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7 - The Six Outcomes of Strategic Innovation

Creativity produces little value if it is entirely random: it must be channeled to achieve a specific outcome, and the authors intend to explore six in the present chapter:

1. Value Innovation: Creating or extending the value chain
2. Cost Innovation: Shortening the chain
3. Volume Innovation: Widening the chain
4. Marketing Innovation: Recasting the chain closer to customers
5. Boundary Innovation: Blending the chain
6. Learning Innovation: Adapting the chain through product/service interactions

Generally speaking, this represents a hierarchy of value creation, such that innovation near the top of the list will result in greater profitability than those lower on the list.

Value Innovation

Value innovation is the most dramatic and profitable form, which is readily recognizable because it involves a highly dramatic even: the foundation of a new company, the introduction of a new product, or the creation of an entire industry, that provides to the customers a benefit that they may not have conceived or believed, or provides a radical leap forward in the way in which they are currently meeting their needs..

From here, it gets random:

• The discovery of mauve dye was an accident, when an 18-year-old was tinkering around in a makeshift chemistry lab was looking to create something else and the result of a failed experiment was a reddish powder that left an indelible stain. It's been suggested that a trained chemist who followed procedure would never have made the same mistake, or the same discovery as a result.
• Discovery may contradict or ignores traditional knowledge. The infamous example of the Yale professor who gave a student a "C" on a term paper and proclaimed the idea to be preposterous and impracticable .. and which turned out to be the business plan for FedEx.
• Another suggestion is that innovation can result from experimenting with adjectives. The Walkman was the application of "portable" to "cassette player" and the Dyson was the application of "designer" to "vacuum cleaner"
• There is potential for discovery in any obstacle: the word "impossible" is to be challenged by asking what prevents something from being possible, and finding a way that obstacle can be overcome.
• In other instances, discovery is the attempt to find a better way to accomplish something more easily or faster. For example, the Japanese hail instant noodles as one of the greatest innovations of the twentieth century - they were conceived by a man who noticed long lines of people waiting for noodles to be cooked.

Cost Innovation

Cost innovation does not seek to create new value, but instead looks to the means by which value is created and attempts to find a way that is more efficient. The simplest method of cost innovation to examine a process and consider whether any steps can be eliminated; a more complex method entails replacing one or more steps with an alternative activity that achieves the same results.

More random stuff:

• One South American meat packing company discovered that if it flew its cargo planes at an altitude of 25,000 feet, where the air temperature is very cold, it was no longer necessary to equip their planes with refrigeration units - saving the cost of running them and increasing the amount of product that could be carried on each flight.
• The "one laptop per child" initiative was able to create a laptop computer that could be produced cheaply by recognizing that much of the power and sophistication of consumer laptops was completely unnecessary to basic tasks that a user needs to perform.
• In a similar manner, Henry Ford was able to make automobiles affordable to the average person (rather than the wealthy enthusiast) by stripping away unneeded features and decorative elements
• The same has been done by discount airlines, which whittled down the air travel experience to the bare bones of transporting people from one place to another - and in so doing also discovered some things that were beneficial but were not being offered by the major airlines
• During economic downturns, many companies seek to economize by eliminating unnecessary expenses, and the innovations they discover are carried forward to heighten profitability when the economic crisis has passed.
• Economical solutions also tend to have great longevity. The author mentions that the simple barcode was first used in 1974 and has remained until this day, withstanding the challenge of several other approaches that offered greater sophistication - but customers felt that the added capabilities weren't worth the higher cost, so the barcode has remained.
• Another recent cost innovation for some brands is a "zero advertising" approach that leverages public relations and social media to create demand for a product without spending significant amounts of money on producing and placing mass media advertisements.

Volume Innovation

Volume innovation is about discovering ways to sell more products to the marketplace - which may involve finding new customers or selling more to existing customers, or may also address problems with the production and logistics processes that prevent the company from meeting existing demand.

To simply make more or sell more is not necessarily strategic or creative if it merely requires duplicating existing processes (open a second factory the same as the first) or doing them more (dividing into three shifts for round-the-clock operations) or even doing them faster (providing bonuses to workers to increase production, assuming it's mere laziness that prevents efficiency) - to be strategic and creative, it must involve doing things in a different manner than they are currently done.

