Successful innovation doesn’t have to be disruptive
Though the business world glorifies big disruptive ideas, in reality, most progress is achieved by implementing hundreds or thousands of minor improvements that can have a big cumulative impact. Nevertheless, and once in a blue moon, one small change can result in a big return because of the internet’s massive scale.
Consider the following example from Microsoft. In 2008, an employee in the United Kingdom made a seemingly minor suggestion: have a new tab automatically open (or a new window in older browsers) whenever users click on their Hotmail link on the MSN home page, instead of opening Hotmail in the same tab. A test was run with about 900,000 UK users, and the results were highly encouraging: The engagement of users who opened Hotmail increased by an impressive 8.9%, as measured by the number of clicks they made on the MSN home page. (Most changes to engagement, in contrast, have an effect smaller than 1%.) However, the idea was controversial because few sites at the time were opening links in new tabs, so the change was released only in the United Kingdom.
In June 2010, the experiment was replicated with 2.7 million users in the United States, producing similar results, so the change was rolled out worldwide. Then, to see what effect the idea might have elsewhere, Microsoft explored the possibility of opening the results in a new tab when people initiate a search on MSN. In an experiment with more than 12 million users in the United States, clicks per user increased by 5%. Opening links in new tabs has been one of the best ways to increase user engagement that Microsoft has ever introduced, and all it required was changing a few lines of code. Today many websites, such as Facebook.com and Twitter.com, use this technique. Microsoft’s experience of reaping big rewards from simple changes is hardly unique. Amazon’s experiments, for instance, revealed that moving credit card offers from its home page to the shopping-cart page boosted profits by tens of millions of dollars annually. Clearly, small investments can yield big returns. Large investments, on the other hand, may have little or no payoff: integrating social media into Bing—so that content from Facebook and Twitter opened in a pane on the search results page—cost Microsoft more than $25 million in development costs, but produced negligible increases in engagement and revenue.
When small changes do result in big returns, they illustrate the power of scale: a 5% improvement can have a big impact if it’s multiplied by a billion clicks. But such changes are rare. What’s more common is a continuous flow of much smaller changes that accumulate quickly and are multiplied by a huge number of instances that can operate over a long time period. Imagine adding up the effects of hundreds of experiments that move important metrics by just 1% (or even less).
The power of incremental innovation
Indeed, incremental improvements of products have always been an important source of innovation. In a recent study of United States economic growth, the authors estimated that, between 2003 and 2013, improvements to already existing products accounted for about 77% of increases. Creative destruction by new companies or the new products of existing companies drove only 19% of growth. Similarly, studies in manufacturing and computer technology have shown that significant performance advances were often the result of a multitude of minor, but not trivial, innovations. Thoughtful managers understand this delicate balance between incremental and breakthrough approaches to drive growth when they allocate resources. When the LEGO Group emerged from near bankruptcy in 2004, its new CEO implemented a structured system of incremental continuous product improvements to drive 95% of the company’s annual sales. A separate group focused on breakthrough innovations, which developed 72 new concepts for each accepted one—compared with an 80% acceptance rate at the incremental product group. Within 10 years, LEGO was the most profitable toy maker in the world.
The tension between breakthrough and incremental approaches can be found in most settings, not just online businesses. For example, medicine has had a long tradition of searching for interventions that have transformative outcomes on patients. But perhaps, as surgeon and researcher Atul Gawande argues, success “is not about episodic, momentary victories, though they do play a role. It is about the longer view of incremental steps that produce sustained progress.” That, Gawande continues, “is what making a difference really looks like. In fact, it is what making a difference looks like in a range of endeavors.” One endeavor, manufacturing, has known and practiced this approach for decades. In Toyota’s renowned production system, for example, real-time experiments by its factory workers to eradicate problems are an integral part of its continuous improvement system. Even there, people are expected to form clearly articulated, testable hypotheses and explain their logic for each attempted improvement.
Of course, breakthrough and disruptive innovation will continue to play an important role in driving growth, as there are limits to incremental approaches. Companies do get stuck in local optimization, such as finding the best color shade for a web page button. It’s impossible to reach the sky if we limit ourselves to climbing a 40-foot ladder. But it’s myopic to view only those employees who take big leaps as innovators. Perhaps the real heroes are the people who run experiment after experiment—with inspiration, patience, and purpose—to win and fail fast.
Reprinted by permission of Harvard Business Review Press. Adapted from Experimentation Works: The Surprising Power of Business Experiments by Stefan H. Thomke. Copyright 2020 Stefan H. Thomke. All rights reserved.