Innovation : CBI Journal 8: Connected Innovation

Perspectives on Business Innovation Issue 8 : Connected Innovation

Published May 2002 - reprinted here by permission.

We print below the "big idea" article from the Journal ( Connectivity reinvents the rules of invention ), the table of contents of the Journal, and also Christopher Meyer's Introduction to the Journal, setting out this issue's themes.

You can download the full Journal in Adobe Acrobat format ( 1.6MB ) 


CONNECTIVITY REINVENTS THE RULES OF INNOVATION

About the Author :

Rudy Ruggles was a senior manager at the Cap Gemini Ernst & Young Center for Business Innovation where he led the Center's research on innovation. His research focuses on idea diffusion, social network dynamics, and technological knowledge management tools and techniques.

Rudy holds a B.S.L.A. in Japanese language from Georgetown University and an M.M. ( M.B.A. ) from Northwestern University's School of Management.

Innovation drives value. It powers growth and it reduces costs. It is one of the most significant attributes investors use to judge a company's overall value.1

It appears prominently in the annual reports and on the websites of nearly all of the Fortune 500. By all indications, innovation matters.2

This is not news, however. History is full of innovations that have altered the course of human events, redistributing power, causing and crushing revolutions. The study of innovation isnít new either. Economist Joseph Schumpeter, for instance, described the economic, sociological, and organizational impacts of innovation and its "winds of creative destruction" well over half a century ago. What is new, however, is the rise of how connectivity - both technological and nontechnological - is affecting the actual process of innovation. In today's highly connected economy, ideas are being created and recombined at great speed and in new ways. Traditional models for creating, developing, distributing, and benefiting from innovations no longer suffice. Success depends on an ability to leverage connectivity throughout the innovation life cycle.

After several years of research, the Cap Gemini Ernst & Young Center for Business Innovation ( CBI ) has begun to understand how organizations can use the dynamics of the networked economy to enhance each of the four stages of the innovation life cycle : Idea Generation, Concept Development, Innovation Adoption & Diffusion, and End Game.

The Innovation Life Cycle

Figure 1 shows the typical s-shaped value curve so often drawn in relation to innovation. The rise of the curve represents the unique value generated by an innovation over time. Given the quirky nature of innovation, the shape of this line will vary considerably - some have long lead-in tails, some have near vertical takeoffs from the start, and so on - but all will show some sort of s-shape. Also, as discussed above, the value calculations will differ, but the dynamic remains the same.


There are four major stages in the life of an innovation :

Idea Generation : The earliest stage of idea creation, this is where it all begins. It includes everything from early scanning, to rigorous gap analysis, to random sparks of insight. At this stage, even those concepts destined for greatness are just barely recognizable.

Development : Here is where resources are applied to turning an idea into an actual product, service, process, business, etc. This stage includes activities such as prototyping, experimentation, beta testing, and other activities that make an idea actually useful.

Adoption & Diffusion : Adoption is the uptake and application of a concept, product, etc., by someone or some group. It is here that innovations get put into action and start to add real value. Diffusion represents the spread of that uptake throughout a population, organization, or other system. The impact grows, and it is here that innovations become distinguishable from mere inventions.

End Game : At some point, there is no more unique value to be gained from an innovation as an innovation. The premium rents to the innovator have all but disappeared. This may be because the innovation has become a commodity ( e.g., automatic teller machines ) or been overtaken by superior technology ( e.g., the fax machine being pushed aside by e-mail ). All innovations hit a point of decreasing returns, even if they are still valuable. They are just not uniquely valuable as innovations.

These stages actually represent a fluid progression through the life of an innovation. But understanding each unique stage helps to further the conversation about what to do about innovation to make it happen more often and with better results. Connectivity opens up new realms for the way in which an innovation can be enabled and encouraged throughout its life.

Connectivity Creates

The truly new idea that turns into an innovation is a rarity. More often, existing ideas are brought together in a new way or in a new context that opens up new avenues. This sort of recombination can only happen if elements are given the opportunity to interact with each other. Increasing connectivity creates these opportunities.3

It is important to note that the idea of recombination is only interesting if the population of elements is heterogeneous, i.e., diverse. Connecting like-to-like may give you mass, but it wonít give you innovation. For example, connecting oxygen molecules to other oxygen molecules isnít nearly as interesting as what happens when you add hydrogen to the mix. And look around you to see what you get when you have all 109 of the elements at play. Whether the elements are people, ideas, or organizations, where the mix is rich, connectivity enables whole new opportunities. While connections create opportunities for recombination, recombinations ( and for that matter innovations ) do not create themselves. Energy is required to take the potential innovations that lie in those connections and make something happen. Therefore, organizations should do the following :

Remove Barriers to Connectivity

Removing barriers to Connectivity is challenging. Connections are not just technological, but also personal. Ensuring everyone is on e-mail, for example, is only the first step. Can they find each other, especially if they donít know whom theyíre looking for ? Quick, whatís the e-mail address of the top innovation expert in your organization ( besides you ) ? Who is the person who might help you develop that perhaps harebrained ( but possibly ingenious ) idea you have about a new business opportunity your organization should pursue ? Just because someone has the capability to communicate with another person doesnít mean that she will.

