Platt Perspective on Business and Technology

Innovation, disruptive innovation and market volatility 7: modeling and understanding change and innovation per se 6

Posted in macroeconomics by Timothy Platt on December 17, 2014

This is my seventh 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 and Macroeconomics and Business 2, posting 203 for Part 6.)

I began discussing innovation and its development in the context of more established businesses in Part 6 of this series, there focusing on fads and other less disruptively innovative products per se, but ones that would still call for significant business investment to develop and offer. And in the course of that I briefly touched on the issues of developing and utilizing disruptively innovative new business processes. My primary focus in this series is on products and services offered, and particularly on marketable products, but I will have more to add to that part of this overall discussion later on in this series and at least in this context. But I turn here in this installment to more fully consider disruptively innovative market offerings: truly novel new products, that like their less innovative product counterparts of Part 6, would require significant expense and effort to successfully develop, produce and bring to market.

In terms of my Part 3 taxonomic model of innovation types, this means high risk, short timeframe, quadrant I innovations (see that posting and its graphical illustration.)

As just noted, there are two innovation classification variable types in this model:

• Risk levels that would be reasonably expected in the course of developing and refining an innovation possibility into a marketable product, bringing it into production, and bringing it to market, and
• Timeframe expectations before any realization of revenue generation from this new offering and going beyond simple break-even before profit realization can be achieved.

As discussed in Part 3, risk here represents the aggregate balance of potential and likely risks and benefits faced, but with emphasis placed on the risk side of this balance and the possibility that sufficient returns on investment not be realized to even meet minimal desired goals. The more disruptively novel an innovation the greater the risks faced and the less certain the scale of any returns payout, or duration of profitable return if one is realized. First of all, even if a truly novel innovation works and would offer value if purchased and used, its novelty might limit its market penetration to a small percentage of potential buyers, and with them mostly just consisting of pioneer and early adaptors, or niche market participants. That can happen for a variety of reasons with history showing that the emergence of new competing alternatives to be a common enough business failure possibility to always merit consideration and planning for, in new product development and release.

To take that out of the abstract, consider the Betamax format videocassette, initially produced and released to market by Sony on May 10, 1975. This first of kind videocassette innovation was met with a new direct competitor in the form of the Video Home System (VHS) format videocassette, which first came out on September 9, 1976. That gave Sony a 16 month first mover advantage over any competitors but they had enormous difficulty expanding their realized market for their Betamax format out of a small number of early adaptors, as using Beta required making large investments in overall home entertainment equipment that this would be used in, and the overall range and variety of video content that movie producers and others would provide in this format remained limited. These problems in fact fed on each other with low numbers of Betamax systems buyers serving as a barrier to development of new Betamax format content, and lower levels of content availability in turn reducing incentive to buy into this new and expensive consumer market equipment, needed to use these new videocassettes.

JVC, and in August 1977 RCA both learned their necessary lessons from this, and developed VHS as a more readily adaptable format and as a more attractive buy for a wider customer base. And making sure that customers were confident that they would continue to be able to readily, inexpensively obtain movies and other content in VHS was a big part of that.

With that example in mind, I note here that:

• Risk in this context is not simply a measure of perceived and likely risk to the innovation providing business, as if observed in a vacuum.
• Overall, aggregate risk has to include perceived risk from a consumer perspective as that, in the above case would retard diffusion of acceptance of an innovation until competing alternatives can catch up and pass it.
• And aggregate risk also includes potential risk faced by other businesses and even other industries. Here in this example that means content providers who saw greater risk then potential benefit in accepting the costs for putting their content into this new format when it had a small market that did not seem to be growing. And to go back to the second of these three bullet points, this reluctance to develop content in this new videocassette format on the part of movie producing companies and others meant that consumers saw greater risk in buying into this, than benefit to be gained from it – a perfect storm.

And with that, I turn to reconsider timeframes. A meaningful timeframe here should not simply be construed to represent a starting point for level of sales achieved to break even financially and/or develop a profit from an innovative venture. Timeframe more realistically, represents a window of opportunity. And to return at least briefly to my Betamax versus VHS example, Sony was able to achieve some early sales so from a strictly starting-point criterion perspective, they should have been a real success here. Their problem was that a failure to develop for a larger marketplace context of consumer-perceived need and risk meant that their real window of opportunity, and certainly of first mover advantage opportunity, closed before they could realize any significant profits from their innovation.

If a product is said to have been “ahead of its time,” think Betamax and for an automotive second example, think Ford Motor Company’s Edsel. The Edsel was a well build, safe and reliable car that came out at a time when markets and market pressures were demanding larger and larger, and more and more flashy – big cars with tailfins and chrome.

• Consumer “risk” means “will this work for me and meet my needs” but it also means “will this meet my taste requirements and be a product that I would want others to know I use?”

Much of what I write of here would at least in principle apply to less innovative new products, but with less force. The issues that I write of here apply very significantly for more novel and break-away new products and product types, and particularly where they would create what amount to entirely new marketplace and consumer needs and perceived needs if they are to succeed as profitable business ventures. And I finish this by going back to the uncertainty that truly new and novel brings with it, as the more novel and disruptive, the less of a track record of any type that would be available to analyze from, and for identifying effectively interested markets and customer types and even for accurately placing a proposed innovation in its right position in the Part 3 model – where in the model’s quadrant I it would belong.

I began this series in its Part 1 with a focus on product innovation – of innovation that would be directly brought to market for sale. And with that in mind, I will turn in my next series installment to consider more behind the scenes business process innovations as they can facilitate this, and even shift the position of a prospective innovation in where it would fit in the Part 3 model. Meanwhile, you can find this and related postings at Macroeconomics and Business and its Page 2 continuation.

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