerliterallybeggedtobuyorinvestin.

Byrapidlyiteratingonsolutionsforinternalcustomerproblems,theServicesInnovationteamgeneratedtheproofthattheycouldsolvekeyinnovationproblemsinsidethecompany.Overtime,theyhaveiteratedfromrapidprototypestomorefeature-richsolutions,suchasaninnovationcapabilitiesassessmentandtoolstocaptureanddevelopideas.Inanotherexample,theteamstartedwithoutanideacapturetool,thenadoptedaversiondevelopedby

startedwithoutanideacapturetool,thenadoptedaversiondevelopedbyBrightidea,thenrapidlyiteratedtodevelopatoolthatallowscrowd-sourcingideasacrosstheentireservicesdivision.Theyhaveleveragedtheplatform,calledSmartzone,tocapture,select,nurture,anddevelopideas.

Forexample,O’Keefferecallsateamofserviceengineerswhowerediscussingthedailychallengeoftryingtogetcustomers’technicalissuessolvedfaster.Thecoreissuewasaccesstopiecesofcode,calledscripts,whichenableacustomerissuetoberesolved.Tryingtofindthesescriptscouldbetime-consumingandoftendelayedresolutionofthecustomerissue.Theengineerscameupwithanideathatwouldbelikeanappstoreforserviceengineers.Thissolution,asocialnetworkingplatformthatquicklyconnectedserviceengineerstotherequiredscripts,hadthepotentialtochangethewayserviceengineersperformedtheirwork.Theteam,ledbySamGrimée,aseniormanagerinTechnicalServices,immediatelysubmittedittoSmartzone,whichattractedthefeedback,interest,resources,andsponsorshipneededtomovethroughthestepsoftheinnovator’smethodandbringtheinnovationtotheserviceengineers.Griméerecalls,“Smartzonewasagreatmediumtotestwhetherpotentialcustomersfoundourideauseful,andithelpedusidentifyandbuildanetworkofstakeholderstoengagewithandlaterpartnerwith.Theexposureandfeedbackwereceivedwereinstrumentaltodefineourplansandguideoursolutiondevelopment.”Theygeneratedenoughenthusiasmandfundingtomakeaviabledemo,aprototype,andtosecurethepeopleneededtohelpthemsucceedinternally.TheresultismorethansixthousandscriptsbeingmadeavailableonasocialmediaplatforminsideCiscoServices,eachonesavingpreciousminutesorhoursofengineeringtime.

Finally,astheServicesInnovationteamprototypedanddeployedsolutions,theyalsoexperimentedtovalidatethebusinessmodel.Forexample,aswiththelaunchofanyotherinnovation,O’Keeffe’steamhadtofindawaytodeliveravalueproposition,acquirecustomers,andmanagecosts.Recallthatcustomeracquisitionrequiresunderstandingwhatmotivatesyourcustomers(thejob-to-be-done),howtheymakedecisions(theconsumptionchain),andhowtocommunicatethroughchannelsthatinfluencethem(theinfluencepyramid).Theteamstartedbyunderstandingtheuniquejob-to-be-donefordifferentcustomers;forexample,juniorengineersarelookingfortimeandrecognition,whereasseniorexecutivesarelookingforbigideasthatwillcreatevaluethroughengagedemployees.Theteamalsolookedattheconsumptionchain—thepointsatwhichinnovationmessagescaninfluencetheircustomers,suchascompanycommunications,annualevaluations,high-profileevents,compensation,andsoon.Finally,theteamtackledtheinfluencepyramidfortheircustomers.For

on.Finally,theteamtackledtheinfluencepyramidfortheircustomers.Forexample,eventhoughnewslettersande-mailshavesomeeffect,theteamdiscoveredthatarangeofevents,suchasanInnovationSummit(foradvocates)andanInnovationLeadershipForum(aspeakerseries),alongwithrewards(a$1,500InnovationCatalystAward),hadanevengreatereffect.Similarly,whenitcomestocosts,theteamthoughtcarefullyaboutleveragingtheresourcesalreadyinCisco,usingpartnersinsideandoutsideCiscotodevelopanddeliversolutions.

Byapplyingtheinnovator’smethod,O’KeeffeandherteamhavebeensuccessfulinignitinginnovationwithinCiscoServices.Inthelastquarteralone,they’vegenerateddozensofinsightsandmorethan$12millionofbusinessimpact,includingliftingemployeeinnovationengagementscoresbymorethan8percentintheteamstheyengaged.5Moreover,peoplefeelenergizedandinspired,sayingthingslike,“IhaveneverfeltsomuchlikeapartofCisco”and“Peoplewhowereoriginallyskepticsarenowgenuinelyexcited.”6Havingnailedtheproblem,solution,andbusinessmodel,theteamnowfacesmanyofthechallengesdescribedinchapter8:developingthewhole-productsolution,standardizingthesolution,andfindingwaystodeliveritatscale.

AdjustingforDisruptiveversusIncrementalInnovation

ImagineyouworkatGoogleandyou’reaskedtoworkonbringinganewsolutiontomarket.You’vebeengiventwoprojectstochoosefrom:GoogleOffers,anideaforaserviceofferingdiscountsandcouponsthatisintegratedwithbothGoogleWallet(forpayment)andGoogleMaps(toidentifythelocationoftheofferingcompany),orGoogleGlass,anideaforawearablecomputerwithanopticalhead-mounteddisplay(OHMD)thatrespondstovoicecommandsanddisplaysinformationinasmartphone-likehands-freeformat.7Bothprojectsinvolvetryingtobringsomethingnewtomarket,butclearlytheGoogleGlassprojectinvolvesamoreradicalinnovationwithhigheruncertaintiesandhigherrisk.Howmightapplyingtheinnovator’smethodbedifferentforanincrementalversusamoreradical,disruptiveinnovation(see“WhatIsaDisruptiveInnovation?”)?

WhatIsaDisruptiveInnovation?

Innovationsfallintotwogeneralcategories:incrementalanddisruptive(radical).Anincrementalinnovationbuildsonafirm’sestablishedknowledgebaseandeitherimprovesaproductoroffersproductlineextensions—forexample,aGilletterazorwithfivebladesinsteadoffour;aSamsungTVwith3-Dinsteadof2-Dimaging;andimprovementstointernaloperationstoaccomplishataskfaster,better,orwithfewerresources.

Incontrast,adisruptiveinnovationdrawsonadifferentknowledgebase,technologies,ormethodstodelivervalueinauniqueway.Examplesofdisruptiveproductinnovationsincludedigitalwatches(versusmechanicalwatches),thepersonalcomputer(versusthetypewriterandmanualprocesses),cellphones(versuslandlinephones),andMP3players(versusCDplayers).

Processescanalsobechangedinadisruptiveway.Forexample,ToyotaengineerTaiichiOhno’sflexibleproductiontechniques,oftenreferredtoasleanmanufacturing,minimizedinventoriesandwastedespitebeingdesignedforrapidproductchangeovers.Businessmodels,too,canbebasedonradicalinnovations.Forexample,Netflixusedtheinternet,software,andwarehousestodelivervideorentalsthroughthe

mailandthroughstreaming,anapproachthatwasradicallydifferentfromthebrick-and-mortarstoresofone-timemarketleaderBlockbuster.Similarly,Redboxrentsvideosthroughvendingmachines,amethodthatrequiresdifferenttechnologies—andadifferentdistributionsystem—fromthoseusedbyeitherBlockbusterorNetflix.

Strategiesbasedonradicalinnovationsaresometimesreferredtoasdisruptive(atermpopularizedbyClaytonChristensen)becauseincumbentscannolongerdobusinessasusual.8Forexample,NetflixandRedboxdisruptedBlockbuster’sstrategy.Disruptiveinnovationsoftenstemfromanewtechnologyenteringatthelowend—themostprice-sensitivesegmentofthemarket—andthengraduallymovingupmarketasthedisruptingcompanyimprovesitstechnologyandprocesses.

AlthoughtheGoogleGlassprojectmayseem“cooler”becauseit’smoredisruptive,thesetypesofinnovationspresentsignificantchallenges.Indeed,TheInnovator’sDilemmaarguesthatmanagerswhoaren’ttrainedtodealwithdisruptiveinnovationsfailwhentheytrytoapplytheirfamiliartoolsforincrementalmanagement.9Intheparlanceoftheinnovator’smethod,weseethedifferencebetweenincrementalanddisruptiveinnovationsintermsofdegreesofuncertainty.Disruptiveinnovationsinvolvemuchgreateruncertainty—sometimesordersofmagnitudegreater.Thismeansthatyou’llneedtoapplytheinnovator’smethodtoalmosteverythingyoudo.Butfordisruptiveinnovationsyoumustalsoadjustyourexpectationsalongfourkeydimensions:targetcustomers,feedbackexpectations,timeline,andstructure.

Beforewedescribethesedimensions,wewanttoacknowledgethatincrementalinnovationscanalsohavesignificantbenefits.Bysomeestimates,theycreateasmuchvalueforcompaniesasdodisruptiveinnovations.Forexample,HindustanUnileverdiscoveredandimplementedmanysmallincrementalinnovations,generatinga40percentrevenueboostinasingleyear.Withincrementalinnovationsyouenjoyloweruncertainty,youmayalreadypossessmanyoftherequiredresources,andyoucanmoreeasilyintegratethechangewithyourexistingbusinessmodel.However,itisalsocrucialtorecognizethatdisruptiveinnovationscreatethegrowthmarketsofthefutureandsoareafundamentalpartofafirm’sinnovationportfolio.

AdjustYourFeedbackExpectationsMostdisruptiveinnovationsareadoptedfirstbynonusers:peoplewhoarenotwellservedbyexistingsolutions.Therefore,asafirstruleofthumb,ifyouarepursuingadisruptiveinnovation,youshouldalwaysexploreyourinnovationwithnonusersingreatdepth.Thatbeingsaid,regardlessofwhetheryouexploreadisruptiveinnovationwithusersornonusers,therearesomepeculiaritiesoftheadoptionprocessyoushouldwatchoutfor.

