THE SECRET RECIPE FOR INNOVATING ALL THE TIME. Anjan Thakor

Transcription

1 THE SECRET RECIPE FOR INNOVATING ALL THE TIME by Anjan Thakor 1

2 THE SECRET RECIPE FOR INNOVATING ALL THE TIME Executive Summary This paper provides a conceptual framework for organizations to develop a culture and mindset for sustained innovation that transcends the industry to which the organization belongs and its existing technological capabilities. The framework developed in the paper begins with the observation that every business paradigm is based on a set of assumptions. Quite often these assumptions are not clearly or explicitly identified. But they exist nonetheless. The key to successful innovation involves two critical steps. The first is to make explicit all of the assumptions underlying the existing product/process/paradigm. The second step is to determine which of these assumptions can be challenged to create something new and better. The secret to successful innovation is to identify important assumptions to challenge. These are widely-accepted assumptions for which there is actually supporting empirical evidence. It may seem somewhat paradoxical that the strongest assumptions are chosen for challenge, but this is what the most successful innovators do. The purpose of this article is to develop this concept, illustrate it with examples of successful innovation and explain how to implement it within organizations. 2

3 THE SECRET RECIPE FOR INNOVATING ALL THE TIME I. INTRODUCTION Innovation is the elusive goal pursued by many individuals and organizations. In this paper, I explain an approach to innovation that can be practiced by any individual or organization. The basic premise of this approach is that innovation requires making something new that is better, and what it replaces is an existing product/practice/paradigm that is predicated on a particular set of assumptions about the environment. What exists today is probably the best product or service if one takes the underlying set of assumptions on which it is based as given, i.e., if one takes these assumptions as valid. So if one continues to take those assumptions as the truth or as immutable, then it is difficult to visualize how one can come up with an innovation that is better than what exists already. To innovate, one must first discard an assumption that is important for the existing product or service and replace it with something else that will lead the product/service design down an entirely different path. The assumption that is discarded must be important even central for the existing product or service in that it is widely shared within the industry and thus has strong empirical support. While challenging and discarding an assumption of great import seems somewhat paradoxical, doing so means that the innovator is going against current wisdom. And going against the current wisdom frees the innovator to delve into areas, combine and recombine components and ideas, and branch into areas previously assumed to be off limits. This then often leads to dramatically new ideas that represent discontinuities ideas like cell phones, quantam computing, and global research engines. 3

4 In what follows, I first describe the approach in more detail in Section II. I then explain in Section III can operationalize this principle for any innovation. Section IV concludes. This paper is a summary of a significantly more extensive discussion of this approach in Chun and Thakor (forthcoming). The reader is encouraged to read that book chapter for further details. It is also discussed as part of a principles of innovation in Thakor (forthcoming). II. MORE ON THE DROPPING KEY ASSUMPTIONS APPROACH Every product, service and business model that we see is based on a set of assumptions about the environment, including assumptions about customers, suppliers, competitors, geopolitics, the government, demographics, weather patterns, and so on. Given these assumptions, firms and individuals optimize and come up with designs for products, services and business models. We only see the output of this process the actual products, services and business models but those involved in producing these use the underlying assumptions that may not be visible to others. Often these assumptions are not even explicitly identified by those involved in the production process, but they nonetheless dominate how products and services are designed. Consider the example of the U.S. coffee industry in the early 1980s. The industry was dominated by three firms Nestlé, Proctor & Gamble and General Foods that collectively had over 90% market share. Coffee was a commodity and profit margins were compressed by intense competition to sell to highly price-conscious customers. The major players were engaged in a fierce battle for market share, but no one was making profits, let alone generating enough profits to exceed the cost of capital and create value. 4

