I love the story of Chris Halberg the founder of Smug Coffee.  He was in class at Marquette University and invented the idea of adding an RFID chip to a coffee cup.  This way the cup could be a stored value system, and even allow the store to know what the customer wanted by simply passing the cup over an RFID reader.  According to The RFID Journal, the system has been deployed at four coffee shops in prototype mode, and Chris plans to release an internet compatible version — allowing him to be compatible with many more point of sale systems.  Right now he’s in El Salvador helping the ministry of transportation install RFID-based prepaid transit cards, and developing nebulizers that can run without electricity.  Nebulizers are machines that transform liquid medication into a mist for inhalation.

There are a number of cool things about this story to me.  First, I love Chris’s do-it-yourself spirit.  Second, it is environmentally friendly, and efficient.  I come from a long line of frugal people; whether it was my Scottish uncle who only painted the “seen side” of his garage door to save paint, or my Lituanian grandfather who used to keep  candle wax drippings from used candles and reformed these scraps into new candles.  I love its potential for thrift.

Most of all, I am enamored of the fact that this young man turned a dumb product into a smart one.  When you think about it, any product could become “smart”.  Your bike; your clothes; your bags.  People have talked about these notions for some time, but now, when a bright young college senior, can put this type of innovation together, literally “on his kitchen table” — we will begin to see some smarts embedded in more products and everyday occurrences — which should make things more fun, green, and easy.

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When something gets modular, the opportunity to create many more innovations skyrockets.  Hundreds, or thousands or millions of inventors can give something a try and then the market can sort out what works and what does not.  Years ago in an interview in the Wall Street Journal I said that I wanted the cell phone to be more open.  Well, with the advent of the iPhone and now the Android phones from Sprint, Verizon and TMobile, we are starting to get a fast moving hardware platform that is setting the stage for many new applications.

In the past few days Google has announced its App Inventor system that seems to have a very easy to use application builder.  In some ways it looks like previous “building block” types of software development platforms, but with the billions of portable phones and the active ecosystem of devices — along with the subsidies by the telecommunications carriers to get these newer tools in the hands of consumers, I’m more optimistic than ever that we will FINALLY have a more vibrant innovation ecosystem for the phone.  It may become the duct tape of the mobile phone software world.

The thing that makes me most optimistic is the fact that Google put us an introductory video that shows a woman making a small application for her cell phone that allows her to touch the picture of her cat on her phone and it meows her cat’s meow.  When people can easily do silly things like turn their cat into an icon on their phone, then the programming environment is facile enough to make it simple for people to do real things.

I believe that Twitter is another example of a simple, modular kit to fill in the cracks of our information experience.  Put another way, we are so linked to our devices and our information environments now that many of us hunger for those simple tools where we can make changes to our environment.  We want these digital duct-tape solutions so that we can weave together our own, personal experience — and link to the inventions of others.  I also think its cool that Google is testing the environment out with grade school kids; those too early in their careers to have low expectations of their software ability…

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All true breakthroughs in an art form come when there is a change in perspective.  Some say that Italian Renaissance painter Masaccio (1401-1428) “rediscovered” how to paint in perspective after the technique had been lost in the Dark Ages, and the Renaissance painters all used it after he showed the way.  The cubists including Picasso, painted the “time” dimension and brought painting to a new height.

It is because of this notion of how a change in perspective can alter art or behavior that I think the dual camera on the iPhone 4G may change common communication.  I remember being at the 1964 World’s Fair in Flushing New York, the location used at the end of the Men in Black movie.  It was there that I first saw AT&T’s video phone — which has been one of those great technologies that has always been just around the corner.  So why do I think the iPhone 4G may unlock video phoning?  Because it not only allows the user to show him or herself, but by to seamlessly change to show what they are seeing. This technologically advanced, shared voyeurism is a very sophisticated change in the point of view.

In addition, their integration with the phone call makes it effortless.  You can easily begin with a voice call, then show something, and then go back to voice.  There are not only many social settings in which such a powerful tool will be used, but many business settings from underwriting to designing.

In the famous phrase of Donald Norman who wrote The Psychology of Everyday Things in which he puts forth the idea of “affordance”, saying that a device with good affordance is easy to use.  It seems to me that the 4G has clear affordance for how people communicate and they have deftly spliced video into the experience.  Maybe after 46 years, video conferencing on the phone, from person to person, will finally become real.