First,fordisruptiveinnovations,customersmaynotfullyrecognizetheproblem,orthesolutionmaybeunfamiliar.Asaresult,youmayreceivenegativefeedbackatfirst.Furthermore,formanydisruptiveinnovations,peoplecannotimaginetheproductuntiltheyactuallytryit.Forexample,whenReebokintroducedtheReebokPump—anathleticshoethathasabuttontoinflateairpocketsaroundtheankle—basketballplayersandcoacheswereskepticaluntiltheytriedtheshoe.Thentheylovedit.TheInnovator’sDilemmacallsthisthe“agnosticmarketing”problem,meaningthat,fordisruptiveinnovations,noone—notexperts,nottraditionalmarketresearch,andnotevencustomersthemselves—cantellyouwhatiswantedorwhetheritwillsucceed.Instead,customershavetotryittofullyappreciateit.10

Tocomplicatematters,theremaybesocialnormsorincentivesthatdistortthefeedbackyoureceive.OneentrepreneurdevelopedaportableX-raymachinethatproducedsuchclearimagesthatanyhealthcareprovidercouldseebonecracksortissuelumps,at10percentofthecostofexistingtechnology.Butradiologistsandmedicaldevicecompanieswerenotinterested.Why?Thenewmachineconflictedwiththeirexistingfinancialincentives(radiologistsinterpretfuzzyfilms,andmedicaldevicecompaniessellexpensivemachines).Ultimatelythecompanyfailedbecauseitranoutofcashbeforeitcouldovercomethesepersistentobstacles.

Similarly,ifasolutiondoesn’tseemlegitimate,customersmayrejectitnomatterhowwellitsolvestheproblem.Inonefamousexample,effortstoteachvillagerstoboiluncleanwaterintheregionofLosMolinos,Peru,failedbecauseofalocaltraditionthathotfoodswereonlyforsickpeople.Becausetheinnovationwasonlyadoptedbypeoplelackinglegitimacy(socialoutsiders),thepracticefailedtospread.11Ifyourinnovationfacespotentiallegitimacychallenges,youmayhavetothinkcarefullyabouthowtocreatethatlegitimacy.

AdjustYourTimelineInthepopularloresurroundingdisruptiveinnovation,incumbentsareblindsidedandrespondtoolate,leadingtotheirfailure.Forexample,Swisswatchmakersdominatedthemechanicalwatchindustryforyearsbeforedigitalwatches—mostofthemmadebyJapanesefirms—enteredthemarket.TheSwissviewedthesenewwatchesaslow-quality,low-margintimepieces;jewelersdidnotwanttosellthem,andSwisswatchmakersfeltcertaintheycouldmaintaintheiradvantage.Butastheperformanceofdigitalwatchesimproved,theybegantomoveupmarket,quicklyreplacingSwisswatchesatthemarket’slowerendandtheninthemainstream.BythetimeSwissmanufacturersresponded,itwastoolate.JapanesemanufacturersweremakingmillionsofunitsforeverytenthousandunitstheSwissproduced.Withinadecade,theSwisswatchindustryhadbeendecimated,withmostmanufacturersgoingoutofbusinessandtheSwissmarketsharefallingtolessthan10percent.12

Onthesurface,theSwisswatchexampleappearstobeaclassiccaseofdisruption,withtheincumbentsbeingblindsidedbyanewtechnology.Butlet’stakeacloserlook.Inthiscase,asinotherdisruptions,theincumbentsactuallyinvestedearlyonindigitaltechnology,buttheyconcludeditwastooexpensiveandtooclunkyandwouldneversucceedagainsttheelegantSwisswatches.Asaresult,theysimplyquitinvesting.

Theissueatstakeisamatteroftimingandperception.Earlyinthelifeofadisruptiveinnovation,itoftenappears“notgoodenough.”Moreover,marketadoptionofdisruptiveinnovationstakesfarmoretimethanwithincrementalinnovations.Insomecasesitmighttakedecadesforthedisruptiveproducttoimprovetothepointwherecustomerswillacceptit.Thismeansthatifyou’reworkingontheGoogleGlassprojectinsteadoftheGoogleOffersproject,you’llneedtobepatientandadjustyourexpectationsforhowquicklytheproductwillgainadoptionandbeseenasvaluable.Moreover,youmayhavetopatientlyimprovecertainnewtechnologies(orworkwithpartnerstoimprovethem)forthedisruptiveproducttonailthejob-to-be-done.Itusuallytakeslongertogetmarketadoption,becausecustomerswillbeunfamiliarwiththesolutionandwillneedtobeeducated.Ifyou’veadoptedalow-cost,high-experimentationapproachliketheoneweadvocate—ratherthanthehigh-profile,high-costapproachtakenbymanyhopefulinnovators—you’remorelikelytosustaintheorganizationalpatienceneededfortheideatomature.

AdjustYourStructureIt’scriticaltoprovidetherightstructure—andtherightmixofskills—fordisruptiveinnovationprojectteams.Manyorganizationsfailwithprojects,especiallydisruptiveones,becausetheyfailtounderstandabasicorganizingprinciple:themoreradicaltheidea,themoreautonomytheprojectteamwillrequire.

Let’sseewhythatis.Acompany’sleastradicalprojectstypicallyinvolveincrementalimprovementstoexistingproducts.Forexample,atSonythenextgenerationofitsPS4gameconsole(we’llcallitthePS5)willlikelybedevelopedbydesignersandengineerswhoworkatSonyandarefamiliarwiththePS4’scomponentsandarchitecture.Innovationsarelikelytocomefrommodifyingorimprovingexistingcomponents(graphics,storage,theconvenienceofonlinegaming)orperhapsaddinganewone(perhapstheabilitytodigitallyrecordTVshowsasaDVRorTiVodoes).Theidealteamforthisprojectisateamofengineerswhospecializeineachtypeofcomponent,workingatthecomponentlevel.Alternatively,Sonymightusealightweightteam—mainlypeoplefromthegameconsolegroupbutincludingafewengineersfromotherfunctionalareas.

ButimaginethatSonywantstodevelopaGoogleGlass–likedevicethatpossessesfeaturesthatleapfrogGoogleGlass(let’scallitSonyGlass)andsupportadvancedgaming.IfSonyattemptstodevelopthenewSonyGlassdevicewithinthePS4engineeringgroup,thenewdevicewilllikelyreflecttheknowledgeandtechnologyofaSonygameconsole.ThesamewouldbetrueifthedeviceweredevelopedbytheSonycomputerengineeringgroup,ortheSonyTVgroup.Togetsomethingmoreradical,Sonywouldbebetteroffpullingfolksfromeachoftheseareas(andperhapselsewhere)intoanautonomousprojectteam,independentandisolatedfromtherestofthecorporation,toprotecttheinnovationandallowfullapplicationoftheseprinciples.

Aprojectmaydiffersoradicallyfromacompany’sofferingsthatitrequiresadifferentbusinessmodel(e.g.,toservedifferentcustomersusingdifferenttechnologies).Inthesecasesitmakessensetocreateafullyautonomousbusinessunit.Forexample,whenAmazondecidedtopursue,andthenlaunch,acloudcomputingservicebusiness(AmazonWebServices),itcreatedanautonomousbusinessunit,becausetheopportunitydemandedadifferentbusinessmodelfromAmazon’sonlineretailingbusiness.

Creatinganautonomousteamorbusinessunitcanbecriticalforseveralreasons.First,whentheexistingbusinessmodelconflictswiththedisruptive

reasons.First,whentheexistingbusinessmodelconflictswiththedisruptivebusinessmodel,stayingwiththeexistingbusinessmodelcandestroythedisruptiveidea.Theexistingbusinessmodelwillstarvetheideaofresources,ashappenedintheSwisswatchcase,oritwillkilltheinnovationoutright,asoccurredwhenPolaroidshelveditsmarket-leadingdigitalcapabilitiesbecausetheyconflictedwithitsfilm-basedbusinessmodel.

Second,largecompaniesrequiregrowththatdisruptiveinnovationsinitiallycannotprovide.Abillion-dollarcompanysearchingfor10percentgrowth($100million)nextyearwillfindthe$50,000revenuesofanearlydisruptiveinnovationirrelevant.Asaresultitwilleitherdefundtheeffortordistortitbytryingtomakeitgeneraterevenuerightaway(usuallyitgetsturnedintoasustaininginnovationthatmissesthemarketopportunity).Puttingthedisruptiveideaintoaseparategroupthatcangetexcitedaboutsmallerrevenueswillletthesefolkstakethestepstoonedaybuildabillion-dollarbusiness.

Third,puttingthedisruptiveideaintoaseparateunitletstheteamdeveloptheresourcestheinnovationneedsratherthanthosealreadyinthefirm.Forexample,whenIBMsentateamtoFloridatodeveloptheIBMPC,theteamdevelopednewcompetenciesandusedtheresourcesofnewpartners,suchasIntelandMicrosoft.Thisstrategysavedtheteamcrucialtimeandexpense,economiesthatprovedvitaltothesuccessoftheIBMPC.

WatchOut:AreYouDependentonSomeoneElse?"

HaveyoueverwonderedhowNokiawentfrombeingthetopphonemanufacturerinthe1990s,onlytobebanishedtothesidelinesinthesmartphoneera?It’stemptingtothinkthecompanydidn’ttrytoinnovateordidn’tforeseethe3Grevolution,withitspotentialformobileinternetandaportable,digitallifestyle.Butthat’snotit.AsRonAdnerrecountsinTheWideLens,Nokiawasanenthusiasticpioneerofthe3Gera.13Projectingthattherewouldbemorethan300million3Gusersby2002,Nokiapushedthedevelopmentofthefirst3Gphone,the6650,whichwasthemosttechnicallyadvancedmobilephonetodate.Despitesuccessfullyproducingthefirst3Gphoneatanaffordableprice—animmensetechnicalfeatin2002—Nokiasawlessthan1percentofthepredictedmarketmaterialize.

