Guest article by Per Kristensson and Tor W Andreassen.

There is a shift in innovation focus from upstream efficiency focus to downstream value creation for customers.

In his seminal book “Tilt: Shifting Your Strategy from Products to Customers,” author Niraj Dawar delineates the gradual shift of innovation investments from upstream (focused on production) to downstream (centered on customers). Dawar argues that today’s business leaders need to transition their focus from what can be produced and sold, to what more can be done for the customers. He even asserts that many leaders continue to seek advantages where they traditionally existed. 

Why Downstream Innovations Matter
Downstream, or market innovations, aim to enhance a business’s market offerings to appear equally or more attractive than competitors. These innovations often incorporate adjustments in the seven Ps of the marketing mix: Product, Place, Promotion, Price, People, Physical facilities, and Process Management. For instance, when Statoil rebranded to Circle K, the change was primarily through ‘Promotion,’ affecting the brand name, logo, color choices, and employee uniforms. The other six Ps remained constant.

Business Model Innovation
For several reasons, executives have become increasingly attuned to innovating their business models. The essence of a business model is to create, communicate, and capture value. Advancements in technology have simplified and cost-optimized these processes, leading to disruptive potentials across sectors. Professor Rita Gunter McGrath developed a straightforward test for an industry’s susceptibility to disruption, evaluating factors such as stable business models, long-term operational focus, and management culture. Indeed, a fine aspect of many new business model innovations is that they consider how customers might benefit from a change, for example by switching from product transactions to anything-as-a-service (XaaS). 

The Critical Role of Customer Retention
A common objective of market innovations is to avoid losing customers to rivals—essentially to improve or maintain the repurchase rate, an aspect frequently overlooked in innovation discussions. According to a study by Lehman and Gupta (2005), a 1% improvement in customer repurchase rate had a 4.9% effect on firm value, significantly higher than the effects of improvements in cost efficiencies or interest rates. Voila, a beautiful aim of future innovations is to zoom in on this rate.

A byproduct of an increased repurchase rate, because of happier customers, is a positive impact on Brand Image and Brand Equity, which in turn aids in attracting new customers. Over time, this leads to increased customer equity— the economic value of the customer base—and consequently, firm value.

In conclusion, the landscape for innovation is shifting. Leaders would do well to recalibrate their focus and resources in line with these emerging paradigms.

Professor Per Kristensson,
Center for Service Research (CTF) at Karlstad Business School
The Innovation Index Coalition (IIC)

Professor Tor W Andreassen,
Center for Digital Innovations for Sustainable Growth (DIG) at The Norwegian School of Economics
The Innovation Index Coalition (IIC)

Dawar, Niraj. (2013). “Tilt: Shifting Your Strategy from Products to Customers.”
Lehman, D.R., & Gupta, S. (2005). “The Long-Term Impact of Promotion and Advertising on Consumer Brand Choice.”
McGrath, R. G. (2011). Finding opportunities in business model innovation. The European Financial Review, 14-17.

Article originally published by Digital Innovation for Growth.
Image credit: Skye Studios.