Failure is inevitable in uncertain environments, and, if managed well, it can be a very useful thing. In fact, organizations can't take the risks necessary for innovation and growth if they're not comfortable with the idea of failing.

As Columbia Business School professor Rita Gunther McGrath explains in "Failing by Design," in the April 2011 Harvard Business Review, the smart alternative to ignoring failure is to foster "intelligent failure." If your organization can adopt the concept of intelligent failure, it will become more agile, better at risk taking, and more adept at organizational learning.

Here are seven principles that can help your organization leverage learning from failure.

Principle 1: Decide what success and failure would look like before you launch an initiative.

People working on the same project often have entirely different views of what would constitute success. In one case, an organization that made environmental remediation equipment was hoping to introduce a new product line.

The marketing group thought the equipment's selling point was that it met a tough new regulatory standard. The engineering group thought the point was cost-effectiveness — and to keep costs down, it was designing out the very features the marketing group wanted to sell.

This gap in understanding could easily have led to a failure of the unintelligent variety. But the company found out about it in time to get everyone on the same page and prevent what could have been a marketplace disaster.

Principle 2: Convert assumptions into knowledge.

When you're tackling a fundamentally uncertain task, your initial assumptions are almost certain to be incorrect. Often the only way to arrive at better ones is to try things out.

You shouldn't start experimenting until you've made your assumptions explicit. Write them down and share them with your team. Then make sure that you and your team are open to revising them as new information comes in. The risk is that we all have a tendency to gravitate toward information that confirms what we already believe — it's called confirmation bias.

A practical way to address this bias is to empower one of your team members to seek out information that suggests your course of action is flawed. You want to find disconfirming information early, before you've made extensive commitments and become resistant to changing your mind.

Organizations that don't record their assumptions tend to run into two big problems:

• First, assumptions become converted into facts in people's minds. During a meeting, a manager might venture a guess that a given market could generate $5 million in sales — and before the meeting ends; the $5 million is baked into next year's budget! This sort of leap causes all kinds of dysfunctional behavior when the guess, almost inevitably, turns out to be wrong.

• Second, such organizations don't learn as much as they could.

They may right their course as they proceed, learning as they go, but if they're not rigorous about comparing results with expectations, the lessons won't be explicit and shared, and future projects won't benefit from them.

Having spelled out and revised your assumptions, you should then design the organizational equivalent of an experiment to test them. As with a scientific experiment, the idea is that whether or not the outcome is what you'd hoped for, at least you will have learned something.

Principle 3: Be quick about it — fail fast.

Quick, decisive failures offer four important benefits:

• First, they can save you from throwing additional resources at a losing proposition.

• Second, it's much easier to establish cause and effect when actions and outcomes are close together in time.

• Third, the sooner you can rule out a given course of action, the faster you will move toward your goal.

• Fourth, an early failure lessens the pressure to continue with the project, because your investment in it is not large.

A practical way to help ensure that any failure happens quickly is to test elements of your project early on. This is the main reason that "agile software development" often produces better results than the more conventional sequential process of systems design. In an agile environment, small chunks of code are written and shared in a quick, iterative fashion with other programmers and users before the team moves on.

This is in sharp contrast to the approach in which analysts spend months documenting user requirements before submitting those requirements to programmers, who only then begin coding. By the time a problem is discovered, a project could have been heading in the wrong direction for years.

Principle 4: Contain the downside risk — fail cheaply.

This is an important corollary to failing fast. Initiatives should be designed to make the consequences of failure as small as possible. Sometimes it's valuable to test a small-scale prototype before making a significant investment.

For example, when the Japanese cosmetics firm Kao was considering going into the manufacture of floppy disks, a big question was whether or not customers would buy Kao-branded disks. So the company went to another manufacturer and bought disks that met its quality standards, put the Kao label on them, and offered them to customers. The response was positive, so the plan moved forward. Had the response been negative, Kao could have stopped the project without incurring substantial costs.

Principle 5: Limit the uncertainty.

