In part one of this blog (see below) I argued that when it comes to creating to create future business value, technological innovation may not necessarily be your best option. It certainly isn’t the only one. The two underlying developments were: diminishing returns and increased commoditization. In this blog I will continue the argument with two more reasons:

3. Innovation is primarily a psychological activity

Innovative technologies usually aim to do one of two things: either improve an existing solution, or provide us with a completely new solution. To successfully innovate, we do not only need to know how to create things, but also: what things to create. Although an engineering mindset is indispensible to solve the ‘how’ problem, it may be a huge disadvantage when it comes to solving the ‘what’ problem.

The wrong questions
Our current level of technology provides us with numerous – if not endless – possibilities to create new or improved solutions, while the resources to do so remain scarce. As a result, the central question in innovation is shifting from: “can we make this” to: “should we make this”. This basically means that the most critical issue will no longer be an engineering problem, but a psychological one.

This human centric view on business is by no means a new one. In 1954 Peter Drucker – wildly recognized as the ‘father of business consulting’ – already stated that: “There is only one valid definition of business purpose: to create a customer……Therefore, any business enterprise has two—and only two—basic functions: marketing and innovation.” According to Drucker marketing and innovation are really two sides of the same coin; you either make people want what you produce, or you produce what people want. In both cases human understanding plays an increasingly important role.

Human centric innovations
The simple truth is that there is really no escape from this principle. Socio- economic developments will inevitably demand a more human centric approach to innovation, one that takes our evolved psychological mechanisms, as well as (social) context into account. We can no longer afford to see our customers as rational, well informed, self interested actors with stable and well defined preferences. Or as Steve Jobs famously put it: “It’s not the customer’s job to know what they want”. Even if they could tell us, it would probably just be a modern equivalent of – sorry for the cliché – Henry Ford’s faster faster horse.

At the end of the day, customer value is rarely created during the production process itself, but rather during the conceptual processes that precede it, or during the marketing processes that follow. Instead of business success flowing from manufacturing skills – production can easily be outsourced to a variety of generic manufacturers- it primarily flows from the ability to design cool products and create brands that people feel emotionally connected to. This brings me to my final point:

4. We don’t need more stuff (we want it…)

It took about 84,000 generations before our ancestors were propelled into the prosperity of the industrial age, 7 generations ago. But it wasn’t until after the second the Second World War that those who were fortunate enough to live in western industrialized societies, truly entered an age of unprecedented abundance. Since the 1950’s we have become up to 300% more prosperous and are now among the wealthiest generations to have ever lived.

Maslow’s Penthouse
We have become permanent residents of ‘Maslow’s Penthouse’. So what do customers with this level of wealth truly value? Well, because most of us don’t really have to worry about physical survival anymore, we spend most of our time worrying about the things we want instead of the things we need.

The inevitable consequence of our preference shifting from ‘needs to wants’ is that the ‘need part’ of a product – e.g. features and functionality – has become a little less important, while the ’want part’ – e.g. aesthetics, entertainment, meaning and significance – has become more important. Nowadays it is more common to see waiting lines in front of the new Apple store than the soup-kitchen, and more than often consumers show us that they are willing to pay a high premium for something as abstract and subjective as a positive mental association.

Arts and entertainment 
Bob Lutz, a former VP at General Motors put it this way; “….we are in the arts and entertainment business”. Why would a business leader in an industry as ‘hard’ as automotive say something like that? My guess is that it’s not because Bob’s a sissy – quite on the contrary; he’s a square-jawed, cigar smoking, ex-fighter pilot, known for occasionally taking a helicopter to work – but because he understood that owning a car is no longer a luxury, in a country where there are more cars than people with driver’s licences.Cars, like most other products, have commoditized. They have become similar, interchangeable options without any clear distinction in functionality or features.

In affluent and commoditized business environments, it’s the ability to add emotional significance to your brand, product or service, which will be the crucial factor in maintaining profit margins. For this we need more soft skills, not less.

Maybe we should all better get used to being in the arts & entertainment business…….