Disruptive innovation in practice

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A disruptive innovation in healthcare that avoids the United States

  
  
  
  

The Swasthya Slate packs a remarkable amount of electronics within a single diagnostic device.  The Slate can take an electrocardiogram, monitor urine, and diagnose a range of serious conditions, all for a tiny fraction of the cost of traditional machines.  Moreover, the Slate's simple interface enables low-skilled technicians to use the device, and communication with central servers allows for decision-support algorithms to recommend potentially appropriate treatments for patients being diagnosed.

There is no remarkable new technology in the Slate.  Indeed, that's partly the point.  Through packaging off-the-shelf parts in a straightforward-to-use package, the Slate aims for low-cost simplicity.  The accuracy of its readings is reportedly 99% as good as far more expensive machines.  Yet the way regulation, purchasing, and usage of these devices occurs in developed economies precludes the Slate's usage there.  Instead, the Slate has been invented and is being rolled out in India.  Read my piece for Forbes to learn more about the device and the disruptive innovation it represents. 

Click for more of New Markets' thinking about healthcare and emerging markets.

5 Ways to Reach Down-Market Consumers Without Harming Your Brand

  
  
  
  

Many companies are not doing enough to fend off low-cost rivals.  They worry that adopting a down-market strategy could ultimately harm their brand.  At the same time, young customers who are establishing roots could become valuable, long-term customers.  Is the risk worth the reward?

Our new piece for Forbes looks at five of the strategies employed by companies that have successfully made the shift down market.  We also explore how Mercedes-Benz is faring with its recent foray into the entry-level luxury car market.  Click the link to read more: http://www.forbes.com/sites/stephenwunker/2014/10/08/5-ways-to-reach-down-market-consumers-without-harming-your-brand/

Learn more about our work in strategy

Why the Apple Pay Business Model Will Push us into Mobile Payments

  
  
  
  

This post is written by New Markets Advisors’ David Farber:

Much of this week’s tech excitement has been around the size, shape, and display of the new iPhone 6.  Perhaps the most important long-term implications, however, will come from Apple Pay, Apple’s new play in mobile payments.  Apple Pay – enabled by Near Field Communication (NFC) – is hardly a noteworthy technology innovation.  Despite limitations in point-of-sale (POS) infrastructure and relatively slow roll-out in the corresponding phone technology, Google Wallet and others long ago made mobile proximity payments a mass possibility.  NFC has been around for roughly a decade.  At the same time, companies such as Square have been steadily popularizing mobile payment solutions for both consumers and smaller merchants. 

So, why is Apple Pay significant?  Much like with Apple’s past successes, the relevant technology is now being integrated into a larger business model innovation.  Somewhat serendipitously, this business innovation nicely coincides with shifting consumer behaviors and demands for retailers to upgrade POS terminals.  In particular, Apple Pay benefits from five key advantages that might allow Apple to be the driving force in fueling the growth of the US mobile payments market.

Devoted and powerful customer base.  Apple’s critics will be quick to point out that Android has captured roughly 80% of global market share (and roughly 60% of US market share) while Apple clocks in under 15% worldwide.  The diffusion of new technology does not occur instantly, however, nor does it begin on a global scale.  Rather, new technologies gain strength through foothold markets, an area where Apple is king.  iPhone users are known for their extreme (and vocal) devotion to Apple products, and Apple Pay will first be available to Apple’s power users – early adopters of the iPhone 6, iPhone 6 Plus, and Apple Watch.  Even beyond these power users, iPhone users as a whole appear quite attractive from a mobile payments perspective.  Research from Experian suggests that iPhone users spend significantly more time using their phones each day (75 minutes, compared to 49 minutes for the average Android user).  According to Swrve, a mobile marketing company, iOS users are 32% more likely to make a mobile purchase, and they spend 10% more than Android users.  Early Apple Pay users will likely provide attractive revenues that will encourage retailers to scale up acceptance of the technology.

Motivated partners.  Unlike with some early players in mobile payments, the Apple Pay business model does not position Apple as a disruptor of major payment networks.  Instead, Apple has established partnerships with major credit card companies and banks, meaning that Apple Pay will be able to support over 80% of credit card purchase volume from the outset.  At the same time, Apple has already announced that several leading US retailers – including Macy’s, McDonald’s, Staples, Subway, Walgreens, and Whole Foods – will support Apple Pay.  With both credit card companies and merchants alike having the potential to boost transaction volume as consumers avoid the constraints of cash-based systems, the entire network has motivation to support the success of Apple Pay.

