Now more than ever, companies need to innovate to make their products, operations and business models more marketable.
Many are simply looking for ways to continue to survive, forgetting that this often requires thinking ahead, not just looking at the current situation. It is more important than ever for companies to double down on innovation to create new products, develop better business models, or defend themselves against large competitors.
No one person can create innovation alone. Ilon Musk and Steve Jobs are often pointed to as examples of people who single-handedly created groundbreaking innovations. Silicon Valley is full of similar myths.
To see innovation for what it is, we need to dig deeper into the details of how companies developed their concepts of innovation.
Many are simply looking for ways to continue to survive, forgetting that this often requires thinking ahead, not just looking at the current situation. It is more important than ever for companies to double down on innovation to create new products, develop better business models, or defend themselves against large competitors.
No one person can create innovation alone. Ilon Musk and Steve Jobs are often pointed to as examples of people who single-handedly created groundbreaking innovations. Silicon Valley is full of similar myths.
To see innovation for what it is, we need to dig deeper into the details of how companies developed their concepts of innovation.
Breakthrough Innovation: Clayton Christensen
Introduced in 1995 by Clayton Christensen, the concept of Breakthrough innovation has become one of the founding theories of the technology industry. Everyone from Steve Jobs to Reed Hastings and Jeff Bezos have invoked the concept.
Christensen wanted to explain how small companies with few people and extremely limited resources could, under certain conditions, displace larger and wealthier players.
Christensen contended that as companies grow, they change their focus from obtaining new customers to holding on to their most valuable customers. This strategy of creating stability and maintaining maximum revenue necessarily leads to some of that company's potential customers going unnoticed.
And this is where startups gain a point of difference in the market by targeting and matching the missed customers of these companies. For example, startups offering a similar service at a lower price are eating up the lower end of the market. And if they can start expanding their market while maintaining that price competitive advantage, they steal more and more of those customers. Once that happens on a massive scale, they have that Breakthrough innovation.
Seagate hard drives have lost out to competitors selling small floppy drives. And video rental chain Blockbuster was killed by Netflix, that once lowly mail-order DVD service that became an online streaming giant.
Introduced in 1995 by Clayton Christensen, the concept of Breakthrough innovation has become one of the founding theories of the technology industry. Everyone from Steve Jobs to Reed Hastings and Jeff Bezos have invoked the concept.
Christensen wanted to explain how small companies with few people and extremely limited resources could, under certain conditions, displace larger and wealthier players.
Christensen contended that as companies grow, they change their focus from obtaining new customers to holding on to their most valuable customers. This strategy of creating stability and maintaining maximum revenue necessarily leads to some of that company's potential customers going unnoticed.
And this is where startups gain a point of difference in the market by targeting and matching the missed customers of these companies. For example, startups offering a similar service at a lower price are eating up the lower end of the market. And if they can start expanding their market while maintaining that price competitive advantage, they steal more and more of those customers. Once that happens on a massive scale, they have that Breakthrough innovation.
Seagate hard drives have lost out to competitors selling small floppy drives. And video rental chain Blockbuster was killed by Netflix, that once lowly mail-order DVD service that became an online streaming giant.
Let's look at a few excellent examples of Breakthrough innovation.
How Netflix displaced Blockbuster
Blockbuster was a video rental chain that focused on new releases in the movie industry and had locations around the world, peaking at 9,000 locations in 2004. However, most of the company's revenue came from late fees on DVD returns, not from the rentals themselves. These fees brought the company $800 million dollars in 2000, about 16% of its revenue, but also antagonized customers.
Netflix, on the other hand, provided DVDs ordered from its Web site and offered its customers unlimited rentals on a monthly subscription basis. In other words, it liquidated late fees.
Netflix founder Reed Hastings, knowing many people's dislike of Blockbuster's fees, even worked them into the origin story of the company itself, saying for years that he founded Netflix because he owed $40 in late fees for the movie Apollo 13.
Netflix has become attractive to some customers for more than just the freedom from late fees. Without the physical limitations of keeping discs on the premises, the company could offer a much larger catalog of movies, including niche film categories. Plus, Netflix offered home delivery of movies. Customers could watch movies at their own tempo. They didn't have to drive to a physical location and could send them back when it was more comfortable for them.
As Blockbuster stayed focused on new releases, the company didn't see Netflix as a major threat. Blockbuster even turned down an opportunity to purchase the company for $50 million in 2000.
Seven years later, Netflix has evolved into an online streaming service. Suddenly, the monthly fee Netflix customers paid gave them access to unlimited content and saved them from waiting for delivery.
The choice was no longer between a trip to Blockbuster or waiting for an order, but between renting a disk or simply pressing a button on a computer screen. Blockbuster later also tried to launch its digital download service, but that attempt failed and the company filed for banking failure a few years later.
Today, Netflix is already positioned as a major player in the global streaming market, which could be worth nearly $150 billion in the coming years.
Once upon a time, the high cost of storage for new releases helped contribute to Blockbuster's downfall. And now Netflix faces a similar problem, paying large sums on licensed content as it has developed competitors like Disney, Apple, NBCUniversal and Warner Media (HBO).
Netflix's business depends heavily on the content of these new competitors. Three of the four most streamed shows at the end of 2019 are from legacy media companies launching their own services - NBCUniversal's "The Office," Warner's "Friends" and Disney's "Grey's Anatomy."
