Friday, November 04, 2011

Innovation: a new paradigm

I was thinking recently that the reason some people grapple with innovation with little success is because it requires a new paradigm, which is simply a big word that means a new perspective or new model of thinking.  Traditionally, most businesses follow a fairly predictable model.  They develop an idea, or product, or service, they scale up to deliver those products and services to more people, they optimize their models for efficiency, then they attempt to lock in to a very optimized model for profitability, and to lock out other competitors and substitutes or alternatives.  So I'll stipulate that the paradigm most businesses are familiar with look like this:
  • Develop
  • Scale
  • Optimize
  • Lock in
And this model is then repeated.  As a business grows, it turns its attention to the "next" product or service, and develops, scales and optimizes the new product or service within the umbrella of the locked in market or solution.  This does two things - attracts new customers with new products while reinforcing the existing core capabilities, making the firm even more efficient - a larger market on the same cost basis.

There are some problems that are easily identified with this model, but no one has yet determined how to resolve them.  First is that a firm scales (gets more customers) before it optimizes.  This means that growth is expensive early in the process, because many firms ignore efficiency and costs when scaling up.  The idea is to get big fast, then go back and optimize the model.  The second is the concept of "lock in".  In the past, a firm or small set of firms could establish a market and lock in their advantages and lock out competitors and substitutes, by controlling the access to the market, by controlling channels of distribution or by colluding on pricing.  The airline industry is a great example of all three.

This model has worked for a long time, but increasingly is under pressure.  There simply aren't enough large firms that are good at development or scaling.  More and more, these critical activities are left to entrepreneurs and startups, or are done ineffectively or poorly by larger firms.  Also, consumer tastes and expectations have changed.  We consumers expect more change, more diversity, more selection and more innovation in the products and services we buy, and are less patient to wait for new products and services.  Thus, a model that expects long development and scaling times and a long lock-in period when profits are realized is running headlong into markets and consumers who expect rapid response, and don't care when the firm makes money.  The existing model has encouraged firms to become monolithic, slow and bureaucratic at precisely the time they should be agile, nimble and aggressive.

So, how does innovation change this paradigm?  Clearly, innovation addresses the "develop" phase, by defining the right products to develop and speeding development.  Done correctly, innovation should reduce the risk and uncertainty surrounding development of new products and services.  Further, innovation should help firms rethink their organizational structure and product/service delivery process.  Innovation is more than bringing new products to market.  Innovation can also address new services, new business models and new experiences as well.

Competitive forces, new entrants and consumer expectations are chipping away at the develop/scale/optimize/lockin model that has been successful for years.  Innovation is clearly one answer to help companies become more agile and meet customers' needs and expectations, but it flies in the face of the existing paradigm, and that is awfully difficult to change.  It's difficult to change because this is the mental model that many people in business have about the "way things should be done".  When you innovate, it threatens to change the existing paradigm (although competitive forces are making those changes as well) and changing the paradigm makes it hard for people to accept.  None of us likes change when it is thrust upon us, especially to tried and trusted models that have "worked" for years.

So whether your existing paradigm is destroyed by the markets, competitors and consumer expectations, or you replace it with innovation, it is under attack.  The question becomes - will you create an orderly transition to a new model, loved or unloved, or will you allow the markets and competitors to undercut and disrupt your business paradigm?
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posted by Jeffrey Phillips at 11:10 AM


Blogger GlobalDude said...

The obvious is that companies need to innovate more quickly and more frequently than before. This article touches the not-so-obvious "how-to." Effective, efficient, repeatable innovation processes are critical. This is a company-wide solution, where ideas are generated, identified, selected and then moved to effective application. This process requires a mixture of "looseness" that enables a creative thinking environment - Idea Generation - with a more structured approach to Idea Selection, Development and Execution. Most companies struggle with this mixture. Also, as noted in the article, is the challenge of how to measure a "successful" innovation process.

1:04 PM  

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