AlthoughNokiadeliveredasolution,itoverlookedachangethatoccurredinthetransitionfrom2Gto3G:successfulinnovationshifted

occurredinthetransitionfrom2Gto3G:successfulinnovationshiftedfrombeinganindependenteffortunderNokia’scontroltoaninterdependenteffort,muchofitoutsideNokia’scontrol.Theshiftto3Grequiredthedevelopmentofoutsideinnovationssuchasvideoconversionsoftwaretodisplaymobilevideo,changesinroutertechnologytohandleincreasedtraffic,databasetoolstoallowmobileoperatorstoidentifyusers’dataaccess,digitalrightsmanagementtoensuresecurityforcontentproviders,andsoon.Asaresult,whenNokiadeliveredthephone,theremainingpiecesoftheecosystemwerestillmissing.Nokiafailedtorecognizethatitssuccesswasdependentonothers,andithadn’tproperlyaddressedormanagedthoseinterdependencies.

Increasingly,innovationisshiftingfromindependenttointerdependentundertakings.Multiplepartnersmustdeploytheirresourcesandevenchangetheiractivitiestoensurewidespreadmarketadoption.Someofthesepartnersmaybeupstreamordownstream,inareasthatyoumightnormallyignore.

Toadapttheinnovator’smethodtointerdependentinnovation,startbymappingtherequiredecosystemforyourproduct.Asyoulookattheuncertaintiesyouface,lookupstreamatanyuncertaintiesabouttherequiredcomponents,downstreamattheuncertaintiesofadoption,andlaterallyatthelargerecosystemofpartnersyouneed.Whatpartiespossesscomplementaryassetsorresourcesthatwillinfluencethesuccessfuladoptionofyourinnovation?Onceyou’veidentifiedthem,it’scriticaltobringthemonboardearly.Otherwiseyoumightspendsignificanttimeandresourcesdevelopinganinnovationthatwillnotsucceedbecauseyoudidnotgetthesupportofentitiesthatpossesskeycomplementaryassets.

AdapttoInnovate

Yourabilitytoapplytheinnovator’smethoddependsonyourcircumstances.Ifyou’reanindividualcontributor,yourpathwaywilldifferfromthatofateamleaderoranorganizationleadertryingtoachieveorganization-wideimpact.We’veobservedthesuccessfulapplicationofelementsofthemethodbyhundredsofindividualsandbydozensofcompanies,largeandsmall.Inmostinstances,managersandentrepreneursadaptedthemethodtofittheirowncircumstances.Thereisnoone-size-fits-allprescriptionforsuccess.

Despitetheadaptations,thereremainsremarkableadherencetothebasicprinciples:identifyaproblem,identifythenecessaryassumptionswithregardtosolvingit,constructlow-costexperimentstotestyourassumptions,andlearnasquicklyaspossible.Weknowyoucanadapttheinnovator’smethodtoyouruniquecircumstances.

Inconclusion,wewanttooncemoreacknowledgethattheinnovationprocessisinherentlymessyandrecursive.Wehavetriedtosimplifytheprocessheretomakeiteasiertounderstand,butinreality,stagesoverlapwithoneanother,somestepsgetskipped,andoftenconfusionorambiguityaccompaniestheprocess.Whenthisisthecase,ithelpstorecognizethatyouaren’tdoinganythingwrong.Rather,youaredealingwithuncertaintyandsuchmessinessispartoftheprocess.Ratherthantryingtostampoutuncertainty,respectandembraceitasmanygreatthingsemergefromuncertainty:creativityandinnovationarejustone.

Conclusion

TurnUncertaintyintoOpportunity

INTHEFIRSTDECADESoftheUSbiotechnologyindustry,mostbiotechcompaniesoperatedaccordingtothesamerule:identifyonepromisingcandidatedrug(usuallyfollowinguponaninsightcomingfromacademia),andthenfocusvirtuallyallyourresourcesonbringingthisdrugtomarket.Becausethecostandtechnicaluncertaintyindiscoveringanddevelopingnewdrugsweresohigh,theprevailingwisdomarguedthatnascentbiotechcompanieshadneitherthecapitalnortheknow-howtodevelopabroaderresearchbaseordrugpipeline.Furthermore,dilutingeffortsbyattemptingtodosowasasurerecipeforfailure.Whilemanyyoungcompaniesraisedtenstohundredsofmillionsofdollarstodevelopasinglenewdrug,thesadtruthwasthatthevastmajorityofthesecompanieswouldfail,neverbringingasingledrugtomarket.Thelandmarksequencingofthehumangenomeraisedhopesthatthingswouldchange:thousandsofcuresforcancerandotherdiseaseswouldbecomeinstantlyobvious,andtherateofdrugdiscoverywouldexponentiallyincrease.Unfortunately,thingsdidn’tchange.Despitetheeffortsofhundredsofbiotechcompanies,nottomentiondozensofso-calledmultinationalbigpharmacompanies,eachyearonlyabouttwentynewdrugsareapprovedintheUnitedStates,andveryfewaretrueblockbustersthatchangethelandscape.

SowhenanewlyformedbiotechcompanycalledRegeneron,ledbyphysician-scientistsLeonardSchleiferandGeorgeYancopoulos,helditsfirstmeetingwithaboardofesteemedscientificadvisers,theteammemberswereexcitedtosharetheirgrandvisionofabetterprocessfordevelopingnewtherapeutics.Ratherthanfocusononesolution,Yancopoulosproposedthattheyfirstinvestinbetterunderstandingwhytreatmentsfailedinthefirstplaceandthenusebetterexperimentstocreatedozensofsolutionsatthesametime.Thiswouldrequirecreatingtoolstotackletherate-limitingfactors—theaccuracyandspeedofexperiments—indevelopingnewtherapeutics.

speedofexperiments—indevelopingnewtherapeutics.

MuchtothechagrinofYancopoulos,formerlyaprofessoratColumbia,theroomexplodedwithcriticism:WhatwereSchleiferandYancopoulosthinking?Whyweren’tthey,likeeveryoneelse,focusingtheirresearcheffortsandresourcesonasinglehigh-potentialtherapeutictreatment?Howcouldtheypossiblysucceediftheyscatteredtheirresourcesandattentionbytestingmultiplesolutionsatonce?

Yancopoulosrecallsbeingstunnedanddismayed.Finally,Schleifersteppedin,assertingthatRegeneronwasgoingtotryitsprocessinspiteoftheadvisers’rejection.AlthoughYancopoulosfeltrelievedtohaveSchleiferonhisside,weaskyoutoputyourselfintheirshoes:someofthemostpreeminentthinkersintheworldhadtoldthemtheyweregoingaboutitallwrong.Werethey?

Fast-forwardtwenty-fiveyears,andwefindthatRegeneronisoneofthemostinnovativecompaniesintheworld.Regeneron’ssuccessindevelopingbreakthroughshashelpeditriserapidlytothenumber4positionontheForbesmostinnovativecompanieslist,withaninnovationpremiumof63percent.AlthoughYancopouloscouldeasilylookbackandgloat,hesayshenowrecognizeshowfortunatethefounderswere.Mostcompaniesthatfollowedtheadviceoftheiradvisersfailed,flamingoutbeforetheybroughtasingleproducttomarket.Asitturnedout,manyofRegeneron’searlyguesses,althoughseeminglyfoundedonstrongscience,alsoturnedouttobedeadends.HadRegeneronfocusedtoonarrowly,ittoomighthavebecomeaforgottenfailure.

Atthecore,asingleinsightdifferentiatedRegeneronfromitscontemporaries:inahighlyuncertainenvironment,youneedtodofastandfrugalexperimentstosolveproblems.WhereasmanyofRegeneron’scontemporariesunwittinglyborrowedtraditionalmanagementtacticsfromestablishedpharmaceuticalfirms(whichfacedcomparativelygreatercertainty),Regeneronstartedwiththeassumptionthatitfacedunprecedenteduncertainty.YancopoulossaysthateventhoughmanyofRegeneron’scontemporarieshaveahealthyrespectforpeer-reviewedscience,hestartedwithahealthydisrespect.“Inmyview60to90percentofdiscoveriesinbiologyareeitherwrongorirrelevant,”hesays.“JusttakealookattheNewYorkTimessciencesection:Ofahundredbreakthroughs,howmanyhavematerialized?IrememberseeingthecoveroftheNewYorkTimesin1998thatcancerwouldbecuredintwoyears...thepointis,mostofwhatwebelievetobefactsarenot.”1

Becausetheyrecognizedsuchfundamentaluncertainty,theRegeneronteam

designedadifferentprocesstodealwithsuchuncertainty.AsYancopoulosrecalls,“Ourcorebeliefwasthatifyoudon’tknowforsureaboutthings,youaregoingtomakealotofwrongturns,wastingalotofresources.Ourbeliefwasthatwecouldactuallyusegeneticsasthemostpowerfulwaytorigorouslytestanidea.Wearedoingsomethingfundamentallydifferentthanthewayalotofcompaniesinnovate.”2

Althoughthetwomendescribethisprocessinmorescientificterms,inessence,theRegeneronteamdiscoveredandappliedtheinnovator’smethod(seefigureC-1).

FIGUREC-1

Theinnovator’smethod

Here’show.Inthefirststep—insight—werecommendsearchingbroadlyratherthanfocusingonanarrowsetofideas.Regeneronsearchesmuchmorebroadlyforinsightsthanmostbiotechnologycompaniesbeforesettlingontheproblemsitwantstotackle.Whereasmanybiotechcompaniesarebasedonasingleinsightfromascientist’slab,theRegeneronteammembersgobeyondthelab,scouringthebroaderacademicliterature,searchingforpotentialassociationsorevenhintsofassociationsbetweengenesandadisease.Then,whentheyfindareportedassociation,theteamdoesexperimentsingeneticallymodifiedmice,createdusingitsVelociGeneplatformtechnology,totestit.Inthisway,theRegeneronteamcangenerateandvalidateinsights,usingrealdata,muchmorequicklythanmanycompetitors.Yancopoulosargues,“Usingthisapproachwecouldre-createreportedassociationsandquicklyjumponthem.Insteadoffollowingtheliterature,wecansampleathousandassociationsandjumponthemostpromisingtentofifty.”3

Forexample,inthemid2000s,RegeneronteamsbecameawarethatresearchersattheUniversityofTexashadfoundaspecificgeneticmutationinpeoplewhohave“bad”(LDL)cholesterollevelsthatare20percentashighasthoseoftherestofthepopulation(andwhohavecorrespondinglylowerratesofheartdisease).PuttingVelociGenetowork,Regeneronscientistsquicklycreatedthismutationintheirmiceandwatchedtheeffect,quicklyobservingandvalidatinganinsight—anassociationbetweenaspecificgene,abiochemicalmarker(low“bad”cholesterol),andheartdisease.Today,Regeneronanditsbigpharmapartner,Sanofi,arecompletingphasethreetrialswiththedrugtheywentontodevelop,whileotherpharmaceuticalgiantsareinhotpursuitinthisnextgenerationofcholesterol-loweringdrugs.