Advanced infrastructure.  One of the biggest reasons for the slow growth of mobile payments in the US has been the lack of the required POS infrastructure.  In recent years, however, major retailers have steadily been investing in the required terminals, and smaller merchants have increasingly been looking for cost-effective alternatives to cash systems.  According to MasterCard’s Mobile Payments Readiness Index, the US is well on its way to reaching the mobile payments inflection point – the stage at which mobile devices account for an appreciable share of the payments mix – with infrastructure readiness far outpacing consumer readiness.  Notably, recent retail data breaches and a 2015 upgrade deadline imposed by credit card networks are already forcing merchants to invest in new POS equipment that is more secure and NFC-ready.  With consumer comfort also continuing to rise (eMarketer estimates the growth of mobile proximity payment users at 161%, 54%, and 57% for 2012, 2013, and 2014 respectively), the US retail market is well primed for mobile payments.

Complementary product suite.  Another major advantage for Apple Pay is that it will be able to draw value from existing Apple assets, including iTunes and the Apple App Store.  To start, many Apple users are already comfortable giving Apple their credit card data (and inputting it into their iPhones), as they have already done so to make app and music purchases.  Furthermore, those looking to ease into the Apple Pay experience will be able to use the function to effect single-touch payments within apps, such as in the Starbucks, Target, and Uber apps.

Under-satisfied job to be done.  Those who have struggled in mobile payments have generally failed to articulate a use case for their offering.  Often, they have tried to suggest that mobile payment options may be faster, but credit card transactions are already sufficiently speedy for most users.  In fact, several of the predecessors to Apple Pay required a number of steps to be taken by smartphone users, ultimately making the process longer.  In light of recent data breaches and compromised credit card numbers, however, Apple Pay can satisfy an emotional job that is top of mind for consumers – security.  With Apple Pay, credit card numbers are turned into encrypted identifying numbers that are securely stored on a chip in the iPhone or Apple Watch.  This means that actual credit card numbers are never stored on Apple’s servers, nor are they shared with merchants.

Pundits have long been announcing that the US mobile payments market will grow to astronomical heights in very little time.  To be clear, there is still a fair distance to go until mobile proximity payments are a significant portion of payment volume in the US.  Nevertheless, mobile payments will see meaningful growth in the US over the next few years, and Apple Pay will likely play a big role in making that happen.  Furthermore, the security and virtualization technology underlying Apple Pay may ultimately act as a foundation for new technologies that are currently unforeseen.

Remember – the iPhone was far from the first smartphone, and the iPod was not the first MP3 player.  They became the first mass market successes by making the technology easily acceptable, wrapping it in an appropriate business model, and marketing it aggressively.  The company is applying the same formula to Apple Pay.  The results should be exciting.

Strategies for Sizing Markets Using Jobs to be Done

  
  
  
  

This post is written by New Markets Advisors' David Farber:

 

Note: BestWatch recently came to New Markets looking to size various target markets using Jobs to be Done, and to develop a strategy for adjusting its product portfolio.  The name and industry of BestWatch have been disguised.

 

WatchBestWatch’s challenge was one that many companies face, though this fact was of little comfort to BestWatch’s executives as they watched their deadline grow closer.  BestWatch had seen exceptional growth in its relatively new line of high-end watches, but analysts were warning that highly anticipated smartwatches would soon be adorning wrists everywhere.  With a board of directors meeting looming, BestWatch’s executives needed guidance on whether to continue to invest in its high-end watch line.  Historic sales data of other types of watches and bracelets suggested that BestWatch should continue to push its high-end watches.  Meanwhile, advisors had averaged the wildly varying projections for smartwatches to determine that they indeed would be the next big thing.  BestWatch hoped that Jobs to be Done could provide the real story.

 

“Jobs to be Done” is a term first popularized by Harvard Business School Professor Clayton Christensen.  It is shorthand for a way to look at latent need in marketplaces and the wide variety of ways that people accomplish certain goals beyond just buying a product.  For instance, a car buyer isn’t just purchasing a mid-sized sedan, but a way to express his personality, plan for a growing family, and impress his neighbors.  He has many other ways of accomplishing those same jobs, and so an automaker has a broad range of competitors, as well as many hidden levers for getting those jobs done beyond everyday functional specifications such as turning radius and headroom.

