3-Laws of Value Creation: Keys for systematic innovative success
Curt Carlson, Ph.D.
Professor of Practice, Northeastern University and Distinguished Executive in Residence, WPI
"Any possibility for improving the effective utilization of the intellectual power of society's problem solvers warrants the most serious consideration. This is because man's problem-solving capability represents the most important resource possessed by a society." Doug Engelbart - National Medal of Technology: creator of the computer mouse and the foundations of personal computing at SRI International
An Important Need
This post is about an issue that profoundly affects the world.??Through innovation we address society's grand challenges, create prosperity and jobs, and provide resources for social responsibility.??Consequently, one of society's most critical opportunities is to improve our value-creation capabilities.??Improvements in value creation are exponential amplifiers of innovative performance.
The 3 Laws?
An individual, team, or enterprise can systematically generate new value for customers and reap the rewards for doing so when they rigorously follow three fundamental practices:
The 3 Laws are multiplicative.??If one is missing, systematic success is virtually impossible.??
We see poor performance because basic value-creation methods are too often missing, especially in academia and government. However, experience proves that even minor improvements in the 3 Laws have a significant positive impact on outcomes.??I will first describe the performance issue, the nature of our competitive ecosystem, the 3 Laws, and then ways we can move forward, especially in universities and government.
The Performance Gap
Almost all measures of innovative performance today are wanting.??Only 3% of patents recoup their investment; the rest are mostly waste that costs many tens of billions of dollars a year just in maintenance fees.??Only one in ten new venture-backed companies has any real success.??Most venture capitalists lose money, and 5% make 95% of the gains.??Only 20% of university tech-transfer programs break even, and for those few it is often the result of a new drug.??In our workshops with almost a thousand global teams from leading companies, universities, and government agencies, typically, only 25% of the projects under development would provide any meaningful new customer value if completed.??Depressingly, too often it has been zero percent.
There are excellent examples of success in all areas of R&D and innovation, but our overall performance today is a fraction of what is possible.??But does it have to be this way???Some think that all the failures are necessary, but that is incorrect.??
The situation is reminiscent of product quality and cost before the advent of total quality management (TQM), one of the world's most significant process innovations.??In various forms, all manufacturing companies now use the ideas of Deming, Juran, Crosby, and Ohno.??Because TQM is based on fundamental learning principles, as does i4i, it has proven to be a significant, sustainable innovation.??
Our workshops and global partnerships have taught us that many of the failures we see are predictable and avoidable.???When one or more of the Three-Laws of Value Creation are missing, the chance of success rapidly declines.??But when they are in place, in some appropriate form, the probability of success improves dramatically.??
Please note that I am not questioning the diligence, skill, or commitment of the teams in our workshops.?That is almost never the issue.??Instead, it is the inefficient and ineffective value creation methods used.??
Improvements Possible
Below is a performance assessment based on the hundreds of i4i workshops we have conducted.??Both companies and universities can identify significant problems.???Most professionals understand some value creation concepts, although we have never been in an enterprise where that was true across the enterprise.??But in almost all cases, the biggest failure is from a lack of collaboration.??
It should be restated that some individuals do all of these things well, but rarely across organizations.??Notice that the performance scores are obtained by multiplying the three scores together.??Thus, a zero in any of the three gives a zero.?
Although this assessment is subjective and others might give different evaluations, it suggests the magnitude of improvements possible.??Based on my experience as CEO at SRI and from working with other organizations, a factor of 2 in efficiency is generally possible (i.e., stopping projects with no potential value and then repurposing the assets). But, of course, this doesn’t capture the potential upside of working more productively.??The returns then can be 10 times or orders of magnitude greater.?
The Innovative Ecosystem
Most significant innovations are, and always have been, interdisciplinary. For example, consider Thomas Edison and electrification. Edison had to make advances in dozens of different technologies to create all the products and services required.??Likewise, today's grand challenges, such as personalized medicine, clean energy, quantum computing, robotic manufacturing, and autonomous transportation, are all highly interdisciplinary.??In addition, many fundamental research programs in physics are interdisciplinary, such as the Large Hadron Collider project located in Geneva.?
