incremental innovations

The Dreamliner and the Risks of Transformative Innovation

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In October of 2011 Boeing launched a new plane, said to be the most innovative new aircraft in the commercial space in decades.  Airlines were lining up to order their own, with Japanese airline ANA waiting over 3 years for its first craft to be delivered. Customers paid up to $30,000 per seat to take a ride in the new plane that had the entire industry and traveling world abuzz. The plane offered huge improvements in energy efficiency, was made from a variety of high tech composite materials, and included a wide-spectrum of high-end consumer features like increased space, reduced noise, modular bathrooms, and even a LED light show during preparation for take-off. It seemed like a huge leap for Boeing and the aircraft industry.

The Dreamliner 787 was meant to herald a new age of commercial aviation. Instead it has Boeing scrambling.
The Dreamliner 787 was meant to herald a new age of commercial aviation. Instead it has Boeing scrambling.

However in the time since, Boeing has been dogged with problems: Cockpit windows have cracked multiple times, now three active Dreamliners have had overheating problems related to their lithium ion batteries, and two planes have had fuel leak problems. Given that only 50 Dreamliners are in service (with hundreds more on delayed order) these are potentially scary indications that the entire plane design may need to be reconsidered. The issue has even led US investment bank Goldman to downgrade Boeing stock from “conviction buy” to “buy” while the issues are reviewed by the FAA.

The question that has to be on the mind of many Boeing executives is whether the Dreamliner was too big of a risk – to big of a redesign and innovation – to have been taken in the first place; particularly in an industry with such high regulatory and consumer scrutiny.

But has the Dreamliner really failed? Or is it simply experiencing the rocky beginning that many transformational innovations go through? What does this case say about the relative merits of the first-mover advantage versus being a fast-follower? Let’s consider the details and the impact the Dreamliner has had on its:

–         Industry/competitors: the airline manufacturing industry is particularly competitive, with high levels of capital required. In fact, two major western companies now dominate the consumer and military industry, with Boeing and Airbus fighting for market share. Airbus is set to launch their own next generation craft next year – it too relies on the same type of batteries found to cause issues for Boeing. Boeing has the first-mover advantage in that they’ve defined the next stage of technical development and can capture the early market – whatever features Airbus shows in the A350 will almost certainly have been inspired by the 787. Airbus however has the fast-follower advantage: the chance to quickly adapt its competitor’s technology while making necessary improvements to have an even better product at launch.

–         Market: the airline industry is intensely competitive, with any opportunity to gain consumer share coveted. The Dreamliner captured the imagination of the commercial airline industry, with airlines queued up to place orders to not only gain an edge against their competition but also to keep up. The Dreamliner has been a success, but it is vulnerable to being displaced by its competition based on the difficulties relating to safety. Unfortunately, in the airline industry almost any issue quickly escalates to a safety concern. No amount of internal testing can replace use in the field, so these ‘teething’ problems are almost inevitable in such an innovation. Only time will tell if these are early indications of incomplete qualification of designs and innovation or just minor bugs that needed to be worked out.

–         Consumers: the Dreamliner did something no plane has done for decades – it captured the enthusiasm and interest of the flying public. Boeing was able to become synonymous with innovation in the industry. This interest almost certainly contributed to the early success in selling the plane within the airline market. Boeing now has the challenge of resolving safety issues in a way that assures the consumer of the concern for safety. This means solving the quickly and completely. Another instance of having the plane grounded might be permanently disastrous for the Dreamliner and Boeing brand in the eyes of consumers, especially related to new innovations.

Transformative Implications BoxThat the launch of a transformative new airliner design will meet with some growing pains should have been no surprise to Boeing executives. With any innovation there is a level of risk involved in introducing it to the market – whether that be market acceptance, technical success, or speed of adoption (among other factors). The bigger question is whether Boeing understood the risks before launch and fully evaluated the upside versus the potential downside of making such a transformational leap. The Poole College of Management provides a great discussion on ‘Managing Levels of Innovation Risk’ on its Enterprise Risk Management page. For the executive or innovation leader it is very important to understand the organizational needs – for real breakthrough growth or to capture a new market segment transformation innovation can be a necessity. However, it may be enough to make more sustainable, low risk incremental innovations in order to obtain the same gains.

