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The US Is Compounding Its Shortfalls In Innovation. Make Sure That In Your Business – And In Your Life – You Are Compounding Positively.

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Curt Carlson, the world’s leading authority on innovation and how to implement it, worries that the US is under-performing on this front – badly. 

On LinkedIn, he writes:

Almost all measures of innovative performance today are wanting.  Only 3% of patents recoup their investment; the rest are mostly waste that costs many tens of billions of dollars a year just in maintenance fees.  Only one in ten new venture-backed companies has any real success.  Most venture capitalists lose money, and 5% make 95% of the gains.  Only 20% of university tech-transfer programs break even, and those few are often the result of a new drug.  In our workshops with almost a thousand global teams from leading companies, universities, and government agencies, typically, only 25% of the projects under development would provide any meaningful new customer value if completed.  

This issue profoundly affects civilizational progress and quality of life. Innovation is value-creation and value-creation improves society for all.

Through innovation we address society’s grand challenges, create prosperity and jobs, and provide resources for social responsibility.  Consequently, one of society’s most critical opportunities is to improve our value-creation capabilities.  Improvements in value creation are exponential amplifiers of innovative performance.

He applies the term exponential in a carefully considered way. There is the opportunity for rapid, accelerated advance from where we are today to where we could be tomorrow. Problems can be solved quickly. Conditions we experience as disappointing or even dismal can become uplifting and exciting in a short period of time.

That is, if we are innovating and generating new value.

The opposite is also true, however. Compounding works in reverse. If we fall behind, the distance we have to go to recover becomes exponentially longer. If this year, we realize only 50% of our value creation potential, then next year or in the next relevant period, we’ll have 50% of the resources we would otherwise have had, and we’ll drop to 25% of potential, and so on and so on. The shortfall compounds and our level of performance declines exponentially.

Professor Per Bylund of Oklahoma State University has the same concern about our country’s economic under-performance. He gives a name to the gap between the value that’s actually created by entrepreneurial businesses and what could have been created: The Unrealized. In his book The Seen, The Unseen, And The Unrealized, he describes this value generation shortfall in economic terms, and attributes it to government regulation. Whether in the form of legislation or bureaucratic rule-making, regulation distorts the market, redirecting entrepreneurial creativity into channels favored by politicians and government departments, or curtailing it with enforcement rules, or prohibiting it entirely in some cases. The regulated economy simply can’t evolve and grow in the same way it would if unhampered.

The Unrealized is, similarly, a compounding problem. The number of regulations increases each year, so The Unrealized expands and grows each year. If the economy grew at only 50% of its potential in a base year, then the next year is constrained in the base from which it grows, and this negative compounding extends annually into the future, forever. Since regulation has been with us for a couple of centuries, the compounding of The Unrealized is incalculably high. We simply can’t imagine the dimensions of what could have been. 

Einstein famously said about compound interest that it “is the eighth wonder of the world. He who understands it, earns it…..he who doesn’t….pays it”.

Unsurprisingly, given the source, this is a very important observation. Compounding can work for us or against us. Saving and investing and re-investing can compound in our favor. Interacting more and more with smarter and smarter people can compound in our favor. Iterating a creative idea in critical forums can compound its innovativeness and applicability until it breaks into the market. Exercising and healthy eating every day can compound for us as we age, making us relatively more and more healthy than our age cohort and standard norms. 

The same is true on the negative side. As Einstein said, if we don’t earn compound interest, we pay it. If we get into debt, interest is working against us, especially if we borrow more and more. If we are not continuously engaged with other smart people and iterating our ideas with them, we are less and less likely to make a creative breakthrough. And if we permit ourselves to avoid fitness activities and if we eat an unhealthy diet every day, we are making things worse for ourselves at compounding rates. Every day we are a little less healthy and fit than we could have been – every daily sugar intake, or alcohol intake or cigarette smoke intake compounds, so that, every day, the impact of unfitness and bad diet is a little more harmful on our less-fit body than it would otherwise have been.

Curt Carlson and Per Bylund teach us to concern ourselves with the compounding of The Unrealized in value generation activities. We should bear this in mind – and, at the same time, make sure that compounding is working for us in our personal and family life.

