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Innovators are not the only force behind innovation. Innovations are largely driven by the use of innovative prototypes. Practically every innovation that defines today's marketplace has resulted directly from extensive prototyping and simulation: the airplane, the animated motion picture, the transistor, the microprocessor, the personal computer, spreadsheet software, recombinant-DNA biotechnology, junk bonds, the leveraged buyout, the Internet and the Web, financial derivatives and synthetic securities, index funds, yield management. If, indeed, the child is father to the man, then the prototype is the father of innovation. In virtually every significant market in today's economy, prototypes, models, and simulations enable innovation.
There may be a handful of truly successful global companies — Phillip Morris and Coca-Cola, for instance — that cannot trace their market leadership directly to prototyping and simulation. But consider the companies that do depend on prototyping to make their projects work: Boeing, Microsoft, General Electric, Gillette, Hewlett-Packard, Sony, IBM, Swatch, Royal Dutch/Shell, Walt Disney, Caterpillar, Federal Express, American Airlines, AT&T, Procter & Gamble, Nokia, Intel, 3M, Merrill Lynch, Toyota, Ford, and General Motors are just a few of the most obvious examples of organizations whose competitiveness utterly depends on a culture of prototyping and simulation.
The inescapable conclusion: In business today, you can't have a culture of innovation without a culture of prototyping and simulation. The future of modeling, simulation, and prototyping is the future of innovation. And the future of innovation is the future of models, prototypes, and simulations. Managing the future of prototyping defines the next great challenge for companies that are seeking to out-innovate the competition.
Microsoft's Win(95)-Win(95) Deal
In August 1995, amid a global frenzy of media hype and consumer anticipation, Microsoft formally launched its much-awaited and long-delayed Windows 95 operating system. The new software had a huge and immediate impact on the marketplace and was one of the most successful launches of a personal-computer program in more than a decade.
Compared with earlier versions of Windows — and relative to its bulk and awkward design — Win 95 was remarkably free of bugs. The operating system had been in the works for years, and top Microsoft executives quietly affirmed that Win 95 had cost the company "hundreds of millions of dollars" to develop. Microsoft's technical managers understandably took great pride in the rigorous testing and development initiative that created a new platform for personal computing.
Perhaps more important, the successful launch of Win 95 made that software the operating system of choice, secured the company's dominant position in the operating-systems market, and greatly contributed to the company's overall value. The rapid acceptance of Win 95 also improved the company's stock-market valuation and solidified its position as one of the world's wealthiest and most influential technology companies.
But here's what Microsoft's leadership didn't quite so publicly discuss about its success: The world's wealthiest software company had received a kind of subsidy from many of its best customers — a subsidy whose value arguably approached $1 billion.
How so? While finalizing Win 95's features and functionality, the company had distributed roughly 400,000 copies of a "beta" version of the system. The beta-testers, working in thousands of beta sites worldwide, included sophisticated corporate connoisseurs of software as well as computer enthusiasts who enjoy the opportunity to participate in a beta-test.
On the surface, the beta-testing project seemed like a good deal both for Microsoft and for the beta-testers. But even the most conservative back-of-the-envelope estimate reveals an enormous transfer of wealth. Taking those 400,000 Win 95 beta versions, let's assume that 25% of them either were never used or provided no worthwhile information to Microsoft. That leaves 300,000 beta copies in use — still a sensationally large sample of people helping Microsoft to discover and debug harmful errors, as well as to suggest potentially valuable enhancements. As a result, Microsoft was able to tap the resources of a technical population that was as large as a medium-size city.
Meanwhile, the beta-testers themselves no doubt incurred hard-dollar costs, plus the normal costs of running a new piece of software on a PC: The new operating system had to be loaded onto PCs, many of which needed additional memory or other technical upgrades, and people needed to be trained on the prototype software. Because the software was still unfinished, it had bugs that occasionally caused computers to crash and to lose useful data. Those crashes might have even brought down entire local-area networks for hours at a time. And, without question, such time and maintenance costs can be significant.
