The Vistage Innovation Framework

Understanding the risks and rewards of an innovation strategy

“What matters most is that your company develops an intentional approach to innovation, and that you’re aware of the risks and rewards associated with the strategy that you choose.” – Joe Galvin, Vistage chief research officer

Disruptors, the titans of innovation, are everywhere these days. Pick up a copy of Forbes, and Elon Musk is gracing the cover. Turn on CNBC, and Marc Benioff is the guest of the day. Scroll through Twitter, and Richard Branson is being retweeted a million times.

There is, of course, good reason for all the attention. They are upending the status quo and doing so at a more frequent clip. Years ago, this phenomenon seemed more contained, as Blockbuster got Netflixed, the Blackberry got iPhoned, taxis got Ubered, and brick-and-mortar retailers got Amazoned. Today, disruption is more ferocious and widespread. And in this new reality, there are two main truths:

Companies that hold on to the status quo for too long will pay for it.

Disruption can happen to any business at any time. As a result, companies need to change how they think about disruption and how they approach innovation.

Why continual innovation is necessary

The phrase “Innovate or die” might be cliché, but it’s valid. To compete with disruptors like Amazon or Apple, companies have to consistently innovate.

This is true for all companies, even the ones that seem unstoppable. In his bestseller Good to Great, Jim Collins profiles a series of companies that outperformed the market by a significant multiplier (on average, 6.9 times) over the course of 15 years. One of those companies was Circuit City, which from 1982 to 1997 had a stock performance that was 18.5 times better than the overall market. Try finding a Circuit City today.

Yes, continual innovation is a challenge, especially when you have other competing demands. As a CEO, you’ve got people to lead, customers to engage, and operations to run. But the innovations in the way you do business don’t have to alter the course of civilization. Innovation falls on a continuum, and it has different degrees of value in different contexts. What matters most is that your company develops an intentional approach to innovation, and that you’re aware of the risks and rewards associated with the strategy that you choose.

A framework for innovation

Innovation is not just about doing something different. It’s about doing something better, whether that’s improving internal workflow to increase profitability or serving a customer need in a new way that increases market share.

When deciding on an innovation strategy, companies should consider two categories of opposing forces:

Incremental vs. disruptive: Incremental innovation consists of small improvements to your company’s existing products, services, or processes for the sake of efficiency or productivity. Disruptive innovation unseats established businesses by creating a product or service that leapfrogs the status quo or is accessible to a new population of customers—usually because it’s offered at a lower cost or is a new solution to your customers’ challenges.

Proactive vs. reactive: Proactive innovation is intentional and planned, and it typically requires a commitment of people, time, money, and resources. Reactive innovation occurs on the fly and is triggered by an event, such as when a large client cancels a major contract. At the center is the Status Quo zone. This is mediocrity perpetuated. Companies that fall into this area believe that what made them successful will keep them successful. The closer you are to this area, the greater your chance for disruption. Let’s explore the risk-reward ratio of each quadrant:

Innovation axis

Quadrant 1: Proactive/Disruptive Risk/reward ratio: High risk, high reward

Company profile: These companies identify and reach an untapped customer segment by delivering an offering that’s more affordable/accessible than anything else on the market. Salesforce, for example, took down Siebel—and an entire category of enterprise software—with its revolutionary cloud-computing applications.

Potential risks: This approach typically requires a major investment up front without a guarantee of return. Innovations have the potential to fail miserably (remember the “new Coke” of 1985?), harming both revenues and reputation.

Potential rewards: As the Salesforce example suggests, the rewards can be tremendous. You can become a category-defining company and a recognized leader in your market.

Quadrant 2: Proactive/Incremental Risk/reward ratio: Low risk, high reward

Company profile: These companies are motivated to continuously improve everything they do. They have a strong culture of innovation and typically have teams and leaders that are specifically dedicated to innovation.

Potential risks: This approach requires a commitment of time, resources, and talent. However, timelines tend to be shorter and investments tend to be fewer in comparison to the Proactive/Disruptive strategy.

Potential rewards: This approach can lead to a high-performance organization, where quality and efficiency permeate all aspects of the business.

Quadrant 3: Reactive/Incremental Risk/reward ratio: Low risk, low reward

Company profile: These companies tend to operate without innovation leadership or a formal innovation team. Innovation projects may be present, but they don’t progress—because either daily work gets in the way, resources are reallocated, timelines fall behind, or there’s no accountability.

Potential risks: Competitors that are adept at innovation are well positioned to steal market share—and your customers.

Potential rewards: Upfront costs are lower because you don’t have a dedicated team in place.

Quadrant 4: Reactive/Disruptive Risk/reward ratio: High risk, low reward

Company profile: These companies wait until something bad happens to try to come up with an innovative idea. For example, if a national player moves into their best market, they try to come up with a game-changing innovation on the fly.

Potential risks: It’s very difficult to develop disruptive innovations in a moment of crisis. You’re likely to weaken your customer base and lose revenue at the same time.

Potential rewards: If you get lucky, you can come up with an innovation that keeps your company in the game. And if you’re even luckier, the innovation can potentially redefine your company.

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