Want a good way to get a group of executives to pause before making a decision about an innovation project? Ask them which of the following innovations they would prefer:

Innovation A: This innovation came out of the gates like a bullet, racking up first-year sales of more than $200 million. A clear value proposition, clever positioning, and a strong distribution network led to market success.

Innovation B: This innovation had first-year revenues of a mere $220,000. The innovation had proprietary technology, but the customer and the business model were very unclear.

It's obvious, right? Innovation A is the winning proposition.

Let's reveal more information. Innovation A was Vanilla Coke. It was a line extension that largely cannibalized sales of Coke's other products. Three years after launch, fizzling demand led Coke to pull the product from the market.

Innovation B was Google. In Google's early days, it had a technology and not much else. After a couple of iterations, though, it came up with its advertising-based business model, setting the stage for one of the greatest economic success stories of current times.

Far too many companies make decisions about which projects to fund based on a single set of metrics, with an overwhelming focus--particularly in today's challenging economic climate--on near-term sales. The context, or the type of innovation, matters a great deal. You should expect a line extension that rides on an established brand name with known distribution will come out the gates faster than a new to the world product that is still experimenting to find its business model.

While first-year sales are important, it's far more critical to tease out the underlying potential of an idea, and to watch how revenues grow in subsequent years. Many great growth businesses start small and take a few years they start exponential growth.

If you don't look at your Innovation As and Innovation Bs differently, you are bound to miss something. If you are like most companies, what you will miss are the Innovation Bs that are the best bets for long-term value creation but seem too small to matter in the early days.

Before making a decision about an innovation, make sure you know what type of idea you are evaluating. Then make sure you use the right metrics for that idea. Judge line extensions based on detailed market forecasts and other quantitative metrics. Judge new-to-the-world ideas based on upside potential, progress against key milestones, and other qualitative markers of success.

When a company talks about trading off pure performance in the name of lower prices, disruptive alarm bells start ringing. After all, companies like Dell Computer, Southwest Airlines, Wal-Mart, Charles Schwab, and Nucor have prospered by following this kind of low-cost disruptive strategy.

A startup company called LifeSize Communications hopes to be next on the list. As described in a recent BusinessWeek article, the company offers reasonably high-quality videoconferencing over the Internet at prices that are sharply below emerging market leaders Cisco Systems and Hewlett-Packard. LifeSize's solutions range from $5,000 to $40,000, compared to as much as $300,000 for Cisco's solutions.

It's reasonable to predict that we'll see an increasing number of similar low-cost strategies as economic woes continue and start-up companies seek to find the opportunity in economic turmoil. Therefore, it's natural to ask: How can you tell if a low-cost disruptor is going to succeed?

Our analysis of companies that have successfully and unsuccessfully followed low-cost disruptive strategies suggest that for LifeSize to succeed, it must be able to answer yes to three key questions:

1. Does it cross the "good enough" threshold? Stripping out performance to lower costs is not that difficult. But stripping out too much performance can leave a company with a product that actually under-delivers against a customer's needs. Consider a free, but inaudible, mobile phone, or a $200 laptop computer with 5 minutes of battery life. You must cross acceptable performance thresholds before price even enters into the equation.
2. Does the company's product / performance bundle run counter to the market leader's natural improvement trajectory? Staking out a low cost position isn't all that meaningful if a powerful competitor quickly crashes your party. Cisco has been quite clear in its desire to lower its price points to appeal to broader market groups. If natural product improvements lead to Cisco introducing a similarly featured, similarly priced product, LifeSize will be in trouble.
3. Does the company have a sustainable cost advantage? Lower input costs do not immediately translate into market success. Rather, low-cost disruptors have the greatest chance of success when they change the model in a way that makes incumbent success difficult. For example, Nucor didn't just offer lower priced steel. It used a completely different production technology (minimills) that allowed it to earn attractive profits at low price points. These kinds of production or business model advantages are much more difficult to replicate than particular features or functionality bundles.

Of course, the potentially massive videoconferencing market could support multiple players. But if LifeSize doesn't meet the three conditions detailed above, its chances of long-term success are quite low.

As a loyal supporter of Amazon.com's Kindle e-reader, an email from a client titled "Throw that Kindle away!" was sure to catch my interest.

