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Business Report

Where Innovation Is Sorely Needed

The pervasiveness of data threatens to upend some business models and enhance others.

Editor’s note: Today we begin a new monthly topic in Business Impact at Technology Review: Innovation Strategies. The world’s most innovative companies are using technology to move faster and more decisively than their competitors. They are mining data on their operations and their customers, letting their employees do inexpensive experiments, and using business software to get sprawling organizations working together. We’ll explore the industries that are most in need of fast innovation and examine new ways of doing business, with case studies and interviews from around the world.

Information flow: The complexity of online connectivity is represented in this visualization of how thousands of blogs link to each other.

Everyone recognizes that technology is destroying long-standing business models in news, music, and other media industries, but the next few years could also bring wracking changes in numerous other businesses, such as insurance, retail, cars, medicine, toys, and utilities.

The reason lies in the third wave of personal computing. The first, beginning in the late 1970s, gave us PCs. The second, the Internet revolution of the 1990s, hooked all those computers together. The third is letting us essentially carry the Internet with us, on smart phones, tablets, and other devices. Cameras and sensors are becoming cheap and ubiquitous. Every person and device will be able to talk to any other person or device, anytime and anywhere. And operating in this world of infinite connections will change almost everything for businesses.

Those accustomed to broadcasting their messages will have to get comfortable in the middle of a conversation where everyone is talking to everyone else, all at the same time. Businesses that act as middlemen will have to justify their value or get pushed aside. Businesses that depend on market ignorance will have to adjust to total transparency on price and quality. And that’s just for starters.

For example, because sensors, cameras, and wireless connections will be active in cars or in the smart phones that drivers and passengers carry, auto insurance will increasingly be based on detailed real-time information, such as how many miles are actually driven, how fast the car is going, and whether the driver stops at stop signs and uses turn signals.

Insurers will need to respond with far more flexible and customized pricing than they offer now. Allstate, Progressive, and others are already offering “Pay-As-You-Drive” programs that offer lower rates to (presumably safer) drivers who allow them to monitor such information. Insurers may also communicate more with customers in an effort to reduce claims. For instance, they might warn that a customer’s teenage son has deviated from the approved route from school and has seven friends in the car. Teens have accidents at about twice the rate of other drivers; any company that can prevent some of those accidents has the opportunity to lower individual premiums and capture much of the $20 billion in overall premiums that teens represent in the United States each year.

The story will be similar in other industries. For example:

• Retail stores. Physical stores will face increased price and quality pressure because of apps like Red Laser, which displays  reviews for a product, and the prices it’s selling for at neighboring stores and online, when the customer uses a smart phone to scan the bar code. Malls and physical retailers have long clung to the notion that once customers are in the store, they will want the immediate gratification of buying a product and taking it home. Yet with unlimited information about alternatives at their fingertips, more in-store shoppers might choose savings and free shipping from a cheaper supplier. It might not be long before location-based capabilities yield another level of price competition. For instance, Amazon could offer an additional 5 percent off to shoppers browsing its site from inside a Walmart store.

• Cars. There’s a saying that car companies make cars while everyone else makes money (on financing, warranties, repairs, insurance, and so on). But car companies could move in on these money-making opportunities by capturing usage and diagnostic data in real time. GM, for example, is already offering discounted insurance to customers of its OnStar remote security system.

• Medicine. Health-care providers will have to switch from seeing patients episodically to seeing them, in essence, every moment of the day. Even now, implantable sensors for people with heart problems can send a steady stream of data through a wireless device to a doctor’s office for evaluation. Over time, as sensors and wireless devices spread, doctors (or, more accurately, their computers) will start monitoring many patients for a whole array of health issues. The data will find its way into the public domain in some form, making it possible for patients to know which doctors are especially effective and creating new types of competition.

• Utilities. Utilities, which have barely innovated for decades, are now adding sensors throughout the electric grid and putting “smart” meters in homes and businesses to manage the grid more efficiently and get a better sense of demand. They will have to be able to vary the retail price of electricity in real time and relay that information to consumers and businesses instantly, so they can adjust their usage to limit demand when prices are high. Some utilities will handle the transition well, but many will not.

• Toys. Kids are migrating to higher-technology content earlier. That may be bad news for companies that sell dolls and blocks, but it’s good for those that provide entertainment on smart phones and tablets. Already, the social aspects of such devices are creating opportunities for innovators to reinvent toys and games. For example, many people now use phones to play a game of Scrabble over the course of several days, making a move whenever they have time.

The companies that operate in this new world had better be smart. Tomorrow, we’ll lay out key principles on what it takes.

Paul B. Carroll and Chunka Mui are cofounders and managing directors of Devil’s Advocate Group, a consultancy that helps businesses test their innovation strategies. They are also coauthors of Billion-Dollar Lessons: What You Can Learn From the Most Inexcusable Business Failures of the Last 25 Years.

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