Schrage unveils a testing framework called the 5×5, in which participants rapidly perform simple experiments that test their business hypotheses. The goal of the 5×5 is to produce actionable results from lean innovations while minimizing risk.
PART I: THE INNOVATOR’S HYPOTHESIS
The Innovator’s Vision
Good ideas are often bad investments. The costs associated with these good ideas often outweigh the benefits they deliver to an organization. Experimentation improves, accelerates, and simplifies ideas, making it easier to manage risk and streamline traditional idea analysis. Schrage’s 5×5 methodology is a framework for innovative experimentation that includes three components:
- A diverse team of five individuals.
- A five-day timeframe.
- Five business experiments costing less than $5,000 each.
Many organizations put money into the wrong things and underinvest in opportunities in order to get quick returns. The 5×5 method strives to align people around insights that emerge from experiment portfolios. This method seeks an80/20/20 vision, meaning that experiments ideally generate 80 percent of the information needed to make good decisions 20 percent of the time, using only 20 percent of the resources typically required.
What Is a Business Hypothesis?
A business hypothesis is a testable belief regarding value creation. It suggests a possible causal relationship between a suggested action and an economically positive outcome. It must be based upon an explicit value metric. A generic version of a business hypothesis looks like this:
The team believes that taking <this action> will result in <this desirable outcome>. This will be proven because <the explicit value metric> <significantly changed.>
To be successful, a business hypothesis must be written down/shareable, simple, frugal, and scalable.
A business experiment is a test of a business hypothesis that yields meaningful, educational, and measurable results. Almost anyone should be able to repeat the experiment and get similar results. When conducting business experiments, individuals should consider three things:
- Whether their experimental methods elicit the core value relationships proposed in their hypotheses.
- Whether the experimental media enhances or constricts learning outcomes.
- Whether the experimental media is compatible with their metrics.
PART II: THE INNOVATOR’S FOCUS
Ideas Are the Enemy
Good ideas are rarely worth the time, money, or effort they require. They are the enemies of productivity. The actual benefits of good ideas seldom outweigh their associated costs. Quick, cheap, and simple experimentation often yields far better results.
Implementation takes precedence over ideas when measuring value creation. Enacting an idea is the substance of innovation, and implementation is a process of discovery. It reveals deeper insights into a concept’s potential. Implementation elevates an idea to practice, making it actionable, practical, and better. Actions bridge the gap between ideas and their applications. Actions should be as quick and cheap as possible, with the results giving form and context to ideas.
Throughout history, successful innovators have discussed ideas, but they invested their time and money in expressive experimentation that allowed them to glean more value more quickly than their competition. This is the secret to innovation success.
Simple, Fast, Cheap, Smart, Lean, Important
There are six components that are essential to competitive innovation:
Successful business experiments also share these qualities. The best experiments generate the greatest opportunities in the least amount of time. The best innovators act, test, and respect results.
Attitude is just as critical as aptitude when it comes to innovation. Open-mindedness and a willingness to tweak preconceived notions are essential. Thinking big but acting small is also key. Tiny experiments can deliver enormous results.
Each experiment should address a fundamental question that everyone agrees is pertinent. It should also produce actionable insights into that fundamental question. Experiments should have a sense of urgency that accelerates value creation and concentrates value appreciation.
The Fundamental Value Innovation
Multibillionaire Warren Buffet’s philosophy is based on sticking to simple financial fundamentals and basic value sensibility. This approach to investment is equally applicable to innovation. Reducing the cost of experiments is an important step in this process. Amazon exemplifies this mandate. It runs hundreds of cheap, quick experiments on business hypotheses in an ongoing effort to add value to its customers’ experiences.
Although Buffet’s philosophy provides the basic tenets for experimental innovation, fundamental innovators must go even further. Quick experiments do not solve every problem, but they can show that problems are solvable. They generate actionable insights extremely quickly and preserve resources for further development.
The success of simple, cheap, fast experimentation belies the conventional wisdom that great returns require great risks. In fact, the opposite is true. Innovators have the ability to develop great value without making huge investments or running significant risks.
Investing in Experiments
In innovation experimentation, curiosity and ingenuity matter more than big budgets. The availability of better and cheaper instruments of experimentation makes it more possible than ever to turn a simple experiment into a transformative innovation.
Technical capability–not just intellectual acuity–is essential to gaining insight. Contemporary advances in instrumental design ensure a continuous revolution where innovative hypotheses thrive. Unfortunately most organizations do not understand how to design or manage portfolios of business experiments, which can result in the inefficient use of resources, poor confidence, and low morale.
PART III: THE INNOVATOR’S PORTFOLIO
Blockbusted: A Case Study in Experimental Frustration and Failure
Schrage worked with video rental company Blockbuster to overcome its customers’ dissatisfaction with the late fees the company was charging. The challenge it faced was transforming the late fees from a consumer pain point to a more marginal issue. It needed a simple, fast, and cheap way to learn more about its customers’ behaviors. The firm wondered whether issuing email reminders about returning videos would make customers happier. The working hypothesis was that more customers would return videos on time if they were reminded to do so, resulting in greater customer satisfaction. The proposed experiment was to design an email protocol, obtain customer email addresses, and send out reminders; however, Blockbuster executives wanted a bigger, more expensive solution. They skipped the experimental method and instituted an untested strategy of eliminating late fees, resulting in bad publicity, class-action law suits, and eventual bankruptcy.
Like Blockbuster, many organizations do not understand innovation investment. They would rather have a brilliant breakthrough than cheap, simple, yet valuable insights. Some of the reasons organizations give for bypassing the experimental method include:
*It costs too much.
*Their lawyers will not allow it.
*Suppliers would be upset.
