Wharton's David Robertson discusses his new book on innovation.

powerlittleideasWhen most people hear the word innovation, they think about Uber, Airbnb and Amazon — disruptive companies that upended entire industries with a radical new way to do business. But Wharton operations, information and decisions practice professor David Robertson argues that this view is too narrow a definition of innovation, and one that is not useful to most companies.

In his book, The Power of Little Ideas: A Low-Risk, High-Reward Approach to Innovation, Robertson talks about a more practical way companies can innovate: by focusing on complementary actions around a key product. He teaches innovation and product development at Wharton and is the host of Innovation Navigation, a Wharton Business Radio program. Robertson recently spoke to Knowledge at Wharton about his book.

An edited transcript of the conversation follows.

Knowledge at Wharton: The inspiration for this book actually came, in some ways, from a can of paint. Why don’t you tell us about that?

David Robertson: My previous book was about Lego, and that was a story about a company that figured out that you didn’t want to innovate inside the box — that wasn’t going to get them anywhere — and you didn’t want to innovate outside the box because that almost put them out of business, but rather, around the box. Complementary innovations around a core product — the brick for Lego — was what really led them to their recent success.

I got my house painted a couple of summers ago, and the contractor I hired put together a proposal. He helped me choose colors and helped me decide what kind of paint, what things needed painting the most, and how I’d manage on a limited budget. He put together a proposal, and he picked Sherwin Williams paint.

I looked at my favorite consumer ratings magazine, and Sherwin-Williams paint is good, but it’s twice as expensive as another paint that’s equally good. So I talked to him, and I said, “Can’t we use this other paint?” And he said, “Well, yes, we could, but it’s going to raise your price.” I said, “I don’t understand, the other paint is half the price.” And he said, “Yeah, but paint is only about 15% of the total cost of your project. I have to think about all the supplies; I’ve got to line up the labor; there’s the overhead of running a company, etc..”

He said, “What Sherwin-Williams does is help me though the entire process of working with you, from helping you choose your colors — there’s a Sherwin-Williams color consultant — to figuring out how much paint is needed for the primer, and for the paint itself, brushes, tarps, all the other supplies. Then, during the project, it is keeping me supplied — I can return extra primer if I don’t need it. If I run out of something, that Sherwin-Williams rep will be over at the site, delivering what I need. Then, at the end, he helps me put together that next proposal. Because there’s always a next proposal, as any homeowner knows.

I looked, and it turns out within a five or 10-minute drive of my house, there are more Sherwin-Williams stores than there are Starbucks, and that’s because they realized who their customer is. It’s not me. I’m the end consumer, of course, and I’m the one that has Sherwin-Williams paint on the house. But it’s that small business, the painting contractor, [that they focus on]. Sherwin-Williams, like Lego, realized it’s not so much about the product — their product is a can of paint — it’s about their innovations around the product that make that product more valuable.

I wanted to write a book for companies that wanted to try this approach to innovation. I don’t argue that there’s one best way to innovate, but it seems like it’s a tool that every innovation leader should have in their tool belt.

Knowledge at Wharton: What isn’t being discussed when companies think about innovation, or how they should strategize toward an innovation?

Robertson: I interview innovation thinkers, gurus, consultants, executives who have done interesting innovative things, and I continually see this binary view of innovation … — [develop] an incrementally better version of your current product here … or something revolutionary and disruptive, be it some kind of Blue Ocean Strategy thing (creating an uncontested market) or lean startup or disruptive technology, some kind of new and better version of your business. In other words, leaving the old behind and venturing out into new territories.

“Sherwin-Williams … realized it’s not so much about the product — their product is a can of paint — it’s about their innovations around the product that make that product more valuable.”

To see innovation in that binary way is dangerous. Most people in most companies doing most of the innovation are focused on that current product that needs to become more competitive. Maybe it’s competitively challenged; maybe it has become a commodity, whatever. What I liked about the approach of Lego and Sherwin-Williams was that it was focused on that type of innovation: How do we take our existing product and make it more compelling, make it more valuable for our customers?

Knowledge at Wharton: Your book is not saying that in using this ‘third way’ of innovating, we have to throw out things. It’s more about finding the right toolkit to use for whatever your problem happens to be, or to solve your market issues. Are there ways, once you start using this third way, to keep your employees on track?

Robertson: This book was a hard one to write, because the stuff in the middle is really review. It’s the material at the beginning and the end that’s different. What I lay out in the book is a four-step process. And the first step — what you are asking about — is really the step of answering, “Who are we as a company? What are our crown jewels? What are those things that we did yesterday that we’re going to do today and that we are going to do tomorrow? The things that made our company great, that our customers still depend on us for? What’s our [Lego] brick?”

