CHAPTER 2: INNOVATE OR DIE
Curt Carlson, Ph.D.
Professor of Practice, Northeastern University and Distinguished Executive in Residence, WPI
THE EXPONENTIAL ECONOMY
"The most powerful force in the universe is compound interest." Albert Einstein
"The exponential economy requires exponential value creation processes."???Curt Carlson
Communication Amplifiers
Global Value Creation:?I held a value creation workshop over videoconferencing for entrepreneurs developing startups from Israel, Sweden, China, Australia, Canada, and where I live in Silicon Valley, California. It was a valuable, fascinating, and fun experience. What did we learn?
First, the teams all discovered they needed help with the same core business issues, such as understanding their end-user needs, finding customers, and signing-up investors. Second, they learned about different cultures and how it influences team formation, interactions, and funding.??For example, they learned how vibrant the venture community is in Isreal. Eventually, some of the teams will work in multiple countries, and this experience will be valuable to them.??
Every year with a colleague, V.R. Ferose, we host a videoconferencing workshop for six new venture teams from across India, all working on issues of disability. None have met before, so, given their shared interests, it is an opportunity to learn and practice value creation and better understand the unique challenges of addressing the needs of disabled people.
One of the teams was led by a young woman designing and selling woman's clothing for people with disabilities. She explained that disabled people are like everyone else and want to dress attractively. Unfortunately, most of what is available looks like it was made for someone in a hospital. Her company addresses the clothing needs of disabled people with beautiful designs. She is almost completely disabled and presented while lying on her bed. Watching her and seeing her passion, intelligence, and courage was an inspiring experience. When she finished, there was not a dry eye in our group.??
Clearly, programs like this workshop that were impossible just a few years ago, will advance the world's progress and bring it closer together.? Universities and incubators providing global team experiences like these will make a significant positive contribution to the world.
Decline of Distance:??We are entering an era of value creation and collaboration where distance is not a significant barrier. Mitigating the obstacle of distance means we can assemble the best resources worldwide and collaborate at minimal expense.
When I started as CEO of SRI, we had facilities and partnerships across the world, but videoconferencing was only marginally effective.??As a result, a challenge was integrating our satellite laboratories into the central location in Menlo Park, CA.??The satellite teams could not participate in recurring Value Creation Forums (Forums), which is how staff mastered value creation and gained essential knowledge and insights from their colleagues.???Unfortunately, this barrier greatly limited performance.??This issue is now removed, but we still see few companies proactively leveraging this game-changing capability.
Another example was our work in Japan, where we had partners who understood the local market, made introductions, and followed up after visits from America. I would go there three times a year, taking a week each time. But when I came home, we couldn't include our Japanese partners in our Forums, so they couldn't fully contribute to the value propositions being developed and add their essential market knowledge. Collaborating with partners and customers globally is easy now.
Government R&D:?Consider next, the sizeable interdisciplinary research and innovation programs at universities, like those for tens of millions of dollars from the National Science Foundation (NSF) in America or the National Research Foundation (NRF) in Singapore. These teams address critical problems, they have considerable funding, and the multiple university teams formed include brilliant researchers.
Nevertheless, performance in these interdisciplinary university programs is generally poor. It would be greatly improved if: 1) the teams shared a value-creation methodology that facilitated collaboration, and 2) they neet and shared their value propositions every four weeks in Value Creation Forums to learn, improve, and synthesize solutions faster than the competition.
How much improvement is possible in these government R&D and innovation programs? Paul Westerhoff, Regent Professor at Arizona State University (ASU), has taken our value creation program multiple times with his interdisciplinary NSF teams. He says improvements of up to ten times are possible. I agree [33].
Intelligence?Amplifiers
We have added Artificial Intelligence (AI) to a high bandwidth-connected world. This advance in AI means everyone will have access to increasingly vast amounts of information, effective processes, and insights to solve problems more efficiently and effectively. This resource will improve our lives. For example, AI will:
Adding AI to a connected world will accelerate our ability to address the world's biggest problems, create new industries and jobs, and improve our lives in ways we can't imagine today. It is impossible to imagine all the different results that will emerge.
