By Greg Yezersky
In search for an answer, one would grope his way through a dark labyrinth he may either find something useful, or hurt himself when bumping into a wall. Another would take a small flashlight along to guide him on his way. And that would shine brighter and brighter, turning into an enormous light source, which would leave not a spot unlighted or unexplained. I am asking you: WHERE IS YOUR FLASHLIGHT?
-- Dmitri I. Mendeleev, Russian chemist and inventor
If one does not know to which port one is sailing, no wind is favorable.
-- Lucius Annaeus Seneca, Roman philosopher
The nature of success in business is almost self-obvious. The company that creates a greater value for its respective market will prosper while competitors will only get what is left for them by the leader. Repeating this difference in value year after year, and success will be permanently associated with that initially leading organization. It seems so simple, but is it?
According to a study conducted by Royal Dutch Shell, the average life expectancy of Fortune 500 firms is 40 to 50 years.1 The time of being a market leader is even shorter. Leaders, thus, continue rising and falling. Examples of failures abound; they are so overwhelming that after studying the history of business, professors W. Chan Kim and Renee Mauborgne wrote in Blue Ocean Strategy that "…permanently excellent industries and companies do not exist."2
There are two aspects of this situation that raise the brows: 1) the entities, unlike human beings, are at least theoretically immortal and 2) the loss of leadership is universal; entities die too often. Why? There must be a fundamental root cause behind this phenomenon, which must be understood in order to find an effective solution to this problem. Without identifying the root cause, the risk of failure is high: no enterprise is immune and no executive is safe.
Since products or services are purchased to solve consumers' problems, the competition between entities can be presented as a competition between the value propositions that the entities offer to their customers. Every value proposition goes through the life cycle process presented in the Figure 1, which consists of a sequence of stages. This universal process ends up with the market's judgment of the value proposition, which leads to its acceptance or rejection, resulting in the financial gain or loss, which is then perceived as a success or failure.
The goal of sustaining success can only be achieved if a company continually comes up with value propositions that are accepted by the market. To avoid variability of results (failures), as operation management, the process of competition must be controlled in its entirety. That is why the best-run enterprises use all the methods that have been proven over time to cut variability in the results produced by such diverse corporate activities as procurement, manufacturing, distribution, marketing, design, sales, etc.
Despite all their operational achievements, however, there is still one stage in the value proposition life cycle that lacks any control. It is the first stage of the process, which forms the content of a future value proposition – the value proposition conceptualization stage. Value creation is possible through both innovation and optimization. While both are valid approaches, innovation is the one that creates new features and provides significant competitive advantage. The first stage of the value proposition life cycle, however, can be considered as the stage of innovation. This first stage, in itself, is a complex process consisting of a number of procedures depicted in the Figure 2: identification of market requirements for a future product (service); formulation of problems that need to be solved to meet the requirements; analysis and solution of the problems; solution evaluations that also include identification of potential consequences (both positive and negative) resulting from a planned change; and, finally, formulation of the future value proposition concept, which is the foundation for the rest of the production cycle. Depending on how sound the foundation is, the cycle results will vary greatly.
There is one important observation that needs to be emphasized. Since the period from the inception of a value proposition until its presentation to the market in the form of a product or a service takes time (often years), controlling innovation really means to know not what the market's present needs are, but what they will be in the future. It is analogous to shooting a moving target; nobody tries to shoot at the location where the target is now but where the target will be. Currently, companies do not have reliable methods to accurately identify the future of the market's needs, which makes control of the process of innovation impossible in principle.
Since the entire chain is as strong as its weakest link, an inability to control the first stage, innovation, automatically leads to the situation where no company can control the results of competition, which, in turn, results in a company's inability to continuously succeed and, ultimately, control its own destiny. The inability to control the process of innovation is the root cause behind the cessation of growth, market losses and eventual mortality of the business enterprises.
There is only one reliable method to control any kind of activity known to the mankind; namely, through the creation and use of science. Science allows for significantly improving problem-solving capabilities, forecasting capabilities and objective judgment capabilities regardless of the area of application. It enables better control of risk, more effective management and more consistent results.
