I’m often surprised to see leading companies with solid innovation programs, missing obvious market turnarounds. They record the same weak signals and trends that I do, they understand them as well or better than me, but they fail to properly act on them. In my experience, the key reason they fail and miss every new market wave is because they don’t adjust to the right perception distortion.

Most innovation programs work on the first order of consequences.

If you’re an insurance company and see your customers relying more and more on digital tools and social web, well, there is a point in time when you decide to get there too. And you feel that you innovate because you transfer your customer journey progressively from a physical brick and mortar, and phone operation, to a digital one. You actually don’t innovate. You’re just adjusting to what the market is progressively telling you to do. You’re not even customer-driven for what it’s worth, you’re getting on par more or less rapidly depending on your internal agility. Which very often is why you feel you innovate. Because it’s painful for your team and involves a huge cultural shift.

But the market doesn’t care.

Innovation is not defined on how much you had to change, but in the effective change you bring in the market. No one is impressed by a bank finally offering fast and easy ways to digitally pay online and in stores, or access your account from a mobile and manage the usual transactions. We’ve had PayPal since 1998, tons of other systems on top or aside of it, and pure players like N26 are the new norm.

What’s worse is the next market wave of transformation is already missed by current incumbents:

CB Insights on how Amazon is trying to disrupt banking in 2018.

Trying to eternally catch up what’s already delivered or in the pipe of the new digital leaders is worse than misguided. It’s not getting what innovation is about. This is a core discussion I have more and more with typical incumbents in various industries still trying to catch up the digital wave from 2007. It’s too late guys.

My case is that yes, you should allocate enough resources to be in the current digital game, but you’re never going to outcompete Amazon at having every products accessible online and delivering them flawlessly to every doorstep. You’re not going to outsmart Facebook at knowing what your customers think before they know it. You’re not going to outperform Google at data intelligence. Or you’re not going to outdesign Apple at smoothly operating perfect digital tools.

So what’s left if you want to rebuild leadership?

I’m sure that there is a convenient Sun-Tzu’s Art of War chapter that I’m not going to bother finding on Wikipedia that says: « If you can’t beat them, leapfrog them. » or: innovation is about the second order of consequences.

Say that instead of a bank you’re a car maker. The trend around autonomous vehicles is real. You might be ahead of the technology readiness curve or not (you probably aren’t) but this trend is not going anywhere. Dealing with the first order of consequences would be to invest in AI, lidars, on-road connectivity, etc. The uncertainty factor here is « just » time to market. When will the technology work enough so that market transfers to self-driving? (Usually it takes longer then expected but once started, the change explodes faster then expected.) Again, there is no innovation there already, and no matter what you’re not beating Waymo at this game anymore.

The second order of consequences are the more unexpected outcomes of the change. When self-driving vehicles are the norm, what are the consecutive waves of change that will appear?

So, the current parking model is clearly a source of congestion: some studies suggest that a double-digit percentage of traffic in dense urban areas comes from people circling around looking for a parking space, and on-street parking ipso facto reduces road capacity. An autonomous vehicle can wait somewhere else and an on-demand one just drops you off and goes off to collect other people. (…) Parking itself is important not just as a part of the traffic and congestion dynamic but as a cost and as a use for property. As mentioned above, some parking is on-street, and so removing it adds road capacity or allows you to add more space for pedestrians. Some of it is at work or retail, or more generally in city centres, and so that land becomes available for other uses. And some of it is at home, either on-street (again using capacity) or in drives and garages, parking lots or parking structures, which add to the cost of housing. The extreme case here is Los Angeles: it has been estimated that 14% of the incorporated land of LA county is used for parking. Adding parking to a new development pushes up construction costs: parking garages cost money, and so does leaving land vacant for parking lots. A study in Oakland, in the San Francisco Bay Area, found that government-mandated parking requirements pushed up construction costs per apartment by 18%. Back in LA, adding underground car-parking to a shopping mall might double the construction cost. If you both remove those costs on new construction, and make that space available for new uses, how does that affect cities? What does it do to house prices, or to the value of commercial real-estate? – Benedict EVANS, 2017

This is a step ahead of everyone right? And that’s only one second order consequence.

But wait, why should you care? As a car manufacturer you’re not going to pivot in real-estate. No you won’t. The question to address is still the same: how as a car manufacturer, can you continue to manufacture cars in the next ten years? Because right now you’re having a Kodak moment (as banks, insurers, retailers, media companies, telcos, … do).

Exploring something where the question is not « When will this happen and will we be ready? » but rather « Is there a chance that something as unexpected as that really happens? » is where you can rebuild competitive advantage. This is your chance to leapfrog (jump to the next paradigm) where no one is really already in leadership and be ready before everyone.

Now I’m sure that you understand that this proposition is actually quite riskier, than, just following everyone else in real-time deep-learning pattern recognition algorithms. Well, not really.

My point is still the same: work on what everyone is working (the current next wave, which is the first order of consequences) and at best you’re still in the middle of the road. You’ll survive but don’t secure any kind of future for your company. This is your get-go strategy because you entertain the illusion that your cars are going to be better than Google’s at self-driving, or that your insurance company will be smarter than Facebook at profiling customers for online mortgages.

The other proposition is about pushing some of your resources beyond that on the « next » next wave.

