IDEO Helps Big Companies Learn From Start-ups (from Forbes)

From original article by Peter Cohen in Forbes.
One of the biggest problems a large company faces is how to create and capture growth opportunities while meeting quarterly earnings expectations. It’s hard to do this because start-ups view this big company problem as a great opportunity to attack their markets.

After all, start-ups reason, if I can offer a big company’s customers more bang for the buck, that big company will be unable to match my offer without cannibalizing its existing business and missing its quarterly earnings targets.

Solving that little problem for large companies is part of Tom Hulme’s job. Hulme is Design Director at IDEO, the design firm founded by David Kelley who also founded Stanford’s Design School. Hulme is from the UK and he brought that British accent and a physics degree to Harvard Business School in 2005, graduating two years later in the top 5% of his class.

Hulme was in New York last week accepting a 2011 Webby Award for OpenIDEO, a platform for solving social challenges. In a June 16 conversation, Hulme explained IDEO’s approach to innovation and how he translates his work helping start-ups to large companies seeking to capture growth opportunities.

Hulme and the IDEO team helped Yoomi, a UK baby bottle warmer company that recently entered the U.S. market, to go from a general statement of human need into a viable business. The human need is one that any new parent can understand. Hulme’s client’s wife had recently given birth and the husband was looking for an easier way to heat up milk so he and his wife could get more sleep. Hulme discussed how the IDEO team helped Yoomi make six choices:

  • Set goals. IDEO took as a starting point the client’s goal of fixing the process of warming a baby’s bottle. This human need became “the anchor for all subsequent design and a rallying call for the IDEO and client teams,” according to Hulme.
  • Pick markets. IDEO realized that mothers had two options — traditional baby bottles and warming stations. But neither had satisfied Yoomi’s founder, Jim Sheikh. When IDEO gave mothers Sheikh’s initial prototype, however, it wasn’t well received. In listening to mothers, IDEO learned early on that all mothers want to breast feed but in practice many end up not being able to do it. So IDEO realized that Yoomi might need to sell its product as a contingency option — namely even though mothers thought they would breast feed, Yoomi’s baby bottle would be there in case they couldn’t always do it.
  • Raise capital. IDEO believes that start-ups should bootstrap for as long as possible. More specifically, they should try to use their own capital to build a prototype that meets the human need. After bootstrapping as long as possible and launching a prototype, it is easier to raise outside capital because the prototype communicates the product’s value and lowers the perceived risk in the start-up.
  • Build team. IDEO believes in creating multi-disciplinary teams because the creative tension among those disciplines leads to faster development. In working with Yoomi, IDEO assembled such a team, including product designers, an ethnographer, a branding expert and an entrepreneur.
  • Gain share and Adapt to change. For these last two choices, Hulme suggests that the only way to do these successfully is to think of a company as being in “permanent beta mode.” In other words, companies must always be doing experiments in which they build prototypes, observe how customers use them, and adapt accordingly. To that end, IDEO encouraged Yoomi to keep its manufacturing local and assembly in-house so it could shorten its “learning cycle time.”

Hulme works with large companies to help them apply these start-up strategies. He has found that large companies are most willing to adopt these ideas if the CEO gives the organization permission to fail and sets two types of objectives:

  • Outcome oriented. These goals might include, say, getting 30% of 2021 sales from products introduced in the last five years.
  • Value in the journey. These goals might involve rewarding people for trying to attack new markets and learning from the resulting successes and failures.

In working with companies, Hulme encourages them to map out what he calls a business model framework – that shows the link between the company, its suppliers, partners, channels, and end-users. Hulme argues that when companies innovate, they need to understand the interactions among the value network participants to figure out whether the innovation will work.

This business model framework is useful for helping companies set up decision trees that can help them learn.  In general, the business model framework might encourage a company to see how its innovation could create value for the network participants.

The most important decisions that would create the most learning at the lowest cost would go first. So Hulme encourages companies to start with the human need, develop a prototype designed to meet it, and once the end-user is happy, expand to other network participants such as retailers, wholesalers, and partners.

For instance, a large U.S. company was seeking to expand into new markets. An IDEO team in New York built a series of live websites to test the appeal of the ideas to consumers and analyze the effectiveness of different marketing messages.

IDEO used Google (GOOG) Adwords to drive real traffic to the sites and the team changed keywords and messaging continuously.  This fast and low cost real market feedback helped IDEO’s client develop a more effective online presence.

Before big companies can succeed with such innovations, the CEO must help people overcome their fear that failure will cost them their jobs. A CEO can do this by discussing her own failures and successes honestly and more generally modeling the behavior she wants people to follow.

Hulme’s enthusiasm for new ideas is infectious and it’s easy to see why companies would want to give them a try. If enough large companies do, they may find their way around the big company conundrum of capturing new opportunities while meeting short-term expectations.