Innovation Can't be Measured in Dollars: Harvard Prof Stefan Thomke

Stefan H Thomke, an authority on the management of innovation, is the William Barclay Harding Professor of Business Administration at Harvard Business School (HBS). He is chair of the Executive Education programme, Leading Product Innovation, which helps business leaders revamp their product development processes for greater competitive advantage, and is faculty chair of HBS executive education in India. He is also author of the books Experimentation Matters: Unlocking the Potential of New Technologies for Innovation and Managing Product and Service Development. In this interview, he talks to Forbes India on the various aspects of innovation.

Q. Innovation is a very loosely defined term these days. How do you define innovation?
When I started looking at innovation more than 20 years back, it seemed to be a little crisper in terms of definition. Now it’s all over the place. Interestingly, The Wall Street Journal did an analysis sometime back where it counted the number of times the word innovation appeared in the quarterly and annual reports in the United States in 2011. They counted more than 33,000 times. It’s a much overused word.

Q. So what does the word really mean?
The word innovation itself really means two things. It means novelty and value. The value requirement is a really important point. And that makes it different from the word invention. Invention is a more legal term. It is about getting patents. If you have a name on your patent you know that value is not a requirement to get a patent. It just has to be new and non-obvious to get a patent. There are companies that have a lot of patents which have no value for anybody. So it’s an input to innovation.

Q. Innovation at times can be a really simple idea as well?
I was working once with a company in the area of in-vitro diagnostics. Basically they made equipment to do blood analysis. So when you go to a hospital, they draw blood from you and put it into a machine.

The machine analyses your blood and gives printouts. One of the biggest innovations for their customers was an algorithm, which was essentially a piece of software that ensured quality control. That was one of their main selling points and customers would basically buy their equipment because they highlighted that. They said that I have this insurance that when I run these tests the equipment automatically checks for quality and is actually very reliable. And they marketed that. From an R&D perspective, it was one of the easiest things that they have ever done. It was really just an algorithm that they figured out using data.

Q. That’s really interesting…
Yes. So sometimes, you know, the most expensive things are not necessarily the ones that provide the greatest value to the market and vice-versa as well.

Q. I came across a blog you had written on product innovation where you questioned putting more and more features into a product. Tell us something about that.
I wrote an article together with Donald Reinertsen and we talk about myths. This was one of the myths. Donald is also an expert on product development. And we have been in many meetings where the entire meeting is dedicated to discussing more and more features. There seems to be an assumption that we are basically done when we can no longer squeeze more features into a product. Presumably assuming that the more features a product has, the customer actually sits there and counts the features, and that somehow drives our ability to price it.

Q. And you don’t agree with this approach?
Sometimes you can actually add value to a customer experience by taking features out, by de-featuring. But that rarely happens. I have rarely been to meetings where the main purpose of the meeting was to remove features from a product with the intent to add value. Usually, when we sit around and discuss to remove features, it is usually because it is too expensive, it is not manufacturable. Maybe what teams should do is think about when they can no longer take things out of a product rather than when they can no longer add things to it. It’s a very different way of thinking about it.

Q. Making things simple is difficult…
We often talk about it as a quote attributed to Leonardo da Vinci that simplicity is the ultimate sophistication. To make things simpler is very hard because that requires you to have a very deep understanding of what the user really wants. And once you have that deep understanding, you have the confidence. Mark Twain once said, if I had more time I would write a short letter. In fact, that should be true in your field as well?

Q. Yes, longer pieces are easier to write.
Exactly. And the same is true about innovation. Creating something out of a lot of bells and whistles is a lot easier to do sometimes than actually creating something that has the essential features, because that requires a lot more thought and a lot more research.

Q. Can you give us an example on this, other than Apple?
A small example is the Danish company, Bang & Olufsen. They make very, very high-end speakers, stereo systems, etc, which are beautifully designed. These speakers are one of the most expensive speakers that you can buy. But there are no buttons for adjusting the frequencies; you just have the volume button. That’s it. What they have done is that they have created products that are very expensive and they have taken away all the controls that normally you would like to have.

Q. How did they get away with that?
They set themselves a very interesting standard. They said, when you listen to something on our speakers, it should sound like the real thing. And we believe that no user will be able to get close to that by tweaking a few buttons than the way we set it up. So they set their standards to be very high and said we don’t want the users to fiddle with it because we are getting as close as we can. All we want you to do is turn the volume button up and down. It’s quite contradictory. You would imagine that if you are charging all that money you would want to give more control to the customers.

Q. But a lot of people love fiddling with features…
Yeah. There is always a market for everything.

Q. If you look at mobile phone marketing, the selling point seems to be features...
Look at Japan for example. If you look at Japanese mobile phones, they have more features than anything you can imagine. You can watch television on them. They’ve got everything on these phones. But when you ask Japanese consumers, one of their problems is that they are so complicated to use. Not surprisingly, the iPhone has one of the highest penetrations in the Japanese markets. So the question is how can that be? It is more expensive. It has less technology in it. It has fewer features in it and yet it has one of the highest penetrations in terms of growth.

