Business Models for an Era of Innovation Glut
ome research on innovation that succeeds suggests two particularly important insights: First, the single largest predictor of new product success offers a differentiated high-value product/service. Second, the single largest predictor of new product failure is inadequate market research and customer knowledge. (Cooper, Robert: Winning at New Products, Basic Books, Fourth Edition, 2011)
However, while most business plans address and articulate the product’s or service’s differentiated high value, most assume that nobody else will identify the same needs or that there are few projects, as yet unpublicized, tackling the same opportunity. Few assume that a large number of competitors will build a similar product with similar tools or offer similar value propositions. This is essentially “me too” innovation.
In a competitive environment, a lack of value differentiation, which is the most important predictor of success, is almost certain to be a problem. And even worse, if you don’t know enough about your customers, then your definition of value may not match that of the market. Or, you may not be able to identify who is likely to buy quickly with a low sales cost.
Value varies by segment and in some cases by individual customer, so the lack of knowledge about a market and customers will send you down the wrong development path. You may offer a product, but the customer wants a service or a solution. You may target the wrong group of buyers. You may offer an inadequate set of benefits. Alternatively, you may over-deliver features, performance and benefits when a simpler product may be easier to understand, purchase and use.
Device life cycles
With the growth of microprocessor-based products, a proliferation of usage and form factors has led to an inevitable shift between embedded devices, appliances and platforms. Failing to navigate the generational shifts between platforms, appliances and embedded devices has proven to be a major cause of failure or loss of market share.
Nokia, a hardware-oriented company that built well-engineered phones (devices), had difficulty matching the email-oriented phones of RIM/BlackBerry. BlackBerry was primarily a service company with devices that offered a great keyboard and a secure email network. The key source of BlackBerry’s differentiation, a closed and proprietary network and a physical keyboard, made it difficult to focus on the idea of the “soft keyboard” needed for a general purpose device and the building of an ecosystem of applications and content availability. Not surprisingly BlackBerry was late to market, because in order to compete with Apple, they had to reject what had made them great. They would have to substitute a soft keyboard for one of their major differentiations – an exceptionally good physical keyboard. And they would have to work with other firms, at the operating-system level (e.g. Android or Windows Phone) and with app developers – all of which pretty much ran against the grain.
Nokia primarily sold products. RIM succeeded as a service business with a dedicated piece of hardware; in the future it will likely be more of a service business than a hardware business. Apple built a platform business but, paradoxically, with a consumer-appliance orientation. And as so often happens with a successful digital business, Google went after Apple with an open source set of parity capabilities.
In the embedded systems world, there is a common problem: squeezing everything into an embedded system often requires significant trade-offs to meet the small-form factor, performance and battery constraints. These constraints often prevent more open development approaches or use of a more general platform. But when the volume of the general platform becomes high and when the size and form factor match the embedded device’s capabilities, the value and attraction of the proprietary embedded or dedicated device is suddenly devalued.
For example, many consumer electronics companies such as Sonos, the vendor of superb wireless music systems, offer proprietary remotes. But they also offer free apps on Android and Apple iOS that are substitutes for the expensive proprietary controllers. In the past a consumer might have bought one proprietary, somewhat expensive controller; it is unlikely they would have bought two unless they had very high income. And over time, formerly primary platform devices (old IOS and Android phones) may migrate to the role of a controller, reducing the market for high-priced, hardware-based custom controllers.
The consequence of these generational shifts is that most businesses must either move from a proprietary embedded system to a more platform-oriented solution, or they must package a platform-based solution in such a way as to make it more like an appliance. Note that I say “more” in both cases. The lines between the two strategies are often difficult to see precisely. Apple’s entire business model is based on taking a platform and converting it to what is primarily an appliance approach for the user’s core usage needs. But clearly, the Apple environment does offer incremental value from third-party apps, which is a platform strategy. From the perspective of value and profit capture however, Apple captures most of the value. The majority of apps are little used and unprofitable for the developer.