Where does Innovation Come From?

Let’s face it, most entrepreneurs are impatient and restless. Within the process of strategic planning, they tend to be dissatisfied with incremental improvements.  Most seek the Holy Grail through some form of market disruption that will provide  competitive advantage. Not every strategic plan will unearth the next iPad. Yet innovation can be manufactured, and provide a clear path for exponential growth.

There are four primary types of innovation a company can pursue:

1. Finance – Entire businesses are built on float and spreads etc. (such as American Express)
2. Process – Creating systems that streamline operations, reduce cost or offer customers an enhanced experience
3. Offering – Companies that develop unique product/design innovations or who offer comprehensive selection (one stop shopping)
4. Delivery – Companies with a unique distribution/come-to-market strategy (which is proliferating now as e-commerce reshapes many industries)

Timing is just as important in considering various innovation alternatives.  The effectiveness of certain strategies will vary dramatically based on industry stage.  When companies enter a white space with a product innovation, risk and return are high. Incumbents interested in volume will ignore such entrants pursuing niche markets[i].  When upstart Under Armor developed undergarments for football teams, they were largely ignored by larger apparel makers. Before Nike knew it, Under Armor was selling golf shirts at Dick’s Sporting Goods.

Once new products are accepted and a market is made, opportunities shift to service innovation.  The fro-yo craze (frozen yogurt) represents a current example of ingenious innovation (higher consumption coupled with lower labor costs).  Once the industry was established, the ingenuity offered was through service delivery (self-serve) as the product was framed in an entirely new context.

Another element the entrepreneur must consider is the organization’s risk tolerance and other factors that may motivate a management team. For example, a company with private equity investment may have additional burden and may be more inclined to take bigger risks; faster.

Companies can consider growth investment  in their core, adjacencies or in more transformational innovation[ii].  What is often counterintuitive to entprenuers is that in most businesses, the next dollar of investment is more likely to provide an ROI when invested in the core business, than it would in disruptive innovation  (which has a much higher risk to fail). In order to optimize ROI and reduce risk, one potential strategy is to straddle your wagers across all three (core, adjacent, transformational) as each has a different risk profile and timeline.  While one could make incremental improvements to the core immediately, transformational innovations (such as an abrupt change to a business model) could take years to execute, and may require a separate LLC, management team and P&L.

Some companies are equipped to ignite and manage innovation and others think of innovation more casually. But to stimulate innovation in any systematic way requires a mindset and management structure that encourages investment. Many companies employ R&D specialists whose role is to develop new products and services. Many establish task forces to constantly consider new ideas and establish customer advisory boards to provide color on what shifts in a market may foster opportunity.

Continuous innovation does not happen on its own, it requires an enterprise wide commitment, investment and an appetite for change.  Do you have the will?

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