To the Osmotic Innovator, the warning is to be certain of the organizational goals in relation to an innovation initiative. While transformational innovations are exciting and capture the imagination both internally and externally they also carry a very high risk profile and can do long term damage to a brand and a company that undertakes them. There is a case to be made that in some cases incremental or core innovations can represent a more easily digestible risk profile.

So where does Boeing net-out? Boeing, hopefully, made the evaluation that its position required or allowed it to take a gamble on a transformational innovation. Rather than suffering the innovators dilemma and being outpaced by other firms it would disrupt its own business and take the risk necessary to do so. While being first-mover allowed them to capture a potentially huge share of the market for the Dreamliners benefits (high efficiency longer-range medium sized planes with enhanced consumer experience) and set the industry standard, technical and supply problems have given its competitor a chance to both learn and catch-up, potentially offering a better comparable product when they do launch. Boeings willingness to work with regulators to make its system safe speaks well to regulatory agencies, airlines, and travelers; but it is inherent that these changes are made quickly to repair the damage to the brand and fend off otherwise equivalent competitor offerings.

The future success of the Dreamliner and its place in history (as either a transformational innovation or a failed early stage technical innovation bested by the fast-followers) will rest on Boeings willingness to dedicate resources to solving its problems quickly and efficiently and on the ability of its competitors to leverage these first-mover difficulties to their advantage.

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Innovative or Not: the iPhone 5

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The launch of the new iPhone 5 was met with high levels of anticipation by the technology, investing, and consumer communities. The reaction to the launch has been mixed; with some saying it is a disappointment and others a major success. This makes it an obvious choice for another round of Innovative or Not.

Innovative: The iPhone 5 is thinner, lighter, and faster.  Does this make it innovative?  Since it largely gives the same experience as the iPhone 4S, it’s just more of the same, thus not innovative.  This argument is easy, right?  Not exactly.  The “easy” argument only speaks to disruptive innovation, but what about incremental innovation?  With the iPhone 5, Apple designers made dozens of changes, some of them incontrovertibly innovative.

Changes include a new display technology, integrated LTE voice/data on 1 chip, a smaller, faster processor, a smaller connector, better call quality with new noise cancellation technology, and vastly improved earbuds.  In the OS, we also see new features like Passbook, which ingeniously integrates all tickets, reservations, and store cards in one place.

Of course, some of the individual new features aren’t innovative, but just smart design. However, smart design decisions become innovation when integrated with novel technology, like the display/touch screen. Previously two parts, the new ‘in-cell’ screen technology integrates them into one.  This has never been seen in a phone before.  Like it or not, this is innovation.  It not only makes the screen thinner, but also optically superior.

Combining many smart decisions to achieve a design goal (thinner, lighter, faster) results in an incrementally better product.  When those decisions require innovative technology, you get incremental innovation.  Incremental innovation may only be incremental, but it’s still innovation.

Not Innovative: The long awaited release of the iPhone 5 has come.  But does it have the awe inspiring innovation that we expect from Apple?  To answer let’s first look at the definition of innovative: using or showing new methods or ideas.  Does the iPhone 5 do this?  As a current owner of the iPhone 4 I struggle to find what the new idea or method in the iPhone 5 is.  Yes it is longer, has an extra row of icons, a new accessory jack (which does not allow you to use your current apple devises without a special adaptor), a new camera, and is 4G LTE, but do these things make the phone “innovative”?  Most likely not as most of the competition (Android and Windows) already have these features.  Yes the iPhone 5 is the longest on the market (in which currently multiple apps do not work correctly with), but making it longer does not constitute the phone to be innovative.  The critics seem to agree.  Wired called the iPhone 5 “utterly boring”. The BBC ran a review stating that “Apple’s iPhone launches no longer excite.”  Instead of giving a new look to the iphone, or updated apps, it seems Apple just wanted to out perform their competition without having to think outside the box.  All in all, the iPhone 5 is an improvement, but lacks on the awe inspiring apple innovative which was expected.

Judgement: Not every round of Innovative or Not has a clear winner or a loser, and in taking on the iPhone 5 this is certainly the case. The merits of both cases are strong: yes, the product utilizes a number of new to the industry technologies, boldly deploying them along with a stunningly fast and efficient roll-out. This is impressive. At the same time, few features will excite the average user and some seem destined to annoy: new cables, connection, and size rendering the phone incompatible with most current accessories, and few new to the world ‘features’ since many competitors already carry the feature improvements that seem to headline the product. But, an answer must be found and, as the first writer argues, the iPhone 5 is the picture of incremental innovation. It represents the next step in the evolution of smart phone technology. Perhaps this is a sign that smart phones as well know them are ready to be surpassed by some new technology or format, starting a new race of innovation and growth in the industry.