Next, it is necessary to define innovation and establish the criteria for judging such a theory, based on the logic previously introduced.
Definition 1: Innovation is a process of value creation, which consists in changing the composition of a set of variables describing a system.
Definition 2: Innovation is an outcome out of the process that fits Definition 1.
While the second definition enables alignment with a "typical" understanding of what innovation is, the first (the primary) definition provides most of the benefits.
Everything is determined, the beginning as well as the end, by forces over which we have no control. It is determined for insects as well as for the stars. Human beings, vegetables or cosmic dust, we all dance to a mysterious tune, intoned in the distance.
-- Albert Einstein
An invasion of armies can be resisted, but not an idea whose time has come.
-- Victor Hugo, French poet and playwright
Guided by the above requirements, the author proceeded to create a theory satisfying them, resulting in the theory now known as the general theory of innovation (GTI).
From the start, three crucial choices were made:
The investigation wanted to uncover the driving forces behind the process of evolution, including identifying those factors that cause the need for innovations/solutions as well as those conditions that caused emergence of the problems and determined subsequent success or failure of the proposed solutions. The following are a few examples of the investigated systems:
Despite being very different, all three examples have a number of things in common:
The predominant direction of evolution can be expressed as the ratio of the sum of the functions delivered by a system (an embodiment of performance) to the sum of connections the system needs to establish for obtaining the required resources for achieving the functionality.
While "functioning" (consider the term "functions") is easily understood, the term "connections" requires greater explanation. Without getting into great details, for the purpose of this article, we may perceive connections as the totality of expenditures (sacrifices) required from the system's environment that assure delivery of a service provided by the system. The first major group of connections to be considered is the "customers expenditures" list (for example, effort needed for use a solution, time involvement, overall cost of ownership, space for storage, the need to learn something new, consequences of use, etc.), followed by the second group of connections (production expenditures) such as required materials, energy, number of manufacturing processes and suppliers, production time, space required for production as well as sub-categories and consequences such as scrap, wastes, pollution, etc. Through the relationship between function and connection, this ratio, the coefficient of freedom (any function empowers a system and makes it freer while any connection increases its dependency and decrease freedom), embodies the business world concept of value. The greater the coefficient, the greater the value delivered by a product or a service.
CFreedom = S Functions/S Connections
Historical analyses of the evolutionary process for various systems (those above as well as bicycles, glass making, baking equipment, welding, shopping, banking, cars, etc.) show the validity of the coefficient of freedom. It is universal, applied to products, processes, services or various entities such as organizations (both for profit and not-for-profit), industries, markets, regions, etc. Moreover, these analyses lead firmly to the conclusion that systems do not evolve randomly; the evolutionary cycle of all systems, regardless of their specific nature, is governed by the same set of natural laws that are completely independent of human will and desire, which is the major postulate of GTI, first defined in 1988. The natural law governing the process of evolution (growth, expansion) of various systems states that a system's evolutionary direction matches an ever-increasing degrees of freedom of the system's environment and is thus entitled the law of an increasing degree of freedom.
Acceptance of GTI major axioms, the existence of the natural laws governing the process of evolution, automatically leads to the following capabilities that are direct corollaries (natural consequences) of that acceptance.
All theory, my dear friend, is gray; the golden tree of life springs ever green.
-- Johann Wolfgang von Goethe, German writer
The capabilities discussed in the previous section have enabled the creation of various applications and tools. Depending on the nature of an environment and its value system that are of interest for those who investigate them, all the GTI-based applications are divided into three major groups presented in Table 1.