The trick is that now you don’t exactly know what to do because it’s not just a matter of time, but a matter of will this happen and to what extent? So instead of having one strategy for the next 3-5 years, you need a portfolio of strategies for the next 3-10 years. Working on them, you escape what I admittedly very dismissively call the « Deloitte » zone. You know what I am talking about right? When you’re an insurer and that Deloitte insights in 2018 for you are:

Digitalization of underwriting can also enable online distribution capabilities, allowing insurers to cast their nets wider and embrace younger demographics that often prefer a more virtual experience. Underwriting digitalization also could remove a barrier to purchase with those of all ages discouraged by the long and complicated life insurance application process.

They call that InsurTech. Or if you’re an airline company, then you have the TravelTech version:

Digitalization of ticketing can also enable online distribution capabilities, allowing airlines to cast their nets wider and embrace younger demographics that often prefer a more virtual experience. Ticketing digitalization also could remove a barrier to purchase with those of all ages discouraged by the long and complicated travel selection process.

… or the FinTech version for banks:

Digitalization of credit application can also enable online distribution capabilities, allowing banks to cast their nets wider and embrace younger demographics that often prefer a more virtual experience. Credit application digitalization also could remove a barrier to purchase with those of all ages discouraged by the long and complicated mortgage process.

(I of course made up the two last ones — not the first one though.)

If you work past these « insights » you have the opportunity to find the next market wave before everyone else. You might form an opinion about it that is not the copy and paste insights from a big consulting firm. For that reason, building your future vision of the market shouldn’t be a work you’d want to subcontract. Not to me, not to Gartner or anyone else. And if no one knows where the puck is going to be, maybe you don’t skate there yet but you actively monitor in different ways if it will bounce there. So that as soon it shows a sign of bouncing in one of the unexpected ways you’ve been monitoring, you’ll react before everyone else. And in that sense it’s strategically safer to explore riskier parts of the market, and playing safe by innovating like everyone else is far too dangerous.

Going back to the self-driving cars and real-estate second order of consequence: what should you do with that if you’re a car manufacturer? Well, first let’s list some of the other second order consequences:

• Real-estate goes down in premium downtown locations;

• No need of last kilometer supply chain anymore (cars will pick up deliveries while you work);

• Insurance costs go down (second or third position in a car total cost of ownership depending on the country);

• Conversion to electricity goes faster than expected (not time to dive into this one but AVs at scale = EVs);

• Media consumption skyrockets (people commuting as much but having an hour of more free time per day… do the maths);

• Etc.

Each of these unveils possible connections for the car market in new value chains (real-easte, media) or unexpected turn around in the current value chain (energy, insurance). For each of them you could explore a bullish take on the possible change or a bearish one. What if insurance premiums fall down (bullish on market change) or rather go up (bearish)? You then naturally end up with a portfolio of different outcomes that point at different directions of the future market.

I already coined the term portfolio and if you read me regularly, you know how important it is. When you enter such market uncertainty levels, no one is smart enough to pick « the right answer ». It is important to have a sort of quantum state approach to it all: consider that all options are possible for now, and when the market will ‘open the box’ we will know which option goes live. But in any case, you’ll be prepared.

The next question is what are you going to do as an innovation program with all these possibilities which might be a dozen or more? Ah, quite frankly, this is where it really gets interesting in my opinion! The goal here is to cover as many possible market outcomes as possible with as little resources as possible. They are many tools that I have already written about in different articles, and they probably sound far more complex than what essentially they really are. The simple logic is that you want to have some teams that you can spread on a few topics at a time, make a proof of concept, learn from it, and follow-up or move to another topic if it’s not statisfying.

But you are not trying to build your next business, this is the core mistake that most innovation programs make. They try to solve the first order of consequences faster than the business unit or division who is in charge of doing just that within the next three years (and when they — rarely — manage to do it, they are killed by said division — justifiably so).

No, working on the second order of consequences portfolio won’t bring business. It will bring insider knowledge ahead of the competition. This is the key ROI you want to benchmark your innovation program against: how many next wave have we detected well before KPMG and others start to explain it to us (in which case it’s already too late)?

The real problem with this strategy of exploring ahead of the market’s curve and sorting out false positives from real trends and opportunities, is that you don’t know what you’ll get out of it. You will find a few directions that could be critically interesting, but they could go in the opposite direction of your current business DNA.

What would BMW do if they developed a very solid internal vision of their future market as being about electric vehicles only (interestingly they seem to start to come around to this, which was heresy only a few years ago) and about utility vehicles, trucks and new form forms of supply chain? What if the key insight for BMW would be that they should prepare to compete with IBM, Cisco and Huawei in the smart city battlefield?

Well, what if?

As I said that would be a Kodak moment. Are you selling chemical films or are you selling memories and thus social interactions? Are you selling status symbols or are you selling mobility pleasure and safety? See, if you ask me some incumbent car manufacturers seem really following a solid innovation logic there. They may be right, they may be wrong, but they are fiercely trying to leapfrog everyone else, and it’s not about 2030 or 2040, it’s about the next two years:

volvo 2020 vision
How Volvo explains its 2020 vision.

You and I don’t know if Volvo will pull this off. But if I had to invest into an ‘old’ company in this market, I will choose one which is guided by a vision on the second order of consequences, and which is picking a fight that no one is yet picking. Not the one with the largest touchscreens…

And I hope that whatever you do right now, you have a very active innovation department that is not just pursuing digital like it was 2007 all over again.