Encourage Recombination Through the Interaction of Ideas

The best way to encourage recombination in this sort of early stage idea development is through a community of interest. Communities, as defined here, are social networks of people who find each other through a variety of means and are drawn together by a shared context, a topic or topics of interest, and some sort of social cohesion.4 They exist within, and beyond, every organization, alongside traditional hierarchies and transaction-based "market" relationships. While each type of structure has its own strengths in what it takes to make innovation happen ( see Figure 2 ), communities are most effective at exactly the types of behaviors and interactions that are so useful at this early, formative stage of idea generation.5

How does all of this work in the real world ? International oil and gas giant Texaco ( now ChevronTexaco ) was constantly on the lookout for new business opportunities. While its Strategic Management Group was specifically tasked with creating, finding, and analyzing such growth ideas, Texaco wanted to open up the front end of this process to as many people as possible within ( and eventually beyond ) the organization. It created an idea development and capture mechanism on its intranet that enabled all interested to participate in the development process. People could submit ideas for opportunities, discuss other peopleís contributions, evaluate the postings, and develop new strategic solutions. Additionally, those in search of new opportunities could use the system to find highly rated, appropriate concepts as needed by searching and through collaborative filtering.6 Other companies, such as Procter & Gamble and Nortel Networks, use similar approaches, drawing upon a diverse set of inputs and feedback mechanisms to generate a more robust population of initial ideas to feed into the innovation process.

Still, for an idea to turn into an innovation, no matter how interesting and well thought through, it needs devoted resources. It needs to move into the realm of development.

A Thousand Blooms From a Thousand Gardeners

Organizations have been trying to streamline and improve their development processes for decades. Portfolio analysis, stage-gate processes, options pricing models, and numerous other tools and techniques have decreased time to market and increased average returns on investments in nearly every industry. These gains are certainly attractive, and firms that are not already trying such approaches should do so. Still, these techniques primarily focus on internal, linear processes. There is a whole new horizon for what kinds of gains are possible when connectivity is leveraged. The age-old idea of letting a thousand ( innovation ) flowers bloom becomes a much more tenable proposition if the gardeners are working together.

The Conference Board of Canada reports that "firms that collaborate are . . . significantly more likely to introduce breakthrough ( world-first ) innovations".7 Collaborations include inter-firm but also working relationships with universities and government labs. This represents the power of multiple members of an economic web of relationships working together. Firms can take advantage of connectivity to enhance innovation development in two new ways : dealing with disruptive innovations by managing networks of modules, and leveraging the power of many through distributed development.

Networked Innovation

Readers of Professor Clayton Christensenís work, including his book The Innovatorís Dilemma, will recognize the term "disruptive innovation" as describing a new technology that starts out below normal standards but improves at such a rate as to overtake the industryís best, ultimately changing the rules of the game. What is particularly frustrating about such disruptions is that incumbent firms may be doing everything right, including creating faster, better, and cheaper sustaining innovations. They find it impossible to justify investing in the new technology ( broadly defined ) since it initially meets none of their ( or their customers ) criteria for a competitive product. Then, when the technology has improved enough to be a threat, they are too far behind and cannot make the switch. So, how can organizations have their innovation cake and eat it too ? Connections. Understanding this entails understanding modularity.

The self-contained elements of a connected system are often called modules. Modularity - structuring complex products from smaller subsystems that can be designed independently yet function together in a seamless fashion - begins at the product level, then ripples upward through organizational structure, and then through to industry structure. CBI researcher Will Clifford has studied how firms can spot and leverage disruptive innovations by managing modularity ( i.e., the configuration of their own modules and connections to others ).8 By focusing only on their core competencies and creating relationships to outsource, yet access, all other competencies, organizations can remain nimble. Management then entails strengthening and weakening links as needed, depending on the dynamics of the environment, be they changes in cus-tomer preferences, new market entrants, or the rise of disruptive innovations. Even if it doesnít make sense for your organization to invest money in a potential disruption, it is certainly worth being connected to those who are working on these new solutions.

