Innovation is about uncertainty and nonstandard processes, so why is it that management literature and advice still deals in certainties? Because the traditional tools of business planning have not caught up with the new kind of problems that managers and innovators face. Below, in an extract from their new book The Innovator’s Method: Bringing the Lean Startup into Your Organization, authors Nathan Furr and Jeff Dyer introduce methods and tools made for the uncertainty – and the brilliance – of innovation.
New perspectives and tools for managing uncertainty are emerging in many disparate fields. Whether you call it lean start-up, design thinking, or agile software development, a new method is revolutionizing the way managers successfully create, refine, and bring new ideas to market without traditional business planning. These and other tools help entrepreneurs, designers, and software developers manage uncertainty through cheap and rapid iteration to systematically lower uncertainty and risk.
But many managers have difficulty applying these tools in the corporate environment, because they run counter to traditional managerial thinking and practice. To help managers apply and adapt these new practices inside established companies, we offer a synthesis of the emerging perspectives.
Our work presents a unified framework for managers, showing them when and how to apply the new approach to innovation in their organizations. The framework is based on our research inside corporations and start-ups that have effectively implemented these practices. The result is a new method for managing innovation that we call the innovator’s method: an end-to-end process for creating, refining, and bringing ideas to market.
We focus on the “how” — how to test, validate, and commercialize ideas using the best tools from lean start-up, design thinking, agile software, and similar techniques used by a few corporations and most successful start-ups. These tools can be applied to create new innovations or solve internal problems that have an element of uncertainty, whether in HR, finance, or another area. In other words, the innovator’s method can work for anyone with a complex problem to solve, not just for innovation teams.
Let’s start with a story.
Rent the Runway
In 2008, Jenn Hyman, a second-year MBA student at Harvard Business School, spent Thanksgiving at her home in New York. During her visit, Hyman noticed her sister, Becky, struggling to decide what to wear to an upcoming wedding. “Becky desperately wanted to buy a $1500 Marchesa dress,” said Hyman. “She felt compelled to buy a new dress because photos would soon appear on Facebook and she didn’t want to be seen twice in the same outfit.” As she watched her sister wrestle with the cost Hyman formulated a potential solution: instead of purchasing designer dresses, women might prefer the option of renting designer dresses online for special occasions. Hyman had a potentially valuable business idea. But what should she do next?
For most business professors and executives, the answer would be, “Write a business plan.” The plan would identify the customer need, describe the product or service, estimate the size of the market, and estimate the revenues and profits based on projections of pricing, costs, and unit volume growth. After all, without this type of analysis, how can we know whether an idea is worthy of investment? Indeed, Hyman received just this type of advice. But she didn’t do it. Instead, Hyman recruited classmate Jenny Fleiss to help her test their proposed solution. Hyman and Fleiss set up an experiment to answer two key questions:
1. Will affluent young women rent a designer dress if it is available at one-tenth the retail price?
2. Will women who rent dresses return them in good condition?
Then Hyman and Fleiss borrowed or bought 130 dresses from designers and set up an experiment to rent dresses to Harvard undergrads. They advertised around campus, rented a location, and invited young women. The experiment answered both questions. Of the 140 women who came in to view the dresses, 35 percent ended up renting one; and 51 of 53 mailed them back in good condition. This experiment resolved some of the uncertainty reflected in the two questions it was designed to answer.
But would women rent dresses they couldn’t try on? Hyman and Fleiss set up another experiment, this time on the Yale campus, allowing women to see the dresses before renting but not allowing them to try them on. In the second trial they had more dress options, because the first pilot revealed that many women didn’t rent because they couldn’t find an option they liked. The Yale pilot showed that women would rent dresses when they couldn’t try them on, and the percentage of women who rented increased to more than 55 percent because they had more options.
Now Hyman and Fleiss were ready to test the big idea: would women rent dresses they could not physically see? The entrepreneurs took photos of each dress and ran a test in New York, where one thousand women in the target audience were given the option to rent a dress from PDF photos. The final experiment showed that roughly 5 percent of women looking for special occasion dresses were willing to try the service — enough to demonstrate the viability of renting high fashion over the web.
The initial idea was to set up a rental option on the websites of existing designers. Hyman’s start-up would take care of fulfillment, and dry cleaning the returns. But the initial response from most designers was extremely negative. They were worried about cannibalization. Renting dresses for 10% of the retail price instead of selling them seemed like a very bad idea. Hyman and Fleiss realized that to make their idea work, they would need to have their own website and inventory. So the idea of Rent the Runway — using the Netflix model to rent a wide variety of high-fashion dresses from multiple designers — was born.
Hyman and Fleiss were ready to launch. But they needed capital to purchase inventory. Still without a formal business plan they took the idea to potential investors. As Hyman explained, “We’re anti-business plan people. We think that so many people just sit around all day and strategize but they don’t act.” Investors were keen. With capital in hand, the two women were ready to build the team.
The typical advice is to hire experts to head each functional area, perhaps someone who can leverage significant corporate experience to take the team to the next level. They didn’t do it. Instead, Hyman took on marketing, and Fleiss took on finance. They then recruited individuals having broad skills who could wear different hats.
[su_pullquote]Increasingly evidence suggests that our familiar management techniques work poorly when applied to the context of uncertainty. For example, research shows that under conditions of uncertainty, planning simply does not work.[/su_pullquote]
With a small team in place, the typical advice would be to carefully develop a flawless website to attract a wider set of customers. They didn’t do it. Instead, Rent the Runway quickly launched a beta version of its service for five thousand invited members. “We followed the minimum viable product approach,” said Fleiss. With the help of a New York Times article titled “A Netflix Model for Haute Couture,” initial demand for the small inventory proved almost overwhelming. As demand continued to increase, they expanded their inventory with help from a $30 million round of financing. “Our revenue growth is amazing,” Hyman told us at the end of RTR’s first year. “This is a dream come true.”
