There is a lot of clutter in the innovation arena. Several players, from consultants to futurologists, come up constantly with different models and definitions around innovation. Many of them merely reflect just academic dogmas or quickly become too intricate.
From my point of view, there are indeed only four product innovation strategies worth the attention of CEOs and their teams. These strategies were first introduced by the Harvard Business Review some time ago. It is far from being an academic exercise. Already from the concept phase, these strategies give CEOs the opportunity to align enterprise capabilities with the main characteristics a new product or service should deliver. Deciding the right innovation strategy for the firm can thus save employees and shareholders months and even years of misallocated resources. These four innovation strategies are :
These four strategies are driven by only two main concepts, technology and business model. It sounds simple, but the implications of choosing the right strategy for the company are paramount. I have summarized my reflections and experience on this issue.
Organic (or routine) innovation is driven by incremental improvements in performance. The technologies embedded in new features is known and proven, although in many cases copied from other industries. In organic innovation, the business model has been almost the same for a long time, even decades.
These are low risk/ low reward bets usually implemented by players in mature industries with low growth rates. Typical representatives of players in this quadrant are car makers and telecom operators in developed countries.These players are usually very cost-oriented and have to deal with aggressive competition and little differentiation among peers. Forced by ever-shrinking margins, they also tend to outsource large parts of their business, even business-critical technologies, to their suppliers. They may also be subject to a demanding regulatory frameworks. In addition, their shareholders tend to look at them as a source of dividend and expect innovation investments to be canalized into the core business.
Radical innovation is driven by the implementation of technologies the are totally new or unknown to the industry and improves the product performance by orders of magnitude. Implementing these technologies don’t alter though the underlying business model. The introduction of glass fiber by Corning as a much better telecommunications bearer than copper cables is a classic example.The invention of the transistor by AT&T is another one.
Companies that excel in this area must be R&D heavy, with unsatisfied customers that feel that the present technology is reaching its performance limits. These companies regard technology as their core competitive advantage and dedicate vast sums to it.
Disruptive innovation is characterized by the conjunction of well known «off the shelf» technology and new business models in the industry. Typical examples are Spotify, Skype and Netflix. The Norwegian classifieds portal Finn.no may fall into this category too. However, the new business models are usually easy to copy for new players (not for incumbents). As a result, the only possible way of defending a position based on disruptive innovation is usually to grow very fast in order to rapidly achieve economies of scale and scare potential competitors away. In order to do this, most disruptive innovations sell at very low prices- or even for free, in order to facilitate rapid massive adoption.
Firms that fall into this quadrant need massive financial muscles behind and patient shareholders that buy the growth story. Losses may be gigantic before a critical mass of paying customers can compensate for the low prices used to lock them in. The outcome of this bet is extraordinarily unsure. These companies are usually backed by Venture Capital.
Finally, there is the king of all innovation strategies, the so called ”architectural”. This strategy implies combining new technology, ideally across industries, with new business models. There are very few examples of sucessess in this quadrant, but those who make it can easily destroy their competition in the prosess. iPod from Apple made quickly all other mp3 players irrelevant based on legal downloading of music and revolutionary hard disk technology. Another example is the Norwegian mobile browser Opera, with its proprietary compression technology and B2B business model that made it a serious contender in several emerging markets.
This innovation strategy is very difficult to implement because it demands a combination of superior technology insight and a risk-taking approach. Few top managers, board of directors or even shareholders are willing to take this approach. As a result, the few cases I know about are either startups or companies on the verge of being irrelevant with nothing to lose.
The lesson of this classification is golden: Don’t try to innovate with products or services that fall into a category your company is not able to compete in.
For example, a company that operates in a mature market and faces fierce competition may let its innovation team play with some disruptive ideas. However, at some point the top management will realize that moving from pilots to full scale business is a very serious step. They will face the prospective of long pay back periods, unsure outcomes and massive investments that the core business badly needs in order to remain competitive. In most cases neither shareholders or the CFOs will, with all good reasons, give green light to the project.The team will be disappointed, the innovation message may have to be reconsidered, and the top management will suffer a credibility challenge.
On the other side of the scale, companies that have the structure and culture to pursue radical innovations at the core of their business should not forget what made them great. To give in to punctual threats, to start imitating instead of innovating, and to give up essential technologies can give a nice boost to a quarterly report. Unfortunately, it also can lead to irrelevancy in the long term, like when IBM sold its stake in Intel at the beginning of the PC era. It ended with a massive attack of PC clones and the sale of the whole PC unit years later to Lenovo.
Finally, it is of course not entirely impossible for a company to break these innovation strategies, but it implies the creation of entire new units or establishing a clean cut Venture Capital arm. That will be the subject of another post.
The original article from HBR describing these four innovation strategies can be found here.
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