What's in your innovation basket?
There are firms across the country innovating every day, if by innovation we mean small, incremental improvements and changes to existing products. However, I suspect that for many firms, innovation means more than that.
There are at least three significant types of innovation. Well, there are probably more but since this is a blog and not a book, we'll look at just three: incremental, transitional, disruptive.
Incremental innovation is about the next ratchet of an existing product or service. Do you like Tide? Would you like Tide with Bleach? Much of this type of innovation is driven by focus groups. It takes things that make sense and seem natural together - laundry detergent and bleach for example - and puts them together. Incremental innovation is important and probably the most consistently practiced. However it is not really very defensible and does not radically change a product, service or market.
Transitional innovation is about a new thing that takes a significant leap but is not a truly "radical" or disruptive change, as we'll define in a minute. My favorite example of this is something that should have been obvious but wasn't - the Swiffer. Take a mop and make the head detachable and disposable. It's like sweeping and mopping at the same time! Who knew they needed this? But the Swiffer has become a really great new product. However, it still requires that we sweep or mop the floors, so it's not a truly radical innovation.
A truly "radical" or disruptive innovation is something that completely changes the status quo or disrupts a market. A good example is the switch from solid state to semiconductor, or from horse and buggy to automobiles. In the automotive example, thousands and thousands of people lost jobs making buggy whips as the need for buggy whips disappeared and the need for mechanics was created. Clayton Christensen is probably the best author to read to learn more about disruptive or radical innovation.
So, what's this got to do with you and your firm? Everything. Any firm should be considering ideas, products, services and business models that reside in all three categories. Placing all your emphasis on incremental innovation means someone will come along and change the space while you're not looking. Betting all the farm on radical innovation could mean a lot of heartache as many radical innovations fail, but just one successful one can create an entire new industry. No, as good portfolio managers we need ideas in all three categories, distributed according to the risk tolerance of your firm and speed of innovation in your industry.