Genius Teams with Genius AI Tutors:??One of the most significant advances from these developments will be how we perform value creation and innovation. Videoconferencing and AI systems are still primitive. They are like the first iPhone. But in 5-7 years, they will be an order of magnitude more valuable.??
The advent of 3-D goggles with over 4K resolution in each eye, head tracking, simultaneous translation in any language, and a suite of AI tools will transform global collaboration and value creation. In such real-virtual environments, we quickly forget that the experience is not actually real. Video images with multiple virtual players will be created and introduced in real-time.
The visual experience will be striking, but adding AI tools will be transformative. For example, AI is an excellent "iteration buddy" to add insights when creating new research papers, editorials, or presentations. Already we are using AI-Tutors to help teams learn and apply the fundamentals of value creation. We use AI-Tutors to teach each central value creation concept, from the value proposition to risk mitigation and finally to a complete venture presentation. These tutors allow participants to iterate concepts repeatedly to see how the parts interact to create solutions. Thus in 30 minutes, a participant can gain more understanding of a value creation concept than previously after being in two or three 90-minute value creation forums.
Alan Kay noted that adding someone to a team with the right perspective is like adding 80 IQ points to the team. For example, understanding the competitors and business models in a specific market ecosystem is a challenge for new entrepreneurs. The solution is to add someone with that expertise.??
Adding teammates with the required skills and perspectives is how to form genius-level teams. But now, imagine going forward with a family of AI programs that add thousands of world-class skills and perspectives, plus new ones as individual disciplines and AI advance. These capabilities apply to almost any situation where people come together to solve problems, whether in healthcare, education, law, politics, architecture, construction, retail, customer service, or media and entertainment.??
The rise of ubiquitous high-resolution global teleconferencing with AI Tutors enables seamless communication and collaboration across geographical boundaries. Whether it is a service center in Bombay, India, or a meeting between international partners, individuals will connect in what feels like face-to-face, overcoming the constraints of physical distance, language, and core knowledge. These systems will profoundly amplify the exchange of ideas, knowledge sharing, and decision-making processes, fostering global collaboration and innovation. They will add to the compounding of knowledge resulting in faster innovation cycles and exponential improvement.
Many New Advances
?The rise of artificial intelligence (AI) and ubiquitous, global, high-speed teleconferencing are just two of a family of significant ongoing technological advances. Here are a few that will have a substantial impact in the years to come:
These, and many other technologies, increasingly embrace and augment the knowledge-based economy and leverage the power of exponential improvement. Sectors that have traditionally progressed slower, such as transportation, energy, and sustainable development, also benefit from these advancements.?
There are already hundreds of autonomous vehicles operating around American cities. The technology is proven.??Soon we will have cars with advanced sensors that "refuse-to-crash," which we will rent when needed. These cars need not weigh 3,000 pounds to protect us. A1,000 pound refuse-to-crash EV will be dramatically cheaper and battery life will be multiple times over today.
With the advent of AI, businesses can leverage intelligent algorithms and machine learning capabilities to automate tasks that human workers once performed, including routine administrative duties, data analysis, and decision-making processes. Companies can enhance efficiency, reduce costs, and improve productivity by utilizing AI-powered systems.??
The combined impact of AI and ubiquitous high-resolution global teleconferencing is evident in the changing dynamics of the job market. For example, it is no longer necessary for many to live in an expensive city like San Francisco. If they want, they can work 7,000 miles away over Starlink in the mountains of Tibet.
Unlimited Talent:??India and China have already emerged as significant players in the global economy. These countries possess large populations of well-educated and ambitious individuals, resulting in a highly competitive workforce. Impressive institutions like the Indian Institute of Technology (IIT) and the emphasis on science, engineering, and medicine contribute to their ability to compete globally. The availability of global teleconferencing and AI will increasingly allow businesses to tap into these huge, worldwide talent pools, leveraging diverse perspectives and expertise to drive innovation.??Going forward, no matter how brilliant your employees are, the most brilliant talent is elsewhere.?