*Their marketings department do not like it.
*It is “not the way the industry does it.”
Understanding an organization’s culture of resistance is key to clearing the way for 5×5 experimentation.
Exploring and Exploiting Experimentation
In today’s global economy, there is an intense competition over acquiring market share. Because of this, organizations must strive to become better innovators to avoid the risk of being left behind.
The 5×5 X-team approach emphasizes lightweight, high-impact business experimentation that improves a company’s innovative methods.Lightweight in this case means lean in terms of time, money, and resources. High-impact means that the experiments test hypotheses that management cares deeply about. X-teams compete against one another to create the best portfolios to present to top management. This method insists upon experimental ingenuity within specific constraints, pushing participants to think inside the box. The box itself is designed to make disruptive innovation not only possible, but also likely.
Key Steps to the 5×5
In order to successfully apply the 5×5 method, organizations must keep five key concepts in mind:
- Make compelling business hypotheses simple and simple business hypotheses compelling.
- Perform simple experiments quickly.
- Conduct quick experiments cheaply.
- Seek results that speak for themselves.
- Focus on experimental insights more than experimental results.
Situational awareness is critical to a successful 5×5 process. The issues of concern should be common knowledge among all participants, and they must be willing to ask simple questions. Participants must also express business opportunities as testable hypotheses rather than good ideas. Finally, they must follow these 10 steps:
1.Know why: Consider how the process affects all departments.
2.Decide how high to go: Gain support from a leader, executive, or process owner.
3.Pick a patron: Find someone who can provide the project with credibility.
4.Do not ask for money: Instead, procure access to resources such as time and technology.
5.Define the scope: Manage expectations by defining measurable and meaningful desired outcomes.
6.Pick a delivery date and deadline: Define finish lines to motivate teams to work quickly.
7.Get an executive presentation commitment: Schedule a presentation where the X-team can report insights and offer proposals.
8.Get the people: Involve creative, ambitious, and high-energy individuals in the process.
9.Plan the kickoff meeting: Introduce participants and review the methodology.
10.Launch: Address remaining questions and concerns and launch the project.
PART IV: THE INNOVATOR’S CULTURE
Crafting Great Business Experiments
Successful, high-impact experiments do not require genius, but they do require ingenuity, the ability to ask and answer fundamental questions about value creation. Great 5×5 experiments reflect collaborative interactions based on three things:
1.Great strategic vision, which requires passionate commitment to bold hypotheses, experiments, and testing. It invites faster, better, and cheaper experimentation.
2.Great problems, which inspire great experiments. The problems may seem insignificant in scope, but they represent opportunities for meaningful innovation.
3.Great disagreements, which inspire great advances. Innovators seeking to reframe organizational boundaries should focus on their firms’ biggest internal disagreements regarding value creation. Some questions that help create value from disagreements include:
*What experiment would improve the quality of the debate?
*What experiment would help win the argument?
*What experiment could create common ground?
*What is the quickest way to do this experiment?
*What new and productive argument should this experiment create?
A Guide for X-Teams
The prime question facing each X-team is, “What impact does the team want to have on top management and the organization?” The struggle over the answer will reveal the talents, ambitions, diversity, and ingenuity of team members.
Five critical attributes of a successful X-team include:
- High-energy focus on potential impact.
- Clear alignment with top management priorities.
- Simple and compelling presentations.
- Pleasant surprises.
- Scalable next steps.
Leaders must choose individuals who are innovative, energetic, talented, and up-and-coming for their X-teams. Each team’s challenge is to produce an impressive portfolio by building on the insights and expertise of each participant. Outcomes must demonstrate ingenuity and enthusiasm. Behaviors that contribute to team success are:
*Beginning at the end to identify desired outcomes.
*Identifying a persuasive story behind each proposed experiment.
*Giving each team member the chance to shine.
*Showing executives the collective contribution as a product of individual inputs.
*Working as quickly as possible to heighten focus, dynamics, and discipline.
*Crafting no-lose and win-win hypotheses to avoid wasted time and resources.
*Making failure affordable by choosing cheap experiments.
*Not confusing surveys with experiments–questions can be part of an experiment, but they do not qualify as experiments themselves.
*Ensuring the hypothesis demands an experiment.
*Addressing the details to build credibility.
*Giving speed, simplicity, and economy precedence over excellence.
*Being passionate, confident, and engaged.
What Makes “Hypothesis” So Hard?
Testable, simple, and compelling hypotheses typically make managers uncomfortable because they are unfamiliar and seem to be unrewarding. Many organizations prefer to define their problems and opportunities in terms of requirements and plans. When organizations begin framing themes as testable hypotheses instead of executable plans, they profoundly alter their interpersonal dynamics. Planning becomes less important as learning takes precedence.
Three heuristics for hypothesis have the power to convince executives:
- Frame challenges that are important to executives.
- Provide reasons to convene teams.
- Identify, incorporate, and influence idea adoption.
PART V: EXPLORING THE 5X5 EXPONENTIAL FUTURE
Experimenting with Experimentation
By design, the 5×5 framework is flexible and adaptable. It promises to be just as effective for future innovation as it is in the present. Strategic market advantage will continue to rely upon diversified portfolios of innovative hypotheses. Leaner, faster, and simpler experimentation will define the future’s innovation ecosystems.
Interconnectivity will form the platforms for rapid experimentation and testing. Future firms will follow the lead of experimental pioneers such as Amazon, Google, and Netflix by exploiting network economics to scale simple experiments into value-added services.
Humans will eventually team up with artificial intelligence to accelerate and improve the 5×5 methodology. Data will be digital and patterns will be complex, but human input will remain an essential component to making freestyle experiments as creative and compelling as possible.