Archive for May, 2010

When Planting a Garden is a Radical Innovation

Posted by Tim in book riffs, innovation, time on 10 May 2010

Nothing could be less innovative than planting a garden at your house, right? Maybe – but maybe not. Take a look at this:

It’s a Green Roof that’s been planted as part of an initiative put together by Sustainable South Bronx. This is initiative started by Majora Carter. The gardens do three main things. They provide food for residents, with a surplus that can be sold to stores and restaurants. The insulate the roofs of the building, which reduces temperatures in the summer and increases them in the winter, saving on climate control expenses. And the extra plants scrub toxins from the air, creating a healthier environment.

Here is how Douglas Rushkoff describes the work of SSBs in his book Life, Inc.:

Through her group, Sustainable South Bronx, she created opportunities for people to grow vegetables at home, to get paid to do environmental cleanup, and to work through local government to stop New York from using the neighborhood as a dumping site for 25% of the city’s waste. Her main innovation was to develop a new method of rooftop gardening that provides high yields of organic vegetables for urban dwellers and local restaurants.
…
Efforts like this scale up in two ways. First, they are shared with or copied by other groups in other communities around the world. Rooftop gardens can work in any city to lower energy bills and clean the air while providing food and jobs. Sharing the wealth is not a matter of Sustainable South Bronx franchising patented techniques to other cities – there’s enough work for them to do in the South Bronx, and they don’t need to extract value from other cities in order to achieve sustainability for themselves. By modeling what they do for others, they develop a network through which they too can learn new techniques.

More significantly, the impacts of their highly local efforts trickle up in profound ways. Less pollution means fewer children with asthma, lower medical and insurance costs, and more time in school.

That’s a lot of good outcomes just from planting gardens. Here are some of the key ideas that are illustrated by the Green Roof program:

If you can innovate gardening, you can innovate anything. This is another example of major business model innovation. The initiatives that SSBx undertakes, and the work that they train people to do is nothing new. The new part is the infrastructure that they have built around these basic activities. In doing so, they are creating genuine value.
This is a great example of what Umair Haque referred to last week as a ‘betterness model’. After describing some major problems with IKEA that he encountered, Haque said:

IKEA’s problem is that it has a business model — but no betterness model. By that I mean, not a model to merely make, market, and sell more meaningless, mass-produced junk, but a model for creating authentic economic value that accrues meaningfully to society.

Sustainable South Bronx is certainly doing this. Their initiatives create significant local value, making the neighborhood a stronger community, and a better, healthier place to live. That’s quite an accomplishment – and one worth aiming for.
SSBx is creating value by connecting. They connect ideas to create new business models and new ways of doing things. Then they connect these ideas to people when they train them – the ideas get transferred as skills. And by creating a network of similar organisations in other cities, they create value for themselves and others through sharing ideas. This is an example of building a network by connecting others, rather than trying to create scarcity by occupying the most valuable network position themselves. Innovation creates value through creating connections.

Innovation isn’t simply coming up with shiny new things. Developing new ways of doing things is a powerful form of innovation. In doing this, we need to consider the broader implications of our business model, which is what makes Haque’s Betterness Model so compelling to me. When you start thinking this way, you can figure out how to innovate something as simple as a garden.

If you’re interested in learning more, here are two interesting talks. The first is Majora Carter’s TED talk, where she discusses her background, and how she came to be involved in sustainable development:

The second is Douglas Rushkoff’s talk at SxSW this year, where he summarises some of the key themes from his book:

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Innovation Lessons from Collapsing Bridges

Posted by Tim in design, innovation on 9 May 2010

Whenever someone comes up with a new type of bridge, there is no way of knowing if the bridge will work or not. The stakes are pretty high too – no one wants to build a bridge that ends up like the The Tacoma Narrows Bridge:

Leon Moiseff, the man who designed this bridge, was no hack. Previously, he had also designed the Golden Gate Bridge, among others. Here is how he described the Tacoma Narrows Bridge:

“The most beautiful in the world.” That’s how engineer-designer Leon Moisseiff described his 1940 Tacoma Narrows Bridge. The statement represents much more than one engineer’s opinion about his own work. Moisseiff’s words reflect important architectural design trends and artistic tastes of the 1930s, as well as three decades of suspension bridge design.