As AI automates specific tasks, it will lead to job displacement in some sectors. However, history proves that innovation has always created more new jobs than those destroyed, but they will be different. AI will help train people to provide new skills and augment their capabilities to make them more valuable employees.??
Exponential Economy
Exponential improvement is a property of knowledge-based activities, like information technology, where knowledge accumulates and leads to increasingly better solutions. The emergence of many digital, knowledge-based technologies has created an exponential economy where one idea rapidly builds upon another. Knowledge compounds, and compounding is exponential.??
The impact of the exponential economy includes large segments of the economy improving in price performance at exponential rates, including computers, communications, biotechnology, and consumer products. For example, for almost the same price as the first iPhone in 2007, the current iPhone has three cameras, Siri, 4-K imaging, 5-G, and many other capabilities and functions. Recently the introduction of ChatGPT and Bard has significantly added another critical attribute – knowledge creation, synthesis, and the beginnings of evaluation and reasoning.?
An Example:?Consider the familiar example of the exponential economy, computers. Gordon Moore, the co-founder of Intel, noted that computers increased price performance by roughly 100 percent every eighteen months for over a hundred years [11]. Although "Moore's Law" is an empirical observation (not a "law"), computers have approximated Moore's Law since the beginning of the twentieth century while the technologies used changed many times, from wooden mechanical structures to relays, vacuum tubes, transistors, and now integrated circuits.
Moore's Law is likely to continue well into the twenty-first century with the introduction of new technologies, algorithms, and 3-D architectures. If we can keep improving at today's rates, by 2040 to 2060, our desktop computers may be faster than the collective computing power of the world's population [14]. Ray Kurzweil called the point?when the abilities of our computers overtake human abilities, the “Singularity" [15]. As he noted, the Singularity is near.
It used to be that computing was the most visible industry exhibiting such exponential improvement rates. Increasingly now, other segments of the economy are joining this club, including entertainment, home services, and aspects of medicine, as we saw with the development of the COVID vaccines in less than a year.??Segments of these markets are doubling in price performance every nine to twenty-four months. Internet backbone bandwidth, for example, doubles every twelve months [17]. In this industry, you are out of business in a few years if you only double your bandwidth at equal cost every eighteen months. Over the next few decades, artificial intelligence and other computing and communication technologies will converge in surprising, nonlinear ways to create unexpected opportunities.
Many traditional products, including automobiles and refrigerators, have transitioned into the exponential economy. Their transformation is not primarily focused on their basic physical characteristics, which improve gradually, but rather on how they are designed, manufactured, and introduced to the market and the additional services they provide.??Refrigerators are now part of the Internet of Things (IOT), where sensors and computer applications keep track what foods are available, make orders for home delivery of groceries, and recommend possible recipes.?
Moreover, advancements in materials and other technologies are being integrated into new products as the entire design and manufacturing process becomes based on computer modeling and simulation. Simultaneously, manufacturing capabilities have improved to the point where the physical quality of many products is no longer the primary determining factor.??
While the exponential economy presents challenges, it also offers unprecedented capabilities and opportunities. Globalization hastens this process by providing access to more ideas and more areas for unique businesses. Increasingly large numbers of business activities will improve at fast, exponential rates as they become more knowledge-intensive and are integrated into the global economy.??
Colliding Exponentials
The developments described above become uniquely impactful when they collide and create transformative innovations, like the Internet. The Internet is the convergence of computing, ICs, and communications. It is growing and improving exponentially, but even faster than Moore's Law, since it leverages multiple exponential developments.
“Colliding exponentials" create economic transitions [21]. Fifty years ago, most of the economy was improving in price performance but relatively slowly, at a few percentage points per year. Products primarily characterized by their physical and material attributes—such as trains, automobiles, houses, stoves, and vacuum cleaners—cannot improve price performance as quickly as knowledge-intensive products and services. Other early products, like analog telephones and televisions, could not be rapidly enhanced because major innovations required new standards.