 

Sizing markets based on customers’ jobs to be done allows companies to adopt a forward-looking perspective that uncovers unseen growth opportunities and more accurately defines potential.  At the same, however, a simple calculation of the prevalence of a particular job to be done in a target population could be just as unreliable as any other estimate.  If BestWatch simply looked at the job of telling time, for example, the potential for its watch would look limitless.  In reality, jobs-based market sizing requires focusing in on the right jobs to be done, as well as refining market projections to account for a company’s core business competencies, willingness to explore adjacencies, and innovation mandate.  Here, we provide some of the strategies New Markets uses to size markets based on customers’ jobs to be done.

 

Consider the full jobs landscape, beyond just the job to be done.  Gathering customer insights involves more than simply understanding customers’ jobs to be done.  Taking a customer-centric approach requires seeing the world from the customers’ perspective, including their motivations, behaviors, tradeoff decisions, and definitions for success.  This information is captured through a seven-part framework.  In addition to providing an integral component for customer-centered design, each element can also be used to refine estimates of potential market size.  In BestWatch’s case, its target customers had a number of functional jobs that could be well satisfied by a smartwatch.  Importantly, however, these same customers were heavily influenced by emotional jobs – such as showing off – that were less well satisfied by a smartwatch in their particular social context.

 JTBD Market Sizing Chart

 

Discern which customer types are in play.  Being able to satisfy a customer’s jobs to be done does not mean that he or she will become your customer.  Segmenting potential customers based on, among other things, their job priorities, current behaviors, and motivations helps to determine whether your company’s offerings will ever be in the customer’s consideration set.  Customers need to be divided into groups based on the factors that drive decision-making, and those factors change depending on the industry and the range of solutions that can be considered.  For example, our statistical analysis for BestWatch revealed that certain attitudinal drivers and smartphone usage behaviors were most significant in determining whether customers were more likely to buy the high-end watch or the smartwatch.  Additionally, segmentation helps to identify customer types that are particularly attractive for companies, including those that are less expensive to please or willing to spend more.  A company’s strategy, competencies, and growth mandate will help determine how much of the overall market is really in play.

 

Tie insights to real data points.  While jobs-based insights are particularly good at providing directional guidance and refinement, much of the insight is qualitative and should be tethered to hard data.  With BestWatch, we followed up our qualitative research with a jobs-oriented quantitative survey of potentially addressable customers.  In addition to providing a reliable base for market sizing efforts, quantitative surveys help to validate that the insights discovered while talking with customers hold true in a larger population.  This survey data can be exceptionally useful, and it can be further improved by anchoring to additional data points.  For instance, beyond just calculating who was screened out based on certain characteristics, we helped BestWatch to avoid sampling biases by tying the survey data to known quantities, including the number of individuals in various occupation types. 

 

Plan for multiple future scenarios.  Even companies that invest heavily in customer insights are still not able to predict the future perfectly.  They will need to make some assumptions along the way and make educated guesses about how certain trends will play out.  Rather than making market sizing efforts an all-or-nothing bet, projections should allow for multiple versions of the future.  Beyond just a best-case or worst-case scenario, work should determine how the market might look different if and when game-changing trends – those that are the most important and the least certain – come into play.  By reflecting the fact that the future is not completely certain, scenario-based projections allow planning based on key assumptions rather than on current thinking that may become quickly outmoded.

 

Projecting the size of the market for a new offering can be a difficult endeavor, particularly when it involves a truly innovative new product or service.  By framing the market around jobs to be done, companies can design customer-centric offerings and capture customer types that were not even envisioned in a product-focused approach.  Creating a realistic and usable projection requires refining a jobs-based estimate by leveraging insights from other elements of the jobs framework, understanding which customer types are in play, tying insights to real data points, and planning across multiple scenarios.  It is a rigorous, expansive, and relatively future-proof way to assess the unknown.

 

Click for more information on New Markets' work and expertise in Jobs to be Done

How Consumer Goods Companies Create Breakthrough Innovations

  
  
  
  

This post is written by New Markets Advisors' David Farber:

For consumer goods executives, keeping up with all of the reports on how difficult it is to win in the industry might be just as difficult as actually winning in the industry.  Countless articles and reports repeat Clayton Christensen’s statistic that 95% of new products fail, or note how very few new products end up being breakthrough innovations that meaningfully impact their categories.  Many more detail how new product launches fail to meet a variety of specific metrics, such as covering development costs or having a material impact on the company’s growth trajectory.  Most recently, however, Nielsen revealed its list of 14 Breakthrough Innovation Award Winners.  Of more than 3,400 consumer goods product launches in 2012, only these 14 met Nielsen’s strict criteria for breakthrough innovation: (1) distinctiveness – delivers a new value proposition to the market; (2) relevance – generates a minimum of $50 million in year-one sales; and (3) endurance – achieves at least 90% of year-one sales in year two.  Looking at the patterns among these 14 game changers reveals several best practices that consumer goods companies can leverage to create their own success stories.

