Heart of Innovation

The Heart of Innovation: A Field Guide for Navigating to Authentic Demand, By Matt Chanoff, Merrick Furst, Daniel Sabbah and Mark Wegman. ISBN:9781523005703 https://www.penguinrandomhouse.com/books/738442/the-heart-of-innovation-by-matt-chanoff-merrick-furst-daniel-sabbah-and-mark-wegman/

Partial excerpts

Foreword by Arvind Krishna

Blockbusters dominate our perception of innovation. The Xerox machine. The IBM PC

But the path to innovation is more often defined by failure than by success, with around two-thirds of all market launches collapsing within a year

The Heart of Innovation tackles this urgent challenge with the novel approach of examining the demand side of innovation through the lens of a deeply layered understanding of human behavior

The result is a comprehensive guide to assessing “authentic demand” and a powerful new tool for innovators.

we now have insights into how blind spots, biases, and false assumptions can impact innovation.

There are plenty of famous cases of bias impacting business innovation

Innovation remains a powerful force, but it is not easy.

It is often a slow, grinding process

As this uniquely insightful book reveals, that process should start by developing a rigorous, science-based approach to identifying authentic demand and recognizing the effects of bias.

Arvind Krishna: Chairman and CEO, IBM

Introduction

helps us understand the difference between innovation and invention

the deepest gladness of innovators is to make and do things that make a difference. In the commercial world, that means making a difference to a market full of customers and clients

Successful innovation also must connect with the deep selves, the motivations, the pride, validation, ambition, et cetera of the people for whom the innovation is intended

Unexamined or improperly examined assumptions may still happen to be correct. But most often they’re not. And when they’re not, no amount of inventiveness or human-centered design or marketing can save them. Innovators can’t reach authentic demand with a clever solution to the wrong problem, and marketers can’t successfully market when the customers or clients are essentially indifferent.

Authentic demand isn’t a matter of desire. It isn’t the product of rational decision-making, or irrational influences from tricks of marketing or framing, or solutions to problems. Authentic demand is a different way of looking at the whole issue of demand.

Imagine a river. There’s a small town on one side of the river and a factory on the other.

an innovator comes along, builds a bridge, and puts up a toll booth. Pretty soon, nearly all the factory workers get into the habit of paying the toll and walking across the bridge.

Authentic demand is the demand of people who find themselves in a situation where buying and using a product or service is just a thing they do as part of living their lives.

The shift to using this new tool wasn’t universal and automatic. But after the shift occurred, often after it was simply thought of, going back to the old way just wasn’t on the menu

That’s what we mean by “not not” (which you will be reading about later): people will not not use the bridge.

That’s authentic demand. But finding it is tricky

Any of those details, and thousands more, might mean that no one uses the bridge

This book describes a method and offers tools and rules of thumb to help innovators and people who work with them to understand the actual situations that markets of people find themselves in

The four authors of this book have spent a good part of their lives inventing, innovating, and working alongside innovators as managers, investors, teachers, and CEOs

This book encapsulates the lessons we’ve learned in four different areas where innovation matters: startups and small companies, large corporations, nonprofits, and universities

Chapters 10 and 11 describe the two central tools Merrick and Matt developed for uncovering unmet authentic demand—situation diagrams and Documented Primary Interactions (DPIs). More detailed instructions for conducting DPIs are in the appendix.

Part One: Accidental Innovation

Part I dives into cases where innovations have succeeded and others where they’ve failed, on account of whether the innovator was able to identify an authentic demand (or not). In each case, though, finding authentic demand was an accident

Later, in part II, we’ll propose a deliberate methodology for uncovering it

1. Getting Unstuck

Some of us find ourselves paralyzed; we cannot figure out what to do next. But more commonly we are stuck

what we are doing, even when it may look productive, isn’t leading us to where we want to be.

Joe recently looked back on the to-do list he’d created for himself as he began the company. Every item on the list, things like creating logos and securing meetings with important people in the business, were just the sort of activities that can feel productive but that were going to keep him stuck.