Is IP Stopping Innovation

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Are we poised to enter the post-IP age? Has the concept of the patent or trademark as we know it today been so muddled by modern corporate strategy and greed that it no longer serves the purpose it was originally conceived to support? In reading about the upcoming Apple vs. Samsung patent trial one has to wonder how the consumer or public good is served as these two giants of the tablet and smart phone industry prepare to battle it out over the right to own the market. Rather than focusing on how to make their product substantially better than the competitors they prefer to fight over how to block them from competing. The question is – does this hurt innovation?

Patents have been used to support invention since at least 1474 when they were formalized by a Venetian Statute. Even prior to this they existed as ‘letters patent’ issued by the king or queen to inventors in England or even further back in ancient Greece where inventors of new ‘refinements’ were afforded 1 year of profits. In the US the Congress passed the first patent act in 1790 to ‘promote the progress of useful Arts.’ Over the two subsequent centuries patent law has been refined and altered to more appropriately suit the now global marketplace and economy but many aspects of these legal grants have stayed the same.

Do the same rules make sense in the new, constantly evolving digital economy? After all, the original intent of providing patents was to incentivize disclosure of invention for the public good. Is that still happening? Let’s break down some key characteristics of patent law today to review how this helps or hurts innovation.

 

–         Filing Process: the process of applying for a global patent is a byzantine one, involving multiple organizations and sets of laws. For any company hoping to commercialize and protect a new invention the process can be daunting. Not only does this add cost and time to commercialization (often lots of both) of a new innovation, the differences in the examination and discovery process mean that what is novel in one state could be found ‘not inventive’ in another. By the time the examiners and lawyers are finished amending and shifting the filings what is protected in one region might be unprotected or infringing in another! Additionally, this expensive and time consuming process tilts the scales against individuals and small firms, leaving them essentially out of the process. The very people meant to be protected by the patent system – individuals with great ideas – are excluded unless they can muster significant resources to go through the filing process. The patent system then becomes a game that is played by large firms with the resources to engage in de facto patent war with their competitors!

–         Lifetime: patents last for about 20 years – great news if you can get one, bad news if you come up with a substantial but infringing product improvement 5 years later (or even 15 years later!). In the world of telecom and digital this is several lifetimes but in pharmaceuticals this is just the start for a successful product. The differences in these industries mean that a one-size-fits-all approach is not necessarily the best one. As well, the speed of knowledge improvement has so substantially shifted in the digital era that one has to wonder why any law written to support innovation in the age of the horse and carriage is still being used in the age of the Dreamliner!

–         Infringement Liability: the substantial rewards that might be expected from winning a patent lawsuit have led to the rise of an entirely new industry, patent trolls. These companies or firms buy up patents and use them as leverage to extort payment from other companies. It also encourages opposing firms to face off in court rather than work together. All this time litigating drains firm resources and limits real innovation, while providing a disincentive to making new and innovative products without obtaining firm IP protection. Too often companies look at the ability to create a sustainable IP position as a major factor in developing a new product, rather than looking for the best products. We’ve progressed from twenty patents in a year to thousands – shouldn’t the legal system have changed to allow speedy resolution of these cases in a fair and equitable fashion as well?

It’s obvious the current system isn’t doing much to drive innovation in most industries. Perhaps its time that governments and innovators came together to reform the patent system in a way that lets both companies and consumers win. Imagine if Apple and Samsung were to focus the resources currently tied up in lawyers and patents with creating new products – the consumers and companies might never look back!

In the meantime what does this mean for you, the osmotic innovator? Avoid falling into the trap of worrying about maintaining a defendable position at the expense of the consumer experience of your product. Don’t infringe on others IP but wasting resources unnecessarily protecting short term innovations won’t pay off in the end! And if this post interests you take a look at some previous posts on this blog regarding Enlightened IP Strategy – hopefully you’ll start to see a light at the end of the dark IP tunnel.

