Engineers say that, a new idea is “invented” when it is proven to work in the laboratory. The idea becomes an “innovation” only when it can be replicated reliably on a meaningful scale at practical costs.
— Peter M. Senge, The Fifth Discipline
Economics of Innovation
To remain competitive, companies must innovate. Without innovation, products and services become more and more alike. In other words, they eventually become commodities. Then businesses have to compete on price, which eventually destroys profit margins. When the market stabilizes at the lower price, investors move to other markets. By contrast, innovation allows companies to differentiate. This enables premium pricing, which eventually leads to higher value. When the market stabilizes well above cost, it becomes easier to attract investors.
“The fundamental principle that drives this argument is that when innovation creates differentiation, it creates attractive economic returns.” [ However, there are other possible outcomes for all types of innovation efforts. The ultimate goal is to calculate “return on innovation.”
There are four other types of innovation
• Differentiation. Innovation designed to capture market share, attract investors, and gain economic advantage
• Neutralization. Innovation to keep up with higher-performing competitors
• Productivity. Innovation to lower costs, thus freeing resources for other forms of innovation
• Waste. Innovation that falls short of achieving any goals
Differentiation is the type of innovation that holds the most potential for economic gains. However, it is often stifled by adversity to risk. A company that is focused on risk reduction stays close to norms and tends to leverage the experience of the market leaders. This is dangerous for companies that hope to take a “value proposition to such an extreme that competitors either cannot or will not follow.”
Companies who seek to be innovative must encourage collaboration. “Breakaway differentiation requires a highly coordinated effort across the entire enterprise.” The idea may come from a small group. But “at the end of the day, every function in the corporation has to realign its priorities in order to amplify the innovation to breakaway status. Anything less is simply too easy for competitors to neutralize.”
Successful innovation requires strong leadership. In most companies, innovation is highly decentralized with multiple projects going on at the same time. This is the best strategy for the incubation stage. But when it comes to selecting the best prospect for further investment, strong leadership is required. “If management does not take a position on innovation strategy, the company’s innovation will continue to bubble up, but they will not be aligned. If all are brought to market- and that is the default option in this scenario—none will achieve breakaway status.”
Taking Ideas to Market
When an organization decides to pursue innovation as a strategy, there are several aspects to consider. First, how viable is the product or service? Second, is the product or service feasible? And third, once it is developed, what is the best way to take the new product or service to market.
Rob Goldberg, an innovation consultant, specializes in helping companies take their ideas to market. He offers the following assessments when considering an innovation project.
Evaluation of Viability
Goldberg uses eight dimensions to determine the viability of products and services.
1. Size of opportunity. What is the size of the market?
2. Growth of market. Is the market growing or shrinking?
3. Strength of customer relationship. Can existing customer relationships be leveraged?
4. Value creating. How do we create a competitive advantage?
5. Degree of government involvement. To what extent is the market regulated?
6. Degree of competitive density. What is the structure of the market, and who are the leaders?
7. Value delivery. What barriers to entry exist?
8. Window of opportunity duration. How much time do we have to launch successfully?
Evaluation of Feasibility
When considering entering the market, there are several questions to assist in assessing feasibility.
• Perception.How much pain is associated with what the company does today? Is there a need for the product or service?
• Competitive density. Are there any 800-pound gorillas lurking?
• Brand image. Can your company deliver a credible solution in this space?
• Innovation. Does the technology exist to develop the solution?
• Experimentation. Does the solution rely on proven technology?
• Business model. Is the company willing to pay for it?
• Return on investment. Does the product or service support corporate hurdles to bring the innovation to market?
• Cost of entry. How do we enter the market?
Taking the Innovation to Market
Once the innovation is ready, Goldberg uses a four-stage process to take an idea to market.
1. Requirements analysis defines the WHAT. The goal is to document all function/feature, performance, and user-interfacing requirements of the solution that meets the customer’s needs.
2. Design analysis describes the HOW. Design essentially transforms the requirement into a blueprint that outlines data structures, architecture, procedural detail, and interface characterization that can be created to deliver the desired customer experience.
3. Feasibility analysis determines the HOW MUCH. The aim of a feasibility study is to see whether it is possible to develop the solution at a reasonable cost.
4. Optimization analysis determines WHAT IT IS WORTH. The goal of optimization is to establish the optimum feature set based on economic value and customer preferences.
Depending on the industry and type of product or service, there may be other considerations. But these basic concepts offer some guidelines for accelerating the innovation process within an organization.