This book is about the difference between great innovations that succeed and great innovations that fail. It is about the blind spots that undermine great managers in great companies even if they identify real customer needs, deliver great products, and beat their competition to market. It is about why, with ever greater frequency, your success depends not just on your ability to execute your own promises but also on whether a host of partners—some visible, some hidden—deliver on their promises too.
The innovation blind spot is everybody’s problem: whether you are a CEO or project team member; in a large multinational or an emergent start-up; in the corporate sector or at a nonprofit; contributing to a collaborative effort or investing in one. No matter your situation, your success depends not just on your own efforts but also on the ability, willingness, and likelihood that the partners that make up your innovation ecosystem succeed as well.
This book offers a new perspective—a wide lens—with which to assess your strategy. It introduces a new set of tools and frameworks that will expose your hidden sources of dependence. It will help you make better choices, take more effective actions, and multiply your odds of success.
The Innovation Blind Spot and Avoidable Failure
Execution focus—developing customer insight, building core competencies, and beating the competition—has become the touchstone of business strategy. In myriad books, lectures, meetings, and workshops, the message to managers is to focus on linking their strategy and their operations, on aligning their teams, on monitoring their competitive environment, and on revitalizing their value propositions. This, they are told, is critical for success.
Yes. Great execution is critical—it is a necessary condition for success. But it is not enough. While this execution focus draws attention to unquestionably important parts of a company’s environment—its management, employees, owners, customers, and competitors—it creates a blind spot that hides key dependencies that are equally important in determining success and failure.
Figure I.1: The traditional focus on execution.
Philips Electronics fell victim to this blind spot when it spent a fortune to pioneer high-definition television (HDTV) sets in the mid-1980s. The company’s executives drove a development effort that succeeded in creating numerous breakthroughs in television technology, offering picture quality that customers loved and that the competition, at the time, could not match. Yet, despite sterling execution and rave reviews, Philips’s high-definition TV flopped. Even the most brilliant innovation cannot succeed when its value creation depends on other innovations—in this case the high-definition cameras and transmission standards necessary to make high-definition TV work—that fail to arrive on time. Philips was left with a $2.5 billion write-down and little to show for its pioneering efforts by the time HDTV finally took off twenty years later.
Sony suffered from a similar blind spot, winning a pyrrhic victory as it raced to bring its e-reader to market before its rivals, only to discover that even a great e-reader cannot succeed in a market where customers have no easy access to e-books. And Johnson Controls, which developed a new generation of electrical switches and sensors that could dramatically reduce energy waste in buildings and deliver substantial savings to occupants, discovered that unless and until architects, electricians, and a host of other actors adjusted their own routines and updated their own capabilities, the value of its innovations would never be realized.
In all these cases, smart companies and talented managers invested, implemented, and succeeded in bringing genuinely brilliant innovations to market. But after the innovations launched, they failed. The companies understood how their success depended on meeting the needs of their end customers, delivering great innovation, and beating the competition. But all three fell victim to the innovator’s blind spot: failing to see how their success also depended on partners who themselves would need to innovate and agree to adapt in order for their efforts to succeed.
Welcome to the world of innovation ecosystems—a world in which the success of a value proposition depends on creating an alignment of partners who must work together in order to transform a winning idea to a market success. A world in which failing to expand your focus to include your entire ecosystem will set you up for failure. Avoidable failure.
Innovation, Expectations, and Reality
Every year, the calls for new innovation to safeguard economic growth, technological progress, and general prosperity grow louder. Every year, vast amounts of money, time, attention, and effort are spent to introduce productive change. From new products and services, to new technologies and business models, to new personnel assessment systems and incentive programs, to new government policies, new education initiatives, and new reporting procedures, innovation initiatives blanket our lives and organizations.
How can we increase profitable growth? Innovate! How can we become more efficient and reduce waste? Innovate! How can we improve loyalty and increase customer satisfaction? Innovate! Innovation is a problem for everyone because it is held up as the solution for everything.
But, despite the excitement, energy, and hype, successful innovation remains the exception rather than the rule. According to surveys by the Product Development and Management Association (PDMA), approximately one out of four new product development efforts ever reach the stage of commercial launch. And even within this highly screened group, 45 percent fail to meet their profit objectives.
Despite these odds, innovation remains imperative. In a world of aggressive competition and easily bored customers, innovation is not a choice but a necessity. A 2010 study by the Boston Consulting Group (BCG) found that 72 percent of senior executives cited innovation-led growth as one of their top three strategic priorities. And if you listen to government leaders and nonprofit heads, you know that their chorus of calls for innovation is deafening. The challenge, then, is to understand the causes of innovation failure and to find ways of increasing effectiveness and safeguarding success.
The experts—authors, gurus, academics, consultants, CEOs—tend to fall into two schools of thought in explaining the sources of failure and the path to success. The first school argues that most innovation failures are rooted in a shortfall in customer insight. Introducing a genuinely new product or service is not enough; if customers don’t see the innovation as uniquely valuable, or are unwilling to pay the required price, then the innovation will not succeed. Success, they argue, requires a better way to generate the really good ideas that customers will embrace.
The second school argues that failure is rooted in shortcomings of leadership and implementation. They claim that the key to success lies in building better capabilities for execution and implementation that will enable us to deliver on our promises and beat the competition.
Both perspectives are crucial to understanding and achieving successful innovation. But, even taken together, they are incomplete. Every serious manager today has been inculcated in the mantra of “listen to the voice of the customer” and “focus on execution.” And yet, innovation success remains as elusive as ever. Even when firms come up with great new ideas and follow them up with great implementation, failure is not only possible but likely. How can we do better?
