Innovation is the New Black

Thanks to Marco Dini for translating this article to Italian.

"Innovation is the New Black" announced Bruce Nussbaum, Business Week's Assistant Managing Editor in charge of the magazine's innovation and design coverage. Bruce was speaking at the recent @issue Business and Design conference in New York City.

"You don't have to sell CEOs on innovation anymore," Bruce told the audience of 200 designers and executives. "They get it."

That was evident at last month's CHI Conference in Montreal, where Intuit's CEO, Scott Cook, said "innovation" approximately 2 dozen times in his keynote presentation. He told the audience of 2,600 usability practitioners, interface designers, and researchers how innovation is core to Intuit's success, citing example after example of how Intuit's innovative solutions increased customer satisfaction and market share.

Interestingly, Scott never defined innovation. However, if one was to try to derive meaning from what he said, one might deduce that innovation is something that neither you nor your competitors have. But if you had it, it would give you a real competitive advantage.

At the @issue conference in New York, Dr. Uh-Po Eric Tsou, Vice President of IBM's Technology Collaboration Solutions Group, said you should not confuse innovation with invention. Innovation, he said, "is the insight, that when acted upon, creates value. It's what makes you special."

Competing Against the iPod

SanDisk, the number two player in the MP3 market, just announced their new Sansa e200 Series MP3 Player, which Eric Bone, Director of Consumer Product Marketing, feels will eat into Apple's core. An admirable goal and, if anyone can do it, SanDisk can.

What's interesting about the Sansa e200 is its technical superiority to the iPod. It's widely acknowledged in the trade press to have a faster processor, a better hard drive, a crisper display, and improved sound quality over its big competitor. Yet, will this be enough to make a serious dent in Apple's market?

Probably not, because SanDisk hasn't created what Apple has built: a powerful user experience for listening to great music. While possibly technologically deficient, the iPod combines the player hardware with the iTunes software, the iTunes Music Store service, the Apple stores for sales and support, and the prestige that comes from the Apple brand.

Apple brings the total experience to the table. SanDisk can't compete if it only focuses on the hardware engineering.

Netflix: David is Conquering Goliath

A couple of years back, Blockbuster, the $6 billion a year video rental business rolled out an amazing new service. Customers could select movies from the company's web site, which Blockbuster would mail to their home. The customers could take as long as they wanted to watch the videos, returning the DVDs any time without late fees, all for a recurring monthly fee. In the two years since its introduction, Blockbuster has signed up a whopping 550,000 subscribers out of its 55 million cardholders.

It was a brilliant idea, if only Blockbuster had thought of it first. Five years earlier, a little west coast startup named Netflix came up with the idea of home-delivered DVDs. Netflix now generates $682 million a year from its 5 million subscribers. Yet, what's even more impressive is shareholders have valued Netflix at $1.67 billion, while Blockbuster is now only worth $0.89 billion.

How did the little startup slay the established consumer giant? Netflix provides such a significantly improved movie watching experience, that its customers are selling Netflix's benefits. In a recent survey, 85% of new Netflix subscribers said they joined because a friend highly recommended the service. In addition, 93% of existing customers say they regularly evangelize Netflix to friends and family.

Netflix has done such an amazing job of designing their experience that their customers become their primary marketing force. Blockbuster would have to create a superior experience to compete with that.

Innovation: Discussed in the Boardroom

The top executives at practically every corporation regularly discuss the stories of Apple and Netflix. They want to make their company's products and services just as successful, capturing the hearts and minds of their customers.

What business wouldn't want more than 75% market share like Apple's iPod has? Who would refuse having more than 85% of their existing customers act as the service's best sales representatives without any referral incentives or discounts? It's not surprising the executives ask how to make this happen.

Focus on the Ideal User Experience

What Apple and Netflix did, while not simple, was straightforward. The value they created came from innovations that dramatically improved the user's experience. They looked hard at the current experience and focused on designing an ideal one.

Understanding the user experience isn't new. It's something designers and researchers have done for years. However, because it's linked to innovation and innovation is now an important corporate objective, its value has increased.

Now organizations realize they have to study how users currently experience their products and service. From this, they derive insights into how to make improvements and those improvements go into the design the teams aspire to achieve.

Fixing the MP3 Mess

Before Apple introduced the first iPod in 2001, there were dozens of MP3 players on the market. Most of them had flash-memory hardware that could only hold a handful of songs, often 10 to 20 at most, with hard to use interfaces and tiny displays.