Moisseiff cared deeply about bridge aesthetics. Bridge designs, he said, needed to be “safe, convenient, economical in cost and maintenance and at the same time satisfy the sense of beauty of the average man of our time.” Moisseiff believed that engineers should try “to develop the beauty of their structures” by emphasizing “the essential, to interrupt rhythmically the monotonous and to indicate the minor importance of the auxiliary . . . and attain the pleasure of good form.” Bridge designers, he said, should “search for the graceful and elegant.”

Why do we need new bridge designs? The main reason is not aesthetic – the primary driver is that new methods of building bridges allow us to cross spans that previous designs couldn’t cross. That is why we see new forms of bridges being designed and built – each advance allows us to get across longer stretches, or to get across gaps that have unique physical problems.

New bridge designs let us do new things – but the risk is that we don’t know that they’ll work until we build them. This is true of many innovations – it is often very hard to know in advance if they will be successful once they are at full scale. How can we deal with this? We can learn a bit from bridge designers.

The first thing that they do is they figure out small-scale experiments that allow them to test possible new designs. Here is how Henry Petroski describes preparation for building the Britannia Tubular Bridge (shown above) in the 1840s, in his chapter in Seeing Further: The Story of Science and the Royal Society edited by Bill Bryson:

The experimentalist-engineer William Fairburn… was responsible for conducting scale-model strength tests to establish the preferred shape and detailed design of the wrought-iron tubes. He began with small-scale models to compare the relative strengths of different shapes and arrived at the conclusion that the rectangular cross-section was the best. The model tubes were tested by handing from their centre weights that represented the load of a heavy locomotive. Weights were added until the tube failed, which revealed the weakness of the structure and thereby provided guidance for how to modify it in the next model. By progressively increasing the scale of his models, Fairburn was able to establish trends of behaviour, and from the experimental data the theorist Eaton Hodgkinson established an empirical formula by means of which he could extrapolate to the requirements for the full-sized tube.

To build a full-scale model and test it to destruction would have been essentially to build the bridge itself. So, as is typical in the engineering of large structures to this day, there comes a point when judgment dictats that the model testing must end and the real thing begin.

Small-scale testing is one method for experimenting to support bridge design innovation. However, there are often things that we can’t anticipate, and consequently can’t test. The problems with the Tacoma Narrows Bridge were caused by the huge amount of wind that whips through the Narrows. This is what generated the huge torsion which tore the bridge apart. The design had been thoroughly tested for strength, but not for wind.

Of course, now we can use things like computer simulation to test even for factors such as wind – simulation is part of a class of tools that can help us with this kind of innovation. This allows for even more extensive experimentation than can be undertaken through physical methods. Still, we can only model things that we know about. The Millennium Bridge in London was simulated extensively before it was built, and yet it still had problems with excessive swaying.

It turns out that this swaying was caused by lateral movement induced by synchronised walking. Once this was discovered, possible changes were simulated, until a method for passively damping the movement was designed and installed. Subsequently, the bridge has been stable.

There are three key innovation lessons in all of this:

Test out your big ideas by devising a small-scale experiment first. It is often difficult to figure out how our innovations will work at full scale. But a good first step is to figure out a way to experiment with trying them on a smaller scale first. This is what Hindustan Unilever did when introducing their Shakti Program in India – this is a radical new sales-distribution model. They tested it first with just seventeen women to see if it would work, then they scaled up over time. We can learn a great deal from experiments.
We don’t always have to do live experiments – there are now many innovation technologies available that will enable us to conduct experiments through methods such as rapid prototyping and simulation. Arup Engineering used simulation extensively in the initial design of the Millennium Bridge, and just as extensively in the retrofitting of the motion damping system. With these technologies, we are able to experiment even more extensively than previously.
Finally, we can’t test everything before we launch – at some point we have to use our judgment about whether or not things will work. Sometimes, there will be problems from sources that we never could have anticipated. This may cause failure – as in the case of the Tacoma Narrows Bridge. The key lesson here though it that when we discover a new way to fail, we must ensure that we learn as much as possible from it. After the Tacoma Narrows Bridge collapsed, subsequent bridges using that type of design included stabilisers that prevented the twisting motion. Consequently, no other bridges have collapsed from that particular problem.

