The New, Faster Face of Innovation

From the Wall St Journal | Aug 17, 2009

Thanks to technology, change has never been so easy-or so cheap

By ERIK BRYNJOLFSSON And MICHAEL SCHRAGE

Call it innovation on steroids. Or innovation at warp speed. Or just the innovation of rapid innovation.

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See the complete
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report.

But
the essential point remains: Technology is transforming innovation at
its core, allowing companies to test new ideas at speeds-and
prices-that were unimaginable even a decade ago. They can stick
features on Web sites and tell within hours how customers respond. They
can see results from in-store promotions, or efforts to boost process
productivity, almost as quickly.

The result? Innovation initiatives that used to take months and
megabucks to coordinate and launch can often be started in seconds for
cents.

And that makes innovation, the lifeblood of growth, more efficient
and cheaper. Companies are able to get a much better idea of how their
customers behave and what they want. This gives new offerings and
marketing efforts a better shot at success.

Harry Campbell

Companies
will also be willing to try new things, because the price of failure is
so much lower. That will bring big changes for corporate culture-making
it easier to challenge accepted wisdom, for instance, and forcing
managers to give more employees a say in the innovation process.

There will be even better payoffs for customers: Their likes and
dislikes will have much more impact on companies' decisions. In
globally competitive markets, they will ultimately end up getting
products and services better tailored to their needs.

Already, this powerful new capability is changing the way some of
the biggest companies in the world do business, inspiring new
strategies and revolutionizing the research-and-development process.

"In the U.S., we do the vast majority of our concept testing online,
which has created truly substantial savings in money and time," says
Joan Lewis, global consumer and market knowledge officer at Procter
& Gamble Co.

Finding the Link

What does all of this experimentation look like in practice?

Consider Google Inc., which runs 50 to 200 search experiments at any
given time. In one case, Google asked selected users how many search
results they would like to see on a single screen. More, said the
users, many more. So Google ran an experiment that tripled the number
of search results per screen to 30. The company found that traffic
declined.

What
happened? On average it took about a third of a second longer for
search results to appear-a seemingly insignificant delay that
nonetheless upset many of the users. The greater number of results also
made it more likely that a user would click on a page that did not have
the information he or she was seeking.

In an environment where experimentation is this quick and efficient,
many traditional practices make less economic sense. For instance,
current research-and-development efforts are often driven by
considerations that the company's technicians think are important but
customers really don't care about. Mobile-phone companies, for one, had
a reputation for piling on features that added more cost and complexity
than value.

Real-World Results

But it's not just Web-based companies that are taking advantage of technology to run crucial experiments.

Even retailers-who might seem to have tremendous logistical
challenges implementing rapid experiments across lots of stores-can tap
this new approach, thanks to the rise of sophisticated tracking systems
that make measuring customer behavior more agile and less expensive.

These systems-which track everything from purchases at the cash
register to how products move through the supply chain-allow stores to
cheaply collect terabytes of data on their customer interactions, the
performance of products in the field, employee productivity and other
factors. Traditionally, companies have simply rooted through all of
that data to look for patterns and trends; they've mined their data.
But some retailers are beginning to realize that they can get much
better results by using their digital systems to run experiments.

Take
Wal-Mart Stores Inc., which frequently runs comparative in-store
experiments with signage, displays and shelf layouts to see what
influences shopper decisions. Wal-Mart can test different arrangements
in a number of stores for a week or so to see which approach boosts
sales the most. If different sign colors or unusual merchandise
juxtapositions increase-or depress-relative sales, the stores can
quickly share the information and implement the same plan. That said,
store managers also have the ability to make decisions at their store
to meet individual customer needs.

Other companies, meanwhile, have blended digital technologies and
conventional systems to test out ideas. For instance, Harrah's
Entertainment Inc. uses advanced information systems to analyze data
from its Total Reward Card and field experiments throughout its casino
and hotel network.

The Speed of Change

• 
  The Evolution: Technology is allowing companies to test new ideas at speeds-and prices-that were unimaginable even a decade ago.


• 
  The Effect: Innovation, the lifeblood of growth, is growing more efficient and cheaper.


• 
  What's Ahead:
  Innovative companies will shift away from traditional
  research-and-development methods. Managers will change the way they
  solicit ideas. And much, much more.

Gary Loveman, the chief executive who brought the experimentation
mindset to 70-year-old Harrah's, quips, "There are two ways to get
fired from Harrah's: stealing from the company, or failing to include a
proper control group in your business experiment."

Experiments to Come

Where will all this lead? Experiments
will become far more pervasive and persuasive as information technology
improves and testing grows faster and cheaper. More companies-and more
enterprising individuals who work in them-will recognize that
experiments don't have to be time-consuming and expensive, and they
will propose more tests that exploit those economies.

Increasingly, the more innovative companies-the Googles and Harrah's
of tomorrow-will shift away from traditional research-and-development
methods. Five years ago, for instance, a leadership team might have
reviewed two or three "big" innovation proposals from consulting gurus;
executive teams today might compare the outcomes of 50 or 60 real-world
experiments to decide which ones to act upon.

For Further Reading

See these related articles from MIT Sloan Management Review.