As an example of an interdisciplinary project, consider developing a medical device with a team of biologists, chemists, electrical engineers, and computer scientists.??If approval by the Federal Drug Administration (FDA) is required, additional colleagues are needed to conduct clinical trials and manage the regulatory process.??The power of these interdisciplinary teams comes from the unique skills and perspectives each teammate brings to address the unmet customer need.??
The importance of interdisciplinary work is amplified today because of the increasing number of opportunities, the intensity of global competition, and the rapid exponential advance of many technologies.??For example, many information technologies are improving in price-performance by two times every two to seven years. Moreover, the convergence of multiple exponential technologies often opens wholly new opportunities, like computer assistants such as Siri, while amplifying developments in others.??For example, advances in material sciences, such as batteries, are enhanced by exponentially advancing information processing systems and tools.??
Of particular importance, because of COVID, almost all professionals are now online with video.??This development has enormously amplified our ability to collaborate.??It has effectively removed the distance barrier for value creation and made the world virtually transparent.??It has transformed the world's potential for value creation, as I will describe below.?
1.??Important Unmet Customer and Market Needs
The goal of value creation is to identify and address important unmet customer and market needs, not ones just interesting to us. The initiative must first matter to our customers and then to our enterprises, investors, employees, partners, and other stakeholders.??If the initiative is insignificant or unable to address the needs of all stakeholders, it will usually fail.??
Whatever your job or position, if you do not focus on things that matter, you will not produce results that matter.??We constantly see professionals who identify a problem, then focus on their approach, but fail to identify the actual customer need and its potential significance.??This is, by far, the biggest mistake we see in all enterprises – the inability to identify the real unmet customer need.
A measure of significance is how many people are impacted by an innovation and how long it remains profitable and available in the marketplace. For example, when we created HDTV, the potential customer base was initially the population of America and then the world.?
Of course, what is "important" depends on the enterprise. For example, a significant improvement in product quality of 2% a year over ten years might be game-changing in manufacturing.??But if you are designing quantum computers, performance improvements of two times every six years might be necessary to survive.???
In addition, every organization must innovate across all elements of its business.??Typically, enterprises have ongoing operations, where incremental improvements are critical to stay ahead of the competition.??In addition, new disruptive offerings are often required as the market evolves. For example, the first version of HDTV we developed, ATSC 1.0, has lasted for 17 years, but now it is being replaced by a new standard, ATSC 3.0, with 4-K resolution and additional features.??For a company to survive, it must catch each new innovative wave.?
In every professional position, the starting question is, "What contribution can my team and I make that will deliver the greatest new customer value while satisfying all other stakeholders?"??Value creation starts by assembling a small team of typically three to five professionals with the skills and knowledge necessary to identify the unmet need and the opportunity's key challenges.?
See additional guidelines in the post, Work on Important Unmet Customer Needs.
2.??Shared Value-Creation Language, Concepts, and Tools
If value creation teams lack a shared understanding of fundamental value creation concepts, they will be inefficient and ineffective. Without shared language focused on the task, it is like a Tower of Babel.??That Biblical story described the community's compelling advantage when it had a shared language and its dramatic demise when its shared language went away.
For example, imagine going into the heart of China to negotiate a business deal if you speak no Chinese and there is no interpreter.??How successful would you be???Because American interdisciplinary teams speak English and have mastered a professional discipline, they often assume that is enough to make them value creators.???In reality, when they come together as an interdisciplinary team, it is as if they are in a foreign country with unique languages, concepts, and customs.