Experimenting is a key tool in innovation. We can use it to discover problems and test solutions before we have a massive failure in public. Experimentation can reduce the risk of innovation. So think like an engineer, and figure out ways to test out your ideas before you fully implement them.

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Innovation through Exaptation

Posted by Tim in evolving economic entities, innovation on 7 May 2010

John Tropea made an interesting comment on twitter about one of my recent posts – asking how the idea of exaptation might be used to get our innovative ideas to spread through the network economy. This is a superb question, and well worth investigating (John’s blog is fantastic, by the way, and you should check it out).

First off, what is exaptation? It is a term from evolutionary theory that refers to shifting the function of a trait over time. An example of exaptation is bird feathers – their original purpose was to regulate temperature, but over time they were used to aid flight. Exaptation is a co-evolutionary process and is one of the ways that complex structures come to exist.

What does this have to do with innovation? Quite a bit, actually. One of the widely acknowledged characteristics of innovation is that the inventor often doesn’t know what the invention is for – the actual function of the innovation is discovered in use. John linked to a nice blog post by my friend Pierpaolo Andriani. In it, he talks about the introduction of micro-projectors.

Often when new things are introduced, everyone thinks that they will end up doing whatever people are currently doing, just slightly differently. Pierpaolo suggests that this is shortsighted, and that it is likely that micro-projectors will actually end up being used in some completely unanticipated way. He ties this in to Clayton Christensen’s ideas about disruptive innovation, and he says:

The take-home message is that disruptions are often preceded by a process of application discovery: underperforming technologies survive by creating new niches based on new non-competitive applications. How are the new applications discovered? Well, once prototypes are set free in the market, they will link with the nearly infinite universe of idiosyncratic needs, contexts, wants and combinatorial imagination of users out there. The co-evolutionary process between prototypes and users creates the new application space, it makes the rules of the game as it goes along.

So what’s likely to happen with the micro-projectors? That depends on another set of questions? Is the microprojector an underperforming technology? Is it disruptive? Is it going to be exapted into something else? If scaling down causes a change in the way projectors are used, then a microprojector might become something very different from a conventional projector. If this happens, then the last to know (what may happen) will be the experts!

If I were in charge of the development and commercialisation of microprojectors, I’d rather give a number of them to a group of highly diverse (cognitively diverse, á la Scott Page) group of people and invite them to play with the microprojectors, link with existing technologies, invent new behaviours (that the MP enables), form communities around the new behaviours, etc. In other words ‘exapt’ the microprojector!

This is a great example of the way that innovation works. In many cases, the final use of a new innovation ends up being completely different from what it was originally intended to do. A good example of this comes from a firm with whom John and I have done a fair bit of work – GroundProbe. Their technology is radar equipment that works with an extremely high degree of precision over a relatively short range. Originally, they thought that this would be very useful for locating pipes and underground power cables when people were digging things up – hence the name GroundProbe.

However, once the technology was brought to market, people were less enthusiastic for this service than expected. After quite a bit of experimentation, GroundProbe found several other uses for their technology. One of these was using the radar to monitor the stability of rock walls in mines. Wall collapses at a mine are extremely dangerous, and often very costly as well. These collapses are preceded by small changes in the face of the wall, and these changes can be detected by GroundProbe’s radar. Consequently, this technology can be used to evacuate a sight before a wall collapse, and sometimes it can provide enough advance warning that the rock wall can be reinforced, avoiding the collapse altogether.

This is an exaptation. Pierpaolo’s example shows how we can use our networks to facilitate exaptation. This is one of the things that makes open innovation so powerful – it is a great way to find the diverse set of potential users. Doing this will make us more effective innovators – by finding the best possible function for our innovation through experimentation in use. You can improve innovation by pro-actively taking advantage of exaptation.

