Buying Digital Innovation: Silver Bullet or Albatross?
Originally published in The Drum.
Walmart’s recent acquisition of Jet.com is certain to be a historical business school case study either on buying innovation, or on poor diligence and overconfidence about integration.
That said, it’s far from unique in today’s marketplace. We’ve seen many traditional and not-so-traditional companies pay heavily for an upstart that’s perceived as innovative. For example, Microsoft greatly beefed up its social presence with its acquisition of LinkedIn. And Unilever laid claim to a new category and distribution platform with the purchase of Dollar Shave Club.
Make no mistake, Walmart has done the same. Though long an innovator in areas like logistics, it’s now taking on Jet.com, which is not valuable so much for its revenue or technology, as for its distinctly different audience segment appeal and customer experience.
On the surface, this seems like a good move. That’s because innovation comes with a risk/reward tradeoff. Doing it yourself is, of course, risky. If your innovation efforts lack commitment, investment, and measurement (as so many do), your customers and employees will soon figure it out. Even companies that succeed brilliantly in this area, as Amazon did with Echo, they also fail (read: Fire phone).
You might think the answer to the problem is to buy a proven innovator. Though expensive, at least it’s a sure thing, right? Not so fast. Plenty of companies have acquired what they thought was lightning in a bottle, only to see to the entire experiment fall apart (see Yahoo’s acquisition of just about anything). So how do you know you’re truly getting the real deal, or simply buying technology you don’t have? The difference boils down to four questions:
Will it help make up lost ground or does it create new territory?
A lot of the time, a company that thinks it’s buying innovation isn’t doing so at all. Instead, it’s making up for its own sluggishness or mistakes in the past. A lot of sports brands, for example, have purchased fitness trackers in the past few years. While they need to do this to keep pace with their customers’ desires, most of these products are not innovative so much as competitive on features. Innovation by its nature breaks new ground. Dollar Shave Club, for example, provided customers with a new shortcut to razors by building a digital service around a product. That changed the category.
Does it compete with a product, or complement the category?
A corollary to this is that truly innovative products don’t compete, they complement. In other words, if you have a product that’s commoditized, you can only innovate at the category level (and if you do so well, you can often redefine and own that category). LinkedIn does not compete with Facebook, for example. Jet.com on other hand, directly competes with Amazon.com, making it a much riskier bet.
Will it alter the consumer experience with the brand?
This is the most critical point. Successful innovation almost always improves the customer experience; it is not merely technology for technology’s sake. For example, let’s imagine that you want to build a better mousetrap. In this case category has a serious problem: no one likes to remove dead mice. You may make the most innovative, rodent-zapping device in the world, but if at the end of the day, your customers are still dealing with dead mice, you haven’t won. A truer innovation might be a smart mouse removal service.
Are the two companies together on any of the above?
Sometimes, an acquisition on its own doesn’t change a category, but when combined with its new owner, it does so. Jet.com touted itself as an Amazon-killer precisely because of its ability to undercut the prices of its rival by 5-7%. That hasn’t proved compelling enough for consumers to switch. However, Walmart already undercuts Amazon in many instances, often by much larger margins than that. If it can marry its pricing power with the innovative minds at Jet.com, the difference may be enough to shift the category. Dollar Shave Club provides a clearer example. There Unilever not only bought a booming business, it also acquired a platform that it can apply to other products in its portfolio—and change its customers’ experience with them as well.
Like many things in life, there are certainly exceptions to these rules, and companies shouldn’t reject a potential purchase because it fails to satisfy them. Sometimes you have to buy your way to make up lost ground. Sometimes you can’t avoid jumping into a category with a lot of competition, and sometimes you need a technology that improves everything except the customer experience. And, of course, you should always have an organic innovation strategy of your own. But if the latest wave of acquisitions shows anything, it’s that true innovation is hard to find—but golden when you find it.