Interdisciplinary team members bring their specific disciplines, languages, concepts, and mental models.?These collective attributes are what allows the formation of genius-level teams capable of solving hard, interdisciplinary problems.??However, to align the team, they must understand the one unique language that determines the direction and nature of their collective work.??That is the language of value creation – the unique language focused on the customer or end-user and other stakeholders.??
In i4i value creation workshops, we introduce a family of concepts, frameworks, and tools to help direct and amplify a team’s value creation abilities. We start with core value creation concepts, such as the definitions for innovation, value creation, and customer value.??These basic concepts must be understood by all.??Perhaps surprisingly, we have yet to find a senior management team where everyone shared the same definitions for those basic concepts.??In i4i workshops we include:
NABC value propositions are essential because they set the direction for all subsequent work.???Almost all failures are a consequence of not addressing those four questions. They apply to all problem solving situations where the goal is value to others. A company that broadly embraced the use of NABC value propositions becomes not just customer focused, but focused on delivering customer value in every function and position.
The lack of knowledge about core value-creation concepts doesn't necessarily stop a team, but it certainly slows them down. To be productive, the team must share and understand the core concepts of value creation, which focuses the team on identifying and addressing their unmet customer’s needs.?
3.??Intense Iteration with Recuring Team Feedback
No person has all the knowledge, perspectives, and skills needed to solve complex problems.??It requires an interdisciplinary team where everyone shares the vision, has unique complementary skills, and shares in the rewards of success.??Even if a superb team is formed, there must still be a process to bring the team’s knowledge together to create a solution that addresses the unmet customer need.??Each professional is like a unique ingredient to be added in the right proportion to create a new recipe.??
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Value creation starts when a small core team of three to five professionals develops the initial NABC value proposition.??This is a challenging task requiring constant iteration among the team and with other colleagues, partners, and customers.??Almost all teams initially focus on their approach without a full understanding of their customer’s need.? Identifying the actual unmet customer need and addressing all the NABC questions demands constant reframing and iteration.??It generally takes hundreds of iterations to address the four NABC questions completely, compellingly, and quantitatively.?
To efficiently address the NABC questions and succeed faster than the competition, the iteration and reframing process must be intense and unrelenting.??For example, before I gave the NABC value position for HDTV to our investor, I first practiced it with my partner Glenn Reitmeier almost non-stop for two months.??At the time it was not obvious that a solution for HDTV was possible, so we needed to make a solid case.??We took turns, over and over, giving it to each other with the other person acting as devil’s advocate to identify issues and to develop more compelling solutions.??
The formation of Siri was similar. It took several years of constant iteration until we had good answers for all parts of the NABC value proposition, including the business model.??Only then was a full team hired and the company formed. After the product launch, Siri was immediately bought by Steve Jobs for the iPhone.??
The value proposition is just the start.??Then the team must be fleshed out with professionals added and subtracted as new challenges are uncovered and different roles required.??To bring the team’s different disciplines together efficiently and effectively we use Value Creation Forums, as described in the HBR article listed at the end.??
Forums are ongoing meetings where multiple teams participate from the first draft of their NABC value proposition to the success of their initiative and beyond.??Here is a summary of the format:
Forums are unrelentingly positive.??The goal is to help all the teams rapidly learn and improve to be more successful.??The motivation of team members is enhanced by the focus on achievement and by participants comparing each other’s results.??Because of the format, interdisciplinary teams rapidly learn the overall project’s goals and how each part contributes to success.??
In Douglas Engelbart’s formulation, Value Creation Forums are Networked Improvement Communities (NICs).??When Forums are held across an enterprise, they form a "network of networks," all speaking the same language of value creation. This allows access to additional information, resources, and others with ctitical skills, which further improves an enterprise’s innovative potential.??That was what SRI International was like when I was CEO.
Active Learning
The goal of value creation is to learn fast, not as some believe, fail fast.??I have never said that our goal was to fail fast. The educational science that describes how people learn, create, and improve the fastest and best is called "active learning."??Value Creation Forums and the other aspects of the i4i methodology are uniquely based on active learning principles.??
