06 Apr

Why innovation requires staying close to your customers (part 1)

Does innovation drive the markets and create demand? Or do continuously changing customers’ needs push companies to adapt their services and products to changed circumstances? Innovation is not the goal, but the ultimate way to stay relevant and valuable and meaningful to your customers.

Nowadays companies can only survive if they have the ability to innovate adequately and to anticipate to changing needs. This is easier said than done. Especially for large, established product and service leaders. These ‘oil tankers’ follow the same path, just as they have done for years, and are having a hard time to change direction. Typical examples are the world-leading car manufacturers, oil companies and chemical companies. According to Platform Revolution those ‘pipeline’ businesses work in a traditional way, creating value by controlling a linear series of activities: the classic value-chain model. From materials sourcing to selling the end product. Their chief assets are resources and cost control. An inflexible, supply driven, labour intensive approach. These companies are characterised by hierarchical silos, departmental communication lines, no shared ownership and an administration overload.

The successful ‘newcomers’ on the market like Uber, Airbnb, Amazon, Netflix, Spotify and PayPal all have disrupted their markets. These so called platform businesses bring together producers/prosumers and consumers. Their chief assets are information and interactions. Their source of value are the connections they facilitate, based on transparent and trustful relationships. These companies act as speed boats; they are agile and adapt easily to changing market circumstances and challenging monopolists.

A few examples of ‘pipeline’ vs. platform businesses in different industries:

  • Logistics: logistic companies owning a tanker fleet, cars and lorries vs. Foodpanda, Deliveroo and UberEATS, platforms that work with riders and bikers.
  • Design: agencies working in teams with many different roles vs. 99designs, a platform that connects (logo) designers with brands.
  • Finance: financial institutions vs platforms like Kickstarter and Lending Club.
  • Education: universities with different faculties vs. platforms like Udemy, edX and Coursera.

Platform businesses virtually always win

The need to own physical infrastructure and assets, and control the chain, is less and less relevant in nowadays business. And how do traditional ‘gatekeepers’ react on this changed business environment? Confronted with new platforms entering their markets, many of the ‘gatekeepers’ strengthen their positions by buying smaller competitors and innovative start-ups (and incorporate these in their traditional processes). Thus, they are trying to ‘close’ the borders of their markets and industries. Others invested in technology. They turned to large business consultancy firms to innovate and transform digitally. Technological innovation makes it possible to leverage the power of platforms, create efficiency gains and learn faster by connecting resources. But what if those innovation processes take years to accomplish? What if during those years new platform businesses enter the market and are more attractive to customers?

Platform Revolution warns: ‘When a platform enters the market of a pure pipeline business, the platform virtually always wins. Firms that fail to create platforms and don’t learn the new rules of strategy will be unable to compete for long.’ Clayton Christensen explains in The Innovator’s Dilemma (1997) why large companies failed: ‘The reason is that good management itself was the root cause. Managers played the game the way it’s supposed to be played. The very decision-making and resource allocation processes that are key to the success of established companies are the very processes that reject disruptive technologies: listening to customers; tracking competitors’ actions carefully; and investing resources to design and build higher-performance, higher-quality products that will yield greater profit. These are the reasons why great firms stumbled or failed when confronted with disruptive technology change.’

Knowing what to offer to each user

So yes, it’s time for established businesses to alter their course. Not just for the ‘gatekeepers’, but also for other resource-intensive and for high-regulatory control businesses. But as stated before: innovation shouldn’t be the goal. The real success comes when a business goes one step further than innovation. So with the use of new technology, creating improved experiences. Experiences based on holistic insights and a deep understanding of customers, the users of the products and services. This requires combining users’ and usage data, and complete these with actual and contextual users’ needs. If businesses harness their unique data and add users’ (real-time) behaviour and feedback to those data, they will be able to know what to offer to each user in a specific situation, and at a specific point in time.

Strengthen the relationship with existing customers

So, in conclusion, to innovate, established product and service leaders have two important assets: market experience and customer and transactional data. When making better connections with their customers, analysing processes and contextual circumstances, they should know how to improve. Or in other words: how to innovate. Therefore, however, they need to strengthen the relationships with their existing customers. Research shows that closing the gates of their markets is not the solution. The key is to open the gates of their companies and co-design and co-create with customers. Otherwise open platform businesses will easily attract and engage with these customers with better, efficient and more relevant services.

This post was published in 2017.