For a long time, “innovation” really meant “innovation in products and services.” An enterprise with a strong market position periodically released updated, better versions of its core products, and customers bought them. But for a while now, innovation of this kind has shown a declining return on investment. Why?
When being successful is a disadvantage
Product obsolescence is no longer the problem – now it’s business models that become outdated at alarming speed. Historically, a successful company could expect a run of 70 or more years in the Standard & Poor’s top 500. Today that number is just 14 years on average. Half of the companies in today’s S&P 500 will no longer be there in a decade.
The underlying causes are the declining effectiveness of economies of scale, and rapidly shifting customer expectations. Historically, investing in a factory, training a workforce, and building a customer base were large-scale investments that were difficult to achieve and took a long time. In other words, they were big barriers to entry.
Today, everything is a service. Need a supply chain? Set one up through Amazon. Need customers? Reach them through digital marketing. Need a customer management system or a financial back office? Access it through Salesforce.com or Sage. Anyone can build a business for next to nothing.
Not only are there few, if any, economies of scale, there are diseconomies of scale. The accelerating pace of business change means structures that centralize decision making through multiple layers are too slow. By the time a decision has been made, it’s out of date. Coupled with this are the infrastructure costs required to keep a business ticking over. The venture capitalist Marc Andreessen refers to them as a strategy tax – the cost of the decisions made to get a business functioning. A new business has neither of these diseconomies of scale.
Customer expectations have also changed radically. Technology has transformed the way people interact with products. The ability to select and compare has improved dramatically and the cost of doing so has plummeted. Customers can now find, track, compare, try out, and resell most things without leaving their sofas.
This combination of factors has put greater pressure on business models than ever before. The likelihood is that somewhere, something or someone is reaching a small segment of your customer base with a new, more appealing offer.
The business challenge has shifted from a protect-and-defend model to an exploit-and-move-on model. Market positions that, historically, could be defended for decades with R&D investment, relationship building, and business lobbying are now much harder to maintain. Companies should continue to explore these, but figuring out the next big thing now takes precedence.
Most businesses are not set up to do this, but start-ups are. The rough definition of a start-up is: “a temporary structure in search of a business model.” Finding a business model – a problem to solve – is their reason to exist and they do it by being organic, adaptive, and driven by curiosity.
Established businesses have already completed this process. They know the problems they exist to solve, and they make money by continuously getting better at solving them – hence the re-engineering, best practices and the like. This all makes perfect sense, until it doesn’t – until the need suddenly no longer exists because of other factors.
The fundamental problem is that the skills required to exploit an opportunity are very different from the skills required to find it in the first place.
There is more to winning than thinking like a start-up
“Think like a start-up” is an overused and inaccurate phrase. Established businesses can certainly benefit from adopting some aspects of start-up thinking, but they also need to exploit what they have.
There are three useful aspects to the start-up mindset. First is the hunger and commitment to track down unmet market needs. This kind of curiosity is generally discouraged in large organizations. Second is the willingness to get things wrong. It’s the fastest way to learn but large organizations find it difficult to tolerate, despite all the motivational posters about embracing failure.
Third is a willingness to question the system. An established business operates as an indivisible whole that only makes sense when all the parts align and work together. Optimization is carried out on a local level by specialists, but the underlying system remains unchanged. This is fine, until that system ceases to be relevant to the market. Those specialized optimization skills aren’t applicable to fixing a systemic problem of this kind.
Even established businesses that adopt the best aspects of start-up thinking will never be as fast or nimble as a start-up. But they do have other advantages. Some of these are obvious, such as deep pockets to fund complex future facing propositions. Others are more left field, such as finding and exploiting hidden assets. These hidden assets may already be in plain view but perceived as roadblocks, until you look at them in a different way.
The ability and experience to leverage finance is another advantage for large companies. Use your understanding of the structure of P&Ls to create exploratory models. The great thing about finance is the ability to lock down where the costs and revenues are. Doing this with exploratory business models means making massive assumptions about these. But if you’re willing to make those guesses, you have a model that allows you to explore the consequences. Once you have spotted a need, the financial model helps you quickly see how it can be solved. The innovation brief emerges naturally from that insight.
The bottom line
Businesses work until they don’t. And when that happens it’s usually too late to fix. The preventative medicine is having the courage to allow a small group of people to build and test exploratory micro-businesses that take advantage of all the things you know are super valuable, plus all the things that just might be true.
Do this with internal resources and outside help. Internally because you need someone to own the challenge and push it through the organization. Externally because it will be quicker and cheaper. Knowledge of other businesses, and insights you may not have even considered, are out there. Leveraging these external resources will help you learn how to innovate, and reduce the risk of doing it all yourself.
Tobias Rooney, Commercial Director Fahrenheit 212, Capgemini Invent