Netflix reportedly paid $100 million to keep showing "Friends" in 2019. That's three times as much as it has in previous years. Since licensed content accounts for about two-thirds of total viewing hours on the platform, the question is: What happens to Netflix if it loses these shows?
Netflix's response to this potential threat has been to increase spending on producing its own shows. In 2018, the company spent about $15 billion on original content. But that strategy hasn't been fully effective. In its second-quarter 2019 investor letter, the company recognized that "content drove less growth in paid net adds than we expected."
With a shrinking catalog and rising prices per month in 2019, Netflix's situation was a reminder that innovation is cyclical. In 2020-2022, Netflix ventured into a new round of development in producing its own content and has succeeded. This proves the cyclical nature of the development of any innovation. That's why leaders in Silicon Valley are so driven to outperform themselves before they are destroyed by someone else.
Facebook's famous phrase for teaching new employees the company's values is, "If we don't create the thing that kills Facebook, someone else will."
"It's always day one," Amazon CEO Jeff Bezos regularly reminds his team and investors.
Netflix, on the other hand, provided DVDs ordered from its Web site and offered its customers unlimited rentals on a monthly subscription basis. In other words, it liquidated late fees.
Netflix founder Reed Hastings, knowing many people's dislike of Blockbuster's fees, even worked them into the origin story of the company itself, saying for years that he founded Netflix because he owed $40 in late fees for the movie Apollo 13.
Netflix has become attractive to some customers for more than just the freedom from late fees. Without the physical limitations of keeping discs on the premises, the company could offer a much larger catalog of movies, including niche film categories. Plus, Netflix offered home delivery of movies. Customers could watch movies at their own tempo. They didn't have to drive to a physical location and could send them back when it was more comfortable for them.
As Blockbuster stayed focused on new releases, the company didn't see Netflix as a major threat. Blockbuster even turned down an opportunity to purchase the company for $50 million in 2000.
Seven years later, Netflix has evolved into an online streaming service. Suddenly, the monthly fee Netflix customers paid gave them access to unlimited content and saved them from waiting for delivery.
The choice was no longer between a trip to Blockbuster or waiting for an order, but between renting a disk or simply pressing a button on a computer screen. Blockbuster later also tried to launch its digital download service, but that attempt failed and the company filed for banking failure a few years later.
Today, Netflix is already positioned as a major player in the global streaming market, which could be worth nearly $150 billion in the coming years.
Once upon a time, the high cost of storage for new releases helped contribute to Blockbuster's downfall. And now Netflix faces a similar problem, paying large sums on licensed content as it has developed competitors like Disney, Apple, NBCUniversal and Warner Media (HBO).
Netflix's business depends heavily on the content of these new competitors. Three of the four most streamed shows at the end of 2019 are from legacy media companies launching their own services - NBCUniversal's "The Office," Warner's "Friends" and Disney's "Grey's Anatomy."
Netflix reportedly paid $100 million to keep showing "Friends" in 2019. That's three times as much as it has in previous years. Since licensed content accounts for about two-thirds of total viewing hours on the platform, the question is: What happens to Netflix if it loses these shows?
Netflix's response to this potential threat has been to increase spending on producing its own shows. In 2018, the company spent about $15 billion on original content. But that strategy hasn't been fully effective. In its second-quarter 2019 investor letter, the company recognized that "content drove less growth in paid net adds than we expected."
With a shrinking catalog and rising prices per month in 2019, Netflix's situation was a reminder that innovation is cyclical. In 2020-2022, Netflix ventured into a new round of development in producing its own content and has succeeded. This proves the cyclical nature of the development of any innovation. That's why leaders in Silicon Valley are so driven to outperform themselves before they are destroyed by someone else.
Facebook's famous phrase for teaching new employees the company's values is, "If we don't create the thing that kills Facebook, someone else will."
"It's always day one," Amazon CEO Jeff Bezos regularly reminds his team and investors.
Product Innovation: Ben Thompson
For Stratechery founder and tech analyst Ben Thompson, innovation comes in the form of seamless, integrated, end-to-end products that transform the user experience. Seamlessness is about maximizing the user comfort or breaking down the boundaries between channels in sales. There's the customer, everything revolves around that customer: websites, apps, customer support, offline and the product itself.
Ford invented the automobile instead of the horse-drawn buggy, Sony created the Walkman instead of an improved record player, and Apple invented the iPhone instead of a better-looking flip phone - all three examples of product innovation went far outside of just improved versions of what came before.
Many great companies create products that customers don't even realize they have. Steve Jobs once said that Apple creates things that no one has talked about, but everyone instinctively wants.
Apple does this because of its deep knowledge of technology and customers, the discipline to break the limits, and the value it places on the inestimable experience of actually using the product.
For Stratechery founder and tech analyst Ben Thompson, innovation comes in the form of seamless, integrated, end-to-end products that transform the user experience. Seamlessness is about maximizing the user comfort or breaking down the boundaries between channels in sales. There's the customer, everything revolves around that customer: websites, apps, customer support, offline and the product itself.
Ford invented the automobile instead of the horse-drawn buggy, Sony created the Walkman instead of an improved record player, and Apple invented the iPhone instead of a better-looking flip phone - all three examples of product innovation went far outside of just improved versions of what came before.
