Why Product Innovation Is Dead

by | Dec 15, 2014

Why Product Innovation Is Dead

Large companies often make large investments in product innovation and operational efficiency. The objective is to slice cost, achieve revenue growth and obtain or improve profit margins. Before the advent of the Internet the pace of technology change was much slower, large companies had a handful of real competitors and the customer was happy to be a customer. Back then product innovation was enough and it was okay to say it’s ‘business as usual.’ That mindset would now be a recipe for disaster.

As the meta driving force of innovation in the last 25 years the Internet (+ WWW) has changed everything. The Internet has reduced the cost of:

  • Distribution
  • Collaboration
  • Communication

Because of Moor’s Law the pace of technological change and innovation has been accelerating ever since. All these changes sum up in the fact that the cost of establishing a new company that creates entirely new product cycles at relatively low costs has decreased tremendously. The next big competitor of a corporate company might be one of the thousands of startups that right now are being build in the dorm room, garage or more likely today, in the coworking spaces of RocketSpace in the bay Area and Hackers and Founders in Amsterdam. On the other hand the customer is more informed, outspoken and critical than ever.

In this highly competitive, fast-paced consumer-centric world product or process innovation is not enough anymore.

The exemplary case of focusing too much on product innovation and not adapting fast enough to a changing market space is the now infamous Eastman Kodak. A corporate company that actually did know how to innovate for more than 100 years. In 2000 it declared that it will become a leader in digital cameras. In just 5 years it ranked number one in the US in digital cameras, selling $5.7 billion, increasing its digital sales to 40%, while its film-based business fell by 18%. You would think Kodak did a great job in transitioning from an ‘analog’ to a digital company. Yet by January 19 2012, the 131-year-old film pioneer filed for bankruptcy. The reason that Kodak failed is because it only focused on product innovation and not on business model innovation.

A good product is embedded in an innovative business model as Raphael and Christoph Zott argue in their research on business model innovation. A new innovation might eliminate the need for your product, but while embedded in a new business model the switching cost might prevent customers to do so. Raphael and Christoph Zott illustrate this nicely with the case of Apple. “Someone might come up with a better MP3 player than Apple’s tomorrow, but few of the hundreds of millions of consumers with iPods and iTunes accounts will be open to switching brands.”

In addition, business model innovation often represents an under utilized source of value. Startups are often very apt in finding this new source of value before corporates do. Furthermore for competitors it’s easy to compete on product or process innovation, but difficult to replicate or imitate an entire new business model.

Great examples of companies that have disrupted industries with innovative business models are for instance AIRBNB, Uber and Square.

The greatest innovation of these ‘unicorn startups’ is not entirely new technology, though very high-tech. Their innovations are of explorative nature. In other words, they smartly exploited state of the art technology to provide a singular level of convenience and user experience.

The fact that a large company can reinvent itself through business model innovation is demonstrated best by Apple. The graph below reflects the success of Apple’s business model innovations from 1998 onwards. For companies concerned with future growth or mere survival the cases of Eastman Kodak and Apple illustrate the imperative for business model innovation.

apple-bmi-success

Source: Raphael Amit and Christoph Zott, MIT SMR 2012

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