What do non-consumption, organizational friction and market failure have in common? These days, everyone is “innovating” to find the next big thing. But where do you start? One way is to try and think of innovation as having mass, and therefore it cannot be created from truly nothing. Innovation must start somewhere, and it must start with something that already exists.

New Sources of value

While it might seem that the disruption du jour is all anybody is ordering these days, making innovation, growth and new value seem like insurmountable things, businesses should focus on where they can find value most quickly. So why not begin where others have ended in non-consumption, organizational friction or market failure? Such unexpected failures provide opportunities for solutions, and solutions are the source of explosive value.

What do these three common challenges mean in business terms? Simply that the economics are not valuable enough to get folks to focus on them. Often, it seems that the problems are too unwieldy to tackle, the transaction costs are too high or the friction is too great to internalize the costs within a firm. However, understanding these issues can help explain why a vast number of businesses are difficult to franchise or scale, or a segment of a market is perceived to be of insufficient value, and therefore of no benefit or interest.

Take any expanding company and ask: what underlies your growth? Across industries and time, explosive value has come from addressing market failure, organizational friction, and non-consumption head-on, through the development and deployment of new assets and capabilities. These issues create a white space or void – an opportunity – in which an innovative solution can provide businesses with the value and growth they seek.

Across industries and time, explosive value has come from addressing market failure, organizational friction, and non-consumption head-on

Non-consumption entails getting those who are not engaged in the market to be fully engaged. Non-engagement in a market does not mean that people don’t have needs or desires, but that those needs or desires are not being met in a form or manner in which they can purchase or consume consistently. The field of Frugal Innovation, targeting vast numbers of people with low incomes, is an example of mapping capabilities to purchase and consume with needs and desires.

Taking on Market Friction

An excellent example of taking on market friction is Uber. The essential value proposition of Uber is ‘convenience’ – get a car when and where you want it and the payment for the service is transparent. Eliminate the frictions of inconvenience and payment transactions and what do you get? Explosive growth.

Similarly, a new startup in Portland, Maine called Gold Frontiers eliminates the market friction of acquiring gold bullion as part of your investment portfolio, usually a lengthy and costly process. Through the introduction of electronic exchange, or following the curve of retail securities and bond trading applied to precious metals, the frictions of time and cost get reduced significantly, and the company is set to flourish.

Market breakdown can be seen in Google, which is well known for creating new markets, or Apple iTunes and its creation of a fundamentally different business model with material implications on explosive value creation (for them) and value destruction (for others).But recently, there has been a new source of explosive value focused on the market failure of anti-microbial resistance.

Market breakdown can be seen in Google and Apple iTunes l with material implications on explosive value creation (for them) and value destruction (for others).

Governments, professionals and the media are among those who have declared anti-microbial resistance to be a growing and unmitigated health crisis. Infections caused by drug-resistant bacteria claim tens of thousands of lives in the developed world, an estimated 500,000 world-wide and cost billions of dollars each year. Over-use of existing antibiotics and industry dis-investment in the development of new ones has led to weakening lines of defense against emerging superbugs. Moreover, the absence of effective, rapid point-of-care diagnostics leaves doctors to treat ‘empirically’, relying on informed guesswork about which medicines a patient’s infection might respond to in a situation where a few hours delay in commencing effective treatment can mean the difference between life and death.

Finding Solutions to Market Failure

The gap between the significant need for innovation in this arena and the meager returns to those who invest in this innovation represents a market failure. How so? The typical pharmaceuticals business model is based on price-times-volume equals revenue opportunity, meaning investment focus. However, anti-microbial resistance does not follow this model because the more the drugs are used, the lesser the efficacy of those drugs. The lesser the efficacy, the fewer the drugs sold. And so, the typical price-times-volume model breaks down, which explains why we have so few pharmaceutical companies investing in this critical health area, reflecting a serious market failure. This is a classic example where a public good, in this case, more effective antibiotics, requires both public and private sector innovation. This is a mounting area of attention, emerging new models and explosive new sources of value waiting to be captured by new types of players and models tackling this market breakdown.

While there is no formula that guarantees growth for any business, addressing these issues is a good place to start. Finding solutions to market failure, organizational friction, or non-consumption can be the difference between massive expansion and a quick exit.

By Ralph Welborn

About the author

Ralph has significant global business advisory and technology implementation experience, focusing on identifying where value is being created and destroyed and how to capture new sources of value. He has held a variety of leadership positions including Strategy and Transformation Leader at IBM (Middle East and Africa) and Senior Partner of Solutions and Innovation at KPMG Consulting. Ralph founded Jericho Group, an independent advisory firm focussed on business model innovation and market access, and was most recently a partner at Tapestry Networks, a stakeholder advisory firm that works with senior business and regulatory executives to govern and lead in times of systemic change. He holds a Ph.D. in cognitive science.

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