Renew or die
I would like to share my recent contribution to the Mexican dailies El Financiero and El Horizonte. I hope you find it interesting.
There is considerable talk of innovation. We all agree that innovation would be very good for Mexico. Nevertheless, few know what it really implies. Some time ago I read a very interesting book on this subject entitled "Dealing with Darwin" by Geoffrey Moore. In the various books and articles that he has written, Moore has emerged as a real expert on what it means to innovate in the 21st century.
In a complex global economy such as we have today and especially in the field of technology, there are many different types of innovations that correspond to the stages in the life of a product and its market. Since innovation is costly, we’re not talking about innovation for the sake of innovation, but rather understanding what kind of innovation we must concentrate on in accordance with the stage in the life of our products.
There are two radically different business architectures, which therefore require different types of innovation: complex architecture and volume architecture.
The former, as its name implies, specializes in solving complex problems for large-scale clients. It corresponds to companies such as Cisco, SAP, Swiss Re, Boeing, Accenture, and institutions such as the World Bank. In contrast, volume architecture focuses on solving everyday consumer needs through specific, highly standardized, and simple products. In this latter category we have companies such as Coca-Cola, Bimbo, Nike, Sony, and of course, Grupo Elektra. Since most of Grupo Salinas’ operations correspond to volume architecture, I will focus on this category.
It is crucial to understand the type of innovation applicable at each stage in the life of our products, and therefore it is important to know what phase our market is in, as they are very different.
(A) Technology adoption life cycle:this is the stage at which a new technology emerges. This was the case with the CD or faxes in the 1980s, Internet in the 1990s, or smartphones in the past decade.
This stage is very complex, so it is divided into different sub-stages: (1) early market, (2) the "chasm", (3) “crossing the chasm", (4) the "bowling alley" (5) the "tornado" and (6) the "main avenue". These peculiar names correspond to different factors. Let’s take a look.
- The early market: Occurs when what is known as Disruptive Innovation is introduced into a market with uncertain but potentially devastating consequences for other products. In this stage only technology enthusiasts will buy the product. Disruptive Innovation creates new markets based on technological change or on a radically different business model. An example would be digital photography, Internet, or the iPod, which forever transformed their industries and wiped out thousands of companies.
- The "chasm": As its name suggests, is the huge gap that separates the first from the third stage. Thousands of new products have been lost at this stage because they simply "didn’t stick". This was the case with the Betamax format or quadraphonic equipment.
- Crossing the chasm:According to Moore, the only way to cross the "chasm" is to focus the company’s efforts, through the use of new technology, on satisfying the needs of a pragmatic group of consumers who are seeking a solution to a specific problem.
- The bowling alley: Finally new technology has gained recognition and acceptance among pragmatic consumers and offers effective solutions to relatively common problems. Increasing numbers of consumer niches gradually adapt the technology and this encourages other niches to employ it as well, with a bowling alley effect. The innovation corresponding to this stage is Applications, which develops new markets for existing products by finding new uses for them. An example would be the use of failsafe systems in ATMs.
- The tornado: This technology has proven useful in niche markets and in the process a generalized application emerges, with which it begins to be accepted by the mass market. The new technology is perceived as necessary and standard. In this stage, revenues grow at double or even triple figures annually. This is where Product Innovation is applied, which focuses on existing markets for existing products, using their differentiated characteristics. Examples of this type of innovation are hybrid engines in automobiles, wireless connectivity in computers, or cameras in cell phones.
- The main avenue: The initial momentum of accelerated growth slows, and as a result, market share begins to become extremely stable and the dominant competitor is defined. Here the Technology Adoption Lifecycle reaches its end.
Phases applicable to growth and maturity in the life of a market
(B) Growing Market: Market growth remains robust, earnings increase at double digit rates, and financial margins are healthy. This is a magnificent stage for leading a well-positioned company, because the returns on investment are considerable while the implied risk is low.
(C) Mature Market: In this stage, growth has stabilized and "commoditization" begins to take shape. Here company growth can only occur at the expense of another competitor or by obtaining additional revenue from the existing customer base through improvements to the product or service in question.
Consolidation in the industry begins to take shape through increasingly aggressive acquisitions with which the leading company’s position is strengthened
. At this stage, the implied risk remains low. Different types of innovation correspond to a mature market
, applicable in the value area
, in the customer’s experience and relationship, and in the company’s operations as such.
(D) Declining Market: In this terminal phase of an industry, investment returns weaken and opportunities to innovate gradually decline. In this stage, the market makes its preparations to adopt a new technology. In a declining market, Organic Renewal or Acquisition Renewal applies. In the Organic Renewal stage, the company uses its internal resources to reposition itself in a new growth market; in other words, the company reinvents itself. Acquisition Renewal occurs when Organic Renewal becomes complicated, and companies acquire or are acquired by those who are better positioned in growth markets.
(E) Death: In this stage, a new technology has crossed the "chasm" and has entered the "tornado" phase. The prevailing technology has become obsolete. What the author calls Harvest and Exit applies at this stage, which involves distributing what remains to shareholders and making a dignified withdrawal. From my point of view, if a company is in this stage, it is because its innovation strategy was unsuccessful.
I have always said that we can never be satisfied with what we have at hand; we must constantly evolve, innovate, serve the client better with cutting edge products, adding value to society and generating well-being.
As we see in Moore's book, this is not easy. There are many different types of innovation applicable at very different stages and markets. Innovation is costly and we should focus our efforts where they yield the best fruits for our companies and our customers.