WHAT IS CORPORATE INNOVATION, AND WHY SHOULD I CARE?

You're probably wondering what in the world "corporate innovation" means. On the face of it, corporate innovation sounds like a buzzword big companies use to sound like they are taking risks and developing next-generation technologies, all while pushing the same old products with new marketing. That is only half right.

Although it's true that much of what happens in innovation groups at large companies would qualify as innovation theater, corporate innovators serve a useful purpose: to identify areas of overlooked opportunity and to find solutions for potential existential threats to the company's current business model. Let's focus on the existential-business-model threat for a minute.

At its core, a business exists to serve a specific customer need, whether that need is coffee, tires, flights, or anything else. That need is backed up by insights into consumer behavior and preferences — which, over time, become ingrained as assumptions. As these underlying assumptions change — whether because of technological shifts, regulatory changes, or even something as seemingly trivial as fashion trends — businesses have to adapt their offerings to continue serving their customers. Usually these assumptions change incrementally, and normal business structures and processes can handle the necessary adjustments. Sometimes, though, there are major shifts, things like the rise of the Internet or the proliferation of mobile devices, that dramatically alter underlying assumptions and qualify as existential threats. When these major shifts occur, previously successful companies can topple practically overnight. The larger business community and media often ignore this dark side of business history, but it needs to be studied in order to understand the purpose and necessity of corporate innovation.

Companies wisely pay a lot of attention to their competition, but the truth of the matter is that established companies such as Coca-Cola and Pepsi will never put each other out of business. The same goes for MillerCoors and Anheuser-Busch, and The Estée Lauder Companies and L'Oréal. The reason goes back to those underlying assumptions. These businesses are all built to respond to the same set of consumer behavior and preferences. Yes, competitors may incrementally shift their core strategies and take percentage points of market share from each other, but they are solving the same problems with very similar methodologies.

For this same reason, when there are major shifts in the underlying assumptions, entire industries can be equally unprepared to adapt to the new conditions on the ground. To illustrate this point, let's look at the favorite corporate innovation case study of Blockbuster. Back in the 1990s and 2000s, Blockbuster was the most popular way for someone to rent a movie and watch it at home (the consumer need). To capitalize on this consumer need and serve as many customers as possible, Blockbuster built more and more locations around the world and started selling ancillary products like candy and snacks. Along the way, other video-rental companies popped up to capitalize on the same consumer need and compete with Blockbuster. The largest of these many competitors was a company called Hollywood Video. As these companies competed with each other, they used tactics like pricing, movie selection, and location convenience to try to take market share from each other. But at the end of the day, they were locked into a sort of dynamic stalemate.

Then in 1998, a guy named Reed Hastings decided to cut the bricks-and-mortar element out of video rental and created something called Netflix, a direct-to-consumer method for renting movies. The underlying shift that allowed this to happen? The Internet. Consumers could go to the Netflix website, select which movies they wanted to rent, and have those movies show up in their mailbox a few days later. When they were done, they sent the movies back to Netflix and received the next set of movies on their list. By offering a rental service through the Internet, Netflix was able to cut out many of the expenses in the Blockbuster/Hollywood video business model, such as retail employees and rent.

You already know how this movie ends. Unable to adapt to changing consumer preferences, Hollywood Video and Blockbuster both went out of business — Hollywood Video in 2010 and Blockbuster in 2013. But let's rewind the tape and see how these "incumbents" responded when Netflix had clearly started to make a dent in their market share.

In 2007, Blockbuster started its own digital distribution service to directly compete with Netflix. Let that sink in for a minute. Netflix was around for nine years before Blockbuster launched a similar service of its own. While some of that delay can be tied to corporate inefficiency, it can mostly be attributed to the fact that Blockbuster was not built to be a mail-order or digital business. Its DNA, so to speak, was in renting movies to people at retail locations. When Blockbuster hired new corporate employees, it did so on the basis of how well that person could support their retail business. Blockbuster's knowledge base simply wasn't built to support a direct-to-consumer or Internet-based business model.

So, did Blockbuster eventually realize that they needed to shift business models in order to stay relevant? Quite simply, no. As late as 2007, the company was still staking its future on retail. It didn't know how to do anything else. At the time, Blockbuster CEO John Antioco was asked about the Netflix threat, and he said, "We have everything that Netflix has, plus the immediate gratification of never having to wait for a movie."

What Blockbuster had entirely missed was the underlying assumption shift. As consumers became more comfortable with the idea of buying things online and having them show up at their door, they correspondingly became less inclined to visit...