This guest post is written by Swaroop C H, co-founder of a startup called IONLAB. He writes regularly on his blog at www.swaroopch.com. His company has announced their upcoming product called “Track Every Coin” which can be best described as “Your personal finance in a keychain.” Check it out at www.trackeverycoin.com.
I always used to find the concept of “innovation” very fuzzy, especially when the big managers talk about it. The best explanation I’ve read is “Innovation is the by-product of a well-executed product.” But maybe that’s equally fuzzy as well.
A few years ago, when I was working at Adobe, I got to attend the famous internal “Dev Summit” which is a fantastic event that happens every year. At this event, I got to attend a talk on the “vectors of innovation” by Geoffrey Moore. This talk is related to his book “Dealing with Darwin”, so for those who have already read that book, please do chip in with your thoughts on the takeaways from the book in the comments section. For the rest, I have jotted down here my notes from that talk.
First, he exploded the myth that innovation in itself is valuable and that innovation is the same kind in every company.
He explained why innovation is important to a company:
Innovation is valuable only if it helps us achieve competitive advantage. Its greatest value is when it differentiates us from our competitors sufficiently that customers prefer our offers to theirs and will pay a premium to support that preference. It also has value when it helps neutralize their competitive advantages over us and when it helps us improve our own productivity and thus profitability. But we should realize there is a lot of innovation going on today in our company that meets none of these criteria, that is in fact creating waste. Managing innovation successfully requires us to redirect that energy back into economically rewarding outcomes.
The economic argument in favor of innovation focuses on pricing power. Without innovation offerings become more and more like each other. They commoditize. As they do so, customers are able to play one vendor off against the next to get a lower price. Over time the market stabilizes at prices at or below cost, creating returns for investors below the cost of capital, causing investment to flee the marketplace. By contrast, when innovation is applied, offers become more and more differentiated from one another, leading to different ones becoming the preferred choice for different market segments, giving those vendors pricing power within those segments. In this scenario the market stabilizes at prices well above cost, creating returns above the cost of capital, attracting more investment into the marketplace.
The fundamental principle that drives this argument is that when innovation creates differentiation, it creates attractive economic returns.
This brings up the next important point:
Focus and prioritization. Those are the issues when it comes to innovation for differentiation. If we do not break away from the herd, we have wasted our budget. In order to break away, we must overcome risk reduction mentality and lack of corporate alignment. Neither is a natural act.
Now that we know why innovation is important, we have to figure out how to focus on what kind of innovation.
Geoffrey describes what he calls “innovation vectors” – The idea that each type of innovation can be thought of as a strategic direction for investment that competes for resources with alternative vectors.
Here are some of the example innovation vectors that he describes:
- Product Leadership
- Disruptive innovation (Google)
- Application innovation (Amazon)
- Product innovation (HP)
- Platform innovation (Microsoft)
- Customer Intimacy
- Line Extension innovation (Apple, Autodesk)
- Design innovation (Apple, Ideo)
- Marketing innovation (Salesforce.com)
- Experiential innovation (Facebook)
- Operational Excellence
- Value engineering innovation (âfreemiumâ model, open source)
- Integration innovation (Microsoft Office)
- Process innovation
- Value migration innovation
It’s an art to be good enough on many innovation vectors and being great at specific innovation vectors. This is what will differentiate and “make” the future of the company.
The “good enough” vectors are for hygiene if it’s bad, people will crib. If you’re good, nobody will pay attention. The “great” vectors is where you make your mark as well as maintain your discipline. Choosing a primary vector is key. And avoid diffusion of innovation that leads to no returns. Once you choose, align.
And when you make that decision, you have to constantly repurpose from Context to Core:
Core as we traditionally have defined it applies to processes that differentiate your offers to create competitive advantage leading to customer preference. Context refers to all other processes. The overwhelming bulk of all work is context, not core. The goal for managing context is productivity, freeing up resources to repurpose for core. To this traditional definition we have added an extension that applies to markets. Here core means a market is in play, with market leadership up for grabs, and context means its structure has been determined, the market share pecking order set. Again, the best strategy is to extract resources from context markets, even ones that are highly competitive, and repurpose them for core. Needless to say, this is not for the faint of heart, but it is behavior that Darwin rewards.
To explore more on this subject, please refer the “Dealing with Darwin” book website.