What Is This Wonderful Institution We Call Entrepreneurship? It’s A Force For Social Good.

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What exactly do we mean when we use the term entrepreneurship? The theoretical definition is the intentional pursuit of new economic value. Intentional means people – entrepreneurs – do it, either as individuals or teams or in an institutional setting like a firm, or a business or a corporation. Value means that there are other people who benefit as recipients, and become better off. Pursuit means that the people who conduct the process are not guaranteed a successful outcome every time, and may take a while to establish the right recipe and the best practice. New means continuous innovation and improvement for those recipients of value. And economic means it’s an ever more efficient use of the resources available to us, free from politics, that mean and vicious fight over dividing the pie that the entrepreneurs have so generously baked. 

Yet, beyond this definition that comes from economics, there is something even greater and more expansive. Entrepreneurship is a social force for good – the greatest such force that has emerged from the long and checkered history of civilization. And if we employ the entrepreneurial method that makes it a force for good, we can achieve greater and greater levels of community, collaboration and societal advance.

Innovation and improvement

To continuously improve people’s lives, we need new things. We need people to invent things that haven’t been thought of before. And we need innovators, people who improve those things and find new purposes for them or new ways of producing and distributing them. And we need entrepreneurship, the marshalling of resources to produce these better things faster and more efficiently and get them into more people’s hands.

Entrepreneurs are those unique people who organize the marshalling of resources, and who risk their own capital and their investors’ capital in this pursuit of a better future for all.

Cascading Development

When entrepreneurs undertake this act of discovery, and especially when they succeed, they trigger cascading development. One innovation and entrepreneurial initiative leads to another. They are all aimed at making people’s lives better – easier, more convenient, more affordable, more efficient. And, eventually, knowledge spreads, and people’s lives are transformed, so that Indian peasant farmers can check produce prices on their smartphone and get the best offer from the market. Development cascades from individual to individual, firm to firm, market to market and country to country. It’s never-ending improvement.

Long termism and ethical behavior

The outcome is long term uplift and benefit for all. Entrepreneurs are long term thinkers. They are focused on the lifetime of their company and their products, and perhaps to passing them on to the next generation. (Politicians are the opposite – they can only think in election cycles.)

Entrepreneurs don’t want to just make a short term profit and then leave the market. They want long term revenues and long term profits. That means creating reliable, returning customers who love the entrepreneur’s product. That requires delighting those customers, serving them impeccably, never letting them down or breaking a promise. There are few, if any, institutions that are constituted in this way.

This long termism is ethical. Entrepreneurship is ethically driven.

Internationalism

A small firm can trade on a global stage, and if they can, they will. It’s easier than ever before in the digital era. New and better ideas quickly spread around the world. But it has always been the case, since the earliest of times. Politicians establish borders to divide people, and then violate them in invasions and wars. Entrepreneurs see no borders between people. Political borders can’t divide markets. 

Social good

Entrepreneurship achieves more for social good than any other institution. Entrepreneurial innovation in goods and services enhances life and opens up new possibilities. Customers flock to entrepreneurs because of the tremendous service they deliver. The constant improvement delivered by entrepreneurs constitutes civilizational progress. The competitive pressure to improve quality and utilize resources more efficiently generates more and more value for the world. 

It’s an error to see business as extractive – extracting and using up resources. Business is generative, putting life-changing inventions at the disposal of the global population. What’s seen is the dirt and smoke left over from mining or manufacturing. What’s not seen, and often unappreciated, is the huge amount of good that comes into the world via entrepreneurship.

Entrepreneurship is the application property rights at every scale

It’s another error to think of entrepreneurship as small business or young and immature business. Ray Kroc of McDonald’s was a great example of an entrepreneur who worked out how to operate a hamburger restaurant at global scale with continuous improvement. Entrepreneurship requires property rights; people need to have control over their property in order to transform it into marketable innovations and services. But that does not limit the scale of entrepreneurship. Property rights are a principle that supports global scaling.

