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David Wendorsky works for 3M in its labs. He also goes out to universities to speak to students about innovation.

On one of his visits, he noticed that students were reading books and making passages with highlight pens.  He also noticed that some of them were flagging pages with Post-It notes. 

Wendorsky put 2 and 2 together – and came up with 3M’s latest hit, a highlight pen that has little Post-It flag notes attached to it. By combining the highlight pen with the Post-It sticky notes, it is far easier both to highlight and to flag.   

This is an example of an innovation ‘formula’ known as X+Y. Take two existing products. Combine them, in a manner that creates new value.  

In my book Innovation Management, I describe the X+Y innovation of Lucky Goldstar (the early incarnation of today’s Korean giant LG). A brilliant engineer thought of combining a TV with a VCR, in the same box, using a single tuner, and called in a Viewmax.  It was a hit.  Stores bought it for counter-top displays. Students bought it for dorm rooms.  

Another example is the cell phone with digital camera built in. 

If you can add, you can innovate. Try this exercise: write a list of products you use daily, on the left hand side of the page. Now write the same list on the left hand side. Randomly, join products. See if you come up with something that makes sense and creates value.

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Susan and Donald Sutherland, who lived in Tempe Arizona with their five daughters, thought they might like to start an ice cream business. They talked to a friend, bought some equipment – and 20 years later, Cold Stone Creamery is a $ 500 m. empire with 1,400 franchised stores across the United States.  

What is their secret?

They asked, as Harvard Business School professor Ted Levitt counseled, what business are we in? Ice cream?  No. Fun. Entertainment. Cold Stone personnel let customers design their own ice cream, choosing the ‘base’ ice cream flavor (French vanilla, pumpkin) and combining it with a huge variety of things like raspberries, M&M’s, Oreo cookies, etc. The ice cream is mixed with the flavorings on a cold granite slab. No two servings are the same. 

When a customer gives a small tip to the Cold Stone personnel, they get a mini-performance: A spirited song and dance by the ice cream servers. According to Wikipedia: “In the spirit of joviality, and to encourage customers to give tips, Cold Stone instructs employees to sing a Cold Stone song, usually to the tune of recognizable melodies such as “Take Me Out to the Ball Game” or “Bingo,” when a customer places money in the tip jar. Lyrics include short, catchy phrases, such as, “This is our Cold Stone song, it isn’t very long.””

Like other franchises, Cold Stone strives to provide similar service at every store by supplying instructional material and training videos to franchise owners. The founders have intuitively applied the principles outlined by B. Joseph Pine in his book The Experience Economy. Cold Stone customers get, with their ice cream, a memorable experience. Chances are, they come back for more.

The Sutherland’s five daughters all grew up in the business. When the Sutherlands began to franchise it, they were opposed – they liked the “Mom and Pop” business they grew up in. But recently on the Oprah Show, they seemed to be enjoying the success and attention the booming franchise generates. 

Cold Stone Creamery is now the sixth-best-selling brand of ice cream in the U.S. and now operates stores in Japan, Taiwan, South Korea, Puerto Rico, Indonesia, Guam, China, and Mexico. The company was also named the 11th fastest-growing franchise by Entrepreneur Magazine in January 2006.

Not everything is rosy. Richard Gibson recently wrote an article about Cold Stone in The Wall Street Journal, about how not to run a growing franchise.

It is a sad fact: Many startups and established companies run into trouble, when their innovative development projects go awry, exceed their budgets, miss their time targets and fail to achieve their goals.

Why? Most project managers are well-trained, experienced, diligent and hard-working. What goes wrong?

Former TIM Board Member Prof. Alex Laufer, past Dean of Technion’s Civil Engineering Faculty, has a theory.  The classical discipline of Project Management assumes a world of certainty and provides finely-detailed planning tools, like Gant charts, that specify every detail. Most project managers use those tools in one form or another.

But the real world is chaotic, uncertain and stochastic in nature. Planning tools tend to be static, while projects they plan are highly dynamic. The conventional wisdom is misleading and even harmful. A dynamic project requires a dynamic approach to planning. Successful project managers are flexible, adaptive and quick to improvise solutions to unexpected problems that arise. 

This brings to mind the early days of rockets and guided missiles. A branch of mathematics known as optimal control was used, to plot the optimal trajectory. But it was quickly discovered that rockets and missiles are constantly buffeted by unexpected forces – winds, humidity, temperature. You cannot plan the rocket’s trajectory just once and expect it to reach its planned destination. You have to recalculate the trajectory every millisecond. This is known as adaptive control.   

In project management, a set-in-concrete project plan is often built. But almost invariably it quickly becomes irrelevant. You need an adaptive dynamic approach in order for your project ‘rocket’ to hit its target.
I recently had the privilege of evaluating a Ph.D. dissertation written by Laufer’s student, Zvi Zilick. Zilick has some grey hair and has long experience in managing projects. His thesis was unusual – it comprised 10 detailed case studies of successful dynamic project management, including a highly unusual story of an emergency heart operation to repair damaged heart valves. I wish every project manager could read these fine case studies. They combine both Zvi’s experience and the insightful experience of those whose stories he recounts. 

In two books (and a new forthcoming one) Laufer explains his own principles of dynamic project management that contradict the current conventional wisdom. I recommend that every innovator read his 2000 book, co-authored by E. Hoffman, Project Management Success Stories (Wiley, NY). You learn more from successes than failures, Laufer notes, because there are millions of wrong ways to run projects (and fail), but only a few successful right ways. 

