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The economist Joseph Schumpeter coined the term “creative destruction” in the late 1930s—long before Moore’s law and the creative destruction that was unleashed by a doubling of computing power every 18 months. Compared with the events of recent decades, what Schumpeter saw was creative destruction in slow motion. And the pace of innovation has picked up markedly in the last five years, because the spread of smart phones, tablets, and other mobile devices is letting us all take the incredible power of the Internet with us wherever we go.

To come out ahead, companies should follow four principles:

Think big, start small, fail quickly, scale fast.

Even as he built the DVD business that toppled Blockbuster, Netflix CEO Reed Hastings was guided by the big idea that mailing people DVDs was a mere way station on the road to streaming movies directly into people’s homes. The market is now richly rewarding Netflix for being on the cusp of achieving this vision, but what Hastings should get credit for is how diligently he prepared for this day.

As far back as 2001, Hastings spent $10 million on research into streaming; he was willing to forgo most of his small company’s profits to get started on his preparation. In the years since, Hastings has frequently prepared to offer streaming video—only to junk the projects when he realized they weren’t feasible. As streaming started to become real, Hastings did a host of deals with content providers to see which would work and to make sure he wasn’t left out, even though it was clear that most of the deals wouldn’t amount to much. Hastings also considered numerous pricing models for streaming and ultimately decided to start by giving it away as part of DVD subscriptions. That way, people could get used to streaming while he built his library of offerings, and he wouldn’t create an opening for a competitor.

In late 2010, after almost 10 years of experimentation, he offered a streaming-only option for about half the price of a subscription for DVDs by mail. That, combined with the increasing size of the library, should accelerate the move to streaming.

Hastings had a grand vision from the outset, but he started with lots of small projects that often failed and that he killed quickly. Now he’s scaling fast and reaping the benefits of his diligent approach to innovation in confusing times.

Many companies are not very good at this process. In particular, they can’t seem to start small because senior management won’t pay attention to small projects. Companies also aren’t very good at failing quickly. Instead, they tend to swing between complacency and panic. They wait until they’re way behind and then bet everything on one big idea. And, as one senior executive has told us, “the only thing harder than starting a strategic initiative is killing one.” Once something gets under way, too many people are invested in it for it to go away easily.

Start with a clean sheet of paper.

At the moment, malls have a huge disadvantage relative to online stores. Electronic retailers have detailed knowledge of a prospective customer’s preferences and purchase history, while those in malls generally can know nothing about their customers until they present a credit card at the register. At that point, it’s too late to personalize promotions or shape the shopping experience.

New connected technology is giving heretofore “offline” malls and stores a chance to reimagine how they interact with customers. The first step is getting customers to identify themselves using their smart phones. Some customers already do so through social apps such as Foursquare and Facebook Places. Others do so when offered small incentives through loyalty programs such as Shopkick, which gives shoppers points when they check in at participating malls, like many of those operated by Simon Property Group, and at retailers, like Best Buy and Crate & Barrel.

Building on this newfound identity and location information, and leveraging social media, malls and stores are starting to create social experiences that are not possible online. Eventually, a group of teenage girls might go to a store and disperse but keep track of each other through the GPS on their phones. They’d identify themselves through the mall loyalty program and be treated to a slew of customized promotions based on their preferences and buying histories. The girls would keep up with each other via Facebook, tweets, or texts and gather periodically as someone finds an interesting item or person. They could attract other friends to the mall. A movie theater, practicing yield management the way airlines do, might entice some of the girls with cheap tickets rather than have seats go vacant. The whole mall experience could become an adventure.

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Tagged: Business, Business Impact, innovation, Innovation Strategy

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