Wednesday, March 18, 2009

Disruptive Innovation versus Continuous Improvement

I was at a seminar last week and one of the speakers shared a few great quotes which stimulated some thought and led to this. The two quotes were "Edison’s electric light did not come about from the continuous improvement of the candle…"-Oren Harari and "If I had asked people what they wanted, they’d have told me ‘a faster horse’!"-Henry Ford.

These quotes led me to consider what today's business leader's are looking for. Are they seeking the next great innovation that will change their business or are they trying to improve their existing core operational processes and get more efficient. I think the answer is both but I believe that continuous improvement is a lower strategic priority. I'll tell you what leads me to this belief and what its implications are for analytics professionals.

I have been working as a data mining/management consultant for 20 years helping large corporations get efficient by improving marketing efficiency, improve location selection, make less risky loans, eliminate fraud, improve manufacturing throughput - in a nutshell, trying to make analytics a strategic priority by marrying analytics and core operational process. Everytime a client has acted on the analytic recommendations (perhaps 1 out of 10 times) the results have been staggering in terms of return on investment. The other 9 out of 10 times, a great business case, clear findings and definitive recommendations have led to inaction. I have struggled to understand why many clients are not willing to act. In previous posts, I talked about transparency and willingness to act and these are some of the reasons. My current realization is that companies seek disruptive innovations because

1) A new innovation comes in an form easily recognizable to the experiences of a business executive, it's a new business model (internet channels) , a new product ( a light bulb, a car ), a new value proposition (combo meals at quick service) ... you get the idea

2) Innovations are exciting and understood by an organization's customers.

3) Continuous improvement requires analytic capabilities (not in abundance), sophisticated processes (measurement, tracking, forecasting), is not exciting (most retailers would rather have new iPod that sells like crazy than predictive forecasting models to improve merhcandise buying), not easy to understand, and invisible (Aside definition of invisible: bad direct marketing starts with a list of names randomly chosen, after building a data warehouse, hiring statisticians, building mathematical models, spending significant time and effort improving the process you end up with a list of names. The new and improved list looks no different than the original list. To prove it is better you have to set up and execute design of experiments and track business execution and generate sophisticated reporting to show on paper which list was better. Not obvious to say the least. The output of most analytic based continuous improvement activities leads to output which on the surface looks no different than what you started with).

4) In my experience people look for a silver bullet (disruptive innovation). Continuous improvement is not easy ... it is continuing to execute and be the "hamster on a treadmill"


My conclusion here is that analytics will always be a second class citizen to disruptive innovation unless we educate a new generation of business leaders and create new business management paradigms based on analytics. The implication for analytics professionals is that we will not get the strategic executive support required for significant corporate initiatives, we will continue to have to seek those few management individuals who understand the power of information and that the business intelligence/analytics industry will not achieve that status and promise that it should.

My belief is that continuous improvement through analytics will generate double digit bottom line gains (see my original Power of Information post) and that year over year continuous improvement will generate more return than disruptive innovation which happens on the order of a decade in most industries.

Companies who have focus on continuous improvement and use analytics to understand every operational facet of their business are those companies that will not only survive this recession but grow and gain the marketshare lost by their peers who have been looking for that silver bullet and hence have less insight into operations and less ability to make critical decisions about survival.

My recommendation is that companies should focus more on continuous improvement while keeping an eye out for disruptive innovation. If your organization is not analyzing your operations, start now. The business return from analytics can happen in weeks. It could be the difference between survival or failure.

2 comments:

kmax12 said...

"Edison’s electric light did not come about from the continuous improvement of the candle."

which of oren harari's books did this come from, do you know?

Anonymous said...

Good post Gary. Very insightful for a small article.