Once people figure out that they could really be hit with a rogue innovation in their industry, their next question usually is – “so, what is the answer to the problem?”. My video below briefly summarizes how firms can design the answer – their option C.
You may notice that even if you don’t face this issue right now, this exercise is critical for your business success for two reasons. First, this will allow you to be prepared for a rogue innovation in your industry. Second, even if you realize that there is a slim chance of a rogue innovation in your industry, this exercise will allow you to come up with game changing innovations for your business. At least, you will come away from this exercise with several ways to magnify your existing innovation pipeline.
A couple of weeks back I was visiting UK. As I was walking down a busy street one day, something on the wall near me caught my attention. It was as if I had imagined space travel potential many years back and was suddenly looking at the advertisement of the same today. I immediately took out my iPhone and clicked a few pictures. What I saw was the advertisement below
Although a simple advertisement of laser based hair removal service, it shows some devastating possibilities for blades and razors industry. The technology for laser based hair removal is far from a state when consumer devices would allow in-home laser based hair removal.
However, technology changes with small steps such as that seen in the advertisement. As I came back to Boston I began to search for the latest hair removal devices based on laser / light technology. And I found a few of them.
While this technology evolves at its own pace, the implications for hair removal and care industry are somewhat horrifying. This could potentially eliminate the replacement demand of blades and razors on the one hand and a whole host of creams, moisturizers, and after shaves on the other hand. If the lifetime value of revenue and profits from blades, razors and similar products is summed for a customer, it becomes clear that the prices being touted for hair removal devices will ensure profit destruction in blades and razor industry. Could this be a rogue innovation heading towards the blades and razors?
Take a look at my article on Lighting industry where I present my analysis of the key opportunities and challenges for incumbents and new comers. It also shows why deep understanding of several industries help see patterns emerging across industries. Clearly LED will be a rogue innovation for the lighting incumbents.
Read the article here.
When firms face a rogue innovation, their biggest enemy is often their past success. Consider Kodak and Polaroid. When they looked at their future, they saw a future where their core capabilities remain relevant. Kodak thought that its chemical science capabilities would remain important to success in photography industry; Polaroid thought people would continue to value instant print.
Why would firms fall into this trap? If a firm has been extremely successful, it obviously believes that it is great at what is needed to win. Moreover, it just knows that it takes to win. As a result, its efforts are directed toward being better at what it does well. Its investments are focused on building the capabilities that made it successful.
To suddenly abandon what made the firm successful and start from scratch is a pretty foolish suggestion no matter where it comes from. However, when faced with a rogue innovation this past success becomes the biggest trap for such firms. The consequences is that such firms do look ahead but stop short of searching for future solutions in an expansive manner.
What happens when you are searching for a lost key? You look at several places until you find it. The same goes for a firm facing a rogue innovation. Its managers search for the key and stop once they find it. The only problem is that although this key worked in the past, it may no longer work in future. So the situation calls for an iterative search wherein managers need to find new keys that may work in future.
However, such a search mechanism this is contrary to our normal search behavior wherein we start the search with an end in mind and we stop a search when we find what we are looking for. This search requires one to start without knowing what will be the final answer and not stop at the first instance when one stumbles upon a reasonable answer. To keep looking!
If Kodak and Polaroid had done this, they would have seen that although the future they were envisioning was possible, other futures were perhaps equally likely. It would have prepared them better.
Do your organizational mechanisms make you stop when you find the first answer? Do people around you stop looking after the first possible answer is found. Can you build mechanisms to make your managers keep searching far beyond after the familiar key is found?
Earlier, I wrote about Kodak and its fate in the camera industry. Clearly it was following a vision of convergence between chemical science and microelectronics that did not pan out. The role of chemical science diminished significantly as the photography industry evolved. As a result, Kodak’s investments in convergence products yielded little.
Although Kodak’s efforts in the camera industry did not succeed and it lost market share, it did find a place where it could put its newly acquired capabilities in microelectronics to good use.
Kodak created a rogue innovation in the printer industry. Traditionally printer manufacturers made money the same way that Kodak made money historically. They made money by selling cartridges rather than by selling printers. Kodak’s new printer moved a part of the cartridge to the printer and thereby reduced the price per cartridge. If this technology succeeded, it would be a rogue innovation as it would eliminate significant replacement demand of the cartridge business. If HP and others embraced this innovation, they would witness a reduction in revenue and profits from this business.
