The Idea in Brief
Most breakthrough innovations don’t succeed in isolation. They need complementary innovations to attract customers. Consider high-definition TVs. Top-quality HDTV sets were ready for mass market in the early 1990s. But critical supporting elements—signal compression technologies, broadcasting standards—weren’t. Result? While HDTV manufacturers waited for complementary innovations to catch up, new formats and rivals emerged. HDTV pioneers that had invested billions to develop the first sets now compete for consumer attention in a crowded market.
Clearly, operating in an innovation ecosystem—the synthesis of your new offerings and other firms’ that creates a coherent customer solution—carries risk. To mitigate that risk, author Ron Adner suggests this method: Gauge the likelihood that all your partners will deliver their offerings on time. (The more partners, the higher the risk of costly delays.) Consider delaying product development to let other players catch up. Apple did this by postponing iTunes’ entry into the online music retailing market until digital rights management made online distribution legal and profitable. Bypass the risks of entering large markets by offering a simpler product to a smaller market. Palm Computing did this by foregoing development of a handheld computer in favor of its wildly successful replacement for the lowly appointment calendar.
Correctly assess ecosystem risks, and you establish more realistic expectations and accurate contingency plans for every new offering. Your reward? Smart strategies and profitable innovations.
The Idea in Practice
Author Ron Adner proposes assessing innovation ecosystem risks by answering these questions:
How Does Our Project Measure Up?
Evaluate your own offering’s feasibility—considering likely attractiveness to customers, competition, supply chain capabilities, and project team quality. Decide which of these risks you’ll handle internally, and which are better shouldered by a partner.
Whose Projects Must Succeed Before Ours Can?
Your offering’s success hinges on expert development and deployment of all other solution components. With key partners, assess the probability that everyone will satisfy their commitments on time. Incentive problems, financial difficulties, and leadership crises can all derail a partner’s project. By gauging all parties’ risk of failure, you identify potential delays and can set expectations accordingly.
Who Must Adopt the Innovation Before Consumers Can?
The more intermediaries who must adopt an innovation before end users can, the higher the uncertainty of market success. Failure to account for delays in intermediaries’ adoption—and to adjust your expectations accordingly—can doom the effort. Example:
When Michelin’s run-flat tire was introduced in 1997, no consumer could buy it. Why? The innovation uses a dashboard light to alert drivers to the need for service after a specified amount of distance driven following a flat. Thus the tires can be used only in vehicles designed to accommodate them. Michelin had to wait until willing car manufacturers’ design windows opened—often three to four years before volume production. Additional intermediaries included dealers that needed to understand and support the system and automobile repair shops that had to invest in new service equipment. Nine years after its introduction, the run-flat tire is standard equipment on only a handful of car models.
After assessing ecosystem risk, Adner advises developing your innovation strategy by considering the following:
Where Should We Compete?
When innovation ecosystem risks are high, any market is risky—even if you’re certain your firm can deliver its own part of the solution. That’s because your company can’t control factors affecting other ecosystem participants’ success. Therefore, your firm’s best strategy may be to pursue a market opportunity that carries lower external risks, even if internal risks, such as high development costs or scarce talent, are relatively high.
When Should We Compete?
Being ready with your component ahead of your direct rivals may not confer any advantage if complementary products aren’t ready when you are. If risk of partner failure is high, consider slowing your development cycle to conserve resources and refine your strategies over a longer time period.
High-definition televisions should, by now, be a huge success. Philips, Sony, and Thompson invested billions of dollars to develop TV sets with astonishingly high picture quality. From a technology perspective, they succeeded: Console manufacturers have been ready for the mass market since the early 1990s. Yet the category has been an unmitigated failure, not because the consoles are deficient, but because critical complements such as studio production equipment, signal compression technologies, and broadcasting standards were not developed or adopted in time. Underperforming complements have left the console producers in the position of offering a Ferrari in a world without gasoline or highways—an admirable engineering feat, but not one that creates value for customers. Today, more than a decade later, the supporting infrastructure is finally close to being in place. But while the pioneering console makers waited for complements to catch up, the environment changed as new formats and new rivals emerged. An innovation that was once characterized as the biggest market opportunity since color TV is now competing for consumer attention in a crowded market space.