|Table 1: GTI-based Applications and Tools|
1. A performance-based challenge
|1. RelEvent diagram|
2. Problem-solution templates
3. Conflict strategies
4. Algorithm for a conflict elimination (ACE)
5. Failure prevention analysis
1. System evolution forecasting
|1. Evolutionary templates|
2. Generic growth strategies
3. Value growth templates
4. Value matrix
|1. Creation of the capability of an entity (a unit) to innovate on demand|
2. Creation of the innovation management system for an entity
|1. All of the above|
2. The program template
The first group of applications relates to the situation when the value for its respective market is known, but an entity has not yet addressed it for the market's satisfaction, and a change in a system state (an innovation) is required. Since the need for a change is demanded by the market, an entity must react to it – reactive innovation. The second group of applications relates to the situation when the market does not complain about specifics of an offering. The entity itself pursues a change in its offerings, so the prosperous future will be assured. In this case, the entity proactively seeks a change, thus this group of applications (primarily driven by the future business goals such as discovery of strategic opportunities and threats; discovery of growth avenues, etc. is proactive innovation. The third group of applications relates to the need of the entities to innovate at each stage of the system life-cycle and to do it on-demand, i.e., when the need arises. They are aimed at the creation of the sustainable entity's capability for on-demand innovation. (While the majority of the applications (and all the tools) from the first two groups were tested and proven, the applications of the third group were tested only partially and remain largely theoretical.)
Developed in cooperation with Dr. Paolo Mutti
We don't ask consumers what they want. They don't know. Instead we apply our brainpower to what they need, and will want, and make sure we're there, ready.
-- Akio Morita, co-founder and former CEO of Sony Corporation
Two case studies will illustrate how GTI and its tools can assist in a system of evolution forecasting and strategic decision-making. Not only do these two studies belong to unrelated businesses (movie rental and lawn mowing equipment) but the first represents a service while the other is a product.
Both case studies will heavily utilize the principle of time-to-value reduction, which is a universal mechanism and can be used to identify problems any product or service will be facing in the future. The principle is a corollary of the law of an increasing degree of freedom, which can be increased by decreasing the denominator. One of the most important connections from the customer expenditure list is the time that customers have to spend to get what they want. To keep the examples simple, the focus will be on this specific principle throughout the case study analysis.
This project started in June of 2003 when the USPTO granted a broad patent to Netflix Inc., capturing the author's attention because GTI has patent circumvention methodology. While analyzing the situation, the author carried out evolution forecasting for the industry, which was updated in October of 2004 and became a part of a white paper in 2005. In December of 2004, the author was approached by a consultant for an entity that was going to buy the Hollywood Entertainment (HLYW) movie rental chain; his client became familiar with the forecast and got interested. This case study presents a certain portion of the old paper that was based on the original forecast (June 2003/October 2004), for which the author was not paid, so it is not a part of any agreement. The author periodically checked (the last time in December of 2007) how the forecast faired against the reality; comparisons between the forecast and real facts will be made.
The nature of a rental business is simple; customers want to use a product that they cannot – or do not want – to buy. Movies, which are often watched only once, fit this requirement perfectly. In the fight for the customer's movie-viewing dollar, the rental business competes with movie theaters (only with new titles but at a greater expense for the customer) and pay-per-view cable programs (also with fewer, fresher and more expensive titles). Since the 1990s, the market has been dominated by Blockbuster Inc., the company that successfully wiped out most of its franchised and independent competition.
The typical movie-rental process involves numerous steps. Customers take a trip to the store, browses the shelves, finds what they like, check it out, return home, watch the movie, take another trip to the store to return the movie and return home again. There is a penalty if the movie is returned later than its due date.
The process is cumbersome, containing many redundant and no-value-adding steps such as multiple car rides, having to browse the available titles each trip and late fees. What this means is that there is definitely the opportunity for improvement in delivering a service of greater value to the customer. Netflix, Inc. was able to create a new business model that solved many problems associated with the original rental model.
The Netflix model has no due dates or late fees and no repetitive trips to the store. Movies are selected via the Internet and are then delivered and returned free of charge by mail (usually with a 24-hour turn around). To make the model financially viable, there is a subscription fee and restriction on a number of movies a customer can possess at any given time, but no restriction on the number of movies the customer can request in a month. As soon as a subscriber returns a movie, the next title from his saved selection list is immediately sent. This saved selection list keeps the customer from having to browse inventory every time a movie is requested.
