Originally published in The Huffington Post, 20 August 2012.
Part 1: We pay less get more
“Innovation” – one of the most hackneyed terms of our era. Though I have perfected the cover-up of the reflexive reaction over time, I silently wince when I hear or read it and am certain the flash in my eyes is susceptible to any astute observer.
Proponents of the term rarely fathom its true definition; it is has been bastardised as a synonym of “new” or “invention”, which, to me, is a distance from the true meaning. Newness is only half the story.
Innovation is a wonderful thing. I just wish it would lose its PR chic, that it would not be so lavishly splurged in reference to anything firms, particularly technology firms, do/produce.
To me, innovation is a process of enhancement wherein the status quo is substantially altered and, in doing so, significantly improves performance or value.
Innovation can occur at any of four levels:
3. Business model
4. Industry (the way firms compete)
For innovators, rewards scale the further along the chain they go – Ryanair is a great, though controversial, example of innovation at the Industry level that has reaped the firm considerable return.
Apple (yawn!) are the distinguished example; it is iTunes and the app store, the dominant marketplace for digital content and applications that has made them the goliath they are today, with product innovation – the iPod, iPhone, iPad – delivering revenues as a consequence, rather than as standalone products.
In most cases, real innovation is focused on delivering benefits to customers that in turn drives business revenue. Even when improving processes internally to streamline costs or to improve efficiency/speed of delivery, the benefits are usually passed on to customers; improving customer satisfaction and capturing market share as a result.
Broad benefit, to customers and innovators, of innovation makes for rational strategic choice – if a firm in a competitive industry were to innovate in such a way as to purely maximise their own benefit, they would quickly fall to the wayside as other firms implement similar change and differentiate by sharing the derived value with their customers.
Even monopoly-like industries and their firms, for example Microsoft in the OS market, recognise that their dominance can be eroded in the blink of an eye should they try and retain innovation benefits purely for themselves and ignore their market. Lower prices, improved services and product features, easier access and improved usability are regularly delivered by all the incumbent behemoths (ok, let them off, MS do at least try) across industries; if they choose not to, they die.
Part 2: Selfishness
Interestingly, the one obvious contrary to this paradigm (apologies – another term I find cringing, but I am being lazy and it fits in the sentence) is in banking, Specifically the UK banking sector.
Electronification of processes, saving the banks time and money, has not led to lower costs for the majority of customers. New products have caused more issues than deliver value; complex derivatives clouding risks but promising high returns have led, as in the case of Mortgage Backed Securities, to cataclysmic losses for some investors.
Where the basis of competition has changed in the industry as a result of innovation, dividends have been generated to a sub-section of banking clients, large corporates and other financial institutions, but not to the masses of SMEs and consumers.
An obvious example is in Foreign Exchange. Liquid electronic markets coupled with electronic distribution have significantly reduced tangible costs to a bank’s largest customers, but the benefits that could be delivered to you, I, and our businesses have been greedily retained by the banks as profit.
We, as customers, don’t help the situation; we don’t act. The elasticity of demand for banking services (measured against a broad range of factors including price and reputation) is relatively flat through history.
Recent statistics paint the picture starkly – out of 64 million bank accounts in the UK, only 60,000, less than 0.1%, have voted with their feet and shifted banking provider in the four years to the end of 2011. Even then the likelihood is that the switch was to one of the other three big banks.
For specific services at the consumer and SME level, banks rarely bother with improving services and incurring R&D expense. Why should they? They (rightly?) feel they are not going lose nor gain any customers regardless. Things, however, are changing.
The fact that 1) banks don’t share their innovation benefits with customers 2) banks can avoid innovation in services altogether, spawns opportunity for innovators to do the opposite.
Alternative, technologically innovative banks, such as Bank Simple, Holvi and Movenbank, will launch in the UK soon. barring deposits (looking after your money is something banks arguably do pretty well), specialist new finance firms that take a sliver of the financial services value chain and do it exceptionally well, also provide real alternatives for our financial service needs.
Aside from the obvious improvements in services received and lower costs, by instilling real competition in financial services through supporting new finance alternatives, we will wake up the banking sector. The banks will realise that they need to do better, that they need to innovate more and share the benefits with their customers. The “market” would be better off.
To see the effects of customer led industry reform, look at the music industry. The innovation of electronic music and video distribution that has been adopted on mass by customers has driven a fall in prices of traditional CDs and DVDs. The legacy incumbents of the music industry are slowly collapsing or are evolving to compete effectively in the new market; all to the benefit of the customer.
Innovation, combined with customer adoption is a powerful force. Use it.