The entrepreneurial method

Probably the best way to define entrepreneurship is as a process or a method. It’s akin to – and as important to civilization as – the scientific method, but different. They both involve trial-and-success, coming up with ideas and testing them. The scientist tests against reality, looking for a law, a repeatable outcome that will never vary. The entrepreneur tests against consumer approval, looking for acceptance that might be repeatable until conditions change, such as new competition arriving. Entrepreneurs can’t predict the future as scientist can, and they can’t exert control in the form of unchanging laboratory conditions. Yet they still are challenged to build  a business that lasts.

Can we nurture this institution?

Yes. In school, via literacy and entrepreneurially-oriented education, teaching young people about profit, and uncertainty and the requirement for supportive environmental elements such as property rights and flexible labor laws, and the value of trying multiple different initiatives before discovering a winning proposition. We might not be able to teach successful entrepreneurship, but we can create the conditions for learning. 

Entrepreneurs Are Those Who Refuse To Accept The Status Quo – In Business, Politics, Institutions And Society.

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Entrepreneurs refuse to accept the status quo. Their function is to create new economic value for their customers, and thereby to profit for themselves, both financially and psychically. They do this by introducing new products and services to the marketplace, designing and implementing new processes, adding value to others’ inventions by turning them into market-wide innovations, and offering new pleasures and satisfactions and solutions that no-one knew of or imagined.

The pursuit of new is a refusal to accept the status quo. That includes any and all existing market conditions and structures, any monopolistic incumbent firms, any regulatory barriers, any capital shortages, any “it can’t be done” pessimism. 

We think of entrepreneurs in economic terms, market movers dealing in goods and services, taking dollars and cents in exchange. But the entrepreneurial mindset and the entrepreneurial process can be applied in many more contexts where the status quo requires a challenge and change is called for. Functional entrepreneurship is a process that can be described as a series of steps:

  • Development of entrepreneurial belief. An entrepreneur develops and continually adapts and polishes a belief about the status quo that no-one else holds. The belief is that the status quo is inadequate, wrong, or susceptible to improvement. For whom? For customers – i.e. not for the entrepreneur herself but for others. The status quo is under-serving others, and the entrepreneur is determined to fix that error. The entrepreneur, of course, expects to get something back in return, which could be psychic fulfillment (a sense of purpose and meaning from being the status quo buster) as well as profit (which is the financial signal to the entrepreneur to keep going). It all starts with dissatisfaction and the belief in the possibility of eliminating it.
  • Alignment with customers: As the entrepreneur develops the belief, she or he continuously aligns with (potential) customers. Am I getting this right? Does what I believe align with your preferences? If I change things in the way I am thinking, will you endorse the change? You are the customer, and you are my guide. You have the final decision.
  • Implementation: Given supportive feedback from customers (“the market”), the entrepreneur moves ahead with the new initiative – designing, building, and marketing it. It’s offered to the market as a value proposition (“I think you might like this – here’s why”). The market (i.e. customers) responds yes, no or conditionally (“I’d like it better if………). The entrepreneur receives the feedback, reshapes the value proposition and re-offers it until the customer confirms “Yes! That’s it!”

This mindset and the BAI process – Belief, Alignment, Implementation – can be applied not only in business but in any context or setting where there is dissatisfaction with the status quo on which an entrepreneur can build a belief and a customer can express a preference. As a result, we can imagine a wide range of fields in which the entrepreneurial mindset can be applied to society’s benefit.

Institutional Entrepreneurship

Many of the institutions in our society have reached all time lows of disrespect. Representative democracy is being widely questioned, and the institution of Congress has a very low approval rating (18% job approval – and moving lower – according to Gallup Poll in mid 2020). Also in the Gallup Poll, half of Americans revealed “somewhat negative” or “very negative” ratings of the federal government. We are losing confidence in our money, and the Federal Reserve, the institution charged with preserving its integrity and value, yet does the opposite. Similarly, we re losing respect for educational institutions that prefer to indoctrinate our children rather than educate them. 

In all these instances, there are entrepreneurs who have developed the belief that they can bring improvements to a corroded status quo. Even democracy can be innovated. Or, alternatively, we could re-think the entire founding of the US. Entrepreneurs are the ones who initiate these changes.