Design offerings around jobs to be done – Launching a product that truly makes an impact on a category requires more than looking at what customers are currently buying and adding a few new features.  At the same time, it also does not require companies to place all-or-nothing bets on long-shot projects.  Innovation is about thinking outside the box, not launching into the stratosphere.  Importantly, real game changers require insights from real customers.  Taking a jobs-based approach to product design requires looking at the functional and emotional jobs that customers are trying to satisfy, understanding how new products can target the awkward work-arounds that are currently addressing those jobs, and building solutions that cater to a customer-defined characterization of success.  For example, Kimberly-Clark’s Depend Silhouette and Real Fit Briefs were designed to account for the compensating behaviors –from wads of toilet paper to frequent wardrobe changes – adopted by many adults suffering from incontinence.  While the briefs needed to meet a number of functional criteria, much of their success is also attributable to the emotional and social jobs they satisfy.  By designing and marketing around emotional and social concerns, Kimberly-Clark was able to capture substantial sales volume from adults who previously suffered for 6 months to 2 years before buying an incontinence product.

Capitalize on trends, not fads – Often times, teams tasked with launching new products start by looking at what their direct competitors have done.  In addition to taking too narrow a view of competition, this approach often leads to product designs that account for fads that are already half played out.  Even when these products show initial signs of success, they generally fail to deliver sustainable value.  Instead, companies need to engage in a deeper level of forward-looking discovery that leverages insights from other industries, uncovers trends with a high potential for impact, and leads to solutions that account for a variety of uncertainties and possible industry scenarios.  Sargento’s Ultra Thin Slices may look like just thinner slices of cheese.  Looking more closely, however, the Ultra Thin line capitalizes on individual-centered health trends that are playing out across several industries.  Among other achievements, the thinner slices allow consumers to reduce their intake of fat, calories, and salt without trading down to low-fat varieties.  Ultra Thin doubled its sales in its second year, and it is also credited for much of the 6% increase in sales of natural sliced cheese.

Think beyond historic customer groups – Many consumer goods companies fail to create breakthrough innovations because they focus too heavily on their existing customers.  Companies delight in the comfort they get from how well they know their customers, and they are often wary of introducing products that do not appeal to those customers.  Unfortunately, focusing on such a limited range of customers substantially limits growth potential.  By contrast, The Boston Beer Co. – maker of Sam Adams – embraces the opportunity to reach new customer types.  By launching its Angry Orchard cider, Boston Beer was able to attract a large segment of customers who do not typically drink beer.  Angry Orchard has been particularly successful among women, who have historically been a hard demographic for beer makers to target.  Angry Orchard has already captured roughly 40% of the U.S. hard cider market, and analysts project that it will account for 20% of Boston Beer’s sales volume by the end of 2015.

Improve relationships throughout the value chain – It can be very hard to change engrained consumer behaviors, and fitting a new brand or product category into existing retail merchandising schemes can also be quite the challenge.  On the other hand, everyone wins when consumers understand what a company is selling and how it can benefit them.  More often than not, this requires work from more actors than just the manufacturer.  When Nabisco introduced its belVita “breakfast biscuits” to U.S. consumers, it was already facing an uphill battle.  It was trying to create a new breakfast category by selling customers a product that sounds like a buttery side dish but looks more like a cookie.  Although the biscuits are currently sold in the cookie aisle, Mondelez (Nabisco’s parent company) worked with grocery stores to make sure that the product was initially promoted in locations where consumers buy breakfast items, such as the cereal aisle.  BelVita brought in more than $70 million in year-one revenue, and sales grew by more than 50% in its second year.

Build capabilities that support sustainable success – Relatively few companies have demonstrated an ability to consistently launch new products that meaningfully impact their category.  Doing so requires finely honed processes for exploring new markets, generating high-potential ideas, and turning those ideas into game-changing product launches.  No one recognizes the value of building innovation capabilities more than P&G, which, incidentally, is responsible for 3 of the 14 breakthrough product launches on Nielsen’s list.  In addition to being the leading spender on consumer and market research, P&G also invests roughly twice as much as its major competitors on strengthening its innovation capabilities and pipeline.  While P&G improves its go-to-market structures at a scale that is hard to match, its insistence on interacting with real customers and focusing on innovation infrastructure is a mindset that all companies would do well to adopt.