Bullet time:

• Ford's innovation was applying the factory-line approach to manufacturing cars rather than having them built individually by artisans with general skills. Other firms innovated further this by completely contracting out the production process rather than owning their own factories.
• Apple's stimulated volume of music sales by creating an easy-to-use service (iTunes) to manage not only the selling of the files, but their management on various devices.
• The "Dutch auction" (starting with a high price and bidding down until someone purchases) enabled the flower market in Holland to move inventory more quickly than the more time-consuming traditional format
• Oral-B found it could sell more toothbrushes by adding a blue dye to the bristles that faded over time, reminding customer to replace their toothbrush more often - and was able to divert attention from its profit motivation by convincing customers that changing their brush improved their oral hygiene.
• Gillette's introduction of the disposable razor was likewise billed as being more hygienic and convenient for the customer, but was motivated by the desire to decrease production costs: a thin sliver of blade is cheaper than a full-size razor blade, but wears out quickly. Selling this flaw as a benefit was a stroke of genius.
• Publishers of trade books noticed that people did not buy them very often, and switched to magazine formats, which not only increased their income, but stabilized it, and gave their audience the sense that they were getting fresh information.
• The Swatch corporation found that it could sell a greater volume of watches if the unit price were lower, and overcame the consumer's habit of buying a single high-quality watch by producing an array of colors and designs to coordinate with their daily outfits.
• "Throx" was able to increase revenue by selling socks in sets of three rather than two, on the premise that people would often lose a sock and have to throw the other one away. Granted, solving the "lost sock" problem would decrease the frequency with which people bought a pair - but this loss was counterbalanced by the volume of customers who thought it was a great idea.
• Frequent flyer programs were a volume innovation that led to greater customer loyalty: the loss the firm took on providing rewards and free flights was more than offset by customers who chose their airline rather than a competitor when the difference in fare was marginal.

Market Innovation

The authors describe this idea in a vague way - changing the way that people think about the product. It seems a vague collection that involves not only the way in which the product is used, but also in the way in which it is paid for and distributed.

• In many instances, the creator of a product fails to profit from it, whereas an imitator who markets the product better wins out. Elias Howe may have invented the sewing machine, but Isaac Singer was so successful at selling it (through a finance program that "rented" machines for a monthly fee) that his name is best associated to the product.
• In the online medium, many firms have been innovative in giving away desirable services for free, and instead making their revenue from advertisers or market research firms. Likewise, the shareware model (in which users get free software and are asked to pay if they find it useful) has been experimented with by a few authors and musicians, with varying degrees of success.
• The computer gaming industry is adapting to a new model - the game software is given away for free, and the firms make their revenue by selling customizations that give players a functional advantage in the game, or simply customize their in-game characters.
• Several Bollywood studios have adopted the practice of releasing films to the box office and DVD simultaneously, rather than waiting to milk the proceeds of the cinema. They recognized that theater or DVD is a choice customers make regardless of timing, and a fast DVD release preempts piracy.
• Netflix innovated by changing the delivery format and payment model for video rental, from the physical store where people would pay based on the number of videos they rented to a mail service where people would pay a subscription fee.
• Dell computer also shifted distribution from computer stores to direct purchasing and mail delivery, recognizing that if the price and sales support were sufficient, customers would overcome their reluctance to purchase a product without inspecting it
• In some instances, firms generate more profit by slowing down their delivery rather than speeding it up. Consider that Ferrari has a lengthy waiting list for vehicle, increasing the exclusivity of its cars as well as the price people are willing to pay because there is not a perception that the firm is desperate to offload inventory.
• Another instance where slowing down has been in the food service industry, which for years has sacrificed quality in order to serve food quickly. There is a slow-food backlash among customers who want to take their time to enjoy a meal, and have the perception that their time is rewarded with quality.
• There are numerous innovations that pertain to the way in which products are packaged, such that the product container makes it more useful or easier to transport.

Boundary Innovation

The authors are likewise hazy in their definition of this concept - which seems to be another catch-all that involves various ways to create additional value by creative rearrangement of the value chain.

