The word innovation and its meaning has seemingly elicited much attention recently: mostly negative. Has it lost its meaning? Should we abandon even using it? Two recent articles on the HBR Blog Network caught my attention. One titled “Stop Me Before I “Innovate” Again!” (1) used the example of the CEO of Kellogg recently citing the Gone Nutty! Peanut-butter Pop-Tart as a key “innovation” for 2013. The author, Bill Taylor, wonders if that is considered “innovative”, than what new product is not? Fair enough. A second article, “Say “No” to Innovation-in-General” (2) by Maxwell Wessel almost on cue provides a good case, which I happen to agree with, that the real problem is not the word itself but that often those talking about innovations don’t differentiate between various types. Not all innovations are created equal. I do think we err on both sides. In other words, sometimes we only consider a product innovative if it uses radical, new technology. We focus on the latest technology as a surrogate for defining whether something is innovative or not. On the other hand, sometimes, even something like the Gone Nutty! Peanut-butter Pop-Tart is considered innovative. Maybe both are right, or maybe both are wrong.
What company CEO or business owner does not want to become more “innovative”? What does that really mean, however, in the context of a specific industry, technology, market and company? Every company wants to be seen by their customer’s as “innovative”, don’t they? In Taylor’s article, he cites a Boston Consulting Group poll of 1,500 executives that asked them to rank their company’s ability to innovate on a scale of 1 to 10. Perhaps not surprising, more than 2/3 of the respondents ranked themselves 7 or higher. Maybe they are and maybe they are not, but one thing is certain: every business can get better at managing innovation and driving revenue and earnings growth. The drive to get better, to learn from others and your own past mistakes, and to “look beyond your four walls” should never end (3).
So while I do agree that the word has taken on a somewhat mythical place in the CEO’s and business owner’s lexicon, I don’t believe we should simply ban it. I believe it is more important to educate those who use the term to understand what it really means, how it is context specific and that all new products or services are not created equal, and most importantly how to operationalize innovation in order to create value and drive revenue and earnings growth. While there are many things that motivate for-profit businesses, the need to generate revenue and earnings growth ranks right up there! Innovation is a means to an end for most businesses, or should be.
What does the word really mean? As Wessel correctly states: “At its highest level, innovation is simply where ideation meets commercialization.” I often use the figure below to illustrate that innovation is a process that mediates between two parameters: technology and a market need (4). Both are changing as a function of time, and innovation comes about when the right technology is matched with a market need, and at the right time.
This diagram implies that not all innovation is created equal. You might have an existing technology that is applied in a new and unique way to satisfy an unmet customer need and create a very innovative product. The recent example of how Netflix is disrupting the entertainment industry illustrates the point (5), as do many other examples such as Amazon, Walmart, etc. You might have a cutting edge technology that a company has spent millions of dollars developing, but for which a market does not exist and no one buys. That is not innovation. Developing a new technology for the sake of the technology, without a market need, is not innovation, it’s generally a waste of precious company resources. If it is being done just because a senior manager, CEO, or owner believes blindly it is the right product to develop that is possibly a sign of a dysfunctional innovation management system. There are of course spectacular exceptions, but they are just that, exceptions.
In my experience, there are in general three primary types of new products. There are incremental extensions of existing products. The new Pop-Tart falls into that category. There are products that are new to the company, but may already exist in the market. The concept of the “fast follower” might apply to this type of product. A company may choose to let another company blaze a trail, then quickly enter the market, sometimes with great success. And finally, there are the true, new-to-the-world products. Something that just does not exist. As Wessel points out, “Without differentiating between things like sustaining and disruptive innovations, the conversation never directs managers to the nitty-gritty details where new products live and die.” So true.
In thinking about the innovation process, I believe it is important to consider another factor. When it comes right down to it, there are two types of organizations. There are start-up companies, and there are established, on-going enterprises. How each approaches innovation management, and what it means to each is different.