Some companies have many different bricks. Lego was easy. Sherwin-Williams was easy. But there are other companies where it’s more difficult [to find the key product]. But starting small, choosing something important, and then trying to understand what customers are getting from the product is the first step. That is a different step. It’s almost where you’re not going to innovate. What’s going to stay the same? I think that’s a much more stable base to build innovation efforts from. Then, once you’ve done that, it’s understanding what the value is to the customer, what I call “the promise,” that’s the second step.

Then you come to the third step, which is the creative idea generation, and there’s lots of different ways to do it. Then, going into some of the prototyping and experimentation to understand whether you have the right ideas, that’s all pretty well-trod territory. I put in some things that are unique to this approach to innovation in the book. But then, it’s the fourth step, and you have to read all the way to Chapter 7.

If you’re a company that’s good at product development, developing a better version of your product or service, then you have probably set up roles and responsibilities, and structured processes, metrics, reward systems, that make you very good at that. But that actually prevents this approach to innovation. You have to change some of that, otherwise, you are setting your team up for failure. That last part, about how you change your organization to give your team the chance to be successful, that’s what makes this so hard.

“Get a team organized around some product, and give them the freedom to really think more broadly than just about the product or service.”

Knowledge at Wharton: You also have to organize your company that way, because if it’s organized toward disruption, you can’t do this.

Robertson: That’s right, and it’s why I suggest starting small. Get a team organized around some product, and give them the freedom to really think more broadly than just about the product or service. Rather, give the team the mandate to start thinking about other services, partners, channels to market, whatever, that will really help your customers get more value from the product. That’s something that can be really difficult to overcome in a company. But if you start small, you can show that it’s valuable, and then build up from there.

Knowledge at Wharton: Now you also point out — using Kodak as an example — that this is not the answer for every company, for every problem. For example, Kodak probably couldn’t have used the third way to survive the advent of digital photography.

Robertson: That’s right. I think of it as another tool in the tool belt that I don’t see people talking about.

Knowledge at Wharton: One of the things you talk about in the book is that Lego — back when their fortunes had declined, and they were looking for a way back to growth — first turned to incremental innovation. Then they turned to disruption, and then they turned to this [third way of innovating around the box].

Robertson: I saw that pattern being repeated again and again. I saw it with Apple; I saw it with Gatorade. One of the first things that companies tend to do is … maybe they’ve grown because they came out with a great product. So they do more of that product, and they expand it to new geographies, and the company grows and everything’s wonderful. Then, all of a sudden, that’s not enough. That avenue for growth hits its inevitable end. Then what often happens — what happened at Lego, Apple, Gatorade, etc. — is they keep putting out more versions of the product.

Every new variant that they spin off makes less money, but has just as much cost. So profits go down, sales don’t go up, and the whole thing — if you keep doing it — will result in a problem. What happened at Lego — as also happened at Apple, and that happened at other companies — is that they begin to ask this: How can we reinvent the future? How can we reinvent the future of play for Lego or computing for Apple or whatever? And they come out with all kinds of revolutionary disruptive products. And that’s really dangerous. It’s expensive, it’s difficult, it fails a lot.

It doesn’t mean you don’t want to try. You absolutely want to try. You have to have somebody looking out there to see what’s happening with technologies, and with competitors, and new low-end, high-tech solutions that could disrupt you if you’re not really paying attention to it. You’ve got to be focused on that.

“Steve Jobs was not a disruptor. He was disruptive, but not a disruptor. That may sound like academic nitpicking, but I think it’s really important.”

But it’s tough to bet the company on it. It was only when those companies went back to the core product and started innovating around it that they began to have the success that they had.

Knowledge at Wharton: A lot of times, when people talk about innovation at Apple, what they talk about is disruption. You argue that it’s the third way that actually came first.

Robertson: Yes, and I get a lot of heat for that second chapter about Apple, because I’m arguing that [its late cofounder and visionary CEO] Steve Jobs was not a disruptor. He was disruptive, but not a disruptor. That may sound like academic nitpicking, but I think it’s really important, because it says something about where innovation leaders should look for ideas. Let me go into that in a little bit of depth.

Apple, when it came out with the iPod and iTunes in 2001, made major changes in the music industry. Of course, in 2003, when they opened up the iTunes Store, that was a big change. And it opened up the first major digital market.

If you’re a music company or if you’re a company making MP3 players, that feels like a disruption. But the point that I try to make in the chapter is that Steve Jobs was not looking to disrupt. You’ve got to go back to 2001 to see that Apple was a company that had focused on the PC market, and had steadily been losing share. I think they had a peak of about 15% in the mid-1990s … and hit a low of 4% market share. Things were really bad at Apple in 2001. Of course, it was the tech crash, so there was less demand, but things were not going well.

