Where innovation ideas come from: Changes in a firm’s broad environment

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One common source of innovation opportunities for firms arises from changes that occur in the border macro environment. Such changes create new demands for products, as well as new possibilities for startups to enter existing markets. This article explores changes in a firm’s environment as one source of innovative ideas.

Considering the firm’s broad macro-environment: The PEST(EL) framework

One of the most common frameworks for considering changes to the firm’s broad environment is the PEST framework (or extensions such as PESTEL). This framework helps to categorize the external changes that are occurring in a company’s market into political, economic, social, and technology trends (PEST), with extensions including ecological (or environmental) and legal factors (PESTEL).

The PEST(EL) framework helps bring some structure to external analysis – helping to ensure firms are aware of key trends that may impact their business. It is also useful when considering innovation opportunities – changes that occur within these categories, and especially social and technology trends, are key sources of innovation for firms.

Technological

Changes occurring to broad technology are one of the most common sources of business innovations. While some technological innovation occurs directly within firms, there are also significant opportunities created by changes outside – new technology advances that you can take advantage of to create new products or serve customers in different ways.  

Opportunities arising from technology changes can include:

  • Product attributes: Possibly the most obvious impact of technology changes are new product features (or completely new product categories) that are enabled by technological innovation.
  • Ways of substantially reducing the cost of service: Another possibility is to use technology to substantially reduce the cost of a particular product or service. Using machine learning may for example allow what was previously a manual task to be undertaken at significantly lower costs than previous.
  • Internal coordination and ways of contracting: Technology advances need not be externally facing – greater coordination facilitated by advancements in technology can be one form of innovation. Similarly, adjustments to contracting relationships – potentially allowing spot contracts with a distributed workforce, is another form of innovation that may allow you to operate more effectively or efficiently than incumbent firms
  • Distribution channels and business models: Another key way that technology can open up new business opportunities is by changing the way that goods are sold to customers. Technology changes may facility new channels that you are able to enter or business models for how you sell your product.

When we think of innovation it is easy to think of the mega technological innovations – the cutting edge technologies like virtual reality or autonomous vehicles. Of course, these major technology advancements create new opportunities, however more modest technology changes can allow new ways of offering a product or service, in turn potentially providing an avenue to enter and compete in a market.

Social

Social and demographic trends can be another critical source of innovation for firms – demographics change, and social trends can influence what is deemed desirable. Some opportunities arising from social trends include:

  • Changing preferences: Social trends can significantly drive demand for adjustments to product attributes and features and changes to business approaches. A growing demand for environmentally conscious consumers for example drives demand for organic food and energy-efficient products.
  • Growing demographics: Changes in the demographics of a population can also increase demand for certain services. An aging population may for example increase demand for certain services to meet the needs of the elderly. Similarly, immigration trends may influence demand for services to be provided in different languages – again opening the possibility of opportunities for firms who are better able to meet the unique needs of an underserved segment of the market.

In many cases, changes in social trends tend to be relatively gradual – recognizing them may however allow you to develop a focus on a growing market segment or demand.

Other components

Changes within other components of the PEST(EL) framework can also present opportunities for firms to innovate or enter markets. These can include:

  • Political/Legal: Changes in a political arena (which in turn can influence legislation) can open up – as well as close – certain markets. This presents opportunities for firms to both take advantage of areas that would previously have been restricted or serve markets in new ways where prior offerings are more restricted. 
  • Ecological: Changes in the ecological environment present new opportunities – particularly those changes that occur relatively quickly for which existing firms have not had time to adapt. For example, innovative ways of serving the needs of remote workers or isolated individuals have become increasingly demanded during the pandemic.
  • Economic: Broad changes in income levels may influence demand for certain price points of goods – potentially making more cost-focused business opportunities possible in recession periods, while goods and services targeting more affluent customers become more viable in times of economic growth. 

Final thoughts

Being aware of changes in the environment plays an important role in identifying new business opportunities. If we think of the success of Lyft and Uber – at least part of their success comes from the growing rise of smartphone usage – recognizing the opportunity for using this to allow individuals to easily book a taxi service – and developing a platform to make this a smooth process, is at least part of their success.

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