Wednesday, July 21, 2021

The cost of delaying innovation

 Right now, as we (hopefully) emerge from the COVID pandemic in late summer 2021, there is a real debate underway in a lot of corporations.  The debate is about whether or not to fund innovation work, and if the decision is positive, how much to spend or invest in innovation.

The debate is fueled by the fact that during COVID few really new or interesting products were created, and by the sense that customers are beginning to demand something new and different from the same old products and services.  In this regard, there is clear demand for innovation, for new products, new services and experiences and consumers have the funds to spend on new things.  On the other hand, as my economist friends like to say, is the issue of potential inflation, the issues with clogged supply chains, the sense that many people have that wages or benefits must increase to attract people back to work.  In other words, there is a sense that costs are increasing and will increase.

This means that innovation is caught in an age old quandary:  executives recognize that they need innovation, which should lead to new products and on to new revenue and profit streams, but they also recognize that costs are likely to increase in the short run.  Since innovation almost always pays off only in the longer run, and cost management can be controlled in the short run, the dilemma is obvious.  When you get evaluated in 90 day increments by the stock market, cutting or controlling costs is always an easier decision than investing in innovation.

But we are asking the wrong question.

The question management teams are asking and answering is:  how can we manage our near term costs to keep the investors happy in the short run?  Note that this is NOT a bad question to ask, because investors are constantly watching the effectiveness of the management team and want to see companies hitting their numbers.

Perhaps the question we should be asking is:  what is the cost of delaying innovation?

This is a question that is much more difficult to answer, but in this environment is at least as important as the previous question.  

Our economies are improving and growth is returning as we emerge from the COVID scare.  Growth in the US economy is evident and we anticipate growth in the economy in future quarters. Consumers are returning to the markets at a record pace, and thanks to the government's largess we have more funds to spend.

Yet there are few really interesting or new products on the market and the products and services that exist are becoming commoditized.  If companies choose to manage costs and stay the course with existing products or at best minor improvements to existing products, they can manage costs effectively but will see little change in their revenue and profit outlook.

What do companies that fail to invest in innovation miss?

What the companies that make the decision to maintain cost containment will miss is the opportunity to put new products and services into the product development funnel.  What they are doing in effect is robbing their future revenues and profits to sustain a slow growth model now.

The difficulty in this tradeoff is in understanding what the cost of delaying or postponing innovation is.  If the company isn't all that good at innovation, and what they delay for a few quarters is only incremental innovation that does not radically change the product portfolio, then I think it's reasonable to suggest that delaying isn't all that risky.  Unless their customers and markets are changing quickly, and their products are rapidly commoditizing.

On the other hand, if the company believes in its innovation process or capability, or has exciting new ideas that could be realized as new products and services, the cost of delaying or postponing innovation could be quite high.

What work can be done to improve innovation and shorten time to market?

It's far easier to control cost and postpone investments in the short run, and much more difficult to predict exactly what innovation and new product development will achieve in the long run. There are methods to improve this trade off, but they too require investment:

  • Better innovation skills throughout the organization
  • Defined innovation processes
  • A strategic framework for anticipating innovation across three horizons
  • The ability to bring new products and services to market more quickly - using agile development, MVPs and rapid prototyping
  • The willingness to kill off older products to free up resources for new ideas

The cost of delaying innovation isn't just the potential loss of future revenue and profits, it is also the doubling down on the existing way of doing things, locking the company into more of the same for the next planning cycle.  The gains from doing innovation aren't just new products, but the gains reveal themselves in new ways of thinking, expanded market definition, capabilities to accelerate ideas and products.

What's the real cost of delaying or postponing innovation?

We've got to stop thinking about innovation and new product development as a one off activity that skips across the surface of a company, and start thinking about it as a capability that improves how a company operates and functions.  That's the real cost of delaying innovation - your company never makes the leap to become more strategic, more innovative and more adaptive.

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posted by Jeffrey Phillips at 10:06 AM


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