The customer is clearly receiving greater value from the Netflix model, which is why Netflix was rewarded generously with 2.6 millions customers by the end of 2004, each paying about $20.00 per month as a subscription fee. Where did these customers come from?
Blockbuster tried to ignore Netflix for many years, but the bottom-line prevailed. In the summer of 2004, Blockbuster opened an Internet-based rental unit. By this time, however, Netflix had already established itself as the Internet-based market leader. As always happens with any successful innovation, the Netflix model's initial success immediately attracted a number of copycats. Not only did the existing players (such as Blockbuster) jump in, but also almost a dozen other companies joined the market, including Wal-Mart and Amazon.
Even at this early stage of development, the market became overcrowded with competitors that offered the same service for a similar fee. There was little clear differentiation between competitors. This led to service commoditization with subsequent price war, which only benefits the consumer. Since its inception in August, the price of Blockbuster's subscription has gone down from $21.00 to $14.99 a month. It can be easily foreseen that the entire market could be captured (and competition eliminated) by a diversified competitor such as Amazon or Wal-Mart, who would provide the rental service free of charge as an incentive to buy other products or services that offer more value to the provider that the cost of the monthly service charge. Since people already buy products online from Amazon, such an incentive would be a logical and attractive proposition for both provider and customer.
What does the future hold for the movie rental industry? The Netflix model has a time delay between placement of an order and movie delivery (about one day). Based on the principle of time-to-value reduction, it can be predicted that movies will be delivered to a customer's screen (via cable, Internet, satellite, etc.) at the moment they are requested; for the cost that she pays now for a movie rental, the Netflix model will become obsolete. At that time, all of the companies that have adopted the Netflix model will have to accept the new model, switch to a different market or go out of business.
Some might say that this was too obvious, too easy. But this simplicity is exactly why understanding of the predictable nature observable in the evolution of any product or service is such a valuable planning tool. Indeed, the concept of movies on-demand has been around for a number of years. Moreover, there are companies that already provide this service over the Internet. Certain technical challenges (such as minimization of download time and movie quality) still need to be addressed to make this model a viable reality, but it can be predicted that this will happen in the not too distant future.
The emergence and evolution of the movie-on-demand service raises additional problems, but in the application of GTI this is equated with more business opportunities. For example:
Will these inevitable developments in the movie on-demand industry completely replace the traditional retail rental industry? No, it is an unlikely development. The market for traditional rental service will survive as a niche, but in a modified and shrunk form. It will be defined by circumstances where download service is impossible, inconvenient, prohibited, etc.
For example, if downloaded movies are prohibited during flights due to safety concerns, a new business opportunity emerges. A network of retail rental kiosks located in airports could rent movies, DVD players or both to customers about to board a plane, and returns would be made at the destination point. This service could also be ordered through an airline while booking a flight, with movies delivered directly to your seat after boarding. (Update: In 2004, one billion people worldwide flew. If only 10 percent of them (i.e., 100 million) had given an innovative entity $10.00 per rental event, it would have added one billion dollars to the bottom line.)
Another similar opportunity would be to provide a service for people who forget to download movies prior to their car trips. They could stop by a store and rent a movie, DVD player or both. However, this market will be small. Therefore, stand-alone rental stores will again give way to the travelers' kiosk, this time in gas stations and convenience stores such as 7/11. Perhaps this type of rental will include DVD with timed, self-destruct mechanism so that returns are not an issue.
Another opportunity can be again identified by using the time-to-value reduction principle. If today's business model requires a dedicated trip to a store, then bringing movies to the locations where people (customers) will be represents an interesting opportunity. For example, locating rental stores at malls, supermarkets or office buildings would provide a major value for the customers. Imagine positioning a few stores at a large technical center where tens of thousands of people work and delivering movies to their desks by the end of a working day.