Microsoft's move into the "Information Superhighway" arena is an interesting example. In the early 1990s, Microsoft paid little attention to the emerging Internet industry. Then, in about 1994, Bill Gates decided that Microsoft should be in that game. Microsoft was able to get up to speed extremely quickly by combining its own competencies and market strength with a very aggressive relationshipbuilding strategy with players in all of the major industries who had the necessary complementary competencies. Microsoftís ability to develop into an Internet powerhouse came from its ability to combine modules quickly and flexibly to achieve its objectives.9

Distributed Development

On a more tactical level, connectivity enables a whole new innovation development model. The most straightforward version of this is a virtual team collaborating on a project. While not particularly recent, technology is enabling such teams to do new and different things.

At the extreme is what is referred to in the software development world as "open source". While this approach and its implications receive far more detailed treatment elsewhere in this issue, it is worth touching on briefly here.10 Source code is the root programming that runs the software. Software firms usually guard it extremely carefully since it allows people to make changes to the very DNA of the program. However, there are some software efforts that post this source code for anyone to use and change. Often done in an academic context, open source has recently gotten a lot of recognition as the way in which the operating system Linux was created.

Linux is an interesting story for two reasons. First, the scale of the effort was considerable, with some 40,000 people from all over the world contributing to the code, all of whom did so voluntarily. The second reason is that Linux is seriously challenging Microsoft's server operating system dominance. This is not just a hobby.

Snowball Effects

Where the development stage of an innovation's life cycle takes it from mere concept to something that actually has an impact, the adoption and diffusion stage determines just how significant an impact it turns out to be. While there is no golden rule when it comes to the acceptance of an innovation, firms now have the opportunity to use connectivity to increase the likelihood that their innovations will spread.

In 1962, Everett M. Rogers published the first edition of Diffusion of Innovations, now in its fourth edition. This landmark work continues to be the touchstone for all studies on diffusion, which he defines as the process by which an innovation is communicated through certain channels over time among the members of a social system.11 Increased connectivity allows new social dynamics, and in fact whole new social systems and communications patterns to emerge. Malcolm Gladwell, in his book The Tipping Point, examines adoption and diffusion patterns as examples of outbreaks, or as he puts it, "social epidemics".

Such diffusion patterns relate to practices as much as they do to products. It is therefore imperative for organizations not only to understand that such patterns exist, but also to be able to do something about them. As Seth Godin writes in his book Unleashing the Ideavirus, "Ideas that spread the fastest win".And, as Procter & Gamble has said, some 60 percent of the adopters rely more on social influence than mass media. Leveraging connectivity is the key to success.

There are four major steps in leveraging connected innovation. First, assess the network as is, using social network mapping and analysis tools. Next, profile the adoption and diffusion potential of the innovation itself. Rogers' work uses the following five characteristics of an innovation to assess its adoption potential :

  • Relative advantage - The degree to which an innovation is perceived as better than the idea it supersedes.
  • Compatibility - The degree to which an innovation is perceived as being consistent with the existing values, past experiences, and needs of potential adopters.
  • Complexity - The degree to which an innovation is perceived as difficult to understand and use.
  • Trialability - The degree to which an innovation may be experimented with on a limited base.
  • Observability - The degree to which the results of an innovation are visible to others.

Once you have established the connectivity of the market for the innovation and the adoption potential of the innovation, the third step is to test hypotheses and introduction strategies, experimenting with changes in various attributes of both the network and the innovation. While it is possible to do this with prototyping and test marketing, many companies are finding that doing these tests "in silico" is much more effective. For example, the simulation software created by the CBI and Bios Group, called Snowball, uses an agent-based modeling approach to reflect the complex nature of the interaction of the innovations and the networks.13

The results of such models can then be used to guide the fourth step : making and implementing strategic marketing and manufacturing decisions. For example, one company found that changing the "observability" setting in the model for one of its products had a significant impact on its diffusion score. This helped the company decide to offer an instant spot-remover in small pocket/purse-sized applicators, since even though that was a more costly packaging approach, it paid for itself in broader diffusion ( i.e., more usage ). However, the most significant diffusion gains came through connecting previously separate geographic customer clusters by giving samples and coupons to people who crossed the geographic boundaries. The target users were identified as college students in one location who were heading home for the holidays in the other locations. The model enabled the marketers to find the most appropriate ways to leverage, and in this case augment, connectivity to enhance diffusion.

