Expand Your Innovation Horizons

Most innovations fail and it’s easy to see why. They are expected. They are unimaginative, boring, and fail to excite or fill any real need. Indeed, most so-called innovations aren’t innovative. They are mundane line extensions to existing products and services that have no currency with cynical, time-starved customers. So why do companies keep churning out me-too innovations that have no magic or address problems that have been adequately met elsewhere?

I think part of the problem is that most companies put most of their innovation effort into what I’d call horizon-one type innovations. These are low-risk innovations that aim to incrementally extend the existing business. They usually make sense internally but most customers can do without marginal innovations, especially if switching from one product to another costs valuable time or money.

A few companies look beyond this activity to horizon-two type innovations. These are new products or services that aim to create entirely new categories within an existing market. This type of blockbuster innovation is difficult, but there are big rewards for any company that’s smart enough and persistent enough to try.

The third area of activity is horizon-three type innovation. But outside of technology this is as rare as a red carpet no show by Paris Hilton. Horizon-three type innovations seek to disrupt existing markets through the use of new business models, processes, or technology. This is an area where old industries are remodelled and where emerging science and technology is harnessed to address demand that does not seem to exist. It is an area at the very edge of what’s possible where comments like ‘ridiculous’ are often a favorable response because few companies have the imagination or the courage to follow such bold moves.

This is where the really big money is.

According to an INSEAD study, 86% of innovation is low risk and generates around 30% of current company profits. The remaining 14% of innovation is radical but generates over 60% of current company profits. I’d add to this that unless you are actively looking at horizon-three type innovations, chances are your company won’t be around in another 20 years to invest in lower risk incremental innovations. For example, only 26% of the companies in the Fortune 100 in 1980 were also on the same list in 2001. In other words, playing it safe 100% of the time is a dangerous business. So ‘innovate or evaporate,’ as author and innovation expert James M. Higgins says.

Another reason innovations fail is that successful innovations that remain in market are quickly copied by competitors. Not only that, competitors playing a ‘follower strategy’ are not disabled by many of the costs associated with bringing a new idea to market. Fast followers can quickly learn from the mistakes of the original innovator who is invariably bogged down by the double whammy of internal resistance and external inertia.

For example, can you imagine the money Unilever must have spent to put black laundry detergent (for washing black clothes) on shelf only to find archrival Procter & Gamble putting an almost identical product on shelf a few moments later? (I actually forget who was first and who was the follower--but that’s my point).

Furthermore, companies often seriously underestimate the hidden costs associated with innovations, so what looks like a success on paper is often a commercial flop over the longer term when hidden costs like logistics are taken into account. Incremental innovation (horizon-one type innovation) is something companies need to do to stay in the game, but it rarely delivers any long-term competitive advantage unless you can create continuous company-wide innovation as a core competency.

This is not to say that companies (or individuals) can’t get rich by inventing and capitalising upon a single new product (look at Red Bull, Dyson, or Swatch), but it’s getting increasingly difficult as mass markets fragment and consumer attention spans evaporate.

For instance, Apple (pre iPod and iTunes) held approximately 1,300 patents and had fanatical brand loyalty. The company was also held up as a poster child of the innovation economy. But Apple had only around 2.5% to 3.0% of the global personal computer market behind grey box brands like Acer and Legend. In contrast, Dell had a share of around 18% of the worldwide market thanks to process innovations like its ‘built-to-order’ production system. In personal terms, Michael Dell is also worth considerably more than Steve Jobs. Dell is the 12th richest person on the planet with around $17 billion, while Jobs languishes in relative poverty in 140th place will around $4 billion. This is ridiculously simplistic, but surely these numbers say something about the value of process versus product innovation?