Three sources of innovation you may have overlooked
It might not be obvious, but Starbucks, Google, and MasterCard have something important in common. All three have tapped into enormous growth markets with the potential to turn their industries on their head. This success is not simply due to pouring money into product development. Aware that this approach produces diminishing returns, these companies focus on innovating their business models. In particular, they use three strategies most companies overlook: experiential, ecosystem, and technology-based operational innovation (Figure 1).
Each of these companies has leveraged at least one of these sources to develop business models that have outflanked their competitors. Starbucks has created a rich social experience for its customer that continues to evolve. Google has built a huge ecosystem that has opened all sorts of new markets. And MasterCard is working with the GSMA (Global System for Mobile Communication Association) to provide people with the ability to transfer funds anywhere they want, whenever they want.
Experiential Innovation: The Story of Starbucks
Customer satisfaction is at the core of business success. Knowing this, the best companies make experiential innovation part of their game plan. They dig deep into their customers’ experiences to find out how they can develop to enhance those experiences. This understanding makes it possible to deliver value in new and more meaningful ways—far beyond what a single product or service can deliver—and develop a distinguishing source of competitive advantage.
Take Starbucks for example. In a crowded market, Starbucks understands that people want more than a cup of joe. But unlike its competitors, the company has done more than create a gourmet drink—it has created an entire social experience. Over the past 10 years, the experience of having premium, personalized coffee in a comfortable setting has expanded as the addition of Wi-Fi made Starbucks a place to connect. The T-Mobile HotSpot became the gateway to a rapidly growing array of Starbucks-branded products: not only coffee, but CDs, the iTunes Wi-Fi Music Store, and digital cards. And the number of Starbucks cafés grew as well, reaching more than 15,000 worldwide.
At the same time, Starbucks started doing book promotions and getting involved in larger social issues. In 2005, it acquired Ethos Water, a brand with a mission to help children around the globe gain access to clean water. This is just one example of how Starbucks, which proudly “puts people before products,” has positioned itself as a “feel-good” brand—not only for its customers, but for the coffee farmers, employees, and communities it works with. It’s no wonder that between 1995 and 2006, Starbucks revenues jumped from USD $465 million to $7.8 billion—a compound annual growth rate of nearly 23%. Or that last spring it was ranked number two in the Fortune 2007 Top 20 Most Admired Companies in the World.
Starbucks knows it’s important to revisit the experience on a regular basis to ensure it still meets the needs of target customers. This is the approach CEO Howard Schulz is taking in response to the company’s recent decline in sales. It’s key, he said in a memo to employees, to focus on the core “Starbucks experience.”
Starbucks is not alone in seeing the value of experiential innovation. Companies as diverse as Federal Express, Amazon.com, GE, craigslist.com, and Yellowtail Wines have all innovated in this dimension and have developed business models delivering strong returns (Table 1).
To deliver experiential innovation that really makes a difference, it’s key to first determine what aspects of your customers’ relevant experience you are not successfully addressing. Companies do this in a number of different ways. Nortel invites customers to provide first-hand feedback, while Lego gets them involved in product design. Intuit stations employees at customers’ business sites to observe them using its QuickBooks software. And members of Black and Decker’s Strike Force—teams of product managers, engineers, and industrial designers—take product development on the road so they can watch consumers test out tools and prototypes. Sometimes these teams uncover needs that customers do not articulate—latent requirements that may represent significant opportunities for innovation (Gary Burchill and Christina Hepner Brodie, Voices into Choices: Acting on the Voice of the Customer, 2005).
Ecosystem Innovation: The Power of Google
An industry going through fragmentation, integration, or other changes can present the opportunity for ecosystem innovation, where a company builds a network of relationships to develop new products and services. The rules of the game change, to everyone’s benefit. Instead of ignoring or competing with each other, complementary players go to market together. They redefine old relationships and form new ones—sometimes with competitors—to create greater value than any single company could create on its own.
Ecosystem innovation has been one of Google’s strategic weapons from the very beginning—all of 10 years ago. At that time, the Internet search and online advertising maestro began building a comprehensive network of third-party developers and mashups, web applications that combine data from two or more sources in a single tool. This approach has enabled Google to pull in more and more informational content from multiple sources to create an integrated seamless experience for its users.
