David Stoughton of ValueKinetics writes:
Several revealing interviews on 'In business' last night affirm what what we know instinctively is happening - innovation continues to flourish within the, ever inventive, small business sector. The crunch has not noticeably dented their spirits, if anything these players see this as the ideal time to launch new products and services. If capital is a little harder to come by, the same spirit of invention quickly finds alternative ways to launch and grow. Meanwhile established businesses struggle to make sales - the public humiliation of some great, established, institutions is just the tip of the iceberg.
This is shaping up to be a time of upheaval, of the 'creative destruction' that Joseph Schumpeter hails as “the essential fact about capitalism”. The signs are that, if some of its flag bearers over the last fifty years are having reservations about its future, capitalism is renewing itself in the time honoured fashion.
Giant corporations, with few exceptions, are notoriously bad at developing and launching the genuinely new. The failure rate is frightening. Depending on the authority, approximately 70% of new product development projects fail and, perhaps more tellingly “between 33% and 60% of all new products that reach the market place fail to generate desired economic returns” (Smith, P. and Reinertsen D.). Notice the weasel words, ‘that reach the market place’- many, perhaps most, never get that far.
Individuals and small businesses probably fail just as often at innovation: the research does not distinguish the causes of business failure in this sector. But individuals and small businesses are both more plentiful and more resilient - they bounce back with a new, or refreshed, idea and a new business vehicle, ready to start again within months. The odds are not good that, in a straight race to bring new products and services to market, big business will win.
The traditional remedy, of course, is to wait until the upstarts have proved the concept (and taken the initial risk) and then buy them. The success rate here is nothing to write home about either - as we know, many of these acquisitions fail - but the odds are slightly better than doing it yourself.
There's a catch though. Buying up companies requires good judgement (many fail to grow as predicted), the capacity to integrate and capitalise on unfamiliar processes and cultures, and deep pockets. All of these, especially the last, tend to be eroded in a sharp downturn. Many corporations will emerge without the readies, or the resilience, for successful acquisition - and anyway it may be too late by then.
Something has to be done now if the future is to be secured. Given the low success rates in new product development, big business should play on the part of the pitch where it has the advantage, better targeting, superior customer service and improved experience.
The fact is, there is more than one direction for successful innovation at present, if managements think clearly. The incumbent's advantage lies in ownership of the route to market - that is having the brand, capacity, and reputation for service that the majority of customers value. These are the attributes that newcomers lack, and can build only slowly.
I'm betting that the two keys to surviving a storm of creative destruction are:
- Secure the front, market-facing, end of the business - by introducing innovations to the experience and service that bind the customer more closely to the company;
- Increase agility at the back, supply, end - by improving agility in partnering, developing skills in brokering value networks and in assembling supply chains quickly, so that the newcomers see reaching their market through the corporation as the quickest and safest way to grow scale.
There are many advantages to such a strategy. Not least that the necessary development can be undertaken in small, incremental, tranches - no 'bet the farm' projects are required - and the initiative will expose equivalent opportunities for savings in areas that will add little or no value for customers or company in the future.
Innovation is a real opportunity for established businesses after all, and far more radical in its results than conventional product development - it just takes a less dramatic form while in progress. Most of the biggest opportunities of the future lie in owning the horizontal platform which customers rely on for whole categories of goods and services, not the vertically integrated, unitary, value chains that are becoming a millstone round the neck of their owners and managements.