The email linked to a video demonstrating an electronic reader that a U.K. company called Plastic Logic plans to launch next year. The video is eye-catching. Plastic Logic's device--which is powered by the same E Ink technology behind readers offered by Amazon and Sony--is the size of a sheet of paper and has a stunning 13-inch screen.

As the company's name implies, the device is based on plastic technologies originally developed at Cambridge University. Plastic Logic is betting that lower capital costs and a simpler production process will provide it with a sustainable cost advantage over devices based on silicon.

A beautiful design and a sustainable cost advantage certainly sound troubling for Amazon. How worried should Amazon's CEO Jeff Bezos be?

Innosight's lenses suggest not too worried, unless Plastic Logic dramatically shifts its approach.

There are two problems with Plastic Logic's approach. First, the company appears to be targeting business users. Its demonstration showed how users can carry the device instead of bushels of documents.

What's wrong with that focus? After all, the business market is where the money is after all. And who likes being weighed down by thick stacks of paper?

But think about that target user. Hassled executives have defined patterns of behavior about how they interact with documents. They are used to flipping, scribbling, and shuffling through those documents. Sure, the weight of the paper can be cumbersome, but Plastic Logic faces an uphill climb if its device makes it harder rather than easier to review and comment on documents.

Even more importantly, Plastic Logic doesn't appear to be following a business model that can hold a candle to the elegant simplicity of the Kindle model. As an example of Kindle's simplicity, I recently passed the Kindle around a small group to which I was presenting. By the time the device got back to me, a friendly audience member had subscribed to The New York Times (Amazon let me easily cancel the subscription).

While Plastic Logic still has plenty of time to sharpen its market focus and develop a compelling business model, I'm not ready to throw away my Kindle yet. I continue to believe that Amazon remains in a great position to continue to build a booming growth business.

You want to surprise people in your office? Ask them to estimate the percent of U.S. mobile phone subscribers who use email on their phones. Depending on who's doing the estimating, the figure ranges from seven to 13 percent .

A startup company called Peek looked at those figures and saw disruptive opportunity. After all, one of the most powerful ways to create new growth is to expand markets by making consumption simpler, more affordable, or more convenient.

This week, Peek's first product appeared in Target stores. The simple device, designed by product design powerhouse IDEO, costs $99. It allows users to send and receive email using T-Mobile's wireless network for $19.95 a month. And that's it. No phone, no wireless Internet connectivity, no attachments. Just email.

Will Peek follow the Apple iPod or Pure Digital Flip video camera--both elegant devices that have grown markets through simplicity--on the road to disruptive success?

Reviewers suggest it delivers on its promise of making mobile email simple. David Pogue from the New York Times wrote, "If you get lost on this machine, heaven help your encounters with an A.T.M."

The critical question is why so many people don't send email messages on their mobile phone. If they are truly scared off by complexity, hard-to-use keyboards, or overpriced data plans, Peek has a chance of success.

There's another explanation, however. Perhaps the need to send email away from the office or home actually isn't that important to the mainstream consumer. In other words, they reason why they aren't consuming is not because existing solutions don't get the job done; it is because the job simply isn't that important to them.

My hunch is that much of the non-consumption in the market actually results from disinterest, inhibiting Peek's chances of success.

Even if it turns out that there is a huge pool of hungry non-consumers, however, Peek might be in trouble.

The company is following a business model--device plus monthly subscription fees--that looks very familiar to mobile handset manufacturers and wireless operators. If Peek's handset were significantly cheaper or if Peek featured no monthly charges, the company would increase its chances of success.

Perhaps Peek is already working on a second-generation device encased in a truly disruptive business model. If not, even if Peek does pioneer a market, expect growth hungry handset manufacturers and operators to figure out ways to mimic Peek's approach. While that would be a good result for consumers looking for simpler, cheaper devices, it would be bad news for Peek's chances of long-term prosperity--unless of course a market incumbent decides to pay a hefty premium to buy Peek!

Innovation is tough in the best of times. What do you do when times are tough and your industry's very survival is in question?

A newspaper executive asked me that question during a discussion this past Monday. While just about every organization is feeling some economic pinch these days, few have it as tough as newspaper companies. Print circulation continues to slide. Advertisers are fleeing to the Internet, where newspapers continue to lose ground to Google, Yahoo!, and countless others.

Newspaper companies are experimenting with new approaches to disseminating content, but those ventures aren't getting big enough quickly enough to offset declines in the core business.

