Innovation: Increment or Transform?

In the past decade we've seen entire industries face huge transformations, as the digital economy and behavioural change forces entrepreneurs and innovators ask the question, "How Can We Transform Entire Industries?." One of the best ways to look at the possibilities of transformation is to ask yourself, what is a book? As first glance is appears to be a fairly simplistic, straight-forward question. Historical norms would suggest everyone knows what a book is. Or do they? Over the centuries, books were made out of paper. A fusion of paper and ink. While production methods evolved, they remained based on the same idea of producing a physical object for distribution. The creation of the cassette tape gave birth to audiobooks, as millions listened to Tony Robbins on their walkman or daily commute. Then came eBooks, quite popular first as PDF style documents or readers like Amazon's Kindle. The book industry is one of the best ways to show the variations in levels of innovations.

In its simplest forms, there are three levels of innovation that we see. To date, many incumbents chase transformative levels of innovation, but only execute the strategy, tools, and support for lower-level, incremental innovations. The three levels are:

  1. Incremental Innovation. This consists of small, yet meaningful improvements in your products, services, or business increments tend to be the "new and improved" innovations that we frequently see in the market. Based on an existing baseline, these increments tend to be; all-natural flavour  improved packaging, bigger or smaller size, faster or slower functioning, reductions in complexity or cost, heavier or lighter weight. By pinning improvements to a something establish, an innovation can see stronger acceptance rates, prolong the life of the product line, or optimise the profitability. Think Nike's latest runners, Microsoft's updates to MS Office, or McDonald's Double Cheeseburger.
  2. Breakthrough Innovation. At times, innovators can create large leaps forward, beyond the 'new & improved' to change an entire market. The breakthrough tends to give the inventing organisation a market leading position until competitors can catch up. One of the most famous breakthrough innovations of the recent decade is Amazon's Book store, which changed the distribution model of physical books. This model has since been copied, but it created a market leading position.
  3. Transformational Innovation. The deepest form of innovation in which has impact beyond a single market. Transformations tend to change the ecosystem, how we live, how we behave, or create an entirely new ecosystem. Transformative leaps forward usually result in the redundancy of an incumbent. Which means leaps of this size rarely come from an incumbent player, as they avoid the inherit legacy of business models, infrastructure and markets. While transformative innovations are rare, they often have large impacts, and give birth to entirely new industries. While Amazon's Book store was a breakthrough  the transformation came when Amazon launch the Kindle, completely remodelling our thoughts on what a book is. They would have us believe that a book is its content, the physicality of a paper book is redundant.

Transformational innovation tends to be the most desirable amongst entrepreneurs, as it gives them a competitive advantage that incumbents struggle to catch or copy. In one of the most prominent falls from grace, Borders. As of January 30, 2010, the company operated 511 Borders superstores in the US. The company also operated 175 stores in the Waldenbooks Specialty Retail segment, including Waldenbooks, Borders Express, Borders airport stores, and Borders Outlet stores. On February 16, 2011, Borders applied for Chapter 11 bankruptcy protection and began liquidating 226 of its stores in the United States. Borders was not able to find a buyer before its July 17 bidding deadline, and therefore began liquidating its remaining 399 retail outlets on July 22, with the last remaining stores closing their doors on Sunday, September 18, 2011. The Chapter 11 case was ultimately converted to Chapter 7, and rival Barnes & Noble acquired Borders' trademarks and customer list.

Amazon's Kindle had changed the game, consumers behaviour had shifted. In an overwhelming tidal wave, the purely digital distribution of books became the new norm in purchasing a book. Barnes & Noble created the Nook, Apple release iBooks, along with a long list of new market entrants. At its core, the product was redefined and digitalized. Once in new form factor, it unleashed an entirely new ecosystem, distribution and business model. Changes that the industries incumbents, like Borders, couldn't respond fast enough to.

Borders story is not unique, but the alarming piece is it's a trend that many fail to see coming. Blockbuster used to be one of the largest distributors of movies and music, but the rise of iTunes, Spotify, NetFlix, Hulu(all transformative innovations) changed the game, and put them on the sidelines.

So it leaves us with the question, increment or transform. For the majority of large multi-nationals and industry incumbents with deep legacy in brick and mortar models, they continue to seek the incremental innovation path. Bank of America isn't going to close 85% of its branches to reposition for future success. Mobile Operators aren't about to pivot away from the SIM, their core physical tie to their customer. But for each, if a transformative innovator was to gain sufficient scale, they could foreseeably 'change the game' for the incumbents, leading to a story we are very familiar with. The industrial age brought about massive change across multiple industries. And I feel the information or digital era will have the same effort.

If your working in an incumbent corporation, ask yourself "What transformative change could bring about the redundancy of the way we do today?" This should be the top concern for banking executives today, who sell product can easily be 100% digital. When a product can be digitalized, there is no need for physicality in a digital world.