The critical interplay among innovation, business models and change
Jeffrey Phillips and I have collaborated over a number of years and I have always felt these have been highly productive, original in thinking and truly valuable.
One such collaboration was around the interplay of innovation with business models and change.
I wanted to extract part of this white paper”Critical Interplay Innovation Business Models Change 6-2“(goes to PDF), in this post, as it offers all involved in innovation a structure to break down innovation into its different models of application. It describes some important observations we often forget when innovating.
The dynamics of innovation and change
Many corporations haven’t carefully defined the scope of innovation activities and don’t recognize the impact of innovation and its incumbent requirement for change. We’ve defined the three constituents that are impacted by change: customers, competitors or market, and the innovator itself. Let’s now describe three tiers or scope of impact an innovation can create:
- Incremental: Making changes to existing products and services with little change to an industry or market. Customers may need to change to some degree to adopt or adapt to a new product. Competitors and markets will ignore or quickly match the new capabilities or features.
- Breakthrough: Making changes to the existing industry or business model. A company may discover innovations that impact the industry’s operations, structure or business model, in effect forcing change on its customers, its industry and by extension, itself. A breakthrough innovation extends or changes an existing technology, capability or market in such a way that customers and competitors must change to some degree.
- Disruptive: Innovating to create a new market or industry, or innovating in an existing adjacent industry. An innovator may identify or discover needs that allow it to create a completely new market, segment or industry, or enter an existing market, segment or industry and change it or disrupt the adjacent market. Disruptive innovation requires change on the part of the customer and creates such drastic change that competitors are forced to change or remove themselves from the market.
What’s important to understand is that every innovation creates change, and the amount and impact of change that occurs is different across these three distinct types of innovation.
Applying the three horizon framework to innovation and change
To explain the impacts of innovation and the change it creates, we’ll use an accepted framework (the Three Horizons) to consider the impact innovation has on change capabilities and business models. Here we introduce the three horizon concept to better understand the range of innovation outcomes and the potential change requirements.
The three horizons framework provides distinct horizons, requiring different outcomes and approaching the scope of innovation in mindsets. Usually, it is represented by a typical XY plane, whereas Y is the amount of scope/need/value/change over x, the time each takes/seen/needed
What’s important to understand is that every innovation creates change, and the amount and impact of change scales out across each of these three horizons. For greater clarity, let’s examine each of the three horizons in a bit more detail.
Defining Horizon One – Operating in the Now
Horizon One defines the portion of the potential innovation space that is most similar to existing services or solutions. The typical innovation focus in Horizon One is on improving efficiency or cutting costs.
Innovators working within this space are typically creating small but useful changes to existing products and services, offering new solutions to existing customers and prospects. The anticipated outcome is “incremental” change, easily adopted by existing customers and no real threat to the market, competitors or the industry. This innovation is based on existing capabilities with the intent of maintaining or growing existing shares in the existing markets. It relies on existing capabilities and emphasizes excellent operational execution, with less focus on new needs or expanding the competitive market space.
The internal change focus is on improving execution and increasing efficiency. There’s little change required for external constituents. Consumers are already familiar with the products and have some expectation of improvements or modifications. Competitors and the industry at large aren’t significantly impacted by the innovation.
The vast majority of innovation activity is “incremental” innovation because the risks are low, and market knowledge is relatively high.
Defining Horizon Two – Looking ahead, anticipating change
Horizon Two is the portion of the potential innovation space that focuses on extending existing capabilities into new markets or introducing new capabilities into existing markets. Horizon Two is the mid-point between “incremental’ change in Horizon One and “disruptive” change in Horizon Three.
Companies innovating with this horizon anticipate “breakthrough” innovation, usually extending a known technology into a new market, or introducing new technologies or capabilities into the existing marketplace. Breakthrough innovation often requires extending to new capabilities as well as building on existing capabilities, with the intent of expanding markets and the competitive space.
The innovation arising from the 2nd horizon requires more experimenting than Horizon One innovation and often leads to some change for all three constituents. Internal change in this horizon is focused on experimenting and extending capabilities. Consumers may experience change due to the introduction of new technologies or capabilities. Competitors will experience change due to the broadening of industry definitions or modifications to industry or technology conventions.
Operating in Horizon Two the innovator begins to stretch its horizons, using either new technologies, extending or establishing new practices or capabilities as they explore and enter new markets or shape existing ones differently.
