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A lesson in innovation – Why Amazon’s predictive delivery system signals a game change
by Elix-IRR
Thursday, June 12, 2014

According to Forbes, Amazon is the largest online retailer and currently ranked number 33 in the world for market value. Amazon’s initial success worldwide was part of a broader surge in internet business in the 90s. Unlike so many other companies that declined after the dot-com bubble imploded, Amazon maintained its growth and competitive edge. How? Their success is down to an unwavering focus on their long term vision, continuously innovating their business model and relentless focus on responding to customer needs.

Traditionally, innovation was about proprietary R&D. The pharmaceutical industry is the best example of this model, where it used to be that a sizeable investment was necessary to develop a new product. A patent protected the high premiums charged on the new drug, which funded the R&D costs. This model remains strong in some businesses which are at a huge disadvantage because the main flaws of R&D-centred innovation are its high costs, slow speed to market, and lack of early market testing.

The second wave of innovation puts this model upside down by placing the customer at the centre of innovation. Technological advances have fundamentally shifted the way that we think about and interact with businesses. This movement is increasing in momentum as businesses try to respond to rapidly evolving consumer expectations and new market entrants emerge with laser focus on specific needs. To give some examples, the emergence of big data analytics allowed companies like Amazon, Apple, Expedia or Tesco to tailor their offerings to individuals, with similar trends across other industries.

The most recent trend in business innovation centres around technology-enabled business processes, rather than IT solutions or data. This allowed many tech start-ups (e.g. Google, Facebook) to compete with the ‘big guys’. One example is Amazon’s recent attempt to patent their predictive dispatching solution. At a moment when online retailers are competing for customers on service and delivery times, Amazon is planning to send parcels to unspecified addresses in broadly defined areas before customers order them, and redirect those parcels once the orders are in. This would potentially allow Amazon to lead the same day delivery market at no significant additional cost.

What’s really interesting about Amazon’s example is that it concerns a patent for a business process, which, while enabled by technology, refers to an otherwise rudimentary business method. Will they truly be able to prevent competitors from using the same approach? The US patent office seems to think so, but the patent is still pending in Europe (the EU has previously rejected several other patent requests by Amazon, including ‘One Click’). So, how do you protect investment in process innovation?

Until recently, patents were an effective line of defence for companies at the R&D stage of innovation. The advantage of patenting remains having the option of legal action to prevent others from replicating your solution. The disadvantage of patenting has always been that businesses also have to publicly disclose the details of the new technology or method in the patent application – thus encouraging competition to do ‘the same thing differently’. Some of the most successful innovators in the R&D space have therefore never bothered about patenting and kept their formulae secret – think Coca-Cola. 

In the age of business process innovation the ability to stop others from using a similar process map is highly dubious. While the innovator has the first mover advantage, the competition is rarely far behind, and the USP does not rely on proprietary technology. The only viable way of protecting your competitive position is to continuously innovate. This is why Amazon keeps winning. They do so by accepting that the only way to maintain their competitive advantage is through continuously disrupting the market. They have truly embedded the culture of innovation inside Amazon and it works.

A truly innovative player will use technology to transform their industry rather than just transform their business. Competitors will be at a disadvantage, as adapting new business models is not as easy as replicating a technological solution. Businesses need to understand that the wants and expectations of customers are changing as a result of what innovators like Amazon are repeatedly doing. Companies need to be able to respond to this quickly through creating adaptive business models.

The winners in today’s economy are those who embed a continuous innovation model and a conscious innovation strategy. Only fundamental changes to operating and business models will ensure future competitiveness.

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