When It Comes to Digital Innovation, Less Action, More Thought

27 January, 2015 / Articles

A few years ago, we had an idea for a new business opportunity. One of our colleagues owned a restaurant and was complaining about the amount of money he lost because expensive bottles of liquor often went missing (the industry calls this “shrinkage”). This is a problem affecting tens of thousands of restaurants — an attractive target market. So, like good innovators, we began working on a solution to our colleague’s problem by building an automatic liquor inventory-management system.

We partnered with a company in a Singapore that had expertise in RFID technology, and began to put together a solution involving tags on bottles, a customized storage unit that could read the tags, and a software management system. The system would give owners real-time inventory information, which would help them to identify shrinkage early. Wall-mounted cameras near the storage locker would allow them to see precisely when a bottle left the locker, which would serve as a strong deterrent. A matching tag reader in the bar allowed the software to send out alerts when a bottle was removed from the storage locker but never showed up at the bar.

As we went through various iterations of the solution and spending mounted, it became increasingly clear that there were good reasons why no one had tackled what seemed like an obvious opportunity. The integration between the tags, the storage unit, and the software was technologically tough to pull off. What’s more it required busy bartenders, who weren’t particularly interested in making their jobs more complicated, to scan new bottles before putting them in the locker. Integrating our software into the myriad inventory systems used by restaurants across the United States was even trickier. When we finally had prototypes to show customers, they balked at the idea of investing in expensive hardware when they could simply hire an individual consultant to provide occasional advice about stopping shrinkage. In 2009, we decided to shut the business down.

Our failure highlights a hidden challenge facing innovators today. The simplicity and affordability of innovation has led to too much action without thought.

Starting our business wasn’t free by any means, but by tapping into low-cost designers in India, partnering with the company in Singapore with the enabling RFID technology, and using off-the-shelf software, we were able to develop the first version of our solution relatively quickly and cheaply.

And today, almost a decade later, the cost of starting such a business has radically decreased. Imagine starting a computer hardware business today. An entrepreneur can rent computing capacity from Amazon Web Services, find skilled designers via eLance, accelerate software development with GitHub, place targeted advertisements on Google or Facebook, and tap into a legion of contract manufacturers. Scaling a business still requires hard work and investment, but an entrepreneur can develop the first version of a solution and approach early customers on very lean budgets.

That would seem to be good news for innovation, and in many ways it is. But it has also created the ever-strengthening impression that the only way to learn is by action. Paralysis by analysis, the bane of many a large organization, should certainly be avoided. But so too should doing without thinking. In fact, doing without thinking is arguably even more dangerous because you can squander time and money by tripping over traps that could easily have been identified if only you’d done the right work beforehand.

Before you fling your minimal viable product out into the world to see what happens, at the very least make sure you have done the following:

Identify offerings comparable to what you envision that have struggled commercially and find out why. Perhaps you’re about to make the same mistake.
Consider why it is that the large companies that could have gone into the space you’re contemplating haven’t. Is it possible they know something you don’t?
Talk to someone who knows more than you do about the key part of your business, such as your target customer, distribution channel, or business model. Are there hidden risks?
Document, with a degree of detail, a single transaction. Who is your first customer? How will he hear about your idea? How will she obtain it? How will you support him if he’s not happy?
Devour publicly available financial statements for companies competing in markets related to yours. How do people make money? What big investments are typically required? Are you missing an important ingredient that is necessary to compete? Are you underestimating what it will take to get to market?
Create a hypothesis for how you will make money, and describe it to a savvy friend. Ask that friend to poke holes in it.

A company that aspired to bring a sustainably oriented product to the university market shows the benefit of proper upfront thinking. The team was developing a plan to pilot the business. As they mapped out a transaction, they imagined that it would take a few months for them to close their first sale. But since they’d never sold to the university market before, they thought to check their assumption with some people in their network who had relevant experience. A couple of calls to experts suggested that the product the company contemplated crossed several internal jurisdictions, and could therefore take years to sell, not months. The business model wouldn’t make sense with such a long sales cycle, so the team decided to consider other target markets and entirely different models.

This kind of learning can happen very quickly. While it doesn’t replace the very vital lessons that comes from prototypes, pilots, and other mechanisms that get you as close to the realities of the market as possible, it certainly enhances learning from those activities.

If an ounce of prevention is worth a pound of cure, perhaps an ounce of preparation is worth a pound of prototypes.

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