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It always amazes me how the most creative folks often have one part of their radical plan which is very old style and conservative.  In particular, Vice, the growing edge-dwelling media group which began publishing in 1994, when as they put it “any idiot could publish,” is hoping to become a major cultural force, as Wired Magazine recently reported by joining up with Intel on The Creators Project – a place where “the brightest young minds”  can get together to create and distribute new art.  One of the things that is true of any Digital medium is that it is a “natural mashup”.  By natural mashup I mean every digital incarnation of anything is infinitely reproducible at extremely low marginal cost; infinitely distributable on the web, and infinitely recombinable with other digital experiences.  Digital is the only medium for art which is message, means, distribution and options – are all created together and naturally.  I call this the “digital gift“.  Put another way, digital gives options that non-digital does not.  Below is one of their featured artists in an interview.

Of course, the digital gift allow enormous degrees of freedom to artists and publishers alike, and according to Wired’s report, Shane Smith, co-founder of Vice, is working with Intel to create an atmosphere like the 1920s Paris Salon culture where artists of different flavors mashup (not a 1920s term) to create new thinking and new things.  To my eye, the one fly in the ointment is that Vice could have used something like IndieGoGo — which is like a crowdsourcing venture firm/investment bank which will help anyone raise money for any idea or cause — and take 9% off the top. The Creators Project could allow the audience to help fund the art. It seems like the “radical” media empire is still conservative where the money is concerned.

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Recently, a team consisting of MIT students, along with Pratt & Whitney and Aurora Flight Science Corporation announced a radical new design for a jetliner which would take about 1/4 the amount of fuel consumed by today’s planes.

The Bubble Jet

It made me wonder, what are the attributes of a breakthrough design?  The Tesla electric car is an example, as was the original iPhone, the Sony Walkman and the Brooklyn Bridge.  What do they share?  Here’s my list of five things:

1. Radical goals.  Each was at least a 50% increase in performance (the bridge), decrease in size (the Walkman, or radically new design (the plane);
2. Willingness to invent new core concepts.  The Brooklyn Bridge invented a whole new kind of underwater excavation.  The iPhone reinvented interface.
3. A recognition of the desire for a better way — either as a creative exercise (Walkman, iPhone) or as a solution to a really difficult problem (Brooklyn Bridge and Bubble Plane).
4. A brilliant team of engineers.
5. A visionary leader.  We know the ones for the iPhone, Brooklyn Bridge, and Walkman, and I’m sure one will surface for the bubble plane.

What are your candidates for innovations that broke the Paradigm?  How did they do it?

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One of the trickiest decisions in business is to assess: is this innovation too innovative for my firm? You need to decide, will the core business embrace the new product or service, or reject it?  Xerox, which invented the laser printer, ethernet, and the personal computer — rejected the new computer and network but adopted the laser printer. Why?

History is littered with attempts at diversification which “went too far”. My friends Chunka Mui and Paul Carroll’s book Billion Dollar Lessons, waded into the largely unfathomed waters of large scale business failures, and found a number of firms that tried to diversify into growing markets only to lose money and valuable management time. (in the interests of full disclosure, my firm Diamond Management & Technology Consultants worked with Paul & Chunka on the research in the book.) One of their more memorable stories concerned the attempt by American Standard, famous for their toilets, and a manufacturer of plumbing supplies, air-conditioning and automotive systems to enter the small medical device testing business powered by their core competency in laser technology. As Paul & Chunka point out, even though American Standard was solidly profitable at this time they wanted to grow faster and success in the medical device domain would give them patent protection for their inventions, if successful. In 1997, American Standard bought a series of companies and applied their expertise into the medical device market. By 1999, after $30 million in losses, they took a $126 million write off and sold the division.

In hindsight, it is easy to say they were wrong. But as executives we have to make forward looking not backward looking decisions! If the executives at American Standard were following the logic of “Core Competencies of the Corporation,” the very popular 1990 article by Prahalad and Hamel, one could argue that American Standard was making the right bet. So where did they go wrong? How could they have known that their investment was not “close enough” but rather it was “too far out?”

I think we can define “closer” in a very straight forward way. First, if an innovation threatens the core business model — it is a non-starter. There is no way that the New York Times could have invented Craig’s list — because it would have been commercial suicide. Once we get past that first and vital observation, I believe that we can look for “closeness” by using the some insight from the brilliant business historian Al Chandler. In his 1977 book The Visible Hand, Chandler pointed out that there are five ways to diversify a business: by customer, by distribution channel, by product/service, by geography and by competency. I believe that if the innovation your firm is considering is “close” to current practice on all five of these it is less risky to implement. If it is different on these five dimensions, it becomes much riskier. See the illustration below.

