Andy Howard

Would Your Company Make the ASX200 ‘Innovation Fund’?

High-growth companies aren’t focused on their existing markets.

In 2006, ten companies on the NASDAQ were selected in the ‘UX Fund’, a portfolio of companies with market-leading user experience (UX) design. UX is the commercial engine of the Internet and these companies were selected for their growth potential and world-class approach to user experience.

The UX Fund was created by user experience professionals Geoff Teehan and Jon Lax. The simple investment theory was that companies that focus on delivering great user experiences will see it reflected in the stock price. The purpose of the fund was to test to theory and, if it proved true, to share in the reward.

 Netflix, Apple and Nike were the biggest movers. The fund also included Google, JetBlue, Progressive Insurance, Target, Yahoo!, Blackberry and Electronic Arts. 

The criteria for selecting the UX Fund’s investments was simple. Companies were required to show a demonstrated care in the design of their products and website, a history of innovation, a loyal customer base and an overall positive experience of doing business.

The biggest movers in the UX Fund are more than UX leaders. They are world-class innovators. They created value through innovation, along with UX, and disrupted entire markets in a single decade.

If an ‘Innovation Fund’ was created today for ASX200 companies, would your company make the cut? 40% of today’s Fortune 500 won’t exist in ten years. How can ASX200 companies not just protect themselves from extinction, but set themselves up for market-leading growth?

Netflix experienced the biggest growth with a whopping 3064.7% gain. In 2006 Netflix was a DVD rental business in a price war with Blockbuster. By 2016, Netflix had innovated to provide streaming media and video-on-demand to over 100 million customers worldwide. This year Netflix won an Academy Award. In the meantime, Blockbuster filed for bankruptcy in 2010.

Blackberry was the worst performer of the UX Fund with a 93.9% loss. In 2006 Apple and Google had no relationship with cellular carriers and Blackberry was the dominant smartphone brand. By 2016 research firm Gartner estimated Blackberry’s market share was down to 0.1%. By adapting too slowly, and thinking it had more time than it did, Blackberry lost almost all of its value in a single decade. Blackberry had remained stoically focused on appeasing its existing business customers, while Apple rapidly innovated for the consumer market and its mass adoption broke Blackberry’s business hold. 

 The examples also show that past success doesn’t provide any guarantees for the future. Until this year, a 112-year old watch company was the world’s most popular watch brand. Now a technology company is. Apple overtook Rolex in September to become the number one watch brand globally following year-on-year watch sales growth of over 50%. Technology analyst Canalys estimates Apple shipped 11.9 million watches in 2016 alone.

The threat goes far beyond watches, of course. Banking, insurance, automotive, communication, transport, travel, retail, fashion, technology – the biggest movers in these industries over the next decade will be those that invest in transformative innovation and commit to ever-improving the user experience.

The primary criteria for the UX Fund in 2006 was for a company’s products and website to provide a world-class user experience. The founders were looking for the user experiences that were wonderful for customers to interact with and had the ability to grow revenue and loyalty. Examples are Netflix’s recommendation engine that uses algorithms to recommend films a customer will like, JetBlue’s fast and friendly online booking experience, and Google’s free email service, Gmail. Google’s Gmail had far superior storage and ease of use compared to competitors. In 2006 Gmail was invitation-only; existing members had a limited number of invitations to offer to others. Gmail was so desirable that invitations were being sold on eBay.

If an ASX200 Innovation Fund was being established today, how would investors or fund managers select the next Netflix? They’d be wise to back companies that are relentlessly focused on improving the customer experience, have created new revenue streams in new markets, and have a history of financing ‘moonshots’ – high-risk innovation projects that are truly ground-breaking if they land.

Exploring new markets helps a firm be the disruptor, not the disrupted. 40% of today’s Fortune 500 won’t exist in a decade’s time. Innovating outside of a firm’s existing markets is the difference between commercial growth and extinction. 

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