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 / First Quarter 2001 / Issue 22(originally published by Booz & Company)


Here Comes Hyperinnovation

New prototyping methods have radically reduced the cost of testing products, services, and business models — effectively creating a new financial resource: iterative capital. Be sure you spend it wisely.

A new economics of innovation is transforming global business. The marginal costs of prototyping products, simulating services, and modeling business systems are rapidly shriveling into insignificance. It's becoming ever cheaper and easier for ambitious organizations to explore new ideas faster. The inevitable result? Hyperinnovation.

Hyperinnovation is what happens to innovation when innovators upgrade from a scarcity of resources to an embarrassment of riches. Rules change. Opportunity and risk get redefined. Top management has to rethink its innovation strategy and tactics. Hyperinnovation forces even the most innovative firms to pick up their pace. They have little choice.

In their rapidly changing markets, Cisco Systems, Nokia, Goldman Sachs, and American Airlines have aggressively positioned themselves both as first-movers and as even faster followers. Firms like Boeing, Dell, DaimlerChrysler, Industrial Light & Magic, and Federal Express depend utterly on hyperinnovation infrastructures, built on networks of collaborative simulation systems, to hone their competitive edge. They know that the speed, creativity, and cost-effectiveness with which they model their innovations largely determine just how quickly, creatively, and cost-effectively they can bring those innovations to market.

From the outside, hyperinnovation may appear chaotic, a jumble of nonlinear pressures and processes. But the firms that engage in it most successfully understand that they are, in fact, investors in a rational marketplace that is being funded by a new form of capital. Not quite financial or human capital, this brand of capital has nonetheless become a rich and fast-growing source of disruptive wealth. Call it iterative capital: It is a resource that gives companies the ability to play seriously with more and more versions of various ideas in less and less time.

To appreciate the concept of "iterative capital," consider what might happen if the innovation budget of a new product development team unexpectedly tripled. In what might the team invest its sudden windfall? Exploring new ideas? Refining old ones? Hiring new people? Buying new equipment? Would this tripling of resources have a marginal or a major impact on the team's planned innovation initiatives? Now suppose the innovation budget is increased fivefold. Tenfold. One hundredfold. How about one thousandfold? Would that have an innovation impact? Of course it would.

The world's most innovative firms have in fact invested billions of dollars in tools and technologies that let them virtually model, prototype, and simulate their proposed innovations. Once these models are in the machines, the economics of iteration implode. The cost of making changes becomes essentially marginal. Want to alter a mission-critical assumption or test a pet hypothesis? Tap a key to do another iteration. Want to simulate the impact of a requirements change? Iterate, iterate, iterate. Digital media inherently makes iteration faster, cheaper, and easier. The fusion of Moore's Law, which predicts that the number of circuits that can be etched onto a silicon chip doubles every 18 months, and Metcalfe's Law — that the value of a network is the square of the sum of its nodes — ensures that the computational and network costs of doing iteration after iteration of a target model, prototype, or simulation will shrink to near-nothingness. Networked iterative capital is like networked financial capital: Its velocity and impact increase as it hurtles toward opportunity.

Cisco Systems Inc., for example, uses software to simulate network architectures for customers deciding what kind of digital nervous systems they want to build for themselves. The Boeing Company and the Chrysler Group rely on a CAD/CAE package called Catia to prototype their airplanes and automobiles; Goldman Sachs Group Inc. depends on Monte Carlo simulations to stress-test its derivative and synthetic security innovations. American Airlines Inc. and the Federal Express Corporation digitally redesign their operations research models to manage their just-in-time logistics and pricing models.

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