What seems to be a pretty thorough study on how incremental and breakthrough innovations have impact on company value and sustained competitiveness has appeared in the Journal of Marketing. Rather than simply looking at top-line contributions they look at three key factors:

1. Effect of breakthrough and incremental innovations on a firms’ normal profits
2. Effect on “economic rents” (profits beyond what’s required to compensate for risk and time value of money)
3. Effect on firm risk

They come to several conclusions that provide quantification of the issue of balancing incremental and breakthrough innovations. First they find that

…few firms can persistently produce a substantial flow of either breakthrough or incremental innovations. For example, only one firm, Procter & Gamble, had an above-average output of breakthrough innovations each year during our sample period.

 They go on to say:

To CEOs and other corporate officers, we note that incremental innovation keeps firms in business, but breakthrough innovation is the key to achieving sustained long-term growth. Our model allows managers to quantify the average NPV of a breakthrough innovation. Specifically, the estimated coefficient…is .000847, which means that, on average, each breakthrough innovation is associated with a 0.847% increase in the market value of the firm’s equity. This increase accounts for all costs (including a normal equity charge) and thus represents pure economic profit. For the typical firm in our sample with an average market value of equity of $4.9 bioonion, [the profits] associated with a single breakthrough innovation is approximately $4.2 million.

Notably, organizational slack is a significant determinant of breakthrough but not of incremental innovation. A possible explanation is that incremental innovation is more likely to be incorporated into a firm’s baseline investment strategy and less likely to depend on uncertain slack resources. In contrast, breakthrough innovation may be viewed as a more opportunistic activity to be undertaken only when greater slack resources are available.

Another possible explanation: Most companies try to make the most of employees’ time, thus taking slack out of the system. What do they get them to focus on? Mostly next-gen or incremental products. So that squeezes the slack out of the system that appears to be a pre-requisite for breakthrough innovation. (Start-ups are 100% focused on breakthrough in most cases, so their slack is entirely taken up by that. Same thing goes for skunkworks.)

This is a dense article with a lot of math in it, and none of the conclusions are particularly surprising. But the detailed quantification provides a perspective on innovation, particularly the balance between incremental and breakthrough innovations, that is valuable. Sure enough, you can’t rely on incremental innovation to keep you competitive - periodic injections of breakthrough innovation are required for survival.

Download it here 

Jess McMullin has posted an interview he did with me a few weeks back, on his bplusd blog (a very good read all around). We touched on a lot of different topics in our 45 minute conversation, which he summarizes as:

• Chatting about the strategy practice at frog. Differences between traditional strategy offering from McKinsey or Bain. The advantages of integrating strategy with a more holistic practice including industrial and interaction designers, engineers, and others.
• Discussion of Org 2.0 companies and how they are better able to take on innovation and create compelling experience-based products, services, and systems. If you’re in an Org 1.0 company, start with a skunk works.
• Dealing with the innovation surplus. Companies that have embraced innovation now have no shortage of fantastic ideas. Now the challenge is prioritization and execution.
• Core insights. Like core competencies, core insights emerge from the unique combination of experience, skills, information, and activities of your organization. Core insights are hard to duplicate in the market, and offer significant competitive advantages.
• Some thoughts on influencing innovation - how can aspiring innovators escape the gravity well of the status quo? If you’re not in a company that embraces innovation, what can you do? Adam comes back to skunk works as one way to build momentum. Look for much more on this topic at bplusd in the coming weeks and months.

 It was a lot of fun to do, thanks to Jess for suggesting it and putting the effort into doing it. You can download the full mp3 from his site.

Creating good user experiences (UX) over and over again means creating first good employee experiences (EX - I’m trademarking that!). That’s the lesson from Southwest airlines according to an NY Times article about retiring co-founder Herbert Kelleher:

Over the years, whenever reporters would ask him the secret to Southwest’s success, Mr. Kelleher had a stock response. “You have to treat your employees like customers,” he told Fortune in 2001. “When you treat them right, then they will treat your outside customers right. That has been a powerful competitive weapon for us.”…

[W]hen you look at a company like American, with its poisonous employee relations and its glum customer base, and compare it with Southwest, with its happy employees and contented customers, you can’t help thinking that Mr. Kelleher was on to something when he put employees first. “There isn’t any customer satisfaction without employee satisfaction,” said Gordon Bethune, the former chief executive of Continental Airlines, and an old friend of Mr. Kelleher’s. “He recognized that good employee relations would affect the bottom line. He knew that having employees who wanted to do a good job would drive revenue and lower costs.”

This isn’t really surprising for a service company like Southwest, but the same rule applies, I believe, to companies that make products. Employee happiness often comes from walking the walk — in other words not just making big pronouncements about how much you love your employees (Kelleher wept when talking about his employess in his going-away speech), but in seeing those through in actions big and small. And often it’s the small ones  that show how you actually mean. It’s kind of like what they say about ethics - it’s what you do when nobody’s looking.

These small touches to how you treat employees are often the most intimate ones, and they communicate how deeply felt the relationship is (or not, as the case may be). Southwest, for example, seems to give its flight staff a great deal of autonomy when it comes to how they intereact with passengers, but bounded by some established guidelines. This has famously led to some staff singing the safety announcements and adding comedic commentary (I once heard one say “There may be fifty ways to leave your lover, but there are only four ways off this big bird!”). It also probably led to the more recent episodes of passengers getting walked off planes for risque clothing…just goes to show that what constitutes a “good” UX is different for different people.

While any company can luck out with one-off good experiences, a long term systemic philosophy of treating employees right fosters a mindset that is focused on thinking about the needs of others, which ideally translates into the products the employees create for the company’s customers.