It's wise to minimize the number of uncertainties that need to be resolved at any particular decision point. One way to do this is through what Chris Zook, of Bain, calls adjacencies. For example, you can introduce an existing product in a new market: IKEA sells essentially the same furniture in many different countries. You can offer your customers a new but related product: Wells Fargo has had a lot of success cross-selling. Or you can build a new business on the foundation of an existing capability: Air Products and Chemicals has done this with its plant management capabilities.

The point is to learn from failure (and leverage success) in areas that are fairly close to your established activities. For the best results, limit major uncertainties to those that relate either to the market — pricing, acceptance, form factor, and so forth — or to technology and capability issues — standards, scalability, availability of talent, and so forth — and avoid taking on uncertainties in both dimensions at once.

Principle 6: Build a culture that celebrates intelligent failure.

People often fear that their career prospects will be in trouble if something goes wrong on their watch. And, of course, they're often right. Senior managers need to create a climate that encourages intelligent risk taking and doesn't punish any failures that result.

This is an area where CEOs can show strong leadership. A.G. Lafley made fearlessness in the face of failure a core tenet of his time at Procter & Gamble. He said repeatedly that a very high success rate is a sign of incremental innovation, and that he was looking for breakthroughs instead.

In his book The Game-Changer, he lists and even celebrates his 11 most expensive product failures, focusing on what the company learned from each.

Principle 7: Codify and share what you learn.

An intelligent failure whose lessons are not shared is worth far less than one that teaches something to the group or, ideally, the whole organization. There are many ways to capture and transfer learning. Among the most popular are mini post-mortems as a project proceeds, checkpoint reviews as key thresholds are reached, and after-action review meetings at the project's conclusion.

In each case, the point is to identify what the assumptions were going in, what happened, what that implies for those assumptions, and what should be done next. It is critical to avoid finger-pointing.

In an uncertain and volatile world, avoiding failure is not an option. If you accept this premise, the choice before you is simple: Continue to use practices that limit what you can gain from failures — or embrace the concept of intelligent failure, in which learning can create substantial value.

Peter J. Denning and Robert Dunham

The ruling buzzword in business today is innovation.  Technology companies invest billions in developing new gadgets.  Business leaders see innovation as a key to gaining a competitive edge.  And policymakers craft regulations to foster a climate of innovation.

And yet, businesses report a success rate of only four percent of innovation initiatives reaching their financial objectives.  Can we significantly increase our odds of success and lower our expenses in creating innovations?

In our summary of The Innovator’s Way:  Essential Practices for Successful Innovation, Peter J. Denning and Robert Dunham reply with an emphatic yes.  They remind us that innovation is not merely an invention, a policy, or a process to be managed.  It is a personal skill that can be learned, developed through practice, and extended into organizations.

Denning is Distinguished Professor, Chair of the Computer Science Department, and Director of the Cebrowski Institute for Information Innovation and Superiority at the Naval Postgraduate School in Monterey, California.  He is the author of The Invisible Future and other books.  Dunham founded the Institute for Generative Leadership and the consulting company Enterprise Performance.

Denning and Dunham found that the best innovators had personal success rates far above the dismal industry average of four percent.  By examining what these innovators do, they discovered eight personal practices that all successful innovators perform.  This summary will help you to understand and master those eight practices.

Even when cash is tight, businesses don't have to stop innovating. Fortunately, it is possible to launch new offerings that excite customers and respond to unserved needs. The trick is to find assets already in hand that can be brought to market with minimal effort and resources.

In "Innovating on the Cheap," in the June 2011 Harvard Business Review, the authors reveal the six kinds of "in hand" innovation that can lead to big profits at low cost.

Lance A. Bettencourt is a strategy adviser with Strategyn and author of Service Innovation: How to Go from Customer Needs to Breakthrough Services. Scott L. Bettencourt is the CEO of Gardman USA.

Most managers think an innovation must be something absolutely, completely new. Yet the reality is that almost all companies have previous discoveries with overlooked innovation or market potential. The work is done, and the risks are low. All it takes to realize a swift payback is for the company to uncover the hidden possibilities.

