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Published by MIT
Wednesday, February 2, 2011
Four Principles for Crafting Your Innovation
Strategy
Two management consultants explain what successful companies have done to prepare for
a world of constant Internet connectivity.
By Paul B. Carroll and Chunka Mui
The economist Joseph Schumpeter coined the term "creative destruction" in the late 1930s
—long before Moore's law and the creative destruction that was unleashed by a doubling of
computing power every 18 months. Compared with the events of recent decades, what
Schumpeter saw was creative destruction in slow motion. And the pace of innovation has
picked up markedly in the last five years, because the spread of smart phones, tablets, and
other mobile devices is letting us all take the incredible power of the Internet with us
wherever we go.
To come out ahead, companies should follow four principles:
Think big, start small, fail quickly, scale fast.
Even as he built the DVD business that toppled Blockbuster, Netflix CEO Reed Hastings was
guided by the big idea that mailing people DVDs was a mere way station on the road to
streaming movies directly into people's homes. The market is now richly rewarding Netflix for
being on the cusp of achieving this vision, but what Hastings should get credit for is how
diligently he prepared for this day.
As far back as 2001, Hastings spent $10 million on research into streaming; he was willing
to forgo most of his small company's profits to get started on his preparation. In the years
since, Hastings has frequently prepared to offer streaming video—only to junk the projects
when he realized they weren't feasible. As streaming started to become real, Hastings did a
host of deals with content providers to see which would work and to make sure he wasn't left
out, even though it was clear that most of the deals wouldn't amount to much. Hastings also
considered numerous pricing models for streaming and ultimately decided to start by giving
it away as part of DVD subscriptions. That way, people could get used to streaming while he
built his library of offerings, and he wouldn't create an opening for a competitor.
In late 2010, after almost 10 years of experimentation, he offered a streaming-only option for
about half the price of a subscription for DVDs by mail. That, combined with the increasing
size of the library, should accelerate the move to streaming.
Hastings had a grand vision from the outset, but he started with lots of small projects that
often failed and that he killed quickly. Now he's scaling fast and reaping the benefits of his
diligent approach to innovation in confusing times.
Many companies are not very good at this process. In particular, they can't seem to start
small because senior management won't pay attention to small projects. Companies also
aren't very good at failing quickly. Instead, they tend to swing between complacency and
panic. They wait until they're way behind and then bet everything on one big idea. And, as
one senior executive has told us, "the only thing harder than starting a strategic initiative is
killing one." Once something gets under way, too many people are invested in it for it to go

2. away easily.
Start with a clean sheet of paper.
At the moment, malls have a huge disadvantage relative to online stores. Electronic retailers
have detailed knowledge of a prospective customer's preferences and purchase history,
while those in malls generally can know nothing about their customers until they present a
credit card at the register. At that point, it's too late to personalize promotions or shape the
shopping experience.
New connected technology is giving heretofore "offline" malls and stores a chance to
reimagine how they interact with customers. The first step is getting customers to identify
themselves using their smart phones. Some customers already do so through social apps
such as Foursquare and Facebook Places. Others do so when offered small incentives
through loyalty programs such as Shopkick, which gives shoppers points when they check in
at participating malls, like many of those operated by Simon Property Group, and at retailers,
like Best Buy and Crate & Barrel.
Building on this newfound identity and location information, and leveraging social media,
malls and stores are starting to create social experiences that are not possible online.
Eventually, a group of teenage girls might go to a store and disperse but keep track of each
other through the GPS on their phones. They'd identify themselves through the mall loyalty
program and be treated to a slew of customized promotions based on their preferences and
buying histories. The girls would keep up with each other via Facebook, tweets, or texts and
gather periodically as someone finds an interesting item or person. They could attract other
friends to the mall. A movie theater, practicing yield management the way airlines do, might
entice some of the girls with cheap tickets rather than have seats go vacant. The whole mall
experience could become an adventure.
By contrast, the descent of Blockbuster during the last decade shows what can happen
when a company isn't imaginative enough about the new possibilities of a technology. To be
fair, Blockbuster didn't have an easy task in front of it. It had thousands of stores, many
owned by franchisees who had rights that restricted how quickly Blockbuster could change.
Still, Blockbuster apparently never even imagined a world without stores, any more than
Kodak imagined a world where photos didn't require film and chemicals. So while Netflix
plotted for a decade to make its world-class mail-distribution system irrelevant, Blockbuster
clung to its stores and made itself irrelevant. It filed for bankruptcy protection in 2010.
Don't just play defense.
While many companies respond to technological change by clinging to their traditional
markets and business models, Hasbro shows how an old-line business can claim new
territory too. In the face of increasing competition from electronic games and entertainment,
many of Hasbro's products seemed tired, and the market in which they were competing was
in decline. Transformers—basically, robots that could disguise themselves as cars—were
more than a quarter-century old. G.I. Joe went all the back to the early 1960s. But Hasbro
invigorated sales by leveraging its brands beyond toys and games, for instance making
them the basis for a series of big-budget Hollywood movies. Hasbro also effectively adapted
Scrabble to modern technology. Rather than just fight a rearguard action and protect sales of
Scrabble boards, Hasbro now lets people play Scrabble on smart phones and other mobile
devices.
Make sure you look good naked.
Textbook publishers have traditionally been all bundled up. They relied on their lobbying
with states to win the right to sell books, rather than having open, continual competition
based on price, quality, or anything else.
The situation is beginning to change because of consumer uproar about the cost of college
texts, budget cutbacks at schools, and reforms in the educational system. Now technology is
poised to destroy the traditional textbook business model altogether, because the spread of
electronic devices is reducing the need for books and creating an open field for innovation.
Some smart publishers are starting to experiment with new ways of delivering their content
that will look great naked—meaning it won't be wrapped in the traditional format of a book.
They're doing it because costs will be reasonably low and because the benefits will be

3. enormous. Basically, the textbook can become the electronic hub for educating a student.
Johnny won't just read a book on his tablet. He'll be able to tap into other resources right
from his textbook, like teacher notes, videos, and tutors. When Johnny finishes his
homework, the computer will correct it for him immediately and make suggestions about
what to do differently. Parents will be notified that Johnny has done his homework (or not).
The teacher will get an e-mail that night showing which problems caused problems for the
class, so the teacher can address those the next day. School administrators will, over time,
get information about which teachers are having success and which aren't. Textbook
publishers will get data about areas that are confusing students and will be able to test
different wording and different teaching methods.
Accelerated Turnover
Any list of the most successful companies in the U.S. would see about half of its members
drop off every decade, and we're willing to bet that the turnover in the next 10 years will be
even higher than that. Companies will have to adapt to a world in which they don't control
the conversation with their customers. Customers will talk with each other, talk back to the
company, talk to other companies, and on and on. Every permutation will be possible, and
companies will struggle to innovate adaptations.
But as Schumpeter saw, every act of destruction provides an opportunity to create. Although
seizing those opportunities will be tricky because it's hard to discern exactly how the future
will look, we find ourselves turning back to one of the famous sayings of our old friend and
colleague, computing pioneer Alan Kay. He says: "The best way to predict the future is to
invent it."
Paul B. Carroll and Chunka Mui are co-founders and managing directors of Devil's Advocate
Group, a consultancy that helps businesses test their innovation strategies. They are also
co-authors of Billion-Dollar Lessons: What You Can Learn From the Most Inexcusable
Business Failures of the Last 25 Years.
Copyright Technology Review 2011.