Lessons for Managers: How to Turn Uncertainty into Opportunity
Rent the Runway’s story provides a window into the innovator’s method. In a nutshell, it’s a process by which successful innovators manage the uncertainty of innovation — a process to test and validate a creative insight before wasting resources building and launching a product customers don’t actually want. We’ve found that this method is widely used by the most successful innovators in start-ups as well as established companies.
The method doesn’t include writing a business plan. Hyman and Fleiss refused to write one even though virtually every business school holds “business plan” competitions for “start-up” ideas. Why do management experts call for writing a business plan? The recommendation comes from traditional management theory that was developed to solve a certain type of problem: established firms attempting to optimize under conditions of relative certainty. Indeed a closer look at many of our management practices — such as strategic planning, the precursor to business planning — reveals that many of our familiar management practices were originally designed to capture value under conditions of relative certainty. However, most new business ideas (inside or outside the corporation) are characterized by a completely different set of conditions: uncertainty. For example, how could Hyman possibly know what the demand for rented designer dresses would be?
Increasingly evidence suggests that our familiar management techniques work poorly when applied to the context of uncertainty. For example, research shows that under conditions of uncertainty, planning simply does not work. Most of the time it simply wastes time and resources as you conjure evidence that your hypothesis is right. In our example, instead of writing a plan, Hyman designed a set of experiments to test specific assumptions, answering specific questions to resolve the uncertainties surrounding her idea. These experiments helped Hyman and Fleiss “nail it” — our term for deeply understanding the uncertainty and resolving it well.
The RTR experience illustrates the how-to of the innovator’s method: a series of experimentation cycles that resolve the uncertainties around the problem you’re trying to solve, the solution you propose, and the business model to take your solution to market. We describe this method in a few steps — insight, problem, solution, and business model — during which your core tasks are to savor surprises (insight), discover jobs to be done (problem), prototype the minimum awesome product (solution), and validate your go-to-market strategy (business model).
Elements in our innovation model are already widely published, but they cover only a part of the innovation process. Design thinking is exceptional in helping people understand a customer problem, but it doesn’t address the need to find the right business model. Lean start-up excels at prototyping the solution to a problem but often provides little guidance on generating ideas or determining whether you’ve found a problem worth solving. Business models provide excellent tools for figuring out other elements of the business model but do not address generating big ideas or how to deeply understand a customer problem. Our holistic model helps take you through the steps required to nail a business model before scaling it. And because most research focuses on entrepreneurial start-ups, they don’t take you through the crucial step of how to adapt these principles for a large company setting.
To understand how managers applied and adapted these principles in established companies, we conducted extensive research with hundreds of companies to understand what managers do to bring their ideas to market. We studied successful as well as unsuccessful companies to discover the differences between success and failure. These companies fall into four categories:
• Established companies that maintained their innovation capabilities after founding (eg., Amazon, Salesforce.com, Starbucks and Valve Software).
• Established companies that had lost (or were losing) their innovation capabilities but then reignited them (eg., Procter & Gamble, Hindustan Unilever, Godrej and Boyce Manufacturing, AT&T and Mondolez).
• Successful and failed innovation initiatives in new ventures (eg., Rent the Runway, Qualitrics and GitHub).
• Successful and failed innovation initiatives in established companies.
We started this research by asking, “What processes do successful innovators use to validate their ideas and bring them to market?” Does the innovator’s method make a difference? Perhaps the most telling evidence comes from the established companies we studied that boosted their innovation performance after adopting elements of the method. Among the publicly traded companies we describe in our work, we observed that three to five years after adopting key elements, their Innovation Premium (IP) increased by an average of 57 percent.
Although it always takes time for innovations to bear fruit, these numbers are accompanied by growth in revenue, profit, and general excitement at the companies involved. For example, Hindustan Unilever increased its revenue by 40 percent in a single year; Intuit multiplied its revenue from successful new products tenfold over three years; Mondelez China was failing but turned itself into a successful $1 billion business; Godrej created a new category of consumer products sold through an entirely new distribution channel; Procter & Gamble created several multibillion-dollar businesses; and AT&T turned a negative IP into a positive one.
Uncertainty requires a new set of management principles and a new method. While traditional management works well for problems of relatively certainty, they work poorly for problems characterized by uncertainty. By using the approach we describe, you will learn how to creatively solve high-uncertainty problems. You will learn how to transform an idea into a reality.
Reprinted by permission of Harvard Business Review Press. Excerpted from The Innovator’s Method: Bringing the Lean Startup into Your Organization. Copyright 2014 Nathan Furr and Jeff Dyer. All rights reserved.
About the Authors
Nathan Furr earned his PhD from Stanford University and is transitioning to assistant professor of strategy at INSEAD after being an assistant professor of innovation at Brigham Young University. He is the co-author of the best-selling books, The Innovator’s Method (Harvard Business Review Press) and Nail It then Scale It (NISI Press) as well as multiple academic articles in top tier academic journals.
Jeff Dyer (PhD UCLA) is the Horace Beesley professor of strategy at BYU and the Wharton School, University of Pennsylvania. He worked previously as a management consultant at Bain & Company and cofounded the Innovator’s DNA consultancy. He is a co-author of two bestsellers, The Innovator’s DNA and The Innovator’s Method, as well as numerous other popular books and articles.