Regulatory Entrepreneurship

Regulation is the context in which entrepreneurs work. The more thoughtful entrepreneurs question whether the context is unchangeable, and they find innovative ways to make change. Uber and AirBnB are recent multi-billion dollar examples of what’s possible. Uber is what contracted automobile transportation looks like when entrepreneurs question the regulation that keeps the restrictive taxi monopoly in place. According to Josh Johnston Airbnb is just what hotels look like without hotel regulations. Entrepreneurs can out-think regulators.

Social entrepreneurship

Social entrepreneurship is a term that is often misused to mean entrepreneurial initiatives that are conducted without a profit motive, aiming for a higher target of good for society that entrepreneurial capitalism can’t achieve. The true case is that all entrepreneurship is for social good, because society is simply another word for entrepreneurs’ customers, and entrepreneurs want them to do well. Entrepreneurs offer society more and more good things, while trying to use less and less of society’s resources (i.e. lower costs), thereby freeing them up for other social uses. 

A great example of profit-directed social entrepreneurship is the initiative called Entrepreneur Zones, the brainchild of Dale Caldwell of Fairleigh Dickinson University’s Rothman Institute of Innovation and Entrepreneurship. With Entrepreneur Zones, Dr. Caldwell aims to solve problems of urban poverty, family instability and academic underachievement by establishing an environment where local residents can start and grow businesses and make them thrive, in n environment of shared purpose, supportive investment, training, mentoring and relaxed regulation. The goal is to improve society by making a profit, generating jobs, and creating the social environment in which families can pay their bills and their kids can do well in school. 

Cultural Entrepreneurship

In November 2020, Frank Newport of Gallup wrote A Letter to Elected Representatives, From the Average American, based on what average Americans had told Gallup in surveys. One of the statements is this: “I have lost faith in many of our culture’s institutions in recent years”. The term cultural institutions can include many things from religion to the healthcare system. Gallup reports that Congress has by far the lowest confidence of all institutions, of course, but confidence in many of our other institutions is redoing too. The next lowest after Congress is big business followed by the news media (TV and Newspapers), the criminal justice system, and organized labor, then banks and public schools.

We can see entrepreneurial improvements emerging for all these institutions. Home schooling and private schools; fintech replacing many bank functions; reformers trying to change the criminal justice system; internet news outlets offering alternatives to mainstream news media. Consumers get to choose which of these innovations they’ll support. Entrepreneurs will continue trying to secure that support through integrity, earning trust, and giving great service, which is where so many of our institutions fail.

Entrepreneurs and entrepreneurship are society’s resources for continuous improvement of the status quo.

91. Curt Carlson on Innovation Champions

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Austrian economics sees an economy in motion, perpetually renewing itself. Economic agents (firms, customers, investors) constantly change their actions and strategies in response to outcomes they mutually create. This further changes the outcome, which requires them to adjust afresh.

Entrepreneurs live in a world where their beliefs and strategies are constantly being “tested” for survival within an outcome these beliefs and strategies create. It’s complex.

Key Takeaways and Actionable Insights

One of the strategies required in this dynamic system is innovation: the enabling of new value propositions to customers, sustained by new resource combinations, new technologies, new go-to-market capabilities, new channels and new delivery mechanisms.

Innovation has often been characterized as presenting the entrepreneur with an unmanageable level of uncertainty. Curt Carlson challenges this idea and believes innovation can be predictable via the utilization of sound process, captured in his N-A-B-C method, which we explained fully in E4EPod episode #37.

In addition, Curt tells us in episode #91 that the right individuals can strengthen the process by acting as innovation champions. Here are their characteristics.

1. Originate a value proposition.

The route to value starts with a value proposition — accurately identifying a need and developing the appropriately differentiated approach with the right cost structure. Champions are those who can originate innovation projects with an energizing and inspiring proposition. They are customer advocates with creative capabilities. Champions can use Curt’s process map for guidance, or our own “Economics For Business Template” ().