Thinking back to American Standard, the move into medical devices did not threaten the core business model, and it did match closely on competencies, and maybe on geography. However, it was far apart on customer, distribution channel & product/service. Therefore, my little model would say that the diversification was very risky.

Looking forward, I think this model helps explain why I think Microsoft will lose to Google in the war for the mobile phone. First, I believe that third party software for the phone will be advertising supported, not supported by people paying for software applications. According to my friend Andy Lippman co-founder of the MIT Media lab “No one is making money on iPhone applications. They are making money on what other business the iPhone applications is driving for them.” I believe Andy knows this is a bit of an exaggeration, but in the main he is right — the iPhone application revenue stream is not big. Companies should think of iPhone apps just as they think of couponing — as a way to drive demand. Second, it is impossible for Microsoft to switch over to an advertising driven business model (yes, I know MSN has advertising, but its profits are dwarfed by the software business). They cannot start to give away the razor blades — it’s just too painful.

Google, on the other hand not only has business model compatibility because they are already advertising driven, but they also have competency, customer, geography and product compatibility. They have been developing the distribution capability — both within the phone companies, and on their own directly. I know there have been complaints about their execution on the service end, and I’m sure the technology will have issues, etc., etc., but I believe that because of the fundamental “closeness” of this innovation, Google will make it work.

So, when considering a new innovation and you are trying to figure out if it will “work” within your firm ask yourself the following questions:

1. Does it conflict with our fundamental business model? If yes, STOP!

2. If the answer to question 1 is no, then ask yourself how does it fit along the five dimensions in my model. If it misses on a couple, it is risky. If it misses on most, your best bet may be to set up a separate division or company to pursue it.

3. Is your career tied up in a move like the one at American Standard?

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My colleague Anand Rao and I think that augmented reality is going to be a big deal for businesses.  What is it?  It is the idea that locations, devices, even the human body will be “augmented” by linking and overlaying additional information on top of “regular” reality.  Milgram’s reality continuum below is useful.

For example, this month’s Esquire will have visual codes embedded in the text – even on the cover – which you can hold up to your computer’s camera.  The computer will read the codes, and take you to a video or other information linked to that magazine “location”.  As reported in the Wall Street Journal, it is a bit gimmicky – but is it really?  After all, the physical magazine is a great way to create a link to more comprehensive content.  The magazine cannot afford to put too much information between its covers, but it can put as many pointers as it wants to more content.  This basic notion is very, very powerful.  (See the great post on this topic by Gary Hayes which inspired our thinking.)

Anand and I think it will change at least the following five thing:

1. The nature of advertising.  The beauty of augmented reality is that it allows any advertiser to bring the possibility to purchase much closer to the advertising stimulus.  So, if I’m reading an interesting article in a magazine and there is an add with a visual code on it, I can then scan it with my BlackBerry or my iPhone and order it immediately.  We know that if you are an advertiser you want to allow people to transact while they are interested in your product or service.
2. The nature of location.  The GPS revolution in cars has already created a low fidelity version of augmented reality – by enabling maps in any car that wants them.  You are already starting to see applications available on advanced phone that allow an individual to hold their phone up to a location, and the information about the location is overlayed.  Right now these are focused on tourism, but it does not take a lot of imagination to see that any sales or service force would love to be able to walk up to a building and understand the nature of the potential customers inside, or installed products to be serviced.
3. The nature of healthcare.  One of the great problems of healthcare is the lack of information at the point of service.  It is only a matter of time before you will have the option to link your medical information to you.  There is cheap, available bio recognition technology which will allow someone to swipe their finger, or speak into their phone to identify themselves, and then to allow the doctor to have information available to them – just like Esquire allowed for the ads to be tagged to a page
4. The nature of relationships.  The next natural extension of Salesforce.com would be to have a person be able to either scan in a face (face recognition software is standard issue with many new photo products, including Apple’s iPhoto, ’09, and then provide the salesperson with the best available background search on the individual whose information may be out on Facebook, LinkedIn, etc.  Also, if you are like my friend and Diamond Fellow Gordon Bell, who has taken his whole life digital (documented in his book Total Recall, which just came out), you can link any face to all you know about that person.
5. The nature of knowledge.  Much knowledge about devices, setting, and other work is not available because we have a hard time getting access to it at the right time.  BMW did a concept piece on augmented reality where a mechanic is replacing a fan while wearing special glasses which project the instructions onto the car as he looks at the engine compartment.  Our understanding is that this is not operational, but something like it will come.