End Game

Once innovations stop being innovations, they tend to fade into the background. At best they've become commodities, at worst they've failed altogether and have disappeared from view. What good is connectivity at this point ? You might be surprised. The point of the innovation "end game" is to make sure that youíve received all the extraordinary value possible from your innovation. It's about making sure that the upper tail of the s-curve does not flatten prematurely. While it is certainly possible to extend this tail through product extensions, for instance, this is a low-leverage solution. The best way to increase the return on your investments here is to establish, support, and learn from communities. Harley Davidson, Saturn, and others have done a wonderful job creating and enabling user communities, to the admiration and envy of others in their industries. Such communities are nearly impossible to emulate and so create a particularly strong source of competitive advantage.

While such supported communities are well-studied, there is another variation on these social networks that is even more powerful : self-organizing communities. An illustrative case of this is the community that formed around the Amiga computer. The Amiga, first introduced in 1985, was an integrated hardware/ software platform that was tuned for multitasking and multimedia applications from the beginning, even with the rudimentary memory allocations available at the time. Whatís particularly interesting about the Amiga story is that the corporate "ownership" of Amiga has died and been resurrected many times since the mid-1980s. And yet, there are tens of thousands of dedicated Amiga fans who have continued development and support efforts throughout. There are thousands of fan sites on the Internet, and some 50 online and print magazines in the U.S., the U.K., Germany, and a dozen other countries. Connectivity has enabled the community of people passionate about Amiga to work together to keep the value alive, even when the corporate manifestation of Amiga disappeared altogether for long periods of time. The lesson to be learned from this example is that often the community can do your job for you ( whether you like it or not ).

Lastly, the best way to use connectivity in the "end game" is to use it to feed your next innovation. MIT Professor Eric von Hippleís work on ìlead userî analysis has demonstrated that these first adopters ( and adapters ) are an efficient source of ideas for new solutions. The problem with lead users is that they tend to be quite fickle and quick to try another new innovation. On the other hand, communities like Amiga's are perhaps better labeled "lag users", not because they are late to adopt the innovation ( some may in fact be lead users ), but that they stick around even after "normal" users have moved on. Because so much of their interaction happens online and in public or open forums, these communities are a great source of learning for companies. The key is to listen to these communities for what makes them so passionate about this innovation and watch what they are doing to enhance its value. These ideas can be invaluable input to the next generation of that same product ( if it is your product they are discussing ), or even to similar products. What can television, PDA, or car makers learn from the enthusiasm of the Amiga community ? Or, similarly, from the comments posted in such forums as Edmunds.com or Vault.com ? Connectivity allows people to talk. After all, according to Cluetrain Manifesto Thesis No. 1 : "Markets are conversations."14 Are you listening ? Are you learning ? Are you benefiting ?

Change the Rules of Your Game

Organizations should approach innovation in new ways in the connected economy. As previously discussed, organizations can use a variety of approaches to leveraging connectivity to enhance the generation, development, and diffusion of innovations, reaping the greatest possible value throughout their life cycles. While traditional innovation models still have their place, connected innovation has opened up a whole other set of opportunities for those organizations looking to create new products, services, processes, structures, and strategies ( see Figure 3 ).

Certainly the implementation challenges are many. Connectivity, in the end, is just an enabler for new creations. However, there are powerful indicators of what's possible in the world of innovation enabled by connectivity. We hope that you will use these ideas to change the rules of your game.


  1. Low, Kalafut, Seisfeld, Measuring the Future : The Value Creation Index, CGEY CBI Special Report, March 2000.
  2. We use the term "innovation" to indicate a significant, valuable, new product/service, process, organizational structure, or strategy/business model. For more on how to determine whether something is an innovation, see Ho and Chen's article in this issue, "Demystifying Innovation".
  3. For more information on the nonlinear dynamics of Connected Systems, see Stuart Kauffman's "At Home in the Universe", Oxford Press, 1995.
  4. For more on such communities, see Etienne Wenger's Communities of Practice, the Doblin Groupís work on communities ( www.doblin.com ), and Brown and Duguid's The Social Life of Information.
  5. See Ruggles, Abraham, "Innovation and the Failure of Markets", CGEY CBI Just Thinking paper, July 2001.
  6. For more on this, see Abraham, Pickett, "Refining the Innovation Process at Texaco", in this issue.
  7. "Collaborating for Innovation : 2nd Annual Innovation Report," The Conference Board of Canada, 303-00 Detailed Findings, 2000.
  8. Clifford, William, "Disruption in a Networked World : Capitalizing on Patterns of Structural Succession", CGEY CBI Working Paper, December 2001.
  9. Valdis Krebs has mapped such relationship structures; see www.orgnet.com/netindustry.html.
  10. For a more detailed description of this approach, see Gabriel, Goldman, "Open Source : Beyond the Fairy Tales" in this issue.
  11. Rogers, Everett M., Diffusion of Innovation, 4th edition, Free Press, 1995, pg. 10.
  12. Ibid, pp. 15-16.
  13. For more on this model, see "Letting the Market Manage Your Offer" in Perspectives on Business Innovation, Issue 6.
  14. www.cluetrain.com.


