Innovation

All You Have is Marketing and Innovation. And Innovation Comes Second.

Sam Frentzel-Beyme Follow Managing Partner & Strategy Director

The Short of It

  • The purpose of a business is to create a customer.
  • Being able to "create a customer" requires knowing and understanding exactly who your customer is.
  • Marketing is the collective set of activities focused on knowing and communicating with customers in a way that allows a product or service to "sell itself" .

In a previous post, we broke down this phrase by Peter Drucker:

“Because the purpose of business is to create a customer, the business enterprise has two—and only two—basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.”

In that post, we really focused on his definition of marketing and how it creates value for the firm. We honed in on that last phrase, “Marketing is the distinguishing, unique function of the business.”

But in this post, we’ll look at his take on innovation. Using the Google ngram viewer, we can see that the term still captures our interest.

 

The difficulty with a term that has been used so broadly is the dilution of its meaning. Without a clear definition, there is limited practicality in terms of usage. So what does Drucker have to say about innovation? Here is an excerpt from an HBR article titled The Discipline of Innovation.

“Innovation is the specific function of entrepreneurship, whether in an existing business, a public service institution, or a new venture started by a lone individual in the family kitchen. It is the means by which the entrepreneur either creates new wealth-producing resources or endows existing resources with enhanced potential for creating wealth.”

Drucker embeds the context of innovation within entrepreneurship and his take from there is also worth a read:

“Today, much confusion exists about the proper definition of entrepreneurship. Some observers use the term to refer to all small businesses; others, to all new businesses. In practice, however, a great many well-established businesses engage in highly successful entrepreneurship. The term, then, refers not to an enterprise’s size or age, but to a certain kind of activity. At the heart of that activity is innovation: the effort to create purposeful, focused change in an enterprise’s economic or social potential.”

Combining these, we find entrepreneurship with innovation at its core. First, Drucker saw entrepreneurs as those that are able to either create wealth-producing resources (companies) or to repurpose existing wealth-producing resources to enhance their wealth-producing capability. Second, he saw innovation at the heart of creating wealth because entrepreneurs need something, an impetus or insight, that unlocks potential—something valuable that others don’t or can’t see.

The critical insight here is that innovation is a mechanism that can create change. If a company is not doing well on any single economic metric (revenue, margins, costs, etc.), an innovative company will have a way to create a change in that metric. It won’t just wait for it to improve on its own.

Social potential is a broader notion and Drucker doesn’t specifically drill down into what he meant here. But one possible interpretation is to look at how an organization can make people’s lives better and thereby positively impact society. This is significantly more difficult than just focusing on a product or service because it means that an organization must have a clear mechanism for overcoming the bias to what already exists now.

If we think of the evolution of any new product, it had to develop in the context of its absence. For most people, the absence of something means that there is a lack of opportunity. For the innovation-driven company, the absence of a methodology is simply positive confirmation that there could be another way.

To give an idea of how hard this is, take a look at everything you do in your own life. Now try to imagine a world where none of what you do now exists and instead is done in a completely new way. Now try to imagine convincing your friends and family to invest in a company that will build the services or products required for that new way of living. Imagine the sighs and polite stares of consolation as they say they’ll take a pass. Now imagine trying to convince a new group of people to come on board to help. Now imagine that accomplishing your goal takes several years, all the while people are looking on at what you’re doing and shaking their heads.

A nice example of this process playing out is the transformation in the mobile phone space. In the pre-iPhone era of 2006, this was the most popular mobile phone.

In June 2007, Apple launched the iPhone and tried to redefine the global perspective: a phone was no longer just a phone, it was a mobile personal computer:

 

Here is the launch video, which is a good lesson in storytelling in and of itself:

Apple 2007 launch

And here is how the story was communicated:

Apple ad video

Did this mean that the world changed its perspective overnight? No.

In 2007, Apple only shipped 2.3 million units (0.2%) compared to the 435 million units that were shipped by Nokia. In the year of its launch, Apple’s iPhone was a minuscule fraction of overall sales, while Nokia and Motorola commanded 37.8% and 14.3% of the market share, respectively.

But large-scale changes take time. History shows us that societal change is a slow and vetted process. Thus, it is over extended periods of time that we must look for clues as to whether firms are truly innovative. Here is how the story played out:

 

Jumping to 2016 Q4, we find that Apple have sold 77 million units for #1 market share at 17.9% with Samsung at #2, just a hair behind at 17.8% with 76.8 million units. And where is Nokia? After a decline in the market brought about by Apple and rival mobile OS Android, it worked to recover. This included a partnership with Microsoft in 2011 and the subsequent selling of its mobile device business in 2013 for a total value of $6.5 billion. But as the chart below shows, that didn’t help.

 Business Insider graphic

In 2015, Microsoft took a $7.6 billion write-down and sold the Nokia feature phones (lower end mobile devices) to FoxConn for $350 million. Microsoft is effectively out of the smartphone business and the Nokia brand is now controlled by HMD Global, which again focuses on feature phones. And this is what a 2015 typical feature phone looks like:

 

In the end, talking about innovation is ultimately a discussion of the self. Only when moving beyond the confines of our bounded rationality, can we attempt to make truly innovative breakthroughs. Richard Feynman had it right when he said:

"The first principle is that you must not fool yourself—and you are the easiest person to fool."

The hardest part of innovation is breaking through to that which we don’t know. There is a concept called the Johari window, which states that there are just four perspectives.

  • Known, knowns
  • Known, unknowns
  • Unknown, knowns
  • Unknown, unknowns

Drucker asserted that without a concentrated “effort to create purposeful, focused change,” it is impossible for an organization to push into new areas of opportunity. The sad fact is that for many companies this is turning out to be true.

Organizations are spending more time simply keeping up with the existing technology, tools and frameworks. And this means there is little time left to focus on the what could be possible. These companies will find that one day their industry simply no longer exists. At that point, the pivot will come too late.

But there is good news. With more companies focused only what is possible now, there is a growing opportunity for those leaders willing to dedicate time and resources to seeking out opportunities for market redefinition and new category ownership.

Sources:

Every week, we highlight key transformations and trends. Follow us on Twitter.