When we developed Siri, bought from us by Steve Jobs for the iPhone, it leveraged the convergence of almost ten individual technologies, including ICs, communications, semantic networks, natural language, and speech. Today's AI technology integrates even more technologies.
AI technologies have the potential to enhance the compounding of knowledge significantly. Machine learning algorithms can analyze vast amounts of data, identify patterns, and generate valuable insights. As AI systems learn and improve from the data they process, they contribute to the accumulation of knowledge and can fuel further innovation. The iterative feedback loop between AI systems and human experts can lead to exponential improvements in various fields, such as healthcare, finance, and scientific research.
Real-Time Customer Feedback: Because ideas drive innovation, having the ability to interact and respond to customers in real time is the ultimate competitive advantage. Alphabet, Apple, and Amazon have become among the world's most valuable companies by leveraging this capability.
In the 1980s, the Internet became technologically and economically practical, and the "law of exponential interconnections" added another exponential driver to the exponential power of Moore's Law. The law of exponential interconnections says that in a fully connected network, like the Internet, the number of connections as users are added increases exponentially, which helps a company gather ideas and build on earlier ones faster. This compounding allows exponentials like Moore's Law to advance even faster.??
Although these early computing and communication developments were remarkable and impacted some businesses, they didn't initially impact the bulk of the economy. Even into the early 1990s, there was considerable discussion about whether computer and communication technology had made any appreciable impact on office productivity [22]. But as more of the economy became knowledge-intensive, that changed. Today the convergence of computing and communications has advanced to the point where they are touching almost all segments of the economy. These areas include product sales, auctions, publishing, entertainment, education, distribution of goods, manufacturing, and research.
AI will be added to each Internet connection. Adding AI will give all 9 billion people the worlds most powerful amplifier of human capabilities. As remarkably, it will be constantly learning and improving from all connected. These expanding capabilities will, inevitably, create wave after wave of surprising new opportunities and solutions.
Expanding Impact
As we go forward, exponential improvements will increasingly impact other areas that are important to us, such as entertainment, education, and environmentally green products. Consider, for example, entertainment. Individuals will create Hollywood quality movies using their home computers because images, near real-time video, and characters can be synthesized using AI.??
Medicine and health services will be revolutionized as they enter the exponential economy. Doctors today ask how you feel, take your temperature and blood pressure, obtain X-rays and MRIs, and collect blood and urine samples. But humans are immensely complicated organisms, and we require knowledge of the specific signaling and computational processes occurring within our bodies—knowledge rapidly being collected. By decoding the human genome, medicine has entered an era based on detailed methods of how our bodies function. Medicine is becoming an information technology, and with AI, all doctors will have the collected experience of millions of other doctors and scientists from around the world [26].? In the future a doctor without an AI assistant is unimaginable.
Personalized medicine will become a reality as we understand how the unique genetic differences in our bodies impact our health. We will take only those drugs compatible with our physiologies, eliminating many of the hundred thousand U.S. deaths yearly due to adverse side effects [17]. In addition, researchers will increasingly detect and eliminate congenital disabilities and other crippling diseases. Life spans will continue to increase. Can we add ten, twenty, or thirty more years [28]?
Simultaneously, manufacturing capabilities have continued to improve to the point where the physical quality of many products is no longer the determining factor. Even throwaway consumer products have remarkable quality and features compared to those of only ten years ago [30]. Quality is now required to enter the game. At the same time, many products' base cost is approaching the cost of the materials used. The value of products is shifting from materials and manufacturing to quality, design, new features, and the overall customer experience. Competitive advantage in traditional businesses increasingly comes from exploiting advances in the exponential economy.
In addition, the exponential economy is forcing significant segments of the economy to change their business models and create new customer value. For example, online sales by Amazon and others are forcing local bookstores to add new services to survive, such as famous speaker programs, coffee bars, and comfortable chairs. Wal-Mart is using advances in information technology to tie together a global supply chain to drive innovation and revolutionize retailing.