Similarly, there was the cost in terms of t theime needed to log, track, monitor, and report Win 95 deficiencies. Although Microsoft did provide a diagnostic tool with its beta version that automated the monitoring process, working with unfinished operating systems is never a task for the timid, the cheap, or the uninitiated.
A reasonable estimate of the costs of testing a single beta version for several months exceeded $3,000. But even that number is on the low side: Industry experts predicted that the first-year costs of upgrading to a finished version of Win 95 could easily have topped $4,000 per corporate PC — and they were right.
Do the math: If beta-testers absorbed an average of $3,000 in costs per site, and if there were 300,000 copies of the software in use, then those beta-testers effectively subsidized the final stage of the Win 95 development to the tune of $900 million. Remember, this is a deliberately conservative estimate. Factor in the market benefits of new ideas that were suggested by the Win 95 corporate beta sites, and it could be said that Microsoft reaped $1 billion in value from its customers and developers — before it sold a single copy of Windows 95.
In other words, Microsoft's beta process provided Microsoft with roughly $1 billion in subsidies from some of the world's smartest PC users and software developers. That subsidy enabled Microsoft to produce a far better product for far less money in far less time than it otherwise could have done.
Now transfer that scenario to the rest of the world of business. Consider how much more competitive companies like Alcoa, DuPont, or GE Plastics might be if they received the equivalent of a $1 billion subsidy from Toyota, General Motors, and Ford to develop lightweight materials for auto bodies. What if Lufthansa, British Airways, and Air France provided a $1 billion subsidy for Airbus to build its next-generation airliner?
But, of course, that subsidy isn't only about money; it's also about creating and managing relationships that let innovators tap into the talent and the time of their savviest customers in a cost-effective fashion. In this context, social capital is at least as valuable as the financial capital. The inescapable conclusion: Microsoft's skillful use of its prototyping process has given the company a set of extraordinary competitive advantages in the global marketplace — some economic, some intellectual, some social.
Microsoft's perception? According to one senior executive, "It would be fair to say that Windows 95 was a good example of customers' contributing and benefiting from the prototype process. They gain because they assess the prototype or beta software and start assessing the impact on their organization and how to plan for it. Microsoft gains because of the feedback we get on bugs, features and functions, and the enthusiasm we garner if we did a good job."
The Moral: Prototypes can be a medium for both creating and managing a value-added community of customers that subsidizes project-development costs.
The Question: Does your organization use its prototyping process as both a tactical and a strategic resource, and are your best customers subsidizing your key innovation initiatives?
Boeing Prototypes Its People
Boeing's development of its breakthrough 777 jet marked a profound transformation of both the company's culture and its design technologies. New design-build teams replaced Boeing's traditional practice of dividing the work among disparate engineering departments. Plans, drafts, and drawings that were once sketched on Mylar sheets were now digitized and managed by a supersophisticated computer-aided design program called CATIA (computer-aided three-dimensional interactive application).
"Integration is what we were interested in," recalls Henry A. Shomber, a 39-year Boeing veteran and the 777's chief engineer for digital preassembly. "We had a saying: 'If it isn't in CATIA, it isn't in the airplane.' "
That mantra — along with the goal of integrating various design functions — represented a radically new discipline for the world's largest aircraft company. Boeing's plan for the 777, explains Shomber, was to prebuild the entire airplane — including such subsystems as avionics and hydraulics — in CATIA. The goal was to resolve all design conflicts before physical assembly took place. Boeing even devised an add-on system called EPIC (electronic preassembly integration on CATIA), so designers and engineers could test how well their components would fit together.
In preparation for that new approach to creating aircraft, the company distributed about 2,000 terminals to the 777 design team, all of which were connected to what was then the world's largest grouping of IBM mainframes. In addition, key suppliers from around the world had instant access to the data and were notified of changes and modifications almost immediately.