2. Collaborate with a complementary partner.

Innovation is a team game, and it often starts with a partnership of two. Venture capital funds often look for a team of co-founders rather than on brilliant individual. A combination of an engineer and a marketer is a good one, but there are many more. The key is that the partner is complementary: different skills, different experience, same commitment and passion.

3. Build a team over time.

The benefit of complementary skills is not limited to co-founders or co-champions. As an innovation project evolves, the need for more skills and different experiences expands. A champion is able to add complementary skills via new team embers over time, while maintaining team cohesion and integrity.

4. Learn necessary value-facilitation skills.

Recruitment is not the only route to new skills for the team. The champion should be able to recognize skill gaps and fill them via their own learning. For example, mastering the interpretation of qualitative data from customer learning sessions is imperative but not intuitive. Champions work hard at gathering the data (listening and empathy skills) and processing the data (interpretation skills) to project possible future solutions (imagination skills). These new skills are learned over time.

5. Iterate with the team and in larger forums.

It is impossible to predict how an innovation process will proceed, and what twists and turns will be necessary. A champion is able to iterate the understanding of the need, the approach to solving it, the use of technology, and the management of costs. Change is constant not only in the world, but in the innovation project. Iteration can be conducted in the small team, but the champion should also seek larger — perhaps company-wide — forums for sharing and commentary. Everyone’s input counts. Champions don’t become too possessive of their ideas.

6. Champions exhibit enviable human values.

Project teams are often under stress. Deadlines loom, experiments fail, ideas clash. A champion demonstrates human value of trust and respect and integrity that bind teams and projects together. People want to work with champions.

7. Champions take organizational responsibility.

All innovation projects are fraught with risk and uncertainty. Some will fail. Others will take unexpected turns. When the unwanted or unexpected happens, a champion takes responsibility and does not try to deflect blame to exogenous factors. All decisions are subjective, and champions take ownership of their decisions.

8. Champions persevere.

Innovation project timelines can be long. Curt described some that took 10 years or more (like the development of Siri, which eventually became associated with the iPhone4). Despite barriers that might seem insurmountable, and setbacks that might feel humbling, champion s keep going no matter what. They are inspired, and inspirational to others.

9. Champions succeed.

Success is not a behavior or a characteristic, it is an outcome. Nevertheless, with the right process and a good team, champions succeed repeatedly.

In our hyper-competitive world, without a champion success is not possible. The only viable path is to aspire to be the best at what we do. That starts and ends with someone committed to success — a champion.

Additional Resources

Check out Curt Carlson’s HBR article, “Innovation for Impact” (PDF): Click to Download

Curt’s website is PracticeOfInnovation.com. Click on “Innovative Indices” to see how to assess the innovative potential of your firm and projects.

“N-A-B-C Innovation Process” (PDF): Click to Download

“Curt Carlson: There is a Systematic, Repeatable Process to Generate Customer Value”: E4EPod episode #37

Your Value Proposition Language Is Your Customer Commitment And Your Company Culture.

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Peter Drucker is famous for, among many other pieces of business wisdom, his statement that “there is only one valid definition of business purpose: to create a customer”.

That’s a statement with a lot of punch and a lot of clarity. It dismisses all the contemporary alternatives in the debate about the purpose of business firms, such as maximizing shareholder value or sustainability and environmental protection or stakeholder theory.

How do firms create customers? Peter Drucker was equally clear on this question:

“Because the purpose of business is to create a customer, the business enterprise has two–and only two–basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.”

It’s certainly sound advice to place marketing and innovation at the front and center of business operations. Since 1954, when Drucker’s book, The Practice Of Management,  was published, there have been great advances in defining how marketing is conducted and how innovation can be successfully introduced to the market.

The most recent advances have come from the field of economics, a discipline that is dissolving the walls that previously existed between it and psychology and cognitive science, and discovering a new understanding of how and why customers make their economic decisions to buy or abstain from buying, to increase or decrease their usage levels, and to maintain or abandon loyalty to a service provider or a brand.

