In this blog, I will look at an ecosystem innovation where your innovation success is dependent on partners who also have to succeed for your success. Your flawless execution alone is not going to do it.
According to industry estimates, roughly 10% of the innovation succeed (i.e. deliver business results), so right off the bat you are, using the baseball analogy, batting 100. If you are a baseball player, this batting average would not only exclude you from playing in the major leagues, but end your career as a professional baseball player. But in innovation batting .100 is worth the bet since the alternative is worse --- slow death.
What makes innovation so difficult is that before you even get to the point of focusing on ecosystem innovation, you have to manage investors' expectations so you don’t make poor strategic decisions that achieve short-term profits over long term growth. Also, you have to create a dedicated innovation team that focuses on long term growth that is separate from the performance engine (rest of the company) that focuses on revenue to sustain the innovation engine. This is also not very easy to pull off since companies, once established, are built for performance, not innovation. If you have succeeded in these two tasks, then you can turn your attention toward the ecosystem necessary for success.
Adner provides numerous examples of companies who entered the market first with a product, such as Phillips in high-definition television (HDTV) and Sony in e-reader, but did not succeed since others who it depended on for their success had not succeeded in co-innovation for customers to realize the value of their product offering. In Phillips’ case, the high definition cameras and transmission standards were not available in time thus resulting in its failure. Similarly, Sony developed the e-reader, but customers had no easy access to e-books which led to its failure.
The common blind spot of both of these products was the heavy focus on the product and not understanding the ecosystem. They failed to see that there were other co-innovation also required for their sucess. Adner states that “you have to wait till all the other innovations are in place to compete, otherwise you are competing to get to the starting line.”
If everyone loved it, what could possibly go wrong?
There was one problem in the adoption chain risk that was completely overlooked or considered not that important: tire service centers. They were not equipped to repair the run-flat tires and customers had to replace their punctured tires with pair of new tires (to keep them balanced) at $300 per tire. Customers soon did not see the value proposition of the PAX system. It resulted in irate customers filing lawsuits against car manufactures for not disclosing the lack of service centers which ultimately led Michelin to stop further development of the PAX system due to lack of market demand.
The blind spot that led to the failure of the PAX system was how tires were sold. Typically the success of tires are predicated on the replacement market (RM) which makes up about 75% of the market and the car manufacturers make up 25% of the original equipment manufacturers (OEM) market. Tire manufacturers typically focused on the OEM market, thinking that customers would replace those tires in the RM market. With the PAX system it was not that simple since the tire service centers had to learn a new system and required a rigorous certification process which made many of them unwilling to make the investment in the PAX system. As Adner points out that “adoption chain risk is a product of the tug-of-war between innovation and the status quo.” In this case, status quo won and the PAX system lost.
What do you do in this environment?
As a company, you have to determine whether you are going to be a leader by asking this fundamental question: what do you have to offer that would make others win by following you? Others tend to follow when there is something in it for them that you can provide. If you don’t have anything that would make others win, then you have to pick a leader and follow.
How do you succeed in the ecosystem innovation game?
Adner states in his HBR blog that “when success depends on others — suppliers, complementors, distributors, retailers — satisfying end consumers is not enough. The innovator's job is now to create wins across the board. Win-lose-win is a recipe for failure.”
To succeed in the ecosystem, Adner recommends an approach where you start with a minimum viable footprint (MVF), then add more elements in a staged expansion and later leverage elements used in one ecosystem to create a second ecosystem that he refers to as an ecosystem carryover.
Below is a brief description of these three principles:
Minimum Viable Footprint (MVF) -- start with the bare bones structure to create a unique customer value
Staged Expansion -- add more elements to the MVF to increase its value
Ecosystem Carryover -- leverage elements used to create one ecosystem to create a second ecosystem
A good example of this is Apple in how they started with a bare bones structure with the iPod and once they saw that delivered value then proceeded to add more elements like iTunes to increase its value and then created a whole new ecosystem with the iPhone using many of the elements from the iPod. Later they did the same with the iPad.
A lot of companies continue to fail with their innovation not because of their inability to execute, but because they have developed a blind spot of seeing an ecosystem that will result in a win. This is very difficult for companies since they are so focused on getting their innovation to the market that they forget to consider that no matter how fast they are, their success is predicated by the pace of the slowest player in the innovation ecosystem chain. Unless you figure out how to get the slowest player to move a little faster, you are going to be stuck for some time, if not forever.