Many great companies create products that customers don't even realize they have. Steve Jobs once said that Apple creates things that no one has talked about, but everyone instinctively wants.
Apple does this because of its deep knowledge of technology and customers, the discipline to break the limits, and the value it places on the inestimable experience of actually using the product.
How the iPod turned the MP3 player market around
While many think of the iPod as a revolutionary piece of technology, it was a late player in the MP3 player market. The first dedicated MP3 device was introduced in 1997, four years before the launch of the iPod. Countless producers jumped into the battle, each producing something a little different in an attempt to secure the product's relevance to the market.
But these early MP3 players were full of problems. For example, because flash memory was so expensive - in 2000, 1GB could cost more than $3,000 - producers had to make do with the unwieldy hard drives. Creative Nomad's 6GB Jukebox was a hippo, but it was relatively affordable at $500. The portable I2go EGo cost $2,000.
In 2001, when Apple launched the first-generation iPod with 5GB of memory and a compact body for $400, it identified the two most important ingredients: size and price. What made the iPod attractive to consumers, however, was the experience of using it.
Other MP3 players were difficult to use. They were cluttered with buttons, often had confusing user interfaces and transferring music was a manual process. Some copyright laws of the time forced users of products like the Sony MC-P10 to encode audio files in certain formats to play music.
However, the iPod's click-wheel and 1.5-inch screen made it easy to use without knowing the user manual. iTunes made transferring music and buying tracks easier. There weren't many hidden barriers: you connected it and let the software do its job.
Apple put that "feeling" of using the iPod at the center of its marketing. Its iconic ads showing dancing silhouettes were hopeful and exciting. The slogan read: "1,000 songs in your pocket." Instead of demonstrating features and specifications, the ad focused on the user experience and communicated that listening to music on the iPod was fun and easy.
From 2003 to 2010, the iPod would hold about 75% of the market, an incredible and impressive achievement in consumer electronics.
This approach to the product formed the basis for all of Apple's devices. For example, the iPhone 5S compared to its competitors was missing many technical aspects such as clock speed or camera resolution. However, the phone exceeded expectations with its touchscreen, battery life and, most importantly, Touch ID, a technology that made it easier for people to pick up their phone and use it immediately.
Another example is AirPods. They weren't the first completely wireless headphones, but they became the most popular. All the engineering decisions were made to make the product easier and more comfortable to use: a charging case to make AirPods lighter and more comfortable, a W1 chip to make Bluetooth pairing easier, and built-in sensors to automatically pause music when AirPods are removed.
Apple is investing in technology that strengthens the connection between product and user. That's one way it differentiates itself from competitors like Dell, Microsoft and Samsung. Apple has had its product misses, though. And these are mostly products that were launched in response to market demand. For example, the Newton in response to IBM's PDA or the HomePod in response to Amazon's Echo.
But these early MP3 players were full of problems. For example, because flash memory was so expensive - in 2000, 1GB could cost more than $3,000 - producers had to make do with the unwieldy hard drives. Creative Nomad's 6GB Jukebox was a hippo, but it was relatively affordable at $500. The portable I2go EGo cost $2,000.
In 2001, when Apple launched the first-generation iPod with 5GB of memory and a compact body for $400, it identified the two most important ingredients: size and price. What made the iPod attractive to consumers, however, was the experience of using it.
Other MP3 players were difficult to use. They were cluttered with buttons, often had confusing user interfaces and transferring music was a manual process. Some copyright laws of the time forced users of products like the Sony MC-P10 to encode audio files in certain formats to play music.
However, the iPod's click-wheel and 1.5-inch screen made it easy to use without knowing the user manual. iTunes made transferring music and buying tracks easier. There weren't many hidden barriers: you connected it and let the software do its job.
Apple put that "feeling" of using the iPod at the center of its marketing. Its iconic ads showing dancing silhouettes were hopeful and exciting. The slogan read: "1,000 songs in your pocket." Instead of demonstrating features and specifications, the ad focused on the user experience and communicated that listening to music on the iPod was fun and easy.
From 2003 to 2010, the iPod would hold about 75% of the market, an incredible and impressive achievement in consumer electronics.
This approach to the product formed the basis for all of Apple's devices. For example, the iPhone 5S compared to its competitors was missing many technical aspects such as clock speed or camera resolution. However, the phone exceeded expectations with its touchscreen, battery life and, most importantly, Touch ID, a technology that made it easier for people to pick up their phone and use it immediately.
Another example is AirPods. They weren't the first completely wireless headphones, but they became the most popular. All the engineering decisions were made to make the product easier and more comfortable to use: a charging case to make AirPods lighter and more comfortable, a W1 chip to make Bluetooth pairing easier, and built-in sensors to automatically pause music when AirPods are removed.
Apple is investing in technology that strengthens the connection between product and user. That's one way it differentiates itself from competitors like Dell, Microsoft and Samsung. Apple has had its product misses, though. And these are mostly products that were launched in response to market demand. For example, the Newton in response to IBM's PDA or the HomePod in response to Amazon's Echo.
Business Model Innovation: Fred Wilson
According to Fred Wilson of Union Square Ventures, the most destructive force in business is not new technology, but business model innovation, where technology remains just a tool.
In the past, many big companies were built on new technology: AT&T was built on the telephone, General Motors was built on the internal combustion engine, and Intel was built on the computer chip. Once they had the technology, the business model naturally followed: sell the product at a healthy margin.