How can you improve your own project management? First, read case-studies of successful project management. Second, drop your set-in-stone project models. Third, build in to your project plans buffers and ‘shock absorbers’ that permit flexibility. Fourth, remember that managing projects is not about steel girders or transistors, but rather it is about people. Laufer finds that ‘soft’ behavioral variables like interpersonal trust are far more important than ‘hard’ engineering variables. For example, do team members tell the truth? If they are slipping in their timetable, will they tell the project leader in time?   

Projects are dynamic. Managing them, therefore, must also be dynamic. Why has it taken the discipline of project management so long to realize this?

Remember the hype about the New Economy? Companies with no revenue at all, without a real business model and without any grounding in reality launched Initial Public Offerings and raised millions, from 1995-2000 – solely because they had three letters, .com, after their name. After the crash, the words “New Economy” crashed even deeper than the NASDAQ. 

Guess what? The new economy is real, powerful and is changing our lives. What the new economy really is, is the Digital Economy – converting knowledge, information, services and products into bytes, to sell, transform, transmit and store. The dot.com crash was just a minor and temporary setback, as almost always happens during enormous life-changing revolutions.

What is the key to business success in the New Economy?

Let me try to simplify it, in about 112 words.

Economists tell us there are two kinds of costs: VARIABLE (directly related to costs of production, such as raw materials, components, labor), and FIXED (not related to production, such as management, marketing, rent).

In the Old Economy, VARIABLE costs were dominant – the cost of making products.

In the New Economy, FIXED costs are dominant, because once you build the mobile network, or website, the marginal ‘production’ costs of adding another subscriber or customer are zero. In fact, they are negative!   The digital economy has zero or negative marginal costs. Because for a network, the more people there are, the more valuable it is and the more people want to join it.

What does this mean? Take, for instance, Sprint, who spent $1 b. to build America’s first fiberoptic network.  Once that network was in place, the name of the game was innovation – how to innovate new services, based on the network, that people would want and would pay money for? And innovation, not only in services, but in pricing. Pricing innovation is crucial.

Why?

Because economists teach that to maximize profit, companies need to equate price with marginal cost. This works in the Old Economy. But in the New? When marginal costs are negative? Negative prices? Pay customers for using our service???

Pricing policy is the most underutilized area for innovation. The New Economy requires innovative pricing for success – zero prices with subscription fees, zero prices with service contracts, zero prices just to gain eyeballs for advertising – all are pricing formulas that have created billion-dollar businesses, including Google.  

If you want to launch a New Economy business in the new Digital Economy, don’t think pricing is Old Hat.  Find ways to make money with clever pricing systems. Find ways to build demand and utilization for platforms that have nearly infinite capacity. 

The New Economy is actually pretty old. We have always had platform businesses based on utilizing expensive platforms (copper-wire phone systems, for instance). The difference is, today, far more new service innovations are digital in nature. The digital revolution is spreading to huge industries, such as music and publishing, which for the most part simply do not see the revolution coming and have been trampled by it. 

So, innovators: If your innovation is digital in nature: How does your innovative business model answer this question – how can I build a clever pricing model, when the cost of an additional customer is zero or negative? How will I find customers, sell to them, and retain their business, to boost utilization of my expensive platform?      

Yves Saint Laurent, one of the world’s greatest fashion designers, died in Paris. He was 71. Here is what the New York Times wrote about him:

During a career that ran from 1957 to 2002 he was largely responsible for changing the way modern women dress, putting them into pants both day and night, into peacoats and safari jackets, into “le smoking” (as the French call a man’s tuxedo jacket), and into leopard prints, trench coats and, for a time in the 1970s, peasant-inspired clothing in rich fabrics.

Mr. Saint Laurent often sought inspiration on the streets, bringing the Parisian beatnik style to couture runways and adapting the sailors’ peacoats he found in Army-Navy stores in New York into jackets that found their way into fashionable women’s wardrobes around the world. His glamorous evening clothes were often adorned with appliqués and beadwork inspired by artists like Picasso, Miró and Matisse. Above all, he was a master colorist, able to mix green, blue, rose and yellow in one outfit to achieve an effect that was artistic and never garish.

What can innovators learn from Saint Laurent? 

There are three simple lessons. First, he found inspiration, not inside his studio, but “on the streets.” Second, he was fearless, able and willing to break the rules of an industry that has very rigid rules. Third, he built his innovative designs on life style.

I heard a fashion expert explain Saint Laurent’s success brilliantly. “His success was due to the baby boomers”, explained Gil Michaely, Israeli  Paris-based journalist. “He designed clothes for baby-boomer mothers who wanted to look like their daughters. He designed clothes, as well, for the daughters, who wanted to look like their mothers. And, he designed clothes for the mothers, who wanted to look like their [wealthy, successful] husbands.” Saint Laurent invented the pants suit, which now has become a high fashion item women wear not only to work but also to parties and evening social events. 

“My small job as a couturier,” the New York Times quotes him as saying, “is to make clothes that reflect our times. I’m convinced women want to wear pants.”

“The clothes incorporated all my dreams,” he said after a show, “all my heroines in the novels, the operas, the paintings. It was my heart — everything I love that I gave to this collection.”

Live your dream, we tell innovators. Yves Saint Laurent not only lived his – he let other people wear them. In doing so, he made them beautiful. 

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
June 2008
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