Introduction to Innovation

The Netflix and Chill case study showed how Netflix competing against Blockbuster was like the David versus Goliath scenario. When co-founders Reed Hastings and Marc Randolph launched Netflix in 1997, Blockbuster was already the undisputed champion of the video rental industry for many years. Between 1985 and 1992, Blockbuster grew from one location in Dallas to more than 2,800 video rental stores worldwide.

Yet, Netflix managed to turn the tables. As of 2018, Netflix had a stock market value of nearly $165 billion with 130 million subscribers across 200 countries. In contrast, Blockbuster went out of business, having filed for bankruptcy in 2010, after incurring more than $1 billion in losses the previous year. All because Netflix seized one opportunity after another while Blockbuster was refusing them. Netflix’s business began by allowing customers to rent one DVD at a time on their website and receive it by mail, for as long as they like and for as many times as they want, for a fixed monthly subscription fee. When the customers finish watching the DVD, they could simply return it to Netflix by mail and receive another one.

In contrast, Blockbuster kept charging the customers a fee per video rental for a stipulated period in their brick-and-mortar stores. In 2007, Netflix also introduced an online streaming system where customers could instantly watch the movies on its website. Netflix embraced this opportunity with faster bandwidth and higher download speeds, thus shifting away from the mailing business operation to a digital one.

Although organisations can determine their competitive advantage on their size, capabilities, and possession of resources, Netflix is just one among many other organisations that started with limited resources and few capabilities but still triumphed in its industry because it managed to combine its resources and capabilities in such a manner to create novelty in its offers. In other words, it succeeded through innovation.

As the Core Competencies article explains, capabilities and resources are power sources. They maximise the organisations’ profits, reduce costs, attract more talent, and attract new customers. Innovation exists to make these sources even more powerful. It endows the resources with new opportunities to be utilised and sold to generate money. It makes natural resources valuable. For instance, before people perceived oil as black gold, this natural resource was insignificant to society. Oil as a raw material had no value, and few were interested in purchasing it. However, when the co-founder of Standard Oil, John Rockefeller, started to refine oil into kerosene to power the factories, trains, and heaters in homes, its demand increased and became more expensive than gold.

The same holds for human resources, not just natural ones. There is no more significant resource than the human one. However, human resources without skills and purchasing power have no value. Employees without skills cannot produce anything, and customers without money cannot purchase anything. For instance, in the early nineteenth century, American farmers could not afford to invest in machinery, albeit there was a demand for it. They had no purchasing power. Many harvesting machines were available on the market that could improve the amount and quality of their productivity. But regardless of how much they wanted, few farmers could afford to buy them. They simply had not enough cash from past savings. When one of the harvesting-machine inventors, Cyrus McCormick, introduced the instalment payment system, the farmers could now purchase these machines. It was a buy-now-and-pay-later sort of scheme. McCormick did not come up with a cheaper harvesting machine. He simply innovated the way farmers could pay for such machinery, so they became profitable customers.

McCormick’s innovation does not seem to be a technological one. Indeed, innovation comes in different shapes and forms, as one can learn from Doblin’s Ten Types of Innovation article. What is essential is not the type of innovation but what innovation intends to achieve. What granted the newspaper access to everybody, for example, was not Ottmar Mergenthaler’s invention of the Linotype, which enabled many publishing houses to print newspapers quicker and cheaper due to large volumes. It was the idea of publishers like Adolph Ochs who introduced paid advertisements in the newspapers and distributed them to anyone who could read. Since the newspapers were gratis, they could reach a much larger audience, and thus, various organisations were willing to pay a fee to issue their advertisement in the newspaper. The media houses no longer did they need to sell their newspapers. They could even give them away because they were already generating enough money from advertisements.

Another fascinating example of innovation is Facebook. Many people argue that Facebook is an incredible technological innovation by co-founder and software engineer Mark Zuckerberg. However, its value was neither derived from software development nor because it was free. It was derived from social interaction features to express a human response, such as the Like button. When the users click the “Like” button to express their approval on the content they can see on their newsfeed. With such expressions, Facebook can track their preferences and engagement for advertising purposes. Specifically, it could find out what people like and then publish more appropriate sponsored advertisements based on a user’s preferences and tastes. Facebook does not generate money by selling anything. It only makes money through a systematically advertising approach. These advertisers can know exactly whom they shall target and how they can influence them. As the saying goes, “if you’re not paying for the product, you are the product.” And that is precisely the innovation of Facebook; it made the users, instead of its platform, the product for advertisers. Facebook innovated the users, not the platform.

Innovation, as the examples of this article demonstrated, does not necessarily have to be a technological one. Technology is only part of the bigger picture of innovation. Cyrus McCormick’s instalment payment system and newspaper advertisements are perhaps among the most impactful innovations without much use of technologies. Whatever the motivation – be it money, power, curiosity, or fame – the innovative organisation strives to increase its value or find a way to increase such value, usually through resources and capabilities, be it natural or human.

The empowerment of resources and capabilities is just one part of the bigger picture of innovation. One should keep in mind that any of the organisation’s resources and capabilities are not an end but more a means. The bigger picture of innovation is the art and science of combining and exploiting the organisation’s resources and capabilities creatively for a valuable result: a novel, and yet commercially feasible. For instance, Cyrus McCormick’s instalment payment system has purposely occurred to increase harvesting machinery sales.

This comes with a procedure to what Drucker (1985) describes as systematic innovation. In the sense that innovation occurs in a thorough way and not by coincidence or randomness. A procedure to innovate must be done consciously, purposefully, and systematically to achieve something that is novel and yet commercially feasible. The how and when the resources and capabilities are combined will follow a procedure to search for opportunities and seize them. These opportunities emerge from various sources that are outlined in the article Sources for Innovation. The first four sources lie within the enterprise, whether a business or public-service institution or within an industry or service sector. They are therefore visible primarily to people within that industry.

There are still innovations that spring from a flash of genius without much of a procedure or purpose. Some innovations occur out of serendipity. Most innovations, however, result from a conscious, purposeful search for opportunities from various sources and a systematic way to seize them. For this reason, one should innovate properly, learn how to be an innovator, manage innovation, and maintain an organisational culture to promote innovation, as discussed in the articles Maintaining a Culture for Innovation, Managing Innovation, Innovating Properly, and Setting an Innovator’s Mind.

The essence of entrepreneurship is to create value for potential customers, often in the form of a product, and capture another value in return, usually in the form of money. While marketing exists to promote the created value, innovation exists to increase or enhance such value. Innovation does not occur by coincidence, so every organisation should thrive to gain the know-how of innovating.