Fast Second Summary

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Introduction

Fast Second is ideal for those who want to rethink their strategies for innovating or entering new markets. The authors Constantinos Markides and Paul Geroski face a curious challenge: They have a lot of data to support their claim that the way to make big profits, if you’re quick enough, is to be the second company to take an innovation to market.

However, the myth of the first mover – the idea that being first to market is the way to make money – is pervasive enough that they have to spend a lot of time convincingly debunking it. They also show the challenges and risks of trying to become a successful “fast second.” The authors explain the complicated, almost organic, interaction among innovators, competitors, markets and consumer demands that tug at the marketplace. They do a fine job of documenting the collective act of creation.The possibilities of being a second mover will appeal to anyone who is interested in innovation, planning, new product marketing, or social and economic change.

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In a Tweet

— You're better off being a strategic second, You don’t have to absorve the risks of being first to market.

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In two Minutes

You don’t have to be first to market. In fact, you’re better off being a strategic second.

One set of factors produces radical innovation. A different set of factors consolidates those innovations and profits from them.

It is almost impossible for the forces driving innovation and the forces driving profitable consolidation to coexist within the same organization.

Radical innovations emerge from fundamental scientific discoveries.

Efficiency and an awareness of consumer needs drive profitable consolidation.

No one can predict the direction of radical innovation early in the discovery process. Moving profitably into an emerging market requires focused timing.

The best time to enter a market is when a dominant design is crystallizing.

If you are an established firm, it may not work for you to try to create radical innovation. Instead, find ways to outsource innovation and harvest the results. When markets change, they put different stresses on organizations.



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Fast Second in 10 Minutes

Misconceptions about Radical Innovations

Which firm created the innovation of selling books online? Amazon.com? Wrong. Amazon is just one example of a common misconception about innovative firms: that you have to be the first to enter a new market to profit from it. In truth, the innovators who introduce fundamentally new products – and create “radically new markets” – are not the firms that profit. Instead, later firms make the money; organizations that consolidate the innovations and scale them up are the ones who profit from them. History and memory combine to fool the mind. People forget the individuals who created cars and failed before Henry Ford found ways to bring them to market. Generally, innovation takes four forms:

1. Incremental innovation – Minor, small improvements made to a known product.


2. Major innovation – Larger variations made to a known product.


3. Strategic innovation – Relatively minor changes, but ones that “destroy” existing markets.


4. Radical innovation – Major change that fundamentally disrupts your understanding of your business and your product.

Radical innovations matter most, because they create such sweeping change, and because so few people understand the principles involved. Many established business leaders dream of creating new markets and being the first ones there. They shouldn’t. Established companies usually can’t create new markets (and would be wasting their energies trying), since their cultures are not geared for it. In fact, creating new radical markets should not be among their goals, because truly radical innovations share some dangerous traits. First, their development path zigzags because new products emerge from basic research and production, not from customer demand. Second, radical innovations involve many specialists, such as scientists, all working on different elements of the emerging technology alone and for their own ends. They often don’t even know they are part of a generalized revolution because radical innovations pass through a lengthy “gestation process” during which you can’t tell that anything is happening. After that, the innovation emerges, often explosively, and disrupts the surrounding market. Other misconceptions about innovation are that pioneering new markets is where the money is (it isn’t) or that profiting from a market requires creating it (it doesn’t).

Radical Innovation

When radical innovations enter a market, they disrupt it and spread through the “value chain.” Customers have to figure out what to do with these innovations; competitors have to decide if the innovation is a real change or just a fad, how and when to change to adapt to it, and what these changes will cost. What’s more, radical innovations don’t just create new markets; they create new problems and new kinds of problems, so it is hard to tell where their changes will lead and how to plan for them.

Radical innovations don’t come from consumer demand. How can people want things they don’t know exist and don’t know can exist? Consumer demand might stimulate general innovation, set a research agenda, spur funding, articulate priorities or create a market category, but, ultimately, radical innovation comes from producers. For example, research institutions and the military created the first Web networks, but they had no sense of the changes the Internet might spawn.

This “supply-push” of innovation is hard to anticipate. In fact, many major discoveries are accidental byproducts of other investigations. Instead of consciously seeking a specific end, the research community works on specific problems that challenge their entire paradigm. Then a breakthrough happens and a kind of “gold rush” occurs as people hurry to capitalize on it. This creates a situation completely distinct from a “demand-pull” market in which consumers know exactly what they want and demand it. You can target your efforts in such markets, but a supply-push situation creates niche markets, where a minority of specialized users – the early adopters, the rich and the specialists – will use the new product, but most consumers won’t.

You’re essentially guessing where a supply-push market will go. It is difficult to convert new theoretical breakthroughs to technologies, and harder still to anticipate how those hypothetical technologies will match consumer desire. As a result, when a new innovation emerges, a lot of firms rush into the field. In fact, “more than 1,000 firms” have tried their luck in the American auto market, the vast majority between 1885 and 1920. These early manufacturers offered extensive variety, right down to cars with three wheels, and disappeared.

During a market’s early years, competing firms learn from each other, trying to figure out what works best in the face of sudden changes. Companies start and fail quickly. An “information cascade,” in which people suddenly become aware of undefined possibilities, powers the rush. Would-be visionaries can inflate the possibilities, but don’t know the risks. People contribute massive investments to build a competitive infrastructure and then rush in, mostly having bought the myth of the first mover. All these patterns played out in the’90s Internet boom.

Companies that move into new markets enter from either “horizontally linked markets,” where their experience gives them a sense of the opportunities, or from integral “markets that are linked vertically,” from the supply lines to the technological support staff. Most new entrants fail quickly and leave the field during the consolidation phase of the market. This passage is marked by the emergence of a “dominant design,” which both allows and creates mass marketing.

Dominant designs emerge as markets learn what a product can do, and settle on shared definitions. These parameters create a “platform” that producers can use as the base for other innovations. Competing designs can both become dominant if they blend low consumer risk, reliable function, good support and low price. Because a proposed design has to serve different consumers, the producer has to pour investment into establishing it. If you can establish the dominant design first, you’ll be “well-placed to take control of the market.” Being first lets you exploit learning curves and economies of scale, and build a brand. Yet these advantages don’t come from being the first to offer a product for sale, but from being the first to succeed in reaching a mass market.

Colonists and Consolidators

Two kinds of firms enter new markets: colonists and consolidators. Their traits are so markedly different that it would be hard for a single firm to contain both sets of characteristics. Colonizing companies are at ease with change, willing to experiment (and fail often), and enthusiastic about the core technology driving their pet innovation. They want to be first or best, and don’t emphasize money or consumers. By contrast, consolidators establish or build on the dominant design. They move more slowly and are not as flexible. They focus on market realities, listen to customers and can persuade entire marketplaces of the value of their product. Where colonists wanted to create the best of an item, consolidators want to make a good-enough item that is cheap enough to sell to everyone. Colonizers’ and consolidators’ cultures differ even more than their functions. Colonists like their firms to be “small and agile,” able to move from breakthrough to breakthrough. They prefer flat organizational structures and emphasize generating new concepts, without rigidity about finances. Consolidators work best replicating known successes. They prefer a defined hierarchy, and tightly control their processes and costs.

If you try to be both a colonist and a consolidator, your organization can get stuck and conflicted, unable to move either way. You have other options, though. If your firm is established, you can embark on “radical cultural change,” which incorporates the mindset of the colonist. You can spin off a linked, but independent, unit to colonize new markets. If you know, as an established consolidator, that you’re unlikely to innovate radically, you can outsource that function. In 2003, Procter & Gamble committed itself to drawing half of its innovation from outside sources.

Rather than trying to create radical new innovations in-house, identify your goal, then form relationships with firms that are small, lively and fertile with new ideas. Colonizing and consolidating require different strategies, but you can address them by dividing the labor. Recognize the organizational needs of each part of the process, understanding that the two may be in conflict because emergent technologies disrupt established product lines. Pay attention to how they relate, so you can determine where and how they conflict, and decide how to best manage their interaction.

When colonists test different versions of a new product, they emphasize its “technical attributes.” They get excited about what it can do. When they improve new products, they really do make them better, but in the process, they also risk devising innovations that surpass what consumers need and the price the market is likely to pay. To shift to the consolidation phase, try to identify the average consumer’s needs and meet them more cheaply. As more people adopt the emerging design, they produce a bandwagon effect. This starts some economies of scale, but they won’t really come fully into play until your design is dominant, so dominance is your new goal. You don’t have to win directly; you could merge with a competitor and focus on the new firm’s best design. Reduce “customers’ risks” by making the design reliable. Educate potential customers, so they aren’t taking a stab at the unknown. Get your new product into a distribution system, so customers who want it can get it. Subsidiary goods markets will emerge as you succeed (as having cars generates the needs for gas stations, for example), and you may want to help them.