Running in directions that don’t lead you to where you want to be isn’t merely unproductive—it’s counterproductive. It not only fails to take you where you want to go but also gives you an excuse to avoid the problems you really need to be addressing (Focus/Bottleneck)

Innovations aren’t complete until they become embedded in the world outside the innovator’s head

The core of sustained innovation in business and other organizations is reciprocity

Together, the two sets of behaviors support each other in a repeating cycle, and that’s the mechanism of a complete innovation

Being stuck, as an innovator, means being unable to get the reciprocal dynamic going. There are many kinds of sticking points. A lot of work has been done, and a lot of advice has been published, on four broad categories of these sticking points: technical, marketing and sales, financial, and leadership

The premise of this book is that there’s a fifth category, a kind of elephant in the room that is usually ignored or waved away or danced around. Facing the fact that you’re stuck in this fifth category is a courageous act. It’s very easy to duck thinking about it critically until it’s too late

The hidden category is usually called demand, but to distinguish it from random purchasing activity we’ll call it authentic demand. The opposite of authentic demand is indifference.

Authentic demand arises when would-be customers experience not buying as a problem, as something they can’t be indifferent to, almost as a violation of something important

The challenge of uncovering and addressing unmet authentic demand is equally tough and at least as essential, but receives almost no direct attention

Innovators often think in terms of “value proposition” or “solving customers’ problems” or “product/market fit.” But these things are actually just proxies for authentic demand.

None of these proxies really get at the nature of authentic demand, so they can easily lead innovators astray

Value propositions are based on the assumption that if people value something for themselves—that is, they want it—they’ll buy it. But the world is full of things people want and don’t buy

In the same way, solving people’s problems is no guarantee that they’ll buy. People are often happy to talk about their problems

Without an understanding of authentic demand, product/market fit is indistinguishable from prior hopes or post hoc rationalizations.

2. Finding Authentic Demand by Accident

Innovation has to happen before marketing can be effective

Jim Balkcom and Humminbird

The Humminbird Fish Finder company in Eufaula started in the conventional way—with a hard-working entrepreneur

Heathkit

underwater fish locator for recreational fishermen

soon the company had $1 million in annual revenue

grew the company to $6 million in revenue. Then tragedy struck. Dean died of a sudden heart attack

Balkcom’s goal was to dominate the segment, which he estimated to be about $50 million

His marketing team worked hard to develop a thorough understanding of the current market. They watched people fish, held focus groups, and consulted

To no avail. Sales didn’t budge

But after all the expense of nine new product launches, the company was in precarious shape. Now it was do or die. The team tried one more time

This time it was different. The new product broke all sales records

The company didn’t just increase its share of the estimated $50 million market; it blew right past it. The new fish finder generated $75 million in sales during the first year

It succeeded thanks to a paradigm shift, a whole new understanding of the customers, which, in turn, forced a complete redesign of the company

Jim hadn’t hit on a combination of features that got traction: he’d hit on traction.

Jim describes the paradigm shift this way: “We thought we were in the business of catching fish. But no—we were in the business of catching fishermen.”

One thing he’d learned is that his typical customer owned a $30,000 boat and was up to date on payments, but lived in a trailer and was often behind on the rent

Taking their families out on the boat on weekends was their dearly bought escape, the part of their week that helped them get through the rest of it

Jim’s attention shifted from the question of how to help these people catch fish to how to help them be recreational fishermen.

The customers weren’t only the fishermen. A lot of them were spouses. And the users weren’t only fishermen; they were spouses and children who were stuck for long hours on a small boat every weekend

She went back to Jim and told him that he was in the entertainment business

bringing in women for the first time

she started learning things that hadn’t become apparent in her previous conversations with customers. The fish finder screens weren’t usable in sunlight. The buttons and knobs were too complicated. The fish finders weren’t sold where these customers shopped.

One feature that he decided was important to the entertainment market was a good screen. The fish finder screen was a spinning disk like that on a radar screen in a World War II movie. It was barely readable in sunlight. Jim went to his engineer Al Nunley and said, “Go around the world and don’t come home until you find a display that works.” Al went home and packed his bags. In Tokyo, at Hitachi, he found what they were looking for. LCD screens were brand new

The insight into who the customers actually were also proved crucial for navigating sales and distribution. Fish finders were typically sold to distributors that serviced boat dealerships and sporting goods stores. But entertainment customers didn’t frequent those places

the distributors saw Walmart as a threat and issued an ultimatum: if you sell through Walmart, you can’t sell through us. Choosing the big-box store meant burning bridges. It would be nearly impossible to go back. Jim did it anyway.

led Jim to build a new company culture. To sell electronic entertainment devices, Humminbird had to become a consumer electronics company

The Not Not Principle

Jim’s breakthrough happened by accident. But by analyzing it properly we can start to see how to work toward such breakthroughs purposefully and methodically.

