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Had an interesting lecture today about Intuit – still the world´s most admired company in the computer software industry. Bill Ihrie told us about their innovation program – Customer Driven Innovation.

First of all, they seem to have an impressive market shares – around 80% for most of their products. The 10 year growth rate of about 20% may take a hit in these days – but then again, we still need to do our taxes, right…

Their innovation program seems to be centered around finding unsolved customer problems and solving them – not too revolutionary… But I guess they must be doing something a little bit different – and I think that the customer studies (observations of customer behavior) might just be it. While many tend to rely on experts, it seems that Intuit has a habit of making observations and focusing on just the right pain points – the ones that make their products more valuable to their customers.

The holistic thinking they applied to the Point-of-sale product is another good example of innovation that led Intuit into a new market – that of hardware sales. QuickBooks is another innovative product that made accounting available to people who don´t have a clue about debit and credit. And with the worst possible product launch (I honestly think they made all the possible errors) they still made it to the top – amazing…

The recipe is: 1) Slack, 2) Promote Cross-functionalism, 3) Invest in good times, 4) See results before you scale

With 10% unstructured time, their employees work on projects that they are passionate about – an investment in employee satisfaction as well as growth through innovation. Many examples show that the unstructured time has come up with useful features in existing products, although writely was one good one that slip out under the radar…

To succeed you need to have persistence (constant attention and recurring innovation events) combined with top management attention that protects employee´s unstructured time. Amen.

 Open Innovation states that companies should no longer depend solely on their own research facilities and their own ways of bringing inventions to the market, but value external sources of knowledge and external ways to the market as equally important (Chesbrough 2003:43).
You should bring knowledge in from the outside and profit from external research in your current market (outside-in), but also profit from other´s use of your own inventions by taking them outside (inside-out). You could also imagine multiple exchanges where for example an idea is taken outside, built upon by an external company, and then brought back inside the originating company before being brought to the market (aka the boomerang).
In contrast, Closed Innovation describe an innovation

 process based on making little or no use of external knowledge, and where the use of internal knowledge is limited to within the borders of the company. Open Innovation recognizes that the struggle to create value from inventions is equally important as coming up with them.

Why is it important?

Chesbrough´s Erosion factors (2003:34-41) gives some indications why the Closed Innovation model no longer works. The development of a global market for knowledge makes it foolish not to take advantage of the smart people that work outside of your own company (be it other companies, academic institutions or individuals) – perhaps mediated by an innovation intermediary (Chesbrough 2006:135-163). Using your own resources in conjunction with smart people outside your company will allow you to capture a larger portion of the value created.
Open Innovation allows a company to profit from inventions that does not fit well with it´s current business model – inventions that otherwise might be shelved waiting for later use. As knowledge has become more distributed (patents, R&D spending, increased spending in human capital) the exchange of ideas between actors has become more important for innovation (Chesbrough 2003:45-51).
You still need to have smart people within your own organization to come up with new inventions and/or innovative business models, and also to connect to and identify external research or new ways to the market. As external suppliers are becoming more and more capable it is very important to monitor and connect to the world outside of your own company.

Connect + Develop

Innovation assets at P&G

Innovation needs at P&G

Connect + Develop is P&G´s version of Open Innovation – or as they define it on their web site “The practice of accessing externally developed intellectual property in your own business and allowing your internally developed assets and know-how to be used by others” (P&G Connect + Develop, 2009).

According to P&G this strategy has already resulted in more than 1,000 active agreements of various kinds. As a company, P&G is interested in all types of high-quality, on-strategy business partners, from individual inventors to FORTUNE 500´s – and even competitors. This shows that they have matured and are now able to value efficient business models as well as the inventions themselves.

References

Chesbrough, Henry (2003) Open Innovation: The New Imperative for Creating and Profiting from Technology. Boston: Harvard Business School Press.
Chesbrough, Henry (2006) Open Business Models: How to Thrive in the New Innovation Landscape. Boston: Harvard Business School Press.
Open Innovation. (2009, March 23). In Wikipedia, the free encyclopedia. Retrieved April 2, 2009, from http://en.wikipedia.org/wiki/Open Innovation
P&G Connect + Develop (2009). What is Connect + Develop? Retrieved April 3, 2009, from P&G´s Web site: http://is.gd/qznd

Looking forward to the lecture from Geoffrey Moore in the MOT/Fisher IT Center Lecture Series next Wednesday.

We are off to a good start in our case studies – 3 groups (including mine) have presented their work so far.

Today we discussed if this this kind of decision analysis (using probabilistic and non-probabilistic methods, calculating expected value, using utility functions and so forth) and the various frameworks that have been developed by the groups would be useful in a real-world situation?

I definitely think so, it gives a very good background for discussion, and it helps to see the problem from different angles.

In a basic sense, the business model is a description of how a company operates to create economic value.

Firms can create and capture value from their new technology by a) incorporating it in their existing businesses, b) by licensing it to other companies or c) by spinning it out to new companies in new markets.

The term business model is widely used but rarely defined, but Chesbrough (2003:64) defines its functions this way

• To articulate the value proposition – the value created for users.
• Identify the market segment – the users of the company´s offering.
• Define the structure of the value chain – and the company´s position in it.
• The revenue generation mechanism(s), with cost structure and target margins.
• The position within the value network of suppliers, customers, competitors and complementary firms.
• The competitive strategy with existing and potential advantage over rivals.