To their credit, most newspaper executives with whom I've spoken recognize that they have to keep pushing. They know they have little hope of maintaining their relevance if they don't innovate. Yet, the pressure to staunch the bleeding in the core business makes it incredibly difficult to do things differently, to commit to innovating.

It's a tough challenge, and it highlights for other businesses that maybe aren't in the dire situation that newspapers are just how important it is to start innovation efforts when times are good, when you have the time and resources to allow your efforts to reach escape velocity. Had the newspaper industry really pushed the innovation agenda in the mid 1990s, we would be having a very different conversation today.

Telling people they should have done something a decade ago isn't particularly helpful, of course. So I provided the newspaper executive with the following pieces of advice:

1. Lower the cost of testing. Chapter 8 of our new book, The Innovator's Guide to Growth, suggested that companies should "invest a little to learn a lot" about key assumptions. When resources get scarce, you have to be even more creative about how to test critical assumptions. Fortunately, it has never been easier to develop and test an idea quickly and cheaply, using tools such as employee focus groups, low-resolution mock-ups, simulations, and "good enough" beta tests.

2. Creatively tap into outside resources. A lack of financial resources makes innovation difficult, but a lack of human resources to work on ideas makes innovation impossible. Resource-constrained companies need to develop creative ways to find bodies to work on innovation efforts. Newspaper companies can think about tapping into readers, family members, and even retired employees to help push ideas forward. Also, instead of feeling the need to create every new business themselves, newspapers can tag along with concepts pioneered by other companies, like they have done with real estate provider Zillow.

3. Ruthlessly prune the portfolio. Most companies that claim to have no resources actually have plenty of resources--those resources are just tied up in the wrong activities. When times are tough, companies have to be ruthless about weeding the innovation portfolio. They have to shut down the least promising ideas early so they can really focus on the ideas with the most potential (I wrote about the innovation portfolio in more depth on Forbes.com). Even though there's a risk that you might prematurely kill a great idea, better to kill one great idea early than to lose an entire innovation program because of lack of progress.

Unfortunately, I think things are going to stay ugly in the newspaper industry for some time to come. Companies that creatively push the innovation envelope have the greatest chance of emerging from today's troubling times as viable competitors. Those that don't will have marginally better fortunes over the next 12-18 months, but will lose the long-term ability to compete. 

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It didn't take long for the hype machine to gear up. Seemingly minutes after news began to appear about Google's new Web browser (called "Chrome"), pundits started talking about "browser wars" and Google's "Microsoft killer." In this case, the hype might be justified, if Chrome delivers on its disruptive potential.

Early descriptions sound ominous for Microsoft. Google's browser was built from the ground up to make it easier and faster to run Web-based applications. It is completely open source, meaning developers can modify the source code and easily design applications that work with the browser. And of course, it is free.

Google hopes the browser will lead more people to spend more time using its applications, browsing the Internet, and contributing to its advertising revenue. Further, it hopes to lessen the chances that Microsoft uses its browser dominance to subtly push people towards its own Web sites and applications.

Chrome presents an obvious threat to Microsoft's Internet Explorer software. But Chrome could do much more. If it works as advertised, Chrome could allow consumers to eschew Microsoft's operating system and applications. Instead, Chrome, Google applications, and other third-party open source add-ons could function as a viable--and again, free--replacement to the core building blocks of Microsoft's business.

Early reviews suggest that Chrome has some real benefits, but doesn't quite deliver on its promised speed and is missing some features that demanding browser customers take for granted. As Wall Street Journal reviewer Walter Mossberg noted, "Chrome is a smart, innovative browser that, in many common scenarios, will make using the Web faster, easier and less frustrating. But this first version--which is just a beta, or test, release--is rough around the edges and lacks some common browser features Google plans to add later."

The general approach sounds right out of the disruptive playbook. Sacrifice some features in the name of speed, flexibility, and price. Use a business model that looks unattractive to the market leader. Reap the rewards.

Of course, it is far too early to make definitive proclamations about Chrome. The most critical question from a disruptive perspective is the degree to which Google is able to obtain differentiated performance by integrating together its applications and its browser. If one plus one really equals something that is meaningfully more than two, Microsoft will struggle to match Google's performance, let alone deal with the ramifications of a disruptive business model.

However, if that integration does not confer any particular advantage, Microsoft is likely to do a "good enough" job of rolling Chrome's basic features into Internet Explorer, blunting the impact of Google's move.