Thesecondstepoftheinnovator’smethodistodeeplyunderstandtheproblem.Perhapsbecauselifesciencecompaniesfacegreatertechnicaluncertainty(willitwork?)thandemanduncertainty(willcustomersbuyit?),mostcompaniesstartbyfocusingonsolutions.ButasYancopoulosnotes,“Ifyouaresofocusedonthesolution,andthingsaren’tworking,andyouaretryingtogetthingstowork,youdon’tunderstandthereasonsyouarefailing...Ratherthanslappingsolutionsontop,weweretryingtodeeplyunderstandtheproblem,whichisthefirststep.”4

Regenerondoesn’tinterviewcustomers,becausemostcustomerscareaboutproblemslikecuringtheircancerorloweringtheirbloodpressure(thedemanduncertainty).ButRegeneronstillinvestsinunderstandingthephysiologicalandbiologicalproblembeforeworkingonthesolution.Forexample,beforedevelopingsolutionstoblockthewaydisease-relatedgenesinstructthebodytobindproteinswithoneanother,theRegeneronresearchersexperimentedtounderstandhowtherelevantproteinsbindwitheachotherinthefirstplacesothattheycouldbettercreatesolutionstoblockthebindingprocess.BecauseRegeneronfocusedontheproblemfirst,saysYancopolous,“wewereabletocomeupwithatherapeuticsolutionbetterthananyoneelse’ssolution...infact,whereasmostcompanieswoulddeveloponlyonedrugforaparticulartarget,byunderstandingthatfirststepreallywell,weultimatelycameupwiththreedrugsandfivediseaseapplications.”5

Thethirdstepoftheinnovator’smethodistoiterativelymatchasolutiontotheproblemusingaseriesofprototypestoavoidwastingresourcesonunwantedsolutions.Ofcourse,alllifesciencecompaniestesttheirsolutionstomakesuretheywork.Buttheyoftenusealong,expensivetestingprocessthatstartswithtestinginanimalsandthenprogressesthroughthreeroundsofclinicaltrialsin

humans,ultimatelycostinghundredsofmillionsofdollarsandresultinginfailureratesasgreatas97percent.6Manycompanieshavetriedtoovercomethisliabilitybypushingasmanysolutionsaspossiblethroughtheclinicaltrialpipelineinhopesofincreasingtheirhitrate,resultinginasharpincreaseinthecosttodevelopnewtreatments.

Clearlysomeoftheprototypeswehaverecommended,suchasvirtualprototypesdrawninPowerPoint,wouldnotworkhere.ButconsiderhowRegeneronhasappliedtheprinciple.Ratherthanpushsolutionsintoclinicaltrials,Regeneronexecutivesadoptedtheideaofearly,rapidexperimentation,developingatechnologythatwouldallowthemtorapidlygenerateandtestmanysolutionsmoreaccuratelyinthatfirststepofanimaltrials.Mostcompaniestestoneorafewsolutionsinmice.Miceareinexpensivebutareimperfectmodelsforhumandisease.Ratherthanacceptthestatusquoandrelyonanimperfectexperimentwithasmallnumberofsolutions,Regeneronredesignedtheexperimentationprocess,creatingatechnologytogeneratealargernumberofhigher-qualitysolutionsbyreplacingmouseimmunegeneswithhumancounterparts,butatascalemillionsoftimeslargerthananygenereplacementattemptedpreviously.These“humanized”micewerethenusedtodevelopwhatwaseffectivelyamultitudeof“prototyped”solutionsthatwerealsomorespecifictohumandisease:humanantibodies,ratherthanmiceantibodies,totreatadisease.Adifferenthumanizedmousewouldthenbeusedtoquicklytestwhichoftheprototypedsolutionsactuallyworkedtotreatthedisease,inwhatwasessentiallyaprototypeofahumanmodel.Whereastheirclosestcompetitorscouldtestoneortwomouseantibodies(whichareimperfectmodelsofhumanantibodies),theRegeneronapproachletsthecompanyprototypeandthentesthundredsofhuman,ratherthanmouse,antibodysolutions.NotonlydidRegeneronexperimentduringtheearlieststagetofindthebestsolutions,butitalsoinventedatechnologythatallowedittoexperimentbetterandfaster—ahundredtimesfaster.

Aswelookback,partofwhatmakesRegeneronsuccessfulisthatithasappliedtheprinciplesoftheinnovator’smethodtotestunknownsmorequicklyandmoreeffectivelythanmostcompetitors.Ithasmademistakes,butapplyingrapidexperimentationhasallowedittoquicklytestmultiplesolutions,therebyenablingittorapidlyresolvesomeofthehugeuncertaintiesduringtreatmentdevelopment.ThisapproachhashelpedRegeneronsuccessfullydevelopforapprovalthreetreatmentsinthepastfewyears,aremarkableachievementforallbutthelargestpharmaceuticalfirms.

EYLEA,themostsuccessfulsofar,treatsaformofadultvisionlossknownaswetage-relatedmaculardegeneration.Theproductachievednearly$1billioninsalesduringitsfirstfullyear,ararefeatinafieldthatrarelyseesblockbustertreatments.What’smore,Regeneronproducesthesebreakthroughsatacostdramaticallylowerthantheindustryaverage:accordingtoarecentanalysis,mostcompaniesthathaveproducedthreeormoreapprovedtreatmentsspendanaverageof$4.3billioninR&Dpertreatment.Someofthelargercompanieshavespentasmuchas$10billion.Bycontrast,Regeneronhasspentanaverageof$736millionpertreatment,anumberthatincludesboththecostofdevelopmentandtheextrainvestmentinexperimentationtools.7

InnovateontheMethodItself

Beyonditsremarkableapplicationoftheinnovator’smethodinanindustrycharacterizedbycomplexscienceandhightechnicaluncertainty,Regeneron’sexperienceteachesusadeeperlesson.Thecompanyhasbeensosuccessfulbecauseitinnovatedontheprocessitself.Itidentifiedtherate-limitingelementsofitsabilitytonailtheproblemandsolutionandthendevelopedinnovationsthatdramaticallyincreasedthespeedatwhichthecompanycouldfollowthesteps.AsYancopoulosdescribesit,“Wewentbroad,beyondthetechnology,tocomeupwithtoolsthatwouldallowustomakebetterchoicesinthefirstplace.”8

Thesetoolsincludedatasetstotestinsights,thetechnologytoreplacegenes(VelociGene),thetooltocreatehumanantibodiesinmice(VelocImmune),andanumberofotherapproaches.TheseprocessimprovementsallowRegenerontotestproblemsandsolutionsmorequickly,inexpensively,andaccuratelythancompetitors.“Historyisprovingthatourapproachwasbetter,”saysYancopoulos.“We’vebeenabletocomeupwithfaster,betterwaystomakethosecrucialdecisions:Howdoyoupicktherightproblemandhowdoyouknowifyoursolutionwillreallywork.”9

GainaCompetitiveAdvantage

Asuncertaintyincreases,companieswillhavetoreorganizeforinnovation,adoptingnewwaystoeffectivelycreatenewproducts,services,andsolutions.Butratherthanviewsuchachangeasathreat,leadersshouldviewitasanopportunitytocreateanadvantagebydesigningbetterexperimentationtoolstospeedinnovation.

Atthebeginningofthisbookwearguethatyoushouldignorestrategicissuessuchascompetitiveadvantageorfirst-moveradvantageuntilyoudeterminethatyou’vefoundaproblemworthsolvingandasolutionthatnailsthejob-to-be-done.Asprofessorsofstrategyandinnovation,we’rebeingfairlyhereticalinadvisingyoutoignorestrategyduringthefirststagesofthemethod(ofcourse,strategymattersasyoubegintonailthesolution).Butaskyourself,inaneraofuncertainty,whatcompetitiveadvantagestrulypersist?Asweshowinchapter1,competitiveadvantagesaremorefleetingthanever.Wearguethatinhighuncertainty,theonlydurableadvantageistheabilitytomanageuncertainty:tocaptureopportunitiesmorequicklyandtolearnmoreeffectivelythancompetitors,andtobringthoseinnovationstomarket.Althoughittakestimetodevelopandpracticethiscapability,oncedeveloped,it’shardtoimitate.Thatmakesitdurable.

Byapplyingtheinnovator’smethodtotheproblemsofincreasingthespeedandeffectivenessofexperimentation,Regeneronhascreatedacompetitiveadvantage.Althoughthecompanyhasbeencriticizedforworkingindiseasescrowdedwithcompetitors,YancopoulosandSchleifermaketheseseeminglycounterintuitivechoicesbecausetheybelievetheycanlearn—anddevelopeffectivesolutions—morequicklythanothers.Usingitsrapidexperimentationprocesses,Regeneroncantestassumptionssoquicklythatoftenitsimultaneouslytestsitscompetitor’ssolutionsaswellasitsownasitlooksforopportunitiestoleapfrogacompetitor.Whetheritcancontinuetodevelopthesecapabilitiesandstayastepaheadremainstobeseen.Butitsremarkablyhighhitrateandlowdevelopmentcostssuggestthatithasdevelopedadurableadvantagethroughitsinnovationcapabilities.

ProfessionalandPersonal

Westartthisbookbyassertingthataswemovefromtheindustrialagetotheinformationage,wefaceasurgeinuncertaintythatcallsforanewwayofmanagement.Establishedcompanieswillnolongerbeabletorelyontraditionalmanagementaloneiftheyhopetoinnovateorsurvive.Instead,managersandentrepreneursalikewillhavetoapplythenewmanagementscienceofinnovation—whatwelabeledthei-school—totheuncertaintyofcreatingnewgrowthfrominnovation.