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Network Math

Posted by Tim in innovation strategy, networks on 6 May 2010

Metcalfe’s law explains why networks are so valuable – it says that the value of a network is proportional to the square of the number of users. When Kevin Kelly explains this, he illustrates it by saying that the first person with a fax machine was an idiot. What can you do with the only fax machine in the world? Once there are two, you can communicate with each other. And as the network grows, according to Metcalfe’s law, the value created by the network grows even faster than the number of people in it.

This is true of fax machines, of telephones, of internet users, and of social networks. Once we get to very large networks, the number of potential connections available to us is staggeringly large. This high level of potential connectivity is important. It’s one of the reasons that people are willing to stick with Facebook despite each new abuse of their private information – everyone is on Facebook. You can switch to a different social network with better privacy policies, but because currently all of the competing networks are much smaller, the potential value to people is much lower as well.

While the potential connectivity creates the value in these networks, there is a potential downside to large networks. We want to have the ability to reach a large number of people, but we can’t maintain connections with everyone. These large networks tend to be pretty sparsely connected, because it is expensive to build and maintain connections. Think about how much time you’d spend if you were friends with everyone on Facebook – your newsfeed would be impossible to keep track of, and you wouldn’t be able to separate out the news from people you actually care about. At a more basic level, while it’s pretty cool that when you have a telephone, you can call everyone in the world, but what if everyone in the world suddenly decided to call you? High levels of connectivity in large networks are overwhelming.

This is why network structure is important. Every real network consists of a set of ties that are actually a small subset of the total number of possible ties. Consequently, the structure of these ties is very important. Here are some examples from Valdis Krebs’ excellent blog The Network Thinker – a group of ten people might be organised like this:

There are 90 possible ties between 10 people (n * (n-1)) – but this network only has 9 ties. The density is 10% – which is fairly typical for an organisational network. You can see that it has a high degree of structure – it is a hierarchy. In fact, it is an org chart. That’s one way that we can visualise how the group is organised and interacts.

However, if you look at who actually works together within this group, you get a very different picture:

That network is still sparsely connected, but you can see that the structure is quite different. Why is this important? Valdis’ original post makes the point beautifully. We need to understand our actual work-flow and information-sharing network structures in order to get the results that we want within our groups.

Org charts rarely reflect the true network structure of a team. Our actual networks are never fully connected. Metcalfe’s law suggests that the value in large networks is in the potential ability to reach everyone. But in practice, you can’t be connected to everyone. Consequently, the actual structure of connections within a network becomes important. It can be highly structured, like a hierarchy. It can be completely chaotic, with nothing more than random connections between members. Or it can look more like the work-flow network above. In any case, we need to understand the actual structure of our networks if we want them to perform well.

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Innovation – Business Model = 0

Posted by John in innovation on 5 May 2010

We’ve been following a theme on the blog lately on business models and innovation. Last week I wrote about the connection between business model innovation and strategy and Tim wrote a really nice case study of business model innovation in the electric car industry. In this post, I’ll discuss some key ideas about business models from Mark Johnson and Clay Christensen and then show how these play out in a case study of a green-tech company called Papyrus, which developed a method for turning banana trees into paper.

According to Johnson and Christensen, good business models have three key elements that must be logically consistent with each other. These are:

*Customer value proposition
*Profit formula
*Key resources and processes

Using the German white goods manufacturer Miele as an example, the value proposition is the best performing products in their categories enabling margin to be driven by price premiums and the key resources are people and processes that underwrite their R&D and manufacturing. See if you can go through a similar exercise with businesses that you like, or your own organization.

If you have read my strategy post from last week you should start to see similarities with the strategy diamond. Johnson and Christensen’s elements of business models are just a truncated version of the diamond. Once again, the old logic of strategic fit and discipline rises to the surface. An technological invention is part of the third category of resources and processes but there is a big gap between and invention and a complete business model.

Papyrus is small company listed on the Australian stock exchange. I have been using it as a teaching case over the years because it is a straightforward business that is easy for students to understand and analyze. The corporate video is a good five minute introduction to the company.

