Customers might be able to perceive the potential for applying new technology. Visionaries of customer organizations are often able to anticipate the potential for new technology and sometimes begin developing prototypes. If suppliers fail to understand the unmet need, it is likely any new products they develop will fail.

One of the most consistent findings from empirical research is that the probability that an innovation will be successful commercially is highly correlated with the developer’s understanding of customer needs (Freeman, 1974). Companies that are alert to these developments are often able to leverage customer-conceived ideas and prototypes into new products and services, as the customers themselves are frequently unable to make enterprise-ready technologies from initial prototypes.

Suppliers can also “supply” innovation important enough to be included in the final product. Such is the case classically with the microprocessor industry. This “upstream” innovation impacted competitive outcomes in PCs, cellphones and consumer electronics more generally. David Teece writes about how the failure to “design in” new technology/components in a timely fashion will lead to failure; conversely, success can sometimes be achieved by continuous rapid “design in”. With rapid innovation by suppliers, downstream competitive success will result from the ability of companies to quickly tap into the external innovation ahead of the competition- if they could just “sense” such developments in time!

Sensing opportunities and threats can also be facilitated if the strategy leader uses an analytical framework that surfaces most important directions. Within the dynamic capabilities framework, the environment is not simply that of the industry- as previously proposed by the Porter Five-Forces model- but that of the business ecosystem- the community of organizations, institutions, and individuals that impact the firm, its customers and suppliers. The community includes suppliers, complementors, regulatory authorities, standard-setting bodies, educational and research institutions.

See a related blog post discussing benefits of pursuing an ecosystem strategy at Business Strategies: Vertical Integration vs. Ecosystems.

Innovation and its supporting ecosystem infrastructure should and will have immense impact on competitive outcomes in the market. However, even when utilizing the ecosystem as the paradigm for sensing new innovations in the market, it is possible for the firm’s strategy leaders to miss the full import of market trends, industry performance statistics and other developments. Therefore, the evaluative and inferential skill (as Teece puts it) possessed by the managers of the firm becomes important. Decision relevance of information gathered purely “inside” the firm is rather low, and this information must be supplemented by customer insights, research and analysis from outsiders, market research, competitive response predictors, etc. Management needs to make sense of this data and prepare it for action. However, there is still too much to “make sense of” and attention is in short supply, as usual, what with near-term goals always exerting pressure on management. The firm’s articulated strategy can help out here by becoming a relevant and current filter so that attention is not diverted to every business opportunity or threat.

Hope you enjoyed this post!