Because of active learning, the i4i method not only implements the 3 Laws but also does so efficiently and effectively.??Value Creation Forums are uniquely designed to facilitate comparative learning, one of the most powerful ways we learn. The 4 to 6 short presentations using the concise NABC framework allows team members to compare different presentations and learn from those done well. This facilitates compond learning, so improvements can be made exponentially fast. It is the only methodology that exploits this uniquely powerful way to learn.
University Interdisciplinary Research?
Next, let’s see how the 3 Laws apply to university research.??By way of example, consider major university interdisciplinary research programs focused on "grand challenge" problems. They can vary between $10 to $100 million, last for up to 10 years, and include multiple universities, research organizations, and commercial partners.??These programs generally require both basic and applied research and expect significant commercial outcomes.??
We have held workshops for programs like these from the National Science Foundation, the National Academy of Engineering, U.S. National Laboratories, and the Singapore National Research Foundation.??In Singapore, we reviewed large university center programs, including ones from major U.S. universities, such as MIT and Berkeley.??With our partners we have also conducted value creation workshops with many other leading universities in the U.S., Japan, Taiwan, Malaysia, Finland, China, and Sweden.
What are typical academic research practices today? As noted, academics are usually successful at identifying significant problems. Then the objective is to develop a working hypothesis for the solution and a proposal for the initiative - basically a longer version of the NABC questions.
DARPA and NSF provide small seed grants (e.g., around $10K to $100K) to support the core group of researchers who develop the proposal and who recruit the full research team. That is a best practice. Clearly if the working hypothesis is not valid or if the researchers selected are inappropriate, the results will be poor.
An issue during this seed grant stage is that, with hard interdisciplinay initiatives, the types of researchers required will ineviatibly change during the project as more is learned. DARPA allows personal changes, but that is typically a challenge with university grants, like those from NSF and others.
Another issue during the seed grant development stage is a lack of shared value creation concepts and collaboration methods. ?Adding these missing skills should be part of seed funding, not only to build better proposals, but to set the stage for how teams work after the proposal is won. Typically, because these skills and methods are missing today, collaboration across university interdisciplinary R&D teams is generally poor.
Most large academic research initiatives have review meetings every few weeks for roughly an hour to discuss the team's work.??In between, teammates will often call and email each other.??In addition, the entire interdisciplinary team might gather once or twice a year, where graduate students and others give talks about their projects.??These are all excellent practices, but this level of collaboration is not remotely enough to successfully conduct interdisciplinary research.??When doing something completely new, extremely hard, and highly interdisciplinary, getting all the pieces of knowledge to fit together is incredibly difficult.?
First, for success, all the teammates must deeply understand the overall value proposition for the new opportunity.??This value proposition is fundamental because it sets the direction for each sub-team.??Second, each sub-team must have compelling value propositions for their parts and show how they fit into the overall solution. Finally, to improve effectively and efficiently, teammates must regularly obtain feedback from multiple perspectives, including teammates, to gain missing knowledge, including from the viewpoint of end-users and funders.???
Universities rarely engage in such intense, ongoing value creation practices.??Of course, some terrific researchers understand what to do and use versions of the methods described, but they are rare.?
The resulting inadequate performance seen doesn't mean that world-leading researchers cannot conduct excellent research. Of course they can, and they do. But they usually default to their specific research disciplines and fail to fully address the opportunity identified - the research center's initial focus.?
There is now a way to bring the required ingredients into play. Previously, academic researchers from multiple universities and companies did not meet often because of the high cost and significant time commitment from getting together.??But now, with everyone online with video, teams can more easily collaborate, as we are doing at Northeastern University, University of Michigan, and Worcester Polytechnic Institute.