In the meantime, due to the strength and direction of the competition for retail customers in the market, Blockbuster dropped its late fees; this is probably too little too late. Emergence of the on-demand movie model, along with excessive competition and service commoditization in the Internet-based niche, have created a situation in which the entire industry stands on the brink of major change and the outcome for any particular competitor is unclear. The financial markets seem to be in agreement with this conclusion. While the general market trend rose in 2004, the movie rental industry was depressed, as shown in Figure 4. Of course, the investment community does not like uncertainty, and it is uncertain whether future developments in the movie rental market will become opportunities or threats for the current competitors. This solely depends on the strategic decisions made by the leadership of each company.
All of the above clearly indicates that for any traditional rental company gaining advantage lies through significant change, requiring capital expenditures leading to a change in valuation. If such a company continues its business as usual, it is surely poised to continue sliding and losing to savvier rivals until the change prescribed by the law of an increasing degree of freedom is introduced; the sooner it happens, the better and more advantageous it will be for this entity.
Update: The forecast played well with the client who decided to pass on the opportunity. The chart in Figure 5 illustrates what happened to Blockbuster, the company that did not change and stuck to the old business model in 2005. Its stock dropped from $9.30 to $3.75, a huge loss for investors. This slump continued until the summer of 2007 when the company CEO's, John Antioco, was replaced. His successor, James Keyes, quickly realized the need for a change. Blockbuster entered the movie download-on-demand niche by purchasing Movielink LLC. The same move made earlier in 2007 by Netflix complying with the forecast. Meanwhile, Netflix truly enjoyed its online pioneer status. By 2007, its customer base grew to 6,613,000; Netflix still dominates the online market.
On October 11, 2007, Movie Gallery, the company that purchased Hollywood Entertainment in 2004, announced bankruptcy, again validating the forecast. The last strategic move was made by drug store chain Walgreen. On October 28, 2007, it announced that customers will be able to buy movie DVDs that will be burned in stores. Entering the movie rental market is the next logical move, which means that brick-and-mortar stores are threatened, as predicted.
The majority of homeowners in the U.S. have a love/hate relationship with their lawns. It is the subject of either pride, if everything goes well, or irritation. In any case, people spend a lot of time and money making sure their lawn looks good. With this kind of interest, a huge industry has evolved to help.
To understand the future of the lawn mower, it is necessary to analyze its past to find its spot on the continuum of evolution shown in Figure 6.6 A comprehensive history should probably begin with animal grazing and the scythe, neither of which is very efficient by the standards of most lawn owners, which led to the development of the lawn mower. A drum with blades became the rotary lawn mower, then the power mower, self-propelled mower, riding mower (mini-tractor) and remote-control mower – all aimed at reducing the homeowner's time involved in the lawn mowing process. Finally, a completely robotic machine was created to completely eliminate human labor from lawn mowing.
Does the progress stop? No. It is fundamentally impossible to stop the natural process of evolution. There are always new problems arising and waiting to be solved. Consider the robotic machine, which is too expensive for a retail customer. It still requires the owner's involvement because it must be taken out of storage, checked for problems, filled with gas and oil, cleaned, put back into storage, etc. It requires maintenance, repair and so on. What still can be done to decrease the amount of time and energy required by the process of lawn mowing, while increasing the quality of the lawn? As long as this question remains, the evolution of lawn mowing will continue.
In looking for ways to improve the lawn mower, the principle of time-to-value reduction may lead to an increased speed of mowing, which will surely the customer's time. Using a more powerful motor or introducing a different transmission ratio might be a way to implement this concept. However, a "bigger/more" approach, which is typical of companies, is not necessarily the best solution. By constantly choosing larger and more powerful mowers, the homeowner approaches the equivalent of professional mowing equipment, with all of its cost and safety issues, rather than addressing the value issues that are relevant to the lawn of a single-family home.
Another standard solution that saves a user's time is to combine mowing with other operations; for example, a mower could introduce fertilizer or herbicide while mowing. Another alternative is to make the mower multifunctional; the mower could mulch debris or aerate the lawn. Having to buy only an attachment for these jobs instead of another piece of equipment would save the customer money. This approach could lead to the idea of a modular lawn mower's design, with a base unit and attachments. If this concept is taken further, the base unit could become the functional foundation for a number of devices used around the home and yard (such as a snow thrower, power generator, shredder or vacuum pump, which would provide a great value for customers who do not need to buy multiple pieces or equipment. Someone who decides to use this model will not be dependent on the mower market and will gain substantial advantages compared to the rest of the companies.
