Let’s start with the good news: Advances in digitization, biotechnology and smart materials — each representing the convergence of multiple discrete technologies — are increasing opportunities in a wide variety of industries. Major discontinuities in the competitive landscape — deregulation, ubiquitous connectivity and globalization — are further accelerating this trend. As the competitive environment rapidly transforms, the potential for innovation is greater than ever.
And now the bad news: Managers are under overwhelming pressure to create value. Competition is intense, and profit margins are shrinking. Traditional prescriptions such as cost reduction, reengineering and outsourcing, while critically important, cannot solve the problems of margin pressure. The need to innovate is greater than ever.
In this new world, value creation through profitable growth can come only from innovation. But the convergence of industries and the active role of consumers in an increasingly networked society have called into question our basic conception of value and the processes that lead to its creation, including the alchemy of innovation. Managers are discovering that neither value nor innovation can any longer be successfully and sustainably generated through a company-centric, product-and-service-focused prism. A new point of view is required, one that allows individual customers to actively co-construct their own consumption experiences through personalized interaction, thereby co-creating unique value for themselves. There are no best practices to illustrate this perspective because, indeed, no single company can yet be held up as an exemplar of it. Rather we seek to explore next practices, to pick up the early, weak signals of a fundamentally changing paradigm and amplify them into a clearer picture. (See “About the Research.”)
About the Research
This article is not about best practices or current practices. It is about next practices. Therefore, we constructed a research methodology that is appropriate to amplify weak signals, to “connect the dots” as it were. Our goal was to develop a new midlevel theory of value creation and innovation. Our approach was based on synthesis of the early experimentation in a wide variety of industries and companies as well as societal trends. In this article, we use company and industry examples as thinking props to encourage the reader to think differently about value creation and innovation.
The Emerging Competitive Landscape
Converging technologies are causing industry boundaries to shift and blur, changing the very nature of products and services.
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2. There has been a considerable body of research aimed at bringing together user, technology and product use, and market-based and demand perspectives in technology and product innovation efforts. For example, see S.L. Brown and K. Eisenhardt, “Competing on the Edge: Strategy as Structured Chaos” (Boston: Harvard Business School Press, 1998); E. von Hippel, “Perspective: User Toolkits for Innovation,” Journal of Product Innovation Management 18 (July 2001): 247–257; T. Kelley, “The Art of Innovation: Lessons in Creativity From Ideo, America’s Leading Design Company” (New York: Double-day, 2001); W.C. Kim and R.A. Mauborgne, “Value Innovation: The Strategic Logic of High Growth,” Harvard Business Review 75 (January–February 1997): 102–112; D. Leonard-Barton, “Wellsprings of Knowledge: Building and Sustaining the Sources of Innovation” (Boston: Harvard Business School Press, 1995); G.S. Lynn, J.G. Morone and A.S. Paulson, “Marketing and Discontinuous Innovation: The Probe and Learn Process,” California Management Review 38, no. 3 (spring 1996): 8–37; W.J. Orlikowski, “Using Technology and Constituting Structures: A Practice Lens for Studying Technology in Organizations,” Organization Science 11 (July–August 2000): 404–428; S.H. Thomke, “Experimentation Matters: Unlocking the Potential of New Technologies for Innovation” (Boston: Harvard Business School Press, 2003); and S. Vandermerwe, “Customer Capitalism: A New Business Model of Increasing Returns in New Market Spaces” (London: Nicholas Brealey Publishing, 1999).
3. For a technology-, product- and company-centered view of innovation, see C.M. Christensen, “The Innovator’s Dilemma: When New Technologies Cause Great Companies To Fail” (Boston: Harvard Business School Press, 1997); G. Hamel, “Leading the Revolution: How To Thrive in Turbulent Times by Making Innovation a Way of Life” (Boston: Harvard Business School Press, 2000); and M. Tushman and C.A. O’Reilly III, “Winning Through Innovation: A Practical Guide to Leading Organizational Change and Renewal” (Boston: Harvard Business School Press, 1997).
4. A. Carlson, “Strong Medicine,” Context, June–July 2002, 45. For more information on the Medtronic CareLink network, see www.medtronic.com/newsroom/media_kit_CareLink.html.
5. F. Warner, “Detroit Muscle,” Fast Company, June 2002, 88–94.
6. See P. Keegan, “LEGO: Intellectual Property Is Not a Toy,” Business 2.0, October 2001, 90–96; P. Keegan, “Go Forth and Hack,” Business 2.0, November 2001, 38; and M. Pesce, “The Playful World: How Technology Is Transforming Our Imagination” (New York: Ballantine Books, 2000). For more information about the LEGO Group, visit its Web site at www.LEGO.com.
7. For some emerging tools and perspectives on experience design, experience prototyping and experience mapping, see M. Buchenau and J.F. Suri, “Experience Prototyping,” in “Proceedings of the Conference on Designing Interactive Systems: Processes, Practices, Methods and Techniques” (New York: ACM Press, 2000), 424–433; D. Billsus, C.A. Brunk, C. Evans, B. Gladish and M. Pazzani, “The Adaptive Web: Adaptive Web Interfaces for Ubiquitous Web Access,” Communications of the ACM 45, no. 5 (May 2002): 34–38; C. Moore, “The New Heart of Your Brand: Transforming Your Business Through Customer Experience,” Design Management Journal 13, no. 1 (winter 2002): 39–48; and N. Shedroff, “Experience Design” (Indianapolis, Indiana: New Riders Publishing, 2001).
8. C.K. Prahalad and V. Ramaswamy, “The Co-Creation Connection,” strategy+business 27 (Second Quarter 2002): 50–61.