When the company listed in 2005 the prospectus told a compelling investment story. This was a technically elegant solution to a heavily polluting and resource-intensive industry. What’s more, energy and water consumption was a fraction of traditional paper processing using wood chips and pulp mills. The part where the story got a bit fuzzy was the business model. While production cost comparisons were made with pulp mills, the main suggestion was that someone would license the technology and sort out the business model for them.

Going for the licensing option is a preferred route for many tech companies because it puts of the hard work of building the business model to one side. However, I can think of at least five examples of where the buyer didn’t materialize and the company had to start committing to a strategy that included a viable business model. This is exactly what happened to Papyrus.

In the float prospectus, Papyrus looked like it was based on a cost leadership model. Low production costs would enable them to compete with paper and cardboard. However, the business model didn’t have a customer value proposition because they weren’t clear about who the customer was. If they were licensing, then the customer could be a paper manufacturer looking for environmentally friendly processes to experiment with. If they were going to produce the banana paper then the customer was the paper distribution companies. The following diagram compares Papyrus with traditional manufacturers (source: www.papyrusaustralia.com.au)

The problem was that these distribution companies have evolved to operate at scale with low margins in the paper business. Papyrus’s decentralized production model of producing paper at banana plantation meant that coordinating production at scale was going to be a problem. Slowly accelerating production by selling machines to more plantations just wasn’t going to work. Essentially, the key technical resource of papyrus wasn’t valuable to the bulk paper industry.

Back in 2007, I used Papyrus as a strategy case in my MBA class and the chairman, Dr. David Wyatt, kindly gave a guest lecture on the company. One of my best students, who now works in strategy consulting, noticed that timber veneers had some of the highest margins in the timber products industry and showed how a business model of producing veneer could work. This was a good solution because it fitted with the small and flexible nature of production with good margins. With a timber veneer company as a customer, the value proposition was quality sheets of fiber that came from a renewable resource. Instead of ending up as bulk paper, the product would be onsold to custom boat builders and prestige car companies. As you can see in this news report, they are now manufacturing veneer and selling it. The business logic of the company is now starting to make sense.

I think that there are two key lessons from the case:

1. Focusing on the technology and hoping someone else will sort out the business model rarely works.

2. It can take time to find the right model, but it can be the secret to unlocking the value of the technology.

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Think Like a Biologist to be a Better Manager

Posted by Tim in book riffs, evolving economic entities on 4 May 2010

The first Archaeopteryx fossil was found in 1861, and it now resides in the Natural History Museum in London. It was an important find – two years after the publication of The Origin of Species by Charles Darwin, Archaeopteryx was the rarest of fossils, and one that was quite useful for Darwin’s theory – an intermediate form. Archaeopteryx very clearly shows the transition from dinosaurs to birds.

The specimen in London is the type fossil – Richard Owen published the first full description of the species in 1863. However, after that, the fossil hasn’t just been sitting around on display. It was re-described in great detail by Gavin de Beer in 1954 – this description integrated evolutionary theories known as the modern synthesis. More recently pieces of the braincase embedded in the fossil were CAT-scanned in order to learn even more about the nature of Archaeopteryx.

Richard Fortey describes all of this beautifully in his chapter in Seeing Further: The Story of Science and the Royal Society edited by Bill Bryson. He says:

All these endeavours have served to confirm the transitional nature of Archaeopteryx – but have also confirmed that in most important functional respects it is closer to birds than to dinosaurs. This in turn has contributed to the debate about whether birds descended from one particular group of dinosaurs: most paleontologists nowadays concur that they did. One might say the the meaning of Archaeopteryx has changed, while the information that has been extracted from this specimen (and other new discoveries) has increased fitfully as scientific hypotheses have shifted.

The Archaeopteryx story is important for managing innovation. The first lesson is on the research side. When people undertake business research, we like to think that we are being scientific. To many, this means acting like physicists and looking for laws. The problem with this approach is that people and their organisations don’t act like atoms. So it’s really difficult to find laws that apply equally well in all situations, and which allow for prediction.