Lawn mowing has one more major evolutionary avenue available. A significant time reduction associated with lawn mowing can be achieved if the lawn does not need to be mowed as often. This is possible if grass does not grow so quickly. By introducing growth inhibitors instead of fertilizers, a slower growing lawn may emerge. Fertilizers are advantageous for the lawn mowing industry and homeowners whose grass does not grow well, but growth inhibitors could be advantageous for a typical homeowner with a healthy lawn. This idea for a new product could be either an opportunity or a threat for chemical companies, but it is surely a threat for both the producers of lawn mowers and lawn care service providers. Does this mean that progress has stopped? Only for those companies that do not evolve along with their products or services.
Slowing down the rate of grass growth could be achieved on a genetic level as well. If this concept is taken to its extreme, grass may become genetically modified so its length does not exceed a certain ideal height (3-4 inches). If this happens, no mowing will be necessary. Such a grass would have to go through rigorous testing to determine its impact on the environment, which would raise new problems and further extend the evolutionary path of lawn care.
‘Would you tell me, please, which way I ought to go from here?'
‘That depends a good deal on where you want to get to,' said the Cat
‘I do not much care where' said Alice
‘Then it does not matter which way you go,' said the Cat
-- Lewis Carroll, English author
People love chopping wood. In this activity one immediately sees results.
-- Albert Einstein
These case studies illustrate that GTI provides the universal theoretical foundation and set of standard tools that are equally applicable to any industry and any company. Both theory and tools were applied effectively to the unrelated industries of movie rental and lawn mowers. Any organization can just as successfully use the principle of time reduction to assess the current position of its product or service within its industry, and then identify and articulate the problems that it will face in the future. These formulated problems will represent either a company's future opportunities or threats.
GTI is not a quick fix for all of a company's problems and issues. It is, instead, a potent theory that is capable of controlling the process of innovation, which would effectively work for any specific application. As a result, GTI is perfectly positioned to significantly contribute to any conceivable business objective, which requires a change of the status quo, to enable an organization to confidently identify future changes in the marketplace, which is identical to precisely knowing the future needs and desires of your customers. This advanced knowledge will reveal those future problems that will be faced by a product or service, representing a solid foundation for the continual creation of commercially successful products and services – enabling a company to attract and retain customers, and achieve consistent performance and continuous business success.
Before acknowledging the contribution of individuals to the creation of GTI, it is my great honor and privilege to state that what is known today as GTI was started as a research project within the domain of TRIZ presently known worldwide as TRIZ.7,8,9 Moreover, many TRIZ central concepts were used in the process of creating GTI, and even though the content of the majority of them has been ultimately changed, the author feels strongly that the TRIZ influence must be recognized and acknowledged.
Despite having a number of overlapping applications such as problem solving, I strongly and sincerely believe that GTI and TRIZ are not competitive theories but complementary ones that will work in concert with one another (especially after their seamless integration, which will take place sooner or later).
Now I would like to acknowledge the contribution of the following individuals to the creation and development of GTI; without them the results that have been achieved would be absolutely impossible.
To all these individuals I owe my sincere appreciation and gratitude!
Greg Yezersky is the founder and president of the Institute of Professional Innovators (IPI). He was introduced to TRIZ in 1983 and has been in the business of innovation since 1985. Mr. Yezersky has conducted hundreds of seminars on the subject worldwide, taught thousands of students and successfully consulted for many Fortune 500 companies. He is the creator of the general theory of innovation (GTI), a scientific theory that enables creation of innovations on-demand through control over various aspects of the process of innovation. Mr. Yezersky has spoken at many scientific and business conferences on the subject of innovation. Contact Greg Yezersky at gyezersky (at) ipinetwork.com or visit http://www.ipinetwork.com.