Understanding the future of innovation

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In this blog post, I would like to share my observations and ideas for debate about inter-connected ecosystems.

We can see all around us that in the digital, social, and mobile age these ecosystems have become the core innovation drivers that have delivered most reliably and powerfully for pioneers like Amazon, Apple and Google, as well as mainstream players like Nike, GM, BMW and McCormick.

Observation 1: Looking at change in growth strategies

Companies have traditionally grown by integrating either horizontally — adding new products or services — or vertically, by controlling the supply chain. But today, fierce global competition and rapid technological change have made those traditional strategies for gaining market share no longer as effective as they once were.

We have seen tech pioneers become more successful in integrating new digital solutions. To understand and frame a new growth strategy, dictated by the power of digital technologies and their transformational nature, we need to understand change more deeply.

Now there are new opportunities emerging for startups to use these principles for themselves, or digitally enable other existing players.

Observation 2: Traditional corporate environments experience lower innovation success

Bill Joy, co-founder and CTO of Sun Microsystems, coined what he called The Law of Smarts:

“For any problem, the people outside of your company are collectively smarter than the people inside your company.”

You can spend all you want on innovation, but you can’t guarantee success. In fact, the most innovative companies are not necessarily the biggest spenders, according to Booz & Company’s recent global innovation study. They believe successful innovators have a basic set of innovation capabilities:

Step 1: At the ideation stage, an ability to gain insight into customer needs and an understanding of the potential relevance of emerging technologies.

Step 2: At the product development stage, an ability to engage actively with customers to prove the validity of concepts and to assess market potential and risks, and the ability to leverage existing product platforms into new products.

Step 3: At the commercialisation stage, an ability to work with pilot users to roll out products carefully yet quickly, and to coordinate across the entire organisation for an effective launch.

This shows how corporate strategies are capabilities-driven. Leading companies know what they’re good at, how those capabilities create value, and which are the markets where those capabilities can earn them a right to win.

Observation 3: Tech pioneers tend to operate as integrated ecosystems

It’s now become clear that the conception, design and execution of ecosystems represents a new dimension of growth, enabled by the digital age.

So now we need to look deeper into the results enjoyed by the pioneers of this integration strategy and frame it in way that can be measured and applied by most brands.

The term ‘functional integration’ refers to the two dimensions of the strategy: functionality of new pieces of the ecosystem (products and/or services) and integration within the ecosystem itself.

When these two dimensions work perfectly together, the ecosystem will grow in market share and profits at a rate far faster than traditional horizontal or vertical integration.

According to Barry Wacksman, Chief Growth Officer at R/GA, functional integration’s massive competitive edge is supplied by the transformational skills of the technologies used to design disruptive new services. In business terms, technology is the collection of techniques, skill, methods and processes used in the production of goods or services.

Technology may be the knowledge of techniques and processes or it can be embedded in machines, computers, devices and factories, which can be operated by individuals without detailed knowledge of their workings. Therefore, the correct assumption is that new technologies such as cloud computing, wireless sensors, big data and mobile services have enabled innovative techniques and processes that transform the way we operate.

Observation 4: Startups often fail

Considering the economy is moving from one based on products and services to an experience-driven one, startups are proving to be very successful at identifying new user experiences. These disrupt traditional value delivery very effectively, but they often lack of a full set of resources to help them grow.

A recent study by CB Insights looked into the reasons a startup fails. The most prevalent were:

They may fail to create value:

At this point, a few quotes can paint a familiar picture for many of us…

“I realised, essentially, that we had no customers because no one was really interested in the model we were pitching. Doctors want more patients, not an efficient office.”

“We were not solving a large enough problem that we could universally serve with a scalable solution.”

“We had great technology, great data on shopping behaviour, great reputation as a thought leader, great expertise, great advisors, and more — but what we didn’t have was technology or business model that solved a pain point in a scalable way.”

They often run out of cash:

Money and time are tight and need to be allocated judiciously. The question of how to spend money was a frequent conundrum, and reason for failure, cited by startups.

… or they simply fail to monetise:

Failed founders seem to agree that a well thought-out business model is vital. Staying wedded to a single channel or failing to find ways to make money at scale left investors hesitant and founders unable to capitalise on any traction gained.

Assumption 1: We need a framework for evaluation

The ultimate result of a functional integrated ecosystem is the exponential creation of consumer value that would not be possible with the individual elements alone, especially if they were leveraging last-generation connectivity technologies. Therefore we need to clarify a framework under which new services can be evaluated.

If innovation truly enables better ways of doing things, then it’s important to measure results, to ensure we understand and analyse results and frame them into a strategy.

Assumption 2: Startups are proving to be very successful at identifying new user experiences

I believe that the difference between the leading tech pioneers and traditional companies can be found between step 1-2 and step 3 above. Startups have been proven more effective at ideation and product development stage but they have often failed at commercialisation, since it iseven tougher to build the infrastructure to distribute value effectively and become a new ecosystem in the market, than to launch a single product.

Assumption 3: Understanding ‘user functions’

I would like to look deeper into the concept of functional integration especially in the term ‘functional’ which I see more as a ‘user function’ rather than a single new product or service integrated into a portfolio.

The example of Nike+ is a great example of a situation in which the user was ready to extend a fitness experience to data and virtual competition. Nike captured the ‘new user function’ by designing the Nike+ platform and extending the value proposition of performance apparel to performance tools, creating a powerful mix of traditional products and a new set of digital services.

Often we find that the more traditional the corporation, the further away its core capabilities will be from this innovative thinking. Therefore, the most innovative companies are actually the tech pioneers identified by Barry Wacksman that have naturally built a core capability extension ability to match this user functional trend. Traditional corporates today still need to rework their innovation processes to ensure they can do this. 

Observation 4: ‘Functional innovation’ is vital for companies

Another interesting factor is that many failing startups could, in fact, have been a successful innovation if they had been part of existing companies. The traditional companies would have benefitted from innovative services that extend their core capabilities to match expanding user experiences. Innovation-driven leveraging of core capabilities is not as effective as stretching core capabilities towards new user functions.

This means we are effectively losing innovation because we do not have a clear integration strategy.

Could we solve this problem if instead of treating those projects a scalable businesses we would treat them as innovative pieces for existing products and services? I believe this research on functional innovation should serve to address this gap.

Overall, my assumption is that companies today need a ‘functional innovation’ strategy. This can help them predict the evolution of user functions, and stretch core capabilitiesat the same time, making a highly effective and powerful way to meet emerging consumer experience trends.