Entering the Market with the Fast Second Strategy

Many people cherish the idea of being a first mover. This seems partly due to the exhilaration of competition (“We’re Number One!”), partly due to misconceptions about innovation, and partly due to the understandable fear of arriving too late to seize an opportunity and forever playing catch-up. That last fear, of falling into the “second-mover” position, is understandable – but it isn’t the only alternative to being a first mover. Instead of being a radical who creates a market but doesn’t benefit from it because there’s too much risk and cost, or being a second mover who follows along gathering crumbs, follow a “fast-second strategy.”

With this tactic, the second mover waits for just the right moment. Closely track the competition for a dominant design, so you enter the market as the platform crystallizes. Often, speedy second movers are well-established in related fields and poised to move. Other “imitative entrants” don’t offer much that’s new, but instead copy the emergent designs. They offer lower prices or some product variation. Timing is essential. To enter the market at just the right time, watch “the rate of innovation.” Experimentation slows as a dominant design emerges. Heed public discussion of the market; when the public treats it with more “legitimacy,” the time to move is coming. When “complementary goods producers” start to emerge, that’s a sign that the colonizing period is over, and it is time to move in and consolidate. This lets you reduce your “time-cost trade-off.” When you rush to develop a new product, the price is high because you’re innovating so quickly you have no time for the reflection that would make processes more economical.

When Markets Change

When a new market shifts from the first mover’s niche market to the consolidator’s mass market, new pressures emerge. First, as the market grows, you can’t serve everyone. Instead, focus on being the best in your “unique strategic position.” Let go of the things you aren’t going to do. Second, once the dominant design emerges, the nature of innovation and competition changes. Innovation is strategic, rather than radical, and competition is based on processes being efficient and price. New markets tend to be vertically integrated; when small radical firms compete for dominance, they do everything in-house. The shift to a mass market produces “vertical disintegration”: companies specialize in one element or component, and others outsource production to them. This produces a “locked in” state that is useful and dangerous. It’s useful because you can invest in the gear you now know is needed to complete identified processes. It’s dangerous because when you commit to those products and processes, you will resist

change .

Image courtesy of and with Some rights reserved by e53

Brain Rules Summary

In a Nutshell

Your brain evolved to need exploration and exercise. You are capable of remaining able to learn forever, but physical activity is crucial.

Two Minutes

Your brain may look like a big, soft walnut, but it’s really a beehive of activity.

[caption id="attachment_3086" align="alignright" width="300"] Brain Rules: 12 Principles for Surviving and Thriving at Work, Home, and School[/caption]

Your brain believes you are still fighting for survival against a saber-toothed tiger. Knowing 12 rules about brain function can help you learn better and stay smarter. Your brain evolved to need exploration and exercise. You are capable of remaining able to learn forever, but physical activity is crucial.

No two brains are alike. Male and female brains are distinctly different.

People cannot give full attention to dull information.

To recall data short-term, “repeat to remember”; to recall it long-term, “remember to repeat.”

To be your smartest, sleep well and regularly.

Your brain needs information from all your senses, but vision is king.

A child’s brain cannot function best in a conventional classroom trapped in rote learning. Children learn at home, and they learn better overall when that home is emotionally stable.

 

10 Minutes Brain Rules Summary

Your Brain Is Complex and Amazing

Researchers are using brain scans and other techniques to learn more and more about how the human brain works. Although more is left to discover, 12 basic “rules” capture much of what science knows about the amazing computing device in your head.

1. “Exercise” – Your Brain Slows Down When You Sit Still

Physical activity is vital to keep your body and mind working in tip-top shape. Retired television exercise guru Jack La Lanne is a perfect example. At age 70, he celebrated his birthday by swimming across California's Long Beach Harbor pulling 70 boats with passengers onboard. His history of exercising and eating well contributed to his perennially quick wit and agile humor.

Anthropologists note that the first humans roamed in search of food, covering dozens of miles a day, so their brains evolved to handle regular physical activity. Because human brains “were forged in the furnace of physical activity,” if you want to use your entire IQ you must exercise. Inactive couch potatoes lose mental facilities along with physical capabilities. To regain your mental abilities, get aerobic exercise, even if you have neglected yourself. Just walking half an hour a few times a week will boost your cognitive output and reduce your risk of dementia.

Children who find concentrating difficult will benefit from physical activity. Exercise makes oxygen flow more efficiently through the blood and into the cells, cleaning up toxic wastes left behind by food metabolism. When you move you're keeping your brain cells healthy. More than food or water, your brain, which consumes 20% of your body’s energy, requires oxygen to function. Exercise also makes your mental engine run cleanly. Unfortunately, modern civilization requires people to sit for long periods without moving. If schools and offices incorporated physical activity, students and staffers would get smarter, healthier and more productive.

2. “Survival” – Your Brain Is an Evolutionary Triumph

The human species is weak, but brainpower helped people survive and thrive. Your brain has three parts where many survival and learning tools are hardwired: a “lizard brain” or amygdala, a “mammalian brain” and the cortex for higher reasoning. Humans have a great capacity to adapt. Over thousands of years, thanks to their powerful brains, people adjusted to changes in climate and food supply, and came to dominate the planet. Their advanced brains also allow them to “read” each other and negotiate. Your brain’s memory is an informational “database,” and you use mental “software” to improvise and solve problems. You may perform best with encouragement and be unable to perform as well near someone who threatens you. Your primitive lizard brain is always watching out for your safety.

3. “Wiring” – Brains Are “Wired” Individually

Nerve cells, known as neurons, look a bit like fried eggs that have been stepped on. The yolk holds important genetic coding. The long tentacle-shaped edges transmit and receive electrochemical messages at blinding speed. This is the cellular basis of learning. The brain’s neural connections are in constant flux. Your specific brain structure depends on your culture and other external inputs. A musician' brain has different cellular “wiring” than a scuba diver’s. As children grow, so do their brains. Key brain growth occurs up until the early 20s and changes can continue for decades. Many researchers have worked to understand intelligence and to map how the brain functions. Some believe there are multiple types of IQ. One person might be great at math while another excels at physical movement. Different parts of the brain are activated for different memories and skills, so your brain scan looks different than anyone else’s, even your twin’s. Since each brain is individual, educational programs should be customizable.

4. “Attention” – If It's Not Intriguing, Your Brain Isn't Interested

When you find something boring, you don't pay close attention and you can’t retain the content – so when you're giving a presentation, capture the audience’s interest as soon as you can. You want your audience to focus. Multitasking is a recipe for inefficiency and danger. In fact, multitaskers are prone to 50% more errors and take 50% longer to finish a task than people who do one thing at a time. Studies say that chatting on your cell phone while you're behind the wheel of an automobile is as dangerous as driving under the influence of alcohol.

People remember emotional situations longer than calm ones for neurochemical reasons. During emotional events, your brain releases a neurotransmitter called dopamine, which is associated with attention and rewards; it helps you cement the memories. At stressful moments, the brain doesn't pick up details. It focuses on the big picture. If you're trying to teach someone, present “the key ideas and, in a hierarchical fashion, form the details around these larger notions.” Provide information in 10-minute chunks and use entertaining hooks between those chunks.

Researchers who study stroke victims have found that the left side of the brain can only pay attention to visual stimuli on the right, but the right side takes in the entire visual field. So a stroke patient will recover better if the stroke occurs in the left hemisphere of the brain.

5. “Short-term Memory” – The Case for Connection

When you can recall a piece of information immediately, it is stored in your short-term or “working” memory. To make a memory last longer, repeat it and link it to something familiar. For instance, students forget 90% of a classroom lesson in less than a month, but going over the material at regular intervals and associating one piece of data with another will improve their retention rates. Information in a list of unrelated items is harder to recall than material with meaningful connections to something familiar. Thus, people learn better when they can refer to familiar examples. To be more memorable, engage your listeners’ elaborately and substantively.

6. “Long-term Memory” – The Case for Repetition

Sound and images enhance short-term memory, but you won’t retain information in your long-term memory without a stabilizing process called “consolidation,” and subsequent recall and repetition, or “reconsolidation.” Stored memories are more malleable than you might expect. Today’s fresh memories can fade after a few years, forcing your brain to struggle to recall the specifics of events that once were clear. Studies show that “the brain might cheerily insert false information to make a coherent story.” This has disturbing implications for the value of witnesses in a court of law, among other things. If you want to retain something, be deliberate. For example, ignoring your homework and then studying all night before a test is counterproductive. You will do better by spacing out multiple

study sessions. To retain specific information, you need to:

Think about the information within the first hour or so after you learn it. Immediately speak to other people about it in great detail.

Have a good night’s sleep and “rehearse” the information again afterward.

