Wednesday, January 08, 2014

Major League Innovation: The Value Chain

For my first "official" post of the new year I thought I'd write about what separates "big league" innovators from their "minor league" competitors.  When I write about big league and minor league, I'm making reference, for those of you who aren't baseball fans, to the distinction between the major league baseball clubs (The Yankees, the Dodgers, the Reds, the Cubs, etc) and their "minor league" farm franchises.  Every major league club has a syndicate of teams that develop young players and promote them from small city "Single A" teams to Double A and finally Triple A, like my hometown Durham Bulls, a "farm team" of the Tampa Bay Rays.  While members of each of the squads in question all play baseball, the distinctions between them are relatively astounding, especially when it concerns the performance on the field and the rewards the players receive.  Many Single A players are drafted out of high school and play in "the minors" for years, hoping to break into Double A or Triple A.  They play in small parks and are meant to develop into players who are capable of playing "at the next level".  Everyone in Single A through Triple A wants a visit to "the Show", major league baseball.  While they all play baseball, the skill level and quality of play is higher, the stakes are higher, and the outcomes are much higher in the big leagues.

Likewise, I believe there is a delineation between firms which are trying to innovate.  Some are just starting out, exercising small trial programs or generating ideas periodically.  Others are tapping into a larger, more sophisticated innovation program.  So, if many firms are doing "innovation" but some are in the "big leagues" while others are in "the minors" for now, what's the distinction?  What separates the big leaguers from the minor leaguers in the innovation work that they do?  I believe there are several key differences.

The first is continuity and consistency.  Firms in the major leagues of innovation are innovating constantly.  They have staked out a reputation for innovation and recognize that the results of their innovation activities create competitive differentiation and advantage.  Their innovation is recognized as driving increased corporate valuation.  The firms in the minor leagues innovate sporadically, occasionally and never sustain innovation over time.

The second is capability.  In the major leagues of innovation, those firms understand how important it is to build internal skills, knowledge and capability about innovation.  They are investing in their people and their toolsets.  Minor league innovators assume people have enough knowledge to do innovation on their own, or with minimal skills or guidance.  Major league innovators understand that their "bench strength" may not be enough to see them through.  They tap into third parties with open innovation to expand the range of ideas and frameworks.

But the ultimate distinction between Major Leaguers and Minor Leaguers when it comes to innovation is focus.  Minor league innovators set their sights on building a new product or service.  They hope to disrupt an existing product or service, create a compelling new product or service and ride the results for years.  Sounds good, no?  Major Leaguers take this perspective one step further.  Yes, innovation and disruption are valuable, but why stop?  Once you've disrupted one portion of the "value chain", why not go ahead and gobble up more of the value chain?

Value Chain Explanation

I'll pause briefly to be sure that you and I have the same understanding about the "value chain". The Value Chain concept was best described by Michael Porter, who examined all the steps in a process of developing a solution for a customer.  I'm misusing and slightly abusing his idea of the value chain, because the original "value chain" consisted of the steps necessary to bring a product to market.  Here I'm using "value chain" to mean all the ways of delivering similar or additional value to a customer.

Let's use an example, probably one that you are too familiar with.  Let's use NetFlix.

NetFlix started out life as a response to Blockbuster, specifically as a means to escape Blockbuster's high fees for returning videos after they were due.  But over time people recognized that NetFlix solved another problem or offered an ever better benefit.  Consumers could choose the actual movies they wanted to watch and have them delivered to their home, rather than drive to Blockbuster and have to choose Steve Seagal action movies, which were the only ones left on the shelf.  Once they beat BlockBuster, NetFlix could have rested on its laurels.  But NetFlix didn't stop there.  They continued to expand into the value chain, moving into the distribution of movies online.

But the really interesting new innovation, the "value chain" innovation, is when NetFlix moves from a content delivery to content creation.  With House of Cards, my new favorite show, and other content, Netflix innovates again, challenging traditional content development and delivery.  In a certain way, Netflix has inverted the traditional content consumption.  It used to be that you built content and then sought a channel or conduit to the market.  Netflix built a channel and then augmented with content.  But the point is that they continue to innovate, and moved beyond the original product to innovate within the value chain of entertainment.

Of course we can include Apple in the Big Leagues as well, not for the iPod or iPhone, but for iTunes.  Apple subverted the content development cycle not by creating its own content but by creating a platform where anyone could offer content.  Google and of course Youtube are moving quickly in this direction.

Why Value Chain innovation is the "big leagues"

I've made the assertion that Value Chain innovation is the "big leagues".  Here's why I think that is true.  Create any really interesting new widget - phone, watch, PC, tablet, etc - and someone else will eventually copy it or create something better.  Right now, I'm feeling the tug towards Samsung cell phones over my iPhone.  Why?  Because lately Samsung phones seem better, more interesting, could I say it, more innovative than Apple's.  The point is, anyone can innovate once, and whatever you create can be quickly copied.  Big League innovators understand this and continue to innovate, doubling down on the product itself but also looking for adjacencies - adjacent needs, adjacent markets, and eventually, adjacencies in the value chain.  This is how firms stay on top.

Now, many of you reading this will note that I have applauded Apple for being a value chain innovator and then I questioned the innovation around their handset.  The challenge for Apple is:  what have you done for me lately?  Ever thinner versions of a handset that is now six or seven years old, and a music and apps distribution platform that appears more clunky by the day appear to show that Apple may be settling in to play defense, rather than continuing to innovate.  We'll see.

What it takes

Nascent innovators need to understand that to become a "major league" innovator takes time and investment.  A firm doesn't move from sporadic or non-existent innovation capability to leading the major leagues in just a year or two.  Just hitting at the Mendoza line in the Majors is difficult.  What every firm needs to do is understand their capabilities and commitments today, and map a course to where they want to be and need to be in regards to innovation capabilities.

Where is your firm in its maturation level?  Are you at Single A, way down in the minors, learning the basics?  At Double A or Triple A, moving up to the show?  Or are you ready for the innovation big leagues, where innovation is more about consistency, capability and the ability to innovate beyond the product, into the business model or value chain?

More importantly, do you understand the level of commitment, the skill development, the attitudes and perspectives that are necessary to innovate continually and with great resolve?  Can your organization think beyond simple product innovation, to discover innovation opportunities in adjacencies, in business models and within the value chain? 

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posted by Jeffrey Phillips at 5:45 AM


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