It seems logical that a given new technology can be brought to market using many different business models, and it is obvious that we want to adopt the one that is most valuable. The business model frameworks gives us a simplified cognitive “road map” going from technology (inputs) to economy (outputs) and back in our mission to find the most appropriate business model. More generally, the framework provides a level of abstraction that allows us to discuss, compare and recognize the way businesses operate. This is of crucial importance for a business when creating what John Seely Brown refers to as “the architecture of the revenues”.

As much as the business model framework will help us to create and capture value from new technology, the successful implementation of a business model can lead us to being locked into this same thinking for future ventures – often referred to as dominant logic (“Dominant logic”, 2009) (Chesbrough, 2003:70).

The OLPC non-profit association (One Laptop Per Child) and their two generations of innovative portable computers (the XO and XO-2) targeted at the worlds poor children is en example of a non-profit business model. They get funding from large corporations and individuals and sell their computers in large installments directly to governments in selected countries. Using vocabulary from Foster et al. (2009) they seem to be adopting the “Policy Innovator” funding model.

The OLPC association drives the development of the computers and are in charge of surrounding services, marketing, fundraising and negotiations with customers. The business models for their two product generations are very
similar – this might suggest that we are seeing that their dominant logic does not allow them to change their business model more radically. There has been suggestions that their business model falls short when it comes to support (there might be room for a company that uses the professional open-source model (“Business model”, 2009)) and that they should consider targeting other customer, for instance by leveraging micro-credits.

The major differences going from the first to the second generation are changes to the product (new form-factor) and the change from a closed innovation model to an open model with respect to the SW and HW development. It will be interesting to see if these changes in the business model will help OLPC to achieve its mission of educating the worlds poor children faster.

Finally, I would like to note the similarities between the business model framework and the idea of pattern languages brought forward by Christopher Alexander in the world of architecture (“Pattern language”, 2009). Patterns and business models both describe existing solutions in their respective problem domains, and provides a vocabulary that allows us to understand the problems at hand.

Chesbrough, Henry (2003) Open Innovation: The New Imperative for Creating and Profiting from Technology. Boston: Harvard Business School Press.
Dominant logic. (2009, March 2). In Wikipedia, the free encyclopedia. Retrieved March 9, 2009, from http://en.wikipedia.org/wiki/Dominant_logic
Pattern language. (2009, March 2). In Wikipedia, the free encyclopedia. Retrieved March 9, 2009, from http://en.wikipedia.org/wiki/Pattern_language
Business model. (2009, February 23). In Wikipedia, the free encyclopedia. Retrieved March 9, 2009, from http://en.wikipedia.org/wiki/Business_model
The Guardian (2009, January 29). The Sugar daddy for future generations. Retrieved March 9, 2009, from http://tinyurl.com/as5uk7
Foster et al, (2009). Ten non-profit funding models. Stanford Social Innovation Review, Spring 2009.

Seems as GMail is down – perhaps it was a bad idea to change to Google Apps? Hope it will be back up again soon.

- Can you get too close to your customers?

Existing customers rightfully play a key role in just about all aspects of a successful company, including that of evaluating new and emerging technologies. Whereas existing customers may well support the development of sustaining technology which improves the attributes customers already value, customers should not be trusted with the role as arbiter over disruptive technology that presents other attributes than the ones mainstream customers value, normally performing well below existing technologies initially (Bower & Christensen 1995, 3).

In fact, the principles that induces a well-managed company to focus on meeting the needs of existing customers (financial requirements, reducing risks by serving existing customers in known markets) are the very same that blind them from seeing the potential of disruptive technologies. By the time a new technology has evolved sufficiently to meet
the needs of mainstream customers it will be too late: first-mover advantages will ensure that the pioneers remain the champions of the new market.

Traditional rules of management makes it almost impossible for an emerging technology with an unknown market to compete for resources with an existing customer in an existing market. As a result, the responsibility for building a disruptive technology business should be placed in an independent organization (Bower & Christensen 1995, 2).

Many have for some time now been promoting Ruby on Rails – a  web development framework that promises to reduce the time-to-market and cost-of-ownership of software projects. Based on a dynamic programming language – Ruby – and written with ease of use in mind this technology is much more expressive and lowers the maintenance
cost of software substantially. A breakthrough some time ago made it possible to run programs written in Ruby on the same hardware and software that run Java applications, which means that one of the important barriers to entry suddenly disappeared. Other important concerns have been performance and if the programming language itself is
suitable for large enterprise projects. As technology and tools have evolved quickly, these concerns are getting smaller day by day – and adoption increases.

Many companies have successfully completed a few projects (often with new customers) using this technology – many large players are still hesitant. There seems to be a subs

tantial overweight of smaller startup companies that takes on this technology, which leads me to believe that most organizations would have been more successful had they placed the responsibility for developing this technology in an independent organization – a startup for instance. Existing companies are reluctant to use it in their existing applications, and the right market and the right applications seems far away…

Bower, J. L & Christensen, C. M. 1995, Disruptive Technologies – Catching the wave.
Harvard Business Review, January – Febuary 1995, digital reprint.