5 What were the key assumptions the major players were relying on in the coffee business? Here are a few: 1. Coffee is a commodity and the consumer cares only about price. 2. To compete effectively, you need to be the lowest-cost producer, which requires maximizing scale, which in turn requires winning the war for market share. 3. The market for coffee is largely undifferentiated and consists of the entire groceryshopping public. These assumptions were the foundation of the business model that all the major coffee manufacturers were using in the early 1980s. Each of these assumptions had strong empirical support. They were widely accepted. There seemed to be no reason for any of the players to seriously challenge any of these assumptions. Enter Starbucks. It challenged and discarded all three assumptions. By using Arabica coffee beans instead of the cheaper Robusta beans and charging customers almost $2 for a cup of coffee, Starbucks discarded Assumptions 1 and 2. And by focusing on selling through cafés located near places of work and thereby appealing primarily to an upwardly mobile professional customer base, Starbucks discarded Assumption 3. Why did Starbucks dropping assumptions strategy work? The reason is that each of the three assumptions was valid on its own and it was difficult to discard any one of them while accepting the others. Starbucks discarded all three of them. Instead of trying to serve the whole market through grocery stores as the major coffee manufacturers were doing Starbucks chose to initially serve a select subset of the market through cafés, focusing on the entire coffee consumption experience of the customer rather than only on selling coffee. Essentially, Starbucks adopted a different definition of the product from the one that was in place before the 5

6 emergence of Starbucks and others that followed it. While the previous coffee manufacturers defined coffee as a product to be sold in grocery stores, Starbucks chose to define coffee as a social experience. This led to a completely different paradigm for how to make and sell coffee. The message is clear. New products and services emerge from someone discarding the assumptions that dominate the existing paradigm. The challenge is deciding which assumptions to discard. V. PUTTING THE FRAMEWORK INTO PRACTICE While the idea of dropping assumptions is simple, the difficulty lies in the subtlety. Often, we are not even aware of the assumptions we make. People have a tendency to accept something as given more as a subconscious reflex, rather than a deliberate act of compliance. Therefore, the framework we suggest requires thought and deliberation. Brainstorming practices such as those used popularized by IDEO can be helpful in surfacing deep assumptions implicit in the way a particular product or service may be perceived. Remember: It s not about simply discarding any assumption, rather it s about identifying and discarding the right assumption. Our dropping assumptions principle can manifest itself in different ways. However, we extract some general principles of innovation, which we observe in almost every case of innovation in practice. The four points below summarize what we feel are the more robust, and useful, generalizations of this principle: First think of discarding assumptions that, once out of the way, allows for a convergence of two or more industries, such as the coffee and restaurant businesses in the case of Starbucks. This is useful in that it can guide you to an application that is unique and more difficult to copy, hence lending towards sustainable advantage. 6

7 Second, drop an assumption that is central to the existing paradigm, such as coffee is a commodity and the customer cares only about price. Third, examine dropping an assumption that leads to an innovation that meets a latent or expressed consumer need that is currently not being met. For example, one aspect of Apple s itunes was to allow consumers to purchase individual songs (as opposed to the Naptser model) for a reasonable fee. This enabled an economical method of music distribution with broad industry support and a commercially viable business model. Fourth, once the initial big assumption is dropped, look for secondary assumptions that VI. CONCLUSION can be dropped to refine the innovation. The key to innovation is creativity and the key to creativity is to think freely, without the impediment of the things we take as granted. The dropping key assumptions principle is a key element that can help both the individual and the organization to improve the quantity and quality of innovation they produce. By selectively challenging and discarding assumptions, both implicit and explicit, that dominate current thinking and application, firms can innovate free of the shackles that constrain their competitors. I have provided only one out of the abundant list of examples of how this principle can be applied. Using this principle as often as possible, both individually and institutionally, will accelerate your organization s innovation output. 7

8 REFERENCE Chun, Samuel and Anjan V. Thakor, Unblocking Innovation: Breaking the Shackle of Assumptions, in Innovation and Growth: What Do We Know? (ed: Anjan Thakor), World Scientific Press, forthcoming. Thakor, Anjan, V. The Four Colors of Growth, Elsevier, forthcoming 8