These days, however, companies can't rely solely on the innovation part of the product itself.
Tech companies are turning to creative new ways to deliver products and manage costs to build a solid business. Google created paid search, Facebook created advertising technology, and Salesforce created cloud-based signup.
According to Fred Wilson of Union Square Ventures, the most destructive force in business is not new technology, but business model innovation, where technology remains just a tool.
In the past, many big companies were built on new technology: AT&T was built on the telephone, General Motors was built on the internal combustion engine, and Intel was built on the computer chip. Once they had the technology, the business model naturally followed: sell the product at a healthy margin.
These days, however, companies can't rely solely on the innovation part of the product itself.
Tech companies are turning to creative new ways to deliver products and manage costs to build a solid business. Google created paid search, Facebook created advertising technology, and Salesforce created cloud-based signup.
How Salesforce changed the way software is sold
Salesforce turned the software industry upside down with its cloud-based subscription model, kicking off one of the most important innovations in recent history.
In the late 90s, Oracle and SAP dominated the customer relationship management (CRM) market. Their complex, multi-functional products were expensive: high installation costs, on-site support, and regular upgrades.
Marc Benioff, founder of Salesforce, suggested breaking away from the licensed software business model and selling access through the cloud. Instead of a large upfront payment and repeated payments in the future, customers could simply pay a fixed monthly fee, like a utility bill.
This removed the original roadblock of high cost and made the software more adjustable based on the size of the organization. While Oracle and SAP were very expensive, smaller companies could afford Salesforce's scalable pricing.
For larger companies, Salesforce helped remove the bureaucratic pain of having to log out every time an upgrade was made.
Oracle and SAP couldn't adapt quickly to such a radical change in Salesforce and software upgrades. As of 2018, Salesforce had nearly 20% of the global CRM market by revenue, more than double that of SAP and three times that of Oracle.
Even today, the innovative business model offered by Salesforce is widely accepted, and the whole software-as-a-service industry to a certain extent thanks its widespread emergence to Marc Benioff.
The move from desktop to cloud computing was a massive business model innovation that gave birth to thousands of new SaaS companies (software developers).
For large companies, competing with this new model meant years of sales and marketing restructuring. For their startup competitors, it was a big opportunity. Many of the most exciting companies today are also turning away from technical innovation in favor of business model innovation.
In real estate, Opendoor is looking to change the traditional home buying model. In the housing market, sellers and buyers have to act in sync: a home seller steps up to a buyer who can only make one offer at a time.
But Opendoor wants to make these transactions asynchronous. That is, the company acts as a buyer for each home for sale and as a seller with a portfolio of listings for each buyer looking for a new home.
Like traditional realtors, Opendoor makes money on commissions. However, the company also takes on the risk associated with inventory by buying homes directly from sellers. Buyers and sellers have one common goal: to simplify the home-buying process. If Opendoor can successfully scale and turn a profit, its business model could change the world of real estate.
At the same time, online pharmacies like Nurx are looking to change the healthcare industry by offering more convenient services and lower prices. Nurx operates by directly connecting patients with prescribing doctors, offering at-home testing for medical conditions, and delivering medications through the mail. The business model aims to reduce costs and improve quality of care for patients who avoid doctor visits and seek privacy.
An innovative business model does not necessarily follow a shift in technology. It can arise in any industry where the traditional model has become ineffective or leaves potential customers unattended.
In the late 90s, Oracle and SAP dominated the customer relationship management (CRM) market. Their complex, multi-functional products were expensive: high installation costs, on-site support, and regular upgrades.
Marc Benioff, founder of Salesforce, suggested breaking away from the licensed software business model and selling access through the cloud. Instead of a large upfront payment and repeated payments in the future, customers could simply pay a fixed monthly fee, like a utility bill.
This removed the original roadblock of high cost and made the software more adjustable based on the size of the organization. While Oracle and SAP were very expensive, smaller companies could afford Salesforce's scalable pricing.
For larger companies, Salesforce helped remove the bureaucratic pain of having to log out every time an upgrade was made.
Oracle and SAP couldn't adapt quickly to such a radical change in Salesforce and software upgrades. As of 2018, Salesforce had nearly 20% of the global CRM market by revenue, more than double that of SAP and three times that of Oracle.
Even today, the innovative business model offered by Salesforce is widely accepted, and the whole software-as-a-service industry to a certain extent thanks its widespread emergence to Marc Benioff.
The move from desktop to cloud computing was a massive business model innovation that gave birth to thousands of new SaaS companies (software developers).
For large companies, competing with this new model meant years of sales and marketing restructuring. For their startup competitors, it was a big opportunity. Many of the most exciting companies today are also turning away from technical innovation in favor of business model innovation.
In real estate, Opendoor is looking to change the traditional home buying model. In the housing market, sellers and buyers have to act in sync: a home seller steps up to a buyer who can only make one offer at a time.
But Opendoor wants to make these transactions asynchronous. That is, the company acts as a buyer for each home for sale and as a seller with a portfolio of listings for each buyer looking for a new home.
Like traditional realtors, Opendoor makes money on commissions. However, the company also takes on the risk associated with inventory by buying homes directly from sellers. Buyers and sellers have one common goal: to simplify the home-buying process. If Opendoor can successfully scale and turn a profit, its business model could change the world of real estate.
