The authors describe how corporate innovation often produces severe, unintended social consequences. Even as innovation creates value for a firm, it can destroy value within other systems. This occurs with innovation that produces disposable products — the firm captures value from increased sales, but the waste disposal destroys environmental and social value. They propose that companies move away from the traditional innovation model focused on the firm to a systems innovation model focused on the firm and its products in relation to other systems.
When Nespresso launched the coffee pod in 1986, its parent company’s executives had much to celebrate. They had found a way to deliver coffee in easy-to-use, recyclable, aluminum capsules that kept the coffee fresh and office workers/home coffee drinkers happy. Not long afterward, competitors started to appear. Green Mountain Coffee Roasters, now Keurig, developed its own version of a coffee capsule.
Keurig’s capsule, however, was plastic, which was much more difficult to recycle than Nespresso’s aluminum one. Keurig’s innovation sparked unintended outcomes, with disposable plastic coffee capsules generating mountains of waste. By 2020, approximately 40% of US coffee drinkers owned at least one capsule coffee-brewing machine.1 Every minute, 39,000 capsules were made worldwide, of which more than 75% were ultimately landfilled.2 The capsules were good for consumers but bad for society and the environment. Keurig’s K-Cup inventor, John Sylvan, says he now regrets inventing the K-Cup.3
It’s an inconvenient truth that many of the best corporate innovations create severe, unintended social and environmental consequences. Even the most progressive innovations emit carbon into the atmosphere or add plastic to landfills.
Nevertheless, there is an approach to corporate innovation that creates value for the firm and a positive social impact. It is called systems innovation. In this manner, companies make money while contributing to more resilient and sustainable systems and societies. Success is measured not just by return on investment, but also by positive social impact. In this article, we discuss systems innovation and its ability to mobilize sustainability.
Traditional Innovation Models & How They Went Wrong
Before we describe systems innovation, it is important to outline traditional approaches to corporate innovation and where they went wrong. The two most common are the stage-gate model and design thinking.
The stage-gate process was designed for new product development and is the most commonly applied approach to innovation. It starts with an idea that passes through several stages that include a business case, technical assessments, product development, and product launch (see Figure 1).4 Each stage looks at the idea based on successively more intensive criteria. Typical criteria include strategic fit, market attractiveness, and technical feasibility. Each gate is an up-or-out decision. The stage-gate process is methodical and clear, and it efficiently allocates resources.
For example, 3M may see an opportunity to offer a new application for its adhesives. It assesses the market potential of the adhesive, ensures the new format meets regulatory hurdles, and determines whether it is financially viable.
However, the strength of the stage-gate process is also its greatest weakness. Its systematic methodology is rigid and inflexible. All those involved in the innovation process know what to do next and how to report success, but they are also constrained in what they can do. Their creativity is stifled, resulting in incremental innovations. Anything radical is killed early. Furthermore, the stage-gate process is guided by clear goals or metrics, such as sales or ROI. Any innovations that risk not meeting those metrics are squashed.
Rather than starting with an idea, design thinking begins with a problem faced by customers. Taking a human-centered approach to innovation, design thinkers seek to solve customers’ problems, thereby uncovering new products and services or improving existing ones. The phases in design thinking are, not surprisingly, humanistic, including building empathy, defining the problem, ideating, prototyping, and testing.
Design thinking differs in another important way from stage gate. It embraces fluidity among the various phases. Projects loop back through the five phases, especially the first three, as ideas are tested and refined (see Figure 2).5 Design thinking works well when decision makers can see a problem but want to garner a deeper understanding of the users’ perspective.
This approach has generated many iconic products like suitcases with wheels and smartphones. Exemplary firms that have embraced and profited enormously from design thinking include PillPack (a prescription drug-delivery service bought by Amazon in 2018 for US $1 billion6), IBM, Phillips, and Uber Eats.
Design thinking was also behind the massive success of Airbnb. Founded in 2008, Airbnb was struggling and almost went bankrupt in 2009. The company’s revenue was a paltry $200 per week. Applying design thinking, company leaders strove to hear the voice of the customers to understand the problem. Scanning through all 40 listings in the New York area, Airbnb founders identified an absurdly simple problem: low-quality pictures. Customers couldn’t see clearly what they were paying for. The solution was simple. The team rented a camera, flew to New York, met with hosts, and replaced the photos with aesthetically pleasing, high-resolution ones. Within a week, the company’s weekly revenue doubled, marking an important turning point.
