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The cost of disruption

Manjari Raman | June 20, 2003

One of the most disruptive ideas to nag innovators in recent times has been the notion of a return on investment on innovation.

Innovation for the sake of genius or competitive advantage is no longer enough. Increasingly, there is pressure on innovators to justify the investment made in terms of time, effort and resources in tangible terms.

It seems paradoxical to demand a quantitative or monetary return on innovation. After all, the question of what should count as a successful process of innovation raises a slew of doubts. Is a successful innovation process one that generates ideas?

Or one that generates ideas that result in continuous improvement to a company's products and services? Or is it a process that occasionally generates the Big Idea that helps the company leapfrog over competition and change the rules of the industry?

In all events, innovation can no longer escape metrics. In an earnings-starved era, innovation is a process that must work consistently, suffer less variance, and most of all, deliver results at low cost.

Strategyn, a Florida-based innovation consultancy, is developing methods and tools to control the factors influencing innovation in the belief that innovation can be made a more structured, predictable discipline.

Says Anthony W Ulwick, Strategyn's CEO, in a paper titled 'The Innovation Equation': "When production managers were experiencing manufacturing yields as low as 10 per cent just 35 years ago, they applied statistical process control to help reduce process variability, and over time, achieved Six Sigma, virtually eliminating process variability - and failures.

The same thinking can be applied to the process of innovation. By identifying the steps that comprise the process and eliminating the casual factors that introduce process variability, it too can be refined to yield high success rates-- and to dramatically reduce wasted development expense.''

One key factor for reducing the failure rate in innovation, believes Ulwick is to change the way a company obtains customer input. Listening to the 'voice of the customer' can often be misleading because customers tend to focus on features that they think they would like.

Unfortunately, customers are often confused about the value they attribute to each of those features, and so, building new products based on customer feedback is fraught with peril.

Ulwick instead urges companies to try and uncover the 'desired outcomes' a customer might be looking for. A razor manufacturer, for example, may hear customers say they want certain features like more blades or a wider handle -- and still not understand that what customers are really after are outcomes like reduced nicks or less frequent shaving.

Focusing on desired outcomes requires a deeper, richer understanding of customer needs and habits, and sometimes, a greater investment in resources needed to garner that information.

In return, in the long run, a greater understanding of customer needs helps trim costs from the innovation process in at least two ways. It reduces variability, cuts waste, and enhances the success rate of the innovation process. Equally important, it allows a company to unleash the power of low-cost disruptive innovation.

For instance, Discover Financial Services -- a unit of Morgan Stanley, which has 50 million credit card holders -- used its understanding of customer needs to create more space for itself in a crowded credit card market.

In March 2002, the company launched the Discover 2GO card, a small kidney-shaped credit card that can be hooked onto a key chain, belt, or money clip. The card has the same account number, credit limit and expiry dates as the regular rectangular Discover Card.

The only thing that changed was the convenience for a segment of credit-card consumers: on-the-go people, who did not want to be burdened with wallets or handbags.

Coming up with the key-card didn't require rocket science. All the company had to imagine was a shopper laden with bags of groceries and needing to pay the bill. Or someone racing to the gym loaded with gear and no place to carry cash or credit cards.

Or, going to a party or concert and not wanting an unsightly fat wallet to weigh him or her down. By realising that there are many instances when consumers don't carry wallets, but carry keys, Discover quickly changed the rules of a very competitive game.

Rivals like Bank of America scrambled to launch similar products later in the year, while others are still struggling to figure out how to cope with the new threat.

Meanwhile, Discover is enjoying the fruits of low-cost disruptive innovation. "The card has become hugely popular,'' says Courtney Bartlett, spokesperson for Discover Financial Services: "We exceeded the projected number of Discover 2GO cards by 70 per cent, by the first anniversary of its launch.''

The product was a no-brainer - in hindsight. And that's the hallmark of smart innovations: these are commonsensical ideas that disrupt the competition's equilibrium.

(The columnist is a Boston-based management writer)

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