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 Chuck SchaefferThe Innovation Imperative

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Summary

  • Innovation is a risk-reward business growth equation. When successful, breakthrough products or services create differentiation, revenue growth, high margins and customer loyalty. Innovation isn't easy, but it's also not optional for companies seeking differentiation, revenue growth, high margins and customer loyalty. Growth and comfort do not coexist.
  • Innovation can produce market disruption. Any startup or competitor that can find a new or better product, or a new or better way for customers to acquire, consume, use or benefit from a product, can displace an incumbent delivering the status quo.

For most companies transformative innovation is something they read about. It's exciting stuff but shrouded in mystery and reserved for eccentric futurists, unique thinkers and billionaires such as Elon Musk or Steve Jobs. Too many business leaders believe transformative or disruptive innovation is beyond their capability.

However, that's changing as more forward-looking business leaders recognize there are different types of innovation for different business objectives. Business leaders are discovering innovation can be learned, the cost of innovation is plummeting, and innovation is a top business growth accelerator.

A McKinsey Global Survey found that "84 percent of executives say innovation is extremely or very important to their companies growth strategy." And the reasons for the increased innovation adoption are simple – to accelerate revenues, increase margins and grow companies. Gartner reports that, "Companies pursuing breakthrough ideas are able to generate up to twice the product sales of their peers."

When it comes to innovation it's been my experience that there are two types of business leaders. Those that proactively innovate to disrupt their market, and those that get disrupted.

The disrupted generally follow a predictable four-stage process. First, they live in denial, and suggest disruption in their market will not occur anytime soon, if at all. Unfortunately for them, the pace of market disruption continues to accelerate in virtually all industries. Second, once a competitor introduces disruption, they suggest the change is hype or a fad. Once the so-called hype is substantiated, they like to say things like "it’s 5 years away from reality." Third, after they recognize their denial isn't working, they try to prop up their solution or business model that is being disrupted with new never-before realized benefits or value propositions. However, these repackaged benefits deliver no real new value. And finally, after acknowledging the competitor innovation offers superior customer value, they embrace the disruption and pursue a me-too strategy which comes too late, pales in comparison to the disruptor and leaves them to find market niches that the disruptor chooses to ignore.

The disruptors take a different path.

First, they recognize while innovation is far from prescriptive, it follows patterns and processes that can be learned, improved upon and replicated with a framework. Many large organizations have implemented innovation teams that regularly create the new revenue streams for the company. Many midsize firms are starting to replicate their successes.

Types of Innovation

Innovators know they can apply different types of innovation to balance their desire for growth with their appetite for risk. Business leaders need not bet the farm on a big bet or moon-shot innovation wager.

There are different types of innovation, each with its own investment, risk and payback.

  1. Incremental innovation is normally applied to existing product advancements and evolution. It's the most pervasive but delivers marginal value and often just keeps pace with competitors.
  2. Transformative innovation accelerates new market share acquisition and delivers new high-margin, revenue streams.
  3. Disruptive innovation often creates new and unique products or services that achieve first-to-market competitive position. This type of innovation usually gets the headlines.

Incremental innovation is the most popular. After all, what company doesn't continuously advance their products and services? Unfortunately, the safest method is also the lowest payback.

A big problem for incremental innovation is that most customers use only a fraction of a product's capabilities. Adding more capabilities does not increase their utilization but generally makes the product more complex and difficult to use. This scenario provides the opening for disruptors to enter the market by offering a simpler, easier to use or lower cost solution.

The CEB (Gartner) Transformational Innovation Survey, revealed that most companies allocate two-thirds less R&D dollars to transformational innovation than the companies growing most profitably in their industries. They also share, "The average company is sacrificing five percent growth annually due to its failure to act on transformational ideas."

One of Google’s Nine Principles of Innovation is "Think 10x, not 10 percent". Google seeks to bypass evolutionary advancement with revolutionary impact. I was reminded by a colleague that it was Google, not a car maker, that created the first self-driving car.

The Pace of Change

Businesses that have comfortably rested on their perceived size and barriers to entry are increasingly finding themselves challenged, displaced or worse. Look no further than the most recognized companies in the world.

Half of the companies listed on the Fortune 500 in 2000 are no longer around – they have been taken over, gone bankrupt or simply no longer exist. By 2020, as many as three quarters of Fortune 500 companies will be names we do not recognize today. Only three of the most valuable companies on the S&P in 2007 are still on that list today.

S&P change

If digital start-ups and cross industry entrants can unseat complacent incumbents, including Fortune 500 companies, they can unseat just about anybody.

It is estimated there are 274,000 new startups worldwide each day. Born-on-digital companies are created with express intent to disrupt a market, increase cost competition, lower barriers for consumers to change providers, and take market share from incumbents.

Being complacent, inert or passive when facing unprecedented levels of customer disruption and fundamental industry interruption is a one-way ticket to irrelevance and business decline.

Fortunately, the solution is clear. Be the innovator or be disrupted. Savvy business leaders see innovation accelerating around them, and they don't ignore the implications. They recognize it's only a matter of time before a competitor creates innovation that directly impacts their business and viability. It's less clear whether the new disruptive competitor will be a traditional competitor, a cross-industry entrant or a start-up, but that doesn't really matter. Tomorrow's leaders realize before their competitors that they can either be the innovators that capitalize on disruption, or the disrupted that wait the sidelines for others to act. The leaders of tomorrow will be the people who take action today. End

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Innovation is recognized as a one of the top three business priorities by 84% of executives.

—McKinsey

 

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