Innovation Isn’t Just a Buzzword

It’s rather unfortunate that everything has to be an innovation these days. Even worse, is that for a business to be effective, it seems they must drive disruptive innovations. Innovations are simply inventions that have been successful in the market, those inventions might actually business model changes that have been successful in penetrating the market. I personally find that looking at innovation as a framework to analyze business pressure to be extremely interesting. I did this today in an interview and it felt really good as I was able to create context around changes impacting the health insurance industry.

Several years ago I wrote about the 4 types of innovation, Incremental, Modular, Architectural, and Radical. This is a bit different than the framework that Christenson argues, since he only looks at 2 types, Incremental and Disruptive. I believe that disruptive encapsulates both Architectural and Radical. Architectural changes are business model innovations while making a very similar product but one that significantly undercuts existing businesses or creates a new market. While Radical innovations creates a new market but also attacks existing customers, through a new business model and a completely different type of product. Think of a fan competing against an air conditioner window unit, while central air is an architectural change for the window unit.

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I believe that this framework is just as useful for businesses to analyze their environment as Porter’s 5 Forces┬ábecause it forces businesses to confront the disruptive innovations that they might have overlooked otherwise. Without using this framework it is likely that businesses would ignore the new entrants force as they don’t feel that those businesses will ever compete with them. However, based on historic evidence those entrants that have a different business models or a different metrics for their performance eventually supplant incumbents. I believe that this type of analysis should be conducted annually or bianually as many industries and markets have continually increasing uncertainty and faster rates of change than historically.

Amazon’s potential army of Drones – what’s the point?

Amazon wants to deliver packages to you in 30 minutes via drone. While the convenience might be pretty awesome. I’m not sure how good of an idea this is going to be. I also think that this points to a broader push for Amazon. In the past Amazon has mentioned how they had plans to sell groceries locally and deliver rapidly. This is currently in beta test with only two cities involved, LA and Seattle. Depending on the size of these drones this will make delivery of groceries much easier and reduce the risk for goods to thaw while waiting for the resident to come home and get the groceries. Furthermore, if these drones are really good, Amazon could time the delivery of the groceries based on when the customer wanted them to arrive at their home. Let’s say you place the order in the morning, but know you won’t get home until around 6:30, you could ask Amazon to deliver the goods around 6:30 so you could just bring them in the house and start cooking.

A few years ago there were some rumors that Amazon was planning on going to brick and mortar stores while everyone else is going more web, web, web. These drones that are in the video do not look like they have the farthest range in the world, which means for a place like my home town about an hour north of Pittsburgh by car and if there was a distribution center in Pittsburgh (there’s not, but there is one in Allentown), the drone would need to fly close to 120 miles per hour. That doesn’t seem likely for these things. They don’t look like they have the speed, they are clearly designed for shorter ranges than that. Additionally, implementing these drones would require significantly more distribution centers throughout the US. Distribution centers work best when there is a need for high volume, high speed, and high variety at least in many distribution models. However, if Amazon were to use retail stores as part of their distribution network and looked to use the stores as the location where the drones would send goods from, this makes a lot more sense. Retail stores aren’t really there to be retail stores, but micro distribution centers.

This would impact the types of items that would be a candidate for Air Prime in many locations, for instance cities with Stores only would have a much smaller list of applicable items. Cities with distribution centers near by would likely have any item up for Air Prime that would fit on the drone.

This is still 4-5 years out from being deployed, so why is Amazon showing this off now? Well, bad press recently. There have been several articles that came out this past month about how horrible the distribution centers are in the US.

All said though, I think these drones point to continued interest in providing different approaches to brick and mortar stores as well as grocery stores. I think it will start out small and grow from there. Amazon will likely build out some stores first with a similar function to Best buy where you can pick up in the store. In later store deployments they will have options for Air Prime and pick up in store for certain items. It will certainly change things for Amazon workers and will change the way the distribution centers are managed. They may simply become hubs with a lot more being pushed out closer to the end customer.

Facebook, IPO and valuing a company

This week we’ve been hearing about the debacle that was the Facebook IPO.Which has revealed that some of the underwriters for the IPO were doing shady things. Matt Taibbi believes that this indicates that there are essentially two markets. One for the insiders and one for the schumcks, the every day investors.

Why is this important? Well, based on the discussions I’ve read online, there’s a lot of concern of the validity of the whole IPO process, the valuation methods of companies and how investors think of companies. The valuation of Facebook had a great deal of discussion before the final IPO price of $38/share, this was partially driven by two articles that came out. In the first one it was mentioned that GM was pulling it’s account because “Facebook ads don’t work.” The other article of note relates that researchers found that 44% of Facebook users will NEVER click an ad. This research is important because some of the valuation is based on the conversion rates of ad views to ad clicks. On average Facebook was only able to earn around $4.34 per user. The valuation of $100 billion puts the life time earning potential per user at $100 (at 1 billion users). This is pretty low, but at the same time, if only 560 million users ever click ad, that pushes means the people that do click ads need to be earning Facebook roughly $200.

MIT Technology Review discusses how this is an unsustainable growth model for Facebook. Essentially, Facebook will begin to drive down the cost per view for their advertisers to try to increase their total revenue. This falls into the race to the bottom mentality that crushes industries. Advertisers will be able to say to any website, why should we pay you x amount per ad when we only pay Facebook y there is no way that you can get me more views than Facebook. The only way that a site could get more revenue if they can show data for a higher click through and conversion rates than Facebook. That might be tough. The Review article argues that this will eventually kill Facebook and a lot of the ad driven website business models.

The other aspect of the IPO is a difference in the way that business and technology media are reporting on Facebook. Things have shifted from all the non-business related activities to focusing solely on this aspect of Facebook. This will likely shift over time, but I believe that these considerations will be discussed in any article related to Facebook. If Facebook wants to remain a haven for activists it will be difficult if there are potential suits over people being activists. There will be an increase of risk aversion within the “owners” of the company as there will be influence from investors.

Zuckerberg has said that he plans on doing what is best for the long term and try to ignore the demands of investors. He might be able to do that because he still owns 57% of the voting rights for the company. However, it will be difficult for him to avoid the influence of the discourse of media outlets. Even if he gets all his news from his friends on Facebook, there will likely be articles posted that will give him news about the company and things that he probably won’t want to read.

Essentially, discussions will shift from being about the risk of privacy for users to how changes to Facebook will impact investors bottom line. I don’t think this is healthy for businesses, consumers of Facebook or the general public. There are other things companies do that are unrelated to investors that are important for society as a whole. The Facebook coverage really indicates that we don’t look at businesses in a long term sustainable manner. We need to change this if we want to save capitalism.