somewhere on the route to from good to great, it happens. companies start with an innovation, create a marketable product out of it, and produce it at scale. then they transform from innovators to ‘sourcers’ of innovations.
let me explain. a typical company starts out with an innovative idea for a product – it procures the raw materials/parts that it needs, combines them in the unique way to create a product that is valued higher than the cost of the sum of the materials/parts. as you can see, the value addition happens in the way the materials are combined. e.g. you can procure a piece of sheet metal and mould it to make a very ordinary water bucket, or the next best mousetrap. very different ways of creating value.
along the way, hoping the product is hugely successful, it becomes good and very familiar with handling the parts it procures. it develops the expertise in the materials and the whole org is tuned towards making that particular product that it invents.
but the catch is, sooner or later, the innovation is going to become a commodity, and the the money you can earn from the value you have created is going to diminish over time. so what is a company to do? well, it has to come up with a new innovation again – one that adds a large amount of value, but that will use almost the same materials/parts and people that the organization is tuned towards. e.g. companies diversifying from selling airline tickets to adding hotel reservations, etc.
this happens a few times, but then, there comes a point when this cycle yields lower and lower value innovations – e.g.the traditional internal combustion cars are a great example. a car can improve only so much from chassis, carburetor, tyros and engine.
at this point, the company starts to outsource innovation, and to an extant, even the supply chain. the company starts buy into new ‘adjacent’ supply chains and new innovations that they foster. e.g. car companies go into financing. computer makers go into home electronics.
assuming you an do this diversification successfully long enough, you come to realize, that you aren’t good at any particular product, but you are getting good at picking winners. i.e. looking at the budding innovations and supply chains that are ready to hit prime time, and pushing them over the hump. you become a pure marketing company – one that’s good at ‘research’ (knowing what the market is demanding), and ‘development’ (taking an innovation and developing it to reach it’s market at scale).
coca cola does it well with water bottling firms, energy drinks, and sports drinks. cisco does it well with networking innovations. drug companies have mastered this part. proctor and gamble does it all the time. oracle has started to do it in the last few years. that brings us to my side of the world – have the web companies matured enough to go this route? that for another post.