People and firms are a lot more like organisms. Well, people are organisms – but my point is that we need to act more like biologists than like physicists when we are trying to learn what makes our organisations work. This means that we have to study the past, and use abductive reasoning to make our generalisations.

This is where the Archaeopteryx story is important. If we’re studying business like biologists, we need to start by describing things well, and by classifying them correctly. Research that is ‘merely descriptive’ is frowned upon in business schools, and this is wrong. We need more case studies, with a fair bit of detail, so that we can refer back to them in light of new theories and findings, just as biologists have with the Archaeopteryx fossils. Building grand theories might seem to be where the glory is, but we need to get a whole lot better at describing and classifying if we want our theories to hold up over time.

This leads to the second lesson – this time for managers. One of the dangers of being a manager is that often when we try to improve our skills, we end up falling prey to fads. One of the huge giveaways to someone trying to sell you on a fad is when part of the argument is “everything is different now.” This is usually a sign that there isn’t much research behind the idea – it’s often explained just through anecdotes.

One of the signs of a theory that is more grounded in reality is that whoever is explaining it makes some attempt to place it in history. They understand how previous cases fit in with their ideas, and the theories can explain not just what is happening now with dot.coms and social media, but also what happened back in the days of steam engines and telegraphs. Good business theories will do what the biologists are doing with Archaeopteryx – they will go back and reinterpret old evidence in light of the latest ideas.

My prescriptions today then are these: if you’re a researcher, think like a biologist. And if you’re a manager, look for help from research that looks more like biology. Try to use theories that are just as good at explaining Thomas Edison as they are at talking about twitter.

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Innovation, Metrics and Incentives

Posted by Tim in innovation strategy on 3 May 2010

Prior to graduating from high school I had a few different jobs, but they were all casual. My first real job was during the summer before I left for university. I worked in a large electronics firm in the group that assembled circuit boards. My memories of this job are a bit hazy – it was a while ago, and it was also pretty boring work. We worked in a semi-clean room, and the process had about six steps. There were five of us on the team, plus a manager, and we all worked on whatever needed to be done at the time.

We counted the pieces for each batch of circuit boards, sorted them into right order, laid them out in order while interleaving the sheets of “pre-preg” (the composite fiber that included the adhesive), and put the sheets onto metal pins. Once the circuit boards were pinned up, we laid them out in a specific way, and then sent them through a giant conveyor belt that cooked them.

When they came out the other end, they were counted again, we took off the end plates and retrieved our metal pins, trimmed the melted pre-preg from around the edges, and sent off to another part of the factory where they welded the transistors and resistors onto the boards that we made.

I don’t remember that much of the actual work – I’m pretty sure I’ve forgotten a couple of steps in the process. What I do remember is our performance system. Everyone on the team had to keep a daily timesheet. We recorded which batches we worked on, which of the six jobs we did, how long it took, when we took breaks, when we did miscellaneous tasks (like sweeping up) – pretty much everything.

Each of the six jobs on the timesheet had a standard attached to it – a measure of how many of each task we were expected to do in an hour. Once I got comfortable with the team, I asked Martin, the guy that took the most time to show me how to do things about these standards. He said that they weren’t very accurate, so everyone ignored them. Even after just a couple of weeks, I could tell that this was true. Some of the jobs wildely overestimated the time it took to do them, but most underestimated the time. The job that was the most fun was pinning up the boards. This was also the one with the least accurate time estimate – the company thought we should be lots faster at this than we were – even our most lightning-fast guy couldn’t hit the standard.

I also made another discovery one day when I was talking to the manager. The people on my team might be ignoring the standards because they weren’t accurate, but management was definitely paying close attention to them. Each week she received reports on everyone’s efficiency – and these were based on performance against those flawed standards.

Like I said, the job itself wasn’t very interesting. So to keep my mind engaged, I started figuring out how to game the system. I figured out that the best job to do was the one that no one wanted – counting out the pieces when they came in. So I started doing that. Pinning up was by far the worst to do from an efficiency standpoint, so I let everyone else do the popular job. I also discovered a few other tricks to improve the way I looked on paper.