Boeing's new digital-design infrastructure also alerted engineers when design conflicts created "interferences." For example, if the avionics team and the hydraulics team developed systems that competed for the same physical space — for areas of the plane that Boeing called "volumes" — in the digital simulation of the 777, then the Boeing-developed software would send each group an email about the conflict. That way, the two teams could settle the issue before proceeding with the design prototype of the plane. Boeing recognized that integration needed to extend beyond computer-aided design to include computer-enabled communications.
So far, so good: Technology solves integration problems in the prototyping process. But, according to some reports, engineers on the 777 design-build teams deliberately introduced conflicts with other systems into their proposed designs. Sabotage? An unsubtle rebellion against the new technology? Engineering humor? A fundamental abuse of the prototyping medium?
No. Although Boeing officially acknowledges only that interferences naturally evolved, according to at least one mechanical engineer, some of those interferences were intentional. Why? So that engineers in one part of Boeing could use the interference to find the people in other parts of the company with whom they needed to discuss future design issues. The CATIA-enabled network — which was originally created to give Boeing's engineers and suppliers the ability to build a digital prototype suitable for manufacture — was also helping to promote communication and collaboration throughout the organization. In other words, the software's ability to notify appropriate parties about interferences became, at least in some instances, a tool to forge interactions between various groups within Boeing.
The resulting conversations and negotiations resolved design conflicts before more serious problems could emerge. Instead of meeting only to settle difficult engineering disputes, people were meeting in a less threatening, more exploratory context about these anticipatory interferences. Instead of defusing conflicts after the fact, savvy managers used the CATIA technology to prevent problems from developing in the first place. The prototyping medium generated a new genre of interaction between previously isolated disciplines and transcended Boeing's traditional organizational "silos."
The Moral: New prototyping media can spur conversations between people to create new value — sometimes even by chance.
The Question: Do your prototyping and simulation processes create new opportunities not only for formal information management but also for informal interaction?
Sidebar: New Rules for Project Wow
We asked Tom Peters to come up with his short list of essential guidelines to make every project a Wow Project. Here are seven rules that apply to every element of work in the project economy — from fast prototyping to the Art of the Wow.
1. Never accept an assignment as given. That's someone else's way of conceptualizing the project! Your first step should always be to question a project — to challenge it, to reshape it, to remold it into something that you can call your own. Make it into something that you're sure will pass the "Is it worth doing?" test.
2. Every project always consists of both tangibles and intangibles. Like a DNA strand, a project is a double helix. One strand is made up of tangibles: the timetable, the deliverables, the measurables. The other strand is made up of intangibles: the emotions, the experience, the learning. Everyone focuses on the tangibles, but the intangibles are what matter.
3. Embrace the confusion. Here's what you need to be able to say about your project when you're halfway into it: "When we launched this project, we thought we knew what we were doing. Now we know that we don't know what we're doing — but the things that we're confused about are much more important."
4. Create your own professional-services firm. No matter where you work or what your function may be, you need to create your own network of cool people. Collect your own set of freaks and geniuses. Build your own firm-within-a-firm.
5. It isn't worth doing if nobody gets mad. One good measure of a Wow Project: How many people are pissed off at you?
6. Think rainbow. If you pull together a project team, and everyone on it is a white male over age 50, something is wrong! Try the Statue of Liberty approach: "Give me your tired, your poor, your huddled masses yearning to breathe free!"
7. Project management is emotion management. The hardest part of any project is handling the emotional roller-coaster ride that comes with it. Every Wow Project starts on emotions and runs on emotions. Be prepared for the emotional shifts that all projects undergo, and avoid emotional whiplash that will come when your project goes around sharp corners.
Michael Schrage (firstname.lastname@example.org) is a research associate at MIT's Media Lab and a Merrill Lynch Forum Innovation Fellow.
Adapted from "Serious Play: How the World's Best Companies Simulate to Innovate," by Michael D. Schrage. Printed by permission of Harvard Business School Press. Copyright ©1999 by the President and Fellows of Harvard College. All rights reserved. Available in December 1999.
A version of this article appeared in the May 1999 issue of Fast Company magazine.