The Heart of Innovation: A Field Guide for Navigating to Authentic Demand

THE

HEART OF

INNOVATION

The Heart of Innovation

Copyright © 2023 by Matt Chanoff, Merrick Furst, Daniel Sabbah, and Mark Wegman

All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. For permission requests, write to the publisher, addressed Attention: Permissions Coordinator, at the address below.

Ordering information for print editions

Quantity sales. Special discounts are available on quantity purchases by corporations, associations, and others. For details, contact the Special Sales Department at the Berrett-Koehler address above.

Individual sales. Berrett-Koehler publications are available through most bookstores. They can also be ordered directly from Berrett-Koehler: Tel: (800) 929-2929; Fax: (802) 864-7626; bkconnection.com

Orders for college textbook/course adoption use. Please contact Berrett-Koehler: Tel: (800) 929-2929; Fax: (802) 864-7626.

Distributed to the US trade and internationally by Penguin Random House Publisher Services.

Berrett-Koehler and the BK logo are registered trademarks of Berrett-Koehler Publishers, Inc.

First Edition

Library of Congress Cataloging-in-Publication Data

Names: Chanoff, Matt, author. | Furst, Merrick, author. | Sabbah, Daniel, author. | Wegman, Mark, author.

Title: The heart of innovation : a field guide for navigating to authentic demand / Matt Chanoff, Merrick Furst, Daniel Sabbah, and Mark Wegman.

Description: First Edition. | Oakland, CA : Berrett-Koehler Publishers, [2023] | Includes bibliographical references and index.

Identifiers: LCCN 2023017217 (print) | LCCN 2023017218 (ebook) | ISBN 9781523005703 (paperback) | ISBN 9781523005710 (pdf) | ISBN 9781523005727 (epub)

Subjects: LCSH: New products | Branding (Marketing)

Classification: LCC HF5415.153 C424 2023 (print) | LCC HF5415.153 (ebook) | DDC 658.5/75—dc23/eng/20230508

LC record available at https://lccn.loc.gov/2023017217

LC ebook record available at https://lccn.loc.gov/2023017218

2023-1

Book producer: Susan Geraghty

Text designer: Cindy Butler

Cover designer: Adam Johnson

We dedicate this book to our families, for their

inestimable support and tolerance and for

the joy they bring us. To Lisa, April, Karen,

and Dana; Yael, Talia, Eli, Jesse, and Nina;

Jason, Anya, and Lovely; Emily, Zachary,

and Mark; and Mackey and Marley.

CONTENTS

Foreword by Arvind Krishna

Introduction

PART ONE: ACCIDENTAL INNOVATION

1. Getting Unstuck

2. Finding Authentic Demand by Accident

3. Three Types of Innovation: Informative, Transformative, and Formative

4. Informative Innovation: GMR

5. Transformative Innovation: WebSphere

6. Formative Innovation: SoulCycle and a Strip Mall

PART TWO: DELIBERATE INNOVATION

7. Beginning to Innovate Deliberately: The Mystery of Damballa

8. Contending with the Waking Dream

9. Decontaminating the Innovation Lab

10. Diagramming Situations to Uncover Authentic Demand

11. Uncovering Authentic Demand with DPIs

12. Your Deep Gladness and the World’s Deep Hunger

Appendix: DPIs Step by Step

Notes

Acknowledgments

Index

About the Authors

FOREWORD

Blockbusters dominate our perception of innovation. The Xerox machine. The IBM PC. Apple’s iPhone. The Boeing 737. The Volkswagen Golf. But the path to innovation is more often defined by failure than by success, with around two-thirds of all market launches collapsing within a year. This leads to huge financial losses and millions of lost hours of engineering, design, and marketing work. The constraints on economic growth and development are clear and significant.

The Heart of Innovation tackles this urgent challenge with the novel approach of examining the demand side of innovation through the lens of a deeply layered understanding of human behavior. The result is a comprehensive guide to assessing authentic demand and a powerful new tool for innovators.

In the same way that the emerging study of human behavior fundamentally altered economic theory, we now have insights into how blind spots, biases, and false assumptions can impact innovation. The Heart of Innovation introduces valuable concepts anyone can use to avoid some of the thinking errors that commonly thwart the creation of new products.

Many of these thinking errors are well known: seeking out information that confirms our existing beliefs; continuing to invest time, money, and resources in a project because of what we’ve already put into it; misunderstanding information based on the way it is presented or framed. In a classic example, patients will consistently choose a doctor who describes a medical procedure as having a 90 percent success rate over another doctor who describes the same procedure as having a 10 percent failure rate.

There are plenty of famous cases of bias impacting business innovation. Because of its bias for the status quo, Kodak failed to embrace digital photography despite having invented the first digital camera. The same bias delayed Blockbuster’s pivot to online streaming and subscription-based models. In the case of AOL, a false-consensus bias led to an assumption that its customers wanted a closed, proprietary platform.

Despite our human fallibilities, we’re still rational creatures capable of producing life-altering innovations. We put a man on the moon, split the atom, turned sand into computer chips, and unlocked our own genetic code.

Innovation remains a powerful force, but it is not easy. Contrary to popular belief, innovation rarely relies on a eureka moment. It is often a slow, grinding process. As this uniquely insightful book reveals, that process should start by developing a rigorous, science-based approach to identifying authentic demand and recognizing the effects of bias. Doing this is essential for innovation to thrive.

Whether you are an entrepreneur creating a consumer product, a business leader trying to come to grips with shifting markets and client behaviors, or simply a curious mind, The Heart of Innovation is an excellent innovator’s guide for success.

