Every once in a while, we all need to be reminded of challenges of managing the innovation process and forces at play that influence an innovation’s commercial success. Over the weekend, I watched the documentary, Who Killed the Electric Car?
For anyone that is knee deep in driving innovation in her organization, this is a good documentary to watch. It reminded me of all the various internal and external factors that could support or hinder an innovation’s potential success.
This post, without going into politics, will look at the available tools and methodologies for performing impact analysis. Once you have the results, what you do with them (strategic planning, risk management, etc.) would be part of your innovation and technology management process. It is also important to note that this analysis provides a snapshot view point in time. As such, depending on how turbulent your business environment is, you should consider a continuous scanning process.
Porter’s 5 forces framework (Competitive Strategy: Techniques for Analyzing Industries and Competitors
) is a good starting point for analyzing the attractiveness of your market. The inter-relationship between the four external actors (potential new entrants, potential substitutes, buyers and suppliers) and the rivalry between the firms within the industry forms the five competitive forces. In summary, the greater the strength of the competitive forces, the greater the intensity of competition in the industry, and the less profit potential. These forces are summarized as follows.
- The threat of new entrants into the industry — potential entrants reflect the firms that are not yet in your market, but potentially could be lured in for various reasons, usually related to the similar factors as outlined in the ‘intensity of rivalry’ (below). However, these potential new entrants have to deal with several entry barriers:
- economies of scale that maybe available to large incumbents;
- experience curve effects already benefitting the existing competitors;
- access to channels & complementary assets;
- The threat of substitutes for the industry’s products or services — these are alternative but equivalent solutions. Threat of substitution is influenced by all factors effecting the potential entrants as well as the competition among the firms. Additional attributes to consider are:
- buyer’s switching costs to the substitute;
- relative price/performance, and how fast it is improving in the substitute’s industry;
- The bargaining power of buyers of the industry’s products or services — this represents the relative relationship between the firm and its customers. The factors effecting the buyer’s bargaining power is similar to the factors influencing the suppliers.
- buyer concentration;
- buyer’s switching costs;
- threat of backward integration: buyer set up subsidiaries that produce some of the inputs used in the production of its products;
- The bargaining power of suppliers of products or services to the industry — this measures how much a supplier can raise prices without the firm retaliating or switching suppliers. Suppliers include material and component suppliers, as well as skilled labor, technology, software and other inputs to the final product/service. The factors influence the supplier’s bargaining power are:
- importance of the factor to the user: the more important the given component/factor to the user, the more likely the firm has to accept unfavorable terms;
- supplier concentration: the fewer the suppliers, the more bargaining power the supplier has;
- firm’s switching costs: the higher the switching costs, the less likely the firm will switch suppliers;
- threat of forward integration: if the supplier can enter the buyer’s industry with its own competitive product, it has additional bargaining power;
- The intensity of rivalry among firms in the industry;
- growth rate of the market: slow-growth markets may increase intensity of competition among existing competitors;
- number of competitors: the more contenders, the more intense the competition;
- buyer’s switching costs: low switching costs make it easier for competitors to steal each other’s customers;
- firm’s exist costs: the higher exit costs, the more likely the firms will stay in;
- brand loyalty: less brand loyalty, more likely buyer’s will switch vendors;
- buyer’s price sensitivity: the more price sensitive the customers are, the more likely lowering price would entice customers’ to switch vendors;
- ability to differentiate: less opportunities for differentiation indicates less likely to keep existing customers’ loyalty;
Complimentary and Supporting Industries has been added as the Sixth Force to Porter’s model. A product’s complements enable its users to experience the full benefits of the product, such as the iPod and its infinite number of accessories. An industry with easy access to related and supporting industries may benefit from cross-compilation of ideas, common pool of technical talent, opportunities for joint innovation, and opportunities to share infrastructure and/or distribution channels. These opportunities can enable creative and innovative linkages with the complementer to further differentiate your product. However, at the same time, the threat comes if the complementer becomes a new entrant by integrating the offer into their product, thereby becoming a competitor.
