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Explore, exploit, experiment: Peter Lee on how businesses can prosper in an age of disruption

Change in business, as with most aspects of life today, is occurring exponentially and at a pace in keeping with Moore’s Law. Neuroscientists estimate our brains, which have been conditioned to accommodate more gradual and linearly predictable change, simply are not used to tackling the problems and the complexity of modern life. Consequently, simplicity has a premium as consumers and companies seek more comprehensive and ready-made solutions.  

Incorporating services as part of the product provides more of a total and self-contained solution to complex problems. Services have increasingly become an important part of a company’s value proposition in order to provide a more comprehensive solution with minimal complexity. Our increasingly digital world is enabling this trend. Today it is hard to envisage an effective business without some aspect of digitally-enabled service innovation. Products are still important but they are being offered as part of a service. The resulting value can be many times that of the original product. 

In this changing business environment, it is difficult to continue to just be a provider of products. Most of the big inventions in our history have been traced back to interactions among individuals and organisations with diverse backgrounds. We need to find ways to benefit from the larger value to be derived from working in unison with an ecosystem of partners. That is, all business must become increasingly more connected and entrepreneurial. Businesses must find ways to navigate the potential tensions involved with collaborations among partners and customers. To do this, they invariably need to retool their business processes to identify, absorb and apply these external inputs. Many of the skills developed by effective startup companies are becoming the new toolboxes for corporate entrepreneurship in more established companies.

These tools include: the principles and practices needed to openly innovative; co-create along a supply chain; solve imprecise problems with an iterative design-based thinking; explore new businesses and exploit existing businesses within the same ambidextrous organisation; develop innovative business models that realise the full potential of change; and, most importantly be agile.

Today it is hard to envisage an effective business without some aspect of digitally-enabled service innovation. Products are still important but they are being offered as part of a service. The resulting value can be many times that of the original product. 

Realising the additional value requires a company to enter an ecosystem of customers and suppliers with capabilities that can be combined to provide the more comprehensive solutions. For example, the biometrics available from an increasing array of devices to monitor personal health can now be integrated with external data to detect important anomalies and provide a more comprehensive view of personal wellness and recommend responses.

A New Zealand company, O2O2, has developed an improved way of protecting individuals from ambient air pollution. The new wearable device, which is superior in many ways to the traditional mask often used by commuters in polluted urban environments, has the additional capability for monitoring and communicating the real-time breathing condition of the wearer and thereby provide a new and important indicator of their health and well-being. Realising the additional value of the data, which has the potential to be at least as valuable as the clean air, requires coordination with a broader ecosystem of networked data, analytics, portable electronics, sports and health providers.

Open Innovation is now one of the most practiced methods of growing a company beyond its traditional core. Successful practitioners of Open Innovation have learned how to effectively outsource some important components of innovation development and commercialisation while retaining other components essential for sustained competitive advantage. That is, developing strategies about what to own and what to share, in order to realise and retain an appropriate cut of the new value. 

Developing the platform architecture involves negotiating boundaries and defining interaction rules that assert convener status. For example, Apple has outsourced the development of apps for its operating system but has retained control of the development of the portable electronic devices required for their utility.

The ability to co-create among groups of firms up and down the value chain operating in coalitions of the willing is an important corollary to Open Innovation. The increasing complexity of today’s business environment means the ability to co-create is becoming more important. 

Often, co-creation in business is practiced among suppliers and customers to realise mutually valued outcomes beyond the capabilities of either participant acting alone. However, the connectivity is now frequently being extended laterally into adjacent industries to leverage existing capabilities in new ways for truly transformational outcomes. For example, consider the benefits of applying the established practices of aeronautical wing design to the sail boat racing of the modern America’s Cup or the value of repurposing the spare bedroom for additional household income through Airbnb.

Solutions to imprecisely defined problems with only partially developed technologies can be identified through an iterative cycle of conjecture, prototyping, testing and analysis, in order to rapidly converge on an optimal solution to a new and vaguely identified need.  With a good dose of creativity, the results of this approach can be outstanding. For example, another New Zealand company, Wine Grenade, has developed the means to carefully micro-oxygenate fine wine in-situ during maturation, in order to mimic the effects of oak barrels but with a degree of control that produces superior results. This development was made possible by the close collaboration with local winemakers who provided timely and frequent feedback during the design and testing phases of the rapidly developing new product. 

Businesses often find it difficult to exploit today’s products while at the same time explore new value propositions and business models.  The distinctions between the functions of exploiting and exploring require an ambidextrous organisation that can tolerate the many ambiguities created by these two important activities. 

The importance of business ambidexterity has resulted in the development of a range of solutions for companies to manage the tension between these two functions. For example, Fonterra is cultivating a culture of entrepreneurship internally through programmes like Disrupt, which harnesses the curiosity and talent of people within the organisation to create innovative businesses models. Staff members are given the opportunity to submit ideas, proceed to a 12-week accelerator and potentially land a new day job if their concept is implemented within the business. All of this is occurring while the company delivers against the demands of today’s business.

Innovative new business models are generally needed to realise the full value of new products and services. The opportunity to innovate business models has increased along with many of the same forces that have disrupted products and services. The means for greater intimacy with customers, implementation of new revenue models and disintermediation of supply chains have all benefitted from the greater connectivity, speed and ubiquitous nature of technology.

One of my favourite illustrations of the power of new business models is the recent disruption in the razor market caused by Dollar Shave Club, recognised by their edgy videos that went viral on You Tube. Dollar Shave Club quickly took a major share of the US market away from the incumbents, Schick and Gillette, by offering home delivery with a comparable product at low subscription rates. The incumbents tried to counter with their own subscription based sales but it was too late to avoid a significant loss of market share. Not surprisingly, Dollar Shave Club was recently purchased by Unilever for US$1 billion, in order to invigorate their traditional consumer products businesses with a new way of relating to their customers. 

Equipped with this next generation of business tools to cope with rapid change and the skills to apply them, a business and its employees can enjoy the exhilaration of being the disruptor rather than the anguish of being disrupted. However, as with any job to be done well, the successful organisations will be those equipped not only with vision and leadership but also with the best tools and the practices to deploy them well. 

Peter Lee is consulting professor, commercialisation and entrepreneurship, at the University of Auckland and chief technologist at the New Zealand Defence Force
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