Issue 7 : The Innovator’s Dilemma
Why it’s so fundamental to Digital Transformation
Good morning, from the eastern Caribbean, its sunny, warm and very dry here currently. We’ve had a couple of local brush fires with one getting perilously close to housing. Well, it’s Issue 7 already, and others are in the works, thank you for being loyal readers.
This week’s issue dabbles in a little theory — bear with me — it’s not as heavy as previous issues, I hope the illustrations will help you relate. Enjoy and let me have your feedback, it really helps.
Lastly, today is World Water Day, clearly water will become more and more of an issue in the world as we simultaneously increase our population and continue heating the planet. Digital Transformation can help optimise water usage and I heard of an experiment in Martinique by a local water authority, I'm gathering research to write about it in the near future.
On to the update.
Many of you will have seen or read about Facebook’s recent pivot to a more privacy-based social network entitled “Privacy-Focused Vision for Social Networking”. It is absolutely absurd to think this is a change to Facebook’s core product, which is, targeted advertising. This is a completely separate product strategy, with focus on messaging, and in some respects only continues the original purpose of WhatsApp before it was acquired by Facebook. Although, this being Facebook, many questions are left to understand what business model they will employ to gouge money from us… I’m sceptical, to say the least.
However, credit where credit is due, this is an extremely smart decision by Facebook for two reasons, and it serves as a lesson for smaller businesses on the road to Digital Transformation. Let’s take a look at each one.
Taxing and Crediting Strategies
The first reason is something that Ben Thompson coined as “Strategy Credit”. Facebook has, within a 3000 word post from its (I’ll let you insert your own adjective here) CEO Mark Zuckerberg, using its own product, gained attention of not only the tech media, but also the general media in a strategy designed to sway public opinion from the ghoul that Facebook ‘used to be’, in to the angel with a product that “cares” about your privacy.
The definition of a Strategy Credit is, “an uncomplicated decision that makes a company look good relative to other companies who face much more significant trade-offs”, as defined by Ben Thompson. Another great example is that of Apple’s strategy credit when talking about privacy. Apple’s efforts in AI and ML start and are processed on device with no personally identifiable data sent to Apple. That’s the credit that Apple can publicise as it actually costs them nothing because the system was originally designed that way from the outset.
The inverse is a Strategy Tax, whereby the company designing and implementing a strategy unwittingly reduces or otherwise cripples itself in perception and credibility. An example, and a real classic is what is known as the Osborne Effect. Adam Osborne, the CEO of Osborne Computer Corporation, announced that new generations, the Osborne Executive and the Osborne Vixen, were to be better, faster, cheaper than the current model, the Osborne 1. He was actually very honest and very accurate, but unknowingly to him, this “taxed” his strategy, because the bottom fell out of his current sales book because everyone suddenly wanted the ‘new’ thing and not the old one, which put his company in financial ruin in a very short space of time. So much so in fact, that the company went bust before the next generation machine was ever released to market, in turn killing completely the Osborne Computer Corporation and all its products. Incidentally, the term strategy tax was first coined inside Microsoft in the early 1980s.
The Osborne 1, courtesy of oldcomputers.net
Facebook’s Strategy Credit is its ability to say that it is secure and privacy-focused now, and that Apple is not. Facebook cited the fact that they would under no circumstances operate data centres in countries where the ruling regimes have sketchy privacy records, whilst not naming Apple directly, everyone knew they meant China and that they got a free dig at Apple. Apple has openly stated that it operates its iCloud services in China using the data centres and infrastructure of a China-based organisation (Guizhou-Cloud Big Data) which has strong links to the Chinese Communist Party and the government of Guizhou.
One last point, I touched upon in the early part of this discussion, Facebook and more specifically Mark Zuckerberg, use their own tools to publicise their strategy, choosing not to go through a PR firm or announce to the press. They have that much power and they know it, which is one of the reasons why the Strategy Credit move was a smart move. Remember this initiative is in addition to their core products.
The second reason makes me believe that Facebook is well aware of what is termed the Innovator’s Dilemma; whereby successful companies and business models can do everything right and yet lose market share or even completely fail due to new and unexpected competitors entering and eventually taking over market share.