At the same time, online pharmacies like Nurx are looking to change the healthcare industry by offering more convenient services and lower prices. Nurx operates by directly connecting patients with prescribing doctors, offering at-home testing for medical conditions, and delivering medications through the mail. The business model aims to reduce costs and improve quality of care for patients who avoid doctor visits and seek privacy.
An innovative business model does not necessarily follow a shift in technology. It can arise in any industry where the traditional model has become ineffective or leaves potential customers unattended.
Breakthrough Innovation: Peter Thiel
PayPal co-founder and experienced investor Peter Thiel believes that if a company invents something new, it is far from innovation.
Thiel recognizes two types of innovation:
"Horizontal" innovation or going from "1 to n".
"Vertical" innovation or the transition from "0 to 1".
A "0 to 1" innovation is a breakthrough innovation that companies like Google, Amazon, and Uber create when they launch a new product that radically changes the rules of the game in the industry. Such inventions don't just become popular, they create whole new industries around them.
On the other hand, when you go from "1 to n", you adapt an existing product and create a little improved or cheaper version of it. You copy what already works and apply it elsewhere.
According to Thiel's concept, true "vertical" innovation never looks like something that already exists. It's more likely to be something special, driven by the heart of the team's driving vision. Whether it's an online marketplace, a new kind of search engine, or an app on your phone that allows you to call a car at the touch of a button.
PayPal co-founder and experienced investor Peter Thiel believes that if a company invents something new, it is far from innovation.
Thiel recognizes two types of innovation:
"Horizontal" innovation or going from "1 to n".
"Vertical" innovation or the transition from "0 to 1".
A "0 to 1" innovation is a breakthrough innovation that companies like Google, Amazon, and Uber create when they launch a new product that radically changes the rules of the game in the industry. Such inventions don't just become popular, they create whole new industries around them.
On the other hand, when you go from "1 to n", you adapt an existing product and create a little improved or cheaper version of it. You copy what already works and apply it elsewhere.
According to Thiel's concept, true "vertical" innovation never looks like something that already exists. It's more likely to be something special, driven by the heart of the team's driving vision. Whether it's an online marketplace, a new kind of search engine, or an app on your phone that allows you to call a car at the touch of a button.
How Uber went from 0 to 1
The ride industry that Uber wanted to take over was covered in brutal competition, which Thiel doesn't like. But Uber didn't try to compete directly with taxi companies.
Instead, Uber rose above the competition and built itself a monopoly ( however short-lived) with a solution to one of the travel industry's biggest problems - the difficulty of actually and quickly getting a ride.
With variable pricing, Uber has found a way to solve a key problem in the taxicab industry - balancing supply and demand.
When demand outpaces supply on rainy days or New Year's Eve, the cost of a ride goes up, stimulating more drivers to get on the road. On slower days, when supply outpaces demand, the cost of a ride goes down, reducing driver downtime.
Co-founder and former CEO Travis Kalanick once said: "We don't set the price. The market sets the price itself."
Uber, however, did not go after the established market with this innovation. It didn't turn itself into a taxi-ordering service, hiring drivers for taxicabs and limousines. It created its own offering of independent drivers looking for extra income and created a new market.
Uber did exactly what Thiel believes innovators should do: stay away from established markets because competition kills profits.
Yet even innovators like Uber can't hold back competition forever. In 2016, Uber sold its Chinese subsidiary DiDi Chuxing after an intense price war ate into its margins. DiDi's victory in the Chinese market suggests an uncomfortable truth: Copycat "1-to-n" thinking can also be a powerful engine of growth.
Instead, Uber rose above the competition and built itself a monopoly ( however short-lived) with a solution to one of the travel industry's biggest problems - the difficulty of actually and quickly getting a ride.
With variable pricing, Uber has found a way to solve a key problem in the taxicab industry - balancing supply and demand.
When demand outpaces supply on rainy days or New Year's Eve, the cost of a ride goes up, stimulating more drivers to get on the road. On slower days, when supply outpaces demand, the cost of a ride goes down, reducing driver downtime.
Co-founder and former CEO Travis Kalanick once said: "We don't set the price. The market sets the price itself."
Uber, however, did not go after the established market with this innovation. It didn't turn itself into a taxi-ordering service, hiring drivers for taxicabs and limousines. It created its own offering of independent drivers looking for extra income and created a new market.
Uber did exactly what Thiel believes innovators should do: stay away from established markets because competition kills profits.
Yet even innovators like Uber can't hold back competition forever. In 2016, Uber sold its Chinese subsidiary DiDi Chuxing after an intense price war ate into its margins. DiDi's victory in the Chinese market suggests an uncomfortable truth: Copycat "1-to-n" thinking can also be a powerful engine of growth.
Innovation in customer experience: Jeff Bezos
Many businesses have differentiated themselves by becoming customer-centric. Trader Joe's has set itself apart in the grocery market by highlighting its unique in-store experience. Home Depot has invested heavily in creating a more seamless online retail experience than other major retailers.
At Amazon, Jeff Bezos' fixation on customers has been a mainstay of the company's strategy from the beginning. It helped Amazon build its main e-commerce business and resulted in innovations such as a massive fulfillment network and first-class shipping. But it also directed its expansion into even more profitable areas of the business. Amazon Web Services, its cloud service, now accounts for a big part of its operating profits.
