Benny and his friend Griffin at Ocean Beach in San Francisco.

Thursday, July 12, 2012

Just Enough Innovation

So I’ve finished David Halberstam's history of Ford and Nissan for the fourth time since 1990. It's called The Reckoning and much of what Halberstam wrote still rings so true today.

There's a whole section about how the stock market changed companies. It used to be that only rich people owned stocks and they thought long-term. They didn’t expect ever-exploding dividends and hot growth trajectories. Then everyone started buying stocks and the hot stocks weren’t the old blue-chip Fords and U.S. Steel and others, but hot new companies like Polaroid (ha ha). Suddenly ever-increasing divedends were required and managers started thinking short-term rather than long. The new customers were the stockholders, not the people who actually used the product. It warped all the decision making. Investing in the company could hurt the balance sheet, which could hurt the stock price, so managers said no. If the customers were still willing to buy the product, why improve the quality? It was the quality of the stock, not of the product, that mattered.

This new Wall Street also lured the best and brightest into making money in the stock market. These people no longer went into companies and pushed them to innovate, the way those Japanese hotshot engineers transformed how Nissan made their cars. The hotshot engineers were at a car company because that was the only place they could go – they couldn’t build planes or ships. And they transformed the company, took it away from the old-school designers who just made a big iron frame and piled the components on it. Easy engineering. The new guys designed the structure in pieces and balanced the components. Lighter, better, more graceful. This would not have happened if those engineers were making tons of money doing something else.

So what does that say for true innovation in business today? I suppose it’s true that, like everything else in business, innovation follows the money. The hot tech companies with venture capital have the money, so they get the innovation. The companies that truly need innovation only get it if there’s a lot of money to made innovating. A lot of that innovation isn’t in improving the product, but squeezing out maximum profit for minimum investment. A behemoth like Comcast has already proved you can treat customers like crap for decades and it won’t matter if you have a stranglehold. The same goes for airlines.

Even a great company like Netflix — so innovative and high-tech and new-paradigmy — showed it wasn’t immune from such behavior. It revealed that it was just as greedy and contemptuous of customers as any other business with its attempt to spin off the DVD side. It thought it had the leverage to get away with it. Any company that provides a truly vital service — not just printing digital pictures or giving pedicures, but something people really need like banking or cable or plane flights  — can totally screw the customers.

And we customers are increasingly feeling exploited – companies not only want our time and money and loyalty, they want all our personal information so they can make money off that too. They’re like little Faustian demons roaming the earth, trying to find out the price for every soul. What will it take for you to cough up your email address, your zip code, your credit card number. Every day people must make these small decisions – is the convenience worth giving my email address or my name or my hometown? Is the ability to lovingly tend a virtual farm worth the permission to strip-mine my Facebook info and my friends’ info? Every day we must redraw the lines and every day the lines get weaker because, well, we’re tired and busy and the companies are so relentless, they ever tire, they prod prod prod at every weakness. That’s innovation today. It’s not about building something or creating something of value. It’s about creating just enough value so you can con somebody into paying for it, either with money or with information.  Too much value and you’re cheating your shareholders (or future shareholders). To little value and even consumers can see the con. That’s innovation today.

Well, you could argue that this is what capitalism is all about, finding the true market value for what you produce. That was definitely true when business was a little more personal. Big eggs are worth more than little eggs. You paid more for high quality and less for low quality. But it’s all so muddled now. It’s hard to discern the quality, especially with service and high-tech industries, where most of the innovation goes on now. What is a good bank account? It would take all day to figure it out.

I’m not quite sure what I’m saying here, but I do feel that the concept of scientifically determining the minimum acceptable quality down to a single click, kilobyte or interest point that will still sell is crappy innovation. It is nothing new; the Detroit carmakers in the 1960s and 70s sold crappy cars, they didn’t care about safety or quality or gas mileage because they still sold. They figured out to the dime how many fancy options they could pile on an already heavy car and what premiums they could charge for it. That was their innovation, while the Japanese were practicing true innovation with the cars themselves.

Does that mean American companies aren't innovating? Of course not. We here about American innovation all the time. But there’s two kinds of innovation: True Innovation and Just Enough Innovation. True Innovation actually improves the product, which means more value for the customer, which means you can charge more, and it’s a win-win, the customer gets a better produce or service, the company gets more money.  But it’s a risky kind of innovation and it’s difficult and the value doesn’t increase fast enough unless your product innovation is really hot like a minivan or iPod. This can be done with a new service that has real value, like Netflix.

Just Enough Innovation is a lot easier. You can do this kind of innovation an couple of ways. In the first way, you take a product or service — it’s easier with a service because it’s all perception anyway. You take a product or service that already exists and you tweak the hell out of it to finagle more money out of the customer. Cable companies and banks and airlines are great at this. They cut service and pile on the fees. You can do it with a product – like Detroit did with cars — but it’s harder because there’s a minimum standard you have to meet, I mean, the car has to drive on the road. Anyway, you degrade the service or product just enough so you can keep making money.

The second type of Just Enough Innovation is to invent a new kind of service or product that has questionable real value — I mean, it’s hard to think people will really need it — but think of a way to con people into paying for it, either with money or info or both. Think Farmville or that website that keeps your passwords for you. You offer something new and hot and creative and smoke-and-mirror the hell out of it so customers think they’re getting a deal. Hey, I can play CastleVille for free!

This Just Enough Innovation is what many of the brightest minds in business are trying to do today. Either they’re trying to calibrate an existing service or product for maximum ROI and minimum value, or they’re trying to create something new to con customers into giving up something.

A valuable and meaningful mission for America, indeed.

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