Cable TV companies are famously indifferent to user experiences, and my provider, Comcast, recently showcased one example. They finally started allowing previews of on-demand movies, but check out how they managed to  mess up the experience:

That giant blue box stays on screen for the entire duration of the preview, obscuring a good chunk of it (even more for non-widescreen previews than what you see here). It’s really distracting.

You wouldn’t see something like this if Southwest ran a cable system.

References:

The Sinatra of Southwest Feels the Love, NY Times

Org Chart 2.0: Built for User Experience Systems

Isn’t it interesting that in the latest airline quality rankings the top three spots were taken by low-cost carriers? JetBlue, Southwest and AirTran ranked the best while overall the industry had its worst ratings in twenty years.

Just goes to show that providing a leading user experience does not have to mean premium price. All three are relative start-ups compared to the likes of United and American, and they have been able to structure themselves (and therefore their) costs based on lessons learned from the older airlines.

Nevertheless, with issues like number of passengers bumped per flight, amount of baggage lost, and late flights that the survey measured, it’s hard to see how these three airlines would have intrinsic benefits over their older competitors.

There is also a more intangible difference between JetBlue and Southwest compared to most other carriers: the atmosphere on the ground and the plane that emanates from the staff. It is more relaxed, more can-do, more enjoyable. One can always find one-off examples at other airlines, of course, but the widespread nature of it at these two airlines (I have not flown AirTran recently so cannot comment) makes it clear there is systemic approach to managing and encouraging this atmosphere.

(And neither Southwest or JetBlue are perfect: JetBlue had its famed debaucle with passengers stranded for hours on runways in snow conditions, and Southwest is currently not looking so good with questionable maintenance practices. If you raise the user experience bar high, the punishment is extra hard if you fail to meet it consistently.)

People often think of good user experiences as uncontrollable black magic. Nothing could be further from the truth, as JetBlue, Southwest and AirTran show: even in a highly cost-sensitive industry there is room to make it a competitive differentiator. And not just for premium brands.

Mark Ury just alerted me to a post he did on his blog, springboarding off my notion that “the system is the product”. He makes the point that time is an important factor in how systems come to be:

Time determines the success of systems more than any other factor. This can be maddening for strategists and designers slaving away at product, service, hardware, and software ecosystems.

He argues that systems are not so much designed as evolved. This may be a matter of semantics, but I’d argue that while systems do indeed change over time, and there are unexpected mutations caused by hapenstance and the “environment” (the surrounding customers, competitors, culture…), that does not mean design has no role. We have some control of our own destiny, even with complex systems (though perhaps not as much as we like or think). All is not left up to the divine, as it were, and fortune rewards the prepared mind.

Semantics aside, I definitely agree that time is a key factor in system success. I’ve used the phrase “high panic threshold” when it comes to thinking about complex systems problems - you must resist the temptation to prematurely state that you have defined the problem fully. Doing so means you will likely miss out on a key insight into your customers, your competitors or your business, thus losing potential competitive advantage. You must have a high threshold for ambiguity, patience to wait it out.

In the past I’ve written quite a bit about wicked problems. I’m still percolating on that idea, but moving in a somewhat different direction. Why? Because wicked problems are incomplete when applied to the business world because in their classic definition they lack the notion of competition. Wicked problems emerged out of public policy and planning. In that arena there is not competition in the same way there is in business. So you do not have the time pressures to the same degree, and the fear that someone else is going to crack the problem ahead of you and thus gain an advantage.

Competition: The Go-Fast Force 

Competition is fundamental to business. You might think of it as the “go-faster” force that propels the world of business and individual companies forward. This instills a sense of impatience in companies, particularly when dealing with complex, rather abstract systems. Mark hits it on the head:

Most companies don’t have the patience (or the time) for the system to reveal itself. Public companies are focused on three month cycles. Their CEO’s have three-year tenures. Their middle-management has 50% churn. At the other end, startups have no resources. Two-thirds have the wrong-market strategy. Ninety-percent of them fail in three years.

Systems are so rarely produced because they take time and time is one resource companies don’t have. Most die long before the system is revealed.

This is the market equivalent of natural selection.

In this context, time to market comes to the fore. First mover advantage is key. Decisions are made quickly, partial understanding is the rule.

Emergence: The Go-Slow Force

However, as Mark points out, systems take time to understand, to refine. As the wicked problems definition would have it, you have to start making solutions in order to even understand the problem, and the problem definition emerges slowly over time. In other words, wicked problems resist the classic waterfall process of research > synthesize > define > recommend > act . In fact they turn it on its head: It is only by starting to act that you can illuminate the less obvious aspects of the problem, but its those aspects that deliver the competitive advantage for the very reason that they are non-obvious. If you can crack the wicked problem you gain a competitive advantage just because it is so difficult to understand.

So we have a “go-slow” force that is in polar opposition to the go-fast force of competition. I call this force emergence. Instead of time-to-market, time-to-right is the priority in emergence. Having that high panic threshold really comes in handy here, because this can take several years.

Obviously having large monetary resources helps a lot here, as you can afford to make mistakes (up to a point - shareholders and investors often have low panic thresholds). Having said that, start-ups tend to be good sources of illumination of wicked problems as they are laser focused on differentiation from the big-boy incumbents. Rather than complacently thinking they’ve got the problem well bounded, they actively seek out new aspects of it. The resource-constrained nature of start-ups often makes them more efficient at the rapid, iterative prototyping that is at the heart of using solutions to understand the problem (note that “solution” does not have to mean full-blown product on the market).

The Never-Ending Tension

We’ve all experienced the clashing forces of competition and emergence, the tension between going fast and going slow. For many people it sets the daily context of their work life, myself included. All the tools, processes and frameworks that we bring to bear on design challenges (user research, competitive analysis, trend spotting, market analytics, etc.) are fundamentally about trying to resolve this tension, or at least to make it managable.