HP has responded to Kodak’s threat with a potential game changer. It has developed a printer that will need no PC to print. Furthermore, it also contains an app platform that can allow the printer to do many functions while acting as an advertisement platform. If HP succeeds in this effort, it may win in printers but may see some effect on its PC business. Printers that need no PC may eventually reduce the demand for PCs.
Although HP faced a challenging set of decisions, it is headed in the right direction. This is a great example of how a firm may respond to a rogue innovation – go beyond the dichotomy of embrace the innovation or avoid it.
Microsoft has been facing a profit destroying innovation for several years and has been avoiding it. Since Google applications arrived on the scene, Microsoft has been slow to react to it. Clearly, it made no sense to put all of its office applications online and give it away free. However, the downside was clear – if Google’s online productivity apps became a norm, Microsoft may not be left with much of productivity software business.
Finally, Microsoft has embraced this rogue innovation by putting a version of office online. The article in financial times today mentions how Microsoft has been slow to respond to this threat. I have written about how firms facing a rogue innovation face significant challenges that make them drag their feet. Microsoft’s reaction so far has been in line with what others facing rogue innovations have demonstrated.
I also mentioned how firms that win against a rogue innovation do so by creating a compelling third option. Microsoft hasn’t shown that third option yet but it is betting that businesses will not use its online offering and instead continue to buy its future versions of desktop based office. This bet is also in line with the fact that firms facing rogue innovations often underestimate the probability of the success of a rogue innovation due to cognitive blinders.
By avoiding this rogue innovation until its release of Office 2010, it is still betting on the fact that new features in office 2010 will persuade users to upgrade rather than use its free office online. This is not very different from how Kodak believed that chemical science will continue to be an important part of business success in future.
Microsoft needs a compelling third option that is better than either embracing online office suite or avoiding going online. In absence of that third option, it may be making a significant mistake.
Although ipad has been touted as a netbook killer, if it really becomes a netbook killer, it would still not a be a rogue innovation because based on several estimates, profits on ipad are higher than profits on netbooks. This would make ipad a profit enhancing innovation rather than a profit destroying innovation which is what a rogue innovation is.
However, I came across a user innovation that shows how ipad could be a rogue innovation in the in-car satellite radio, GPS, and video streaming markets. This user installed an ipad in the car dashboard, opening several key possibilities for ipad as a rogue innovation.
Consider the fact that terrestrial radio and satellite radios are the two main ways of streaming audio to car listeners. Sirius can charge 13$ per month for its content because it owns a distribution medium that doesn’t have competition (yet). One can argue that MP3 players are competition, but to get unlimited music of a wide variety as Sirius provides, one would need a subscription service. Although several paid and free music services are available over the internet, they still do not reach the car. Paid services such as Napster and Rhapsody and free services such as Last.fm and Pandora allow internet users to get extensive music over the internet. So far internet hasn’t reached the car in a meaningful way. I have tried using internet streaming radio on iphone to play music in the car but it was not a pleasant experience. iPad installed the way this user has done, can bring the internet to a car and thus bring internet streamed music in direct competition with Sirius. This will seriously erode profits for Satellite radio. The same logic goes for GPS makers and for in car video streaming services.
One may even argue that internet radio that does not use a DJ cannot compete with superior quality intervention free music from likes of Sirius. However, Last.fm and Pandora are using analytics models that customize music to your own tastes based on what you (and others) liked. It would be hard for a DJ to provide this service.
In this blog, I have so far discussed rogue innovations that were initiated by either peripheral players or non players. Vanguard was an example of peripheral player introducing a rogue innovation. Sony’s digital camera was an example of a non player introducing a value destroying or rogue innovation. However, not all value destruction needs to take place via competitive activity. Sometimes, value destruction can take place due to consumer shifts alone.
Earlier, I was reading about a shift in the pattern of usage by US teens. The report shows that teens are increasingly using text messages instead of phone calls. While 75% of 12-17 year olds in the US have a cell phone, more of them are using texting to replace phone calls. Unlimited texting packages from carriers imply that more of these subscribers will not lead to stronger bottom-line for the carriers. A more salient impact of this shift may be a permanent change in cell phone usage habits for this generation. Usually, such shifts in habits and demographics does not change rapidly. However, this report shows that teens texting daily has increased from 38% in February 2008 to 54% in September 2009.
This rapid rise in use of texting is significant when compared to how long it took common consumer products to diffuse in their markets. Furthermore, consumer habits often take a very long time to change as any marketing professional will tell you. Product or usage diffusion is often a matter of decades rather than months. However, with the internet on the one hand and network externality effects (i.e. value of a product increases exponentially with the number of other users of the same product) on the other hand, texting seems to be defying what we normally expect diffusion timelines to be.
