Tuesday, May 28, 2013

Pareto and Innovation

Some laws or rules are dictated by leaders.  Some laws or rules seem to emerge from the information we gather about our work.  This is the difference between a taxonomy - an imposed framework, and a folksonomy - a framework that emerges from the data.  What's interesting is to understand how "rules" or laws like Pareto's Law applies to innovation, and why it is so constraining.

Pareto's rule or law or principle basically states that 80% of effects come from 20% of causes.  What this means in every day life is that 80% of a sales of a business come from 20% of its customers, or 80% of your output is based on 20% of your labor.  What's interesting in practice is to review the impact of Pareto on innovation.

Product versus everything else

In most organizations, the time and focus given to product innovation is at least 80% of the total time alloted for innovation.  There is a clear Pareto principle at work, although I believe it is often unintended.  Far too many organizations ignore innovation possibilities beyond product innovation, when plenty of examples demonstrate the power and possibility of innovation in business models, channels, packaging, customer experience and many other alternatives.

I think this particular Pareto failure is rooted in Apple's success. Apple's iPod, iPad and iPhone demonstrate product innovation, but Apple is successful based on other kinds of innovation as well - channel innovation (iTunes and Apple Stores), Value network (iTunes and AppStore), customer experience innovation (design).  While we recognize and celebrate the product innovation that Apple creates, we fail to understand the other innovations that actually create much of the value.

Far too many firms spend far too much of their limited innovation dollars and resources focused on product innovation, ignoring possibly more lucrative innovation opportunities in areas like business model innovation, customer experience innovation or channel innovation.

Incremental versus Disruptive

In most organizations, there's a decided emphasis on incremental innovation.  At least 80%, if not more, of the innovation initiatives are focused on incremental innovation.  Often, that's because there is no strategic focus on how much innovation is necessary for growth and differentiation across the three horizons.  Rather than plan innovation investments across the incremental - disruptive spectrum, companies are happy to settle in on small changes to existing products and services with only occasional forays into disruptive innovation.

The problem with this approach is that it is not strategic, it is accidental.  Without clear goals and plans for innovation, Pareto takes over and the vast majority of innovation activities are limited in scope, time and potential value.  While your teams are busy incrementalizing, scores of firms are attempting to disrupt your market or your customers. It only takes one successful new entrant to disrupt your customers or your market, so even if many of the disruptive attempts fails, only one needs to succeed to cause damage to your business.  You need to plan your innovation activities and intentionally distribute them across the three horizons, rather than allow them to clump in incremental innovation.

The same people

In most organizations, Pareto's rule is evident when you examine who is involved in innovation activities.  Typically a small handful of people are deemed to be the "innovators", while everyone else is expected to continue to focus on business as usual.  The handful of people who are considered innovators are often in demand across the business, and so can only spend a tiny portion of their time on innovation, once again demonstrating the Pareto principle.

Whether it's resources, people, dollars or focus, the Pareto Principle seems to be the dominant way of thinking about innovation.  While this is true, I think it is for the most part unintentional.  The Pareto approach to allocating people or time or focus is simply a fallback mechanism when explicit strategies and investments aren't defined.  And while Pareto suggests that 80% of the return comes from 20% of the inputs, it's rare that 20% of the people of an organization are actively involved in innovation, or that 20% or more of the innovation attempted is disruptive. 

Explicit, intentional strategies versus emerging fallbacks

If you truly want more innovation within your company, you need to start with an explicit, intentional strategy and define where and when you need innovation, how much innovation you need over the three horizons and how much innovation should be incremental versus disruptive.  Unless these goals are set explicitly and constantly reinforced, innovators and teams will struggle to achieve bare minimum goals and outputs.  Pareto's principle, or worse, a narrowly focused, poorly resourced activity with bare minimum goals will be the constant refrain.

AddThis Social Bookmark Button
posted by Jeffrey Phillips at 7:54 AM


Post a Comment

<< Home