According to Bezos, customers are always beautifully, wonderfully unhappy. This simple insight is written into Amazon's DNA. It guides product development processes, meeting structures and internal code. And it fuels Amazon's relentless innovation in retail, software, grocery stores, healthcare and finance.
Many businesses have differentiated themselves by becoming customer-centric. Trader Joe's has set itself apart in the grocery market by highlighting its unique in-store experience. Home Depot has invested heavily in creating a more seamless online retail experience than other major retailers.
At Amazon, Jeff Bezos' fixation on customers has been a mainstay of the company's strategy from the beginning. It helped Amazon build its main e-commerce business and resulted in innovations such as a massive fulfillment network and first-class shipping. But it also directed its expansion into even more profitable areas of the business. Amazon Web Services, its cloud service, now accounts for a big part of its operating profits.
According to Bezos, customers are always beautifully, wonderfully unhappy. This simple insight is written into Amazon's DNA. It guides product development processes, meeting structures and internal code. And it fuels Amazon's relentless innovation in retail, software, grocery stores, healthcare and finance.
How customer obsession became Prime's success
In the early days of e-commerce, Jeff Bezos recognized that online retailers needed to become more coordinated if they wanted to be welcomed by the masses.
Amazon's warehouse optimization for faster delivery and one-click ordering options did the job. But he felt there was still a strong, latent demand for even faster delivery of online goods.
Then came the idea for Amazon Prime: unlimited two-day delivery anywhere in the U.S. for an average yearly price of $79. The idea was internally conflicted: some felt that letting customers get automatic two-day delivery would break the company. Bezos himself wasn't convinced that wouldn't happen.
The main problem was that expedited delivery was expensive. Executives were afraid that customers would love the program too much, take advantage of it, and break the company.
Staying true to Bezos' customer-centric vision, the team forged ahead and launched Prime in 2005. Today, there are more than 100 million Prime members in the U.S., and they spend an average of $800 more annually than non-members.
The reason the Amazon Prime experiment finally successful had nothing to do with complicated math or spreadsheets. Delivery was expensive, and sending a toothbrush through the mail in two days was never going to be profitable for Amazon, especially when the need for speed meant sending goods by air.
When one of Bezos's operational assistants pointed this out to him, he said: "You're thinking wrong." "If customers like Prime, demand will go up," Bezos said, and when demand went up, Amazon would have "the freedom to create new fulfillment centers." "It may be expensive to run Prime now," Bezos said, "but the more people the company signs up for it, the cheaper it will be."
This mechanism can be used to understand how Amazon's business works at the widest level. The more Amazon grows, the lower the cost and pricing structure, while creating a better customer experience.
The better Amazon's customer experience, the more traffic it gets to the site, the more sellers it attracts to the platform, and the better the selection of products it can offer. This drives growth, and it also drives a better customer experience.
Growth generates growth. But such a framework requires effort and investment. Companies must correctly identify their customers' problems and work tirelessly to solve them. But as this mechanism builds up, it becomes a powerful engine of growth - the kind that can turn a small online bookstore into a global e-commerce outlet.
Amazon's warehouse optimization for faster delivery and one-click ordering options did the job. But he felt there was still a strong, latent demand for even faster delivery of online goods.
Then came the idea for Amazon Prime: unlimited two-day delivery anywhere in the U.S. for an average yearly price of $79. The idea was internally conflicted: some felt that letting customers get automatic two-day delivery would break the company. Bezos himself wasn't convinced that wouldn't happen.
The main problem was that expedited delivery was expensive. Executives were afraid that customers would love the program too much, take advantage of it, and break the company.
Staying true to Bezos' customer-centric vision, the team forged ahead and launched Prime in 2005. Today, there are more than 100 million Prime members in the U.S., and they spend an average of $800 more annually than non-members.
The reason the Amazon Prime experiment finally successful had nothing to do with complicated math or spreadsheets. Delivery was expensive, and sending a toothbrush through the mail in two days was never going to be profitable for Amazon, especially when the need for speed meant sending goods by air.
When one of Bezos's operational assistants pointed this out to him, he said: "You're thinking wrong." "If customers like Prime, demand will go up," Bezos said, and when demand went up, Amazon would have "the freedom to create new fulfillment centers." "It may be expensive to run Prime now," Bezos said, "but the more people the company signs up for it, the cheaper it will be."
This mechanism can be used to understand how Amazon's business works at the widest level. The more Amazon grows, the lower the cost and pricing structure, while creating a better customer experience.
The better Amazon's customer experience, the more traffic it gets to the site, the more sellers it attracts to the platform, and the better the selection of products it can offer. This drives growth, and it also drives a better customer experience.
Growth generates growth. But such a framework requires effort and investment. Companies must correctly identify their customers' problems and work tirelessly to solve them. But as this mechanism builds up, it becomes a powerful engine of growth - the kind that can turn a small online bookstore into a global e-commerce outlet.
Innovation in customer behavior: Stuart Butterfield
For Stuart Butterfield, co-founder of Slack, innovation is not the product itself, but the change in human behavior.
Truly innovative products cause a wave of change in human behavior. Facebook and Twitter, for example, have changed how people keep in contact, share opinions, and stay in contact with the outside world. Spotify has changed how people find and listen to music. Waze, a crowdsourced navigation app, has changed the way people drive.
