We know innovation is the key to success. So if it is seen as the magic answer why are the results not meeting expectations? The cause is likely the adoption of a poor innovation investment strategy.
The quadrant info-graph classifies innovation strategies into 4 groups. As we can see two of those categories are classified as unsustainable strategies and two are sustainable strategies. Whilst unsustainable strategies may provide short term relief, organisations need to move towards sustainable strategies. Below we delve further into those four categories of innovation investment.
The most common form of Innovation is pragmatic. The focus is low risk, small change and often focused on cost reduction. Cost reduction is the easiest objective to sell to investors, boards and management. It is top of mind in the public service and private sector.
Often this is referred to as incremental innovation or incremental improvement. It is often recommended by business leaders as the most effective form of innovation. However it is leaving the business exposed to key challenges.
- Incremental changes are immediately copied by the competitors and the benefits are quickly nullified. The rapid take up by competitors does not give companies time to get a ROI from this innovation.
- Reducing costs can only be done for a short term. Eventually there is nothing left to cut.
Reputation risk and litigation is on the increase. Businesses are often undermining the quality and reliability of services and products. Their chase of cost savings is becoming detrimental to the business. Cost reduction may be acceptable as a short term remedy to shrinking margins in a crisis, however it is unsustainable. We are seeing a growing trend to shift the focus to sustainable revenue growth and that cannot be achieved through pragmatic innovation.
Pragmatic innovation leads to a survivalist business model. Businesses are eventually caught up in a cycle of price discounting and squeezed margins. It becomes a war of attrition that is unsustainable.
This is the second most common category of innovation investment. I am being brutal in my assessment of this category. It is often just an investment in creativity hoping for a result. Polaroid knew it was in trouble with digital camera. They invested millions in R&D and still went bankrupt.
We see considerable investment in innovation labs that often fail to deliver. In the public service we often see time given to staff to have creative time yet what does it produce. Whilst some innovation may come out of this, it is insignificant to the level of investment thrown at such a strategy.
This is what caused the dot-com boom/bust of the 90s. I could put an “e” in front of anything and investors threw money at it. (e-commerce, e-retail, e-lawyer). Investors were often throwing money at organisations that had no hope of ever making a profit. Today we are going through the same cycle. We have numerous unicorns replicating the same mistakes of the 90’s. We have fin-tech with great solutions looking for a problem.
I won’t stand in the way of someone prepared to gamble on hoping to buy the next facebook. However there are far better ways to derive a return through innovation than such a haphazard model.
The reality is that this is unsustainable as eventually business leaders and government leaders will pull the plug on such investment. Eventually dot-com booms crash.
Reinvent the Business
The third category of investment is what most businesses should be doing. We learnt this in business schools. If is business 101, we have to continually reinvent the business.
Every company, every product and every service has a life cycle. Eventually growth plateaus as it reaches maturity and then growth declines. To maintain growth we need to reinvent the business, product and service. Yet this is not happening as businesses have become ensnared in a war of attrition in declining markets.
One wonders if price discounting and cost cutting is like a drug addiction. It is so hard to shift the mindset to growing business and margins. Breaking the status quo is one of the greatest challenges facing business and government leaders. Everyone knows they need to do it, few are.
There are great examples of companies successfully reinventing themselves. Lego reversed a loss in 2009 to become the leading toy manufacturer in the world. They did not enter a discounting war with cheaper competitors. They did not succumb to digital disruption such as Xboxes and play stations. They reinvented the business and their products.
This is the most sustainable form of innovation investment that will deliver the greatest return. It is what organisations should be aspiring too.
Reinvent the Business Model
The fourth category of innovation is to radically change the business model. This is where the business can gain a significant leap over the competitors by radical innovation.
For instance digital disruptors are reinventing the business model to massively change the price point and service point. Whilst we see Uber, Air BNB, Facebook as digital disruptors they are in fact business model disruptors. Air BNB has a competitive advantage over hotel chains like the Hilton because Air BNB has limited capital and operating costs. They own no hotels and employ no hotel staff. Technology may enable the business model, but it is not the differentiator.
This can be a successful form of re-invention, but it is a hard pill to swallow for investors and business leaders. To take this approach requires organisations to cannibalise their own businesses. To suggest one should replace a flagship product with something completely different and priced differently is scary to everyone.
Despite the logic that one should cannibalise one’s own business before the competitor does. It requires considerable courage and conviction from the leadership team to do so. We have seen it with Microsoft moving to Office 365 to stave off Google Apps. We have also seen when businesses failed to do this such as Kodak who invented the digital camera.
Whilst challenging, we are reinventing the business. It is a sustainable investment in innovation that will provide significant returns on investment.
We need innovation to survive and grow, that is a given. However how we innovate and where we target investment is critical to whether we have a sustainable or unsustainable business model. When we look at the models that are sustainable the reality is that they are radical innovations. To be sustainable we need to move to game changing innovation. Despite the popularity of incremental innovation, the cold reality is that this is not a sustainable business model.
In the current economic climate and challenging markets, leaders need to have more courage in taking on game changing innovation. Yes it is challenging and yes it is risky. However what most organisations are doing today is not sustainable. Either we change or we fall behind.