The economics of innovation

"The single biggest mistake IT managers make is listening to their customers," says Michael Schrage, a research associate at the MIT Media Lab.

Wait, don't turn the page! Schrage can explain (and he does below).

Schrage specializes in the "economics of innovation," a discipline that moves the topic of innovation out of the realm of marketing hype and into a world where the laws of economics apply and where, he says, intuition often proves incorrect.

He has advised companies such as BP, Wells Fargo, Google, Microsoft, Mars and Cisco. His work explores the role of models, rapid prototyping and simulations as ways to help manage innovation and risk.

Schrage says these techniques, when combined with technologies like the Internet, can lead to "hyperinnovation" in areas such as supply chain and customer relationship management. He recently told Computerworld's Gary Anthes about some winning and losing innovation strategies.

What's wrong with the way companies innovate today?

There are too many organizations that believe that the value of innovation comes from the creation of choice -- more features, more functions. When your cell phone company gives you more options, they claim they are being innovative. But that's rubbish. There may be supply, but where's the demand? Research shows that only a fraction of people use more then 20 percent of the cell phone's functionality. Same is true for PCs, servers, ERP and CRM systems -- you name it. The unit of innovation is not choice, but value from use.

So companies should have simple products that do the basics very well?

The question is, which [features] expand the value from use? A company like Amazon or Google may have interfaces that are so simple that adding more choice creates monumentally more value. For others, more choice just means more confusion, not more value.

How can IT help strike the right balance?

It used to be that segmenting markets was very expensive. One of the fantastic things about the network economy is that we now have mass segmentation; segmentation is a marginal cost. Amazon and iTunes have recommendation engines that show you that people like you want x. Marketing 101 tells you to study your audience and segment it, but digital technology allows you to see how your audience segments itself.

It's something the traditional media least understand. They understand mass audiences, but they suck at exploiting digital technologies to create multiple segments.

Are there other companies that don't get it?

Blockbuster is a company that was either unwilling or unable to effectively embrace the Web. Netflix took direct aim at one of the major flaws in the Blockbuster business model, which was to make a lot of money off late fees. Netflix branded itself as the no-late-fees company, and Blockbuster couldn't adapt because they had become addicted to late fees.

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