Who Makes The Real Money In Innovation?21 September, 2017 / Articles
Everyone talks about innovation. Many governments, universities, and corporations spend fortunes to innovate – to develop new businesses that can create wealth and jobs. But the real money in new products and emerging industries has been made by billion-dollar entrepreneurs, such as Gates, Jobs, Dell, Page-Brin, and Zuckerberg. They have become among the world’s richest individuals by using innovations.
How exactly have they used innovation?
Billion-dollar entrepreneurs have mainly focused on innovative business strategies that takes advantage of products or services developed by others. They “improve” the product, or they focus on a customer segment that offers a long-term edge over competitors. They don’t start with a blank sheet to come up with a “Eureka” product. They improve on other people’s innovations. Then they find a trend that will help them grow and dominate an emerging industry.
Sam Walton imitated the big-box trend along with Target and K-Mart, but decided to grow in small towns where he had to beat small retailers, while the other giants focused on urban areas. Then he expanded to urban America and beat Kmart and Target to become the largest. They believed, until it was too late, that they could not make a profit in small towns.
Mark Zuckerberg copied Myspace to develop a linking site. However, he innovated in the business strategy and focused his efforts on college students. University students were in the vanguard of using the Internet for social reasons, and Zuckerberg helped them along.
Google did not invent the search engine, but improved it based on the needs of web users looking for a rational method to get search results. This gave Google an edge to dominate search for the last two decades.
Travis Kalanick succeeded by developing a better business strategy than a better product. The only difference was that he improved on himself. His initial effort with Uber was to develop an app to help people get limo rides. Uber took off when he switched his business strategy to make it possible for any driver to give a ride to any passenger. This new business model is changing the world of transportation.
Business strategies are also innovating rapidly in other industries, where companies are in danger of losing out to corporations and ventures that know how to succeed in the new trends:
- Large banks, such as JP Morgan and Goldman Sachs, are developing new business models by forming alliances with online lenders for small-business loans (Economist, 12/5/2015, page 74). Small banks – watch out. You’ll be losing a very profitable segment of your business soon.
- Kiko, an Italian company, is bringing fast-fashion business models used by Zara and H&M to the cosmetics industry (Economist, 12/5/2015, page 65). This will affect all fashion retailers.
- Smart cars are all the rage in Silicon Valley with Google and Apple working on, or considering self-driving cars (I’d like to see them test this in Mumbai or Panama). Car manufacturers such as Ford and GM will be relegated to metal benders unless they develop the intelligence needed.
So what does all this mean?
For entrepreneurs: Many entrepreneurs focus on developing an innovative product or service. Billion-dollar entrepreneurs mainly developed a better business model, or they imitated a business model and managed it better than their competitors. Dick Schulze imitated the pioneer who developed big-box stores for selling consumer electronics, and built Best Buy.
For corporations: Corporations spend billions trying to develop evolutionary improvements for their products, but often lose to better business models. This is how Amazon.com beat Borders, and Barnes and Noble; and how Microsoft beat IBM.
For universities: The highly intelligent people in universities spend a lot of time trying to come up with a better technology. Spending time to develop a better business model, with or without a better technology, may reap more dividends.
For governments: Entrepreneurs can be trained to develop better business models, and do it for less. It is much cheaper than citizens being unemployed or offering tax breaks to VCs outside Silicon Valley.
The next two decades will disrupt more established industries than have been disrupted in the last century. And the list of those becoming obsolete will include universities, retailers, banks, manufacturers, hospitals, fashion and clothing, and travel companies. Get prepared.
MY TAKE: Improve the product. Innovate in the model. Invest in the trend. Eureka is for scientists, not for entrepreneurs. Many entrepreneurs focus on a “new” product or service rather than focusing on the business model and on their leadership skills to dominate an emerging market. They should adjust their focus.