Wednesday, December 28, 2011

More efficiency or more innovation?

Every once in a while someone can illuminate a point so well that you simply have to stop and pay homage.  Paul Sloane crystalized a key point about innovation recently when he tweeted: 
Businesses are good at getting better but poor at getting different.
The reason this crystalized one of the key innovation issues is that it reminded me of my early economics classes.  I suspect you remember those somewhat simplistic "guns vs butter" tradeoffs.  Should a country produce more guns, or more butter?  Who benefits from the selections?  What happens if more butter is produced?  Are fewer guns necessarily produced if more resources are shifted into butter production?

If this rings a bell from somewhere back in freshman economics, but at the same time seems too simplistic when viewed in light of the modern economic enterprise, then consider this simple question: 
What is the appropriate balance between efficiency and innovation in a business?

Eliminating all other factors, how much of your time, your efforts and your resources should be invested in driving ever more efficiency in your organization?  How much of your time, effort and resources should be invested in innovation?  It's not until we think of these as investments and force specific tradeoffs that the conundrum becomes clear.  Just like guns and butter, we probably need a reasonable investment in both efficiency and innovation to thrive over time.

A national economy will demand guns for defense and butter for nourishment - those demands will shift and evolve depending on the threats the economy identifies externally and the needs of the population internally.  Businesses, with timelines and incentives that are somewhat different, focus on short term financial results, which tends to shift the balance between innovation and efficiency toward efficiency.  Most initiatives that focus on improving efficiency have an immediate, and positive financial impact.  Thus efficiency is rewarded, and initiatives that are rewarded are repeated.  Innovation often has a negative short term impact - costs without an immediate benefit - so innovation is far less likely to produce a short term financial benefit, and therefore much more difficult to do.  Slowly, over time, the scales shift from a balance between efficiency and innovation to ever more efficiency and increasingly less innovation.  Eventually efficiency is well understood and easily accomplished, but it has ever decreasing marginal returns.  Innovation, on the other hand, becomes more difficult the less it is practiced, and is viewed as risky, uncertain and become even less likely to be taken up.

Clearly, every business needs both - a focus on efficiency and a focus on innovation.  My new book Relentless Innovation provides examples that demonstrate why a balance between innovation and efficiency is so important, and extracts lessons from firms that manage to do both well simultaneously - P&G, Apple, 3M, Google and Gore.  These firms have capabilities and investments that other firms would do well to emulate, because an ever increasing diet of efficiency will create a firm that is exceptionally efficient, but indistinguishable from its competitors.

The economics example of tradeoffs between guns and butter is meant to help students think about investments and tradeoffs.  Both guns and butter are necessary for every economy, but in different degrees.  Likewise, innovation and efficiency are necessary in every company.  Establishing "how much" investment in efficiency and innovation is necessary, and then carrying out that strategy, is very important.  Firms that can achieve an appropriate balance will thrive, while firms too focused on efficiency will become one trick ponies.

Who would have thought that the guns vs butter tradeoffs could illuminate an important business challenge?
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posted by Jeffrey Phillips at 6:11 AM


Blogger Kristina B. said...

What about a company that splits the business to do both? Dow Corning did that with the creation of the XIAMETER brand. Two value propositions- Dow Corning is a pursuit of innovation while XIAMETER is relentless pursuit of efficiency. The dual-brand strategy works well for us.

6:23 AM  

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