Friday, October 21, 2011

Moving beyond product innovation

Those of us who advocate innovation as a business methodology or discipline often talk about the different possible outcomes for innovation.  That's because innovation is often defined far too narrowly as a new "product".  Product innovation is the most well-known, and most consistently performed type of innovation.  However, there are other potential uses and outcomes for innovation, and several evolving changes in the marketplace that will require far more investment in these other outcomes.  Let's look at these two points and understand why they suggest far too much emphasis is placed on product innovation, and far too little on other outcomes.

First, let's consider the US economy.  In the early 1960s, when JFK was talking about sending a man to the moon, manufacturing accounted for over 50% of our Gross Domestic Product (GDP).  In the last 50 years, the percentage has fallen to approximately 20%, as manufacturing has become more efficient and many manufacturing jobs have been outsourced.  There hasn't been a fall off in the number of manufactured products even though the number of jobs and the percentage of our GDP from manufacturing decreased - the products now are imported.  But think about this another way - over 80% of our economy is based on services, which begs the question:  how much service innovation is underway, given the growth and importance of services in this country?

And oh, by the way, we're simply in the vanguard of a big shift toward services.  Other economies will follow this same path.  Western Europe and Japan are sure to follow quickly, and even the emerging economies will shift their mix of manufacturing and services more rapidly than we did.  So, it's not hard to see that services will dominate the economy as a percentage of GDP.  But where is the current focus of innovation?

On products primarily.  Although this is a bit unfair.  Many service oriented firms offer "products" that aren't manufactured, and those service oriented "products" require innovation.  But services haven't had the focus that manufacturing and the subsequent products have had traditionally, and this means there's a big, and emerging, opportunity for service innovation.  And for innovations beyond services.

Many of the things we think of as innovative - the iPad, for example, are still physical products.  That's because it's easier to talk about and display a tangible item and compare its features and benefits than to talk about an innovative service.  Services are more ephemeral, and exist in a moment in time. Services are more difficult to deliver consistently, because they rely on inconsistent people to deliver them.  But services, along with experience innovation and business model innovation, are clearly the next focus area for many firms, simply because of the economic shift toward services, and the overwhelming focus today on product innovation.

Of course we can combine experience, service and business model innovation and deliver it around familiar product innovations.  Experience innovation can be delivered through packaging, through channels and through marketing and support of existing products.  OXO has done some of that by "innovating" common kitchen equipment to make it more comfortable to use.  That's experience innovation in at least one dimension. Few firms have thought deeply about the concept of radically improving or changing a customer's experience of their products and services, and even fewer firms are actively considering business model innovation, yet these outcomes are all available.  They are more difficult than product innovation, yes, but they are also more differentiable and more defendable.

In the book Blue Ocean Strategy the authors argued that many firms needed to find "new blue oceans" to conquer rather than compete in the same red oceans with other firms.  Perhaps that same idea should be put forth for innovation.  Product innovation is increasingly a "red ocean" while relatively easily observable blue oceans of service innovation, experience innovation and business model innovation are available.  As our economy shifts and places ever more importance on services, innovation models and capabilities will surely follow.
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posted by Jeffrey Phillips at 5:39 AM


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