7. “Sleep” – Snooze or Lose

The human body increasingly malfunctions when deprived of sleep. If you are sleepless for a few days, in addition to severe fatigue, you will experience stomach upsets, crankiness, poor memory recall, disorientation, and eventually paranoia and hallucinations. For about 80% of the time you spend asleep, your brain doesn’t really rest. Brain scans show enormous electrical activity among the neurons, even more than when you are awake. The body has a delicate control process, called the circadian cycle, which keeps you alternating between wakefulness and sleep periods. An individual’s preferred sleep timeframe varies genetically. Early birds (called “larks” and “early chronotypes” by scientists) make up about 10% of the population; another 20% of people are late nighters (called “owls” and “late chronotypes”). Everyone else falls midrange on the continuum.

Your brain slows in the afternoon, but a nap can work wonders. Napping for 45 minutes will turbo-charge your brain for six hours. Conversely, students who skip even an hour of sleep each night face a dramatic drop in academic performance. Sleep deprivation impairs “attention, executive function, immediate memory, working memory, mood, quantitative skills, logical reasoning ability, general math knowledge.” Wouldn’t it be great to match job schedules with people’s inherent sleep patterns? Plus, a later school day would address teenagers’ normal tendency to sleep late.

8. “Stress” – Chronic Tension Makes It Harder to Learn

A little bit of stress heightens your ability to learn, but ongoing, chronic stress damages brain function. Chronic stress can cause a phenomenon called “learned helplessness,” in which people simply give up hope and no longer engage their brains or try to solve problems.

During times of stress, people experience a “fight or flight response.” The resulting blood pressure rise and racing pulse are detrimental over the long term, raising the risk of strokes and heart attacks. Chronic stress worsens your ability to work with numbers and language. When you are seriously stressed, you don’t learn as well and have difficulty concentrating, remembering and solving problems. Chronic stress can lead to acute depression. One kind of stress has serious implications for children: Kids who live in homes where parents fight constantly “have more difficulty regulating their emotions, soothing themselves, focusing their attention on others,” and are more often absent from school. Their ability to learn, study and remember is so diminished that their test scores drop. A program called “Bringing Baby Home,” by researcher John Gottman, Ph.D., teaches fresh marital communication skills to expectant couples. As a result, their newborns have healthier brain chemistry than infants who live with fighting parents.

9. “Sensory Integration” – For Best Results, Use All Your Senses

Your brain gets crucial sensory input from your eyes, ears, nose and skin. For enhanced learning, bring all your senses into play. For example, you will retain more of what you read when pictures accompany the text. The more inputs your brain has to work with, the better you will learn and recall information. You also remember things better if you first encounter them in the presence of distinctive sensory clues, like smells or sounds. That’s why Starbucks doesn’t want its employees to wear perfume, because it could conflict with the aroma of coffee in the stores.

10. “Vision” – The Eyes Have It

Expert wine testers can be fooled, and made to ignore their sense of taste and smell, if you change the color of wine they are testing. This illustrates how the brain prioritizes the sense of sight. The human vision-processing system is highly complex, and when the brain encounters blind spots it actually interpolates the visual field. Reading is a complex mental activity, because the brain processes each letter as an individual visual symbol.

11. “Gender” – Your Sex Affects Your Brain

Scientists find subtle anatomical and functional differences between male and female brains. For example, women synthesize the feel-good neurotransmitter, serotonin, more slowly than men. The genders respond somewhat differently to acute stress: Women often assume a caring role, while men isolate themselves. However, no given individual necessarily conforms to group statistics.

12. “Exploration” – A Sense of Wonder Promotes Learning

As infants become toddlers, they act like little scientists, constantly examining their environment, and testing cause and effect. Their brains are busy gaining data and concepts to help them navigate their circumstances. The adult brain remains flexible and plastic. People are able to learn throughout their life spans.

Image Courtesy of Jurvrenston

10 Faces of Innovation Summary

In a Tweet

Combining ideas with different world views can be great for your business.

10 Faces of Innovation In 2 Minutes

You've probably attended more than one meeting in which a participant proposes a new idea only to have someone ask permission to "play devil's advocate for a minute." Just like that, he or she stomps on the new idea and stifles creativity. However, using role-playing to experiment with ideas is not a bad tactic. Although the devil's advocate role is negative, its effectiveness demonstrates that taking on a pretend persona can completely change what you see in a given situation. Role playing is a good way to encourage innovation.

The term "innovation" needs some explanation. The 3M Company defines it as "new ideas – plus action or implementation – that result in an improvement, a gain or a profit." In fact, many ideas don't go anywhere, so 3M's inclusion of "action or implementation" in the definition is important. So far, so good. However, a complete definition of "innovation" should also emphasize the role of people – plural – in the process. Innovation doesn't just "happen." It requires determination and teamwork.

"Learning," "Organizing" and "Building"

Role-playing can add energy and excitement to your meetings, and help your company stay on top of market changes. Ten roles you can use to nurture innovation fit into three categories:

1. "Learning roles" – The "anthropologist," the "experimenter" and the "crosspollinator" see, create prototypes and explore what other disciplines have to say.

2. "Organizing roles" – The "hurdler," the "collaborator" and the "director" connect and guide people, and overcome obstacles.

3. "Building roles" – The "experience architect," the "set designer," the "caregiver" and the "storyteller" build physical, psychological, emotional and linguistic structures that nurture innovation.

10 Faces of Innovation In 10 Minutes

[caption id="" align="alignright" width="240"] The Ten Faces of Innovation: IDEO's Strategies for Defeating the Devil's Advocate and Driving Creativity Throughout Your Organization[/caption]

People can switch roles; no one needs to be stuck playing a particular one all the time. You don't need one person for each role in every situation: Three people might play seven of the roles, such as. The experience of swapping roles itself opens people to new ideas. Make a commitment to innovation organization-wide and over time, not just for one project. Try acting these roles:

1. "The Anthropologist"

Anthropological researchers immerse themselves in alien cultures and see carefully. This sort of intense observation is the single greatest source of innovation you can bring to your organization. View the world with what Zen Buddhism calls a "beginner's mind." Try to see everything as though you've never seen it before and watch what people do without judging them. Seek ideas everywhere: in your own intuition, in daily action and in the clutter around you.

You can't find out how customers use your products by asking them directly, because they will filter and clean up their responses for public presentation. Or, they simply may not know. So, watch what they do. Observe them in person or use technological aids,such as videotaping. If you talk to them, ask open-ended, behavioral questions from several different angles. Don't ask an adolescent, "What's hot?" Instead, ask what he or she would buy with a certain amount of money. Visit a newsstand and buy a magazine you don't usually read. You'll see your culture and your customers differently.

2. "The Experimenter"

You can recognize an experimenter immediately. Like Thomas Edison or, today, like James Dyson, the inventor of the bagless vacuüm cleaner, experimenters are persistent about solving problems. They try lots of prototypes, make drawings, and build and test models. Then, they take what they learn and start all over again.

Many people are reluctant to create prototypes because they think a prototype should impress those who see it – but that is not its purpose. If necessary, you can make a quick-and-dirty prototype out of things you've pulled from the trash. Your aim is to give your ideas a literal shape, so you and others can grasp them and then improve them. Compare two prototypes to discern what works and what doesn't.

3. "The Cross-Pollinator"

Cross-pollinators bring together disparate things. They take designs, practices and concepts from one discipline and they plunk them down in another, creating something new through "unexpected juxtaposition." These juxtapositions can travel startling distances. The concept of punch cards came from the silk-weaving industry and IBM applied it to its early computers.

To innovate, let your mind wander. No matter how counterintuitive it may seem, let go of your focus on your job. Read new things. Travel to new places. To encourage innovation, act as a cross-pollinator by underwriting educational experiences in any subject area for your employees, with the goal of broadening their minds. Organize regular "show-and-tell" sessions among departments. Provide space for people from different disciplines to mix. Set up a speaker series. Hire people with diverse backgrounds. Encourage lateral thinking and simple curiosity. Try "reverse mentoring" by pairing an older professional with a younger one so they both learn another generation's perspective.

4. "The Hurdler"

Hurdlers specialize in overcoming obstacles. You can't defeat them by blocking the direct path to their goal – they'll jump over it or work around it. Hurdlers treat every obstacle as an opportunity.

If, acting as a hurdler, you can solve a problem others can't cure, you'll reap huge rewards. However, prepare to face blockages. Inside the company, you may have to slip past rules that present hurdles. Resist the temptation to just "do your job." Getting a successful project approved after the fact might be easier than getting it funded when it is still hypothetical. Outside forces will also erect hurdles. Experts may even dismiss your ideas, but keep going. Cargill, the food company, wanted to buy from cotton farmers in Zimbabwe, but it faced a hurdle: it discovered that "not enough currency existed in the local economy for the company to pay" the farmers, so Cargill printed its own "money."

