Ineffective corporate innovation and the waste of consumer value

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Why the topic is important

The concept of transformation through digital integration and innovation has gained considerable attention in the business world since the iPhone was launched in 2007. Initially, we entered into an early adoption phase of disruptive technologies such as wireless sensors, cloud computing, big data processed by artificial intelligence and smartphones, as the new consumer interface. The maturity of this phase leads us in a second phase of massive adoption of these technologies; it is clear executives are mostly facing difficulties in adapting corporate strategy to the transformations required to successfully innovate and benefit from new technologies. What is the difference between companies which are extremely effective at digital transformation and other which seem to be experimenting with a range of activities mostly disconnected from their corporate strategy? The result of delay in finding the right approach to include digital transformation in corporate strategy results is a loss of valuable innovations and the waste of consumer value created.

What do we know about the phenomenon

We know from the definition by Amit and Zott, 2001 a business model should be able to link two dimensions of firm activity: value creation and value capture. Extended by Teece, 2010 which work explains the essence of a business model is in defining the manner by which the enterprise delivers value to customers, entices customers to pay for value, and converts those payments to profit. It thus reflects management’s hypothesis about what customers want, how they want it, and how the enterprise can organize to best meet those needs.

The work by Baden-Fuller and Haefliger, 2013 brings a consumer perspective into this concept and suggests managers need to be creative and recognize the value of involving others in the design of the business model. They also argue a business model as a system that solves the problem of identifying who is (or are) the customer(s), engaging with their needs, delivering satisfaction, and monetizing the value. Also, Priem, 2007 has defined the importance of involving the customers and proved they are willing to validate the value of new products and services and thus contribute to a firm innovation process. An even deeper approach has been developed by Schreier, 2011 who has advocated the idea of democratizing innovation by empowering customers to take a much more active stake in corporate new product development (NPD), which enables firms to develop better products and at the same time to reduce costs and risks. The customers in a given domain are willing and able to deliver valuable input and come up with commercially attractive user innovations. This process examined by Schreier, 2008 has shown to be a highly promising source of innovation for new product development tasks. His work extends to explore the firms that sell products designed by users and found this “innovation effect of user design” leads to positive outcomes with respect to purchase intentions, willingness to pay, and consumers’ willingness to recommend the firm to others.

The methods to design business models with the participation of the user have been a core subject of study within the design literature. The work of Liedtka, 2015 suggests the need to include a better practice for improving innovation outcomes by helping decision-makers reduce their individual level cognitive biases. “Design thinking” is one of the resulting methodologies to design innovations. We know design-driven innovations are mainly pushed by firms’ visions about possible new product languages and meanings that could diffuse in society; Dell ‘Era and Verganti, 2009 argue firms must consider the need for linguistic and semantic innovations as well as technological and functional innovations. The concept of function is also studied in platform strategy and the work by Eisenmann, 2011 introduced the concept of envelopment, through which a provider in one platform market can enter another platform market, and combine its own functionality with that of the target in a multi-platform bundle that leverages shared user relationships.

However, what we know it is not enough

In other words, we know we should create value, when designing innovative product and services, and capture it to build a sustainable business models; we know we can and we should involve the consumer and other stakeholders in the innovation process to achieve an early validation; we know lead users can design innovative products and services for firms; we know we should apply methodologies such as design thinking to improve innovation outcomes by reducing cognitive biases; we know we need to consider functional innovations and we can envelope a competitor function by leveraging user base and technologies.

However, we still do not know how to identify the innovative “target” function in a more precise way than only experimentation or relying on an open community of users suggesting their own perspective. It seems there is still a gap between business model theory and consumer value design theory in matching effectively consumer expectations and corporate new product development. From a platform literature perspective, the word function has been used but not explained as a specific target and therefore with the same required precision to help managers understand which function should a firm envelop.

What I am doing

My work wants to understand the changes brought by new technologies within the innovation strategy of firms which seems still struggling. It aims to theorise a new approach to strategy dictated by the power of digital technologies and their transformational nature. The research is driven by the success stories of digital pioneers like Amazon, Apple and Google as well as mainstream players like Nike, GM, BMW and McCormick, which have focussed at building interactive and inter-connected portfolios of business models reaching across industries, rather than concentrating only in applying traditional strategies such as horizontal and vertical integration. The conception, design and execution of these kinds of portfolios represent a complete new dimension of growth enabled by the digital age while the impact on traditional strategic and innovation theories has to be studied.

The introduction of a new variable named User Functional Value, defined as the best match between consumers’ expectation on a specific function and firm ability to deliver the function given its capabilities, is used to measure the perception on consumer value and consequently understand if a decrease in the loss of innovation can be achieved.

The argument is built on the idea of restricting the definition of innovation to an innovative function which can be measured by User Functional Value (UFV) being an extension of the definition of business model by Amit and Zott, 2001 and Teece, 2010. Analysing the value creation aspect of the definition in the work by Priem, 2007, and extend it to the customer intentions in a given circumstance. Basically, bringing the attention to what the customer hopes to accomplish, we could argue that users self-define new functions and therefore do not just contribute in the firm innovation process but define the User Functional Value for a new product or service before is actually marketed to them. The winner is the firm which conquer first the new expected function playing strategically on the demand-side and leveraging pervasive new digital technologies to create exponential User Functional Value.

The theory on functional values is not a firm design driven innovation approach but a consumer need research understood by applying a consumer centric design approach where users are greatly involved since they define valuable functions while firms adapts capabilities to deliver User Functional Value.

Digital companies executing successful innovations, such as the digital pioneers cited above, seem to have this ability. They operate on two dimensions when building their portfolios: the functionality (or function) of new product and/or service and the integration within the existing capabilities. The intuition on the effectiveness of this method is when this two dimensions work perfectly together the firm will obtain the maximum result from digital transformation strategic implementation, growing much faster than its peers.