Seeing the Hidden Traps
As the long history of failed innovation efforts shows, overlooking your blind spots often leads to tragedy. Good people work hard but ultimately waste their time on initiatives that won’t succeed—not because they are less innovative than their competitors or because they can’t execute on their project, but because their innovation ecosystem won’t come together. If they had the tools to see and understand how their success depends on others, they would have done things differently.
This book is designed to help managers, leaders, and everyone concerned with innovation see their hidden dependencies and understand how to develop robust strategies that are more likely to succeed. To start, you must consider two distinct types of risk that arise within ecosystems: Co-innovation Risk, the extent to which the success of your innovation depends on the successful commercialization of other innovations; and Adoption Chain Risk, the extent to which partners will need to adopt your innovation before end consumers have a chance to assess the full value proposition.
Choosing to focus on the ecosystem, rather than simply on the immediate environment of innovation, changes everything—from how you prioritize opportunities and threats, to how you think about market timing and positioning, to how you define and measure success. This new paradigm asks innovators to consider the entire ecosystem by broadening their lens to develop a clearer view of their full set of dependencies. To be sure, great customer insight and execution are still vital. But they are only necessary—not sufficient—conditions for success.
Figure I.2: The wide-lens perspective on innovation strategy.
How We Got Here
The need for collaborative innovation has defined progress since the Industrial Revolution—the lightbulb on its own was a miraculous invention but needed the development of the electric power network to turn it into a profitable innovation. What has changed is the way the collaboration is organized. The shift toward innovation ecosystems follows a historical trend toward greater complexity and interaction that has characterized the rise of the modern economy. In the beginning, the dominant approach was to house all this complexity within a single firm—the vertically integrated organization. In the early days of the twentieth century, vertically integrated companies like Ford, GE, BASF, and IBM showed that large size, reduced variable cost, and dedicated research could produce outstanding change. But while vertical integration offered control, it required massive investments and led to huge, unwieldy organizations. At the close of the twentieth century, firms like Toyota, Dell, and Nestlé led their industries by learning how to leverage external supply chains to outsource activities, reduce fixed costs, and increase operational flexibility, setting a new benchmark for competitiveness that their rivals struggled to meet.
At the beginning of each management innovation wave, the first firms to master the principles of the new approach—from assembly-line manufacturing in the 1920s to management information systems in the 1950s to relational contracting, just-in-time inventories, and total quality management in the 1990s—enjoyed a substantial competitive advantage. Rival firms looked on in awe, trying to figure out what magic allowed for such vastly superior results. But as these innovation strategies diffused more broadly across organizations, their mastery stopped being a source of differentiation and became, instead, simply an operational requirement for getting in the game.
Today we are witnessing another transition point. The enormous benefits that accrued to firms who mastered supply chain management—global procurement, just-in-time-production, lean inventory management—are still real, but they are now widely shared. In industry after industry, we see a major change taking place as firms shift from using supply chains to offer better products to embracing partnerships and collaboration to offer better “solutions.” It isn’t enough for an auto manufacturer to produce a reliable, fast, efficient car: it also needs to offer state-of-the-art computer navigation and entertainment systems. It isn’t enough for hardware stores to sell a variety of goods efficiently: they also need to design classes and tutorials so people can learn how to use them. Newspapers must offer both articles and videos; marketers must offer both advertising campaigns and user communities; phones must offer not just voice calling but an entire media experience. Success in this world requires mastery of ecosystem strategy.
There is a growing trend to not go it alone. In a 2011 survey of senior executives by the Corporate Executive Board, 67 percent expected new partnerships, and 49 percent expected new business models, to be critical drivers of their growth in the upcoming five to ten years. And indeed, today’s exemplar firms—from Apple in consumer electronics to Amazon in retail, from Roche in pharmaceuticals to Raytheon in defense, and from Hasbro in toys to Turner in construction—do much more than “just” execute flawlessly on their own initiatives. They orchestrate the activities of an array of partners so that their joint efforts increase the value created by their own initiatives many times over. These leaders have understood the nature of the blind spot and have expanded their perspective. They have deployed a wide lens in setting their strategy and prospered in their embrace of the ecosystem opportunity.
The Wide Lens
Luck—good and bad—always plays a role in determining outcomes. But in every postmortem analysis of failure, we uncover two different types of surprises: the ones we couldn’t have seen coming and the ones we should have.
All too often we see strategies devolve into tactical adjustments, hurriedly and reactively pursued to compensate for realities that could have been foreseen. The old tools are no longer enough. They may have clarified how to think about customers, competition, and capabilities, but they offer precious little guidance on how to think and act in an interdependent world.
This book will give you a new set of tools with which to craft your strategy and build your success. The ideas in each chapter build on each other, and as you progress, you will increase your understanding, your toolbox, and your odds of success.
In part 1, I introduce the key concepts that make innovating in ecosystems different, beginning with an examination of why excellent managers can become so focused on their own execution that they fail to recognize the extent to which their success depends on others. We will see how co-innovation risk and adoption chain risk combine to create the innovation blind spot and why there is a natural tendency for these problems to stay hidden from view (and correction) until it’s too late.
In part 2, we move from analysis to choice in the context of ecosystems. We will explore how to assess alternatives, how to choose positions, and how to think about timing. We will see why a wide-lens perspective fundamentally changes how we decide where to compete, how to compete, and when to compete.
In part 3, we shift from choice to intervention. I will present a set of new strategies for building and shaping ecosystems—how to reconfigure the structure of dependence and how to leverage advantage within and across ecosystems. We will see how the wide-lens toolbox can be credibly deployed to avoid needless failures and multiply your odds of success.
Dependence is not becoming more visible, but it is becoming more pervasive. What you don’t see can kill you. Don’t let your blind spot become your downfall.
Figure I.3: The plan of the book.
