innovation

COULD YOUR BUSINESS EXPLORE PARALLEL TRANSFORMATION?

At some point in a company’s journey, the products can begin to become a bit stale. New launches appear as barely disguised maintenance releases, with the wow-factor of the original product a distant memory. Customers can begin to feel taken for granted and may start to look elsewhere for solutions to their problems. Or perhaps they just want a change from using what has basically been the same product for years and years.

This is not new, but it is often a trap that companies fall into, particularly when there is a continuous revenue stream and high profits. They kid themselves that the market is stable and stability is profitable. Yet, when a competitor makes a major leap forward or the customer need suddenly moves on, the company can be left behind, not knowing how to survive.

Technology Lifecycles

When we look back through history, we can clearly see that each different technology, and the products created from it, has a lifecycle, from initial conception through to practical limitation. Richard Foster realised that an individual technology lifecycle could be described using a technology s-curve diagram to plot engineering effort against product performance, and talks about this in detail in his book, “Innovation: The Attacker’s Advantage“.

techology_s_curve
Technology S-Curve Theory (Foster, 1986)

Initial intensive engineering effort is required to bring a technology to market. As new mastery of the technology is learnt, engineering effort produces increased product performance gains. This continues until the approach of the technology’s limitations where additional engineering effort struggles to produce increases in product performance. At this point companies can be tempted to rest of their laurels, reaping high profits, while justifying little R&D effort due to its futility of high cost for little gain.

However, this approach ignores the likelihood that another technology s-curve is in ascendance. Sometimes a company may see a competitor developing a product around new technology and dismiss its possibilities. Sometimes they may see the potential, but are too afraid to jump for fear of wasting the huge R&D effort that has been invested in the older technology. And other times, the new technology may have such large barriers to entry that the company may decide to just sit back and see how it pans out.

On the customer side, they may be intrigued by a new product or technology, but the drive to buy it could be determined by many factors. Perhaps the current products on the market are good enough, or perhaps the new technology is just too expensive, or not convenient to use. Or, perhaps this new product captures the customers’ imagination and they see it as the best thing to ever happen to them.

A Dilemma for Management

The reality is that we do not know for absolute certainty what will happen. Yes, we can do market surveys and prototype concepts, but we do not know that a product will sell, and therefore be a successful innovation, until it is on the market and actually selling.

This concept of overlapping technology s-curves and the dilemma facing management can be easily seen if we look at the example of home movie viewing.

Although we could go back further, I am choosing to demonstrate this starting with a format we will all hopefully still recognised – DVDs. Although DVDs are still marketed, they have already demonstrated their technical limitations, especially regarding storage capacity. Innovation continued with the Blu-Ray technology s-curve while DVD entered its own maturity stage. Blu-Ray offers enhanced storage capacity enabling high definition video, improved audio, 3D movies, and interactivity, all while maintaining the same physical disc size compared to DVD. However, the price of Blu-Ray discs and equipment is higher than DVD, giving continued life to the previous innovation.

This overlapping of technology s-curves is then seen again with digital streaming innovating beyond the limitations of Blu-Ray. Streaming removes the logistical needs of a disc. Improvements in customer experience are also achieved with an extensive selection of movies being available instantly and at low cost. However, this innovation comes with its own limitations. Digital streaming requires an internet connection, can reduce picture quality, and hinders the market in gift giving.

If a company were to completely stop using DVD technology and move to Blue-Ray they would have moved to the latest technology of the time, but would have lost the customers who did not move from DVD. Additionally, the company would have made an investment in a technology that was soon replaced in many homes with digital streaming.

Often managers fight against disruptive technology, wishing to keep the company in the perceived safety of their current cash-cow. With the story of home movie viewing moving from DVD to Blue-Ray technology, perhaps these managers would have been proved right. They could have escaped having to make a large investment in a new technology, while retaining their customer base on DVDs. However, if the same managers continued to be fearful of disruptive technology, perhaps they would have also resisted the move to home streaming. If your business was video rental store, you would have probably received a bonus for decided to primarily stock DVDs instead of converting over to the little used Blue-Ray format. However, in continuing to play the fearful card you would have likely lost your job over not moving into streaming – has anyone seen a video store recently?

So, in this example we can see that the same managers making the same decision were the first time correct in their decision making, but were wrong the second time. They are only human afterall, and cannot be expected to be able to predict the future.

Is There Another Approach? – Parallel Transformation

There is however another way. Rather than relying on managers to make big calls and gamble the whole company’s future, instead a company can perform a parallel transformation. With this concept a company will both continue with incremental innovations around its core product line and technologies, while also setting up a new area of the business to explore new products and technologies. Clark Gilbert and his colleagues Matthew Eyring and Richard Foster write about this in their Harvard Business Review article on Two Routes to Resilience.