Winning in consumer goods may be hard, but it is far from impossible.  In fact, the companies who launched the 14 products identified as breakthrough innovations in Nielsen’s report were able to reach such a high level of success by relying on a handful of strategies and best practices.  Looking more broadly, those practices can be roughly categorized into three essential elements of success: (1) rely on real market and consumer research, (2) prioritize building the infrastructure for innovation, and (3) generate new business models that consider innovations across multiple domains.

Click to read more about New Markets Advisors' work in consumer goods.

"Jobs to be done" vs. "needs" and "outcomes"--how they are different

  
  
  
  

My mentor Clayton Christensen, Professor at Harvard Business School and originator of the term “disruptive innovation,” is fond of saying that great innovations come from deeply understanding customers’ jobs to be done.  Are “jobs” different from customers’ needs or sought-after outcomes?

Yes.  All too often, marketers define “needs” in terms of product requirements, like the need for a car driver to have a cupholder.  A driver’s “jobs” can be much more expansive.  For instance, he may have a broader job to eat while driving, and still a broader one to avoid wasting time.  Seen through this lens, an automaker has many more avenues for innovation than simply perfecting a cupholder.  To address the job of eating while driving, the company may create a thin but sturdy tray that folds out from the center dashboard to hold a sandwich, and a tab under the passenger’s side dash where the driver can attach a small plastic trash bag.  To help the driver avoid the feeling of wasted time, the company could e-mail its customers a weekly set of “best of” podcasts chosen to meet their interests.  Importantly, the competition for getting a job done often is not in a company’s traditionalJobs to be done example product class, but instead customer frustration and doing nothing, or an alternative from a completely different industry.  Examining jobs to be done can vastly increase the number of levers a company might pull to create innovative offerings.

“Outcomes” are also distinct.  When customers say what outcomes they are trying to achieve, they provide precise guidance to product developers without stipulating how the engineers choose to accomplish the goal.  For example, an outcome for a driver might be “avoid spilling coffee when cups are very full.”  This is useful.  However, customers are notoriously bad at stipulating the emotional aspects of what they are trying to do, such as how a driver might want to avoid the feeling of wasting time.  They can also be terrible at providing outcome-related guidance for products that do not exist.  For example, what outcomes would customers have recited to inspire Apple to create the iPad?  To refine successive versions of the iPad, outcomes such as “read in bright sunlight” are important, but this sort of customer input often does not point to new avenues for innovation.  By contrast, understanding the job of “read the things I never get the time to read” may have been far more useful.

The jobs that customers are trying to get done stem from context and attitudes, as well as good old-fashioned marketing “needs.”  They involve both functional and emotional elements.  By understanding customers’ jobs to be done, companies can broaden the canvas for innovation, excelling along dimensions that don’t even occur to their competitors.  Firms that embrace jobs to be done win through being different.

Click for more information on New Markets’ rigorous approach to researching jobs to be done.

Harnessing offsite innovation labs and talent-based acquisitions

  
  
  
  

This post is written by New Markets Advisors' David Farber:

Off-site innovation labs and acquisitions are often an effective way of bringing in tech talent or capabilities that a company otherwise does not possess.  These outposts – which often contain a mix of existing employees and outside hires – can be useful places for creating new competencies and fostering innovative ideas that might meet resistance back at headquarters.  However, the gap between the outpost and the core can quickly become a breeding ground for tension and miscommunication.  In many cases, the off-site team produces valuable output that either fails to meet the needs of the core or that fails to gain traction because of an ill-prepared landing zone back at the core.  Over time, the innovation lab or acquisition may quickly fall victim to the traditional “out of sight, out of mind” perils.  By talking to some of the world’s leading companies and exploring their experiences with off-site teams, New Markets has collected some first-hand strategies for successfully harnessing the value of such a unit. Innovation lab resized 600

Tirelessly foster critical relationships – The head of an acquired IT startup for a large North American retailer spoke with us about the importance of building relationships with people back at headquarters.  He admitted that 9 months after the acquisition, his off-site team still did not fully understand the core’s needs, and the core had a limited understanding of the team’s capabilities.  He noted, however, that the team’s early successes in delivering usable concepts to the core were a result of connections he built through his monthly trips back to headquarters.  Even when companies make a senior-level decision to acquire specific capabilities, a strong and continuous voice needs to integrate those capabilities with ongoing projects and priorities.  In-person meetings are an important way to nurture the relationships that keep each side abreast of the other’s needs and competencies. 