Managers should look for:

1. Innovations that were previously developed but never launched, owing to circumstances that may have changed.
2. Features of past products that may meet newly critical customer needs.
3. Existing offerings that should be repositioned, because customers like them for unforeseen reasons.
4. Elements of bundled offerings that could stand alone.
5. New combinations of elements, in which the bundled value to customers is greater than the sum of the parts.
6. Overdesigned offerings that could be pared down for less-demanding customer segments.

Let's take a look at each of these types of low-cost innovation, and explore how you can search for opportunities in each area.

First, when a product concept fails to launch, it tends to be set aside and labeled a loser. But in almost every case, time and money spent on it yielded something useful, and that something might be just what is needed today.

This turned out to be the case when Ryobi Tools introduced a band saw in 2004 that featured a dust collection system called Silent Vac. That was a new concept to customers but an old idea to people at Ryobi: The Silent Vac had been developed years earlier for a benchtop sander that never made it to market.

How can you apply this lesson to your business? Create a storehouse of rejected product concepts and make a habit of revisiting it. Do the failed concepts have innovative features that might apply to different markets? Are the reasons that the innovation didn't fly even still relevant? If the obstacles have disappeared, the company may have an innovative product ready to go to market with only a modest investment.

The second route to low-cost innovation can be a product that did go to market — but had features that were not fully appreciated. As times change, customer needs that were secondary in importance may become primary. Often a company already has a product that meets the newly critical needs.

When Rain Bird introduced its spray nozzles for lawn sprinklers, the Dual Spray series, their number one selling point was that they solved a coverage problem. If you've ever used a spray sprinkler, you know the downside: As it moves through its compass points to water a large circle of lawn, it overshoots the area closest to the nozzle, leaving a brown spot.

Rain Bird's innovative solution to this problem was a nozzle with a second opening to distribute water within that zone. A by-product of this innovation was that less water was needed to cover the same area.

Today, water conservation has become a major concern. As a result, Rain Bird has begun actively promoting the increased efficiency of the Dual Spray series. The company has taken a capability it had all along and, by featuring it more prominently in communications to retailers, caused them to take a renewed look at the series for premium shelf placement and product bundling.

How can your company uncover innovative features that are hiding within a current solution? The best way is to develop an up-to-date prioritization of customer needs and then reassess the capabilities of existing products in light of it.

The trick is to identify not only the needs that are most relevant to customers now but those that may be in the future, and closely monitor how their significance to customers changes. Focus on the job customers are trying to get done — in this instance, watering their lawns — and document the criteria by which they judge how well a product does it, such as minimal brown spots and less water use. Periodically examining those criteria will help you discover product features that may be ahead of their time.

The third opportunity for low-cost innovation comes when an offering succeeds despite its marketing. Companies can launch products but have an imperfect understanding of how customers are using them or why they choose them. Sometimes customers find out about products that fill their needs even when the company behind them isn't getting the word out.

For example, Rain Bird's offerings traditionally featured two basic kinds of products: drip and spray. One product, the DC-6, was part of the drip offerings, but it had an unheralded capability: It could replace a spray-head nozzle to get drip action out of what would usually be a sprinkler.

At some point, Rain Bird noticed that sales of the DC-6 had suddenly taken off. The retailer's merchandiser, it turned out, had stocked the DC-6 alongside spray products rather than with the drip systems. The unexpected surge gave Rain Bird a new insight: It had underestimated the number of customers who would be interested in converting their sprinklers to drip.

Capitalizing on that realization was an easy next step. In 2010, Rain Bird changed the name of the product line to Convert to Drip and repositioned it for the job it filled. Sales took off instantly and continue to grow. Rain Bird had introduced a new product line at a small fraction of the cost traditionally involved in new-product development.

It may well be that your company is also failing to capitalize fully on an offering. Ask yourself: Have we made the connection clear between the products we offer and the jobs they help customers do? Have some jobs grown in importance since these products were launched? If so, can any of the products we already have help customers get them done?

If customers are using a product in a way that the company had not thought about, the company may be sitting on an innovation. It may simply need to align branding and messaging with the new use.

The fourth route to innovating on the cheap is unbundling. Companies often bundle products together. An in-hand innovation can be wrapped up in such a bundle, waiting to get out. The managers of Craftsman, a brand of tools owned by Sears, discovered precisely such an opportunity in 2005. In a focus group about power tools, a customer lambasted Craftsman for a promotion bundling a work-space light with a cordless drill.

