Monday, March 26, 2007

Innovation Tools Part 1: Pick Your Nodes

Back when I was getting my MBA, one time, for no apparent reason, in the middle of a class, a fellow student blurted out the following:

“There are two kinds of people in the world: creative people and those who exploit creative people for profit. I plan on being one of the second kind.”

At first, I thought this guy was a little bit odd for blurting that out in the middle of class. But then I started thinking…I consider myself to be somewhat creative. Hey, this guy just blurted out that he wants to exploit me!

A lot of wealth can be created by exploiting the innovation that comes from creativity. It’s easy to understand why someone would want to be on the receiving end of that wealth. The problem is that there first needs to be some sort of innovation to exploit.

Although there is no sure-fire tool to instantly create innovation, there are some ways you can direct your thinking to help find innovative solutions. There is not enough room in this blog to discuss them all. Therefore, for the rest of this week, we will be looking at these ways of thinking one at a time.

The way I came up with these thinking processes was by examining all of the major innovations over the last couple of decades and then looking for common threads. I looked at everything from bottled water to ipods. I found about a half-dozen common threads. In today’s blog, we will be looking at nodes.

In every business system, there are various steps which get accomplished in order for a product or service to get from the original source to the final consumer. Each of these steps can be thought of as a “node” along a string. For example, in one type of business model, someone extracts raw materials which are then sent to a manufacturer who turns them into a product, which is then shipped to a warehouse, which sends the products to a store, that sells the product to the final consumer. In this example, each of these steps is a node (the extractor, the manufacturer, the wholesaler, the retailer, the consumer).

Most of the time, we tend to take these nodes for granted and assume that this is the natural order of things. In reality, there is nothing “natural” about this. It is just how a process evolved over time. It could have evolved differently. And more importantly, you can often change the process for your benefit.

So, thinking process #1 for innovation is thinking about ways to re-arrange the nodes. This can take three forms:

1) Taking away nodes
2) Adding nodes
3) Changing the order of nodes

We will look at each of these separately.

1) Taking Away Nodes
Another term for taking away nodes is the idea of being a disintermediary. In other words, in the current business model, there is a function of an intermediary who connects two nodes in the model together. Innovation would be finding a way to bring those two nodes together without the need for a third party in the middle.

The internet has provided a great many opportunities to eliminate a number of these intermediaries. For example, sites like Expedia and Travelocity have brought vacation providers and vacationers together directly without the need for a travel agent. The travel agent node is eliminated, as well as the cost of that node. The providers and the vacationers split the savings, making both better off.

A similar situation occurred with the elimination of the traditional stock broker node by trading on-line with companies like Etrade. Firms like Geico eliminated the traditional insurance agent node. Michael Dell eliminated the retail node in the selling of computers. Ashley furniture stores went direct to low cost countries to purchase their furniture, thereby eliminating the branded manufacturer and the independent importer nodes, giving them a cost advantage in the marketplace. TurboTax allows tax preparers direct access to knowledge without the need for the independent tax preparer node.

A U-Pick-It farm eliminates the node of hiring produce pickers and lets the consumer pick the produce directly off the plants. The farm in this example also eliminates the trucker node which gets the food to market, the grocery wholesaler node and the grocery retailer node.

Rock bands have found ways via the internet to create a following for their music and a way to distribute it without the need for the traditional recording label node (eliminating the need for the label’s manufacturing node, distribution node, and publicity node). The band may not sell as many CDs as a label could, but instead of only getting a dollar or two per CD, the band can get $5 or $6 per CD and still sell the CD for less than what a traditional label charges. Hence, they may end up with more money, because they don’t have to share the proceeds with the label.

Therefore, when trying to think of creative innovations to exploit, think about ways to eliminate a node.

2) Adding a Node
Just as taking away a node can revolutionize an industry, one can revolutionize an industry by adding a node that did not exist before. This is the process of adding an intermediary.

Buying cooperatives would be an example of adding a node. The idea is that instead of each buyer trying to negotiate separately with their vendors, a buying cooperative node would be added, which aggregates the needs of many buyers and negotiates a better deal with the vendors than the buyers could make on their own. The Worldwide Retail Exchange is one such cooperative, designed to help retailers purchase business supplies and technology less expensively.

EBAY is another example of the power in adding a node. Before Ebay, it was very difficult for sellers of unique items to find the people who wanted to buy these items. By adding the Ebay aggregation node, buyers and sellers find each other more efficiently. It is worth paying Ebay a cut of the proceeds, because the added efficiency is worth more than the fee. An now a second node is being added, the independent firms that help a person sell an item on Ebay and help package it to ship to the buyer, firms like Quick Drop or eAuction Depot.

Another example of adding a node is the ticket scalper. Rather than go directly to the ticket office to get a ticket, you go to the scalper. You may end up paying more, but the scalper does all the hard work of securing the ticket, something you may not be able to do.

Dating services like eharmony or are additional nodes providing a service which makes finding your mate more efficient.

People talk about the “long tail” phenomenon, where media growth will occur in the fringes rather than in mainstream titles for the masses. The problem is in finding which part of the log tale of niche genres are right for you. This is an opportunity for adding a node that helps you more efficiently search the long tale to find the music and movies that fit your particular tastes.

So innovation can also occur by adding nodes to a business system.

3) Rearranging the order of Nodes
A third way to innovate with nodes is to rearrange the order in which the nodes occur. For example, traditionally, consumers have been brought in at the tale end of the process. Recently, however, consumers are starting to get influence into the process earlier than before. In other words, the consumer node is getting pushed further back into the system. Examples include sites that give consumers more input into the design of a product. For example, M&Ms has a site where you can design the words that are placed on the candies. Various news sources let the consumer in on helping to decide which news is presented. Sometimes, like with YouTube, the consumers produce the products themselves.

Rather than warehouse a lot of inventory, the manufacturing of a product can now be moved to a point after which it has been sold. Thanks to digital technology, there are services that will print a book on site or download content on site to a disk or other device after it has been purchased. Dell would sell a computer before it was manufactured.

There are companies that will sell consumers long-term multi-year contracts on natural gas for their homes, placing the purchasing contract for utilities well before the use of the utility.

Don’t assume that just because something has always been done in a particular way, in a particular order with particular types of people, that it must always be done that way. Sometimes, a process can be made more efficient if you take away current nodes, or add additional nodes, or rearrange the order in which the nodes occur.

Sometimes, the most revolutionary innovations are not about creating an entirely new business system. Instead it is just tweaking the nodes in a current system to make it more efficient. And in the end, you get to pocket some of the efficiency savings.

If only I could figure out a way to eliminate the tax node…

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