Although design thinking is more fluid and flexible than the stage-gate approach, its laser focus on the end user can blind the innovator to the impact of the innovation on the wider context. Users tend to focus on their immediate interests, and in meeting those needs, companies inadvertently overlook the implications of the new product or service on society and the natural environment.
Airbnb is still serving its customers’ needs well, and the company recorded its highest-ever revenue in 2021 (approximately $6 billion).7 However, its business model has contributed to social problems in some communities, causing housing shortages, driving up rents, and hollowing out communities. In cities with a large number of tourists, Airbnb has been criticized for driving residents out of central neighborhoods. One prominent example is Barcelona, Spain: the number of local residents in the city’s Gothic Quarter has declined 45% in the past decade.8
The Case for Systems Innovation
A systems approach to innovation encourages organizations to see the bigger picture. As we explain in detail below, a deep understanding of the system(s) not only enables organizations to better assess unintended impacts but also to better navigate systems risks, barriers, and opportunities.
General Motors (GM) and its EV-1 offers a powerful example. More than 25 years ago, GM introduced the first electric vehicle. Despite the appeal and a strong following among certain consumer groups, GM terminated the production of EV-1 shortly after it was launched. The company did not think the product could gain the mass appeal to make it sufficiently profitable to warrant its continued production. They sent all the EV-1s to crushers, despite protests by customers and environmental activists.
In recent years, the electric vehicle market has grown exponentially. But Tesla, not GM, has led this growth. By mid-2021, Tesla’s market share of the overall US electric vehicle market was a whopping 66.3%, making GM’s 9% market share seem paltry, especially given that they had moved so early and should have had a technological advantage.9 Had GM understood systems, they would have recognized the issue was not a bad product, but bad timing. They had to do more than meet market demands; they had to help shape them.
Traditional Thinking vs. Systems Thinking
Systems are simply interconnected elements organized to achieve a purpose. They make up our body (e.g., the digestive system), the operations of a corporation, and the movement of money in financial markets. More and more places, communities, and organizations operate as a system now that things such as people, money, and information are coordinated and move around the world.
Figure 3 illustrates the difference between traditional and systems thinking. Seeing interconnections offers a more accurate worldview than a focus on the things within a system. When people focus only on things, they believe they can predict and control outcomes through their actions. They apply linear cause-and-effect reasoning.
Systems thinkers, in contrast, recognize that things act and interact, so outcomes are difficult to predict and control. They see everything as part of a system, which extends even to themselves. Thus, anything that they do has implications for others, and others’ actions have implications for them.
What Is Systems Innovation?
Innovation through a systems lens means taking a less linear approach. Corporations must see not just things (i.e., products, suppliers, customers, and the natural environment), but also the connections among these things. Corporations must recognize that cities are not just a collection of houses, roads, cars, and people, but also flows of people between work and home, social ties among friends, and the feeling of shared identity of people in a neighborhood. Often, these invisible connections shape how people act, where they shop, and how they spend their time.
When corporations see themselves as part of a system, they go beyond just producing a new product or service to influencing the system and recognizing that their success is influenced by the system. They realize that selling products or ideas is not just a matter of satisfying single users or even a network of users. They realize that if they can develop products that are good for the environment or society more broadly, those products and services will have more staying power and be more profitable than products that are harmful. For example, even though Uber provided an immensely profitable service, it was only a matter of time before municipalities started to bristle at the added congestion, low wages, and environmental impacts.10
Going back to our opening example, Nespresso embraced the need to recognize the broader environmental system in which it operated and worked with numerous municipalities to ensure its coffee capsules could enter recycling streams and be returned to Nespresso. The company also works with couriers and post offices to facilitate the return process of the used coffee capsules. Keurig, in contrast, is experiencing backlash from the waste it generates.11
We believe the corporation of the future will approach innovation using a systems lens. These corporations will be attuned to their success while recognizing that success can be better sustained when they consider the sustainability of the systems in which they operate. They understand that what’s good for the system is good for the company, which is a far cry from thinking that what’s good for themselves is good for the system.