5. "The Collaborator"

Collaborators not only work well with others, they also generate connections among other people. They encourage teams from different disciplines to work together, mediate among parties and keep everyone on the same page. Collaborators may also broker deals among organizations, helping companies move from simple buyer-seller relationships into multifaceted, more profitable arrangements. For instance, when Kraft Foods and its vendor, Safeway, worked together, they were able to make better plans, improve their supply chain, and reduce handling and inventory costs. Consider these two unusual collaborative techniques:

1. "Unfocus Groups" – Rather than bringing together representative consumers, as you do in a focus group, gather the most extreme, creative consumers for an unfocus group. Then, learn from watching participants respond to one another's ideas.

2. "Cross-training" – Provide training in one discipline to employees in another.

Of course, forming work teams is a kind of collaboration. You can formally train employees in teamwork skills or, informally, you can have work teams play a sport together. Whether you use formal or informal collaborative techniques, harness the energy of "opponents" and bring them into the fold. Celebrate collective and not individual successes.

6. "The Director"

Directors are planners and organizers. While collaborators may work on relatively routine projects, directors are visionary and ambitious. They start new ventures and enlist people to work on them. Being a director requires taking risks and exercising leadership. Hire the best people and lead them in brainstorming sessions. Record the good ideas that result. Let others take the spotlight. Give your projects striking names to draw employees to them.

Put someone who can act as a director in charge of an innovation initiative. In this job, the director would develop goals, find resources, show the criteria for success, protect the initiative, reward people for supporting it and create an atmosphere of trust, where everyone could speak with honesty and without fear.

7. "The Experience Architect"

Experience architects present ideas by appealing to the senses. They're interested in aesthetic pleasure as well as understanding. Expert experience architects use technology to give their audiences new experiences, but even untrained people can act as experience architects if they focus on the five senses. For example, someone in the role of an experience architect would use his or her personal reactions to check the experiences of consumers by tracking "the customer journey," including waiting time, background music, physical comfort and ease of purchase. This involves following every step a customer takes when interacting with your organization. The consumer probably takes more steps than you thought – giving you more areas to improve.

8. "The Set Designer"

Set designers focus on making physical space both functional and pleasing. For example, to take on the role of a set designer, consider whether your organization's space

enhances and encourages innovative thought. Create this effect by arranging desks and hallways so people can gather easily in impromptu groups. Encourage informal talk. Repeal restrictions on how people use and decorate their individual spaces. Reorganize offices to encourage people of different departments to spend time together. Move workers around on a project-by-project basis. Provide materials for recording and showing ideas, and designate wall space for displaying the results.

9. "The Caregiver"

Think of the bedside manner of the best doctor or nurse you ever had, or the calm nurturing that an ideal parent provides. Caregivers, who work well with experience architects, have the ability to put people at ease, but their main concern is providing good service. Caregivers seek ongoing relationships with customers as individuals, as well as with the larger community. They build a sense of shared identity that can help build brand loyalty. In a world increasingly dominated by automated services, caregivers wish to revive the personal touch – and the smile.

10. "The Storyteller"

Unlike facts, stories forge "emotional connections" between the teller and the audience. Storytellers can take the ordinary and reshape it into something special, creating inspirational myths and allegories. The storyteller's goal is to create meaning, not entertainment. He or she seeks the truth and speaks with an authentic voice, both as an individual and as a representative of your organization.

Adopting the persona of the storyteller brings you full circle, back to the anthropologist, because a major part of the storyteller's role is to listen. To act as a storyteller, ask open- ended questions, then take what you hear and weave it into a structured narrative. Such stories bring teams together. They express ideas and experiences that people may not have been able to discuss. Innovation can be chaotic and scary. A good storyteller "helps make order out of chaos" and makes the "vocabulary of change" familiar. Good stories make work enjoyable and meaningful.

The Ten Faces of Innovation: IDEO's Strategies for Defeating the Devil's Advocate and Driving Creativity Throughout Your Organization

Image Courtesy of Pilar Azaña

Making Innovation Work summary

Read the Amazon Reviews

You don't have to wait for innovation to happen. Plan for it, and make it happen methodically in your company.

2 Minutes Summary

Select a "Play-to-Win" innovation strategy or a "Play-Not-to-Lose" strategy. Guide innovation through measurement and incentives.

You can create innovation through several aspects of either the business or the technological side of your company.

Innovation is the greatest source of organizational security in a changing economy.

Innovation is the creation of new value through some intersection of business and technology. Radical innovation changes both the technology model and the business model. Innovating methodically matters because the way that you manage innovation will dictate the kinds of innovations your company creates.

Not every business needs to innovate intensely, or in the same way; the kind and level of innovation your company needs depends on your specific business.

Because innovation challenges the status quo, parts of your organization will fight it. Most people misunderstand innovation. It is not mysterious or magical.

Making Innovation Work Summary

Making Innovation Work is not revolutionary or magical, and not every company has to innovate a lot. Depending upon your industry, polishing existing processes might be enough. Three broad rules govern innovation. First, like other aspects of business, it requires specific conceptual tools, used with discipline. Second, to innovate profitably, you must measure and reward innovation. Third, to change your industry fundamentally, combine a business model change with a technological change. Company leaders - who play the most vital role in innovation - must choose between a "Play-to-Win" (PTW) strategy and a "Play- Not-to-Lose" (PNTL) strategy. Once you determine your approach, guide innovation by using metrics and rewards, and by helping your organization learn.

What Kind of Innovation Fits Your Organization

Companies that innovate can prosper, and change society and their industries. Innovation isn't just for business; nonprofits can apply it as well. Develop the right portfolio of innovation by determining what's appropriate for your company, based on its nature and market position. Innovation can be "incremental, semi-radical or radical." Incremental innovation improves current processes with repeated small changes. Semiradical innovation creates a fundamental change in your business model or technology. Radical innovation changes your business and your technology models at the same time. Sometimes combining two semi-radical innovations creates an "ersatz radical innovation," which has as big an effect as a radical innovation, but happens in stages, and may have a shifting cast of participants.

What is Innovation and How Do You Leverage It?

Innovation is a change in business and/or technology that creates greater value. Six aspects of your organization can drive change, divided between the business side and the technology side:

Business:

1. Value proposition - Change what you sell; offer a new item or a variation.


2. Supply chain - Change how you create products and/or get them to market.


3. Target customer - Change to whom you sell your product.


4. Technology


5. Product and service offerings - Create and sell an item using new technologies.


6. Process technologies - Deliver things differently.


7. Enabling technologies - Create something that lets you execute strategies faster.

How to Design a Winning Innovation Strategy

What sort of innovation does your company need? First, determine if "Playing-to-Win" (PTW) or "Playing-Not-to-Lose" (PNTL) is a more appropriate strategy. PTW works for companies like new tech start-ups that want to transform their industries. But, with PTW, you bet everything on delivering a successful semi-radical innovation in technology, if not a radical innovation. PNTL fits better in a volatile, highly regulated or deeply competitive market. PNTL uses mainly incremental innovation. You can lead an industry this way, but you risk that someone else will make innovations that are more radical.

Once you make this choice, design a strategy that considers crucial internal and external factors. For instance, honestly appraise what your internal organization can do technically, what its structure allows, how successful your current model is, and what resources you can invest in innovation. Blend these factors to shape a clear vision. Externally, consider your industry's nature and what your competitors are doing. How is technology changing in your industry? Can outside parties offer productive supplemental partnerships?

How to Structure a Company for Innovation

To innovate successfully, you must balance creating something new with capturing value. Organizationally, let individuals voice new ideas and provide a mechanism that identifies good concepts. Design interdisciplinary, inter-unit business and technology platforms. Each platform should develop an array of innovative projects, from incremental to radical. Individuals, teams and the company should seek internal and external partnerships. Use "transparent" creative processes, so people know what innovation is underway. Clearly explain the value of the innovation so everyone understands how innovation creates profits. Block the nay-sayers who mobilize to destroy challenging new ideas.

Designing the Process of Innovation

The structure of your innovation system should address five functions: efficiency, communication, coordination, learning and alignment. Efficiency moves innovations quickly from ideas to the market. Those involved in innovation should be able to communicate readily with their internal and external partners. Coordination helps people in different areas work together and share results. With learning, each process tells your organization more about how it innovates. Finally, align the company's objectives: bring all the goals in line.

A range of models let you accomplish these functions, including "Structured Idea Management" (SIM), "Experimentation" and "Prototyping." In SIM, you control the environment and develop project criteria. Participants brainstorm, develop hundreds of ideas and narrow them to a dozen or so. Then they document, outline, briefly investigate and develop these ideas. Consciously assess if these ideas are radical or incremental, and salvage stray "idea fragments." Radical innovation requires experimentation, the process of moving projects through repeated versions. "Prototyping," a related model, works in a modular fashion. Instead of trying to solve all of a project's problems at once, design prototypes that answer one question at a time. Make lots of cheap versions and learn from each one.