• 
  The Era of Open Innovation
  
  
  
  By Henry W. Chesbrough (Spring 2003)
  
  
  Companies are increasingly rethinking the fundamental ways in which
  they generate ideas and bring them to market-harnessing external ideas
  while leveraging their in-house R&D outside their current
  operations.
  
  
  http://sloanreview.mit.edu/x/4435
  


• 
  Institutionalizing Innovation
  
  
  By Scott D. Anthony, Mark W. Johnson and Joseph V. Sinfield (Winter 2008)
  
  
  Building an engine that produces a steady stream of innovative growth
  businesses is difficult, but companies that are able to do it
  differentiate themselves from competitors.
  
  
  http://sloanreview.mit.edu/x/49216
  


• 
  An Inside View of IBM's 'Innovation Jam'
  
  
  By Osvald M. Bjelland and Robert Chapman Wood (Fall 2008)
  
  
  IBM brought 150,000 employees and stakeholders together to help move
  its latest technologies to market. Both the difficulties it faced and
  the successes it achieved provide important lessons.
  
  http://sloanreview.mit.edu/x/50101
  


• 
  The 12 Different Ways for Companies to Innovate
  
  
  By Mohanbir Sawhney, Robert C. Wolcott and Inigo Arroniz (Spring 2006)
  
  
  Companies with a restricted view of innovation can miss opportunities.
  A new framework called the "innovation radar" helps avoid that.
  
  http://sloanreview.mit.edu/x/47314
  


• 
  Creating New Markets Through Service Innovation
  
  
  By Leonard L. Berry, Venkatesh Shankar, Janet Turner Parish, Susan Cadwallader and Thomas Dotzel (Winter 2006)
  
  
  Many companies make incremental improvements to their service
  offerings, but few succeed in creating service innovations that
  generate new markets or reshape existing ones.
  
  http://sloanreview.mit.edu/x/47213
  

All
of which guarantees huge changes for corporate cultures. Challenging
conventional wisdom, for one thing, becomes immeasurably faster,
cheaper and easier. And there's a subtle shift in how people view
innovation. People don't talk about running experiments months into the
future-they're into immediacy, because they see that they can test
ideas right away, and the company culture starts to actively encourage
speed. A provocative hypothesis proposed during a morning meeting might
graduate into a full-blown experiment by day's end.

Even if a test doesn't produce a workable idea, there's usually
something important to be gleaned from it. "Genius is born from a
thousand failures," says Greg Linden, an entrepreneur who has been an
innovator at both Amazon.com Inc. and Microsoft Corp. "In each failed
test, you learn something that helps you find something that will work.
Constant, continuous, ubiquitous experimentation is the most important
thing."

Giving Up Control

This new environment also has big
implications for managers. Simply put, bosses must be prepared to give
up some control. With testing so cheap, easy and accessible, there's
less need to ration it as they have in the past. Managers used to
directing the company's innovation efforts must give their workers the
freedom to come up with ideas on their own and pursue them without lots
of red tape.

Some of the best experiments come from outside the chain of command.
At Amazon, for instance, innovators initially developed the company's
recommendations feature-which suggests other products customers might
want-without explicit approval from higher-ups.

Not only do we expect managers to solicit and welcome more ideas
from lower down in the ranks, we expect that lots more people will be
invited to review experiments and make changes. Customer-service and
maintenance people, say, might chime in on experiments proposed by
manufacturing or distribution.

That might seem hard to believe, given the turf battles that can
arise over new ideas. But when experiments become more abundant-and
easy and inexpensive to change-those proprietary issues won't come up
as much. Think of the difference between improving and sharing
presentations back in the day of transparencies and 35mm slides versus
PowerPoint presentations, which can be modified with a few clicks of a
mouse.

Harry Campbell

As
more people get involved in experimentation, companies will also need
to change their focus in education and training efforts for innovation.
Instead of just getting workers to creatively interpret large volumes
of data, companies will need to help them develop the skills to rapidly
design provocative experiments. Passive analysis will be subordinate to
active experimentation.

Another crucial development down the road will be "scaling." Digital
technology, as we have seen, allows companies to test new ideas quickly
and easily. But the technology also lets companies easily scale those
ideas-or implement them rapidly and cheaply throughout the whole
business. We predict that as companies realize the power of this idea,
they will focus on experiments that not only can be tested rapidly but
also can be put into wide effect just as quickly.

The most obvious example of scaling is a Web site. Companies can
test out a new feature with a quick bit of programming and see how
users respond. The change can then be replicated on billions of
customer screens.

But that kind of scaling becomes rapidly possible in the
bricks-and-mortar world, too, as more business processes become
digital-supply-chain management, customer-relationship management and
so forth. When a retailer identifies a better process for screening new
employees, the company can embed the process in its
human-resource-management software and have thousands of locations
implementing the new plan the next morning.

We think the future of innovation and the future of experimentation
will continue to evolve, thanks to the improving economics of digital
technologies. As a result, the next decade of innovation in the global
marketplace will be even more tumultuous than the last. That's a great
opportunity for innovators-and even better news for customers and
consumers world-wide.

--Dr. Brynjolfsson is a professor of
management at the MIT Sloan School of Management. Mr. Schrage is a
research fellow at the MIT Center for Digital Business. They can be
reached at reports@wsj.com.