*Suppose you were that weekend angler heading out to fish with your family. What’s that excursion about? What could happen that would ruin your day?
Here are three (out of many) possibilities:

  1. Your boat springs a leak.
  2. Your kids spend the whole time yelling, complaining, and carrying on.
  3. You don’t catch the maximum possible number of fish.
    Among those possibilities, only the first two really matter to you.*

Given these circumstances, are you likely to check that the boat won’t leak? Do something to keep the kids entertained? How about buying something that helps you catch the maximum number of fish?

Put simply, the person in this circumstance will not not take care of the boat and not not see to the kids. These things won’t happen every time, but they’ll happen.

The world is full of situations that can be better understood by seeing the not nots. People will not not pinch their fingers in closing doors

Not nots are not musts. Sometimes they fail; sometimes people forget or circumstances intervene or more compelling not nots take precedence. But in any case, they matter

The world is always throwing us into new situations, and we generally cope, adapting to the situation

Except when we can’t. Sometimes situations change in such a way that people can’t find an adaptation that works. Sometimes the ways we cope with one situation come into conflict with how we cope with another. In these circumstances, a product that offers people a new adaptation,

A person in the circumstance of using a fish finder as entertainment on a boat, watching what’s going on underwater, would normally, typically, watch the screen. If they didn’t, it would be weird. Therefore the device wouldn’t play its role properly without a screen that was visible in bright sunlight. Other features that Jim had tried in his earlier iterations of the device—making it more portable or capable of recording or improving the squelch circuitry—didn’t have that sort of quality. They weren’t meaningful to customers in respect to the not not

years later, when he happened to visit Flashpoint, it hit him with a powerful shock of recognition. Understanding the customer situation, and the business situation, in terms of not nots was exactly what he’d been up to

3. Three Types of Innovation: Informative, Transformative, and Formative

the most impressive, Nobel Prize–winning technology innovations can fail to change behavior, while some innovations can establish a dramatic new equilibrium without any technology at all, without even a product

in the 1990s she was a young mother living in something like hell. Kibera is one of the largest slums in the world

A lot of people call Kennedy Odede the mayor of Kibera. He’s a superstar in the nonprofit world. He runs a 2.5 million-member network of poor people all over Kenya

Instead of talking about the organization, Kennedy started talking about his mother, Jane Achieng

Infant and child mortality is among the highest in the world. Welcome to Kibera. But none of that was Jane’s problem; that was just her neighborhood. Jane’s problem was that her husband beat her*

Even though being beaten was common, it was considered a disgrace, so women hid it. They tried not to cry out; they covered their bruises. They didn’t discuss it. One day, though, Jane had had enough. Talking with a bunch of her friends, she proposed something new. “If your husband hits you,” she said, “don’t keep quiet. Yell. Scream as loudly as you can. And if you hear one of us yelling, you start yelling too.”*

They tried it

before long there were men pounding on the door of the one who was beating his wife, telling him to cut it out

Jane’s method became a custom, and in that neighborhood of Kibera the incidence of men beating their wives went down

Telling the story today, Jane (now in her sixties) just says that the men found it annoying. But what seems to have happened is that Jane and her friends flipped the script. Before her radical innovation, it was disgraceful to be beaten; it was a symbol of wifely failure. Afterward, it was disgraceful to be a wife beater

Cultural Innovation Writ Large

About 280,000 people work for IBM. They, and millions of customers, suppliers, distributors, investors, and so on behave in reciprocal ways that sustain each other and sum up to sustaining the company

Corporate culture involves the values, beliefs, expectations, and incentives that determine how employees and management behave and interact

All cultures include and exclude. Some activities and behaviors are within bounds, and some are out of bounds. Innovation risks going out of bounds, doing things that are not OK in a particular culture, and suffering the consequences

So management techniques that aim at fostering innovation tend to focus on incentivizing and making it safe for people to try new things

William Ouchi’s influential Theory Z included an argument that because Japanese employees were guaranteed a job for life, they could be more innovative—taking the time to try or learn new things didn’t threaten their jobs

All the little rules and guidelines of culture do more than shape how people act; they shape how people think. Part of the culture of Humminbird was that the company satisfied customers by helping them catch fish. You couldn’t get Jim and his colleagues to think in terms of helping them in a different way just by incentivizing or making it safe to be innovative.