Eachmajordiscipline,uponencounteringuncertainty,hasdevelopeditsownanswertothechallengeofhowtomanageuncertainty.Eachperspectiveoffersvaluableinsightintosolvinghigh-uncertaintyproblems.Eachperspectivehasgeneratedthoughtfulcontributions.Butrarelydotheholdersoftheseperspectivestalktoeachotherorconsiderhowtheiroverlappingapproachescouldbecombinedtoeffectivelyaddresstheneedforinnovation.

Inthisbook,we’vetriedtosynthesizetheseperspectivesintoasinglemethod,anend-to-endprocessthatyou,yourteam,oryourcompanycanusetogeneratedisruptiveinsightsandbringthemtomarket.Inasampleofcompanieswestudied,wefoundasignificantcorrelationbetweenimplementingelementsoftheinnovator’smethodandanincreaseininnovationpremiumandmarketvalue.Indeed,theaverageboostininnovationpremiumismorethan50percent,anincreasethattranslatesintobillionsofdollarsinmarketcapitalization.Similarly,companiesthathaveinstitutedtheseideas,evenaftertryingtoinnovateusingotherapproaches,haveclaimedsignificantincreasesinrevenuesfromnewproducts:forexample,bothIntuitandCiscoServicesearnedmorethan$100millioninnewrevenues,andHindustanUnileverenjoyeda40percentincreaseinrevenues.

Butmoreimportantthanshorter-termrevenuesandmarketvalue,thesecompaniesdiscovernewopportunitiesandbringthemtomarketatlowercostandathighersuccessratesthantheircompetitors.Regeneronisnotaloneinsaying,“We’vebeenabletocomeupwithfaster,betterwaystomakethosecrucialdecisions”;10JeffBezoscitesareductionofthecostsofexperimentingandaresultingboostinthenumberofexperimentsthecompanyisabletoconduct.11ForIntuitfounderScottCook,theapproachesdescribedherehave“totallytransformed”thewaythecompanyoperates.OurfirsthandresearchshowedthateveryIntuitleader,manager,designer,andengineeringleadused

theprocessofdevelopingahypothesis,framinganexperiment,andthenusingthedatatomakedecisions.

Thisapproachhasallowedcompaniesworkinginawiderangeofindustries,fromsoftwaretocement,frompharmaceuticalstofoodproducts,todiscoverthetoolstoinnovaterepeatedly.Thosethatapplythemethodarefindingthereturnsspeakforthemselves.“Ourinnovationprogramsharpensthefocusofouremployeesandourecosystemonthedirectionwe’regoing,”saysJohnDonovanofAT&Ttechnologyandnetworkoperations.“Butitalsoisprovidingeliteventurecapitalreturns,sothere’srealvalueinit.”12

Whetheryou’realeader,amanager,anentrepreneur,oranindividualcontributor,weknowyoucanapplythismethodtoresolveuncertainty,whereveryoufaceit,whetherininternalprocessesorexternalinnovations,atlowercostandwithgreatersuccessthaneverbefore.Theinnovator’smethodwillhelpyoucreativelysolveproblemsthatyoufaceinbothyourprofessionalandyourpersonallife.Mostofall,youcanusethesetoolstolearnmorequicklythanothers—andinthiseraofuncertainty,speedoflearningisthenewcompetitiveadvantage.Welookforwardtoseeingyouusethesetoolstocrosseachnewfinishlinefirst,whereverthatmaybe.

Appendix

AnOverviewoftheInnovator’sMethod

INTHEFOLLOWINGfigureA-1,wesummarizeallthestepsandtoolsoftheinnovator’smethod.Thisgraphicfeaturesthekeyactivitiesforeachstepoftheinnovator’smethod,thetools,andtheteststoknowwhetheryouhaveresolvedthekeyuncertaintiesofeachelementsufficientlytohaveconfidenceinyourinnovation.Additionalinsightsonhowtoapplythese,andothertoolsandtests,areavailableatwww.theinnovatorsmethod.com.

FIGUREA-1

Notes

Introduction

1.ThomasEisenmannandLauraWinig,“RenttheRunway,”Case812-077(Boston:HarvardBusinessSchool,2012).

2.Ibid.

3.Ibid.

4.Ibid.

5.JennaWortham,“ANetflixModelforHauteCouture,”NewYorkTimes,November8,2009,http://www.nytimes.com/2009/11/09/technology/09runway.html?_r=0.

6.Seehttp://sloanreview.mit.edu/article/rent-the-runway-organizing-around-analytics/.

7.Evidencesuggeststhatwritingbusinessplanshasnocorrelationwithsuccessunderconditionsofuncertaintyandarelargelyawasteoftime.SeeJohnC.Dencker,MarcGruber,andSonaliK.Shah,“Pre-EntryKnowledge,Learning,andtheSurvivalofNewFirms,”OrganizationScience20,no.3(2009):516–537;DavidA.Kirsch,BrentGoldfarb,andAziGera,“FormorSubstance?TheRoleofBusinessPlansinVentureCapitalFunding,”StrategicManagementJournal30,no.5(2009):487–515;JulianE.Langeetal.,“Pre-StartupFormalBusinessPlansandPost-StartupPerformance:AStudyof116NewVentures,”VentureCapital9(2007):237–256.

8.ClaytonM.Christensen,TheInnovator’sDilemma:WhenNewTechnologiesCauseGreatFirmstoFail(Boston:HarvardBusinessReviewPress,2013);JeffDyer,HalGregersen,andClaytonChristensen,TheInnovator’sDNA(Boston:HarvardBusinessReviewPress,2011).

9.Acompany’sinnovationpremiumrepresentsthepremiumthatinvestorsarewillingtopayforacompany’sstockbecausetheyexpectthecompanytolaunchinnovationsthatwillproduceevenbiggerfutureincomestreams.Itisthemarketvalueofthecompanyminusthenetpresentvalueofitsexistingbusinesses.

10.JeffDyerandHalB.Gregersen,“TheSecrettoUnleashingGenius,”

Forbes,September3,2013.

Chapter11.ScottCook,personalinterview,May7,2013.

2.Theinnovationpremium,ametricforinnovationperformancethatwedevelopedanddescribedinTheInnovator’sDNA(JeffreyDyer,HalGregersen,andClaytonChristensen,Boston:HarvardBusinessReviewPress,2011)representsthepercentageofafirm’smarketvaluethatcannotbeaccountedforbyitsexistingbusinesscashflows.WerankForbeslistoftheworld’smostinnovativecompaniesusingthismethodology.Seehttp://www.forbes.com/sites/innovatorsdna/2011/10/20/the-innovation-premium-our-methodology/.

3.PeterDrucker,ThePracticeofManagement(NewYork:Harper&Row,1954),54.

4.Foradetaileddiscussionofthiscase,seetheIntroduction.

5.Alternativeexplanationsforanincreaseintherateofpatentingareglobalization(internationalcompaniesincreasinglypatentingintheUnitedStates),changesinpatentingscope(increasesinthenumberofpatentsofnarrowscope),patentlitigation(increasingpatentingactivitiestocreatedefensibleintellectualproperty),andsoon.Eveninthefaceoftheseexplanations,it’sclearthatthepaceoftechnologyinvention(andadoption)hasaccelerated.

6.JohnMelloy,“iPadAdoptionRateFastestEver,PassingDVDPlayer,”CNBC,October4,2010.

7.RobertR.WigginsandTimothyW.Ruefli,“Schumpeter’sGhost:IsHypercompetitionMakingtheBestofTimesShorter?”StrategicManagementJournal26(2005):1249–1259;RajshreeAgarwalandMichaelGort,“FirmandProductLifeCyclesandFirmSurvival,”AmericanEconomicReview92(2002):184–190.

8.Ascoreof7or8isdeemed“passive”(seechapter5).

9.KaarenHanson,personalinterview,May6,2013.

10.BradSmith,personalinterview,May6,2013.

11.Hanson,2013.

12.Ibid.

13.RogerMartinexaminestheroleofinnovationcatalystsina2011HarvardBusinessReviewarticle,“TheInnovationCatalyst.”

14.Cook,2013.

15.EricRies,inTheLeanStartup:HowToday’sEntrepreneursUseContinuousInnovationtoCreateRadicallySuccessfulBusinesses(NewYork:CrownBusiness,2011),uses“build-test-learn”terminologytorefertothisexperimentationloop.However,weprefer“hypothesis”to“build”becauseinmanycasesyourexperimentistestingahypothesiswithoutbuildinganything.

16.BenBlank,personalinterview,May6,2013;Cook,2013;andThomasEisenmannandTanyaBijlani,“IntuitInc.:ProjectAgranova,”Case813062(Boston:HarvardBusinessSchool,2012).

17.Smith,2013.

18.Leanstartupusesthetermminimumviableproduct,butIntuitsaysitdoesn’twantaminimum“viable”product;itwantsaminimumfeaturesetbutonethatdelightscustomers.Wediscussthismoreinchapter5.

19.Hanson,2013.

20.Cook,2013.

21.Ibid.

22.Smith,2013.

23.Ibid.

24.Ries,TheLeanStartup.

Chapter21.Seehttp://www.quoteswise.com/elon-musk-quotes-2.html.

2.FrederickWinslowTaylor,ThePrinciplesofScientificManagement(NewYork:Norton,1911).

3.PeterDrucker,ThePracticeofManagement(NewYork:Harper&Row,1954),54.

4.AlfredSloan,MyYearswithGeneralMotors(NewYork:CrownBusiness,1990).

5.LawrenceR.Gustin,BillyDurant:CreatorofGeneralMotors(AnnArbor:UniversityofMichiganPress,2008).

6.ScottCook,personalinterview,May7,2013.

7.DavidGarvin,“HowGoogleSoldItsEngineersonManagement,”HarvardBusinessReview,December2013.

8.RyanTate,The20%Doctrine(NewYork:HarperCollins,2012),26.

9.NitinVerma,personalinterview,August26,2013.

10.Cook,2013.

11.JeffDyer,HalB.Gregersen,andClaytonChristensen,“InnovativeCompaniesDemandInnovativeLeaders,”HBRBlogNetwork,August9,2011,http://blogs.hbr.org/2011/08/innovative-companies-demand-in/.

