Innovation Spiral and Business Model
It is widely held that a “new economy” is emerging, one in which conventional wisdom about the innovation process becomes obsolete. Since “new economy” can be easily translated into “digital economy,” we have to think about what is new about the “digital economy. In this context, the author of this paper was quoted by saying: In the analogue world, things cannot be easily combined. However, with digitalization, all sorts of combinations are possible and we can end up with something greater than the sum of the merger (Newsweek, 1999). In the age of digital economy, therefore, I would argue that the emergence of a new business model can be a source of discontinuity and disruption as well as that of technical breakthrough innovations (Kodama, 2000).
In inventing iPod, for example, Steve Jobs (Cupertino Silicon Valley Press, 2011) is quoted as saying: What’s really interesting is if you look at the reason that the iPod exists and that Apple is in that marketplace, it’s because these really great Japanese consumer electronics companies who kind of own the portable music market, invented it and owned it, couldn’t do the appropriate software. In the revolution of portable music, therefore, I would argue, the Sony’s Walkman was obviously a technical innovation derived by the notion of demand articulation. It was based on Sony’s sophisticated translation skill to convert a vague sets of distant human wants into welldefined product concept, i.e., “portable music.” And it is also based on Sony’s product development skills to decompose the concept into a set of development projects. This decomposition was feasible by mobilizing all of the Sony’s competencies: recording and delivery of music, owned by Sony Music Co.; and, the various audio technologies owned by Sony Corporation, like regenerating the recorded music by tapes or CDs, good earphone technologies, and etc. In any way, Sony completed the first cycle of portable music.
According to Anderson and Tushman (1991), an industry evolves through a succession of technology cycles. Each cycle begins with a discontinuity based on new technologies, along economically relevant dimensions of merit. In each case, a process with inherently higher limits redefined the state of the art, increasing machine capacity by an order of magnitude while lowering costs and improving quality. To sum up, each discontinuity inaugurates a new cycle. And the iPod innovation by the Apple inaugurated the second cycle of portable music. Steve Jobs is again quoted as saying: Our idea was to come up with a music service where you don’t have to subscribe to it. You can just buy music at 99 cents a song, and you have great digital – you have great rights to use it. As is clear in this quotation, it is based on a breakthrough in system-of use, i.e., creation of new business model. This is easy to understand if we give some thoughts on what kind of core competencies are owned by Apple, compared with Sony, in terms of physical technologies related to the portable music. Therefore, we might generalize: while a breakthrough in technology starts the first cycle, a breakthrough in business model will inaugurate the second cycle.
We can further generalize this satement. Although the iPod example is characterized as B2C and IT innovation, however, we are now interested in a case characterized as B2B and IoT (Internet of Things). A Japanese construction machinery supplier, Komatsu Co. Ltd., turned out to be the first company which introduced disruptive technologies such as RFID (Radio Frequency Identification) and GPS (Global Positioning System) for development of building lots, and now is a market leader in construction businesses (Nikkei Business, 2007). In this system, RFID sensors are inserted inside their machines that are operating all over the world and all the data about their operating conditions are sent to Komatsu headquarters in Tokyo via satellite communication. The system Komatsu developed is called “KOMTRAX” system. They started its operation in 2001.
The development of KOMTRAX, however, was not as straightforward as we can imagine. In the mid-1990s, the country’s investment in construction business fell down significantly. Facing this reduced investment, companies had to revise the ways in which machinery was procured. This meant a shift away from ownership to leasing and rental (21 % of machinery was either leased or rented by 1993, 30 % by 1997, and 40 % by 2006). In 1997, Mr. Masahiro Sakane (later became CEO of Komatsu Co. in 2001) was appointed as director of the business planning and administration office. At the time, this office was staffed by people dispatched from various divisions. At the end of 1997, the office had received a business plan of 10 pages long, from engineers dispatched from the development department. This plan was for a business model for remotely monitoring machinery, which was in effect the prototype of KOMTRAX system.