Skeptical of the "free with purchase" offer, the participant figured the price must include the cost of the light, and he hated the idea that he might have paid more because of it. However, when the moderator asked if he would like Craftsman to take his light back, the answer was a resounding no.

"That light is my most used tool," the participant said. "I wish I had another." With that, a light went on for the Craftsman marketers who were watching. The work-space light had never been offered for sale on its own; it had only been bundled with the drill to promote sales. Clearly, it had the potential to succeed as a stand-alone offering.

Within six months, Craftsman launched its new line of C3 power tools, including products that already existed in the company's portfolio but had previously been offered only in bundles. Among them were the Craftsman C3 19.2-volt Work Light and the Craftsman C3 19.2-volt Fluorescent Light. Within two years of their introduction, those lights were the two top sellers in the entire C3 line.

To uncover an innovation that is currently all bundled up, a company should first ask sales and customer service personnel if customers are trying to buy individual items within a bundle. That is a leading indicator that the items can satisfy a need above and beyond other solutions on the market.

The fifth type of low-cost innovation is the opposite of the fourth. Companies can create considerable additional value by selling previously unbundled items together.

Until 2004, Microsoft viewed its Software Assurance offering simply as a vehicle for the efficient purchase of upgrades. In exchange for a flat fee, corporate customers who signed a multi-year contract received operating system upgrade rights. However, with renewal rates declining, Microsoft looked at upgrades from a different angle: as one step in the job of managing the life cycle of a software license.

That life cycle included assessing upgrade needs, implementing licensing renewals, and managing software licenses once purchased. Microsoft realized that Software Assurance was helping customers with just one piece of that job. Many of the customers' most important unmet needs related to the other steps in the job.

The company also realized that it had already developed products that would help customers satisfy those needs and get the entire job done; they had just never been packaged together.

For example, customers were having difficulty anticipating potential software incompatibilities when they installed a new operating system. Microsoft already had a tool that addressed this problem — one that it had been using internally. This tool and many others were subsequently introduced to the market as part of a redefined Software Assurance offering. In the year Microsoft announced the changes to Software Assurance, the offering beat its sales goal by more than 10 percent, and renewal rates and revenue have continued to grow ever since.

To discover innovative ways of bundling current products, take a step back and ask: What job do these products help a customer get done? Because the same product can be hired for multiple jobs, take time to identify all the possibilities.

Next, take a particular job and consider the steps required to execute it completely. Those steps may include determining goals and resource needs, gathering required inputs, preparing or setting up, verifying readiness, carrying out the core job, assessing job execution, making required adjustments, and finishing the job. By looking at the products and services that customers hire for each step, you can identify innovative bundling opportunities.

The sixth type of in-hand innovation involves products that are overdesigned for the masses. Companies tend to focus their innovation efforts on the most demanding customers. To address these customers' unmet needs, they introduce next-generation products and services that provide enhanced performance. But value begins to deteriorate for many people in the market because the cutting-edge offerings are overdesigned for their use.

In that situation, a company can reduce the number of product features for the less-demanding segment and create a "good enough" product. Usually, it takes very little development time and few resources to bring a pared-down product to market.

Although this strategy is relevant even when the economy is strong, it's especially relevant during economic downturns, as customers look to trim their spending. An offering with fewer features can expand the entire market by making a product line accessible to segments that hadn't considered it before.

Craftsman found itself in this position a few years back with its C3 cordless drill. Although demanding users appreciated the capabilities of the drill, many features were simply overkill for the typical user, who needed it only for the occasional home repair.

To reach this user and introduce him to the C3 line of power tools, Craftsman created a drill with a gearbox that had one speed instead of two, 125 inch-pounds of torque instead of 410 inch-pounds, a three-eighths-inch keyless chuck instead of a half-inch one, and one battery instead of two.

These changes required only simple tooling and motor modifications and did not undermine the quality of the drill. In the year the one-speed drill was introduced, the C3 line gained twice as many new users as expected. Originally intended as a one-time promotion, the drill was such a hit that it's now a standard part of the C3 line.

