Increasingly we need to rethink the scope, depth and breadth of innovation possibilities, as well as the secondary implications of innovation.
Ignoring this broader definition of innovation means we can never achieve all of the possible benefits innovation has in store.
We believe ignoring the breadth and depth of innovation can also allow competitors and new entrants to disrupt your position or industry. Fortunately, some of these definitions have been created for us. Our responsibility is to understand the definitions and their implications, not stay constrained but seek and explore the broader options this can provide.
In a recent series introduced initially on www.innovationexcellence.com with this one being the third post, originally published on June 16, 2015, we discussed the importance of the emerging interplays and how all innovation has the potential to be a new business model. This series is re-produced here as it is an important concept to consider all the aspects within any innovation interplay.
This increasing importance placed on business model innovation as becoming more central in our innovation thinking and certainly allows us greater scope to broader change, that we believe can provide greater innovating impact.
Both myself, Paul Hobcraft of Agility Innovation and Jeffrey Phillips of OVO Innovation, the co-authors of this series, would argue that we are failing to manage the different and multiple interplays that are constantly taking place when innovation occurs. We are often ignoring them and failing to extract the best or optimal value out of the innovation we are introducing.
We are beginning to ‘flesh out’ firstly in a White Paper we have just written called “The Critical Interplay among Innovation, Business Models and Change (6-2) the important interplay between innovation, business models and change and have further additional “White Paper” of “Why innovators need a new change paradigm
First, we can think about innovation scope
From the Three Horizons framework that takes a more portfolio perspective we can say that innovation can span a spectrum from “incremental”, defined as small changes to existing products and services, to “disruptive”, meaning to create completely new products or services that render the old products or even markets obsolete.
Doblin has also created another way to think about innovation outcomes. Their “Ten Types” of innovation represent different outcomes, illustrating that innovation isn’t simply a new product. Their Ten Types of innovation outcomes include products, services, channels, brands, value networks and business models, it is a framework that explores a ‘greater’ innovation set of opportunities. An innovation project can create incremental products or disruptive business models, or anything in between.
We need to shift our innovation thinking
While a wide range of innovation outcomes are possible, companies are still primarily focused on improving existing products, limiting innovation’s potential. A cramped deployment of innovation leads companies to create new products or services that don’t fully address the needs of consumers. Businesses do need to start with a much larger goal in mind, and when they do, they’ll realize that any really interesting innovation, regardless of its original intent, is also a prospective new business model innovation.
The contribution business models contribute into the interplay needs greater understanding
While the interrelationship between innovation and change is evident, the interplay between these two factors and business models needs far more investigation and understanding. As David Teece has described, a business model “defines the manner in which the enterprise delivers value to customers, entices customers to pay value and convert those payments to profit”. Note that Teece suggests it’s the business model that delivers value to customers, not individual products or services. No matter how much we focus on “innovative” solutions, the business model is intricately bound up in innovation and change. As innovators and change agents reflect on the importance of the business model, several factors will emerge.
The emerging factors we need to consider
First, it’s important to realize that even the most incremental innovation has impacts on internal processes, operations, packaging and channels. In this regard even incremental innovation can impact existing operational and business models. An innovation may create subtle shifts or drastic changes to an existing operational or business model, but those models are typically shared by the other market constituents we’ve identified: customers and competitors.
If the innovation has an impact on the business model and requires changing, then all parties involved (customers, markets and the innovators themselves) will all need to evaluate the effect and impact. The choice is adoption or rejection but the changes it might require often needs greater assessment and understanding to extract or optimize the best value from this changed model. This is where the interplay needs to be considered.
Second, change management becomes as much a consideration as the value of the innovation for what it can entail. Whether it was planned or not, if an innovation does impact the business model, through changing a channel, or reconfiguring the revenue stream, or changing the dynamics of customer service or support, then the innovator is faced with a choice. The innovator must either embrace the change which requires revising its internal operating or business model, or ignore the change and retain the existing models.
Most innovators we find are following the second approach. If this is the case, we need to understand the rationale. Is it a conscious decision to avoid changing existing conventions and methods, or an unconscious choice because they don’t understand the change impact of a new innovation? The approach is probably a blend of both outcomes. Business models evolve over time as competitive forces change and new channels like the internet emerge. Innovators are aware of the need for business models to evolve, but don’t understand the scope of change innovation introduces.
Some may also naively believe their business models can be insulated from the change their innovation creates. They fail to grasp the broader opportunity or change impact picture. Their failure to adjust or adapt models creates work-arounds or gaps that the customer must bridge, markets must accommodate on less than optimal levels or other competitors fill.
Third, innovators who understand that any interesting innovation impacts a business model will plan for and address the impacts on the business model, leading to complete solutions that are difficult to copy and which create more value for the innovator and for the customer. These innovators are fully exploiting the interplay of innovation, business models and change.
As innovators recognize the potential scope and breadth of innovation and its potential outcomes, the innovator is challenged to think more deeply and more completely about how it defines innovation and the impact a new innovation should have, for customers, on the market and on the innovator, and across the Three Horizons. As innovators understand the potential impacts of innovation, across all of the market constituents, new products and services will be far more complete and successful in the marketplace.
Today we are facing a growing reversal
What we can take away from this analysis of innovation, business models and change is a complete reversal of perspective about how innovative products and business models interrelate. Today, innovators create innovative new products and services that accidentally or incidentally create change in existing business models. That is, many innovations create unintended change in business models or operational models. We believe that this perspective should be reversed.
Perhaps the best way to think about innovation in the future is to focus on the desired impact on the business model, and treat innovative new products and services that emerge as by-products of a business model transformation. In effect, the vast majority of innovation should be focused on business models, which will result in understanding the value of the business model and the necessary products, services, channels and experience to achieve the desired new model.
This approach has benefits when we consider the different constituents involved (customer, market and innovator) and the Three Horizons within which change innovators operate managing the transformation from a product centric position into a business model one that in the future engages with all the constituents of customers, markets and the innovator’s ecosystem. Rather than accidentally influencing business models with incomplete innovation, innovators should focus on business model innovation that results in new products, services and experiences across each stakeholder’s perspective and changing need.
Innovators need to become real change agents: not focused just on internal change but agents of change that consider and design innovation through new business models, delivering new innovations into the interplay of customers, market participants and their organization. It is taking change to a different level of understanding, delivering to a stakeholder’s perspective.
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