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Retail business event at Radisson Blu Scandinavia Hotel, Gothenburg.

The role of markets in the innovation process

It’s universally understood that innovation transforms markets, sometimes in a small way, sometimes radically, but how do markets influence and encourage innovation? And if they do, what are the drivers that will make it happen? Some markets are unquestionable more mature than others, but maturity is not the right way to look at it, as history has shown that almost non-existing markets can have a great influence on innovation, while markets that consist of millions of customers and vendors have hardly any influence on innovation that matters.

The most recognized examples of markets that either had a huge influence on innovation or didn’t matter at all are the original Apple computer and the Nokia phone. While Nokia devoted lots of energy and resources to study how people used their handsets, it wasn’t an endemic frustration amongst mobile users that created the original Apple iPhone in 2007. It was the frustration of a small set of people at Apple, and the technology they were developing in the form of the touch screen, that brought about the iPhone.

Article imageThe original Apple computers (the Apple II and Macintosh) benefited to a large extent from a small but opinionated community that gave much needed input, enough to drive the next step in the innovation process. It was a group of enthusiastic hobbyists, who wanted to make their own creations, either these were programs, spreadsheets or simple documents. They either had or knew someone who had a mini computer or mainframe at work, and they wanted to share that experience at home. These were early adopters who were willing to overlook imperfections while the idea of a personal computer more than well served their needs and interests. For them, it was as exciting as traveling the world in the ’30s. Usually opinionated, but in a constructive way, they often had other interests besides computers — in art, medicin, or zoology — who gave them unique perspectives in the field of computer science. Proximity to this community was, if not critical, very important to drive Apple’s understanding of what needed to be done. Although 95% of all ideas these hobbyists came up with were rejected, it was the ones that got through that resonated with and built Apple’s future.

Nokia also recognized the need to observe how their customers used their handsets. They sent experts in behavioral science and psychology to study people in parks and cafes, often secretly, but the problem Nokia had was that they lacked the proximity and kind of users Apple had; the ones that would benefit Nokia in the long run. People loved Nokia’s products, but it wasn’t the kind of love who made the community come up with new ideas that could be incorporated in future products. Nokia’s elicitation activities, including their usability labs, only managed to make them outperform their current competitors, which wasn’t bad at the time, but it didn’t secure their future. Nokia lacked the active community Apple had in order to innovate. Innovation isn’t a one way street, and has never been, which most successful companies understand. In order to build products that can survive in the long run, companies need a market that is active and has a deep understanding of the products they use.

Time and time again history has shown how different needs can be present in a market, while the actors who should serve the needs don’t have the ideas or incentives to do it. Instead, these actors become gatekeepers, preventing real solutions from entering the market. Not seldom is this done in collusion with an unwitting government in order to keep entry barriers in place, wasting booth human talent and emotions in the process. It only feeds frustration and anger in those who challenge existing solutions and who look for change. These gatekeepers are more interested in fulfilling their own needs, either these are career goals or financial targets, creating lock-in effects to make customers dependent and vulnerable instead of helping them.

Markets that work properly will supply a constant flow of ideas, demands, and opportunities; they will even supply people who can be employees or part of an ecosystem. A market is a testing ground for innovation, a place where entrepreneurs and companies can benchmark ideas. Markets are not above failure; they can easily go down blind alleys, like the 3D television and the supersonic passenger jet airliner Concorde. But markets are seldom wrong in the long term, as customers will rank, reward and punish companies and their innovations. Markets that are agnostic when it comes to brands and technology are less likely to play an important role in the innovation process. This is what happened to Nokia, whose customers were not aware of what they wanted or why they wanted it. People who are easily convinced by their friends and influencers have few strong opinions about the products they use. It’s therefore not enough to build the best product, it has probably never been, as history is filled with exceptional innovations that were knocked out by much inferior products. Markets can become single-minded and outright hostile to ideas that are different. This is frequently seen in the Software engineering community, where people are mocked because they dare to be different, which is really a sign of misgiving and insecurity when it comes to own choices. The more people dare to express their opinions, the more a market will evolve. The alternative is a market that stagnates and where innovation is largely absent.