Nearly every market has segments that are more demanding and segments that are less demanding. A product is overdesigned for a segment if its members don't consider the secondary needs the product addresses to be important.

Consider whether features can be pared back or removed because they are intended to satisfy needs of relatively low importance to the segment. Once again, a focus on the job customers are trying to get done and the outcomes they use to assess how well an offering does it will help companies identify more- and less-demanding customer segments.

As Peter Drucker once wrote, a company has only two basic functions: marketing and innovation. To win customers and stay ahead of the competition, innovation is critical.

However, in searching for the next great thing, companies should be careful not to overlook commercially viable offerings that they already have under their noses. These can be brought to market faster and more cheaply than ideas still on the drawing board, and often, at much lower risk. To amend the familiar proverb: An innovation in hand is worth two in the lab.

REFERENCES

Harvard Business Review, June 2011, “Innovating on the Cheap,” by Lance A. Bettencourt and Scott L. Bettencourt. 

© 2011 Harvard Business School Publishing.  All rights reserved. 

To view or purchase this article, please visit:

http://hbr.org/2011/06/innovating-on-the-cheap/ar/1

Peter Sims

Most creative professionals and entrepreneurs have one trait in common:  They make a series of little bets about what might be a good direction, and then learn from minor failures and small wins that allow them to arrive at extraordinary outcomes.

By contrast, the majority of people believe they have to start with a big idea, or plan an entire project out in advance and try to foresee the final outcome before they act.

In our summary of Little Bets: How Breakthrough Ideas Emerge from Small Discoveries, by Peter Sims, you’ll learn a whole new way of thinking about how to break away from conventional methods of problem solving so you can unleash your untapped creative power.

Sims is the co-author, with Bill George, of the best-selling book True North.  His work has appeared in the Harvard Business Review, Fortune, and TechCrunch.  Previously, he worked in venture capital with Summit Partners, a leading investment company.

Brace yourself – you’re about to learn a set of simple but counterintuitive methods that will free your mind, enable you to make unexpected connections, and allow you to perceive priceless insights.

This is complete electronic library of the greatest titles ever written on the subject of innovation. It provides instant access to the best ideas from the most respected minds in innovation, including Gary Hamel, Robert Sutton, Warren Bennis, and over 40 others. And it features super concise, forty-five-minute audio versions of each best-seller for easy iPod listening.

7 reason you can't go wrong with the Innovator's Library

For the past 20 years, the growth formula for business has been to increase revenues by expanding product offerings and streamlining supply. But today, in a time of recession and digitization, the new challenge is to locate and capture "pools of high-profit demand."

How do you achieve this? Our summary of How Companies Win, by Rick Kash and David Calhoun,provides the answer. The revolutionary, demand-driven model you're about to learn has already proved successful for some of the world's most admired companies, including Best Buy, Anheuser-Busch, Hershey's, and Allstate.

The authors have the kind of proven track records needed to back up their revolutionary insights. Calhoun is CEO and Chairman of the Executive Board of The Nielsen Company. He previously served as the vice chairman of General Electric. Kash is the founder and CEO of The Cambridge Group, a growth-strategy consulting firm, and he is also the author of The New Law of Demand and Supply.

The principles outlined in How Companies Win will help your business run faster, cut costs, and deliver the high-quality products and services that are needed to win in even the tightest economic climate.

Today, creativity is more important than ever, but most companies are creatively bankrupt.  They constantly focus on cost-cutting, efficiency gains, and top-down control.  The problem is made even worse by the ever-escalating arms race for competitive edge.  When the dust settles, the only thing that can’tbe commoditized is creativity.  Creativity is what will separate the winners from the also-rans in the emerging world of business, and in life.

To demystify creativity and develop a system that could be used to nurture, manage, and grow creativity, Josh Linkner interviewed more than 200 thought leaders, including CEOs, billionaires, musicians, and entrepreneurs, to examine how they used creativity to drive their success.  In our summary of Disciplined Dreaming:  A Proven System to Drive Breakthrough Creativity, you’ll learn an easy-to-apply five-step process – Ask, Prepare, Discover, Ignite, and Launch – that will help you and your team discover new paths to profitable solutions.