By definition, a blind spot can’t be seen. But you can start to make sense of where blind spots tend to live

one way to start doing that is paying attention to the difference between innovation and invention

An innovation always involves a change in behavior. It’s a sustainable, repeatable change that results in a new equilibrium, a change in the form of the culture itself. Innovations and inventions are distinct. An invention might be a flash in the pan, a new thing that’s relegated to a research paper, incorporated into a product that doesn’t sell and just doesn’t change behavior

All innovations change an equilibrium situation that’s being held in place by a culture. That can happen in three different ways, three different sorts of sustained changes in the form. We call them informative, transformative, and formative

Informative innovations are the ones that allow more of the same. They don’t change the outward shape or total form. Instead, they fill up the form with new assets

Transformative innovations are the ones that change the form itself

Formative innovation is the least familiar and a particular focus for Deliberate Innovation

Informative

innovation happens inside that form, without changing the basic structure. Informative innovation leads to incremental improvements in products and gradual improvements in customers’ lives, along recognized, established lines

Transformative. These innovations change the assumptions at the root of how customers or companies behave in a situation.

can lead to a quantum leap in opportunities

Formative. Formative innovations are the ones that led to forming the situation in the first place. Virtually every successful company starts by forming something new, something that isn’t incremental and isn’t a transformation of something else.

Understanding the differences between the three types of innovation helps with expanding opportunities and guarding against challenges. Each type of innovation has its own problems and its own most effective tools

To see more clearly, innovators can ask themselves, “What type of innovation might make sense here?” or remind themselves, “When I’m stuck, it might be because I’m thinking about the wrong kind of innovation.”

Deliberate Innovation involves considering and choosing a type of innovation to focus on, understanding the challenges that come with the territory, and using the right tools for the job

4. Informative Innovation: GMR

Most innovation, measured by time and money spent, is informative—and that’s how it should be. It’s the type of innovation that’s synonymous with improvement

Sometimes, though, seeking improvement isn’t the right approach

GMR was an invention that IBM implemented as an informative innovation. A rival properly recognized it as a transformative opportunity for consumers, and IBM’s business suffered.

In 1997, scientists at IBM made a breakthrough. They took a recent scientific discovery, called giant magnetoresistance, and used it to build a new kind of hard disk. Giant magnetoresistive heads for hard disks (GMRs) were expected to revolutionize the hard disk industry.

They thought it was revolutionary, and had plausible reasons for that view. They thought that GMR blew competitors like EMC out of the water. They knew their customers well; they’d heard loud and clear that disk space was a huge problem that could only get worse.

David Patterson at UC Berkeley and his colleagues had come up with a way of linking cheap hard disks together, based on a system called RAID

Customers, industry journals, and scientists all talked about digital storage in terms of speed and capacity. Customers assessed products in those terms, and competitors competed on those metrics.

But when Patterson demonstrated his RAID technology for potential collaborators and tech reporters, something unexpected happened. The purpose of the demo was to show off the speed of his new RAID system. Almost as an afterthought, at the end of the demo, he dramatically pulled one of the hard disks out of the RAID system. Because the same data was on each disk, the system kept working, just a bit slower. To his surprise, it was that afterthought that caught the attention of the market

10. Diagramming Situations to Uncover Authentic Demand

Alexander Osterwalder wrote a seminal PhD thesis called “The Business Model Ontology,” in which he set out to do something similar: pin down the anatomy not of a person but of a business.1 That thesis was the beginning of a journey that led Merrick to create situation diagrams, a key tool that we employed at Flashpoint.

Getting to Situation Diagrams

Osterwalder’s goal was “to provide an ontology that makes it possible to explicate a firm’s business model. In other words, the proposed artifact helps a firm to formally describe its value proposition, its customers, the relationship with them, the necessary intra- and inter-firm infrastructure, and its profit model.”

The visualization of Osterwalder’s results is called the business model canvas (BMC).

According to the model, every business

will include these “organs”:

■ A value proposition

The idea is that if you iterate on and ultimately validate the parts that fit into each box, you will end up with a template for a business that, once it’s executed correctly, will be viable.

The BMC was becoming a common tool during the rocky start of Damballa when Merrick was trying to understand why value propositions weren’t working as expected


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