Arvind Krishna

Chairman and CEO, IBM

INTRODUCTION

Frederick Buechner went right to the heart of why we wrote this book when he said, The place God calls you to is the place where your deep gladness and the world’s deep hunger meet.¹ This book has nothing to do with religion, and Buechner was talking about a spiritual calling, but being an innovator really does mean being called to where your deep gladness and the world’s deep hunger meet.

This idea helps us understand the difference between innovation and invention. Yes, innovators can be inventors too; they can take pleasure in inventing beautiful things or constructing technological marvels. But the deepest gladness of innovators is to make and do things that make a difference. In the commercial world, that means making a difference to a market full of customers and clients. In the nonprofit and academic worlds, it means making a difference for beneficiaries and students. In all these areas, the innovation isn’t complete if the hoped-for beneficiaries are indifferent—if the innovation doesn’t, in one sense or another, sell.

On the surface, innovation looks like an exercise in self-actualization. Innovators are inspired with a solution to what they perceive as a problem or an opportunity. Sometimes the inspiration comes from thinking long and hard about the problem, which strikes a spark. Sometimes the inspiration comes from something narrower and more personal—a stroke of lightning, long experience, maybe undefinable creativity. Wherever inspiration comes from, the innovator is invested because the inspiration is a manifestation of their deep self. The motivation to drive it and see it through is a matter of pride, validation, and ambition.

That’s part of the story. But a key part is missing, a small nuance that very often spells the difference between success and failure. Successful innovation also must connect with the deep selves, the motivations, the pride, validation, ambition, et cetera of the people for whom the innovation is intended. Not only the innovator’s deep gladness, but also the world’s great hunger.

Any good marketer might read that and think of course, how obvious. Good marketers do their best to pay attention to their customers’ hunger. They know that customers look for solutions. They know all about the framing and influencing factors that steer customers in one direction or another. But when it comes to innovation, marketers are usually too late. True innovations come at the very beginning of things. Marketers market what they’re given, or on the basis of theories about the product they’ve been given. The same is true of most innovations that come out of innovation labs and design companies—they can be fabulous new solutions to known problems. But in those situations, the innovators too are also starting too late. They start with a prompt, an idea about a need or problem, and they go to work looking for new ways to address it. But by then, assumptions about needs and problems are baked into the project, viewed through the distorted lens of an invented solution. Too often, they find themselves marketing square pegs to round holes. Unexamined or improperly examined assumptions may still happen to be correct. But most often they’re not. And when they’re not, no amount of inventiveness or human-centered design or marketing can save them. Innovators can’t reach authentic demand with a clever solution to the wrong problem, and marketers can’t successfully market when the customers or clients are essentially indifferent.

This book centers around understanding and creating the conditions for authentic demand. Authentic demand isn’t a matter of desire. It isn’t the product of rational decision-making, or irrational influences from tricks of marketing or framing, or solutions to problems. Authentic demand is a different way of looking at the whole issue of demand.

Imagine a river. There’s a small town on one side of the river and a factory on the other. The people who work at the factory live in the town. At 5:00 p.m., the factory whistle blows and the workers make their way home. Some go to the riverbank, where they’ve left little boats, and row their way home. Some walk upstream to where the river is shallow and ford their way across. A few people have invested in bigger boats, and they sell tickets to get across.

But then an innovator comes along, builds a bridge, and puts up a toll booth. Pretty soon, nearly all the factory workers get into the habit of paying the toll and walking across the bridge.

What demand looks like depends on where you sit. The bridge builder/toll taker sees overwhelming demand: every day, hordes of people head for the bridge and fill up the cash box at the toll booth. But from the customers’ point of view, there’s no intense desire, no clamoring for the product. The customers are not rationally solving problems. They’re not irrationally being influenced by marketing. Authentic demand is the demand of people who find themselves in a situation where buying and using a product or service is just a thing they do as part of living their lives.

Before the innovation, the workers went about their business using the tools at hand—boats, the shallow ford upstream, or whatever. After the bridge went up they kept going about their business, only now the tool at hand is a bridge. The shift to using this new tool wasn’t universal and automatic. But after the shift occurred, often after it was simply thought of, going back to the old way just wasn’t on the menu. Using a boat would make you look and feel like an oddball. Fording, if you happen to even think about it, now seems dangerous or unpleasant. Of course there will be exceptions, but not using the bridge will seem like a violation of acting normally, an exception to the rule. That’s what we mean by not not (which you will be reading about later): people will not not use the bridge.

That’s authentic demand. But finding it is tricky. The situation we’ve described here—workers, factory, river, and so on—is incomplete and can easily mislead. Suppose those workers typically went fishing from their boats on the way home, and brought home fish for dinner. Suppose there was prestige attached to being in the river-fording club. Suppose someone was building a new housing development on the factory side. Any of those details, and thousands more, might mean that no one uses the bridge. This book describes a method and offers tools and rules of thumb to help innovators and people who work with them to understand the actual situations that markets of people find themselves in, in the necessary relevant detail, so that the products and services that innovators offer will fit into and become part of customer situations.

The four authors of this book have spent a good part of their lives inventing, innovating, and working alongside innovators as managers, investors, teachers, and CEOs. You’ll see Danny’s story, bringing IBM into the internet age, in chapter 5. Danny has had a forty-year career at IBM, starting and/or running divisions of the company with thousands of people working for him and billions of dollars at stake. He’s now a consultant to IBM and to private equity firms and hedge funds. In chapter 8, you’ll see Merrick and Matt’s story of starting a company called Damballa. Merrick has founded eight startups, has been a tenured professor of computer science at Carnegie Mellon and Georgia Tech, and was head of the