Platt Perspective on Business and Technology

Innovation, disruptive innovation and market volatility 6: modeling and understanding change and innovation per se 5

Posted in macroeconomics by Timothy Platt on November 9, 2014

This is my sixth posting to a series on the economics of innovation, and on how change and innovation can be defined and analyzed in economic and related risk management terms (see Macroeconomics and Business, posting 173 and loosely following for Parts 1-5.)

I initially presented a basic four quadrant graphically organized model for taxonomically classifying proposed innovation developments according to timeframe and risk criteria in Part 3 of this series. And I have been elaborating on that model, adding in real-world complexities since then.

• I focused on how different types of observer/participant can differently view and understand the same innovation opportunity, and on how they can characterize that same potential innovative opportunity differently in this classification model accordingly (see Part 4.)
• And I have explored the issues of insider and outsider participation and how this can influence how an innovation opportunity would be seen and acted upon (see Part 5.)
• And in both cases, how an observer/participant sees a potential innovation-based business opportunity significantly determines what types of strategic and operational approaches they would pursue, and both in deciding whether to participate in this venture and if so, how and with what levels of commitment.
• And up to here I have primarily focused on new innovative opportunity as it might arise in a new business startup or early stage business context. My goal for this installment is to break away from that to discuss innovation in established businesses – and here focusing on situations where an investment would be required that cannot simply be addressed by current staff and skills on-hand, by current capital investment resources, or by current cash flow at hand, and simply as a new element of essentially ongoing business as usual. I focus here on established businesses that seek to develop new innovative business and profit centers that would call for major and even massive new investment and associated risk. Think in terms of a business that has a successful product or service line but that faces potentially massive opportunity from a disruptively new innovation that could open up whole new markets for it, if this innovation can be nurtured to success.

For a still, as of this writing relatively new example consider the first bricks and mortar retail businesses that saw opportunity in being early developers of online sales business. They in most cases had to bring in new personnel with new-to-them sets of skills and experience that they were unfamiliar with managing. They had to make significant investments in computer and related hardware, and in many cases had to purchase a wide range of new licensed software too. They in many cases had to enter into agreements with specialist web development companies, with all of the oversight requirements for making effective use of their services. And their new staff and hardware for this venture generally needed in-house physical space to work in and basic utilities support (e.g. light and heating/air conditioning, etc.) while there, adding to ongoing fixed operating expenses for the business as a whole.

But the businesses that took these steps and accepted these risks and succeeded, in many cases became first-in prime movers in advancing their entire industries and marketplaces, and with first-mover advantage from that from being known as the first, and the premiere online business in their particular market space.

I readily acknowledge that I grossly oversimplify with that cartoon summary example, but the basic principles that I suggest in it hold and widely so when businesses face large buy-in and investment requirements – if they are to gain value from a potential new innovation that they have an option on developing.

• The more minor and even cosmetic an innovation, the less likely it is that a business would see justification in expanding operational capacity or developing new capacity to develop it. (The basic assumption here is that the more minor and marginally incremental in scale the innovation, means the more minor and marginally incremental any potential increased value and profitability obtainable from it.)

One real exception to that would be when the goal is not to create new and dramatically so in what is offered to the marketplace, but rather to bring a perhaps more standard product to market more rapidly and at reduced cost per item to manufacture and distribute, allowing for sale at a lower price point and the capture of increased market share as a result. And then, the marketable product, or service might only be marginally innovative at most but there is still probably a significant level of more genuine and impactful innovation underlying this change – with real and possibly even disruptively novel innovation in business processes.

Another reason why even a more minor or cosmetic product innovation might call for increased productive capacity and associated investments might arise if the marketplace and customer base for this type of offering is rapidly and significantly expanding. But then the business has to ask if this is a fad product development opportunity where new production capacity could become unneeded and a profitless cost-center even as it goes online, or if this increase in perceived market scale and interest represents a more stable and lasting shift. To cover for the fad possibility and for marketplace changes in general, any capital development in productive capacity would be designed to be flexible for repurposing and new use, as the product portfolio offered evolves, and even rapidly and disruptively so to meet changing market demands.

So the point that I raised in my last bullet point before this might or might not be valid depending on key contextual considerations. And how a proposed innovative opportunity might be evaluated according to the Part 3 model would vary accordingly (e.g. whether a given innovation should be viewed and developed more as a quadrant III low risk/short timeframe opportunity and a fad or as a quadrant IV established product opportunity.)

Now let’s consider the basic alternative of overtly novel and disruptive innovations. I am going to turn to that scenario in a growing established business context in my next series installment, and will then compare the issues involved in that scenario to the minor or cosmetic improvements example started here in this posting. Meanwhile, you can find this and related postings at Macroeconomics and Business and its Page 2 continuation.

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