And so, it goes. Automobiles, retailing, education, travel reservations, media, broadcasting, financial services, and entertainment: all these industries, and more, are trying to figure out how the colliding exponentials all around them will transform their business models and open new opportunities. Others are working to develop new business models to replace today's incumbents. Just as eBay and Amazon created new business models from the first wave of the exponential economy, the companies that emerge from the next wave of colliding exponentials will augment and replace those that seem remarkable today.
Productivity
Will the dramatic improvements in performance and cost described here result in correspondingly significant improvements in a country's gross domestic product (GDP)? The relationship between rapid exponential advances in knowledge-driven segments of our economy and the economy's overall growth is complex. Nevertheless, consider productivity, which is the primary driver of GDP. The U.S. productivity increase from 2000 to 2005 was 3.4 percent yearly, the highest rate in fifty years. Arnold Kling noted, "Suppose that productivity growth in the traditional economy is 1 percent per year and that productivity growth in computers is 50 percent per year. In that case, an economy of 6 percent computers and 94 percent everything else should grow at 3.9 percent per year" [3]. Information technology is about 20-30 percent of the U.S. GDP in 2022, but we have yet to see the gains expected. A complication is that the information technology solutions are often deflationary. The iPhone is an example. At the equal cost of an iPhone in 2007, the value of the offerings provided now is likely ten times greater.???
How significant is this increase in productivity? Nobel Prize winner Robert Fogel has pointed out that the future of Social Security depends on it. He said, "If we continue to grow as we have in the neighborhood of two percent per annum per capita over the past fifty years, we won't have any difficulty paying for it" [33]. Three percent productivity growth might even be enough to make Medicare viable. This observation is a compelling motivation for making innovation the centerpiece of a nation's economic policy. Government policy must also adapt and leverage these megatrends to provide support and infrastructure.
The force of these developments is still in the early days of exponential growth. How we interact, work, and play will all change, as will our social customs, political processes, and global relationships. We are entering one of the most remarkable, important, and in some ways, frightening periods in the history of humankind. The exponential economy has created an abundance of opportunities, but it has also created a profoundly more competitive world.??
Company Lifetimes:?One indication of increasing competitiveness in the exponential economy is the declining lifetime of companies, as described in the book by Richard Foster and Sarah Kaplan [34]. Consider Figure 2.1 from their book, which shows the lifetime of Standard & Poor (S&P) 500 companies over the past seventy years. The S&P 500 is a leading index of large and medium-sized U.S. companies. "Lifetime" is measured by how long one of the S&P 500 lasts as an independent company. They can die by going bankrupt or being bought and merged into another company. Most get bought.?
The curve shows two significant results. First, it indicates regular and dramatic business cycles where companies go out of business faster or slower. Second, at the beginning of the twentieth century, companies survived on the S&P 500 for more than fifty years. Many employees had lifetime employment, but this data suggests company lifetimes are down to roughly fifteen years. More recent data from Geoffrey West indicates that listed company lifetimes have been only ten years for decades [13]. In either case, lifetime employment is effectively gone.
Figure 2.1 Curve showing the average lifetime of S&P 500 companies.
The phenomenon of short, declining lifetimes of companies is particularly astounding because companies that make the S&P 500 are larger and more successful. They have all the ingredients: customers, proven offerings and business models, technology, capital, people, and brand visibility. But at this point, when everything needed is in place, the average company has only another ten to fifteen years or so to live. Curiously, these companies are not dying because of a lack of opportunities— they are swimming in them [35]. These are just opportunities that established companies can't respond to fast enough.
These results illustrate that Joseph Schumpeter's forces of "creative destruction" work in the marketplace in ways that might surprise even him [36]. The observation about the dramatically shortened lifetime of companies is justification enough to cause us to rethink our innovation processes. As Darwin pointed out, "It is not the strongest of a species that survives, nor the most intelligent; it is the one most adapted to change" [37]. Successful adaptation in the market is innovation.
Failure to adapt can lead to extinction in our world — fast. Foster and Kaplan show why adaptation to change is extremely difficult for established companies. They point out that over the past seventy years, only a few companies could outperform the market over a sustained period. This finding is significant because if you fall behind the market, you are likely on the path to extinction.??