Google is also using ecosystem innovation to expand into the social networking space. Its OpenSocial, a platform that allows software developers to write programs for a variety of social networks, has attracted powerful partners like MySpace, Friendster, and Oracle. More ecosystem innovations are in the works. Through the recently announced 35-member Open Handset Alliance, Google is providing Android, the first complete, open, and free mobile platform, which software developers can use to produce innovative programs. The software will be provided free of charge to handset manufacturing companies to power thousands of types of phone models. Everyone wins: Google, its partners, the users, and let’s not forget the shareholders. With revenues that reached $10.6 billion in 2006, it’s easy to see why Google’s stock price has skyrocketed since its IPO of $85 four years ago.
All kinds of companies, whether product or services, B2B or B2C, know the value of ecosystem innovation. IBM, Microsoft, eBay, Ericcson, and Wal-Mart each occupy the hub of a powerful and massive network. They proactively invest in programs, tools, and technologies to build their ecosystems and provide sustainable sources of new value. And they develop customer and supplier relationships to strengthen their positions and manage value creation.
How does a company develop an ecosystem as powerful as any of Google’s? First, identify the different types of potential value and the interdependencies necessary to deliver it. Figure out what businesses are needed to bring together to develop the new offerings, while also reaching untapped markets and revenue streams. By building on the strengths of diverse partners—and collaborating in new ways—a company can go where no company has gone before.
Technology-Based Innovation: Microfinancing by MasterCard
Leveraging technology to change the business model seems intuitive, and maybe that’s why companies don’t consider it often enough. Yet certain technologies, both old and new, have transformed how entire industries operate.
Look no further than MasterCard. Over the past year, MasterCard and the GSMA, a global trade association of more than 700 mobile operators, piloted a microfinancing program that could fundamentally change the financial services transaction model—and international commerce. Through this program, which is aimed at the some 200 million international migrant workers, people lacking access to traditional banking services can send money wirelessly to their families in other countries with the help of mobile payment technology. Once a recipient receives a text message sent over the mobile networks, recipients can access the funds wherever they are through debit and prepaid accounts issued by local banks. The transfers will be far simpler to conduct and far cheaper than in the past.
The program could make a big difference to a lot of people. GSMA projects that with the participation of 19 mobile operators with networks in more than 100 countries, the number of recipients of international remittances will double to more than 1.5 billion—helping to quadruple the size of the international remittances market to more than $1 trillion by 2012. Everyone wins—the recipients and their families, the mobile operators, and the financial institutions. And the door is opened for other types of international commerce as well.
Like other sources of business model innovation, technology-based operational innovation depends on discovering key areas where needs are not yet being met. In our experience, this discovery process works best when both perspectives—the needs and the technologies—are considered.
To identify customer needs, see what insights can be derived from current customer experiences. Determine if changes in the economy are causing industry shifts that will create new needs. Ask if it’s possible to satisfy these needs with technologies in an entirely new way. Then figure out what kinds of technologies can be used to create new products and services, and identify the specific customer needs that technology-based innovation can address.
Taking the Road Less Traveled
When it comes to innovation, taking a road less traveled can often provide enormous benefit—measured in significant growth and profit margins. But it requires a mindset unencumbered by assumptions you may have made in the past—it requires innovating how you innovate. Once you are able to do this, the opportunities will multiply.
To get the most from innovation efforts, we find it’s useful to keep three things in mind:
- Compete with yourself. Pretend you’re one of your competitors. Design innovative products and services that they would design—even if it means cannibalizing your traditional value offerings. Wouldn’t you rather change your business than let a competitor do it?
- Develop innovations in all sizes. You need both incremental and radical change to succeed, so don’t neglect one for the other. Incremental innovations are critical because they maintain market share and support the margins of existing products and services. They don’t, however, generate significant growth. For that you need breakthrough innovations that generate above-average revenue growth and higher margins via new or massively rejuvenated products and services.
- Combine and conquer. Don’t be afraid to mix different types of innovation. Indeed, some of the best companies—not just Google and Starbucks, but also Apple and GE—know the wisdom of innovating along experiential, ecosystem, and technology dimensions simultaneously.
The book on innovation is long, but there are many more chapters waiting to be written. By looking for innovation itself in new places, companies will be able to tap into important new sources of growth going forward.
