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1-Page Summary of The Innovator’s Hypothesis
Ideas Versus Reality
It’s commonly believed that innovation requires ideas and that you need good ideas to compete in business. That’s not true, though. In fact, “good ideas are typically bad investments.” Instead of brainstorming new ideas, focus on developing a few hypotheses about how to innovate your business and then test them through experiments.
Business hypotheses are beliefs about how to create value. They should be measurable and testable, such as an action that will lead to a specific outcome. You have to agree on what metric you’ll use to evaluate the experiment’s results, like performance or revenue growth. The experiments should also be easily replicable by others who want to verify your results.
The “5×5 Approach”
A new innovation technique is the 5X5. This tactic focuses on a specific business approach and sets up several constraints to help create an experiment that will test a hypothesis. Five teams of five people should be assembled, each team creating at least five experiments over a period of five weeks or less for under $5,000 (€5,686).
You should try out at least 25 experiments in the workplace. Not all of them will be successful, but 10% to 20% of them may work and help you learn what people value most. The creativity of your employees may surprise you and make the workplace more interesting.
In order to compete in today’s marketplace, you need a product that is “simple, fast, cheap, smart and lean.” The 5×5 approach will help you achieve these qualities by asking the right questions and taking small steps toward your goals. It shows people that actions speak louder than words. Thinking rationally can be difficult for most people since they make mistakes when making decisions. The 5×5 approach will guide them toward rationality while providing empirical evidence to support their decision-making process.
Warren Buffett is known for investing in companies that are undervalued. He says, “The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.” Many investments ask you to invest two dollars just to get one dollar back. The 5×5 approach minimizes such opportunity costs and maximizes return on investment. It does not exhaust all possibilities in an area but seeks answers that yield immediate returns.
Scientists and inventors have made many discoveries with simple, low-cost experiments. Thomas Edison said that you can measure success by the number of experiments in a day. Experiments force people to rely on data more than their assumptions.
Making 5×5 Better
The 5×5 experimentation method can help you come up with the answers to your questions. Make sure that your hypotheses are clear and compelling, as well as simple and cheap to test. Shoot for results that speak for themselves. After these general principles, there are 10 additional steps:
Why should we do this? We need to know why our company wants to use the 5×5 X-team approach. We will write a 200 word statement that clearly and persuasively explains why we want to use it.
“Decide how high to go” – 5×5 works best when you have support. Your CEO’s backing is nice, but not required. Pick one department or unit that will help demonstrate the value of experimentation and work with them on it.
“Pick a patron” is an important step to becoming successful. Find someone who’s willing to pay attention and give credibility to your experiments.
“Don’t ask for money.” Instead, identify what you need to accomplish your goal and then make a list of people who could help. You may also need special technology or access to resources.