When Foster and Kaplan wrote their book, they noted only two companies that outperformed the market, GE and Kodak. Since then, Kodak has failed, and GE has fallen out of this exclusive club. Nevertheless, others, like Google, Amazon, and Tesla, have joined it. Their results indicate that "built to last" is an illusion [38]. Today with the inclusion of AI, who will thrive and who will die? History suggests it may be a family of new companies.
A fundamental reason for this failure by established companies to keep up is that they are, by definition, built to fight the last war. Nevertheless, the world unrelentingly changes, demographic shifts occur, customer needs evolve, technologies get invented, management practices improve, and novel business models emerge. The problem is that established companies focus on preserving today's products and business models over emerging, but eventually meaningful, opportunities.?
They have well-defined organizations and processes designed to achieve these earlier objectives, but they now resist the changes needed to exploit the new opportunities. Finally, senior managers' customer experience and worldview are based primarily on experiences obtained earlier in their careers that become obsolete experiences. The time needed to overcome these obstacles slows the company's value-creation activities. At the same time, the companies in the market do not experience these legacy-induced delays. Over decades the inability to innovate at the speed of the market usually turns out to be fatal.
Andy Grove, the former CEO of computer-chip manufacturer Intel, often said, "Only the paranoid survive" [40]. As his comment suggests, there is no room for arrogance or complacency when attempting to keep up with exponential growth. That is why we call these developments the exponential economy. We want to stress their rapid and profound effects, which, if ignored, overwhelm us. The exponential economy is a highly competitive ecosystem where we must quickly create and re-create compelling new customer value.
Product Life Cycles
The product life cycle has shortened in transitioning to a knowledge-based, exponential economy. While major products would have lasted for decades in the past, they now often have a lifespan of only a few years. Established companies often struggle to transition from one primary product to the next, making the ability to innovate rapidly a critical survival skill in this new economy. Success requires a systematic and disciplined process of identifying unmet customer needs, developing innovative concepts, and creating compelling customer value in the marketplace. Because so many new opportunities are emerging, companies that can do this will be well-positioned to succeed in the future.
Figure 2.2 shows the product life-cycle curve. A new idea is born at A and then works its way up in customer and company value to become a new product or service at B. An invention can occur at A and result from a single individual. But it takes a multidisciplinary team many years to create an important innovation. Thus, the investments required to go from A to B can be tens to thousands of times greater than those needed to develop the idea at A. Unfortunately, inventors and the authors who write about them often underappreciate the importance of innovators and the larger teams required for achieving marketplace success.
If the new product or service reaches B, it is introduced into the market and sold to customers. From B to C, the innovation is sold to make a profit. Eventually, the product or service matures at C and declines as it is either commoditized or obsolete. The enterprise must then introduce a new product or service to repeat the cycle.
Figure 2.2: The product or service life-cycle curve. It shows a new concept moving up in value to become a product or service and, over time, becoming mature and obsolete. The process then starts again.
The product life-cycle curve (Figure 2.2) illustrates the journey from a new idea at A to becoming a mature product or service at C and eventually declining. The transition from A to B, where the idea becomes an innovation, requires significant investments and the efforts of a multidisciplinary team. Innovators like David Sarnoff (RCA), Steve Jobs (Apple), Morris Chang (TSMC), and Elon Musk (Tesla and SpaceX) play crucial roles in turning inventions into successful innovations by assembling the necessary resources, teams, and organizations.
Thus, the trouble starts when a product begins to reach the end of its life. Then a new offering must be developed and introduced successfully into the marketplace. P&G, for years, had a successful process for doing this, as does Toyota and W. L. Gore today. But this is not the rule.??
Once an innovation is successful in the marketplace, most companies can run their business from B to C. They have organizational structures and well-thought-out processes to monitor and grow the business. The CEO and management team focus on day-to-day operations to keep the company profitable. But as an innovation moves from A to B, it is often managed with different intensity levels. Indeed, some CEOs consider research an unwelcome cost that lowers the stock price since it may not pay off on their watch. Leaders like Sarnoff, Jobs, Chang, and Musk commit to the new vision and make it happen.