Defining Horizon Three- The future, defining change and transforming
Horizon three is the portion of the potential innovation space that seeks the most significant innovation change as the innovator seeks to create new markets or dramatically change or disrupt existing markets, or create completely new technologies or capabilities.
When companies conduct “disruptive” innovation the anticipated result is market or technology disruption, creating new market dominance by upending existing products, technologies, capabilities or markets or creating entirely new products or markets. Innovating in Horizon Three requires significant discovery and learning while building and adapting new capabilities. Successful innovation will create disruption for all three constituents. This is the space where the most change will occur.
Consumers will find a completely new, novel and valuable solution to an existing problem or challenge, and must change their actions or behaviour to adopt it. Disruption of industry expectations and norms will force competitors to react and may cause so much change that they cannot respond to the speed and scope of the change.
The innovator themselves must change, in order to provide all of the features and capabilities the disruptive innovation requires in order to be adopted by consumers. These internal changes will be based on exploring new technologies, evolving business models and expanding the definition of the market or solution.
Those attempting Horizon Three innovation are creating entirely new capabilities or technologies, creating new segments or markets, or both
Relating innovation and change within the three horizons
As we define each of the three horizons and the anticipated innovation outcome, we can begin to document the differences among the potential outcomes, in terms of approach, the leverage of new or existing capabilities, intent and strategy, and many other factors.
| Horizon One | Horizon Two | Horizon Three | |
| Outcomes | Incremental | Breakthrough/ Distinctive | Disruptive/Radical |
| Type | Core | Growth | Future |
| Working approach | Plug n Play | Read and React | Learn and Leverage |
| Capabilities | Based on existing | Connecting to new | Adapting to emerging |
| Strategic focus | Exploit and Optimize | Expand and Build New Options | Explore unknowns and future spaces |
| Intent | Secure existing markets | Build and extend | Explore and disrupt |
| State | Business as Usual Leveraging on the existing, extracting the optimum | Transforming, building resilience sustaining and extending | Adaptive, exploring potential from new options |
| Focus | Good execution | Frequent Experiment | Explore and discover |
| Change Impact | Little change to any of the three | Some change to all three | A significant change to all three |
| Approach emphasis | Superior Execution | Positional Advantage | Foresight and Visionary |
Understanding the decision making, strategy, intent and emphasis required for each horizon helps delineate the commitment, resources and effort involved, and begins to signal the scope and impact of potential innovation and the change the innovation can create, for customers, markets and the innovator.
These ideas culminate in a rather interesting conclusion, which is that any innovation, especially in horizon two or horizon three, regardless of its intended outcome (product, service, channel or business model) is also by definition a need to reflect on a business model innovation change.
Will the innovation significantly change the existing business model or distort or disrupt the model? This means that innovators internal to the industry will be constantly evolving the model from within, questioning it, evaluating changes, and new entrants and disrupters will seek to change and challenge existing models from their external perspective.
Both of these facts lead us to the conclusion that good innovators must excel at sustained change and business model evaluation.
Most corporations don’t understand how much change is created by innovation.
As we begin to understand the Three Horizons and the anticipated impact innovation can have in each of these horizons, we can begin to grasp the amount of change innovation creates, and which constituents will feel the brunt of that change.
Each horizon has a different and direct influence on innovation outcomes and the change these require
Clearly, as we’ve demonstrated above, breakthrough and disruptive innovation outcomes create change for customers and for competitors and markets.
More importantly, these innovations create change impacts that will also force innovators to change
This is often an unexpected outcome of innovation activity, as many innovators believe themselves to be inoculated from the change their innovation creates.
The assumption that innovation will impact the customer and competitors but won’t force the innovator to change is dangerous and almost always wrong.
Many corporate innovators hope to create significant impact and to disrupt their competitors with new products that in turn also delight their customers.
Yet few innovators think carefully about the ripple effects of breakthrough or disruptive innovation. They prefer to conduct what we’ll call “guided missile” innovation, assuming that they can create meaningful and valuable change for customers and disruptive and destructive change for competitors while remaining isolated from the change their new products and services create
This naïve assumption is dangerous and almost always wrong.
Innovation in almost any form may require that the customer or market change. It’s very likely that these innovations will require that the innovator change as well. We simply cannot expect to create change in the marketplace or in the customer base without also being expected to change as innovators.
**Taken from the white paper Critical Interplay Innovation Business Models Change 6-2