Q. That’s an interesting example…
The reason why I came up with this observation is because I bought this toaster, which came with a manual and had a little LCD display on it. And it set me thinking. I bought an iMac and it had no manual and I bought a toaster and it came with a manual that thick.

Q. There is no manual with an iMac?
No. There is no manual with an iPhone. You just get a little leaflet in there in terms of what to do if something goes wrong. In fact, when Steve Jobs came back to Apple, one of the first things he did was he took manuals away from developers. The belief was that manuals are for developers who don’t know how to make it intuitive. So, as a developer, if we don’t know how to make it intuitive, we think that there is always the manual where we can write down and explain how it works. The problem is that nobody ever reads a manual. So the perfect solution was let’s just take away the manuals from the developers. If you cannot explain it, if you cannot make it intuitive, then don’t do it.

Q. Do organisations become less innovative as they become large?
I wish I could give you a yes or no response. There are actually certain advantages that come with size and there are some disadvantages that come with size. As you get bigger, you have a momentum. You have an established customer base. Sometimes you can take a long-term view as well because you’ve got an ongoing business and you can afford to wait a little bit. But you have some disadvantages as well. You’ve got a customer base that may hold you back and drive you in a different direction. As you get bigger, you need to have processes and procedures for co-ordination that are often then viewed as bureaucratic.

Q. Can you give us an example of a large company that is innovative?
Take a company like BMW. It is very innovative. Right now, they are launching the i3 which is an extremely innovative car. It’s a fully electric car. But that’s not the only innovation. They also figured out how to actually make the entire body shell out of carbon fibre. This is an example of great innovation in all dimensions. They had to come up with a process innovation. Carbon fibres are basically carbon bodies, very light structures that go into very high-end automobiles. For example, Formula 1 cars are typically made from re-enforced carbon fibre bodies. You need to bake them. It’s a very labour-intensive process.

Q. And BMW changed that?
They couldn’t follow a manual process for a car like this because they want to mass manufacture it. It would be way too expensive. So they had to actually innovate in manufacturing. They had to automate the production of carbon fibre. And it changes everything. Once you make the body of your car from carbon fibre, things like crash dynamics totally change. Then there was the electric side of it as well. The i3 is coming out this fall. The whole project was more expensive than any of the car platforms that they have developed recently. Estimates are of around $1.5-2 billion. It’s a huge risk and they don’t know whether the car is going to sell in enough numbers. It is going to be priced pretty close to $35,000-40,000 in the United States and close to around €35,000 in Europe. This is a huge bet that they are placing.

Q. And they are able to do it because they are big?
BMW is a very big company. A small company may not be able to take that bet because they don’t have the expertise. They may have the expertise in one area but they don’t have all the different knowledge bases that this will require to put it together. So BMW has the deep expertise. They are very profitable. They can afford it. Whether they can afford to let the i3 fail—that remains to be seen. If it fails, that will be a big dent. But they can afford to put $2 billion into something like this which could really change the future not just for BMW but for the car industry as well. So, large companies can be innovative.

Q. No interview around innovation is complete without talking about Google. The company keeps doing many things, but other than their AdSense business, nothing really has been a big money spinner.
That’s been making a lot of money.

Q. Innovation should also lead to some profit. How do you explain the disconnect in the case of Google?
I am no expert on Google. There are two ways to look at it. One way is the way you describe it. They have got one business model essentially and they are trying all these things. None of it, at this point, seems to be able to create another business model or another source of significant revenue for them. Another way of looking at it is that all the things
they do drive more traffic towards them. I don’t know how much money they are spending on Google Glass.

But that in itself is driving so much traffic to their site, which then increases the costs of the ads. They can probably pay for the whole project and more, just from the addition of the incremental traffic and the incremental ad revenue that one project created.

Q. This makes tremendous sense…
When you use Gmail, you are actually giving them information. They can actually use it to place customised ads. It’s the same thing with Android, which they give away for free. But by making Andorid available for free, it’s all on the mobile phones and gives them access to mobile phones, which then allows them to do ads on mobile devices. You can see the whole logic. All these things ultimately lead back to their fundamental business model, which is the ad model. I bet they are trying really hard to think of other ways at one level, but at another level they are probably thinking about an ecosystem that they are trying to create that ultimately drives people back into the ad space, and gets more information about them.

Q. So basically they won’t allow any other search engine to come up…
They won’t want to do that. Of course not. They want traffic. The worst thing that can happen to them is traffic going somewhere else and the ad revenue falling .The whole business model will go away.