Getting from A to B: Moving from A to B to create and deliver new customer value requires a systematic value-creation process. Innovations can range from creating wholly new industries to making incremental improvements to existing products and services. Incremental innovations, when accumulated over time, can be highly impactful, as companies like Toyota demonstrate.
Creating compelling customer value in the marketplace involves not only revolutionary technologies or imaginative product designs but also the creation of new business models. Scania is a Swedish truck company that has been profitable for over 60 years. Trucks must perform many functions for customers. To address this need, they pioneered the design of trucks based on radical modularity. Modularity allows customers, like with LEGO blocks, to design trucks that better match their needs. Modularity also improves quality and cost, providing another competitive advantage. Today's leading companies like Apple, Alphabet, and Amazon have business models that leverage the "network effect," where competitive advantage improves exponentially as new customers are added.
Value creation is the process of getting from A to B. It requires identifying an important unmet customer and market need and then delivering an offering that is better than any alternative in the marketplace. The new customer value only becomes an innovation if it has a viable business model satisfying the needs of all stakeholders.??
As we will discuss in another chapter, the conceptual vehicle for getting from A to B is an NABC value proposition, which addresses the following fundamental questions:
Your value proposition applies at every step from A to B and is the nucleus of all your activities to create new customer value.
Innovations are not limited to creating new industries, as Sarnoff, Edison, Jobs, and Land did. The most significant opportunity for people working in established companies lies in making incremental improvements to existing products and services—improvements to existing products above point B.??
Incremental innovations have a life-cycle curve identical to that shown in Figure 2.2, and they need to be developed just like more transformative innovations. These minor innovations can be significant, especially as one builds upon another. We share the passion that quality gurus W. Edwards Deming and Taiichi Ohno had about the power of accumulated small innovations. As Toyota, TSMC, and others have demonstrated, many minor improvements can create sustainable marketplace success.
Figure 2.3: Innovations arise from new ideas, either technical or business, and an understanding of significant unmet customer and market needs.
Whether incremental or transformational, innovations are all developed through a value-creation process: they don't just happen. Since speed and urgency are essential competitive advantages, an efficient, disciplined innovation process is needed to seize new opportunities quickly. The "tech push" and "build it and they will come" approaches imply that you simply build a new product and push it up the life-cycle curve from A to B.??
Experience shows that this is the primary point of failure because understanding what the customer wants is lacking. RCA, which no longer exists, lived, and died using this approach. So did Compaq, Polaroid, DEC, and many others. They produced many great technological inventions but did not meet their consumers' needs. Hubris by management and undisciplined innovation practices led to the companies' failure and death.
The only way to systematically create compelling customer value in the marketplace is to simultaneously interact with both the market and the sources of new ideas, as indicated by the arrows in Figure 2.3. You must continually interact with the marketplace to identify critical unmet customer and market needs and to develop a deep understanding of the overall ecosystem and competition. You must continuously interact with sources of new ideas to understand what is possible and to be able to develop innovative concepts. New ideas can arise from many sources—technology, process improvements, business models, and labor cost, to name a few. These new ideas are the raw materials from which an original approach for your new product or service concept is built.
Principle of Knowledge Compounding
Why do knowledge-based activities improve exponentially? Although the reasons are generally complex, a simple explanation based on the compounding of knowledge gives insight into the process and what successful value creation methodologies must achieve. It helps explain when exponential-like performance improvement is expected and when it is not. This knowledge-compounding model also plays a central role in our value-creation processes for innovation teams. You must innovate rapidly and exponentially to thrive in the exponential economy.
Einstein purportedly said, "The most powerful force in the universe is compound interest." If you understand this principle, you know why the exponential economy is so important. Consider a simple example we are familiar with that illustrates the basic concepts: If you have a dollar today and the interest rate is 20 percent per year, your dollar will be worth $ 1.20 in a year. In a hundred years, by starting with only one dollar, you would have more than a million. The conclusion from this simple example is to make the interest rate large and to compound often. That's what loan sharks do.?