The Trap of the Knowledge Economy

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We take it for granted that we live in a world of data. Google and Facebook both rely on user data to drive their innovation and products while constantly creating new ways to collect and use that data. Facebook is a great example: “[it] has some 750 million users, half of whom log in every day. The average user has 130 friends and spends about 60 minutes a day tinkering on the network.”[1] Thanks to programs that allow them to monitor your every click the company is able to understand its consumer to an extent never before seen. In fact, it is now sometimes said that ‘Every second of every day, more data is being created than our minds can possibly process.’[2]

This new paradigm, what some term the ‘knowledge economy’, has spread into every industry and has quickly become a standard factor in internal product and innovation evaluations. We now have a wealth of information about our consumers that we can use for good . . . or bad. As well, consumers now know far more than they ever have before. For the Osmotic Innovator, it is important to understand how this happened and how it has impacted the way we should go about innovation.

In reviewing the impact of the knowledge economy on product development and innovation we don’t need to go to far into the past to find a time when data was not so easily obtained yet product development was undergoing a renaissance. At the turn of the century, after the industrial revolution had changed both the way consumers lived and companies grew, people like Ford and Edison made fortunes inventing new products that have since become iconic. But for every Ford and Edison success there were many failures – like Edisons’ automatic vote-tally system for Congress[3] – or a failed inventor whose radical ideas never were embraced in their time (think about Tesla). The number of failed innovations during this time period was enormous, just as some of the successes (the Model T and the Light bulb) were equally enormous. Without access to data, companies and inventors trusted their gut, valuing passion for a product as the driving force in creating and launching into the market.

Moving forward to the 1950’s & 1960’s one enters another golden age in product development in Western economies – the age of marketing. If you’ve ever watched an episode of Mad Men you know the stereotypes: bold marketers using data (and their intuition) to make new products successful by attempting to actually understand and meet new consumer needs. With a market already satiated by 50 years of new products and innovation, companies saw segmentation of markets and use of data to identify the best and safest product launches as one way to obtain a competitive advantage. Data was available and used, but it wasn’t the primary driving factor in innovation. Did this increase the number of product successes or the ratio of product success versus failure? We know that product launch success was actually higher in the 1950’s than now, but don’t have the data to understand how this stacks up against earlier periods.[4]

Fast forward 50 more years to present day – the era of the ‘knowledge economy’. Vast improvements in computing have allowed equivalent improvements in analysis and theory. No product is launched by a large company without extensive vetting through any number of market research toolkits and analytical systems. Consumers are split into segments and dissected in every way possible as companies in mature and developed industries look for any possible unmet need. Disruptive products that don’t fit the models are scrapped while incremental innovations are launched because they are able to fit into the segments that have been so carefully developed. In many ways, the innovator in a large firm is now crushed by the weight of the data available to them instead of empowered. With all of this data in hand guiding decisions for large firms we must have achieved a new high in new product launch success, right? Actually, current measures show that only 1/3 of NPD launches are ‘successful’[5] – and the consensus is that this number that has actually decreased since the 1950’s. Obviously, the exponential increases in data and advances in market research tools are not returning an equivalent value in NPD success.

One might argue that only companies ignoring the market research ‘facts’ are launching disruptive new products – the ones that actually capture real substantial value and create new markets. Take it from Steve Jobs, praised universally for being a disruptive thinker and innovator: “When asked what market research went into the iPad, Jobs replied: “None. It’s not the consumers’ job to know what they want…we figure out what we want. And I think we’re pretty good at having the right discipline think through whether a lot of other people are going to want it, too.”[6]

The figure below shows the growth of the ‘knowledge economy’, the corresponding drop in the capacity of a large company to launch disruptive or truly innovative products, and relative product launch success rates. Unless your company is willing to ignore conventional market research and analytical tools – which some might call wilfully ignoring your consumer – delivering true innovation to the market is nearly impossible. That is why disruptive innovation seems to come from smaller companies and start-ups; without a business to protect and with few resources, market research is an unnecessary luxury.

Looking at the discussion graphically – the question to ask is why are companies so reliant on data and market research when using it encourages incremental innovation without improving new product launch success? This is the trap of the knowledge economy: it promises to remove risk from new product development yet prevents the innovator from truly exploring disruptive innovation that could create new markets.

How can the Osmotic Innovator avoid falling into the trap of the knowledge economy?

  • don’t make every product fit the models currently used by your company
  • be willing to trust your organizations understanding of what the consumer will want (just like Steve Jobs)
  • be bold in launching risky products in the face of failure – most ‘safe’ products fail anyways

Are these prescription alone enough to solve the problem of low NPD launch success rates or change the reliance of mature companies on data? No. But they should give the Osmotic Innovator something to consider the next time you are working through the portfolio.