How to Measure Innovation

Metrics are essential for guiding innovation. Use a few sharply focused metrics that enable information to flow from innovation teams to upper management and back. Your metrics should blend objective and subjective (to account for intangibles) measurements. Metrics should touch on each stage of the innovation process, from creating ideas to capturing value. Your goal is to make the process visible at each stage and to evaluate it. Your measurement system should take specific factors into account: talent, resources, knowledge development, managements' influence, communication flow and more. The most challenging aspect is measuring how a radical innovation creates value. This kind of innovation usually takes time, creates new capacities for entirely new markets, and - naturally - carries a high rate of failure. While you might evaluate it subjectively, you could also explain its success in terms of intellectual property and project stages completed, rather than in terms of numerical or financial rewards.

How to Design Incentives to Support Innovation

Four major factors feed motivation: vision, passion, recognition and economic incentive. Address the first two by articulating a vision, and creating a healthy unified culture that allows passion to flourish. The second two factors, recognition and economic incentives, require specific tools. Designing specific, measurable bonus reward systems is easier with incremental innovations, such as new ways to reduce process time. But, workers involved with radical innovation are often driven less by financial motives than by intrinsic motivation, that is, the desire to discover or create something new. A radical innovation project's end goal is also less obvious, so set points of recognition, marked with acknowledgements, new titles and awards that underscore your employees' dedication.

How Do Organizations Become Better at Learning?

Distinguish between "learning to act," which focuses on how to improve existing processes, and "learning to learn," which addresses the actual innovation process. An organization must do both to innovate well. Everyone makes mistakes, but innovative firms learn from them. That requires linking your learning process directly with your innovation strategy. Actively manage knowledge and ignorance: determine what you know and what you don't know, then correct the areas you know least. Useful tools for this purpose include "project roadmaps," which show you how to use one project as the basis for several others, and "learning histories," which relate how specific innovations worked or failed.

How to Design a Winning Culture

Some organizations see innovation as the new religion that's going to save everything. Don't let your company grab on to this almost mystical worship of innovation; that re- mystifies it. Instead, spread the demystification of innovation through your organizational culture. Perhaps surprisingly, you must be cautious about success as you create an innovation-friendly organizational culture. Success can make employees complacent, and past successes can harden into dogma. People want to keep doing what already works. When they do so, they often shift to PNTL, rather than PTW.

Let your organization grow in cycles - allowing periods of rest and integration after radical innovation. Be organizationally stable, but open to change. Allow people to think and explore freely, but within generally accepted "rules of play" that guide and focus their work. Balance the creativity that creates new ideas with the discipline that recognizes their value and repackages them for the market. Balance control and trust. Since innovation often happens invisibly, or away from upper management, executives must trust that it really is happening - and must protect innovators from outside attention too early in the process. Such attention can kill innovation.

Your company's executives should know how innovation works, and how to establish a culture that nurtures it. Executives must evolve a vision of innovation that they support with physical and intellectual resources. Innovators need to know where they can get straight answers and money. A good environment for innovation includes:

Narrative support - Tell stories of great innovators in your company's past, making individuals who lived their values into the equivalent of mythic heroes.

Physical environment - Use color and light to put people at ease. Workspaces should allow privacy as needed, free lines of sight and an easy flow of information.

Personnel - Hiring the "wrong" person, say someone creative who doesn't readily fit your culture, or someone without certification - may be the right choice. Different kinds of people add diversity; people outside their ruts apply new perspectives.

Applying the Innovation Rules to Your Organization

Emphasizing innovation too much can destroy your company. Adhere to the seven rules of innovation:

1. Strong leaders must define, guide, fund and support your innovation strategy.


2. Integrate innovation into the company's basic business mentality.


3. Align the amount and type of innovation to the company's business.


4. Manage the natural tension between creativity and value capture.


5. Keep "organizational antibodies" from smothering ideas just because they're new.


6. The basic unit (or fundamental building block) of innovation is a network that includes people and knowledge both inside and outside the organization.


7. Create the right metrics and rewards" to measure and manage innovation.

Fulfil the first three rules immediately. Review what employees do to promote innovation in your culture. The relative weight you place on different types of innovation should match the innovation strategy that fits your firm and your industry. Decide if you want to refine your current innovation processes or redirect them. Several general structures will help you actively manage innovation. In a "stage-gate process," you divide an incremental innovation project into stages, and set up "gates" it passes through, stage by stage, toward a known goal. In a "venture capital model," you delay trying to capture value as a team pursues innovations without specific goals. In the "technology innovation model," a tech team drives innovation, perhaps beginning ambiguously but emerging into a measurable process. Finally, the "time-driven system" works with incremental innovation, focusing on deadlines and reduced production times.

The image is from the IBC Innovation Offices courtesy of Karma Trendz

The Heart of Change

The Heart of Change:
Real-Life Stories of How People Change Their Organizations.

Get Your Kindle Copy!

In some eras, stability matters. Businesses are preoccupied with consolidating their positions. But today’s economic environment is turbulent, and companies of all kinds must either change or die. Yet, people still find change difficult. Most people don’t do it well because they have never had a successful change experience. Too often, managers try to instigate change with appeals to reason - with reports, spreadsheets, budgets, plans or mission statements. But these tactics cannot create the widespread sense of urgency organizations need to alter their course. Instead, the “heart of change” resides in the heart itself - the emotions of individual employees. Only deep feelings can motivate people to change familiar behavior, and only individual behavioral changes can drive organizational change. Changes in vision, systems, products and culture all have their roots in behavioral change.

Step One: “Increase Urgency”

So, how do you reach the heart to create a sense of urgency? A story or artifact that demonstrates the problem works better than endless explanation. One vivid, creative and inexpensive demonstration constructed by a frustrated manufacturing company manager provides a good illustration. The company had no central purchasing system or policy; instead, each factory bought its own supplies. Convinced that this was a waste of money, the manager asked a summer intern to find out what kinds of gloves each factory used and how much they cost. The manager knew things were bad, but he was astonished to discover that the factories used 424 different kinds of gloves, which they purchased for prices ranging from less than $5 to more than $15 per pair. Next, the intern obtained a sample of each glove and sorted the samples into categories by price and division. The manager put them on display in the central office boardroom. The executives who toured the display were speechless. They sent the glove display to every division and many factories, telling and retelling the story. The experience became the first step in developing a new, company-wide purchasing system.

Note that the impetus for change did not come from the top. The manager knew he needed to reach executives, but he engaged people throughout the company because of the vividness of his message. Of course, he had to present the glove display without blame or anger. When people feel defensive or fearful, they focus on self-preservation, not creative solutions or progress.

Step Two: “Build the Guiding Team”

Once employees feel that change is urgent, many are eager to help. Choose a team of “the right” people who are committed to working together. An organization’s politics and history - especially if it has undergone mergers - can undermine efforts to construct a strong team. Confronting problems or changing old patterns can be difficult, given people’s tendency to “duck the issues.” Or, work gets “dumped” on weak people, setting the team up to fail. “Ducking and dumping” are common, but you can avoid them with trust and good leadership.

One company that grew quickly through acquisitions reached the point where it had to look inward and begin to put the pieces together. The close-knit, homogenous executives who were used to the tempo of takeover negotiations found this change in direction hard to take. One executive said, “Before we used to get a deal done and then work like hell to make it work. It was exciting. Now there’s none of that.” But the firm’s new leader recognized that it needed a different kind of team. He invited people from all functions and divisions to participate. At times, the team’s diversity felt unwieldy. Members often debated their direction and priorities - but that was the point. To create this new kind of group, the new leader had to buck company history and trends.

Choosing the right people means both “pulling” - inspiring team members, often throughmodeling - and “pushing” - redirecting those who are ineffective or entrenched in old ways, or taking them off the team. Sometimes, consultants or managers try to solve team problems by creating “complex governance structures,” which may even work a little better than a poorly constituted team. But endless subcommittees and reports aren’t solutions. Instead, they often become ways to “duck” formal or informal power structures. Direct, honest communication, though painful in the short term, creates trust and works better in the long term.

Step Three: “Get the Vision Right”

Once you achieve consensus that change is urgent and put a leadership team in place, the team can begin to craft a vision. A vision is not a budget, plan or strategy - although these pieces help implement the vision. Ultimately, developing a workable vision requires “venturing into unknown territory.”

