In my opening post, I touched upon how companies that take a systematic approach to innovation manage to escape what we call “The Innovation Death Spiral”. They do so by balancing incremental-, platform-, and breakthrough innovation projects in line with their market positions, ambition and strategy. This week I will explore innovation types a bit more in-depth and zoom in on the importance of project portfolio balance.
Innovation success is either luck or it is based on a competitive advantage in foresight & insight. Companies that out-innovate competition time and again, systematically develop the market foresight and customer insight that informs them which are the most attractive future growth options and where they have the best chance of winning. Innovation most of the time does not start with an idea (something that happens to you) but with a sound understanding of a business opportunity driven by a customer need. The rigorous and systematic approach to defining business opportunities and developing ideas and solutions to meet customer needs, drives Bigger & Better innovation simultaneously. Consistent innovation success builds innovation confidence within the organization (f/e to overcome the fear to fail) and reinforces client interest in news from the company, almost as a self fulfilling prophecy. Innovative companies are also seen as more attractive to work for by top talent. So this is all why companies as diverse as Google, P&G and of course Apple generate superior value from innovation.
Accenture research confirms that successful innovators take a systematic approach to innovation, balancing offensive innovations (breakthrough and platform) with defensive innovations (incremental). Innovation portfolio management in essence is an effective form of risk management, helping senior management keep their finger on the pulse of what works and what doesn’t work, and releasing funds step by step as uncertainty decreases.
So how do companies find the right balance in their project portfolio? Let’s take a closer look at the three innovation types, each with their own level of ability to attract new demand and risk profile.
Incremental Innovation
Incremental innovations are defensive, designed to secure or marginally improve existing market positions. Incremental innovations are variations on themes which do not offer a true differentiated customer benefit and therefore don’t provide the customer with a reason to exercise additional demand. The growth generated by incremental innovations is mostly the result of activation, attention or refreshment. Incremental Innovation is therefore often called renovation rather than innovation.
All market positions require some level of renovation but companies tend to overemphasize incremental. The rationale is clear: incremental projects are easier, faster, less expensive and less risky than real innovation projects. However, if the plan is to generate substantial demand-led growth from innovation, it is unlikely that an incremental portfolio will deliver. The overemphasis on incremental can also hide a more fundamental problem of a lack of big innovation ideas. This links back often to a competitive disadvantage in market foresight & customer insight. As described in the recent Accenture article “The Innovation Death Spiral” incremental innovation does drive-up business complexity and associated costs. If the value of the achieved growth is smaller than the cost of the additional complexity, incremental innovation destroys value.
Platform Innovation
Platform innovations provide superior customers benefits. If the benefits are sufficiently relevant and differentiated, they will allow a price premium or market share gain. Platform innovations in general do not grow market volume. They seduce customers away from competition, or replace existing volumes with better margin volumes. Platforms are therefore also called Share of Market Innovation. Platform innovations are typically about improved performance (e.g. iPhone4 or iPad2) or about a new combination of benefits (e.g Diet Coke or Coke Zero: no calories same Coke taste). P&G’s “First Moment of Truth” philosophy is in essence platform innovation: Their ambition simply is that product performance at 1st trial is so distinctively superior that consumers will become instantly loyal to the brand.
Platforms take more time & budget and are more uncertain than incremental innovations. If you get them right they will bring more profitable growth. If you get them right frequently and consistently, platforms can significantly contribute to the economic value and company valuation.
The challenge with platform innovation is the increasing pace of commoditization, which reduces the competitive advantage and limits cash flow. Think of the increasing speed at which Retailer brands release exact copies of successful product innovations these days, often taking rapidly up to half of the market in their stores. The rapid commoditization of product platforms is driving a trend of Business Model Innovations. In addition to the product, other aspects of the business model are innovated, strengthening the sustainment of competitive advantage over time. Where would iPhone be without the App Store and where would Nespresso be without the Nespresso machines and the direct to consumer delivery channel?
Breakthrough Innovation
Breakthrough innovations create new markets or disrupt existing ones. The term break through comes from technology and often they are based on some sort of proprietary new technology. Others appear to hold new technology but mostly apply existing technology in relevant novel ways (I promise this is my last reference to iPhone). Break Through innovation is high effort, high risk, long lead time but high reward, if you get it right. The challenges with break through increasingly are with the magnitude of the upfront investment. For example blockbuster medicine development in Pharmaceuticals has become almost unaffordable. I feel it is important however to realize ourselves that not all break through requires big new technology solutions. Break Through thinking in business, market definition or even product positioning can establish new markets and new segments. So when Unilever redefined Cup a Soup from a bad soup to a healthy coffee alternative, it established a new habit: the Cup a Soup 4 pm moment. In similar ways mainstream digital technologies have created the opening for innovative business models that have disrupted industries as diverse as travel, real estate and probably soon payment.
In my next post I’ll be talking about moving from innovation that happens to you to manage innovation (your tomorrow’s business) with the same rigor and discipline as you manage your current business. Until then, I’d like to leave you with two questions:
1. How incremental is your innovation portfolio?
2. What are your options for non-technology led breakthroughs?
Loading ...
As products become more complex, if simpler in customer experience, innovation must increasingly address the “whole product”, such that services, operational capabilities, human skills, and business models, must all converge in a holistic mode of innovation. iPod and iTunes, product and business model, are only the most obvious example.
Dear Sonja, thanks much for your question.
You are right: Improvements in organizations, processes and systems can drive very significant value. This is also where most of Accenture’s client work takes place. We just don’t call that work “Innovation”, because our clients see innovation primarily in the context of their growth agenda. So we scope “Innovation” as new solutions that generate new revenues. Within this scope, innovation is not restricted to product innovation, but can also comprise services, earning models, routes to market and delivery models, as long as the intent is to generate new demand. So it is just a matter of definition.
Wouter
Your blog posts seems to focus mainly on product innovation, with the distinction specifically on how it entices the customer.
I’m wondering how a balanced innovation portfolio relates to internal company innovations, such as process innovation or logistics innovations which could improve margins without that being carried over to the customer. Which place in the balanced portfolio do these innovations have?