But for Butterfield, creating a good product alone can't bring about such large-scale change. To make people change their behavior, you need to tell the right story about your brand.
For Stuart Butterfield, co-founder of Slack, innovation is not the product itself, but the change in human behavior.
Truly innovative products cause a wave of change in human behavior. Facebook and Twitter, for example, have changed how people keep in contact, share opinions, and stay in contact with the outside world. Spotify has changed how people find and listen to music. Waze, a crowdsourced navigation app, has changed the way people drive.
But for Butterfield, creating a good product alone can't bring about such large-scale change. To make people change their behavior, you need to tell the right story about your brand.
How Slack became the product that transformed work
Slack messenger branded itself as a product that would transform work. The teams that installed it planned to save time on communications, improve decision making, and experience less stress.
The power of branding was that the developers believed in the idea. In an internal business memo, Butterfield rallies his team with the assurance, "what we're selling is organizational transformation. The software is simply part of what we want to build and sell."
The articles talked about how Slack would solve the problem of overflowing inboxes, bad chat apps, and distracting coworkers. Slack was going to improve the lives of its users. The product's launch page read "be less busy" against a warm background image of a man leaning back and putting his feet up on his desk.
Slack made a powerful brand promise and expected to fulfill it by creating a well-designed product.
It capitalized on beta tests to purposefully build features that people would want and use. Because the original Slack team was a group of game developers, the product was fun, educational, and attractive. Once users sent their first 2,000 messages, Slack discovered that there was a 93% chance that users would stay for the long term.
By cleverly combining branding with product development, Slack grew rapidly. It became one of the fastest growing enterprise products in history with daily active users growing from 16,000 in 2014 to over 12 million by the end of 2019. Slack was hardly a groundbreaking technology. Combining team chat and file sharing was being done by competitors such as Hipchat and Campfire.
However, most users didn't recognize that team collaboration tools should make up a separate category of software. During Slack's beta testing, Butterfield said, "When we asked most users what they used for internal communication, they said, 'Nothing.' But they were clearly using something. They just didn't think of it as a category of separate software."
Slack saw an opportunity where its competitors didn't, providing an opportunity to make Slack a category-defining product. It capitalized on that opportunity by promoting the brand's credibly side.
The power of branding was that the developers believed in the idea. In an internal business memo, Butterfield rallies his team with the assurance, "what we're selling is organizational transformation. The software is simply part of what we want to build and sell."
The articles talked about how Slack would solve the problem of overflowing inboxes, bad chat apps, and distracting coworkers. Slack was going to improve the lives of its users. The product's launch page read "be less busy" against a warm background image of a man leaning back and putting his feet up on his desk.
Slack made a powerful brand promise and expected to fulfill it by creating a well-designed product.
It capitalized on beta tests to purposefully build features that people would want and use. Because the original Slack team was a group of game developers, the product was fun, educational, and attractive. Once users sent their first 2,000 messages, Slack discovered that there was a 93% chance that users would stay for the long term.
By cleverly combining branding with product development, Slack grew rapidly. It became one of the fastest growing enterprise products in history with daily active users growing from 16,000 in 2014 to over 12 million by the end of 2019. Slack was hardly a groundbreaking technology. Combining team chat and file sharing was being done by competitors such as Hipchat and Campfire.
However, most users didn't recognize that team collaboration tools should make up a separate category of software. During Slack's beta testing, Butterfield said, "When we asked most users what they used for internal communication, they said, 'Nothing.' But they were clearly using something. They just didn't think of it as a category of separate software."
Slack saw an opportunity where its competitors didn't, providing an opportunity to make Slack a category-defining product. It capitalized on that opportunity by promoting the brand's credibly side.
Cultural Innovation: Ed Catmull
Ed Catmull, co-founder and former president of Pixar, doesn't think innovation comes from good ideas. It comes from talented people, like Pixar's hundreds of animators and producers, who collaborate to make something greater than the sum of all its parts.
For Catmull, the foundation of an innovative organization is a strong culture built on open and honest communication.
The stage for innovation comes when creatives from different walks of life feel free to share ideas that are not yet fully developed and give each other constructive feedback.
Without a culture of honesty, people will avoid asking for help or sharing bold, risky proposals. This approach can result in missed deadlines, disappointing products, and discordant quality.
People at Pixar think great stories start with the "ugly kid." Seems like a bad idea. Yet the studio has produced blockbuster after blockbuster from Toy Story to The Secret of Coco that exceeds their budgets and creates a trusting environment where all kinds of ideas are shared and encouraged.
Ed Catmull, co-founder and former president of Pixar, doesn't think innovation comes from good ideas. It comes from talented people, like Pixar's hundreds of animators and producers, who collaborate to make something greater than the sum of all its parts.
For Catmull, the foundation of an innovative organization is a strong culture built on open and honest communication.
The stage for innovation comes when creatives from different walks of life feel free to share ideas that are not yet fully developed and give each other constructive feedback.
Without a culture of honesty, people will avoid asking for help or sharing bold, risky proposals. This approach can result in missed deadlines, disappointing products, and discordant quality.
People at Pixar think great stories start with the "ugly kid." Seems like a bad idea. Yet the studio has produced blockbuster after blockbuster from Toy Story to The Secret of Coco that exceeds their budgets and creates a trusting environment where all kinds of ideas are shared and encouraged.