Having spent a long time in the service department, Mr. Sakane had a deep appreciation of the intricacies of managing construction machinery maintenance, and hence understood well the value and potential of the KOMTRAX system (Nihon Keizai Newspaper, 2014/11/24), and thus this idea proceeded into the development stage. In this regard, the KOMTRAX development was initiated as a kind of local project using the funds provided by the business planning and administration office. The company completed 5 prototypes by 1998, and asked Mr. Chikashi Shike of the “Big Rental” (a rental company at Koriyama in Fukushima prefecture), which had only started up in 1997, to test the 5 prototypes. At that time, Mr. Shike had been also thinking about a brand-new rental business model that entailed using IT for centralized management to raise the utilization rates of rental construction machinery, and because this remote construction machinery monitoring system fit well with his idea, Shike agreed to take on the prototypes for testing. Being engaged in a rental business, Mr. Shike had no difficulties in understanding the inherent value of KOMTRAX systemFootnote 12
At the end of 1998, it was suggested at Komatsu that fifty pieces of equipment should be subsequently tested. However at a development meeting, supervising executives took a negative view regarding continued testing. At that meeting, meanwhile, Mr. Shike was asked for his opinions about the commercial advantages of developing the remote monitoring system. Shike explained that the system was a piece of remote communications infrastructure, and thus it is not appropriate timing to discuss in details what sorts of businesses would be enabled by it.Footnote 13
) Unfortunately though, it was decided that the remote monitoring system development should be cancelled. The Komatsu development team had not been able to draw a picture of a business model using KOMTRAX, because they did not have an understanding of its inherent value.
Nevertheless soon after that Mr. Shike, who had understood the value of KOMTRAX, wrote an order for 1,000 units and paid Komatsu 150 million Japanese yen (JPY) – an order made despite of Big Rental’s having only 500 pieces of rental construction machinery at the time. In those days, KOMTRAX units were externally attached and cost 150, 000 JPY per unit. Thus, such a large order made KOMTRAX a viable business, and so development was continued within Komatsu. In the beginning of 2000, the Big Rental grew rapidly and within 3 years became the top rental company in Fukushima prefecture. Shike quickly refitted all the Big Rental’s construction machinery with KOMTRAX units as soon as the units arrived from Komatsu. The product originally consisted of a communications terminal and modem, GPS and a simple CPU etc.
The capabilities and advantages of KOMTRAX in remote management of machinery and in work on construction sites, became widely known gradually. Komatsu Co., meanwhile, filed the business model patent for rental businesses so that that ways KOMTRAX could be used in a rental business. At that time, KOMTRAX was known as a business model for rental businesses, and was only available as a user option. In June 2001, Mr. Sakane has become the CEO of Komatsu company. He had aggressively pursued the possibility of utilizing KOMTRAX, not only as a tool for customer service, but also as a tool for visualizing the corporate management (Sakane 2006).
By establishing the KOMTRAX system, Komatsu headquarters has obtained and access to all the data about operation conditions of all the Komatsu machines installed all over the world. In fact, these collected data are effectively utilized for discussion on demand forecasting being conducted at the headquarters. Based on this demand estimate, headquarters formulates production schedules and equipment investment plans at each factory. In 2004, for example, the Chinese economy was in downturn, due to the financial policies then implemented by the government. The collected data by KOMTRAX system showed clearly that the operating ratios of their machines were abnormally low in China. Komatsu halted production three months before the demand reduction was officially announced by a Chinese government agency. This gave Komatsu an enormous advantage.Footnote 14
A cyclical process of research, development, production, and distribution is called an innovation cycle (National Research Council 1983). Now, we have learned that the second cycle of innovation related to B2B and to IoT, is triggered by the new business model creation rather than by technological discontinuity. On the basis of this experiences both in B2C (iPod innovation) and B2B (KOMTRAX invention), I would suggest that the innovation cycle in the open innovation paradigm, becomes a spiral innovation model with three-dimensional cyclesFootnote 15
). Our review of the history of the second spiral of B2C and B2B case studies, I would argue, revealed that the trigger at each stage came from different fields of knowledge areas. Furthermore, each time a change in sources of innovation occurred, dramatic upgrading in the inherent value (higher upper limit) of innovation was accomplished.
In a spiral model of innovation, therefore, “demand articulation” is effective in starting the first spiral. When it comes to the second spiral, meanwhile, this wording had better be replaced by a term which is more proactive than the demand articulation by itself (Kodama 2000). Having described so far new phenomenon and new research findings, I would suggest that “articulation of demand” should be replaced by “creation of a new business model,” in the second innovation spiral, i.e., in particular, in the process of “open innovation.”