We can further Porter’s forces by looking at the external forces that impact the business environment utilizing STEEP forces analysis (Social, Technological, Economic, Environmental, Political).
- Social —what are the current trends in the communities and relationships, and how the industry and technology influences those trends, such as: demographic factors (population distribution, age distribution, education and income levels), attitudes towards capitalism, individualism, environmentalism, church and religion, health and nutrition;
- Technological — what are the technological changes and their potential impacts, what is the efficiency of the infrastructure (transportation, education, health care, communication, etc.), cost and accessibility to power, new technologies, manufacturing processes and overall industrial productivity;
- Economic — how are the economics changing in the industry, such as: economic growth, unemployment and inflation rates, consumer and investor confidence, currency exchange;
- Environmental — what are the environmental trends and influences: impacts to firm’s production processes, affects on customers’ buying habits, perception of the company or product;
- Political — what is the political climate, its stability and risk, what are the various government policies and mandates, export restrictions, taxes and tax breaks, copyright and patent laws, environmental protection laws, union laws;
You can assess the impact of these forces using a range of –/++ to indicate how favorable (++) or unfavorable (- -) a given force is. You can also do further sensitivity analysis on your findings and by exploring what ifs: what if a given force changes by X value, or what would it take to make a given factor favorable? You can also funnel these learnings to your strategic plans and risk management activities. Again, the speed that your business environment is changing should dictate the frequency of this activity. For emerging and highly turbulent markets, you should consider putting in place a continuous environmental scanning process.
On a different note, ecosystem modeling allows you to visually diagram the interrelated roles, interactions and influences for your product. This will be a future blog topic.
The next step in your analysis should include the examination of internal organizational dynamics for additional insight. As Christiansen points out in The Innovator’s Solution: Creating and Sustaining Successful Growth
:
A surprising number of innovations fail not because of some fatal technological flaw or because the market isn’t ready. They fail because responsibility to build these businesses is given to managers or organizations whose capabilities aren’t up to the task. Corporate executives make this mistake because most often the very skills that propel an organization to succeed in sustaining circumstances systematically bungle the best ideas for disruptive growth. An organization’s capabilities become its disabilities when disruption is afoot.
Radical innovations especially challenge the established firms as the conflicts can occur within existing resources, established processes and organizational values. Fear of cannabilizing their existing products, and concern for disrupting their well-oiled cash machine can quickly kill new and different ideas. Even when the products make to the market, sales force, unsure of the product and/or compensation models can easily drive potential customers away. This is why the role of senior executives is important, as they can create the needed interference between the new business and mainstream business, and also sense and redirect the business as the circumstances changes and new challenges emerge.
Christiansen also points out that the issue with disruptive innovations are rarely with the technology, but how the market is managed. Sustaining technologies continuously provide improved product performance, at least in theory. (I just had a flash back to the Microsoft Word 6.0 release…) Disruptive technologies on the other hand provide the market a different value proposition. They also tend to lack in product performance, at least in the near term. However, they certainly provide benefits that niche customers demand. As such, identifying this segment of the market, captivating the visionaries and ideal spokes-persons, and selling the value proposition and benefits of the product (selling sushi vs. selling cold dead fish) becomes a key management issue.
These main internal and external factors can also be captured as part of your SWOT analysis (Strengths, Weaknesses, Opportunities and Threats), which deserves a separate post of its own. These tools can collectively provide the needed extra insight for your innovation’s success, as you will have a better understanding of what are the forces, i.e. opportunities and threats — internal and external, surrounding your innovation. Now, grab a pen ‘n paper, and brainstorm forces impacting your innovation while watching the documentary. As always, a bulleted list of items by themselves are not useful on their own, so make sure to funnel them to your innovation and technology management process.
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) As always, there needs to be a balanced approach, as highlighted in Ballmer’s interview with 