Microsoft used the power of integration to famously crush Netscape in the browser wars in the mid 1990s. Today the company controls more than 70 percent of the browser market, and of course maintains a dominant position in the operating system and productivity applications market.

Early signs suggest that this story might play out in a different way, if Google can deliver the disruptive goods by turning the integration tables on Microsoft.

For another view of what Chrome means for Microsoft, see this post by Jeff Stibel.

People typically associate innovation with the introduction of a sexy new product or service. While this kind of innovation gets the headlines, innovative ideas applied to everyday problems can have just as much business impact.

Consider a recentWall Street Journal article describing how top fashion companies like Gucci and Burberry are working hard to better manage their supply chain. One critical problem: replacing dud collections before retailers grow antsy. Burberry has spent more than $100 million to improve its ability to ensure that the right products get to the right stores at the right time.

These challenges of course require a fair amount of blocking and tackling, but there's also ample room for fresh, innovative thinking. And think of the top- and bottom-line impact of finding better, cheaper, and faster ways to get products into stores more quickly.

Innovation should matter to you if your job doesn't involve strategy or product development.

Innovation is about solving old problems in new ways. Human resources or information technology workers can think of new ways to help internal customers solve the problems they face. Process-focused managers can develop ways to have their processes run better, faster, and cheaper. Customer-focused employees can find new ways to provide positive experiences to customers. And on and on.

The good news is that the principles that help growth-seeking innovators apply equally to internal innovation efforts. The following questions are a good starting point for any innovation effort:

• What is an important problem that the customer, or internal client, can't adequately solve?
• What stops the customer, or internal client, from adequately solving the problem?
• How can you make it easier and simpler for the customer, or internal client, to address the problem?
• What is a low-cost way to test your idea?

Innovation doesn't have to land in the headlines to have impact. Everyday innovation can be critical to long-term business success.

Companies just starting innovation efforts often begin by getting a group of people together and telling them "It's innovation time!" I've never seen efforts like this succeed in meaningful ways.

Instead, we suggest that companies begin innovation efforts by creating an innovation strategy that details clear targets and tactics.

Clear targets help internal innovators know what they're shooting for. A reasonable starting place is to imagine what success looks like five years in the future. Are you seeking to double your business? Hold it steady? Something else? Setting a target that is several years in the future can help to de-politicize a potentially charged discussion.

Then think about the sources of growth. How much can you reasonably expect your core business to contribute? In some industries your five-year contribution might be below today's contribution, and that's okay.

Next, look at what's already in your development pipeline. What can you reasonably expect that pipeline to contribute in the future? One tip here: make sure to risk adjust your pipeline. If you assume all of your projects will succeed, you are being wildly optimistic.

Now, calculate the gap (it will almost always be a gap) between where your projections suggest you will be and where you want to be. That gap is your target for new innovation efforts.

Then think of the tactics that are on and off the table. A lot of people think that creativity and chaos are friends. We disagree. Instead, we find it helpful to carefully consider what you want innovators to do, what you'll consider, and what you don't want innovators to do.

One way to make the tactical options tangible is to use this "Goals and Boundaries" visual (from Chapter 1 of The Innovator's Guide to Growth).

The figure (download it here) represents the "goals and boundaries" of innovation. Note how the figure includes a diverse set of elements, such as steady-state revenue, channel, business model, and brand. Customize the vectors for your context, and gain consensus about what's clearly in bounds, what's on the fringes, and what's clearly out of bounds.

Gaining consensus on this visual will help you to evaluate ideas and to guide innovators in their exploration efforts.

Formalizing targets and tactics is a great way to kick-start your innovation efforts. Start allocating resources to support your strategy, and you are on your way to innovation success!

Innovation inspiration can come from outside the business world. Today's source of wisdom: The Simpsons. Today's lesson: Be wary of peddlers offering skin-deep fixes for deeply rooted innovation issues.

Companies looking to boost their abilities to innovate routinely turn to companies that seem to have solved the innovation equation for inspiration. They observe elements of the company's environment (free food! no doors! online jam sessions!). They seek to mimic those environmental elements to get similar results.

The problem is that a "culture of innovation" involves much more than these superficial elements. In fact, my colleague Steve Wunker is fond of saying that culture is a lagging, not a leading indicator. Changing culture requires changing activities. Changing superficial stuff without changing the real stuff doesn't accomplish much.

