Monday, January 18, 2010

Innovating in a regulated industry

Here's a news flash for you:  innovation is difficult to accomplish on a consistent basis.  Even more so if the culture and management team of your organization is risk averse.  And few industries are as risk averse as those that are heavily regulated by the federal government or state governments.  Just last week I was told by a prospect that it was difficult to innovate in a regulated industry.  Makes me wonder where all of the phamaceuticals, medical devices, insurance offerings and many other products and services came from, since they weren't hatched from the whole cloth.  It's time to put the lie to "you can't innovate in a regulated industry".

This is, of course, an excuse which allows a company or team to avoid making decisions and stay within the status quo.  It is ENTIRELY possible to innovate within a regulated industry, otherwise we'd never have created a pacemaker (for example) in the first place, and we'd never improved on it once it was developed.  Tell that to people who are living with pacemakers and other implanted devices decades after their surgery.  One might be able to argue that it's more difficult to innovate in a regulated industry, as opposed to an unregulated one, and that might be true.  Regulated industries usually deal with human health, or where there is an expectation of disparate knowledge (financial services, insurance) between the company and the customer.  However, the fact that a firm is regulated doesn't give it a pass for innovation.  In fact, it may make the need for innovation even greater.  Here's why:  heavy regulation builds a comfortable fence around an industry, and the key players within that industry usually agree to divide the market up.  They don't compete and don't offer new products and services, since that would rock the boat and cause work for the entire industry.  Look at many heavily regulated industries - life insurance for example.  There's exceptionally low innovation and rapidly increasing commoditization.  Firms accept the fact that since they are regulated, they should not have to innovate, and all innovation happens at the margins, where disrupters can steal customers away.

Too often, the regulations become a "ceiling" for new products and services.  Rather than dream up new products and services that customers need, then try to revise the regulations to fit those products, firms use the regulations as a hard and fast rule, never to be breached or violated.  They are in a box of their own making and own choosing, and careful never to question the box.  Again, disrupters are going to seek ways to make that box obsolete, and the interesting thing about most regulated firms is that they employ lobbyists, whose job it is to influence or change regulations.  A truly innovative firm would identify products and services that met customer needs, then lobby for the changes necessary to implement those products, and force the rest of the industry to follow.

Regulated products and services face stiffer tests and constraints because they have the propensity or opportunity to damage us in some way - in our wallets or in our bodies.  For that reason they should face higher hurdles for safety and communication.  But that should not stop firms in these industries from innovating.  However, the few firms that do innovate in these industries (ING in banking, Progressive in insurance, St. Jude and Medtronic in medical devices) are considered risky upstarts who disrupt the normally placid waters of the industry.  Good luck to them.  We need as much innovation in these industries, if not more, than we need in search engines, video games and cell phones.
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posted by Jeffrey Phillips at 5:55 AM


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