Appreciating ‘Constrained Innovation’

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When Fast Company ranked the 50 Most Innovative Companies for 2011 a glance at the top ten would seem to tell you one thing: the cutting edge of innovation is headquartered on the web and that, by-and-large, companies in mature industries need not apply. Does this mean that companies in mature industries need to begin raiding Silicon Valley for a new wave of entrepreneurs to replace their failing ones? I think not, as I will argue below many of the companies on this list benefit from an overly positive view of the virtues of ‘creative innovation’ compared to ‘constrained innovation’.

Most readers will be familiar with Everett Rogers theory of diffusion of innovations[i] – in his book Diffusion of Innovations Rogers’ argues that as technology is applied to a market, penetration phases from low to high along an S-curve while adoption follows a bell-curve with innovators and early adopters in the first phases and laggards at the end.

Technology Development S-curve

The S curve model is often also applied to technology development. Traditionally, the focus is on the creation of new technologies (embodying radical or disruptive innovations) that can create a new curve (curve B) and restart the adoption bell-curve.

Long term stagnation for a technology or market

However, firms in established markets often face a reality where no new technologies or disruptions are available to replace the current one and ‘incremental’ innovations become the only currency for retaining and gaining market share in the face of slow segment growth. It is within this space, where market penetration is near complete and technologies are mature that innovation becomes a real challenge (line C extension of Curve A). This is not to argue that radical and disruptive innovation is unimportant for corporate strategy, rather that it is essential to utilize incremental innovation to maintain market leadership in the absence (or during the development) of these types of innovation.

But why is it that incremental innovation is so often ignored in favor of innovation occurring at the leading edge of technology? Disruptive or radical innovation has the potential to capture the imagination not to mention the market, however, it is the incremental innovation that sustains a company while it seeks out success in these riskier areas. Companies themselves often discount their own incremental innovations – selling the innovators and themselves short in the process. This is especially frustrating to those in these environments because successful incremental innovation can be very difficult.

Constraints increase with technology development.

To understand the key differences between innovation on the leading edge of technology compared to the trailing edge the curve could be moved to a graph that shows ‘constraints’ increasing as a market or space matures. This reflects the fact that in mature markets development is constrained by higher expectations and limiting technical specifications. For sake of simplification, the curve could then be viewed in two halves around the inflection point: to the left, the ‘easy to innovate’ space, and to the right, the ‘hard to innovate’ space. (Figure 3) It is important to note – ‘easy to innovate’ is no guarantee of commercial success. For a specific example, Pets.com seemed like an easy win or innovation early in the development of the web however was a commercial failure.

Radical or disruptive innovations aren’t necessary early in a technology or market development because artistic creativity or marketing can be nearly enough to ensure continued growth, while later in development high levels of skill are necessary to continue innovation for growth when it is most important. If it were to be considered in scientific terms, it is as if in the initial stages of technology or market development innovation is free from constraint – few rules apply as companies develop the market. Take a look at the lists of ‘Most Innovative’ Companies for 2010 or earlier – it will be littered with failed start-ups and failing companies. The winners, or those that define the market, find themselves in an interesting position when the market or technology has matured. At this point, the survivors are forced to work within a falsifiable system – a system with highly developed rules and limits to pure creativity. Masters of innovation in these environments are people that can operate creatively within a highly restricted area, like Einstein developing the theory of relativity within the bounds of Physics.

Innovation in a developed market or technology field means meeting a very advanced set of customer expectations. Staying a market leading company in this case requires maintaining an advanced core technical skill set, absolute focus on the customer, and the ability to quickly transform ideas into products with limited time for redesign. This balance of skills is what we referred to earlier as ‘constrained innovation’ – the ability to create new products and excite the customer while operating within a strict set of conditions established by the market.

Can and should firms focus on creating new markets using radical or disruptive innovation? Yes. However, one cannot ignore the fact that without a strong ability to deliver ‘constrained innovation’ firms will not survive long enough to implement the more widely appreciated types of innovation. That, the ability to grow and survive regardless the market constraints, is why ‘constrained innovation’ should be recognized as an essential and critical function for any firm that should be more widely appreciated by the world at large. Imagine if we recognized the best innovations of 2012 as those that succeeded despite constraints – would we be talking about the innovators from Ragu, Dunlop, Haines and Colgate instead of Facebook, Twitter, and Google?