In 2001, there were several PC music management programs available. However, their interface to the various MP3 players seemed almost an afterthought, convoluted and inconsistent. Simple features, such as playlist support, were non-existent, since each player's support varied so widely.

Users, wanting new music on their player, needed to purchase an entire CD album, even if they were only interested in a single song. Once purchased, putting the music on the machine was extremely difficult, requiring many steps and several different interfaces to "rip" the music, transfer it to the player, and subsequently listen to the music -- all made by different companies with radically different commands and displays.

The difficulty of getting music from the CDs to the player encouraged users to look at online libraries of already encoded music. Why go through the effort of ripping your own CDs when someone has probably done it before? The popularity of music libraries, such as Napster and Kazaa soared, as did the temptation to upload music the user hadn't paid for.

Apple's iPod Insight

Apple's designers could see something better emerging from this mess. They imagined a future where music listeners could find the specific song they wanted, click a single button and the system would instantly purchase the music, download it, and transfer it to the player, ready to listen to.

The hardware had to be easy to use. A long-playing battery, crisp lcd display, simple controls, and sleek design was all part of their vision. The PC software would know about the hardware's features and seamlessly make the interface flow.

The 99-cent-per-song price point for music was as much part of the new experience as the hardware design. Picking and choosing just those songs the listener wants to own, without getting songs they aren't interested in, makes it easy for people to build a personal collection they love. Moreover, the slick design of the unit makes it more likely people will gloat about their new player.

While it took several years for the vision to realize itself fully, the new customer experience emerged to change the way music is sold. Apple, once a hardware company, now is realizing more than $1 billion every year just through the sales of the songs in the music store. Innovation took Apple into the leadership position of an established industry in less than three years.

1999: Video Chaos

Stepping out of the way-back machine into 1999, we come upon the chaotic world of the video rental market. Frustration abound as renters rushed to stores, only to find the most popular movies already rented out. Those with eclectic tastes for foreign films, documentaries, or black-and-white classics found limited selections at their local store.

Choosing a video to rent was a gamble. Other than the marketing blurb on the back of the box and the rare expertise of a clerk, there was no real information in the store to inform whether a movie would be any good. The chance of seeing something disappointing was extremely high, since Sturgeon's Law ("99% of everything is crap") was in full force.

Renters also quickly discovered another phenomenon of the selection process: rental stores induce short-term memory loss. People would make mental notes about films they desired, but as soon as they stepped into the store, their notes became locked away into some deep mental abyss, unavailable for access while perusing the massive quantity of titles. Some people would keep a running list on their refrigerator, only to not have it in their hands as they actually rented.

Of course, the real chaos came back from the rental store's punishment tool: the late fee. Convoluted policies and inconsistent customer service made returning a movie more complicated than selecting one. Late fees were such a profitable part of the business that when Blockbuster removed them they saw an immediate loss of $600 million in annual revenue. Late fees actually stopped people from renting films, out of fear.

Netflix's Insight of Order

Like Apple's designers, the designers at Netflix also imagined a way to bring order to this chaos. They imagined a future where renters could rent directly from their own home and have the videos the next day. A detailed recommendation system would suggest likely films a viewer might find interesting, based on other things they've said they've liked. A detailed review database could help see a renter find out what makes a movie click and avoid the unlikely candidates.

Users could create an online queue of movies they want to watch. As soon as they return one movie, the next one would immediate go out in the mail, keeping the viewer always stocked with interesting things to watch. No longer would people need to walk around with mental lists of all the films they wish to see.

Because Netflix would mail the movies from a centralized warehouse, they could afford to keep many copies of even the most eclectic DVDs. Do you want to watch a Swedish comedy? No problem, they have them all. (There aren't that many Swedish comedies, so it isn't hard to stock all of them.)

A key part of Netflix's vision was the removal of late fees. If someone couldn't watch the movies for a month, because life became busy, that was not a problem. They could watch the movie as soon as time availed itself, putting no pressure or guilt on the renter. A single monthly fee makes the entire thing easy and carefree. Electronic billing would make this all possible.

Innovation from Understanding the Experience

Apple and Netflix gained insight by investing in understanding the current experience of their potential customers. Those insights led to industry-changing innovations that have made an indelible impression on businesses everywhere.

As innovation is now the new black, experience design is the fabric of new insight. The work designers do is now the hot spot to be.

Get more on innovation tips from Scott Berkun's podcast Creating a Culture of Innovation.

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