Innovation is about ferreting our value from the market out of ideas. Well, is not a great idea to help customers get the job done better enough? Despite increasing the flow of ideas and risk capital to roll them out, why are more than 80 percent of innovative ideas failing to extract profitable revenue from the market? Does it mean that great ideas and risk capital to roll them out are not good enough? For ferreting out value from the ideas, we need a winning innovation strategy that gives us a game plan to win the race.
Of course, we need empathy to understand customers’ pain points and innovative ideas for helping customers to get jobs done better. But that is not sufficient to create innovation success stories. In addition to addressing customers’ pain points, ideas must succeed to generate profitable revenue. It happens to be that in the competitive market, an innovator is not a solo player. There has been a race between competing innovations. Hence, willingness to pay for innovation not only depends on how innovation helps customers. It also depends on competing products. Furthermore, customers’ preferences, underlying technologies, and externalities keep changing. Hence, we need a strategy to win the unfolding race.
Innovation strategy for turning humble beginning into a great success
The strategy should spell out how to penetrate, grow market share, and increase profit. It should indicate how to blend different innovative ideas like incremental or disruptive into a well-orchestrated move. The innovation strategy should determine whether innovators get into head-on competition with incumbents or start gaining momentum by progressing from the periphery. It should tell us how a humble beginning could grow as a breakthrough performance. The innovation strategy must focus on attaining price-setting capability out of the flow of ideas, creating a blue ocean. Furthermore, to win the race, it should blend product and process innovations into a strategy to improve quality and reduce cost.
Getting jobs done better:
The journey of winning strategy begins in delivering an innovative product that customers find attractive to recruit to get their jobs done. Studies find that customers consider between 50 and 150 metrics in assessing the suitability of a product to execute any job. Hence, innovation strategy should focus on empathetically observing customers busy performing their jobs. Identification of the nature of jobs, job executers, competing products that customers are using, pain points, and technology feasibility to support idea generation to address unmet needs should be the beginning of forming an innovation strategy.
Innovation strategy for making quality-cost trade-offs irreverent:
The conventional strategy focuses on whether to compete on quality or cost front. Should we focus on quality or cost is always a strategy debate. But there are opportunities of pursuing ideas that improve the quality and reduce the cost simultaneously. For example, the Microsoft Office suite is an excellent product. Although its development cost is very high, the per-unit cost is meager. Hence, by charging a minimal price, a tiny fraction of development cost, Microsoft succeeds in generating significant profitable revenue.
On the other hand, customized software application developers have been failing to succeed by delivering poorer quality software at a higher price. Similarly, Airbus succeeded in making the cabin of A380 quieter while reducing fuel consumption. To make quality-cost trade-off irreverent, both Microsoft and Airbus had to make upfront R&D investments in strategic areas. For example, Airbus’ R&D led to the development of carbon fiber in reducing the plane’s weight, making engine size smaller, turning the cabin less noisy, and lowering fuel consumption.
Growing market through innovation diffusion:
Growing market demands increasing diffusion of the innovation through different customer groups. Unlike innovator-type customers, others are highly pragmatic in assessing the value and cost. Furthermore, different customer groups have variations in jobs to be done. For example, not every customer would like to use mobile handsets to schedule meetings or capture 3D pictures. Hence, innovation strategy should focus on customer segment-specific variations, whether through addition, removal, or advancement of features. It may lead to developing a family of products around the same core assets for availing the scope advantage.
Innovation strategy should also focus on attaining a high scale advantage in pursuing those ideas which create high perceived value and require a minimal marginal cost for replication. Often time, though, those ideas demand high R&D costs. The change of the role of hardware with software also creates such an effect. Furthermore, for leveraging continued technology progression, innovation strategy should focus on redesigning products at regular intervals so that innovation diffuses as a series of progressive waves.
Sustaining innovation strategy:
Irrespective of the greatness, every innovation faces the reality of competition. It does not matter how well an innovation helps the customers execute their jobs, willingness to pay keeps drifting downward. It happens due to competition responses in the forms of replication, imitation, innovation, and substitution. Even, magical iPhone could not avoid this reality. Hence, for sustaining, innovation strategy should fend off this reality by developing capacity for releasing successive better versions at regular intervals. This is a solid strategic response for dealing with eroding willingness to pay and expanding the customer base. In the absence of it, iPhone’s success could have been history, as the sale of the iPhone 1 came down to near zero just within one year. For realizing successive better versions, innovators should have a strategy of creating a flow of ideas through in-house R&D, acquisition of capabilities from the outside, and building the supply chains.
Timing and leveraging externalities:
Timing highly matters in turning out innovative ideas into a profitable business. For example, some of the .com ideas that got bust in the late 90s have become innovation successes lately (2022). The underlying cause has been the timing. Due to the lack of resonance between innovative ideas, customer preferences, infrastructure, technology maturity, and standards, many great ideas falter. As Bill Gross identifies, although ideas, funding, team, and business model matter, timing is the most important factor. Furthermore, innovation strategy should create and leverage positive externalities.
Reinnovation for pursuing disruptive innovation strategy:
All the innovative products are around a certain technology core. For example, all the microwave ovens have a common technology core. Similarly, all the automobiles used to have the same gasoline technology core; now, an electric vehicle technology core has emerged. At the maturity of a given technology core, an opportunity of reinventing it arises. Subsequently, the reinvention of technology core opens up innovating new products and reinnovating existing ones. These dynamics open up the strategic possibility of forming new waves of creative destruction and pursuing disruptive innovation. For sure, pursuing a disruptive innovation strategy is quite different than incremental and sustaining ones.
Innovation strategy for creating an imperfect market: blue ocean
In the innovation race, not all companies make the same rate of profit. For example, although both LG and Samsung make innovative smartphones, unlike Samsung, LG incurs a loss. The equilibrium between supply and demand does not set the price that all innovators take. Instead, the innovation race leads to the price-setting capability by the smart performers to make a profit while compelling others to incur a loss. Hence, the competition in ferreting out value from the market creates an imperfect market, forming a competitor-free blue ocean. In an extreme situation, the winner takes all. Therefore, all the elements of an innovation strategy should form a synergy for creating price-setting capability. Of course, it would take place through cumulative effects.
The innovation strategy is at the core of systematically ferreting out value from the market out of ideas. Innovators should focus on creating economies of scale, scope, and externality effects for attaining the capability of offering the highest quality at a given price that nobody can match. It does not matter how great an idea is; innovation strategy is a must. In its absence, even followers take the lead from the inventors. Hence, a well-designed innovation strategy attaining a price-setting capability is an essential requirement.
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