12.Ibid.

13.Cook,2013.

14.PaulKirschbaum,personalinterview,October17,2013.

15.ValveSoftware,“ValveHandbookforNewEmployees,”2012.

16.J.J.McCorvey,“AmazonFreshIsJeffBezos’LastMileQuestforTotalRetailDomination,”2013,http://www.fastcompany.com/3014817/amazon-jeff-bezos.

17.RicardodosSantos,personalinterview,October30,2013.

18.RicardodosSantos,“JustSay‘Maybe,’”Necrophone,2013,http://necrophone.com/2013/10/30/just-say-maybe/.

19.JohnDonovan,personalinterview,December20,2013.

20.BenBlank,personalinterview,May6,2013.

21.RogerMartin,TheDesignofBusiness(Boston:HarvardBusinessReviewPress,2009).

22.KaarenHanson,personalinterview,December26,2013.

23.“ValveHandbook,”2012.

24.BalaIyerandThomasH.Davenport,“ReverseEngineeringGoogle’sInnovationMachine,”HarvardBusinessReview,April2008.

25.BrianM.CarneyandIsaacGetz,“Google’s20%Mistake,”WallStreetJournal,August27,2013.

26.RyanSmith,personalinterview,May10,2013.

27.Hanson,2013.

28.Kirschbaum,2013.

29.“ValveHandbook,”2012.

30.IntuitLegalDepartment,2013.

31.Foranexcellentsummaryofthedangersofusingfinancialtools,see“InnovationKillers:HowFinancialToolsDestroyYourCapacitytoDoNewThings,”HarvardBusinessReview,January2008.

32.Cook,2013.

Chapter31.StephenRemedios,“ProjectBushfire:FocusingtheMightofanEntire

OrganizationontheConsumer&Customer,”ManagementInnovationeXchange,January1,2013,http://www.managementexchange.com/story/project-bushfire-focussing-might-entire-organization-consumer.

2.Ibid.

3.KalaVijayraghavanandSagarMalviya,“HindustanUnileverCeoNitinParanjpeTargetstoWorkTowardsPerfectioninaStore,”EconomicTimes,August10,2011.

4.MichaelDell,personalinterview,June25,2004.

5.ScottCook,personalinterview,May7,2013.

6.ClaytonM.Christensen,TheInnovator’sDilemma:WhenNewTechnologiesCauseGreatFirmstoFail(Boston:HarvardBusinessReviewPress,2013).

7.Remedios,2013.

8.Ibid.

9.JuliaKirbyandThomasA.Stewart,“TheInstitutionalYes:AnInterviewwithJeffBezos,”HarvardBusinessReview,October2007.

10.KirbyandStewart,2007.

11.LarryHustonandNabilSakkab,“ConnectandDevelop,”HarvardBusinessReview,March2006.

12.JeffHowe,Crowdsourcing:HowthePoweroftheCrowdIsDrivingtheFutureofBusiness(NewYork:RandomHouse,2008).

13.HowardLeventhal,RobertSinger,andSusanJones,“EffectsofFearandSpecificityofRecommendationuponAttitudesandBehavior,”JournalofPersonalityandSocialPsychology2,no.1(1965):20.

14.JeffZias,personalinterview,May6,2013.

15.ValveSoftware,“ValveHandbookforNewEmployees,”2012.

16.PaulKirschbaum,personalinterview,October17,2013.

17.TeresaAmabile,“MotivatingCreativityinOrganizations,”CaliforniaManagementReview40,no.1(1997):39–58.

18.“ValveHandbook,”2012.

19.RyanTate,The20%Doctrine(NewYork:HarperCollins,2012),26.

20.Ibid,28.

21.MatthewHerpen,“TheMiracleWorkers,”Forbes,September2,2013,94.

Chapter41.MikeMaples,personalinterview,May13,2009.

2.AsrecountedbyMaples,2009,andinJeffreyRayport,MarcoIansiti,andMyraHart,“MotiveCommunications,”Case699-157(Boston:HarvardBusinessSchool,2001).

3.QuotedinClaytonChristensen,ScottCook,andTaddyHall,“MarketingMalpractice:TheCauseandtheCure,”HarvardBusinessReview,December2005.

4.AnthonyUlwick,“TurningCustomerInputintoInnovation,”HarvardBusinessReview,January2002.

5.GianfrancoZaccai,“WhyFocusGroupsKillInnovation,fromtheDesignerBehindSwiffer,’2012,http://www.fastcodesign.com/1671033/why-focus-groups-kill-innovation-from-the-designer-behind-swiffer.

6.SeeJeffreyDyer,HalGregersen,andClaytonChristensen,TheInnovator’sDNA(Boston:HarvardBusinessReviewPress,2011).

7.JuanCarlos,“DaviPlata:‘Self-Service’FinancialInclusion,”ManagementInnovationeXchange,2013,http://www.managementexchange.com/story/daviplata-financial-inclusion-all-using-self-service-transactional-product-going-kyc-kyc-know-.

8.Ibid.

9.MarkSandhill,personalinterview,January5,2009.

10.AlistairBarr,“AmazonLending:CompanyOfferingLoanstoItsOnlineSellers,”Reuters,September28,2012;SarahNeedleman,“WhattoKnowBeforeBorrowingfromAmazon,”WallStreetJournal,October4,2012.

11.Ibid.

12.Ibid.

Chapter51.IsakBukhman,TRIZTechnologyforInnovation(Taiwan:CubicCreativity

Company,2012);GenrichAltshuller,AndSuddenlytheInnovatorAppeared:TRIZ,theTheoryofInventiveProblemSolving(Worcester,MA:TechnicalInnovationCenter,Inc.,1996).

2.JuanCarlos,“DaviPlata:‘Self-Service’FinancialInclusion,”ManagementInnovationeXchange,2013,http://www.managementexchange.com/story/daviplata-financial-inclusion-all-using-self-service-transactional-product-going-kyc-kyc-know-.

3.AndrewHargadon,HowBreakthroughsHappen:TheSurprisingTruthaboutHowCompaniesInnovate(Boston:HarvardBusinessSchoolPress,2003).

4.WendyCastleman,personalinterview,January13,2014.

5.BradStone,“InsideGoogle’sSecretLab,”BloombergBusinessweek,May22,2013,http://www.businessweek.com/articles/2013-05-22/inside-googles-secret-lab.

6.AustinCarr,“Google’sProjectGlass:InsidetheProblemSolvingandPrototyping,”FastCompany,June5,2012,http://www.fastcodesign.com/1669937/googles-project-glass-inside-the-problem-solving-and-prototyping.

7.JessicaLivingston,FoundersatWork(NewYork:Apress,2008).

8.DougBerger,“InterviewonExtremeInnovation:WithAlbertoSavoia(Google)andJeremyClark(Fxx),”TheInnovators,2011,http://www.innovate1st.com/newsletter/january2011/eXtreme_Innovation.pdf.

9.JeanneLiedtkaandTimOgilvie,DesigningforGrowth(NewYork:ColumbiaUniversityPress,2011).

10.MarkGoldenson,“TenLessonsfromaFailedStartup,”VentureBeat,2009,http://venturebeat.com/2009/04/29/10-lessons-from-a-failed-startup/.

11.MarcPincusandBingGordon,“ASeriousTakeonInternetGamePlay,”video,StanfordTechnologyVenturesProgram,October28,2009.

12.ThetermminimumviableproductwasfirstusedbyFrankRobinsonandlaterpopularizedbyEricRies.

13.NathanFurrandPaulAhlstrom,NailItthenScaleIt(Lehi,UT:NISIPublishing,2011).

14.JaredAllgood,personalinterview,December10,2009.

15.GeoffreyA.Moore,CrossingtheChasm(NewYork:HarperPaperbacks,2002).

16.Anonymous,personalinterview,February20,2012.

17.ScottCook,personalinterview,May7,2013.

18.AmirEftekhari,personalinterview,January7,2014.

19.GaryRhoads,MichaelSwenson,andDavidWhitlark,Boomstart(Dubuque,IA:Kendall-Hunt,2009).

20.RyanTate,The20%Doctrine(NewYork:HarperCollins)pg.22.

21.BenBlank,personalinterview,May6,2013.

22.Massolution,TheCrowdfundingIndustryReport(Massolution,2013).

Chapter61.“ChotuKool:AnInnosightImpactStory,”video,Innosight,2013.An

abbreviatedversionisavailableonlineat:http://www.innosight.com/impact-stories/chotokool-case-study.cfm.

2.Ibid.

3.Ibid.

4.Ibid.

5.AdditionalsourcesforthisstoryincludeG.Sunderraman,personalinterview,February14,2013;andEricBellman,“IndianFirmsShiftFocustoPoor,”WallStreetJournal,October21,2009.

6.AlexanderOsterwalderandYvesPigneur,BusinessModelGeneration:AHandbookforVisionaries,GameChangers,andChallengers(NewYork:Wiley,2010).

7.JeffreyDyer,HalGregersen,andClaytonChristensen,TheInnovator’sDNA(Boston:HarvardBusinessReviewPress,2011).

8.UpsellsreferstocompanieslikeZyngaorSkypeofferingafreeproductandthentryingtogetcustomerstopurchaseapremiumversion.Amongfreebusinessmodelsthisisoftenreferredtoas“freemium.”

9.SuzanneE.Taylor,InsideIntuit:HowtheMakersofQuickenBeatMicrosoftandRevolutionizedanEntireIndustry(Boston:HarvardBusinessPress,2003).

10.Ibid.

11.IanC.MacMillanandRitaMcGrath,“DiscoveringNewPointsofDifferentiation,”HarvardBusinessReview,July1997.

12.Ibid.

Chapter71.JessicaLivingston,FoundersatWork(NewYork:Apress,2008).

2.PeterThiel,personalinterview,March16,2004.

3.Livingston,2008.

4.Ibid.

5.PhanishPuranam,BenjaminC.Powell,andHarbirSingh,“DueDiligenceFailureasaSignalDetectionProblem,”StrategicOrganization4,no.4(2006):319–348.