The stories of the mythical lone, relentless visionary toiling away in a garage that in the end creates a whole new industry abound. Everyone has heard them ad nauseam. For every one you hear about, there are many, many more that do not survive beyond the first couple years. A start-up is a special case. They are typically on the cutting edge and truly developing a radical, new-to-the-world product. They will live or die based on creating a viable business before funding runs out. It may be related to brand new technology, or an entirely new business model. It may mean serving a heretofore unrecognized customer need. In many cases, how the company thought the product might be used turns out to be completely wrong. There are many reasons for society to support and celebrate this risk taking. It is the heart and soul of the creative destruction that goes on every day to move society forward, but managing this type of innovation is not for the feign of heart. An excellent book on this subject is The Lean Startup by Eric Ries (6).
For the existing, on-going enterprise, managing innovation presents different challenges. For a company with multiple products, operationalizing innovation is a key strategic activity of the president, CEO, owner, or the senior manager responsible for that business’ P&L. The senior manager has to treat innovation and new product development as a key business process and be completely engaged (7). There is ample evidence to support this. A recent Accenture study found that those companies with a formalized innovation management system are much more likely to be satisfied with their return on innovation investment (8).
A key component of operationalizing innovation is the concept of the project portfolio management system. I and others have written extensively about this topic (9) and won’t go into a lot of detail here, but it is this process that enables an organization to effectively prioritize projects, allocate scarce resources, and create product roadmaps. It is a never ending process, and while may formally happen only a couple times a year, will need to be continually running in the background. Typically it is a process driven by a product manager, with other key stakeholders involved. An important feature of the portfolio process is that it forces, or should, explicit decisions about the nature of the project portfolio. In other words, what will be the percent of incremental, new, and radical projects in the queue? Balance is important. A company will usually not want to place all their investment in radical, new-to-the-world products any more than having a portfolio dominated by incremental, low risk projects.
It is here that an established company can learn from the start-up. There are powerful forces at work in established companies, especially public ones that drive them to become more risk averse (10). That means that they tend over time to have portfolio’s dominated by incremental projects. When the Kellogg CEO touts the Gone Nutty! Peanut-butter Pop-Tart as a key innovation, this might be a symptom of this mentality. What drives most public company CEO’s? What better way to meet quarterly numbers year in and year out than with safe, incremental product extensions where the market is very well understood. Of course the counter argument is that you can only survive that way for a finite period of time. If you continue to live on existing knowledge, without ever investing in creating new knowledge, as do start-ups, then you will eventually wither and die. The point is that senior managers have to understand the forces at work that drive them to incremental projects and purposefully force more balance in the portfolio. The recent book entitled Escape Velocity by Geoffrey Moore (11) speaks to that problem.
So, should we ban the word innovation? No, but we should understand what it means, that not all new products are created equal, and how to effectively operationalize innovation to drive value creation.
Do you believe the word innovation has become meaningless? Do you think that most who use the word understand what it really means? Is an incremental extension of an existing product any more or less innovative than a radical new-to-the-world product? How would decide which one is more innovative?
(1) Taylor, Bill. December 6, 2013. Stop Me Before I “Innovate” Again! HBR Blog Network
(2) Wessel, Maxwell. January 23, 2014. Say “No” to Innovation-in-General. HBR Blog Network
(3) See this article: Looking Beyond Your “Four Walls”
(4) See pages 30-31: Thomas J. Allen and Gunter W. Henn, The Organization and Architecture of Innovation. (New York: Elsevier, Inc., 2007)
(5) LaPorte, Nicole. February 2014. Netflix: The Red Menace. Fast Company February 62-68,102-103
(6) Eric Ries, The Lean Startup. (New York: Crown Business, 2011)
(7) See this article: New Product Development (NPD) as a Key Business Process
(9) For information on portfolio processes, see these articles: The Importance of a Balanced Project Portfolio; Critical Aspects of Project Portfolio Management in NPD Success
(10) See this article: Are Companies Becoming More Risk Averse in New Product Development Decisions?
(11) Geoffrey A. Moore, Escape Velocity. (New York: Harper Collins, 2011)
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