We once ran out of cash on a vacation trip after the banks closed for a holiday in Denmark. We asked the son of a colleague, five-year-old Peter Winarsky if we could borrow the $20 he had brought on the trip. It was his life's savings. Peter looked at us in disbelief. So, we made a deal with him. We said, "Peter, we will give you ten percent compound interest for each day we keep your money." He asked, "What is compound interest?" After explaining this to him, he looked away for a long time while doing some mental math and then turned to us and said quietly, "I like this idea. You can borrow my money." Smart fellow.
Technological and business developments can lead to exponential improvements too. Each discovery builds on previous discoveries to create additional improvements. Exponential improvement can occur if there is a critical need for the resulting innovation, new ideas to drive the innovation process, a compounding process to let improvements build on previous results, and the financial, human, and other resources to make it happen. The convergence of communications and AI technologies will likely create the fastest compounding of knowledge ever.
Figure 2.4 illustrates this process. Imagine, as an example, that a computer is used as a tool, Tool 1, to collect new ideas to design a new computer, 1. That computer then becomes a new tool, Tool 2, to collect still more ideas to create another new computer, 2. This process can repeat for as long as there remains an unmet need for improved computers, new ideas, a way to keep building on the earlier developments, and appropriate human and other resources.
Figure 2.4: Top: Tools, new generations of computers, and the compounding effect of accumulating new ideas. Bottom: What exponential improvement looks like. In this case, the performance increases by two times per cycle.
In simple terms, this is the engine that keeps Moore's Law going or, for that matter, any knowledge-compounding process where these primary conditions are satisfied. The formula for a compounding improvement process is identical to the recipe for compound interest [45]. As with compound interest, you want to collect as many great ideas as possible and compound often [46]. Evidence shows that Moore's Law is slowing down but continuing [47]. Other activities will also speed up as more people worldwide add new ideas, and an improved communication infrastructure allows faster sharing and compounding of ideas.
In "Through the Looking-Glass," the Red Queen tells Alice, "It takes all the running you can do to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!" [48]. As Grove's earlier comment implies, being in the computer-chip business, or any other rapidly compounding knowledge business, is a little like being in Wonderland. The Five Disciplines of Innovation are about how to "run even faster."
Application to Innovation Teams
The ideas discussed above apply to any improvement process. If you are working in a profession that is improving exponentially, you need an exponential improvement process to keep up. That is, if you are involved in an activity where you are accumulating knowledge to make something better, you want to
The goal is to achieve exponential improvement that will put you ahead of the exponential improvements occurring in your activity by your competitors. These ideas are at the core of our value-creation process: important customer and market needs; tapping the genius of the team for ideas; tools and processes to compound these ideas to build new solutions quickly; and champions and innovation teams to drive the process. The more successfully we emulate these conditions, the more rapidly and successfully we can innovate to create new customer value.
These concepts can be applied to many activities, including product development, quality control, government policy, education, and basic research. They extend and enhance traditional "brainstorming," where groups develop new ideas. They extend the pioneering contributions on quality improvement by W. Edwards Deming and Taiichi Ohno but now applied to value creation for knowledge workers. Because the ideas described here are general concepts, they are effective even if the activity you are working on is not changing as rapidly as in the computer business. This conclusion includes all creative and innovative activities.
Although the exponential economy presents many challenges, it also represents a time of unprecedented opportunity. The emerging global marketplace, plus wave after wave of exponentially improving technologies, will continuously create significant business opportunities in most market segments. We disagree with the "doom and gloom" crowd who only see problems ahead. Instead, these global developments will produce economic improvements worldwide, including the United States. Although world poverty is still a daunting problem, it is declining by almost fifty million people annually [49]. These positive developments should continue and even accelerate over the foreseeable future.
As Einstein suggested, events that compound can create surprisingly impressive results. We are solidly in the exponential economy. We need to heed Einstein's observation and master the most powerful force in the Universe. Our value creation methods must be exponential.?
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