6.Formoredetailondifferentkindsofpivots,seeEricRies,TheLeanStartup:HowToday’sEntrepreneursUseContinuousInnovationtoCreateRadicallySuccessfulBusinesses(NewYork:CrownBusiness,2011).

7.Theresearchprojectconsistedoftwoparts:first,aformallystructured,multicaseinductivestudyfollowingteninnovatorsforayear,observinghowinnovatorsmanagedthechangeprocess,andsecond,aconveniencesampleofestablishedcorporationspivotingduringinnovation.

8.FormoredetailaboutAardvark’sevolution,seeThomasEisenmannetal.,“Aardvark,”Case811064(Boston:HarvardBusinessSchool,2001).

Chapter81.Forexample,seeNoamWasserman,“Founder-CEOSuccessionandthe

ParadoxofEntrepreneurialSuccess,”OrganizationScience14,no.2(2003):149–172;WarrenBoekerandRushiKarichalil,“EntrepreneurialTransitions:FactorsInfluencingFounderDeparture,”AcademyofManagementJournal45(2002):818–826.

2.RyanSmith,personalinterview,May9,2013.

3.NathanFurrandPaulAhlstrom,NailItthenScaleIt(SaltLakeCity,UT:NISIInstitute,2011).

4.EverettRogers,DiffusionofInnovations,5thed.(NewYork:FreePress,2003).

5.GeoffreyMoore,CrossingtheChasm:MarketingandSellingDisruptiveProductstoMainstreamCustomers,reviseded.(NewYork:HarperBusiness,2006).

6.Ibid.;andGeoffreyMoore,InsidetheTornado:StrategiesforDeveloping,Leveraging,andSurvivingHypergrowthMarkets(NewYork:HarperBusiness,2004).

7.FilipeM.SantosandKathleenEisenhardt,“ConstructingMarketsandShapingBoundaries:EntrepreneurialPowerandAgencyinNascentFields,”AcademyofManagementJournal52,no.4(2009):643–671.

8.RyanSmith,personalinterview,May9,2013.

9.CoreyWride,personalinterview,October13,2013.

10.MegWhitman,personalinterview,November5,2004.

11.T.R.Weiss,“Q&A:CraigNewmark,”ComputerWorld,February,2007,http://www.computerworld.com/s/article/print/9053838/Q_A_Craig_Newmark_of_Craigslist_fame_looks_back_and_ahead

12.Ibid.

13.MarcBenioff,“HowtoCreateAlignmentwithinYourCompanyinOrdertoSucceed,”SalesforceBlog,April9,2013,http://blogs.salesforce.com/company/2013/04/how-to-create-alignment-within-your-company.html;.alsodiscussedinMarcBenioff,BehindtheCloud:TheUntoldStoryofHowSalesforce.comWentfromIdeatoBillion-DollarCompanyandRevolutionizedanIndustry(NewYork:Jossey-Bass,2009).

14.Ibid.

15.Ibid.

16.JimCavalieri,personalinterview,September24,2013.

Chapter91.EverettRogers,DiffusionofInnovations,5thed.(NewYork:FreePress,

2003).

2.KateO’Keeffe,JohnMarsland,CarlosPignataro,andLisaVoss,“UnleashingInclusiveInnovationatCisco,”ManagementInnovationeXchange,January7,2013,http://www.managementexchange.com/story/unleashing-inclusive-innovation.

3.KateO’Keeffe,personalinterview,October24,2013.

4.KateO’Keeffe,personalinterview,March11,2014.

5.Ibid.

6.Ibid.

7.Seehttp://en.wikipedia.org/wiki/Google_Glass;JaredNewman,“Google’s‘ProjectGlass’TeasesAugmentedRealityGlasses,”PCWorld,April4,2012;NickBilton,“BehindtheGoogleGoggles,VirtualReality,”NewYorkTimes,February23,2012.

8.ClaytonM.Christensen,TheInnovator’sDilemma:WhenNewTechnologiesCauseGreatFirmstoFail(Boston:HarvardBusinessReviewPress,2013).

9.Ibid.

10.Ibid.

11.Rogers,2003.

12.HistoryoftheSwisswatchindustryadaptedfromAmyGlasmeier,“TechnologicalDiscontinuitiesandFlexibleProductionNetworks:TheCaseofSwitzerlandandtheWorldWatchIndustry,”ResearchPolicy20,no.5(1991):469–485.

13.RonAdner,TheWideLens:WhatSuccessfulInnovatorsSeeThatOthersMiss(NewYork:Penguin/Portfolio,2012).

Conclusion

1.GeorgeYancopoulos,personalinterview,December10,2013.

2.Ibid.

3.Ibid.

4.Ibid.

5.Ibid.

6.WilliamBains,“FailureRatesinDrugDiscoveryandDevelopment:WillWeEverGetAnyBetter?”DrugDiscoveryWorld,Fall2004,http://www.ddw-online.com/business/p148365-failure-rates-in-drug-discovery-and-development:-will-we-ever-get-any-better-fall-04.html.

7.MatthewHerper,“HowTwoGuysfromQueensAreChangingDrugDiscovery,”Forbes,September2,2013,http://www.forbes.com/sites/matthewherper/2013/08/14/how-two-guys-from-queens-are-changing-drug-discovery/.

8.Yancopoulos,2013.

9.Ibid.

10.Ibid.

11.JeffBezos,personalinterview,July30,2007.

12.JohnDonovan,personalinterview,December20,2013.

Acknowledgments

NathanFurr

Foralmostadecade,I’vehadadeepsuspicionthatwemightnotreallyunderstandhowtomanagetheuncertaintyofinnovation.WhileeverythingIlearnedatbusinessschoolwashighlyrelevanttotherelativecertaintyofcapturingvalue,Ibegantowonderiftraditionalmanagementmightnotworksowellgiventherelativeuncertaintyofcreatingvalue.MysuspiciongrewduringmytimeatStanford,asIwatchedthedesignschoolbeingformedatthesametimeastheLeanStartupmovementgatherednear-religiousfervoramongentrepreneurswhowerealsoangryaboutthefailureofthemethodstheyhadlearnedinbusinessschool.Ifounditstunningthatinmostacademicentrepreneurshiptexts,therewasplentyofinformationabouttheantecedentsofentrepreneurshipanditsoutcomes(e.g.,IPOs,acquisitions),butthesectionsontheprocess—howtocreatevalueunderuncertainty—werebasicallyblank.Iconcludedthatperhapswehadn’ttrulyunderstoodtheprocessofcreatingnewvalueinthefirstplaceandwroteabooktoexplainitcalledNailItThenScaleIttohelpnewentrepreneursavoidthemistakeofscalinganunproveninnovationtooearly:amixofmotivationand“howto”thatcameoutsimultaneouslywithmycolleagueEricRies’sbook,TheLeanStartup.

However,asIreflectedonthefirstbookandresearchedthehistoryofmanagement,Iconcludedthat,asafield,managementfacesamuchdeeperandgraverchallenge.Ifwelookatthehistoryofmanagement(andmostotherfields,withthepossibleexceptionofthehumanities),itwasfoundedinresponsetoaparticularproblem:howtomanageandoptimizethelargefirmscreatedbytheIndustrialRevolution.Inotherwords,managementwasdesignedtomaketrainsrunontime.Thetopicsofinnovationandentrepreneurshipwerescarcelystudiedatalluntilthelastfewdecades,andevenwhentheydidfinallyappearinbusinessschools,wecarriedovermanyofourexistingmanagementtheories—designedforconditionsofrelativecertainty—intothecontextofinnovation.Onlynowareweawakeningtothefactthatbecausethesetheorieswerefoundedontheassumptionofrelativecertaintyandforadifferentpurpose(capturingvalue),theyworkpoorlyforuncertaintyandcreatingvalue.Itisanawakeningthathasoccurredinotherfieldsthathaveencountereduncertainty:designthinkinginengineering,leanstartupinentrepreneurship,agilesoftwareincomputerscience,andactivelearninginphysicsaretheindividualresponsesofeachfieldtomanagingradicaluncertainty.

AlthoughIbecameconvincedthatweneedanewsetoftheoriesandtacticstomanageunderconditionsofradicaluncertainty,IconfessIlackedthecourageto

manageunderconditionsofradicaluncertainty,IconfessIlackedthecouragetoswimupstreamagainsttheprevailingcurrent.WhenIbegandiscussingmyideaswithJeffDyer,hebelievedImightbeontosomethingandgavemethecouragetomoveforwardonthisbookandonmybroaderresearchagenda.Idon’tmeantosaythatothershavenotmadegreatstridesintherightdirectiononinnovation(I’mparticularlyappreciativeoftheacademicworkofClayChristensen,KathyEisenhardt,VijayGovindarajan,IanMacMillan,RogerMartin,RitaMcGrath,TinaSeelig,andBobSutton).However,ittakescouragetosuggestthatthefieldmighthavegottenafoundationalassumptionwrongand,asaresult,althoughallthatwehavediscoveredhasimmensevalueinmanycontexts,weneedadifferent,oratleastdramaticallymodified,setoftheoriesforthecontextofradicaluncertainty.

IwouldliketothankJeffDyerforhelpingmefindthecouragetosharethismessageandforbeingsuchasupportivefriend,robustthinker,andwonderfulcoauthor.HeisoneofthefinesthumanbeingsIwillevermeet.IwouldalsoliketothankmyStanfordmentors,colleagues,andfriendswhostartedmeonthisjourney,particularlyKathyEisenhardt,myadviser,andSteveBarley,TomByers,TinaSeelig,andBobSutton.IwouldalsoliketothankSteveBlankforhisinterestandmentorship,EricRies,withwhomIforgedanearlyresearchpartnership,TomEisenmann,whoprovidedhisrigorousthinking,andAlexOsterwalder,whohasbeenafriendandthoughtpartner.Inaddition,myfriendsatBYUhavebeenparticularlyinstrumental,especiallyProfessorNileHatch,TomPeterson,andGaryCorniawho,asdeanoftheMarriottSchoolofManagement,helpedmecreatetimetoworkonthisbook.ThanksalsotoGaryCrocker,whoprovidedsignificantinsightandsupport,PaulAhlstrom,whoencouragedmetowritethefirstbook,andtheteamattheCenterforEntrepreneurshipandTechnology,ledbyScottPetersonandSteveLiddle,whoprovidedenthusiasmandfinancialassistance.IwouldalsoliketothankmyacademiccolleaguesChrisBingham,BenHallen,RahulKapoor,RoryMcDonald,JacksonNickerson,RobWuebker,andthefacultyatINSEAD,whoencouragedmeandhelpedmerefinetheideaspresentedinthisbook.Furthermore,Ioweaparticulardebtofgratitudetomyteamofresearchassistants,ledbySalvaelOrtegaandcomplementedbysomeparticularlyfineresearchers:AaronBoswell,SeanBrown,SpencerCalvert,KentonNicholls,JamesOakes,JaneThomas,MasonWooley,andPavelYurevich.Ialsowanttothankthemanyexecutiveswhogavetheirprecioustimefortheresearchandwhoarementionedinthisbook,aswellasthosewhoarenotmentioned.Yourparticipationwascrucialtomakingthisresearchhappen,andyouhavemadetheworldabetterplaceforit.