Linkner is founder and chairman of ePrize, a dominant player in the promotions industry that serves 74 of the top 100 brands, including Coca-Cola, American Express, Disney, General Mills, Procter & Gamble, the Gap, Nike, and Microsoft.  He has launched three other high-tech businesses and won several business, technology, and design awards, including the Ernst & Young Entrepreneur of the Year Award, Crain’s 40 Under 40, Automation Alley’s CEO of the Year, and the Detroit Executive of the Year.

By mastering the key lessons in this summary, you’ll learn exactly how you can create profitable new ideas, empower employees to flex their creative muscles, and tap into the power of creativity to sustain a competitive advantage over the long haul.

For decades, companies have been using customer "requirements" to guide growth and innovation, yet failure rates are still high and breakthroughs are still rare.

What's the solution? Ignore the "voice of the customer." Instead focus on the "jobs customers need to get done" and uncover the "outcomes customers hope to achieve."

In our summary of What Customers Want: Using Outcome-Driven Innovation to Create Breakthrough Products and Services, by Anthony W. Ulwick, we'll show you how to use this secret weapon behind some of the most successful companies of recent years.

Known as "outcome-driven innovation," this revolutionary approach transforms innovation into a science from which randomness and uncertainty are eliminated.

Ulwick is the CEO of Strategyn, Inc., a pioneer and world leader in outcome-driven innovation. Since 1991, he has served as a consultant to Johnson & Johnson, Microsoft, Hewlett-Packard, AIG, and dozens of other leading corporations.

This summary details an eight-step approach that uses outcome-driven thinking to dramatically improve every aspect of the innovation process. Armed with this knowledge, you'll be equipped to reduce your company's failure rates, recognize opportunities before your competitors do, and create the products and services that your customers really want.

Businesses don’t succeed by inventing a better mousetrap.  They succeed by finding the best, most cost-effective way to get rid of their customers’ mice.

In industries ranging from health care to heavy machinery to financial services, service innovation is about finding new revenue streams by helping customers to get things done.

In our summary of Service Innovation:  How to Go From Customer Needs to Breakthrough Services, Lance Bettancourt, a strategy adviser at Strategyn Inc., explains that true service innovation demands that you shift the focus away from the solution and back to the customer.

You’ll learn proven ways you can design specific frameworks for discovering service innovation opportunities, whether you’re creating new services, improving existing ones, or adding supplementary services to your current offerings.  This is the essential guide to building a winning service strategy!

Innovation@Work 3.0 Members have access to the following videos:

LESSON 1: OVERVIEW (2:54)

A recap of Managing Innovation classes one through three.

LESSON 2: CORPORATE CULTURE DEFINED (7: 33)

Before discussing how you can create an effective innovation culture, we’ll first discuss what makes up corporate culture.

LESSON 3: A WILLINGNESS TO CANNIBALIZE ASSETS (4:53)

Innovation success sometimes depends on successful people to think the unthinkable.

LESSON 4: FUTURE ORIENTATION (8:19)

Why you need to know how future events are going to unfold so you can both exploit and shape them.

LESSON 5: RISK TOLERANCE (9:09)

When seeking to make innovation a way-of-life, you need to foster and promote a tolerance for risk.

LESSON 6: METHODS FOR MANAGING INNOVATION RISK (9:09)

Learn the three common portfolio management techniques proven effective in mitigating innovation investment risk.

LESSON 7: THE PRODUCT CHAMPION (7:34)

Now let’s discuss what makes up product champions and the role they play in an innovation culture.

LESSON 8: INCENTIVES FOR ENTERPRISE (15:35)

This practice refrains from primarily rewarding people for the management of current products, businesses, processes, and markets.

LESSON 9: CREATION & MAINTENANCE OF INTERNAL MARKETS - PART 1 (8:34)

A practice that supports two very important aspects of the innovation culture: internal autonomy and internal competition.

LESSON 10: CREATION & MAINTENANCE OF INTERNAL MARKETS - PART 2 (10:16)

A conclusion of our discussion on internal autonomy and internal competition.