By the end of the summer, in terms of actual speed, I was probably about 3rd best out of the five of us. But on the management report, it was a different story. Martin’s efficiency was about 110%, the lightning-fast guy was just under 120%. And I was just over 180%! This was the first time I really thought seriously about performance metrics – something that ended up being one of my strengths as a manager.

There are three innovation lessons in this story.

People will respond to incentives if they are clearly communicated. In this case, they weren’t. If everyone had been aware of the way that the standards were actually being used, we would have been fighting over who got to count pieces, not over who got to pin them up. On the other hand, I’m not sure that the standards really reflected the behaviors that the managers wanted to encourage, which brings up the second point:
Your metrics need to be aligned with your strategy. The metrics for our circuit board team didn’t match up with what the firm wanted. They actually wanted no defects (we weren’t measured on that at all!), at a reasonable speed. But what they measured was speed, inaccurately. Because the metrics weren’t aligned with what they wanted, I’m pretty sure that they didn’t get what they wanted. This is also often a problem with innovation. We want innovation to improve our performance, or transform our business (or industry!). But that’s not what we measure. Often we don’t measure innovation at all. If innovation and strategy are not linked, your organisation will not be innovative, and it probably won’t meet its strategic goals either.
You almost certainly need new metrics. My electronics firm definitely did, and most of us need better innovation metrics too. No metrics are bad, measuring something like patents is only marginally better than doing nothing (and could actually be worse!). We need better metrics for tracking innovation. Scott Anthony has some excellent suggestions. He recommends developing a suite of metrics that include inputs (things like Google’s 20% rule – all the programmers have 20% of their time to put into projects), process measures (such as innovation portfolio balance), and outputs (as 3M does with their target of generating 25% of their revenue from products introduced within the past 3 years). Stefan Lindegaard has also written a very good post on this subject, with examples from Johnson & Johnson and Intel.

The metrics that we use provide the incentives for action within our organisations. Getting them right is important. If you are trying to improve innovation, a good first step is to improve your innovation metrics.

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Electric Cars & Business Model Innovation: Better Place

Posted by Tim in business models, evolving economic entities, time on 2 May 2010

When was the first car fully powered by electricity built?

Depends on how you define it. There was a prototype built in 1835. One built in Belgium set the land speed records in 1899 (68 mph!). And a few were on sale from at least 1895 on.

In all that time, they’ve had one fundamental problem – battery life. They’ve all had restricted range. As a consequence of this, most of the recent electric cars have been small, with poor performance – making these trade-offs extends the range of the vehicle. It’s always been possible to make electric cars that perform as well as or better than petrol powered vehicles. Just look at the Belgian land speed record – or the cars from Tesla Motors today.

So electric cars have been around for a long time. Why haven’t they take off? There are a variety of reasons, but one critical one is that for the most part, they have primarily been conceived and sold using the same business model used for petrol-powered cars. Consequently, they are judged against the performance of petrol-powered cars, and in this regard they consistently come up short.

What’s the solution?

Business model innovation, of course! Watch this talk by Shai Agassi from last year’s TED Conference, and think about the business model that his company Better Place is trying to implement:

We discussed this video in class this week – when I asked how this business model stacked up against the traditional one for cars, one woman enthusiastically said “Everything is different!” She’s right. That is why Better Place is becoming a popular example among people interested in business model innovation. Mark Johnson talks about them in Seizing the White Space, Anders Sundelin has written several excellent posts on Better Place on the Business Model Database Blog, and it’s been discussed on Knowledge @ Wharton Innovation and Entrepreneurship page.

Because Better Place has already been pretty widely discussed, I want to focus on just two parts of their business model innovation: revenue generation, and their value network.

The Better Place vehicles are being sold on the mobile phone model – the hardware is pretty cheap, because it is subsidised by a usage fee. You get the car for very little, but you pay Better Place a mileage fee. This is important for several reasons. One is that dramatically changes the economics of buying a car. In Denmark, you will be able to buy a BP car for about 1/3 the cost of a petrol-powered car of similar specs, and running costs will be about the same. This introduces a new buying decision for people. It’s no longer “I’d like to be green so I’ll accept a bunch of severely limiting performance trade-offs to do so.” This payment structure actually makes BP cars attractive whether you want to be green or not.