Lastbutnotleast,I’dliketoexpressthedepthofmygratitudetomywifeSusannahforherendlesssupportandbeliefinmeandinmywork.Iamalsodeeplygratefultomyparentsandmyfourchildren,whohavesufferedthroughtheresearchandwritingofthisbook.AnythanksIcouldexpressherewouldbeinsufficientbycountlessordersofmagnitude.

Movingforward,Ihopetofurtherdevelopthemanagementscienceofuncertainty—whatIhavecometocallthe“InnovationSchool”incontrasttothemorefamiliarbusinessschool.Manyofmycolleagueshavealreadymadeexcellentprogressinthisdirection,andIhopethatbysettingtheboundariesofourbasicassumptionswecanworktogethertocreateanewandricherperspectiveonhowtomanageuncertaintyandinnovation.

JeffDyer

WhenNathanFurrandIstarteddiscussingthisprojectalmostthreeyearsago,Ididn’tfullygraspthepotentialofwhatwewouldlearnaswedidtheresearchforthisbook.TheInnovator’sMethodresearchhasopenedmyeyestothefactthatweneedacontingentviewofmanagement:managingunderconditionsofhighuncertaintyisreallydifferentthanmanagingunderconditionsoflowuncertainty.Italsohelpedmeseethat“TheInnovator’sDNA”istypicallyjustthestartingpointforinnovation—andthatwecanallgetbetterattestingandvalidatingourideastomakesuretheywillworkbeforeweinvestinlaunchingthemintothemarket.IwouldfirstliketoacknowledgeandthankNathanforbeingsuchaterrificcoauthor.I’vereallyenjoyedthecollaborativeprocessaswetriedtomakesenseofwhatwe’dlearnedfromourresearchtogether.Moreover,Nathangetsthingsdone.It’sadelighttoworkwithsomeonesocapable.

Thedatacollectioneffortforthisbookhasbeensignificant,andIhavemanyresearchassistantstothankwhoworkedcountlesshoursonthemanuscript.IwouldespeciallyliketothankMasonWooley,ChadHowland,SamuelStapp,KyleNelson,TylerCornaby,andZachRogers.Inaddition,I’dliketothankCurtisLefrandt,principalandVPoftrainingandproductdevelopmentatInnovator’sDNA,forhishelpfulcommentsonthemanuscriptandforhisroleinworkingwithBenTerrestodevelopthevisualgraphicoftheInnovator’sMethod.BenTerresdeservesspecialmentionforhisexcellentdesignworkonthemaingraphic,andMasonWooleysimilarlydeservesspecialmentionforhiscapableassistanceonthemajorityofthegraphicsthatappearinthebook.IwouldalsoliketoextendmythankstoMichaelMcConnell,anadviserofHOLT(adivisionofCreditSuisse),whoconductedtheInnovationPremiumanalysisforthecompaniesweanalyzeinthebook.Thetranscriptionsofalloftheinterviewscarriedoutbymeand/orNathanweredonebyNinaWhiteheadandherstaff,whoalwaysseemedtomeetmyASAPdeadlines.Indeed,allofthestaffmembersthatsupportmeatBrighamYoungUniversityareterrificanddeservemythanks,especiallymyassistantsHollyJenkins,StephanieGraham,StephenPowellGustin,MarissaTenney,andPrestonAlder.IalsomustextendmyheartfeltthankstoformerBYUdeanGaryCorniaandEntrepreneurshipCenterdirectorsSteveLiddleandScottPeterson,whohaveprovidedresearchfundingoverthelastthreeyearstosupportthisproject.

Iwouldalsoliketothankanumberoffolkswhoprovidedextremelyusefulinsightsduringtheresearchphaseofthebook.ManyofthemcomefromIntuit;

mostnotablyScottCook,BradSmith,andKaarenHanson,butalsoJoshWalker,AmirEftekhari,BenBlank,AlanTifford,JeffZias,WendyCastleman,JoeHernandez,andRachelEvans.I’dalsoliketothankJodiMaroney(PRAccess),whohelpedfacilitateourvisitsandinterviewswithIntuitexecutives.ThanksalsotoMarcBenioffandJimCavalieriofSalesforce.com,JohnDonovanandRobListerofAT&T,JeffBezosofAmazon.com,andPaulKirschbaumofValveSoftwareforthevaluableinsightstheyprovidedduringnumerousinterviews.Finally,IwouldliketothankmyfriendClaytonChristensenforwritingtheforewordtothebookandalsoourendorsers,MarcBenioff,JohnDonovan,BradSmith,BobSutton,andSteveBlankforkindlyreviewingthemanuscriptandsharingtheirthoughtsaboutit.

IwishIcouldwriteabookwithoutittakingovermylifeforaleastashortperiodoftime.Asalways,IoweadeepdebtofgratitudetomywifeRonalee,whohasalwayssupportedmeinmyworkandpatientlylistenstomedroneonaboutthisandthatrelatedtowhateverprojectIamworkingon.RonaleeespeciallydeservesrecognitionfortakingsuchgreatcareofourfamilyandcatchingtheballsIinvariablydropwhenIamfocusedoncompletingabook.

AbouttheAuthors

NathanFurrearnedhisPhDfromtheStanfordTechnologyVenturesProgramatStanfordUniversityandiscurrentlyaprofessorofinnovationandentrepreneurshipatBrighamYoungUniversity(rankedamongthetopfiveinentrepreneurshipeducation)andavisitingscholaratINSEADandESSEC.Furrisarecognizedexpertoninnovation,entrepreneurship,andchange,coauthoringTheInnovator’sMethodandNailItThenScaleIt:TheEntrepreneur’sGuidetoCreatingandManagingBreakthroughInnovation.

Furr’sresearchfocusesoninnovationandtechnologystrategy,particularlyonhownewandestablishedfirmsmanagetheuncertaintyoftechnologicalchangeandinnovation.HisresearchhasbeenpublishedinleadingjournalssuchasStrategicManagementJournal,OrganizationScience,andStrategicEntrepreneurshipJournal,aswellasbeingfeaturedinForbes,SloanManagementReview,andsimilaroutlets.HisresearchhasreceivedmultiplenationalandinternationalawardsfromtheAcademyofManagement,theKauffmanFoundation,theSloanFoundation,andotherhighlyrecognizedacademicinstitutions.Basedonthisresearch,ProfessorFurrhascreatedortaughtinterdisciplinaryinnovationprogramsatBYU,Stanford,ESSEC,andotherschools.HealsocofoundedtheInternationalBusinessModel,acompetitionthatreinforcesthemethodologiesheteachesandthatattractedover2,500teamsfrommorethan250universitiesaroundtheworldinitsmostrecentyear.

Professionally,ProfessorFurrhasactedasthefounderoradvisertocorporationsandstart-upsinthehealthcare,cleantechnology,professionalservices,internet,retail,andfinancialservicesindustries.HealsositsontheinvestmentboardoftheKickstartSeedFund,aninnovativeearly-stageventurefund.FurrwasamanagementconsultantatMonitorGroup,apremierinternationalstrategyconsultingfirm,workingwithseniorexecutivesonarangeofstrategicandmarketdiscoveryinitiatives.ClientshaveincludedAT&T,Sony,TecdeMonterrey,USTAR,andotherleadingcompaniesandorganizations.

JeffDyer(PhD,UCLA)istheHoraceBeesleyProfessorofStrategyatBrighamYoungUniversityaswellasaprofessorofstrategyattheWhartonSchool.Beforebecomingaprofessor,DyerspentfiveyearsasaconsultantandmanageratBain&Company.Hisbook,TheInnovator’sDNA,coauthoredwithClaytonChristensenandHalGregersen,isabusinessbestseller,hasbeenpublishedinmorethanthirteenlanguages,andwonthe2011InnovationBookoftheYearAwardfromCharteredManagementInstitute.TheDecember2009articleofthesamenamewasrunner-upfortheprestigiousMcKinseyAwardforbestHarvardBusinessReviewarticleoftheyear.

ProfessorDyeristheonlystrategyscholarintheworldtohavepublishedatleastfivetimesinbothHarvardBusinessReviewandStrategicManagementJournal,thetopacademicjournalinstrategy.In2012hewasrankedtheworld’s#1“mostinfluential”managementscholaramongscholarswhocompletedtheirPhDsafter1990bythepeer-reviewedjournal,AcademyofManagementPerspectives.ThisrankingwasbasedonmorethanthirteenthousandacademiccitationsandalmostfivehundredthousandGooglesearchesonhisname.Dyer’sbook,CollaborativeAdvantage,wontheShingoPrizeResearchAward,andhisTeamBuildingbook(withGibbDyerandWilliamDyer)isinitsfifthedition.

ProfessorDyer’sresearchhasbeencoveredbyForbes,theEconomist,Fortune,Businessweek,theWallStreetJournal,CNN,andmanyotherpublications.HedeliversspeechesandworkshopsoninnovationtoclientssuchasAdobe,AT&T,Cisco,GeneralElectric,GeneralMills,GileadSciences,Harley-Davidson,Hewlett-Packard,Intel,LifeTechnologies,Medtronic,andSony.