Is your company innovating enough?
Updated: Apr 23, 2021
Innovation is an afterthought or a side project in many companies. Here’s why it is the most important thing your company should focus on.
Why do companies exist?
Companies exist to deliver value to customers and to deliver profit to their shareholders.
The companies that deliver the most value to customers are almost always the ones that generate the highest profit.
Do companies need to innovate?
Executives in companies that have developed a great product or service may think their work is done. They will have happy customers and be generating healthy profits. But here’s the catch. Customer’s needs are constantly changing and the products/services that they want today will not necessarily be the ones they want tomorrow.
There are numerous examples of highly successful companies, such as Nokia or Blockbuster that created immensely valuable products/services but were caught out by changing customer needs and lost much of their market share and profitability.
The graph below shows how revenue fell at Eastman Kodak worldwide from 2005 to 2019. Much of Kodak’s revenue came from selling camera film. When digital cameras arrived on the scene they had an opportunity to innovate, creating new products/services, but they were so focussed on protecting their main revenue source that the opportunity passed them by.
So how can companies continue to offer value and generate a profit when the world is constantly changing? The answer is innovation.
What is innovation?
Innovation is defined as the implementation of ideas that result in new or improved products/services. These new or improved products/services must deliver value to customers.
It’s worth noting that innovation differs from invention. An invention is the creation of something unique or novel. An invention does not necessarily add value. Innovation may not necessarily be unique or novel, but it always adds value.
Innovation examples in the real world
The music industry has gone through many changes over the last 40 years. Each of these changes presented an opportunity to add customer value and generate profit, but the executives at the large music companies repeatedly failed to innovate, putting their very existence at risk.
The compact disc was invented in 1979. It paved the way to switch from analog to digital music. But early discs had an issue that prevented digital music from really taking off - the sound files were huge. Then in 1993, researchers at the Fraunhofer Institute invented a way to shrink music files by a factor of 10. They called it MP3. The invention of MP3 led to several radical innovations.
In the 1990s music executives were focused on selling CDs to generate profit. CDs were cheap to make and had a large profit margin. Customers were hungry for music but were forced to pay for an entire album even if they only wanted one or two songs.
There was an opportunity here to create more value for the customers, but the music executives were only interested in selling more CDs. Shawn Fanning saw the opportunity and created Napster in 1999.
Napster (an innovation based on the invention of MP3 and the internet) allowed users to find and share MP3 tracks with each other. The music industry was caught unawares and by the time Napster was shut down in 2001, it had 60 million users, a vast library of music, and many copy-cat services. Whilst it infringed copyright law, Napster definitely delivered value to its customers.
The music industry had an opportunity to learn from the value delivered by Napster and build a service to allow customers to legally buy music tracks online, but they were still focused on selling CDs.
Steve Jobs saw the opportunity that they missed. He launched iTunes in 2001, enabling customers to easily buy, upload, organize and play their digitized music, simply and legally. It reigned for years and in 2013, had 575 million active user accounts.
But customers' needs continued to change and Daniel Ek saw an opportunity to create value for customers in a different way - streaming. Once again the music executives missed this opportunity. Ek launched a music streaming service called Spotify in 2008.
Daniel Ek said that Spotify was a direct byproduct of his love for Napster, and his desire to create a similar experience for users. He convinced the music labels to agree to have their songs on the platform and would advertise or charge a monthly subscription fee to generate the license fee. In 2020 Spotify had 155M paying subscribers. As music streaming services such as Spotify, Apple Music, and Tidal increased in popularity, iTunes' customer base began to shrink. It was eventually shut down in 2019.
The graph below shows music revenue adjusted for inflation. The launch of Napser in 1999 sparked a 15-year decline in revenue. The music industry only started to see growth in revenue in 2015, thanks to the value offered to customers by streaming services such as Spotify. Had the music companies innovated more, their decline would have been less severe and they would have achieved growth sooner than they did. They also wouldn't have had to share their revenue with Apple or Spotify.
This example shows the power of delivering value to customers through innovation. The music industry had several opportunities to innovate but failed to act. This gave Napster, iTunes, and Spotify a chance to dominate the market, and in iTunes and Spotify’s case, generate billions in revenue.
By failing to innovate companies put everything at risk. Yet, if innovation is given sufficient priority within the company it can be the reason for continued success, growth, and profit. That’s why innovation is the most important thing every company should focus on.