Do The Underlying Structures of Your Company Support How Value Is Created?
January 7th | 2016

John Hagel, John Seely Brown, Tamara Samoylova and Duleesha Kulasooriya from Deloitte’s center for the Edge describe a massive bifurcation of industries into those that are fragmenting and those that are consolidating. Consolidating industries provide platforms or infrastructure. Fragmenting industries are built on top of those platforms and infrastructure.

Buried within this “Shift” is an equally massive transition from industries that are based upon consistency, toward industries that are based upon innovation.

In some cases, it’s fairly clear which delivers the most value. Energy industries create value through consistent production and delivery. Technology industries create value through innovation. But in many other industries value has shifted almost invisibly.

A good example is food. Historically, the food industry has been rewarded for consistency; for the safe, efficient, consistent delivery of product at scale. While this model still generates a lot of revenue, the real value is increasingly around innovation. The MIO example I wrote about last year was a good example of the fact that new brands are often more successful than established brands. Rather than facing high barriers to entry – new food brands can tap into existing sourcing and manufacturing channels and often find distribution easier to gain because they drive interest and excitement which drive traffic and sales.

Another good example is the marketing services industry. While there’s a great deal of talk about innovation, this industry has also traditionally created the majority of its value through consistent delivery of its product. Agencies were asked to deliver consistent creativity or consistent effectiveness, while consultancies were asked to deliver consistent top-line growth or bottom-line savings. And because consistency has been the fundamental driver of value, most marketing services companies are built, very fundamentally, around the delivery of consistency.

You can see this in their structures, processes, departments, divisionsand mostly in their financials. But while the structure of marketing services organizations are built around consistency, the true value within the industry is shifting towards innovation. It’s a deeply fundamental disconnect between what people really want from a marketing services organization and how those organizations actually make money.

This isn’t unique to marketing and food, it’s happening across many parts of the economy. The underlying structures of many industries are fundamentally at odds with how value is being created. I think of it as analogous to our transportation infrastructure which is crumbling and incapable of handling the demands of the 21st century. Much of our business infrastructure is even more outdated and in an even sorrier state of disrepair.

I have a suspicion that this is a root cause of many of the ailments that business suffers from the very small feelings of disempowerment and dislocation felt by employees of many companies to the very largeinability for macro economic measures to really describe what’s going on.

But this is also the root of a strategy that many of the most successful companies employ. Because the choice isn’t simply binary: innovate or be consistent. The speed and frequency of innovation is a variable that can be manipulated quite dramatically for advantage.

Zara is the poster child for this. Its success is largely due to its speed.“The company can design, produce, and deliver a new garment and put it on display in its stores worldwide in a mere 15 days. Such a pace is unheard-of in the fashion business, where designers typically spend months planning for the next season.” This is a pace that is impossible to match, and they are able to do this because they have built an infrastructure specifically for speed. “Zara (also) achieves four times more profitability than most apparel retailers, by combining higher turn and margins, and lower inventory risk in a highly uncertain business.” Plus they have an average markdown for sales that is less than 25% of most of their competition.

This is also the strategy that is propelling brands like NikeApple and Ford. Each have established a pace of innovation within their categories that is faster than the norm and are benefiting through dramatically improved financials by delivering better on what people actually want. Like Zara, they have invested in building infrastructures that simply allow them to innovate faster and with greater frequency than their competition.

Their investment in infrastructure pays compound dividends as noted in the Zara story above. They don’t simply capture the lion’s share of value within their categories, they also benefit from improved financials across a range of other measures. Additionally, as they are moving faster, and doing it with greater frequency, while their competition are standing on infrastructure that’s a lot less firm, the distance between them increases exponentially as time passes making them even harder to catch.

As marketing, product development, service and innovation blend, the infrastructure upon which brands are built becomes even more critical. While an infrastructure that enables you to innovate faster and more frequently than your competition isn’t a guarantee of success, it’s probably the investment that can deliver the greatest return over the long term.

Photo Credit: ryaninc via Compfight cc