THE BIG IDEA

7 CONNECTIVITY REINVENTS THE RULES OF INNOVATION
Ubiquitous connectivity has changed the way we innovate, how the process works, whom we decide to partner with, and where we find our customers and disseminate information. Rudy Ruggles takes us through the innovation life cycle in a connected world.

16 STILL WAITING FOR THE REVOLUTION : A CONVERSATION WITH ALAN KAY
Alan Kay is one of the most influential computer scientists of the modern era. His contributions, among many others, include the concept of the personal computer. We sat down with him to discuss his take on how innovations happen.

INNOVATION IN ACTION

21 REFINING THE INNOVATION PROCESS AT TEXACO
Amid sweeping changes in the oil and gas industry, innovation has never been more
important. Find out how Texaco met this challenge by harnessing the innovative ideas
of its employees.

27 INNOVATION - BASED SUSTAIN ABILITY AT CAPITAL ONE FINANCIAL
Capital One Financialís remarkable growth can only be attributed to one thing : innovation in its processes and its people.

33 FROM ROADMAP TO ROADWAY : MANAGING INNOVATION AT BMW
Innovations sometimes just happen, yet more often, they are a calculated part of corporate strategy. Learn how BMW's sustainable innovation process sees ideas through to fruition.

A BLUEPRINT FOR CHANGE

39 ONLINE COLLABORATION : THE NEXT WAVE OF INTERNET INNOVATION

Utilizing the benefits of the Internet and new technologies, Collaborative Product Commerce ( CPC ) is strengthening alliances and improving productivity for many innovative companies.

46 DEMYSTIFYING INNOVATION
Innovation is commonly regarded as one of today's most important value drivers in a company. Here are some suggestions for recognizing and assessing innovation in your own organization.

ON THE HORIZON

53 THE CBI FUTURE SCAN : A VIEW FROM THE CROWíS NEST
What forces will shape our economy over the next two years ? The Center for Business Innovation has identified the five trends companies will either embrace or resist. Your choice may determine tomorrowís success.

59 OPEN SOURCE : BEYOND THE FAIRY TALES
Itís not just a software development model. The open source movement is being embraced by innovative companies and imbedded in their business strategy.

SHARED CONVERSATION

Our purpose in Perspectives on Business Innovation is to promote a Shared Conversation among business practitioners and observers. Here are some vital perspectives weíve heard lately . . .

66 DISRUPTION IN A NETWORKED WORLD : WILL CLIFFORD ON PATTERNS OF STRUCTURAL SUCCESSION

71 REFLECTIONS ON THE FUTURE OF SOFTWARE

75 THE INVISIBLE ADVANTAGE OF INNOVATION

DEPARTMENTS

79 TECHNOLOGY WATCH

Cap Gemini Ernst & Young's Technology Advisory Board recently convened to discuss how the relationship between technology and its users will evolve in the future.


85 WELL-READ MANAGER
A review of Seth Godin's Survival is Not Enough by Larry Keeley, CEO of the Doblin Group, and other books worth reading.

 

90 HEADS-UP
A list of upcoming events not to be missed.

 

91 RESEARCH ROUNDUP
Summaries of current research projects at the Center for Business Innovation.

 

97 IN CONCLUSION

We discovered some of the most obscure patents weíve ever seen. Apparently, every invention
doesn't always become an innovation.


Christopher Meyer was the director of the Cap Gemini Ernst & Young Center for Business Innovation in Boston. The Center was charged with identifying the issues that will be challenging business in the future, and defining responses to them. His own current research interests include the development of a New Theory of the Firm, the implications for management of new discoveries in complexity and self-organizing systems and the development of the "connected economy."

Chris established the BIOS Group, Cap Gemini Ernst & Young's initiative to develop complexity-based solutions for management. He has more than 20 years of general management and economic consulting experience. With Stan Davis he co-wrote "BLUR : The Speed of Change in the Connected Economy" ( Addison-Wesley, 1998 ), "Future Wealth" ( Harvard Business School Press, 2000 ), and "Itís Alive : The Coming Convergence of Information, Biology, and Business" ( Crown Business, 2003 ).

Chris can be reached at Chris.Meyer@gotnerve.com.


© All material copyright CGE&Y - Center for Business Innovation reprinted by permission

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