One British company used an exercise called “painting pictures.” Deregulation left their industry at a turning point. The possibilities for a future direction were divergent and confusing. Members of management selected seven broad options, and for each one outlined possible products, revenue, employees, customers and competition. They examined the assumptions behind each option, and what it would take to achieve it. They wrote short descriptions and discussed them in detail, down to what their offices might look like, that is, the “painting.” After the meetings, participants received a one-page summary. “You could almost hear the sigh of relief that they weren’t being sent another Excel file or an e-mail with 16 new attachments.” Once the options had been “painted,” people could be assigned to develop plans and budgets - now that they had some specifics.

A good vision motivates people, as the widespread problem of “efficiency versus service” illustrates. Simply telling managers to cut costs does not motivate them; if anything, it makes them feel stifled. In contrast, in one government agency, the staff was inspired by a vision of better service, and began to focus on “removing impediments. And removing impediments in the bureaucracy inevitably leads to eliminating wasted expense. It follows logically.”

Step Four: “Communicate for Buy-In”

When employees first hear about a big change, their responses often reflect fear, cynicism and anxiety. Communication that ignores these feelings becomes propaganda and arguing about emotions sounds defensive. Instead, present the vision clearly and honestly, and confidently address responses such as anger. To get this right, most teams need to practice, using notes, role-playing and feedback.

What a company says must match what it actually does. One company’s change effort to cut costs stalled when employees challenged the message, particularly questioning the purpose of the existing fancy executive offices. Bosses balked. They said spending for renovations would contradict the cost-cutting vision. Then, a new CEO came in and “nuked” the entire executive floor. Workers began to share the exclusive elevator. The firm sold artwork and added conference rooms. Executives moved around as massive renovations tore everything up. Ultimately, the new space was less expensive to run and more efficient. The savings eventually paid for the renovation. Most importantly, the drastic action demonstrated that the leadership viewed transformation seriously, even if it discomfited those at the very top of the hierarchy.

Step Five: Remove Barriers to “Empower Action”

The classic “barrier” is an “old school” boss, such as the stubborn manager who greeted all new ideas with, “We tried it and it didn’t work” or “We thought about it and decided not to try it.” One crucial customer grew so frustrated that he asked for the manager to be fired. Instead, the company assigned the manager - on pain of taking on the task or losing his job - to be a quality inspector in that customer’s plant for several months. The experience turned his attitude around completely. He came back full of ideas about how the company could improve its products. The moral: Do not jump to the conclusion that someone is “hopeless.” Verbal explanations did not work. Training probably would not have helped. The manager changed when he “saw” things differently through the prism of his new experience.

Executives often see the entire middle management structure as a “rock” that impedes change. But change cannot happen unless steps one through four are carried out correctly. Perhaps the leadership has not demonstrated or communicated urgency; maybe the team isn’t functioning; maybe the vision is not well developed. Systems - especially evaluation procedures and standards - are other common “rocks.” Do not set people up for failure by asking them to change and take risks within a system that offers tiny rewards for achieving transformation and “a hammer on the head” for failing. Reward people for innovation. Fear, anxiety, cynicism and other negative thought patterns are behind most resistance to change. To counteract “the power of the mind to disempower,” reward new kinds of behavior, provide role models who have been through a successful change, share sufficient information and cultivate a realistic attitude that everything can’t be done at once.

Step Six: “Create Short-Term Wins”

The vision is long-term, but initially shoot for some quick immediate successes. Short- term successes confirm the work of transformation leaders, boost hard-working staffers, undermine skeptics and stoke everyone’s belief in the change effort.

One firm’s change team created a “Big Four” goals list. Even though they eventually needed to make many changes, they posted only the top four targets. Employees read and discussed the messages. When a goal was accomplished, the team crossed it off and added a new one. Workers felt energized as they saw progress. One employee said, “We’re really knocking ’em down.” However, never exaggerate or propagandize the effort to establish “wins.” In an e-mail “message of the week,” one transformation team claimed, “90% of our pre-go-live objectives have been met.” Workers knew this high estimate was patently false. After that, they mistrusted even documented good news. Morale deteriorated. One manager warned, “…any form of hoopla is a mistake.”

Step Seven: “Don’t Let Up”

Step seven may seem to contradict step six, since it de-emphasizes short-term wins. But, people must remain aware that the job is not finished. Instead, use short-term wins as an impetus to heighten urgency, reigniting the initial fire of the change campaign. In one firm, cross-company teams with broad powers - dubbed “action labs” - led the change efforts. One action lab created a video that mocked executives’ negative behaviors during a budgeting process. The characters included a “Merchant of Fear,” a “Glory Hunter” and a “People Protector.” One lab member reported, “I think top management burned the film.” But even so, executives referred to it: “Watch out, this is beginning to look like Merchant-of-Fear talk,” they would say.

Exhaustion is another pitfall at this stage. People feel urgency, they’re making rapid changes, they’re still doing all their old work - and it is just too much. Hopelessness takes over; people feel there’s no way out. The solution is straightforward: drop some of the work. One company rigorously examined the merit, value and necessity of each task. As a result, management quit requiring departments to produce 25-page monthly reports. It cut regular reports to two pages, saving thousands of hours of writing and reading.

Step Eight: “Make Change Stick”

Groups enforce their embedded cultural norms without even thinking. Because culture goes so deep, changing it may be the hardest kind of transformation. Many people assume that cultural change must come first. After all, if people can open up to new values and processes, the rest must be easy. In fact, culture changes only after people have tried out new behavior and are convinced that it works. These new attitudes do not become culture until they go deep. If they last only as long as the change leaders are in charge, real change has not happened. Most companies find that they must teach the innovative norms to new hires in training sessions, and must promote staff members who exemplify the fresh values.

Featured image courtesy of Nomadic Less. Few Rights Reserved.

Free: The Future of a Radical Price Book Summary

[caption id="" align="alignright" width="300"] Free: The Future of a Radical Price Book Summary[/caption]

Free: The Future of a Radical Price
Chris Anderson

In a Tweet

Giving things away for free is the newest successful sales strategy.

 

 

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In 2 Minutes

“Free” can mean many things, all of them enticing to the buying public, but “almost free” has almost no magic with customers.

In the offline world, “free” often is merely a marketing gimmick. But online, it is real. With almost no small costs, the Internet is the classic $0.00-pricing medium. Google, the immensely profitable online search company, gives most of its products away for free.

Many online firms, including gaming companies, boldly pursue inventive new free marketing strategies.

Giving consumers something free can be a great money-making business model. Free stuff always represents some variant of “cross-subsidies,” an economic term implying that costs are always present, even though often subtle and paid by others.

Anything digital is on a direct glide path to being free.

Free Web services, like Craigslist classified ads and Wikipedia, have taken revenue away from print businesses and given it to the public, but at great cost.

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Free: The Future of a Radical Price Book Summary In 10 Minutes

The Fortune in “Free”

Google, the online search behemoth, became a highly successful company by giving away most of its products and services. Google supplies online visitors with almost 100 products, mostly free, from “photo editing software to word processors and spreadsheets.” To many, particularly those rooted in a traditional business model, giving away products makes no economic sense. But it works for Google. Indeed, it is a $20 billion firm, more profitable than all U.S. car firms and airlines combined.

So how does Google actually make money? Primarily, it earns massive advertising revenues from its core products, most notably its famous search engine. Companies pay Google to place their ads next to relevant search results. The revenue potential is tremendous. Google has become the “flag bearer of Free” among online businesses. Thousands of companies are feverishly attempting to emulate its free-services business model, which it developed in three distinct phases. From 1999 to 2001, it built a better search system. From 2001 to 2003, it offered advertisers an innovative self-service method for aligning their ads with specific “keywords or contents.” Additionally, it got advertisers to outbid each other for the best ad positions. Since 2003, to increase its online reach and cement users’ loyalty, Google has developed and provided many free services. Where possible, it sells accompanying ads.

“Take whatever it is you are doing, and do it to the max in terms of distribution,” says Google CEO Eric Schmidt. “Since the small cost of distribution is free [online], you might as well put things everywhere.” By offering free services, Google can “reach the biggest possible market and meet mass adoption.” Most online activity complements Google’s primary business. Every time a blogger posts something online, Google’s Web crawler indexes it, thus increasing the value of its search results. Every time an online user clicks Google Maps, the company’s database of consumer behavior becomes slightly more comprehensive. The e-mails sent via Google Gmail adds to the company’s basic understanding of its Internet network connections. Google parses this information for statistics it can use to enhance ad sales and to develop new Internet products. What is good for the Internet is good for Google and vice versa. The more time people spend online, the more Google profits – and its abundant, free Web services make users more inclined to spend that time online. For Google, this represents perfect commercial work together.

