After the recent events like the pandemic and conflict in Europe, with supply chains still recovering and ebullient inflation, the economic outlook for businesses has become more challenging. We’ve seen the direct effects on businesses: (1) higher operational and capital costs; and (2) weaker demand as consumers rethink their spending patterns. A key question for business leaders: Is it possible to innovate to build resilience in an era where cheap money is no longer available? The answer: Yes.

Investing in Innovation in a Downturn is critical…  

Innovation might seem like a luxury in times like these, but it is indeed more critical than ever. Innovation not only helps businesses work their way through recessions but prepares them for the subsequent upturn. Recessions are ultimately transient. As American Express CEO Ken Chenault said in 2008: “A difficult economic environment argues for the need to innovate more, not to pull back.”

…but it Demands a Strategic Approach

At times of restraint, teams and funds for innovation are often the first candidates for cutting. This is a mistake. Research suggests that companies that skimped on innovation during the 2008 crisis, as the cost of capital skyrocketed, had lower performance after the crisis had passed. Conversely, companies that cut costs but reallocated resources to strategic innovation projects, were more resilient and outperformed when the economy recovered.

How Should You Reassess & Rebuild Your Innovation Portfolio to Create Resilience?

Four key activities are essential to rebuild your innovation portfolio:

1.   Rediscover Your Customers

You must reacquaint yourself with your customers, their needs and wants, and how these are evolving as the environment changes. During downturns, customers may tend to revisit their spending and new patterns emerge. This raises several questions: How are spending patterns shifting? What changes will stick even after an upturn? Can we assess (beyond assumptions) the changes in an unbiased manner?

We have seen many organisations achieving results from adopting this approach of rediscovering customers, and reimagining value propositions based on that new knowledge. Ikea, for example, has different innovation teams to unearth customers’ nascent needs: Space 10, is a think tank established to assess how living patterns shift; there is also a Circular Innovation team focused on innovations addressing growing customers’ demands for sustainable products.

At times of reduced budgets, not starting at a place of deep understanding of the customer can be expensive and wasteful.

2.   Restructure Your Innovation Portfolio

As you rediscover your customer’s evolving needs, your innovation portfolio needs to be re-aligned to those new priorities. If, for example, your customers are moving to electric vehicles, then the focus on repurposing petrol stations becomes a top priority. Here, it is essential to evaluate every project with a zero-based lens and be ruthless in restructuring the portfolio. As the cost of capital rises, it is critical to free up cash from projects that are no longer aligned to the market reality and reallocate it to programs that do. 

With a CPG firm we worked with recently, we’ve seen how revisiting its portfolio (after an unprecedented uplift in online sales generated by the pandemic started to fizzle out) helped it bring clarity across teams, and ultimately better results as investments and customer needs were better aligned.  

3.   Revamp Your Operating Model

Restructuring your innovation portfolio is only part of the story. You also may need to (re-)define how innovation is done; moving away from long and expensive project planning and execution processes and toward a nimbler and open approach — one in which smaller experiments are favoured, a data-driven, learn-fast culture is adopted and the cost of prototyping and testing, including working with external parties, is significantly reduced to make innovation more effective and efficient.

A Middle-eastern retail holding we worked with recently was looking to build an innovation model to help them succeed in the coming years. They set out to define their innovation framework from the ground up: new stage gates, prioritisation criteria, and metrics relevant to each phase, as well as governance, data collection, capabilities and its overall innovation funding model. In our experience having helped dozens of businesses, institutions and governments establish new innovation capabilities, we have found that building the right innovation operating model is crucial.  

4.   Reimagine Your Value Proposition

Having rediscovered the changing needs of customers and adopted a more creative and knowledge-driven innovation approach, reimagining your value propositions (current and future ones) becomes easier and is done with more confidence. Nike, for example, has dedicated innovation teams to research and define new value propositions, build concepts and rapidly test them to ensure they resonate with customers before implementation even begins. 

Building evolutive value propositions that resonate with customers needs and wants, both today and tomorrow, is the ultimate source of resilience.

Looking at an Uncertain Future

At times of high uncertainty, budgets come under intensified scrutiny. However, if we accept that continuous uncertainty is the new norm, backing away from innovation is not the intelligent choice. As the economy and consumer preferences evolve in a new economic cycle, it is the one tool that can help businesses build a healthy creative resilience for that new future. 

How is your business building resilience today?

About the author:

Omar Valdez-de-Leon is the founder of Latitude 55 Consulting, an European advisory in areas of strategy, innovation and business transformation.

Erica Moreti is an innovation executive based in Milan and a strategic foresight professor at Milan Polytechnic.

Throughout the modern industrial era, industries have generally been organised as linear value chains, producing vertically integrated organisation, organised to control the entire value chain and achieve economies of scale, to create a competitive advantage. As digital technologies gain adoption, they enable new ways of organising how value is created. This transition to digital ecosystems is challenging. There is still limited knowledge of how these ecosystems are created, how they work and how organisations can best participate in such ecosystems.