We have been developing the ideas behind systems innovation over the last two and a half years through Innovation North, a university-based research practice lab.12 Through our work, we have learned how systems innovators see complex interconnections, embrace tensions, appreciate the bigger picture, and expand their perspective through consultation with diverse and relevant others. Organizations engaging in systems innovation are adaptive and open to constant change. By learning more about the system, conducting experiments within it, and constantly reviewing their understanding of problems and solutions, innovation becomes more viable and less risky for the firm and the wider systems.
How to Innovate for Systems
Systems innovation integrates systems thinking with design thinking. By cycling rapidly through all five phases of design thinking, systems innovators learn more about the system and continuously innovate and refine products and services (see Figure 4).
Each iteration of the cycle reveals more about the system. Systems innovation does not seek to develop a single product or service; it works toward a number of tangible (e.g., products and services) and intangible (e.g., changes in identity, language) ideas that solve a problem — whether for a user or a society. This ecology of solutions works collectively to build support for the innovation.
The continuous cycling of these multiple steps in the innovation process helps the corporation continuously refine its offerings to be beneficial for both the corporation and the system.
Systems innovation builds on design thinking, but with key differences. First, systems innovation does not focus exclusively on short-term end-user interests; it also considers the wider problem and the long-term implications. Because it’s sometimes hard to see the bigger problem or imagine the long term, systems thinkers are good listeners, especially of diverse perspectives.
For example, had Airbnb integrated systems thinking, it would have engaged municipalities, residents, sellers, and buyers to ensure their needs were met. The company would have not just done this once, but regularly as it kept improving its product. This would have ensured that Airbnb accommodations did not hollow out neighborhoods, so that Airbnb customers could still experience the authenticity and connection experience that is central to the company’s value proposition.
Systems innovation requires continuous iteration throughout the process (from sensing to testing). Because a system cannot be fully known, prototyping and testing are critical in exposing insights into it. Systems thinkers move forward incrementally, constantly experimenting, learning, and adapting.
Once the organization develops prototypes, it uses them to further sense the system. Consequently, systems innovation becomes a series of nudges, rather than major product/service launches. Systems innovation doesn’t end with a new product or service launch, but each action, no matter how small, is a step toward understanding the system.
Businesses need to understand how they can innovate not just for themselves and immediate stakeholders, but for systems. System-wide disruptions such as climate change and pandemics pose hidden risks, but they also create opportunities for innovations that are beneficial for both companies and the wider systems in which they are embedded (social, environmental, and economic systems). By engaging in systems innovation, we argue, corporations can not only better prepare for systems disruptions, they can also become beacons for positive systems change.
1Ridder, M. “Share of US Consumers Who Own a Single-Cup Coffee Brewing System from 2005 to 2020.” Statista, 13 January 2022.
2Burrows, David. “Have We Solved the Problem of Coffee Pods That Harm the Planet?” Caffeine, No. 26, 2017.
3Evans, Pete. “K-Cup Creator John Sylvan Regrets Inventing Keurig Coffee Pod System.” CBC, 5 March 2015.
4Cooper, Robert. “Stage-Gate Systems: A New Tool for Managing New Products.” Business Horizons, Vol. 33, No. 3, February 1990.
5“Design Thinking Defined.” IDEO, accessed May 2022.
6Huddleston, Tom. “Meet the 32-Year-Old CEO of the Online Pharmacy Amazon Just Bought for $1 Billion.” CNBC, 28 June 2018.
7Menze, Jill. “Airbnb Ends 2021 with 25% Revenue Growth over 2019.” PhocusWire, 15 February 2022.
8Mead, Rebecca. “The Airbnb Invasion of Barcelona.” The New Yorker, 22 April 2019.
9Miller, Marty. “While EV Registrations Grow Through the First Half of 2021, Non-Electric Remains Dominant.” Experian, 18 October 2021.
10Thorpe, David. “Why Uber Is Bad for Cities.” The Fifth Estate, 26 November 2019.
11Imbler, Sabrina. “The Best Keurig Machine (But We Really Don’t Recommend It).” The New York Times, 10 September 2021.
12Innovation North website, accessed May 2022.