The changes in the value network are driven by these changes in the revenue generation mechanism as well. Better Place is not manufacturing cars – they are assembling an electric vehicle ecosystem. Here is the description from the Wharton piece:

Just like telecoms operators established a wireless network to enable mobile phone communication, Better Place established a network, but in its case to enable mobile transportation with electric vehicle charging spots and battery exchange stations powered by renewable energy. It is creating an ecosystem of companies, which will produce electric cars with batteries that can be exchanged or recharged at the stations, manufacture batteries, set up electric-car dealerships and more. Just like telecoms customers paying for minutes used on a wireless network, its customers pay for miles driven. The vehicles become the means of generating revenue for Better Place.

“The company thought about a novel way to [change] the automotive industry in a way that alleviates a reliance on fossil fuels. It’s good for the environment, good for national security, good for consumers,” Amit notes. Better Place “may even give customers a car for a nominal fee because it makes money from renting a battery, just like the cell operator gives you a free phone to use on their network.” The Better Place business model, he says, has turned much of what the auto sector does on its head. “Right now, when a dealer sells you a car, he doesn’t make money when you drive it. The Better Place revenue model is based on car usage. This is a different business model.”

By approaching their business model this way, Better Place accomplishes two important things. One is that they establish an ongoing relationship with the car buyers. For as long as you are driving one of their cars, you’re connected to the firm. The second accomplishment is that this extended recharging and battery-swapping network gets around the range problem that has been the critical issue for electric cars for well over 100 years. By taking that out of the equation, they eliminate the primary reason for not driving an electric car.

Finally, this business model positions Better Place to take advantage of what will be substantial falling costs of producing electricity for their cars. As Agassi notes in the talk, the cost of producing and storing power will drop in half about every five years. This is staggering – it means that these savings can either be passed on to consumers, or held as extra profit. Either way is good Better Place.

As my student pointed out, all aspects of the Better Place business model are different – not just these two things. This is a great case study of business model innovation. It shows how new business model can reinvent an industry. It’s pretty easy to see how the auto industry will change enormously if this approach works. It also demonstrates how all of the elements of a business model need to be integrated. I didn’t talk about all of them, but you can see in the talk how the market being served, the problem being addressed, and the firm’s place in the value chain are all different too – and that everything fits together.

Business model innovation is a powerful, yet often overlooked form of innovation. Innovating your business model not might have results as radical as Better Place’s, but it is an option that is open to all organisations. And it’s one to which you should give some thought.

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Design and Innovation

Posted by Tim in design on 1 May 2010

Which of these two things is better designed?

The Robert Graves Tea Kettle by Alessi?

Or the little plastic thing that goes in the pizza box to keep the cheese from sticking to the box?

And which of the two is more innovative?

Does the Graves tea kettle heat water more effectively than other tea kettles on the market? For that matter, is the one manufactured by Alessi any better than the nearly identical one, also designed by Graves, sold at Target for about half the price?

I’m not so convinced that the answer to either of those questions is yes.

How about the pizza tripod? It does its job superbly. Is there anything better at what it does? Not really. Prior to the pizza tripod, we didn’t really have anything other than cheese stuck to our cardboard. It is a fantastic piece of design, and a great innovation.

We often mistake design for making things look pretty, or cool. Great design can be aesthetically pleasing, like the Graves tea kettles, but it doesn’t have to be. The pizza tripods aren’t the kind of thing that you can display in your house as art, but they sure get the job done. And they were completely new to the world when they showed up.

Great design isn’t just making stuff look great. Innovations aren’t just flashy technical gadgets. Great innovation and design should make our lives better. There are plenty of ways to do that, and many of them are as simple as keeping our pizzas intact.

My challenge to you today is to go out and think of a way to make things better. Your idea doesn’t have to be a thing. It can be a new way of doing things – a better way. But think of something, and do it. That’s innovation.

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