Enable quick wins – The off-site mobile experience team for a global retailer acknowledged that the team’s output gains the most traction when it delivers a “wow” factor back to the receiving team at headquarters.  The team has learned that quick, head-turning wins have given it the credibility to pursue longer more meaningful projects.  By delivering upfront wins that gain attention, off-site teams can buy more time and trust from managers back at the core.  Nevertheless, even quick wins need to be substantive.  Rather than focusing on building a flashy component for a long-term challenge, teams should generate quick wins by focusing their efforts on important – but relatively compartmentalized – challenges that can be solved quickly. 

Bring in strong external leadership – Although quick wins are helpful for building confidence and relationships, outposts are often regarded as a failure because they are unable to meet unrealistic expectations about the value they can deliver.  The new head of an off-site innovation team for a global manufacturer helped solve this problem by negotiating a schedule for its output in advance.  In particular, the schedule included a generous scale-up period during which the team was not required to deliver results.  Accordingly, the team was not forced to prematurely deliver unfinished output, and it had more time to focus on integration with the core.  External leaders often feel less pressure to modify projects to fit unreasonable timelines, and they typically have an easier time pushing back on the design of success metrics. 

Recognize the burden of your biggest asset – External leaders also have the ability to solve another unusual problem facing large companies looking to build innovation outposts.  Many of the highly-regarded companies we spoke with were troubled to learn that their brands – ordinarily their most valuable asset – were scaring away the best tech talent.  Top programmers and designers expressed wariness of joining these industry titans because they lacked a reputation for innovativeness and tech-centricity.  Bringing in a well-known outsider to head your lab allows you to capitalize on a reputation that your brand would otherwise lack.  This separation between core and outpost also signals to prospective employees that the off-site lab is likely to have a distinct culture and an appreciation for true innovation.

Avoid taking on too much – When we spoke with the head of an off-site digital innovation lab for a global company, he was keen on emphasizing the importance of a clear mandate.  When designing the lab, his conversations with other innovation teams revealed that they often got pulled into “all things digital,” diluting their ability to deliver value.  When off-site teams take on too much, it typically creates two problems.  First, the team’s purpose becomes murky.  Leaders at the core become unwilling to send the team high-priority projects because it is not clear that there is a particular thing that they do really well.  Second, the team tends to work on projects that overlap with those back at the core.  Accordingly, resources are used inefficiently, and multiple teams waste time working on the same task.  By focusing on a targeted group of projects, off-site teams can both raise their status back at headquarters, and avoid fostering workflow redundancies.

Running an innovation lab or tech outpost is very different from running a department in the core business.  Capturing value from these off-site teams requires a different set of strategies than those that the company normally employs.  One of the biggest challenges is finding the proper balance between distance and connectedness.  On the one hand, there needs to be a strong relationship between the innovation lab or acquisition’s off-site team and the core, which includes a hospitable landing zone for the team’s output.  Quick wins and in-person connections can help support that relationship.  On the other hand, there needs to be a strong leader who can push back on unreasonable expectations for output, create an innovative culture, and attract top talent.  The ideal point on that connectedness spectrum will vary by company, depending on its industry, goals, and culture.  Regardless of where a company falls, however, creating a tightly-defined mandate will be essential to generating anything more than short-term excitement.

How the tech world is winning through deals in new markets

  
  
  
  

This post is written by New Markets Advisors' David Farber:

A comprehensive growth strategy generally requires a well-balanced portfolio of organic growth programs and adjacency plays that support the core business.  Winning in adjacencies is not always easy.  In fact, many companies decide every few years to timidly test the waters of new markets before ultimately returning to the safe and stable profits that they know the core business can provide.  Nevertheless, those that leverage key assets from the core and use new market opportunities to bring hard-to-capture value back to the core can save themselves from the do-or-die decisions that need to be made when a company waits too long to evolve.  To that end, several major tech deals over the past few months have done a good job illustrating five of the primary ways companies can use new businesses in adjacencies to support the core.