The carriers are in a similar situation as firms that face a rogue innovation often are. Although there is no producer innovation here, the value destruction is more triggered by usage innovation in a customer segment. This highlights the importance of understanding major and minor trends in your target industry. Although strong and rapid trends such as these will ensure that you do not miss them, the speed of change will also make it harder for you to react. This points to the fact that perhaps you need some new capabilities to deal with such rapid trends.
One capability that will become increasingly more important will be the ability to quickly resurrect value in the fact of profit destroying forces. A natural place to start learning about these capabilities is the firms that tamed rogue innovations.
It’s been some time since I reviewed my pictures from the last cemetery that I wrote about earlier. I was desperately trying to find a tombstone that I believe is perhaps one of the the biggest idea killers that you may find around you. Unfortunately none of my pictures from the last cemetery had this tombstone. I think it should have been there. As a result let me put it
We are already doing it!
Wasn’t doing it and didn’t see the light of the day
Died before birth
How many times have you seen this? You are bursting with energy and are inspired by an idea and you share it with someone and they tell you – oh! but we are already doing it. Sometimes they are right but often they are dead wrong too. Once someone compares your idea to something already existing with an assertion of similarity many people start focusing on all the commonalities and confirm in their mind how your idea is not very different from something already there. As a result any merit in the idea you proposed is lost.
Why do people do this? Sometimes it is a deliberate attempt to protect turf whereas at other times they focus on the similarities. We make our lives easier by reducing cognitive load because such load requires more information processing. By putting new information in pre-existing categories, we reduce such load. When someone tells you that what you are suggesting is exactly what is already being done, they may be minimizing the cognitive load by finding major similarities.
So what do innovators and creative idea generators do about it? A few things to get you started. First, positioning an idea is an art and requires some understanding of how framing can affect how your information will be perceived and received. Innovators can not afford not learn this art of positioning ideas. Second, you can take any two things and find similarities. You can think of an ipad and iphone and say they are really the same. Although difficult, innovators need to spend some time thinking about the point of similarity and the point of difference between what they are proposing. A good analysis of key points of similarity and key points of difference with some major initiatives that your idea may be compared with is essential. These two pointers will prevent you from framing the idea in an obvious / trivial manner and at the same time ensure that when it is compared with another initiative you agree to the points of similarity but at the same time make a strong case by showcasing the points of difference.
This way, even if there are major points of similarity, you can at least position your idea as a major add-on/improvement to what is being done. At least the merit of your idea won’t be lost to the organization.
In my previous post, I wrote about the innovation of CT scanner. The CT scanner industry shows another forms of innovation that I call neutered innovations. Such innovations do not destroy profits of firms but neither do they enhance firm performance. Although rogue innovation would appear only rarely in an industry, neutered innovations regularly appear across all industries.
In early history of the CT scanner industry, as EMI began to succeed in the market, large medical device firms such as GE and Picker entered the industry quickly as fast second movers. A fast second mover strategy helps established firms balance the innovation risks and rewards well; by letting others test the prototype and the market, fast second movers build on the early success of the first movers. The incumbents innovated on scanner speed and resolution rapidly and thus moved ahead of the innovators in product performance. As a result, they drove out all the new comers from the industry. In effect, innovation allowed firms such as GE and Picker to gain market share and drive out the pioneers who could not innovate fast enough. This is the traditional story of innovation – innovation is difficult but once the incumbents innovate, they reap the rewards of innovation.
The interesting part appeared in the next stage of the story. These firms continued to innovate on scanner speed and scanner resolution – two most important criteria for customers. As I studied the impact of this innovation on firms at later stage, it emerged that after a point these innovations stopped making an impact to the performance of innovators. It was as if the firms continued to innovate just to stay in the same place and to maintain market share. It was as if the innovation became powerless to change performance of firms. It was as it the innovations were neutered.
You have probably been in this situation when your innovation stopped rewarding you. This happens at some point in time in any industry. At that stage firms get into the rut of neutered innovations that do not help performance. They are compelled to innovate just to stay in the same place. What should firms do when they get into this trap?
Take a look at Apple and Nintendo to learn the solution. When Microsoft came out with Zune that was supposedly an ipod killer, Apple didn’t start competing on price or added hard drive capacity to get back at Microsoft. It launched Ipod touch that became a game changer. Similarly, when Sony and Microsoft were battling in video game consoles, Nintendo was losing out. It came up with a new dimension of innovation – kinesthetic capabilities in gaming consoles. The answer to neutered innovations is either a new dimension of innovation or a game changer.