Business Report

Four Principles for Crafting Your Innovation Strategy

Two management consultants explain what successful companies have done to prepare for a world of constant Internet connectivity.

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.

By contrast, the descent of Blockbuster during the last decade shows what can happen when a company isn’t imaginative enough about the new possibilities of a technology. To be fair, Blockbuster didn’t have an easy task in front of it. It had thousands of stores, many owned by franchisees who had rights that restricted how quickly Blockbuster could change. Still, Blockbuster apparently never even imagined a world without stores, any more than Kodak imagined a world where photos didn’t require film and chemicals. So while Netflix plotted for a decade to make its world-class mail-distribution system irrelevant, Blockbuster clung to its stores and made itself irrelevant. It filed for bankruptcy protection in 2010.

Don’t just play defense.

While many companies respond to technological change by clinging to their traditional markets and business models, Hasbro shows how an old-line business can claim new territory too. In the face of increasing competition from electronic games and entertainment, many of Hasbro’s products seemed tired, and the market in which they were competing was in decline. Transformers—basically, robots that could disguise themselves as cars—were more than a quarter-century old. G.I. Joe went all the back to the early 1960s. But Hasbro invigorated sales by leveraging its brands beyond toys and games, for instance making them the basis for a series of big-budget Hollywood movies. Hasbro also effectively adapted Scrabble to modern technology. Rather than just fight a rearguard action and protect sales of Scrabble boards, Hasbro now lets people play Scrabble on smart phones and other mobile devices.

Make sure you look good naked.

Textbook publishers have traditionally been all bundled up. They relied on their lobbying with states to win the right to sell books, rather than having open, continual competition based on price, quality, or anything else.

The situation is beginning to change because of consumer uproar about the cost of college texts, budget cutbacks at schools, and reforms in the educational system. Now technology is poised to destroy the traditional textbook business model altogether, because the spread of electronic devices is reducing the need for books and creating an open field for innovation. Some smart publishers are starting to experiment with new ways of delivering their content that will look great naked—meaning it won’t be wrapped in the traditional format of a book. They’re doing it because costs will be reasonably low and because the benefits will be enormous. Basically, the textbook can become the electronic hub for educating a student.

Johnny won’t just read a book on his tablet. He’ll be able to tap into other resources right from his textbook, like teacher notes, videos, and tutors. When Johnny finishes his homework, the computer will correct it for him immediately and make suggestions about what to do differently. Parents will be notified that Johnny has done his homework (or not). The teacher will get an e-mail that night showing which problems caused problems for the class, so the teacher can address those the next day. School administrators will, over time, get information about which teachers are having success and which aren’t. Textbook publishers will get data about areas that are confusing students and will be able to test different wording and different teaching methods.

Accelerated Turnover

Any list of the most successful companies in the U.S. would see about half of its members drop off every decade, and we’re willing to bet that the turnover in the next 10 years will be even higher than that. Companies will have to adapt to a world in which they don’t control the conversation with their customers. Customers will talk with each other, talk back to the company, talk to other companies, and on and on. Every permutation will be possible, and companies will struggle to innovate adaptations.

But as Schumpeter saw, every act of destruction provides an opportunity to create. Although seizing those opportunities will be tricky because it’s hard to discern exactly how the future will look, we find ourselves turning back to one of the famous sayings of our old friend and colleague, computing pioneer Alan Kay. He says: “The best way to predict the future is to invent it.”

Paul B. Carroll and Chunka Mui are co-founders and managing directors of Devil’s Advocate Group, a consultancy that helps businesses test their innovation strategies. They are also co-authors of Billion-Dollar Lessons: What You Can Learn From the Most Inexcusable Business Failures of the Last 25 Years.

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Next in this Business Report

Innovation Strategies

The world’s most innovative companies are using technology to move faster and more decisively than their competitors. They are mining data on their operations and their customers, letting their employees do inexpensive experiments, and using business software to get sprawling organizations working together. We’ll explore the industries that are most in need of fast innovation and examine new ways of doing business, with case studies and interviews from around the world.

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