  • Customer lock-in -- Between Amazon’s recent announcement of its Amazon Prime price hike and the general rise in eCommerce free shipping offers, some have begun to question the value of Prime.  In fact, ShopRunner – a Prime-like service that works across a wider variety of retailers – recently announced that it would offer a free one-year membership to individuals willing to leave Prime for ShopRunner.  In a move to ensure that it keeps this attractive pool of customers, Amazon announced a deal with HBO that will give Prime members free access to select HBO programming.  In effect, Amazon is using its unique infrastructure and bargaining power to provide shoppers with (beyond-the-core) value that other retailers cannot easily replicate.
  • Differentiate the core – Earlier this year, Lenovo announced that it was purchasing Motorola’s smartphone business for nearly $3 billion.  In addition to giving Lenovo access to a wider and growing customer base, this deal will make Lenovo one of the few major players to have successful global product lines in PCs, tablets, and smartphones.  In addition to being able to share resources and expertise across device categories, Lenovo will have the opportunity to leverage this adjacent new business to differentiate its devices by offering cross-device integration and a one-stop shopping experience that most other device manufacturers cannot provide.
  • New sources of value – The FTC just approved Facebook’s plan to spend $2 billion acquiring Oculus, a leader in virtual reality technology.  While Facebook has expended substantial effort optimizing and enhancing the desktop and mobile arenas, the Oculus acquisition gives it a springboard to a new platform that is still in its infancy.  By moving beyond its core competencies and buying a right to play in the virtual reality space, Facebook can help shape the development of an adjacent space, securing a long-term space for Facebook to grow into.  This looks to not only create value for the consumer – through a new way to experience interconnectedness in the digital age – but also to create the potential for a plethora of new profit models for the core business.
  • Block asymmetric threats – Prior to announcing its plan to buy Oculus, Facebook also spent $19 billion purchasing WhatsApp, a messaging app for mobile devices.  Although part of its high price tag was driven by its large customer base (over 450 million monthly active users worldwide as of the acquisition date), Facebook also paid a premium to ensure that it could protect against indirect competition.  WhatsApp provides an enormous base of mobile messaging users looking for a cheap alternative to SMS, with particularly large opportunities in emerging markets.  Since the acquisition, WhatsApp’s user base has grown fastest in Brazil, India, Mexico, and Russia.  By buying such a big stake in an adjacent domain, Facebook is sending clear signals about its intentions for mobile messaging.
  • New consumption occasionsOne of the earliest tech acquisitions this year was Google’s $3.2 billion purchase of Nest – the second largest acquisition in Google’s history.  Although there has been massive speculation surrounding Google’s motives, it is clear that the deal offers the potential to bring Google multiple new revenue streams.  At the basic level, making a big play in the connected-home space allows Google to credibly sell smart devices in a world over-saturated with analog alternatives.  More interestingly, Nest’s devices allow the company to gain insight into the real-time energy demand and behavior of connected-home customers.  Coupled with Google’s existing analytics capabilities, Nest’s utility partnerships could lead to a new business model that allows Google to profit by saving money for both consumers and utilities.

After seeing companies like these succeed in adjacencies, many others will try to do the same.  Of that group, most will see diluted short-term profits and realize that they do not have the stomach for the uncertainty that a foray into a new market always brings.  Many will bring in a new CEO with a leaner, back-to-basics approach that focuses all efforts back on the core business.  Nevertheless, a small number of the best-run businesses in that group will succeed in their new market expeditions.  And those businesses will have two things in common.  First, they will leverage enough of the core’s defining competencies to earn a right to win in the new space.  Put another way, they will borrow the assets that let them win, and leave behind those that would slow them down.  Second, they will use the play in the new market to improve the core by bringing in value that would otherwise be expensive or difficult for the core to access.  Most likely, that value will take the shape of one of the five categories from above: locking in customers, differentiating the core, creating new sources of value, blocking asymmetric threats, or creating new consumption occasions.  By creating a plan that succeeds along those two dimensions, companies will be able to use new market plays to bring significant value back to the core.

Avoiding five common pitfalls in building innovation capabilities

  
  
  
  

This post is written by New Markets Advisors' David Farber:

While the term “innovation” has recently been lambasted for both its misuse and its overuse, there is no denying that a strong innovation program is an essential component of long-term organic growth.  Despite their importance, innovation programs frequently become sinkholes for employee time and company money.  Far too often, these programs become holding pens for pet projects from senior management or high-cost training programs that fail to produce meaningful output.  By mining insights from our own capability-building projects and reviewing contemporary case studies from a wide range of industries, we have identified five of the most common mistakes companies make in launching new innovation programs.Image from Activision

1.  Focusing on leadership buy-in.  Those looking to launch innovation programs often exert substantial effort trying to get senior leaders on board.  And, to be fair, a lack of leadership backing can destine an innovation program for a lifetime in low-profile purgatory.  The problem, however, is that too little effort is spent getting (mid-level) managers and team members on board.  With poorly designed programs, team members often find that working on innovation projects interferes with their ability to do their “day jobs.”  Similarly, managers find that working on innovation projects makes it more difficult to meet their existing performance targets.  If innovation is meant to be anything more than a few big-bet projects carried out by a dedicated innovation team, then innovation efforts need to be closely aligned with corporate objectives, and performance evaluations need to reflect the company’s focus on innovation.