The new discoveries concentrate in the phenomenon of value. Business language has embraced value in the past, and shifted its focus from value creation (the idea that value is produced within the firm) to value co-creation (the idea that value is produced jointly in an act of exchange between a service provider and a customer). Now, economics – and specifically that brand of economics known as Austrian economics – has identified that all value is created by the customer. It is the customers’ investment of time and effort and emotional commitment and intent to better their circumstances that creates value. Value emerges in the customer domain.

Behind this discovery is a new definitional understanding of value. It is a feeling in the customer’s mind, an experience that’s unique to each customer. Only the customer can have the experience. New research is revealing more about the experience – for example, that it is a learning experience. It takes place over time, beginning with an anticipation or estimate of future value (“what’s in it for me?”), an appraisal of relative value (“is it worth it?”), an exchange experience (the act of buying), a usage experience (the act of using the good or service) and finally an assessment of whether the experience met the expectations of the initial anticipation. The customer is busy and highly engaged in the physical, cognitive and emotional processes of value.

Where does all this leave the firm, and their marketing and innovation activities? The new discovery is that the successful firm is a facilitator – rather than a deliverer or creator – of value. There are degrees of facilitation ranging from passive (e.g. making a purchase opportunity available on an e-commerce site) to active (e.g., providing help-desk or personal service in real time when the customer is experiencing product usage), and many in between.

The pivot in the shift from value creation to value facilitation is the new role of the value proposition. Firms can create new information of which the customer is unaware, such as the development of a new service or the addition of new features to an existing service. Customers want to appraise the potential value represented by new information. They will make the decision, and they give some weight to information from the service provider.

The first element of information in a sound value proposition is empathy. The value process begins with the customer’s pursuit of betterment. They give a signal to entrepreneurial innovators that betterment is possible: the signal is dissatisfaction. Customers can create value but they can’t design their own products and services. Their genius is to always want something better. The responsive entrepreneur diagnoses their inarticulate dissatisfaction using a highly tuned sense of empathy. The value proposition communicates to the customer that the entrepreneur expended significant effort at empathic diagnosis.

The next element of the value proposition is a promise. While unable to create value, firms and brands can promise that they have worked hard to find a way for their customers to  experience value. The value proposition must demonstrate to customers that

  • You recognize them as individuals. Show evidence.
  • You understand their current dissatisfaction – reveal your empathic diagnosis.
  • You offer a credible promise of relief.
  • You reinforce your offer with reasons-to-believe. Before the customer engages emotionally, they want to engage rationally.
  • You have a clear statement of benefits that you can demonstrate are greater than the customer’s cost. The customer’s cost includes not just willingness to pay, but also opportunity costs such as inertia, alternatives and value uncertainty. Help them with their economic calculation.

The value proposition sets the customer’s value learning process in motion: anticipating, weighing, exchanging, experiencing, assessing. The value proposition is your commitment to the customer that the process will be worthwhile, satisfying, enjoyable, and, ideally, beyond their expectations.

And this valuable exercise in making a promise does much more. Through its language, it becomes the culture of your company. Starting from Peter Drucker’s definition of business purpose, every employee, supplier, agent and partner should know their role in creating and retaining a customer.

In the language you use to recognize your customer and their dreams and hopes, their individual context and their preferences and desires, you’ll communicate to your organization how to love the customer and develop relationships. In the language you use to describe the customer’s current dissatisfaction, you’ll nurture an empathic organization. In the language you use to make a promise, you will embed commitment to keep it. In the language of credible and rational support for the promise, you’ll cement internal belief in the promise-keeping mission. And in the language of benefits to the customer, you’ll set the standards of customer-facing behavior and customer relationship management for everyone in your firm.

Yes, a value proposition is just language. In business strategy, language is all we have to tell each other how we will collaborate around a purpose, to share the tools and tactics we’ll all use, and to communicate the successes and learning opportunities that come from implementation and promise-keeping. And, most importantly, to invite the customer to allow us into their value learning process.

Value Proposition Deisgn and Template 5-minute audio for hh.com

37. Curt Carlson’s Systematic, Repeatable Process to Generate Customer Value

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Is successful value creation through innovation the product of genius? Or of luck? No, it’s the product of a system, applied with discipline. Utilizing the system can result in repeated success in customer value generation.

