Over the last few years, Web 2.0 has evolved to become not only a design paradigm, but also a development methodology that has become synonymous with innovation. Web 2.0 companies are able to innovate rapidly for four simple reasons:

  1. Low cost of innovation. You don’t need a bucketful of cash to prototype a Web 2.0 product or launch a Web 2.0 company.  Costs of computing and storage have fallen dramatically, and services like cloud computing virtually eliminate the need for heavy IT infrastructure, reducing fixed costs. Case in point: Y-Combinator, a seed fund that invests an average of just $15,000 per venture, has helped many young companies get their start.  Y-Combinator success stories include Reddit (acquired by Conde Nast) and Zenter (acquired by Google).
  2. Rapid bite-sized improvements instead of massive launches. The software that powers the Web services can be updated constantly, because it’s delivered over the Web. As a result, Web 2.0 companies often upgrade their services every day or every week, launching new features and fixing bugs.
  3. Ease of “measuring” user interactions with the service. Web services have the advantage that user interaction with the site or the service can be measured in a very precise manner. It’s easy to record the time spent by an average user on the site, the number of page views they saw, the trail of clicks and pages that helped them complete their task, and a lot of other such data. Because everything can be measured, Web companies have developed a philosophy of testing and measuring a lot more and guessing a lot less. Before any feature is launched to the entire audience of a site, it’s often tested on a small portion of the user base.
  4. An open innovation model. Web 2.0 companies have realized that some of their most innovative ideas might not come from within the company. Using Web-service application programming interfaces (APIs), they have exposed some of their most precious data to outside developers who can build innovative applications. Real-time search, one of the most used applications on Twitter, was developed by a company called Summize, using Twitter’s API. Twitter later acquired Summize.

Taken together, all these methods are geared towards a new model of innovation -- one that emphasizes rapid experimentation and serendipitous discovery. Since every idea is cheap and quick to try out with real users, and the results are easily measurable, Web 2.0 companies get to road test several ideas without spending excessive amounts of time trying to prioritize between them. Similarly, by allowing outside developers to use the company’s data to create applications without any restrictions, Web 2.0 companies are in effect launching hundreds of experiments simultaneously.

This throws the traditional model of product development and innovation on its head. In the old days, companies performed exhaustive (and costly!) analysis to determine which one or two ideas would be most likely to succeed, and then invested accordingly. The Web 2.0 model makes it possible to experiment with a lot of ideas, without investing a lot of upfront cash or forcing assumptions about which idea will deliver the biggest upside. This new model is great for a world in which consumer preferences are difficult to predict and change rapidly.

While your business might not have the same natural advantages as a Web 2.0 company, with a little bit of redesign of your processes, you could use elements of the same philosophy to fast-track your innovation. Here are some tips to get you started:

  • Lower your cost of new product development. Be on the lookout for opportunities to reduce your costs of new product development. Using technology for knowledge management and outsourcing to low cost countries are among some of the ideas that innovative companies use. For example, in the electronics industry, Original Design Manufacturers (ODM) companies based in low cost countries like China have emerged as choice partners for prototyping and launching new designs.
  • Create experiments that lead to continuous bite-sized improvements.If any aspect of your offering is a service, you can keep innovating by adding small features or by improving the workflow. In order to do that, you need to build a test-bed for trying out lots of experimental ideas. A few years ago, Stefan Thomke, a professor at Harvard Business School, published an insightful study detailing how Bank of America turned its branches into “Service Development Laboratories.” For instance, Thomke talks about an experiment designed to solve the problem that users perceived their wait times to be longer than the actual time. In order to remove the perception, the experiment involved testing user perception when televisions were installed over teller booths and comparing that with a standard branch without televisions. By measuring the improvement in customer satisfaction ratings with the television, the team was able to develop a case for wider rollout to some of the bigger branches of BofA. This is a great example of an experimental setup that leads to constant improvement in the quality of service.
  • Measure everything and create feedback loops. You should aim to find opportunities for measuring user interaction with your product or service directly at the point of interaction, without relying on “marketing surveys.” Harrah’s is a great example of a company that invested in business intelligence solutions around its loyalty program, and made all of its marketing efforts highly data driven. Whenever a customer conducts a transaction using their Harrah’s card, the information is transmitted to a database, and used in a variety of ways to target the customer. The success of marketing campaigns is also measured using this data, and the campaigns are optimized accordingly. Soon after the program was launched a few years ago, its success made Harrah’s the most profitable company in its sector.
  • Open up the innovation process to others and plug in with the ecosystem.  In his book Wikinomics, Don Tapscott talks about how Goldcorp Inc., a struggling Toronto-based gold mine, opened up its sensitive geological data to the public to help the company get accurate estimates of the location of gold in its mines in Red Lake, Ontario. Within weeks, solutions poured in from all kinds of unexpected quarters, and identified more than 110 targets, half of them not previously identified by the company, with 80 percent of the new targets yielding substantial amounts of gold. In another example, Proctor & Gamble has developed a program called “Connect and Develop” with a goal of having 50 percent of its new products come from outside the company’s labs. The program also opens up access to P&G’s innovation assets. On the other hand, if you can’t find good ways of exposing your own data, you could instead think of using the data and APIs exposed by others -- for example, Pure Digital, the manufacturers of the Flip Video Cameras, used YouTube’s APIs to make it easy to upload videos directly into YouTube, and in the process out-innovated the competition.

It’s clear through all these examples that the new model of innovation is for everyone, and not just Web 2.0 companies. Find applications for these ideas in your business, and use them to change the world for the better.

Vijay Chittoor is the director of product panagement at Kosmix, an exploration engine that offers a 360 degree view of any topic on the Web.  A former McKinsey consultant, Vijay is a graduate of Harvard Business School and the Indian Institute of Technology, Bombay.  He shares his thoughts on technology at his blog..