Companies need to shape, not predict, the market

3 October 2017

Companies need to shape, not predict, the market

Instead of just gradually improving or creating new products and services, businesses now need to look at everything that impacts on what they make and how it is used – and shape that wider ecosystem. Nearly always, this will involve collaborating with other firms and players - sometimes even with competitors.

It’s called “market-shaping” or “market innovation”. New Zealand firms seem to have the fundamentals of what it takes to shape markets, but very few are doing it – which is likely resulting in many lost opportunities and product failures.

These are some of the conventional-wisdom-busting conclusions reached by University of Auckland researchers, Associate Professor Suvi Nenonen and Professor Kaj Storbacka, from their three-year research project into market innovation.

“There was a quote from Mahatma Gandhi that we heard more than once from managers of entrepreneur-driven companies: ‘Be the change that you wish to see in the world’,” says Dr Nenonen, who is the director of the Graduate School of Management at the Business School.

“People are beginning to realise that, with the pace of change and digital disruption, you can no longer predict the market, but you can innovate and shape it. You can reconfigure the playing field. The old rules say you have to reactively adapt to the environment that you are part of. The new playbook says: seek to proactively adapt that environment to yourself, so it works better for you and others.”

Market innovation means deliberately shaping existing markets or creating whole new ones. It often involves tech innovations, but not necessarily. It is about identifying the bottlenecks in the wider system – points where the need for a particular resource holds everything up - and fixing them. For instance, switching your business model from selling to leasing machinery means that customers need less capital to acquire the machinery, which makes the market bigger.

Take Apple’s iPhone. It was not the first smartphone, but it was the one that popularised the device, making new customers out of people who had never thought about owning one before. One key to its success was identifying the bottleneck of continuously coming up with enticing new Apps – what actually makes the smartphone smart. So, Apple created the App store, outsourcing this role to app developers and focussing on developing the iPhone hardware and operating system.

“Market innovation is not simply a matter ‘build it and they will come’,” says Dr Nenonen. “Rarely, if ever, will a new technology be so radical and compelling that it spontaneously calls into being a market. Just like the car needed roads and the iPad needed wireless technology, innovations generally need certain conditions to make them viable. These conditions often involve a whole lot of different players, from suppliers and partners to support infrastructures and regulators.

“To make a new market, it’s not enough to create a ‘minimum viable product’; firms now need to identify the ‘minimum viable system’ their product needs.”

Dr Nenonen and Professor Storbacka received a Marsden Grant for their project “Is New Zealand betting on the wrong horse in the international innovation race? The importance of market innovations for small open economies”. They looked at 21 companies from New Zealand, Finland (their birth country), Singapore and Sweden that had a market-shaping innovation, and drilled down into the capabilities and activities which had allowed them to change the rules of the game. Half of the market-shapers they analysed were SMEs, the other half larger companies.

They pinpointed 57 capabilities. Examples were:
• capabilities used by firms to directly influence the market, such as bundling or unbundling products and services, building the infrastructure that supports customers using your product, cutting out middlemen, developing new terminology, creating new technical standards, and influencing regulations
• underlying thinking that supports these capabilities, which includes understanding what creates value to customers, being willing to seek win-win-win scenarios that benefit everyone involved, investing in organisational learning, and adjusting plans accordingly

“Our call to shape markets represents a 180 degree turn for those with a traditional business education,” says Professor Storbacka. “It requires a profound shift in mind-set about how the market works and therefore how to best grow your business. That shift is from fighting for a bigger market share, or piece of the pie (zero-sum game), to baking a bigger pie for everyone (positive-sum game) via systemic innovation.”

Says Dr Nenonen: “Entrepreneurs may intuitively practice some of the marketing-shaping capabilities and activities we identified, but that comes from their personal vision or hunch, not a deeper understanding and systematic approach. With this project, for the first time we’ve provided a playbook and a toolkit for firms of all sizes and at all stages.”

Based on their analysis, the researchers developed a questionnaire to measure market-shaping capabilities in New Zealand firms.

They found the New Zealand managers reported more of the underlying capabilities than the 21 proven shaper case studies they had analysed, but lagged behind in capabilities needed to put it into action, particularly the abilities to:
• Introduce radically new products or services
• Encourage customers to look beyond current use of their product
• Influence what customers are looking for in their product
• Engage with media to influence the language used to report on their industry
• Influence how their industry is measured and reported upon by official bodies

They also found that market innovation pays, leading to sales growth, improved financial performance and market share, and that it can “grow the pie” across sectors.

“It may take a long time, often years, but investment costs are usually considerably lower than in traditional R&D,” says Professor Storbacka.

There is still a place for traditional innovation, they say, but firms need to recognise when to use each approach.

“Our findings raise the question: why are New Zealand firms not realising their potential to shape and innovate markets? Many new products fail – we believe this is because many managers are stuck in the traditional, narrow view of markets that does not allow for market-shaping.”
The pair have co-authored a book on market shaping aimed at managers and entrepreneurs, to be published by Emerald in 2018. Their 2010 book Designing Markets: Are you Market Driven or Market Driving? was awarded best business book in Finland in 2010.

BOX: QUESTIONS FOR FIRMS WANTING TO INNOVATE:
• What is the “system” that has to be there for my customer to reap maximum benefit from my product or service?
• Are there some bottlenecks in that system that limit value creation – either to my customer or our other stakeholders?
• Who could I partner with to eliminate these bottlenecks?
• How will I make sure that everyone in my “minimum viable system” benefits from this change?
• Am I prepared to change my market shaping plan as I learn as I go?
• Am I willing to continue market shaping for a longer period of time (usually market-level change takes years – and it definitely won’t happen in the next financial quarter)?

ends

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