Key Takeaways and Actionable Insights

Curt Carlson is the world’s leading expert practitioner. He is the founder and CEO of Practice Of Innovation, LLC, and was President Of SRI International, identified as the most successful innovation company in the world based on its development and introduction of globally important innovations like Siri for the iPhone4 and HDTV. Under Curt’s leadership, SRI grew 3.5X and created tens of billions of dollars of new customer value.

Curt believes any company can systematically generate new value for customers, and reap the rewards of the market for doing so, when they rigorously apply three fundamental rules.

  1. They have a simple value creation methodology that everyone in the company (and its collaborative partners) can describe, understand and apply every day in every job function. (Curt’s test: ask everyone in the company what the firm’s value creation method is: if they can’t describe it, there isn’t one.)
  2. They have metrics to define innovation work that is important rather than merely interesting. While subjective value is not quantifiable, there are proxies for measuring importance and market potential.
  3. They have a system for active learning. Innovation is a learning science, and active learning is a specific, high speed, high productivity version of learning, applying the best learning science principles.

In this week’s podcast, we focused especially on the simple, effective value creation methodology that Curt identifies by the initials N-A-B-C.

NABC Innovation Process

Click the image to view and download the full PDF

N is the identification and quantification of the important customer need. In B2B businesses, it’s possible to monitor financial flows and identify needs based on quantifiable elements – cost savings, time savings, and measurable quality improvements. In consumer businesses, need identification is much harder, and quantification impossible except by proxy, since needs are subjective and individual. Importantly, they are also multi-dimensional, and need identification must encompass all the dimensions.

It’s important to deeply understand human wants, whether it’s for convenience, or higher order wants such as pride and identity. Surveys told Steve Jobs that consumers wanted a “new keyboard” for existing Nokia phones that were hard to use. Jobs’s intuition was that what they really longed for was convenience. The touchscreen on the iPhone provided convenience and opened a doorway to all kinds of additional services.

A is the Approach the entrepreneurial innovator takes to meet the customer need. The approach is the design of an experience that the customer will desire. The Approach mist embrace both the assembly of the right resources into a technical solution, and the business model so that the solution makes money. There’s an iterative back-and-forth between technical solution and business model that can continue for years. Nike’s technical solution for shoes is good but not unique; its business model for sponsoring athletes to inspire aspirational consumers who wanted to “be like Mike” (or today like LeBron) elevated their offering from product to experience.

B is Benefits Per Costs. Curt uses this construction to emphasize that there are large buckets of both benefits and of costs. Benefits include not just features and performance and appearance, but also the feelings produced by the experience. Costs are similarly multi-layered: not just dollars, but also the effort required to acquire the product, and perhaps to master its use, the opportunity cost of what is given up, durability, and more. The innovative entrepreneur must look at costs from all of these angles and calculate that the “benefits per costs” for customers are much better than alternatives.

Curt’s rule of thumb is 2X to 10X better. People measure perceived benefits in percentages. 10% better, 50% better, 100% better than the status quo or the alternatives. Transformational innovations are 2 – 10X better.

C is the competition and other alternatives – both today and in the future. What are all the other ways the customer can experience the benefit they seek? What are alternative ways for them to spend their money – perhaps on a different experience that’s not a direct substitute but on which they’ll spend instead of buying our solution. How does your innovation fit into their lives so compellingly as to become preferred over all these alternatives?

N-A-B-C is a simple framework, but it’s not easy to achieve results. It requires iteration at speed among many collaborators (including customers, and possibly investors), all with different and specific talents and tacit knowledge. No individual can command sufficient knowledge, so team learning – active, comparative learning, frequently updated – is critical to the outcome.

The result is transformational: for customers who experience new value, for the firms that facilitate it, and for the individuals who practice the discipline of innovation.

DOWNLOADS & EXTRAS

Download Curt Carlson’s NABC Innovation Process PDF: Our Free E4E Knowledge Graphic

Buy a copy of Curt Carlson’s book, Innovation: The Five Disciplines For Creating What Customers Want.

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