Sunday, August 10, 2014

The Innovation Imperative: Customer Loyalty Won't Save Your Company From the Collaborative Economy

“Because the purpose of business is to create a customer, the business enterprise has two–and only two–basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs.”
                                      ― Peter F. Drucker
One of the mistakes that successful companies make when faced with profound change in the business environment is to believe that their loyal customers will stay loyal, both to the brand and traditional business processes. Of course, building customer devotion is a necessity for brands nowadays, but leaders must recognize that today's strong brand loyalty offers no protection against significant changes in consumer expectations and behaviors.

This is an especially vital message now as we witness the birth and growth of the collaborative economy. No brand, regardless of existing consumer preference and loyalty, can avoid innovating to meet consumers' evolving expectations around sharing, renting, collective consumption and P2P (peer-to-peer) commerce.

I love the Drucker quote that leads off this blog post, although I would change one word, replacing "marketing" with "Customer Experience" (CX). At the time he said it, Drucker was referring to the old "Four Ps" model of marketing--product, price, place and promotion; nowadays, too many marketers are concerned with Promotion, leaving the other Ps to different parts of the organization. Nonetheless, what he says is that today's success is not enough; marketing and CX can create strong customer relationships today, but innovation is what creates strong customer relationships tomorrow.

Of course, studies demonstrate Drucker was correct. For example, in "The Living Company," Arie De Geus shares a study completed by Royal Dutch/Shell Group. Researchers examined similarities in companies that have existed since the nineteenth century. The study found that companies that enjoy long-term success share four attributes. Two do not pertain to innovation, but are important nonetheless--successful companies are fiscally conservative and have strong cultures with a firm sense of identity. The remaining two factors speak to the way innovation is baked into the core of their business:

  • Successful companies are sensitive to their environment: "As wars, depressions, technologies, and political changes surged and ebbed around them, they always seemed to excel at keeping their feelers out, tuned to what-ever was going on around them." These companies "managed to react in timely fashion to the conditions of society around them."
  • Successful companies are decentralized: De Geus later rethought the word and redefined it as "tolerant." He notes, "These companies were particularly tolerant of activities on the margin: outliers, experiments, and eccentricities within the boundaries of the cohesive firm, which kept stretching their understanding of possibilities."

Source: Econsultancy
History teaches us that today's brand strength furnishes no protection against the need to innovate. This has never been more true than today; while innovation has always been important, as the pace of change increases, the demand for business innovation grows. That companies today struggle with the quickening pace of innovation is apparent, as the average age of organizations in the S&P 500 has dropped from 60 years to less than twenty in the course of the past five decades.

We can examine what has occurred over the Internet era to see many obvious examples of companies that quickly failed despite very strong brand preference and customer loyalty. This loyalty meant little once the companies could not provide a product that met the changing needs and expectations of customers:

Study after study demonstrate that Customer Experience is a powerful driver of brand financial success, so what happened to Borders (and NBC and the New York Times)? Brand loyalty can drive success from today's consumers based on today's expectations and today's business models. It also gives brands a leg up in terms of introducing new products and services. But what history has taught us is that no amount brand strength and customer loyalty can save a company that fails to innovate. It does not matter that a TV network is the most popular in real-time broadcasts if consumers continue to want greater diversity in on-demand and time-shifted viewing, nor does being the most popular store in the mall save a company if fewer consumers walk through the mall entrance. 

Today, the collaborative economy is growing. What this means is that being the most popular seller of goods will not matter if consumers choose to rent more, nor will having loyal customers protect your company should consumers decide to procure more P2P. If your model is based on selling goods and services to consumers who own and consume them individually, the time has come to consider and test collaborative business models. 

Having loyal customers is not enough. No company can rest on its laurels--it must constantly innovate or it will get left behind. Success is it's own problem, because it prevents companies from seeing new risks and trying new things. To reinforce this point, I will end this blog post as I started it, with a Peter Drucker quote:
“The people who work within these industries or public services know that there are basic flaws. But they are almost forced to ignore them and to concentrate instead on patching here, improving there, fighting the fire or caulking that crack. They are thus unable to take the innovation seriously, let alone to try to compete with it. They do not, as a rule, even notice it until it has grown so big as to encroach on their industry or service, by which time it has become irreversible. In the meantime, the innovators have the field to themselves.”
                                       ― Peter F. Drucker

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Unknown said...


Good blog. What would be helpful is to show a traditional company that has made the shift when a major disruptive innovation has come along (and thrived) versus those that haven't and failed. Would make for a nice comparison.


Augie Ray said...

Great comment and idea, Brett. It's easier to find the failures than the successes, often because the successes come out the back end looking so different. Any suggestions? I'm thinking Netflix? Apple? Maybe even Amazon(which is more than just a P2P digital yard sale nowadays.) Starbucks?

What successes come to your mind?