How Pixar created a culture of creativity
Pixar's cult-like atmosphere, to which Catmull attributes the company's continued success, began to take shape during the production of Toy Story, its first full-length animation.
The directors and producers of "Toy Story" developed a special and unique working relationship. According to Catmull, they could have very stressful and hot discussions. They always knew the passion was for the story and was not personal because they trusted each other.
This gave rise to Pixar brainstorming, a feedback system based on director parity. At any given moment, directors could present everything they had to a group of other directors, producers and writers, like-minded creatives and get honest feedback on their projects.
In addition to the brainstorming model, Pixar uses the practice of daily discussions to encourage continuous feedback and build trust among team members. Animators discuss their progress with the director at the end of each day, brushing aside any worries about presenting unfinished work.
These insights helped Pixar understand the most important second act of "Toy Story 3," which earned more than $1 billion. It helped the "Puzzle" director gain confidence in his vision, telling the story from the perspective of the emotions living inside the mind. And it also helped change the ending of the movie "Wall-E" which ended up nearly three times its production budget.
Few movie studios have been as successful as Pixar under Edwin Catmull's leadership. Since 1995, Pixar has produced 20 full-length films that have grossed more than $14 billion and won 40 Academy Awards.
The key to this success has been Pixar's ability to attract and retain the best people, not just design skills, storytelling ability or any other secret ingredient.
The original production of Toy Story 2, in Catmull's own words, did not go well. The leads from the first Toy Story were busy and so the project was taken on by another team at Pixar. It wasn't until John Lasseter, Joe Ranft, Andrew Stanton and Lee Unkrich returned to production that the movie got back on track.
"It taught us an important lesson about the primacy of people over ideas," Catmull writes of the episode, "If you give a good idea to a mediocre team, they'll ruin it. If you give a mediocre idea to a great team, they'll either fix it or throw it away and come up with something that works."
Pixar has a solid company of long-term employees who stick together, learn from each other and strive to improve with each production.
The creative freedom to brainstorm and Pixar University, which offers employees access to classes from fine art to illustration, are designed to keep these employees engaged.
As a result, when Pixar writers or directors have potential hits, they aren't looking for a higher paycheck from another studio, they are preparing for their next movie at Pixar.
The directors and producers of "Toy Story" developed a special and unique working relationship. According to Catmull, they could have very stressful and hot discussions. They always knew the passion was for the story and was not personal because they trusted each other.
This gave rise to Pixar brainstorming, a feedback system based on director parity. At any given moment, directors could present everything they had to a group of other directors, producers and writers, like-minded creatives and get honest feedback on their projects.
In addition to the brainstorming model, Pixar uses the practice of daily discussions to encourage continuous feedback and build trust among team members. Animators discuss their progress with the director at the end of each day, brushing aside any worries about presenting unfinished work.
These insights helped Pixar understand the most important second act of "Toy Story 3," which earned more than $1 billion. It helped the "Puzzle" director gain confidence in his vision, telling the story from the perspective of the emotions living inside the mind. And it also helped change the ending of the movie "Wall-E" which ended up nearly three times its production budget.
Few movie studios have been as successful as Pixar under Edwin Catmull's leadership. Since 1995, Pixar has produced 20 full-length films that have grossed more than $14 billion and won 40 Academy Awards.
The key to this success has been Pixar's ability to attract and retain the best people, not just design skills, storytelling ability or any other secret ingredient.
The original production of Toy Story 2, in Catmull's own words, did not go well. The leads from the first Toy Story were busy and so the project was taken on by another team at Pixar. It wasn't until John Lasseter, Joe Ranft, Andrew Stanton and Lee Unkrich returned to production that the movie got back on track.
"It taught us an important lesson about the primacy of people over ideas," Catmull writes of the episode, "If you give a good idea to a mediocre team, they'll ruin it. If you give a mediocre idea to a great team, they'll either fix it or throw it away and come up with something that works."
Pixar has a solid company of long-term employees who stick together, learn from each other and strive to improve with each production.
The creative freedom to brainstorm and Pixar University, which offers employees access to classes from fine art to illustration, are designed to keep these employees engaged.
As a result, when Pixar writers or directors have potential hits, they aren't looking for a higher paycheck from another studio, they are preparing for their next movie at Pixar.
Conclusion
Innovation activities involve a range of scientific, technological, financial and commercial activities that together result in innovation. The varieties of innovation activities include:
- preparation and organization of production, covering the purchasing of production equipment and tools, changes in them, as well as in procedures, methods and standards of production and quality control required to create a new technological process;
- pre-production development, which includes product and process modifications, retraining of personnel to apply new technologies and use of equipment;
- marketing of new products, which includes activities related to the launch of new products on the market, including pre-market research, adaptation of the product to different markets, and an advertising campaign;
- purchasing immaterial technology from outside in the form of patents, licenses, know-how, trademarks, designs, models and services with technological content;
- purchasing of physical technology - machinery and equipment with technological content related to the introduction of product or process innovations;
- production design, which includes the preparation of plans, drawings and technical specifications to define production procedures.
Each company is looking for its own successful recipe for innovation: from improving the user experience to introducing an innovative communication culture.
Task. We've looked at the experiences of a few of the strongest innovators. Find and explore one more. Write a short report about it in the document on the link.