• One example is branching out into other areas of the value chain. Consider that many automobile manufacturers started out in as motor companies in the industrial or B2B market (selling their motors to another firm who would use them as a component in building cars), then took on more of the value chain to build their own cars, and some have now evolved to being car companies that purchase their motors from other firms.
• The software industry is riddled with firms that were not able to achieve commercial success in developing a consumer product, but found greater success in supporting other firms that sell consumer products - such as consider the producers of game engines who do not produce the actual games.
• A corporation that owns multiple companies can leverage synergies among them. In the contest between BluRay and HD DVD, Sony was able to rout Microsoft because it was able to bring multiple forces to bear: Sony has tremendous popularity in home electronics, owns two major Hollywood studios who decide what formats to support, and fitted its Playstation gaming system with a BluRay player.
• In some instances, clinging to the old ways can prove profitable. The authors mention the resurgence of popularity for record albums (vinyl) in spite of the more widespread popularity of CD and digital download music. There is a corps of vinyl enthusiasts that, while small, is highly profitable to serve.
• Mass customization is another form of innovation that enables the customer to become a co-designer of his product, rather than having to choose between a small number of standard models. Customers can also cooperate in the production process - consider Wikipedia, which enables users to participate in the content creation and curation processes.
• Even before the Internet, many products had a social element: consider the way in which a closely-knit community of consumers, such as the Deadheads or Harley Davidson Owners Group, helps to sell the product and maintain the loyalty of other consumers.
• The Linux operating system might have been the start of a mediocre software company, but rather than attempting to sell the system, its creator gave it away, and instead has made a living as a coach and consultant to firms that use the software.

Learning Innovation

The notion of "learning innovation" seems to be tied to the discoveries that are made during the process of implementing other innovations that lead to additional initiatives (rather than modification of the present one). This can occur in the planning, execution, or analysis phase and results from people interacting with one another.

(EN: It is likely worthwhile to consider this as a separate source of innovation, as a method of maintaining focus. Too often, an innovative idea gets sidetracked chasing after other ideas that have arisen during the implementation process. By suggesting this is a separate thing, it can be relegated to a sidebar for separate consideration.)

• One form of learning innovation is simply asking open-ended questions, which discovers problems and opportunities that the firm may not have identified on its own.
• When IBM moved into consultancy services in the late 1990s, it did not entirely abandon its traditional hardware and software businesses, and the information that its consultants learned in working with clients enabled the firm to improve its own products.
• Test screenings in the motion picture industry are often learning opportunities for the firms: in addition to assessing what viewers respond to (positively or negatively) for a specific film, the firm learns more about the things they might like or dislike in future films.
• A firm can learn much by listening to customers even after a product is launched. For example, the two-compartment dishwasher was intended to enable small households (individuals or couples) to be able to wash dishes in small loads rather than accumulating them, while still having the ability to run both compartments for larger loads. They discovered that Japanese consumers were delighted at the ability to use the compartments for additional storage in their small kitchens, and that Jewish customers were able to use the two compartments to keep their meat and dairy implements separated, and were able to use these unexpected benefits as copy points.
• The adhesive for the 3M Pots-it note was initially considered to be a failure, but by letting employees experiment with it (15% of time is provided for personal research), they discovered the value of a "poor" adhesive - and the way employees modify the notes in the company's own office has identified many opportunities for customized and nice products.
• Companies who participate in social media often learn ways to appeal to customers. The example is given of a Cadbury ad that ended up on YouTube, where people were remixing it. Rather than take offense and aggressively discourage the defacement and satire, the firm played along and encouraged it - gaining a great deal of free advertising and positive sentiment.
• The LEGO company also benefitted from listening to consumers by paying attention to the way people painted or modified its building bricks, to discover ways to create customized or themed "sets" that would be appealing to the market.
• The concept of learning from failure is also popular in the software and online services industry, in which companies rush half-baked ideas to market in order to get feedback from the market. Microsoft has made a standard practice of this, because it has the financial resources and brand strength to sustain constant criticism. Smaller firms launch a half-baked product under one name, take it off the market, and then re-release it under another brand.

The author makes a general observation: learning innovation seems to be the demesne of American firms. It's generally a consequence of American culture: people there are eager to try something new, accept that they may not be perfect, and are not shy about sharing their opinions.