Using our example of a video rental store, the management would continue to perform incremental innovations on the core products and with the current technologies. For example, they could extend the opening hours, make it easier to pickup and drop off DVDs. Perhaps they could start a subscription scheme where customers could rent as many DVDs as they like for a flat monthly fee. Good ideas, but still using the same core product and technology. But with parallel transformation, management should also create a new business unit that explores new technology and looks at how they could create a new product for their customer base. In our example this would be starting a video streaming business unit.

Autonomous Business Units

This concept of parallel transformation is different from having a small innovation unit within a business. Instead, the idea is to have an autonomous, disruptive business unit that can develop its own innovations without fear of being stopped by the legacy side of the company. Ideally it will also have its own go to market.

The separation and autonomy of this new business unit is important as a method of preventing management from the legacy business, who have vested interests in current products, from blocking progress. Any manager getting a financial bonus related to how many DVDs were rented would certainly be against the idea of a streaming company taking away the customers.

However, although it is autonomous, this business unit still needs the financial resources of the larger company to protect it while it finds its feet and speculates in new technology areas. It needs to have the room to take risks and innovate.

An Eventual Pivot?

The parallel transformation strategy would enable a company to continue protecting and profiting from their main product lines with their current technology, while enabling unhindered experimenting with new technology s-curves in other product areas. If a new product line or technology shows potential, the investment can be ramped up, regardless of whether it moves customers over from the core business. For, isn’t it better that the customers migrate to a new product within the same company family rather than eventually go to a competing company? In an ultimate scenario, the new product line may be so successful that the whole company pivots to this being its main focus.

Keeping the Messaging Clear

When performing a parallel transformation of a business it is important to keep communicating with employees and customers. The messaging should be clear. It could be dangerous to the company’s reputation and profits if current customers (and legacy employees) feel they are being abandoned while the company focuses on a completely new area. If this is the message that is going out, then it is wrong.

Parallel transformation is not about abandoning one part of the business in favour of another part. The company should still strongly invest in the legacy side. Incremental innovations, new product launches, and schemes to retain customers should still continue. If anything, this legacy side of the business should be in competition with the new innovations business unit, fighting to keep its customers.

The messaging should explain to customers and employees that the legacy side of the business is still very exciting and has lots of opportunity. That it is the best place for customers and employees to be. Where possible the two sides of the business should try not to contradict each other. Instead, each side should highlight the strengths in its own product lines, rather than talk about the weaknesses in the others. The car industry is getting good at this, with the combustion engine side of the business talking up the power and long drive opportunities in its range, while the electric side of the business emphasises its green credentials.

Concluding Remarks

Every company can execute a parallel transformation strategy. It does not need to start big. Perhaps it could start as only a small business unit with a couple of people discussing ideas, while sharing the resources of the rest of the company. But importantly, with the authority from the top to be independently minded. Then as the ideas grow, the business unit can grow.

I challenge you to try this in your company. The idea may be shot down, but then try again. Remind your boss that they do not want to be known as the next case study for lack of innovation, like Blockbuster (who?) or Kodak (such potential but no).

Let me know any questions you may have in the comments and I will try to help.

2 comments

  1. Interesting article. Apple have lost their way with iPhone having been caught up by Android. What do you think Apple could do to regain their leadership position?

    1. Hi.

      Thank you for reading my blog. You raise an interesting question about Apple and how they are doing their innovation. If you had raised this question a couple of years ago, I would have fully agreed that Apple had become stale, and were losing ground to Google’s Android operating system and the associated handsets.

      However, what we have seen in the last couple of years is Apple embrace a strategy that has many features of parallel transformation. As Apple continue to perform incremental innovation on their iPhone, iPad, Apple Watch and the iOS app purchase marketplace, they have also been building up a subscription business.

      This can be seen recently with the fitness subscription service, Apple Fitness +. https://www.runnersworld.com/news/a33605039/apple-fitness-subscription-package/

      Not only is this innovation opening a new area of business to Apple, it is also a threat to their original business model – why would competing fitness companies want to develop apps for iOS or want to support Apple products if they could lose customers to an Apple subscription! Because of this threat, there were likely many managers within Apple who would have been against this new business area. Instead, they would have wanted to protect the current business model of making money from the commission on sales of other people’s apps, and in-app purchases.

      Apple are showing that they can embrace other business areas, without being overly protective of the legacy business model. In doing so, they have the potential to continue innovating and become leaders in their field again.

      Importantly they are not simply pivoting to subscription. They are still innovating in the earlier business areas. But they are also explore new areas.

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