Drucker Forum 2019

This article is one in the “shape the debate” series relating to the 11th Global Peter Drucker Forum, under the theme “The Power of Ecosystems” taking place on November 21 & 22, 2019 in Vienna, Austria.
#GPDF19 #ecosystems

The need to better understand digital ecosystems

Moving to an ecosystem model involves a different approach and a new set of strategies, processes, competences and technology assets.

In a recent interview, the SVP of IoT at Sprint, a major Telecom operator in the US, explained how telecom operators are struggling to transition from serving the single-service consumer market to the myriad of new applications that form part of the Internet-of-Things (IoT) ecosystem.

The key building blocks of digital ecosystems

There are three main elements for building a successful ecosystem.

1. The Platform

This is the enabler upon which ecosystem partners can build their products or services. The platform allows access to platform resources (via APIs, for example) enabling participants to build complementary products or services. The platform in turn supports the other two elements.

2. Network Effects

This is the self-perpetuating cycle of ecosystem participation and user enrolment. More products or services on the platform lead to more end-users attracted to it. At the same time, more end-users on the platform attract more participants with their products and services. Organisations driving successful ecosystems tend to focus on creating the right incentives (financial and other kinds), as well as systems to support other ecosystem participants. Here the focus is on creating and sharing value across the ecosystem.

3. Market Expectation

Market expectation is related to how prospective participants and end-users perceive an ecosystem in terms of its potential to become dominant. Indeed, in choosing an ecosystem they tend to focus more on the prospective development of the ecosystem rather than its current size and position. In a way, building credible market expectations is the first push to get the wheel rolling towards self-perpetuating network effects. This is arguably one of the reasons why the Windows phone operating system failed. Nokia and Microsoft could not create enough market expectation among both users and app developers to propel their ecosystem. As a result, they ended up losing to Apple iOS and Goggle Android.

The above are the three key elements that make up digital ecosystems. The key question is how to activate and cultivate these three elements.

The Enablers of Digital Ecosystems

There are six levers that are used to shape the three key elements that make up digital ecosystems.

Application Programming Interfaces (APIs)

APIs are basic building blocks of a digital ecosystem. APIs can be used to promote network effects. A good example of this is Stripe, a company whose platform enables payments over the internet. Their approach from the start was to build their platform with developers in mind, so their APIs would be simple, well-documented and stable. The company has used APIs to propel its network effects by focusing not only on building its credibility (market expectation) among the developer community, but by providing all necessary support (see support functions below) to drive developer adoption and advocacy.

Communities

This is communities of participants that interact with one another and create value within the ecosystem. These participants develop products and services based on platform resources (via APIs). The benefits can be significant as in the case of Stripe. By enabling others to invest and create new products and services on the platform, the ecosystem can provide a richer set of options to end-users than it could do on its own. Moreover, the faster an ecosystem develops a positive reputation among developers and thus more join the platform, the further it develops. This reflects market expectations driving network effects. As more developers are attracted to the ecosystem, more users are drawn to new products and better services offered.

Spearhead Products or Services

The launch of ‘spearhead’ products or services is another essential driver of ecosystem development. These are products or services that are developed on top of their platform, in order to target a key segment of the market. This approach helps develop market expectation. However, the real power of spearhead products or services is that they create a user base that can help kick-start the ecosystem. One way to visualize this is to look at how the video games industry relies on one or more key spearhead games (think Call of Duty) to drive early user adoption to consoles, which helps attract developers to the platform and in turn brings in even more users.

Support Mechanisms

In exploiting a platform enabling an ecosystem, participants expect support. This support includes among others, technical (for example, how to use an API), marketing (how to sell your apps on our marketplace) and operational support (“fulfilled by Amazon” logistics support services). When an element is missing it tends to create frustration and disinterest among participants that can lead to the demise of the ecosystem.

Revenue Model

The revenue model is a key feature of a digital ecosystem. The ecosystem has to have a well-defined revenue generation and allocation model – one that incentivises participants to be part of the ecosystem, so reducing their risks to invest and innovate within it. Also the revenue model needs to be flexible and adaptable to avoid partner frustration and churn. One such frustration is with Apple and Google, who are being pushed to adapt their revenue share models in response to complaints by partners such as Spotify, Netflix and Match Group regarding their high platform fees.

Governance

An governance model establishes very clearly the rules of engagement among ecosystem partners. It also sets out processes to deal with disputes, as well as how value will be distributed based on the agreed revenue model. In the end, just like all other enablers, the governance model needs to be defined in a way that supports the development of the ecosystem and helps create value for all stakeholders.

As digital technologies continue developing and gaining adoption, they start enabling new ways of organising how value is created. If ecosystems are the new way of organising and enabling value creation, then it is essential that we realise how these ecosystems work. By seeing ecosystems through the lens of the three key elements and the six levers described above, we shall be better prepared to approach this new convention.

About the Author:

Omar Valdez-de-Leon is a digital transformation practitioner and advisor, founder of Latitude 55° Consulting. He is author of the “How to Develop a Digital Ecosystem: a Practical Framework”.

This article is one in the Drucker Forum “shape the debate” series relating to the 11th Global Peter Drucker Forum, under the theme “The Power of Ecosystems”, taking place on November 21-22, 2019 in Vienna, Austria #GPDF19 #ecosystems