Friday, December 07, 2012

Why your business needs more innovation

I was working with a client recently where there's a real, palpable disconnect between the product managers and the executive team.  The product managers believe more innovation is necessary - not simply more new products, but more expansive innovation.  They want to pursue new categories, offer dramatically new features and create new to the world products.  In addition, they are interested in expanding the definition of innovation to encompass services, experiences and business models.

The executive team, on the other hand, is concerned about profitability, efficiency and effectiveness.  They want innovation, but they want to know why more innovation is in order.  And if more innovation is in order, why does that new innovation have to include new to the world products and/or new services or business models.  Why do we need more innovation than we did previously, and what forces are requiring us to expand our definition of innovation?  This is a perfectly acceptable question, and one we innovators need to have good answers for.

Porter's Five Forces

As a newly minted MBA in the early 90s, I was entranced by Porter's Five Forces model.  Basically, it's a model that examines forces on an industry.  The model should help executives in any industry parse the changes and threats and determine responses. The model is as good a place as any to start thinking about the need for more, and different, innovation.

Three of these forces that we think drive the need for more innovation, and more broadly defined innovation:

New Entrants
Every market has new entrants, and newer entrants and competitors are less invested in the way things used to work within the industry or market, and more interested in disrupting how things work in an industry.  Barriers to entry are falling in many industries, leading to new entrants from other industries or geographies and new entrepreneurs.  These new entrants offer new products, services and business models that weren't considered before.  

Buyer Power

Thanks to the internet and a wealth of information on the web, buyers have far more power, and far more options, than they had previously, and this will only increase over time.  As buyer power grows, firms must counter by offering products and services tailored to the buyers' needs, and providing experience and information that matters. 

Alternatives and Substitutes
Increasing, thanks to advances in technology and more efficient trade, there are often many more alternatives or substitutes for products or services than there were previously, and this fact too will continue to increase.  Find French red wine too expensive?  Look no further than Australian Shiraz or Argentine Malbecs.  Customer have choices and alternatives, so our products and services must be more differentiated or more compelling.  Old, tired offerings are no longer good enough.

Pace of Change
One factor that Porter leaves out is the pace of change.  The pace of change is accelerating at an ever-increasing rate, and leading to discontinuities in the market.  In the past, we designed products and services in the expectation of long product life cycles, hoping for a return over years or even decades.  The increasing demands and the pace of change are dramatically shortening product life cycles, to the extent that manufacturing is returning to the US, in order to be far more responsive to changes in consumer tastes and the ability to fulfill orders quickly.

It's a race

In auto racing, the pack starts out together and the leaders are just slightly ahead of the laggards.  Over time, however, the leaders pull away and begin to lap the laggards, moving further ahead in the race based on speed and agility.  This metaphor describes what's happening in your markets.  Often we hear clients say that they believe they are innovating at the same speed as their traditional competitors.  That's only one important measurement.  There are at least two others:

Speed of change in the market
Are you introducing new products and services at the speed and expectation of the market?  Merely matching your traditional competitors may mean that you are drafting on one of the laggards, not a leader.  What is the pace of change that consumers expect?

Shifts in expectations
Are you introducing the range of products and services that align to customer needs and expectations, and are you aware of the products and services offered by new entrants or substitutes to your existing products?  Subtle shifts quickly become landslides. As products become commoditized, consumers expect innovation as new products, but also as enhanced experiences, services, channels and business models.  If you don't believe that, put down the $5 bottle of Fiji water and drink tap water for a while.

Speed of change based on new entrants and substitutes
The real accelerator of any market isn't the entrenched players but the new entrants and the products or services that offer substitutes.  What is the pace of change of new players in your market?  What new concepts or solutions do they offer, and what changes do those offerings inflict in the market?

Why does your business need more innovation?  Because the older model of long product cycles, limited competition and complacent consumers with little information is dying, and a newer, faster competitive model that relies on more information, more readily available, with lower costs of entry and more competitors and substitutes is growing.
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posted by Jeffrey Phillips at 7:08 AM


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