Online Gaming

Online gaming firms also use the Web’s zero-cost pricing model to salutary effect. Online gaming was a $1 billion industry in the U.S. in 2008. In China in 2010, it will be worth $2.67 billion. “A Petri dish of new forms of free,” this industry offers most games for free, but it makes money five different ways:

1. “Selling virtual items” – More than 60 million people worldwide are registered users on Maple Story, an online game for young children. Participants don’t have to spend money to play the game, but the small gamers can buy “teleportation stones” that enable them to play faster. Virtual items for sale include a “guardian angel,” and “new outfits, hairstyles and faces.” Online gaming firms such as Maple Story sell virtual items (that is, bits of nonphysical information in the Internet ether), or they charge transaction fees for such purchases. World of Warcraft is another popular online game. Membership is not free, but the game enables players to earn online “virtual assets” which they can sell outside the game for real money. Facebook uses a similar revenue-generation enhancement model when it sells “digital gifts.”

2. “Subscriptions” – Club Penguin was an online community with more than 12 million child members when Disney bought it in 2007 for $700 million. Since then, it has become even more popular. Children do not have to pay to play and many don’t. However, many users ask their parents for the $6 monthly subscription fee so they can enhance their online igloos (more Internet ether) or buy virtual pets for their virtual penguins. RuneScape, an online game of “orcs and elves,” has six million users. One million of them pay $5 each month for an enhanced gaming experience making RuneScape a profitable business.

3. “Advertising” – Many companies cleverly blend paid ads into online gaming environments so they seem to be a part of the virtual landscape. Before the 2008 U.S. presidential election, the xBox Live Burnout Paradise racing game featured a billboard near the tracks showing Barack Obama urging gamers to vote for him. Other paid ads appear on the virtual racers’ clothes and as posters on virtual buildings.

4. “Real estate” – Second Life isn’t really a game; it is a virtual world where users meet each other and interact. Currently, half a million people have free Second Life accounts. They can explore its virtual world and associate in novel ways. However, to build your own “in-world” house, you need virtual land. Linden Labs, which owns and runs Second Life, offers monthly land leases for $5 to $195. The land-leasing business is so good that some people now make their livings as Second Life real estate brokers. One broker claims to have become a millionaire reselling virtual land in Second Life.

5. “Merchandise” – Webkinz is a “clever combination of free and paid.” Parents buy stuffed Webkinz animals which come with a code. Kids register their new toys with that code on the Webkinz Web site, where they can play with virtual simulations of their toys. Lego and Mattel use this “online/offline model” for their free Web games.

Numerous other online companies, in the gaming industry and outside of it, now use the partly free business model to make money. These include Skype, the Web phone service; and LinkedIn, the professional social network.

Offline for Free

The free (or almost free) pricing model works as well offline as on the Web. Some examples:

Air travel – Dublin-based Ryanair will fly you from London to Barcelona for $20. Its real cost for the flight is $70 per passenger, which it recovers through various extra or optional fees, like $30 to check two bags. Eventually, the company plans to fly passengers for free, perhaps paying for the flights with “in-air gambling.”

DVRs – Comcast, the U.S. cable company, gave free digital video recorders to about nine million customers. It immediately recovered part of the cost through a $20 installation fee and it charges a $14 monthly fee to use the device. In effect, users pay for the boxes over time. Finally, Comcast hopes that new customers will subscribe to its other, more profitable services, such as high-speed Internet and pay-per-view movies.

Silverware – In 2008, the Portuguese media company Controlinveste gave 60- piece silverware sets away to boost sales of its newspapers. Inventively, it bundled one utensil in each day’s edition. Thus, customers had to buy 60 different issues of the paper to get a full set. If they missed one edition, their sets would be incomplete. That same year, it also gave away tool boxes with tools, dinner place sets and other premiums.

A Primer on Free

The free merchandising approach has many forms. Sometimes, free things are not truly free. “Free gift inside” means your price includes the cost of the gift. “Buy one, get one free” means that when you buy two products, you get a 50% discount. Ad-supported media, like TV and radio, claims to be free, but you must tolerate commercials to get to the content. But online, “free really is free,” most of the time. Wikipedia, the most comprehensive encyclopedia ever designed, is free. Most people intuitively regard “almost free” as substantially different from free. People have no barriers against getting something free, but they will refuse to pay even a minor amount. Free or almost free offers involve certain variations on the same basic “cross-subsidies” formula: “shifting money from product to product, person to person...now and later, or into nonmonetary markets and back out again.” Four cross-subsidies categories support the free business model:

1. “Direct cross-subsidies” – You get a free product, which motivates you, or requires someone else, to pay for a different product. Example: You get a credit card free, if you pay your bill on time, but sellers pay every time you use it.

2. “Three-party market” – The third party pays to use a market that you and some other entity create. Advertisers (third parties) subsidize the heavy production costs of newspapers (second parties). The papers “sell” their readership base (first parties) to advertisers.

3. “Freemium” – You can use the limited-in-scope version for free or at nominal cost. But to upgrade, you must pay for the premium version. Flickr is free, but Flickr Pro is $25.

4. “Nonmonetary markets” – Cash payments are never a factor, as with Wikipedia.

When Costs Don’t Count, Free Is Only a Matter of Time

The Web is “all about scale.” While Internet companies pay for large, costly banks of powerful servers to send content over the Web, the immense number of users is growing almost exponentially. Thus, the real per-user costs of reaching millions of people are miniscule. Further, the Web’s three basic components – “computer processing power, digital storage and bandwidth” – are becoming almost “too cheap to meter.” As their capabilities increase and their costs drop, the Web itself – the “bits” world – becomes a medium where cost is not a reason.

Free Fall Losses

The downside of free is what it does to paid content. Craigslist free classified ads cost newspapers $30 billion dollars, destroying jobs and forcing some papers into grave financial straits. Craigslist made $40 million in 2006, so where did the rest of the money go? It went into the pockets of the site’s users, who no longer pay for classified ads. Wikipedia is “decimating” physical encyclopedias. Without charging for its service, it dried up the industry’s revenues and gave online users free access to information. In that way, “free...turns billion-dollar industries into million-dollar industries.” With the Web, some things that were scarce (like TV channels) become plentiful instead. This “de- monetization” is the impact of “marketplace efficiency,” “liquidity” and infinite capacity. In the face of this trend, according to Jeff Zucker, head of NBC Universal, the TV industry is scared of “trading analog dollars for digital pennies.”

How to Be Free

Keep 10 rules in mind as you assemble your company’s free business model:

1. “If it’s digital, sooner or later it’s going to be free” – Marginal costs are the greatest price points for competitive markets. On the Web, marginal costs are near zero. Thus, free will soon be the default (not optional) place online. “Bits want to be free.”

2. “Atoms would like to be free, too” – But they never will be, yet, brick-and-mortar companies are discovering inventive ways to put the free approach to work.

3. “You can’t stop free” – It’s impossible in a world of hackers and intellectual pirates.

4. “You can make money from free”– It just takes imagination and savvy marketing.

5. “Redefine your market” – Better Place makes battery-driven cars. So, it produces cars but, in its niche, it is not competing with other automobile manufacturers.

6. “Round down” – When costs are going to zero, be the first one to charge nothing.

7. “Sooner or later you will compete with free” – Prepare a plan so your company can survive – and even thrive – when a competitor offers a 100% discount.

8. “Embrace waste” – Overuse makes sense when basic business components, such as processing power, digital storage and bandwidth, become too cheap to meter.

9. “Free makes other things more valuable” – Contrast premium services with free online offerings.

10. “Manage for abundance, not scarcity” – In a digital age, where costs are near zero, your marketing can be far more bold and experimental. You also have less to lose if you don’t win. Just try and then, try again – for free.

10 Rules for Strategic Innovators Book Summary

"Forget, Borrow and Learn" is your guide to growth in unexplored territory. (Click to Tweet)

In 2 Minutes

Evaluate strategic experiments based on what you learned from them (not based on profits).
If you establish a new division, enable it to borrow knowledge and resources from the parent company – but minimize tensions.
To guide strategic experiments, and to learn from them, use “theory-based planning,” which includes testing and revision.
Frequently revise any plans involving strategic experiments in light of what you've learned along the way.
As you start new projects, forget the corporate culture of the older institution. Undue politics, inside competition and bad planning can disrupt learning.
Beware of organizational factors that inhibit innovation.

10 Rules for Strategic Innovators Book Summary
In 10 minutes

Strategic Innovation and Strategic Experiments

Change dominates business today. Companies face great pressure to give birth to the next major innovation. However, rather than waiting for change or stumbling across discoveries, you want to engage systematically in strategic innovation, redefine your customer relationships, and re-examine the assumptions underpinning your company and industry. This requires understanding your company's organizational code, an underlying structure that parallels the human genetic code.

Strategic experiments are at the heart of strategic innovation. Such experiments offer great growth possibilities, because they happen in new or not-yet-defined industries, and because they can change your assumptions about how organizations succeed. Strategic experiments also can alter how you define business and success (rather than just making you better at what you know and do now).

