How can we innovate forever?

Innovation and inertia are two forces that established enterprises have struggled with from time immemorial. These struggles are rooted in a fog of misunderstanding, including the following three "myths":

  • Innovation in and of itself is valuable
  • Innovation becomes less necessary and less possible as categories mature.
  • The essence of innovation is the same in any company.

Innovation is valuable only if it helps us achieve competitive advantage. Its greatest value is when it differentiates us from our competitors sufficiently that customers prefer our offers to theirs and will pay a premium to support that preference. It also has value when it helps neutralize their competitive advantages over us and when it helps us improve our own productivity and thus profitability. But we should realize there is a lot of innovation going on today in our company that meets none of these criteria, that is in fact creating waste. Managing innovation successfully requires us to redirect that energy back into economically rewarding outcomes.

The economic argument in favor of innovation focuses on pricing power. Without innovation offerings become more and more like each other. They commoditize. As they do so, customers are able to play one vendor off against the next to get a lower price. Over time the market stabilizes at prices at or below cost, creating returns for investors below the cost of capital, causing investment to flee the marketplace. By contrast, when innovation is applied, offers become more and more differentiated from one another, leading to different ones becoming the preferred choice for different market segments, giving those vendors pricing power within those segments. In this scenario the market stabilizes at prices well above cost, creating returns above the cost of capital, attracting more investment into the marketplace.

The fundamental principle that drives this argument is that when innovation creates differentiation, it creates attractive economic returns.

Picture in your mind a Chevrolet sedan from the past ten years. Just try. Nothing? That's my point. Now can you picture a Corvette, a Chysler PT Cruiser, a Cadillac Seville, a Hummer, a Mini Cooper? Of course you can. That's the other half of my point. Innovation for differentiation must be bold enough that, if it wins, it achieves separation. That's why Chrysler's failures are more memorable than Chevrolet's successes-the Viper and the Prowler for two.

Focus and prioritization. Those are the issues when it comes to innovation for differentiation. If we do not break away from the herd, we have wasted our budget. In order to break away, we must overcome risk reduction mentality and lack of corporate alignment. Neither is a natural act.

What type of innovation will we so excel at that we will leave all our competition behind?

Whenever we hear the word innovation, we tend to call to mind its most dramatic form- disruptive innovation, the sort of thing brought to life by brilliant inventors, rebellious artists, and daredevil entrepreneurs. That is indeed an important type, and it has pride of position at the far left of the diagram below. But as the diagram indicates, it has a great many brothers and sisters with whom to share the category life cycle:

In Chapter Four, we ask you to think of each innovation type as a different vector, an arrow pointed in its own unique direction. Any vector sufficiently amplified will achieve breakaway from your competitive set. What then would cause you to choose one over the other?

There are three such factors in our view:

  • Core competence
    Different companies have different assets to exploit, some latent, some realized, in part a function of their business architecture, in part a function of their particular histories.
  • Competitive analysis
    Different sets of competitors leave different openings to exploit, either by neglecting them altogether or by targeting them but underperforming.
  • Category maturity
    Different stages of the category maturity life cycle reward different forms of innovation. As categories mature certain forms of innovation become outmoded and new ones are called for.

The innovation types model helps with all these responsibilities. It offers a broad universe of innovation strategies to choose from. It makes clear where in the category maturity life cycle they are most effective. And it explains how each one is distinct from all the others. It is, in effect, a taxonomy that will aid you and your team to properly frame your alternatives and then make the best choice.

What happens to the workforce?

This chapter represents the last step in our journey to create competitive advantage in a commoditizing world. Our path has been lit by the mantra "extract resources from context to repurpose for core."

In the move toward a global economy, work forces in all the developed economies have been profoundly threatened by offshore outsourcers leveraging low-cost labor. This trend shows no signs of subsiding, and companies who do not avail themselves of this opportunity are severely challenged to price their goods and services competitively. In the public sector, politicians are divided between those who favor protectionist responses to mitigate the impact on their fellow citizens and those who believe the twin forces of consumer benefit and natural selection should prevail. Alignment, in short, does not characterize the current state.

In our view this problem must be solved by the corporations themselves-management and labor collaborating with each other for the collective good of customers, employees, and investors. Together they must build a solution that actively embraces both outsourcing and off-shoring while at the same time building a stronger in-house domestic workforce compensated commensurately with their local standard of living. We grant that this is a tall order, but we think it not only can but must be filled.