2.  Providing training in isolation.  Too often, employees are thrust through an innovation training mill that provides consistent training, but a complete lack of follow-through.  Companies spend exorbitant sums of money on one-off training sessions that do little more than ensure that a large portion of the workforce has achieved a baseline competency in innovation.  On occasion, employees even turn around and leverage their new qualifications for better jobs at other organizations.  By tying innovation training to ongoing project work, companies can combat the innovation vs. day job mentality, reduce employee defection rates, and foster a deeper understanding of innovative behaviors.  Moreover, as project teams continue their work throughout the organization, innovation lessons are spread at a faster rate, and team members are forced to continue using the methods they learned, rather than treating their training as a one-and-done experience.

3.  Layering new programs over old ones.  When helping clients launch new innovation programs, one of the most common questions we get asked is how this program relates to the countless other programs employees have been introduced to.  Over the long run, employees wonder which of their 15 methodologies should be applied to a particular challenge, or they assume that the newest program simply replaces those from prior years.  At the outset, companies need to spend time creating alignment on why the new capability is important for the organization, how it differs from existing initiatives, and when employees should use any new tools or learnings.  If the answers to these questions are not clear, leadership will be unwilling to invest in the program, and employees will be unwilling to embrace it.

4.  Reinventing the wheel.  Innovation often gets treated as an ethereal specter, just beyond the grasp of mere mortals.  Because of its unusual status, managers often combine ad-hoc practices in an unstructured fashion, hoping that innovative ideas will get captured along the way.  Innovation never seems to be attempted the same way twice.  In reality, innovation is a managed process built around established business fundamentals.  Many of innovation’s core elements – ideation, business planning, prototyping, and scaling, for example – have been practiced throughout the organization and perfected over the years.  Rather than reinventing the innovation process every time, companies need to create a consistent program that preserves institutional knowledge.  A good innovation program combines best practices with internal lessons on what works and what does not.  It celebrates internal innovation successes and captures lessons from innovation failures.  While the output from an innovation program may be outside the box, the process for getting there can be fairly concrete.

5.  Using the wrong metrics.  Measuring innovation is difficult.  Companies often make the mistake of judging innovation projects under the same criteria they use for the core business, causing new ventures to fail before they ever have a chance to breathe.  Many companies focus on ROI calculations that unwittingly prioritize measurable markets over high-potential (but difficult to measure) new markets.  Companies might also give excess weight to a “freshness index” that measures the percentage of sales from new products without evaluating how innovative those products are or how they might cannibalize older offerings.  Instead of trying to find the right innovation metric, companies need to create a set of criteria that match the innovation program’s overall mandate.  For example, it may be useful in the short term to track the number of ideas being gathered, how broad participation is, and how far experimentation stretches beyond core competencies.  Over time, longer-term metrics can evaluate concept development speed, portfolio plan fit, and profits from new customers.  While the right combination of metrics varies based on the company, its industry, and its aspirations, it is important to use a comprehensive set of metrics specifically designed for innovation.

Although launching a new innovation program can be both challenging and intimidating, there are plenty of companies that have done so successfully.  Even better, the companies that have made a concerted effort to launch their programs the right way have mined significant value from the resulting innovation.  Avoiding the most common pitfalls in capability building requires taking five key steps: (1) ensure that project manager performance goals are tied to innovation goals; (2) link innovation training to ongoing project work; (3) clarify how the innovation program relates to existing initiatives; (4) leverage institutional knowledge and best practices; and (5) design new metrics that fit the organization’s innovation goals.  By following these guidelines, companies lay the foundation for years of innovation.

Costovation -- delighting customers, cheaply

  
  
  
  

Costovation is innovation in pursuit of cost leadership.  Rather than seeking innovation to differentiate a product and potentially earn a price premium, managers embracing costovation are aiming for radically lower price points.  Although this quest inevitably involves trading off some features that some customers may appreciate, it is distinct from simply economizing.  This is not about removing the olive from the salad, to take American Airlines' (in)famous example, but rather about broadly re-imagining the offering to attack often hidden drivers of expense.

Importantly, costovation can delight customers even while it takes a parsimonious approach to business.  By carefully targeting customers over-served by existing alternatives, costovation provides a well-defined customer type with a handful of welcome features even while stripping away other, superfluous benefits.  Case in point:  the YOtel hotels found within European airports that provide a miniscule room, yet one which is steps from the gate, abundant in power ports, and complete with a Monsoon shower.  For more detail on approaches to pursue costovation, see my piece for Forbes.

Stephen Wunker is the Managing Director of New Markets Advisors.

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