Innovation Ecosystems

Stephen DeAngelis

September 25, 2014

In today’s interconnected world, being the best or most innovative company is not enough to ensure success. To be successful, an innovation needs to capture the public’s eye and establish some sort of industry standard. Nowhere is this more true than in the electronics industry where format is everything. Members of today’s younger generations (i.e., those who have grown up with DVDs and CDs), don’t remember the heated battle that was waged in the mid-1970s between Sony’s Betamax format and JVC’s Video Home System (VHS) format. Although other formats appeared, they were early casualties in the Betamax–VHS format war. The Betamax format was one of the first systems to market, it had a smaller sized cassette than the VHS format, and it had good quality — but it cost more and recorded less than VHS systems. In the end, the Betamax format lost the war. Video stores (remember them?) stopped carrying Betamax tapes and concentrated solely on providing VHS tapes. Cost played a role in the Betamax demise, but the “ecosystem” surrounding the video tape industry played an even larger role. The ecosystem involved manufacturers, retailers, and, of course, the buying public. In the end, it was probably the fact that a VHS tape could record twice as long as a Betamax tape that ensured the victory of the VHS format. Early on Sony was informed about the work being done by JVC and, according to Wikipedia, at a meeting with Matsushita executives, with JVC management in attendance, Sony executives were shown a VHS prototype. Matsushita executives “advised them it was not too late to embrace VHS ‘for the good of the industry’ but Sony management felt they were too close to production to compromise.” Without the support of the video tape ecosystem, Sony’s unwillingness to compromise meant that it would eventually lose its gamble.

 

The video tape format war isn’t the only format battle that Sony has lost. Ron Adner, Ph.D. (@RonAdner), a professor of strategy at the Tuck School of Business at Dartmouth College, reminds us, “Sony suffered from a similar blind spot, winning a pyrrhic victory as it raced to bring its e-reader to market before its rivals, only to discover that even a great e-reader cannot succeed in a market where customers have no easy access to e-books.” [“The Innovator’s Blind Spot,” Psychology Today, 14 March 2013] The “blind spot” to which Adner refers involves “failing to see how their success also depended on partners who themselves would need to innovate and agree to adapt in order for their efforts to succeed.” Adner provides two other examples of companies suffering from that blind spot. He writes:

“Philips Electronics fell victim to this blind spot when it spent a fortune to pioneer high-definition television (HDTV) sets in the mid-1980s. The company’s executives drove a development effort that succeeded in creating numerous breakthroughs in television technology, offering picture quality that customers loved and that the competition, at the time, could not match. Yet, despite sterling execution and rave reviews, Philips’s high-definition TV flopped. Even the most brilliant innovation cannot succeed when its value creation depends on other innovations — in this case the high- definition cameras and transmission standards necessary to make high-definition TV work — that fail to arrive on time. Philips was left with a $2.5 billion write-down and little to show for its pioneering efforts by the time HDTV finally took off twenty years later. … And Johnson Controls, which developed a new generation of electrical switches and sensors that could dramatically reduce energy waste in buildings and deliver substantial savings to occupants, discovered that unless and until architects, electricians, and a host of other actors adjusted their own routines and updated their own capabilities, the value of its innovations would never be realized.”

The business executives involved in these cases weren’t stupid. Clearly, they had all demonstrated successful business skills and had risen in the ranks. Nevertheless, they focused too narrowly on internal innovation. Adner writes, business executives must cope with “a world in which the success of a value proposition depends on creating an alignment of partners who must work together in order to transform a winning idea to a market success. A world in which failing to expand your focus to include your entire ecosystem will set you up for failure. Avoidable failure.” No failure is as painful as one that could have been avoided. Adner adds, “Two distinct risks now take center stage.” They are:

  • Co-innovation Risk: The extent to which the success of your innovation depends on the successful commercialization of other innovations.
  • Adoption Chain Risk: The extent to which partners will need to adopt your innovation before end consumers have a chance to assess the full value proposition

Clearly, those risks can only be overcome by involving the entire ecosystem in the innovation process. Needless to say, that is easier said than done. Doug Collins (@InnoArchitect) believes that collaborative innovation not only helps address those risks but helps foster a culture of innovation that will last. “People who pursue the practice of collaborative innovation intend to instill a culture of innovation within their organizations,” he writes. “The people they engage first contribute to that culture by offering and collaborating on ideas. The culture strengthens as the contributors enter the back end of innovation, where they explore the potential of their ideas through concepts, trials, analysis, and ultimately implementation.” [“What’s That Smell? Skunk Works® Meets Collaborative Innovation,” Innovation Solutions, 5 March 2013]

 

If you are not an aviation buff, you may never have heard of the Skunk Works. The name “Skunk Works” was lifted from a moonshine factory that was featured in a popular comic strip called “Li’l Abner” that was published nationally beginning in 1934. Skunk Works eventually became the unofficial (and now official) alias of Lockheed Aircraft Corporation’s (now Lockheed Martin’s) once secretive design group. The Skunk Works is responsible for a number of famous and successful aircraft designs, including the U-2, the SR-71 Blackbird, and the F-117 Nighthawk. Each of these aircraft had to be designed in secret; but, the most well-known trait of the Skunk Works is designing great products in record time. The first project produced by the Skunk Works, the XP-80. It was designed in only 143 days. Members of the Skunk Works were able to accomplish this because they had complete control over the project. Collins writes:

“This rule speaks to common sense born of experience by anyone who has worked on the fuzzy front end of innovation. New concepts disrupt existing value streams, profit pools, and — by extension — compensation and hierarchy schemes. Incumbent businesses excel at quashing concepts that threaten the status quo. Governance matters.”

On the other hand, the ecosystem must eventually be tapped if an idea is going to become an innovation. Collin explains:

“Fast forwarding to today, the practice of collaborative innovation may benefit Skunk Works programs by (a) feeding the program candidate ideas to pursue and people with leadership potential to pursue them, (b) giving the program team a means to engage the crowd without having the crowd become meddlesome bureaucracy, and (c) helping the program team vet outcomes and risk reduction strategies that they, small in number, may miss or choose to ignore during concept testing. The practice in this context becomes a useful tool for focused engagement.”

Collaborative innovation helps reduce corporate blind spots and provides a broader view of the ecosystem. Dr. Rob Cross, an associate professor at the University of Virginia’s McIntire School of Commerce, Dr. Andrew Hargadon, a professor in the Graduate School of Management at the University of California, Davis, Dr. Salvatore Parise, an assistant professor in the Technology, Operations, and Information Management division at Babson College, and Dr. Robert J. Thomas, executive director of Accenture’s Institute for High Performance Business, agree that the more collaboration that takes place the better the innovation process becomes. They assert that there are five steps that companies can take to help make the innovation process more successful. They are: 1) Get the right people talking; 2) Rapidly test and refine ideas; 3) Think twice about leadership; 4) Make collaboration easy; and 5) Consider “energy” — meaning groups with a positive outlook produce better results. [“Together We Innovate,” The Wall Street Journal, 15 September 2007] Adner would add: Use a wide lens. He explains:

“Expanding your focus to include your ecosystem, rather than just your innovation changes everything — from how you prioritize opportunities and threats, to how you think about market timing and positioning, to how you define and measure success. … Dependence is not becoming more visible, but it is becoming more pervasive. What you don’t see can kill you. Don’t let your blind spot become your downfall.”

There are few, if any, industries today where formats and standards don’t make a difference when it comes to determining the success of a product. The more engaged and receptive the ecosystem is to a product the better the chances it will succeed.