Researchers first come together at those universities for a 4-to-8-hour i4i workshop, so everyone understands the fundamentals of value creation.??Then, 4 to 6 teams meet for 60 to 90 minutes every two weeks at Value Creation Forums.??New value creation concepts are inntroduced each meeting. At the Forums, researchers give 2 to 5-minute value propositions on either their current research or new proposals.??After each presentation, other teammates note what was good, give suggestions for improvement, and provide insights by adopting the perspectives of end-users and different funding agencies.??
Note, these value creation programs are not initially aimed at either innovation or entrepreneurship.?They are for first identifying important opportunities and developing a compelling working hypothesis for the solution. What academics want and need is first to win grants and then successfully perform the research.??We help them with those goals and that matches their motivation.???Over time some researchers realize they can create innovations, and a tiny few become entrepreneurs.
Other Models
There are dozens of different models and frameworks for improving innovative performance.??Historically the most significant is Total Quality Management (TQM) and its variants, like 6-Sigma. It adheres to the 3 Laws while addressing the issues of poor product quality and high cost.??The ongoing customer value delivered from the use of TQM is almost immeasurable.??
Other effective methods include Scrum for basic software development and versions of NSF's I-Corps for venture formation.??Amazon has a novel, minimalist approach that satisfies the 3 Laws.??Employees understand Amazon’s metrics for what constitutes an important unmet need.??If they see an opportunity, they write a one-page ad for the new offering plus answers to a list of Frequently Asked Questions (FAQs).???Then a group of employees gathers to first quietly read the ad and its FAQ before discussing the initiative's merits and possible improvements.??Depending on the proposed innovation, the process might repeat as it moves up to the responsible executives in the company.
What does not improve innovative output are complicated models, like the use of the Business Model Canvas (BMC). It is a useful checklist of over 40 business topics, but it is not a framework for value creation and innovation. What is needed are better practices that apply at the starting point of value creation and innovation, the origin of most failures.
A Transformation in Outcomes
In the U.S. government, the best R&D and value-creation model is DARPA and related programs, like I-ARPA and ARPA-E.??Their results vary, but overall, they have proved that remarkable achievements are possible by following analogous 3 Law principles.
Over the last ten years, NSF has also made significant improvements in its center-based research programs.??I was part of a 2017 National Academy of Engineering study that acknowledged NSF’s advancements and suggested others.??But, at the time, progress in improving collaboration was limited by the time and travel costs at universities.??But with that barrier mostly eliminated with everyone now online with video, an important question is how much NSF's programs could improve if it adopted additional 3 Law practices?
Professor Paul Westerhoff at ASU, who has repeatedly worked in the more productive way described here, believes NSF and other government funding agencies could improve their innovative performance two to ten times.??I agree. For example, when I was CEO at SRI International, we grew our research base by over 300% and, at the same time, systematically created one major innovation after another, such as HDTV and Siri, now on the iPhone.
If even a fraction of NSF's $8 billion a year budget was improved by two times, it would significantly increase America's potential for growth, prosperity, and job creation.??In addition, it would lead to much better commercialization results and produce a workforce with essential, career-defining value-creation skills.??
It is hard to imagine any alternative action NSF and other government funding agencies could take that would more substantially improve the nation's growth and prosperity.??This opportunity is possible because everyone is now online.
Conclusion
Our value creation and innovative performance can be significantly improved.??Our current performance is like the poor quality and cost of products before the wide use of TQM.??
But unlike the 1970s, our focus now is on improving all forms of end-user or customer value creation across the entire enterprise and society.??The 3 Laws help define the kinds of improvements required and active learning principles define the most successful methods.??In addition, the advent of ubiquitous online video has opened the opportunity for greater collaboration across both enterprises and nations, which will profoundly improve innovative outcomes.??
See: Curt Carlson, Harvard Business Review,?“Innovation for Impact”
Delivering proof-of-concept AI projects for IBM Client Engineering
3 年Curt, GREAT post. Very comprehensive as well, meaning including other innovation methodologies. I'm going to bookmark this as a MUST-READ for anyone in my network! -John