Why are we so bullish?  The military has been augmenting the battle field for some time, and now with advanced GPS devices, better telecommunications and  hand held devices that have enough display and computing power to make things interesting, we think we are at the beginning of a boom market in augmented reality.  So the question becomes, is your firm thinking about how their advertising, selling, products and service will change when you can overlay the right information, at the right time and in the right form – everywhere?

What do you think?  Are we at the beginning  of a revolution or is augmented reality an idea that will always be in the near future, but never here?

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Oliver Yeh a first year Mechanical Engineering student at MIT just successfully designed, launched and retrieved a camera 17.5 miles into the atmosphere and took 4,000 photos for $150.00!  That’s probably more money than he will spend on his celebratory dinner.  The Boston Globe’s article on Yeh was entitled “Modern Icarus took off with the right stuff”.

Not only is this story inspirational to someone like me who after millions and millions of miles in the air (no exaggeration), still sits glued to the window when I fly over Manhattan or the Grand Canyon, but it points out how the minimum efficient scale of doing fantastic things is getting orders of magnitude lower in some industries.  This lower cost of entry can be magnified and acelerated when you have someone come to the design problem with an entirely new set of expectations.

Craig Newmark’s Craig’s List is estimated to have about $100,000,000 in revenue — with 30 employees.  That’s $3.3 million per employee, and even if it costs $70,000,000 to run it (which it can’t), that’s a profit per employee of $1,000,000 — compared to Amazon’s at approximately $30,000!  His model is so disruptive because he gives away all the ads except those for jobs, thereby turning what was newspaper profits into what economists know as consumer surplus.

Now, there’s been a lot of interest in “disruption”, ever since Clay Christensen did his pathbreaking work on The Innovator’s Dillemma — which chronicled how incumbent companies were upended by competitors or substitutes who arose from “lower” markets to create a new cost and demand base.  Southwest Airlines did it in air travel, and Wal-Mart in retail.  You know the story.  In addition, Wired magazine, this past summer, just had its “disruptive by design” conference — prominently featuring Chris Anderson’s new book “Free”, which chronicles how more and more things are given away for free.

What is the tool-kit to create a disruptive design?  Here are some ideas:

1. Simultaneously simplify a number of advantages together to create a new cost base. When Southwest Airlines launched they flew only one aircraft — the Boeing 737.  Today, they have one aircraft.  They had one class of service.  They had simple fare strucutures.  They sold direct to end customers.  They went to the less frequented, second tier airports.  They had broad job descriptions and cross-trained so that one person could do many jobs — including pilots handling luggage.  The created radical simplicity by simplifying many dimensions. They are not the only business where complexity has stopped adding value.  New, radically simple business models can be created in everything from financial services to healthcare.

2. Give away the other guy’s razor!  Craig Newmark garnered dominant market share by giving away almost all the blades.  Put more formally, every “two-sided market” has a vulnerability — and if you can enter by aiming at the vulnerability — you can win.  In China, Google is now giving away MP3′s and sharing the ad revenue with the artists.  Paid music is now all marketing promotion.

3. Look for new, radically cheaper ways to do the job.  Yeh used run of the mill technology — cell phones, video cameras, and even a styrofoam cooler — to create a much cheaper design.  Consumer technologies and on-demand services like Amazon’s Mechanical Turk, enable new business designs that could have a fraction of the cost to deliver the same services.  Imagine a security company that was truly designed around the inexpensive, internet connected, monitoring equipment available today.

4. Think about leveraging a very few individuals with extraordinary talent.  It is possible today for a small group of people to make a spectacular movie — ala Pixar, or to manage billions in capital — ala hedge-funds.  Is there a way to create incredible value for your organization by leveraging the power of a small group across millions of consumers or billions of dollars?

One good way to get at these disruptive designs is to do what we at my firm call a “Fiercest Competitor Workshop” — which starts with the premise that you have been fired from your old organization but you have access to ample capital and talent.  Your task is to design the fiercest competitor that could take the market from your old firm.  In my experience when running these workshops — it takes people about an hour to get out of their old mindset, but when they do, they often design the most wonderfully dangerous potential competitors — because no one knows their company’s vulnerability to a disruptive design better than their own employees.  It is just the leaders job to unlock this disruptivie design potential — so that it can be harnessed to help the incumbent make more money for it current shareholders, employees, and provide better surplus value to customers.

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