Strategic experiments generate uncertainty. You won't know how to evaluate them and you'll find them unprofitable at the start. Because of this uncertainty, keep strategic experiments distinct from your stable, familiar core business. To emphasize this distinction, call the strategic experiment NewCo and the parent business CoreCo. Follow the ten rules for strategic innovation, which are:

1. In all great innovation stories, the great idea is only Chapter 1

2. Sources of organizational memory are powerful.

3. Large, established companies can beat start-ups if they succeed in leveraging their enormous assets and capabilities.

4. Strategic experiments face critical unknowns.

5. The NewCo organization must be built from scratch, with new choices in staffing, structure, systems and culture.

6. Managing tensions is job one for senior management.

7. NewCo needs its own planning process.

8. Interest, influence, internal competition and politics disrupt learning.

9. Hold NewCo accountable for learning and not results.

10. Companies can build a capacity for breakthrough growth through strategic innovation.

To understand how these rules work, first you need to know what strategic innovation is not. It isn't continuous process improvement, in which you make a lot of little changes, as GE does through Six Sigma. It isn't a process revolution, where your process stays the same, but you improve productivity, as Wal-Mart is seeking to do by using RFID (radio frequency identification) tags to track inventory. It isn't product or service innovation, in which you create new items for sale, but leave the existing business model in place.

Strategic innovations may include any or all of these steps, but always involves unproven business models. However, you can create strategic innovations without changing your product, service or technology. To understand the different kinds of innovation, envision a spectrum. Put process revolution and product innovation in the middle. Continuous process improvement is at one end and strategic innovation is at the other. At the continuous process improvement end, changes are small, cheap and quick; results are fairly predictable.

At the strategic innovation end, change can take an unknown amount of time and money, and then it may not work, at least not initially. However, strategic innovations offer greater potential for growth, especially the nonlinear growth that transforms an industry, bringing big potential profits. You and your colleagues probably won't face the opportunity to carry out strategic innovation all that often in your careers (maybe only once), so it's unlikely that anyone will have sufficient direct experience with such change to be of much help.

To Innovate Strategically, Do Things Differently

You've probably heard a CEO announce that things are going to be different. He's got a world-changing idea. He studies, plans and organizes...and then shifts his focus away. Everything withers because he's bought one of the great myths about innovation – that it is all about the great idea. It's not. That is why Rule 1 says that a great idea is only the start. Unsupported, even the best idea will die. For innovation to succeed, at least one top executive must protect the idea by generating funding, resources and support without a lot of managerial involvement, and by helping the organization learn quickly from the trial steps in developing the idea.

This innovation champion must remember Rule 2's warning that organizational memory springs from a powerful source. When your organization starts something new, it will tend to repeat things it already does well. That isn't innovation. When you do something new, you can't plan methodically or follow a regular process. Instead, encourage thinkers to explore new ideas or products. Eventually NewCo will be efficient, but now it needs to be creative.

That means forgetting how CoreCo defines itself, its core competencies and even its business model. At the same time, NewCo wants to borrow expertise from CoreCo, and to design itself so it can learn. To consciously set CoreCo's habits aside, follow Rule 5's dictum that NewCo has to start fresh with new systems. Hire new people (creators, not implementation experts), organize them differently (a flatter structure, not a hierarchy), and breed an independent culture that is open to risk, and that emphasizes experimentation and learning.

Forget, Borrow and Learn

The three core challenges in establishing NewCo are forgetting, borrowing and learning. As you try to forget CoreCo's powerful organizational culture, ask how your new business model must differ. Who are your new customers? How will you serve them new ways? Which areas of expertise does NewCo need and in what proportions? Where can you use predictions and where do you have to deal with uncertainty? How should you evaluate management performance in a project that requires risk or could even collapse? Organizational memory gives you the business instincts that let your company react quickly to challenges, but if you don't forget the old responses, you are doomed to fail.

To address organizational and technical challenges, hire a mix of old and new people. Set up new behavior models, especially in accountability and performance. One tough challenge is deciding when NewCo must make money. Too often start-ups are held to arbitrary demands that they show a profit, when, in reality, you need to expect them to lose money at first (they are experimental, after all) and give them grace periods.

Borrowing Tangible and Intangible Resources

You want to forget CoreCo's constraints and culture, but you also want to borrow resources from it as needed. For example, the Internet division of the New York Times Company, New York Times Digital (NYTD), borrowed its initial organizational models directly from its parent firm, which lent it personnel and credibility. As a result, NYTD took only limited advantages of the Internet's possibilities. Then, eager to pursue fresher opportunities, Martin Nisentholtz of NYTD hired more outsiders for new jobs, upgraded tech support and let new ideas emerge in a bottom-up, amorphous fashion, following emerging markets and technology. This created tension, turf wars and divided loyalties. Such tensions accompany any new project, because as NewCo succeeds, it seems to consume CoreCo's resources and make it obsolete. Yet as NewCo moves into new areas, it will lose money, so negative comments may fly from both sides.

Nonetheless, as Rule 3 says, established organizations can defeat innovative upstarts if they can leverage their assets. NewCo should borrow from CoreCo, but it must diffuse the accompanying stress. That's why Rule 6 explains that senior management's primary job is to manage tensions. The two entities should plan for cooperation and demonstrate common ground. NewCo should borrow only in the areas where borrowing gives it a great advantage. Don't link support departments (i.e., HR, legal, purchasing, etc.) even if that would be easy, because they are strong carriers of an organization's DNA and will make NewCo too similar to CoreCo. Establish NewCo outside CoreCo's physical limits (not the same building or campus), but near enough to borrow easily. As NewCo takes loans, find ways to repay.

Heed all interactions, including how you price the transfer of resources. If you answer to both CoreCo and NewCo, coach colleagues at each one differently. Work to coordinate NewCo and CoreCo processes. When you create new projects, try to benefit both organizations. Let NewCo boost CoreCo's established brand. Finally, use CoreCo's established manufacturing capabilities and knowledge.

Focus on Learning

To survive, emphasize learning. As Rule 4 cautions, strategic experiments face crucial unknowns. Your greatest learning task is to address these unknowns through better predicting and functioning, even though an unknown or emerging industry can't use formal prediction tools or intuitive rules of thumb. Instead, you must learn through trial-and-error as you engage in repeated experiments. Make your experiments clear, repetitious and speedy (as soon after one another as possible, so they stay fresh in your memory). Determine what you think will happen. Plan, execute, measure your results and review how the results compare with your predictions.

This will put you far ahead of most people who engage in strategic experiments, because they either don’t understand the learning process or they execute key elements badly. They ignore their predictions, plan badly and hastily, or they execute but don't compare their results. That is why Rule 7 for strategic innovation mandates an independent planning process for NewCo.

Barriers to Learning

Barriers to learning are crucial. As Rule 8 explains, many factors can disrupt learning, including influence, inside competitiveness and political jockeying. Flawed planning also disrupts learning, as seen in Hasbro's late-1990s attempt to develop interactive toys. Some insiders there manipulated predictions to support their positions, and made faulty and rigid predictions based on flawed assumptions. They also sought profit too quickly, which can sink an innovation. That is why Rule 9 makes NewCo accountable for learning, instead of results.

Surprisingly, management also can inhibit learning by being reasonable, inspiring or diligent – at the wrong times. These good qualities are likely to be informed by CoreCo's values or, more simply, to be misapplied. A mature company can insist on a lot of planning data because it operates in a known field. An innovator in an unknown field cannot, so seeking more planning information will force attention there, and away from learning.

Theory-Focused Planning

Planning in a new or changing industry might seem futile. Much planning is, but you can gain a great advantage with theory-focused planning, in which you create a theory with testing in mind and then test it. Describe the new business and what it must do. Then identify metrics, by asking what you can measure. Set goals and spending guidelines. Predict outcomes and identify areas where you cannot presume a result. Note and test assumptions. Analyze the gap between what you predicted and what happened, and revise your plan based on what you learned.

The first, essential step in theory-focused planning is making sure everyone agrees on the business function. Using graphic organizers, such as an influence diagram (also called a bubble-and-arrow diagram) can show how the planned steps relate to each other. Show the chain of cause and effect. Your plan will differ from traditional approaches. You'll revise it more often, since traditional annual planning is too slow. Fill in the unknowns in your plan as you develop your business. Make the theories behind your business explicit. Revisit that logic as your experiment develops. Include more factors in your plan, such as tracking trends that shape your emerging industry.

To review performance, balance this wider focus with a detailed historical examination. Finally, hold managers accountable for learning. They can't just execute known processes; they must understand and articulate new ones, so that all of NewCo gains a better understanding. And everyone will agree with Rule 10, that strategic innovation is the way organizations can generate breakthrough growth.