Innovation's link to strategy
The "purpose" of innovation
This question is often where executives start to roll their eyes. The "purpose" of innovation is obvious, isn't it? Executives value increased sales, increased market share, increased profits, glowing publicity, differentiation and a rising stock price. The purpose of innovation is to achieve these outcomes, at least in their minds. But to get to that point, a slightly more esoteric discussion is necessary.
What are the outcomes we hope to achieve? I like to think about innovation as a component of corporate strategy, an enabler or toolbox to help organizations achieve their strategies. In this light there are four or five purposes that innovation can support:
- Perfecting existing products
- Reinventing the company
- Disrupting an adjacent market
- Broadening an offering or portfolio
Like Brian Cranston does as an actor, it's possible for a company to reinvent itself. That is, to build on what exists but take the firm in a new direction, with new offerings, new value proposition, new interactions. Changing a company is far more difficult than shedding a skin the way an actor does. Established culture and consistent revenue streams make it difficult to change a company quickly, but they can be changed. If your organization is stuck in the doldrums, competing in a "red ocean" with low margins and little opportunity to differentiate or grow, the best option may be to consider reinventing your firm, adjusting the business model, customer experience or channels. Often product innovation isn't the answer here - but differentiation and innovation around other key components of your value proposition may be. It may be that only a product line or business needs reinventing, rather than an entire company. Products and businesses like people grow and age, and need reinventing or they will slowly die.
Too many innovation projects are focused on what I'll call "perfecting" existing products. That is, deep examinations intent on interesting but ultimately incremental change to existing products. This innovation is safe, because it usually builds on existing products and revenue streams, but is often a net neutral effort, since the new revenues barely cover the cost of the innovation effort. Perfecting is also dangerous because it attracts resources that could be used to consider disruption or fighting off new entrants.
The "kissing cousin" of perfecting is broadening, that is, adding new products and services to a portfolio to broaden an offering and squeeze out competitors. Many firms offer a vast array of shapes and sizes of products in order to satisfy every customer, yet these "innovations" often address only a very small minority of the market. Rather than add to the portfolio, many companies should prune their product portfolio and use the resources for new innovation activities.
Perhaps the most interesting innovation opportunity is the one that is the most frequently overlooked. Disrupting an adjacent market has some significant risk, but allows a firm to grow into new markets or segments based on core capabilities. The recent book Thinking in New Boxes describes BIC's move from pens into disposable razors. The natural evolution was to Broaden the portfolio of pen products, but an executive at BIC reframed the company to think of itself as a designer and manufacturer of disposable plastic products, which led the company to lighters, razors and other products. Disruption is often about applying an internal capability in a new way that allows easy entry into another market or segment. Disruption may focus on product innovation, but may also rely on knowledge, customer insight, internal capabilities or other factors that innovation can accelerate.
Impact on Strategy
Note that all four of these outcomes are particularly based on corporate strategy. Innovation can accelerate any of these outcomes. However, corporate strategy must open or close specific avenues before innovation teams can proceed. Is "perfecting" the existing product line the best alternative, or is introducing new products to "broaden" the product line preferred? Does your company need to reinvent a product or business? In the absence of these questions and their link to strategy, every fallback position for innovation is either perfecting or broadening, which in turn means every innovation activity is focused on products, not business models, channels or customer experiences.
Innovation is not a strategy, but is closely aligned to corporate strategy when done well. How effectively you design and communicate your strategy will communicate the potential degrees of freedom innovation teams enjoy.