What Steve Jobs was doing with the iPod and iTunes was he came out — and I urge anybody to go back and listen to his Macworld presentation from 2001, where he shows a picture of a Mac in the middle, and he shows around it a VCR and a digital camera and a CD player and a Palm Pilot — and he said, “Your life is becoming digital. Your pictures are digital, your movies are digital, both the ones you watch and the ones you take. And your music is digital. And in no place is this experience worse than with music. So, we’re going to help you manage your digital life.” And then, he introduces the iPod and iTunes.

And iTunes, actually, was a product called SoundJam that he’d acquired the year before and improved slightly, but it was introduced as iTunes. And of course, the iPod was, at that time, an MP3 player. And Steve Jobs, if you go back and read Walter Isaacson’s biography, fought like crazy resisting taking iTunes to the IBM platform, which of course, was necessary. I mean, the customers just demanded it, so he had to. But the purpose of the iPod and iTunes was not to disrupt the music industry, it was to complement the Mac. It was to sell more Macs and to make the Mac more valuable. It was to make it the hub of your digital life.

Again, if you’re in the music industry, those feel very disruptive. But Steve Jobs was not looking to disrupt. He was saying, “What is our brick? What’s that center of who we are? It’s the Mac. How can we sell more Macs? Well, by making it more valuable. Well, what do people want? They want to manage their digital life.” And in 2001, that was becoming a real thing. Let’s do that for one area — music — and let’s see whether that can’t sell some more Macs. It really was, I think, a misunderstood case. That is not a case of disruption, not from the standpoint of what was going through Steve Jobs’ mind in 2001.

Knowledge at Wharton: What do you think is Apple’s brick today? Would it be the Mac or the iPhone?

Robertson: They followed where their customers led them. That iPod, of course, became the iPod Touch, and then it became the iPhone in 2007. Then the App Store opens up in 2008, and there’s this whole system of complementary innovations around the iPhone. Now, of course, they make a lot more money from the small screen than from the big screen. The iPhone has become its own center of a system of complementary innovations. One of those, of course, is the Watch. We will see whether the Apple Watch becomes a third center. It doesn’t look like it is. It looks like Apple is not quite able to execute. One of the things that Steve Jobs was able to do, he had that force of personality that demanded everybody in the company work together to make an insanely great customer experience.

“The purpose of the iPod and iTunes was not to disrupt the music industry, it was to complement the Mac.”

Well, as the company has grown, and as Steve Jobs is gone, it may be getting harder within Apple to bring together all the different parts of the company to really make that seamless experience. To make it not around one center, but around two or even three, if you count the Watch.

I end the book with a story of Disney. Disney is both a great example because they were the first to do this — back in 1937, they were doing this with the first animated feature, Snow White and the Seven Dwarfs. They also had records, so you could sing along. They had bath salts, so you could smell like Snow White. They had events at the movie theater. The Mickey Mouse Club, at its peak, was bigger than the Girl Scouts and Boy Scouts combined. All those things made the movie more valuable and the whole experience better. But as Disney grew, and — especially during the [CEO Michael] Eisner years, this has been well documented — all those different things became their own business units.

So there was the theme park business unit, the movie business unit, the stores business unit, and the TV shows. All those things kind of went in their own direction. And the one that was let go, that lost some of its luster, was movies and telling stories. A lot of the characters in the stories were the things that drew people to Disney World, and to the merchandise in the stores and so forth. And Bob Iger, when he took over for Eisner, realized that. He said, “I had this eye-opening trip in Tokyo, where I looked around, and all the characters that kids were really excited by or interested in were either very old Disney characters, like Mickey Mouse or Donald Duck and Goofy, or the new ones from Pixar.”

All the other movies that they had been making — The Princess and the Frog, Bolt — were just a lot of very ho-hum movies that Disney put out. They’d lost that art. So Iger purchased Pixar, and used the management of Pixar to help revive the fortunes of the Disney innovation. Of course, that led to Frozen and some of the other great Disney animated features that we’ve seen, and a revival of the whole system of innovations around it.

Knowledge at Wharton: How do you find those ah-ha moments, like when Gatorade realized that athletes were its core audience?

Robertson: It starts with that question, ‘What are our crown jewels?’ Lego asked the question, ‘What would the world miss if we were gone?’ And what they found was that people would miss the brick, the plastic brick. … The toys that didn’t have bricks in them were the toys that failed. People felt that if there was no brick, they had no reason to do business with Lego. They’d rather go to Fisher-Price or Mattel or Hasbro. Just asking that question, ‘What are our crown jewels?’ And then, for each of them, what would the world miss if it was gone? Then, going out and talking to those customers and watching them use the product. Watching kids play, or watching a contractor paint a house: That’s what you have to do to understand where other innovations might make that crown jewel more valuable to a customer.