Monday, June 17, 2019

Understanding the innovation options in your business

I'm writing a series of blog posts to document some of the things I've learned in innovation along the way, over 15 years of leading corporate innovation work.  So far I've written several blogs, the first about the importance of defining a why and a how for innovation, the second about the importance of an idea sponsor.

Today I'm going to focus on the key drivers for innovation and explain what drives innovation in many organizations.  And in doing so I'm going to revert to a bit of probability and statistics, using a normal distribution curve.

Which firms innovate and why

Before we go deeply into the analysis, let me first say that most firms innovate, occasionally and sporadically, so to be fair, innovation is often happening in many organizations.  That's important, but what's more important is the nature and type of innovation.  For the vast majority of companies, the vast majority of innovation work is incremental at best, adding a new feature or capability to an existing product.

Now, incremental innovation isn't necessarily easy and it is important.  Incremental innovation is what ensures you have something new and attractive to provide to customers three to six months from now.  It's a new flavoring in an existing soft drink or a new feature for an electronics device.  Incremental innovation is relatively safe, and usually returns a small value for the investment, but rarely fails to flop.  That's why incremental innovation is so valued, and also why it is so dangerous.

Interesting and disruptive innovation

More valuable and far more risky are different types of innovation, those that achieve true breakthroughs or disrupt existing markets or industries, or create something really new and different.  The investments are often higher, and the risks of failure are often far higher with this type of innovation.  This could include innovating to offer a physical product as a service, or introducing an entirely new relationship or business model (ala Airbnb).  Disruptive innovation often originates from outside the standard players in an industry, because most of the existing players have too much to lose to make a significant transformation in their existing industry.

This leads back to the normal distribution curve

All of this leads back to the normal distribution curve.  If we assume that in every industry, companies are distributed across the risk and success curve in a normal (bell shaped) distribution, then the companies in the middle (moderately successful) are likely to conduct incremental innovation.  It's the firms two or three standard distributions away from the mean (industry leaders and industry laggards) which are most likely to conduct interesting, disruptive innovation, for two different rationales:

  • Industry leaders can afford to make big bets and investments, to try to keep a significant differentiation between themselves and the second tier competitors.  The leaders will double down, introducing new capabilities and features at an increasing rate, and will expand the definition of innovation beyond purely product features and shift into channels, service and experience innovation.
  • Industry laggards, falling behind the leaders and the second tier competitors, have no choice but to swing for the fences.  They will conduct disruptive innovation activities because they need to become relevant again to customers and to do that they must change the nature of competition.  These companies are more likely to conduct disruptive innovation that changes offerings and especially business models.
Which company are you?

From this simple analysis we can see there are three categories of companies within an industry (note I am not considering new entrants because they typically try to disrupt the industry or offer a significantly new business model, channel or experience).  Leaders will attempt to reshape the industry with new products, new services and new experiences to lock in their advantage.  Second tier competitors will fiddle around the edges and respond to innovations that the leaders introduce, but most of the second tier competitors will conduct incremental innovation.  Industry laggards, more desperate for attention and needing to change the nature of competition are more willing to take risks and conduct disruptive innovation.

Knowing which kind of company you are in, and the stomach for risk and change in your company and in your industry, will tell you a lot about the potential for the different forms and types of innovation.  Doing incremental innovation in a laggard is whistling past the graveyard.  Most second tier companies prefer to wait to see what the leaders do and then follow those actions, rather than define a new course for the industry.  Leaders lead, until like Apple they no longer innovate and simply rest on their laurels and watch their share get taken away.

What kind of innovation you want to do, and perhaps can do, is to some degree dictated by what kind of firm you work for, its position in the competitive pecking order and the amount of risk it is willing to undertake.
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posted by Jeffrey Phillips at 10:20 AM


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