This is a common threat when you are dealing with digital products and services. By definition, digital goods are easier to distribute and copy but more importantly, if your clients see a new product or service and that their sunk costs are sufficiently low as to avoid the sunk cost fallacy — I wrote about it briefly in Issue 4 : The Digital Transformation Model in detail:
The sunk cost fallacy explains why, when faced with difficulties to complete a given project, we have a tendency to stick to the original plans in proportion to the amount of time and money invested. That is to say, having already spent a ton of money on a project that is clearly destined to fail (where the evidence is there to prove it), the scope is often revised in order to finish a project, even if it isn’t the project.
The following graphic I made attempts to articulate this dilemma:
The orange line traces the lifecycle of product A that has some success in the market, but as we can see product B, represented by the blue line, has started to gain some traction, but not currently enough to be on the radar of the company selling product A. As the revenue hits the peak and starts to decline we see that product B has gained more sales, so much in fact, that it has become a real threat to product A — this usually happens because it resolves the jobs to be done of product A, either faster, better or cheaper than product A — eventually overtaking product A to render product A obsolete and thereby cutting off revenue for the company selling product A.
Obviously, the best position to be in is that of the original innovator and the disruptive innovator in order to profit from the new product. That’s easier said than done. However, let’s look at an example of such a move.
In 2001, Apple Computer, Inc., launched a surprise product that could hold “1000 songs in your pocket”, the original iPod. Many years and generations later the iPod reached all-time sales numbers with nearly 54 million in 2008, as shown in the chart below. This was by far the most successful electronics product of its era.
Source: MySchizoBuddy - Own work, CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=7047449
Apple realised that these sales numbers couldn’t continue forever just by iterating on the core product, so it set about producing a whole new product category, which eventually was released as the iPhone. The iPhone solved the innovator’s dilemma and its sales dwarfed those of the iPod, completely cannibalising the original product. In fact, during the keynote presentation — still one of the most remarkable presentations of a product — Steve Jobs even said it had amongst its three tent-pole features, the first being a wide-screen iPod with touch controls. The chart below illustrates this well. If I were to chart Average Selling Price (ASP), the difference would be even more flagrant, as the ASP of the iPhone is way higher than that of the iPod.
Incidentally, it’s common to mistake iteration for innovation, it’s not! I should write about that in the future… Note to self.
Facebook has been almost as ruthless as Google when it comes to killing off projects that are going nowhere, Notify, Parse, Deals, Gifts, Offers, Inbox, to name a few. They have additionally been as ruthless in their acquisition of potential threats to their business, illegally so, some would say. Their acquisition of Instagram was to head off the very real threat of Snapchat, and the purchase of WhatsApp served a similar purpose.
If you don’t innovate, someone else will
So why is it so important in Digital Transformation? The sub-heading explains pretty much all you need to know. If you don’t innovate, someone else will, and they’ll pull the rug from under your feet when you least expect it.
If you are currently going through, or are about to start your Digital Transformation journey these are some of the concepts you need to understand. For further reading, I recommend the books by Clayton Christensen, the Innovator’s Dilemma and the Innovator’s Solution.
What Customers Want from Your Products - Harvard Business School
A short, but concise article about the concept of jobs to be done. Although written in 2006, it’s still a good primer to understand the concept.
By understanding the job and improving the product's social, functional, and emotional dimensions so that it did the job better, the company's milkshakes would gain share against the real competition—not just competing chains' milk shakes but bananas, boredom, and bagels. This would grow the category, which brings us to an important point: Job-defined markets are generally much larger than product category-defined markets. Marketers who are stuck in the mental trap that equates market size with product categories don't understand whom they are competing against from the customer's point of view.
30 years on, what’s next #ForTheWeb? - web foundation.org
An open letter from the World Wide Web’s creator, Sir Tim Berners-Lee. Despite the current climate, he remains positive, whilst simultaneously acknowledging the dangers. I think the web has so far been an overall positive for society and I’m hoping it will stay that way.
French-founded digital health startup Doctolib raises €150 million at a €1 billion valuation - tech.eu
Not all unicorns are born in the USA. A good example of Digital Transformation in practice is what Doctolib is. It solves not only the problem of discovery, which is essential for internet businesses, but it additionally reduces friction for patients needing to get to a doctor, with even a possibility to get an appointment that day. Doctor’s Surgeries also benefit from reducing their administrative burden, allowing them to concentrate on their value-add and not bookings and cancellations. To be truly successful, the platform needs to expand, and this funding should help them do just that. Their business model is simple, a subscription for the professionals and a free to use application for patients, ensuring demand is high enough to enhance supply.
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