The 3 Stages of Innovation

The concept of a business cycle is something of a misnomer, as every company operates with an economic cycle, monetary cycle, industry cycle and company life cycle. The trajectory of these cycles, as well external forces and factors combine to provide a unique set of characteristics for every industry at any given time.

The maturity of an industry shapes its acceptance of innovation[i]:

Phase 1 Innovation– occurs when a new entrant exploits a white space.  When Under Armor burst on the scene it focused on a niche market; undergarments for football players. The brand was rugged and authentic.  As Under Armor gained distribution and awareness, it spread to new segments including baseball, tennis and golf and gained distribution in national chains such as Dick’s Sporting Goods.  The incumbent (Nike) ignored Under Armor deeming the niche as too small and the entrant as a non-threat.  Big mistake.

Phase 1 innovation is high risk, high profit

Phase 2 Innovation– occurs when a market is maturing but not saturated, and an incumbent or entrant provides new features or benefits that improve utility.  Frozen yogurt has been popular for a decade, especially in warmer climates such as California where healthier lifestyles are emphasized.

It was not until roughly 2010 that the market moved towards self-serve yogurt shops (fro-yo as the industry is called). Entrants such as Menchies provided a disruption in the form of a better delivery system (consumption is higher, and labor is lower).  The product offering itself hardly changed at all.

Phase 2 innovation tends to be moderate risk, moderate profit

Phase 3 Innovation– occurs when an industry is approaching saturation. Generally, a well funded competitor will invest heavily in supporting the status quo, making subtle changes in terms of efficiencies and distribution. At this stage, the product is commoditized and prices erode sharply.

When McDonalds began offering its McCafe coffee line in an effort to combat Starbucks, it did not offer new varieties of coffees or espresso. McDonalds leveraged its massive scale and distribution to undercut prices.  In this case, sameness plays to their strategic advantage. McDonalds lacked motivation to offer a “leap of innovation” in terms of new products.

Phase 3 Innovation is lower risk and lower profit

As an industry matures, the motivation of its participants varies based on their ambition for growth, profit or strategic position.  Time your innovations wisely.

Marc Emmer is a President of Optimize Inc., a California based management consulting firm specializing in strategic planning. Marc is the author of the book Intended Consequences. Marc can be reached at marc@optimizeinc.net.

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