If you have trouble remembering this, think back to the episode of The Simpsons when, after a random bear sighting, the town of Springfield invests heavily to guard against future "attacks." The town thinks the heavy investment pays off, because bear sightings drop by 100 percent.

One of Springfield's residents is notably unimpressed. With thanks from The Simpsons Archive, here's Lisa Simpson's conversation with her father Homer.

Homer: Not a bear in sight. The Bear Patrol must be working like a charm.

Lisa: That's specious reasoning, Dad.

Homer: Thank you, dear.

Lisa: By your logic I could claim that this rock keeps tigers away.

Homer: Oh, how does it work?

Lisa: It doesn't work.

Homer: Uh-huh.

Lisa: It's just a stupid rock.

Homer: Uh-huh.

Lisa: But I don't see any tigers around, do you?

[Homer thinks of this, then pulls out some money]

Homer: Lisa, I want to buy your rock.

It's a classic example of mixing up correlation and causation. The rock correlates with a lack of tigers--just like Google's free food correlates with a perception that Google is innovative--but it doesn't necessarily cause tigers to stay away.

Whenever someone tries to peddle you an innovation rock, ask, "Why exactly would that work?" and "What other things have to be in place for the rock to function?" If the rock peddler can't answer those questions, respectfully pass.

Out of curiosity, anyone else draw innovation insights from strange places?

One of the excellent editors at Harvard Business Publishing forwarded me a link to a BBC article in an email with the subject line: "Could Windows by Disrupted?" I didn't have to click on the link to know the answer is yes.

You see, everything could be disrupted. The important question is will disruption play out in a way that favors or kills the incumbent market leader? The real interesting question is "Will Microsoft disrupt Windows?"

The forces of disruption are at work in every industry. It can happen more quickly in some industries than others, but the potential is omnipresent. And as Clayton Christensen pointed out in his seminal book The Innovators' Dilemma, market leadership isn't just an insufficient buffer against disruption, in some cases it is the root cause of failure.

Consider the management classic In Search of Excellence. While some of the companies featured in the book continued to excel after it was published, companies like Amdahl, Atari, Data General, Digital Equipment Corporation, Eastman Kodak, and Kmart all encountered serious difficulties. In fact, an analysis by IMD Professor Phil Rosenzweig in his worthwhile read The Halo Effect found that the average "excellent" company from In Search of Excellence generally under-performed the stock market in the years after the book's release.

What about Microsoft? Windows has been one of the greatest business success stories of the last century. Complain all you want about initially buggy software or how Apple is always a generation ahead. Microsoft has a dominant market share and runs a business that generates an obscene amount of cash.

But this too shall pass. Windows is threatened because the computer itself is losing dominance to other devices and models of computing are shifting to minimize the importance of the operating system.

The change has begun. So-called cloud computing, a model where much of the functionality a user experiences exists beyond their own computer, minimizes the importance of software that resides on the computer. Increased mobility and inter-connectedness will hasten the rise of cloud computing.

Further, the proliferation of connected devices like Apple's iPhone, Amazon's Kindle, Sony's PlayStation 3 and Nintendo's Wii lessens the importance of the computer itself. Throw in virtualization--where a single physical machine functions as multiple "virtual" machines--and you have a recipe for a changing world.

Microsoft has no choice but to proactively plan for a world without Windows. The BBC article referenced an internal effort, code-named Midori, that's centered "on the internet and does away with the dependencies that tie Windows to a single PC."

A promising start. The fundamental question behind Midori and other efforts that are surely kicking around Redmond is to what degree will Microsoft truly let go of Windows? Can the company truly approach solving the problem of enabling computer applications and providing productivity enhancements from a somewhat blank piece of paper?

Microsoft's overwhelming tendency will be to look at the world through Windows-colored glasses. The urge will be to try to force fit its current business model--where most of its growth comes through the sale of a new computer--onto new growth markets. If Microsoft does this, the company will miss the real opportunities to prosper from disruptive growth.

Because the essence of disruption is simplicity and convenience, disruption almost always grows markets. While it's hard to imagine something that surprasses the personal computer market, there are billions of people who have no computing power whatsoever. And there are hundreds of problems people encounter regularly that lack good, elegant computing solutions.

If Microsoft can take its awesome reservoir of talent and free that talent from the constraints of its business model, perhaps it can be the next example of a company that turned the forces of disruption to its advantage.