Where's the Value in Innovation?
"Innovation is creating something new, of value."
I received a large number of comments in response to my last post "Not Everything New is Innovative," both agreeing and disagreeing with me. One of them, written by the founder of a very innovative and successful company in Israel stands out in my mind because it highlights an important point: technical innovation does not necessarily mean creating a new product. "... in my view regarding generating profits / monopoly - I think that reducing costs will be difficult to define as monopoly, and still this is important business value and important business innovation can be around it."
To this, two answers:
He is absolutely right. My article was about increasing profit through innovation. There are many other ways to create profits and reducing costs is certainly one of them; and
You can be innovative about more than just product by developing new ways to be more efficient in the delivery of services and finding better ways to be close to your customer. If those developments give you a competitive advantage, they will generate profits.
(If you missed the post explaining why not every new thing is innovative, you can go back and read it here.)
I think that most people would argue that Apple is a pretty innovative outfit. Certainly it's been my experience when running strategy sessions that when I ask for examples of innovative companies Apple is usually near the top of the list. I love that part of the workshops because my next question usually is:
"In what way is Apple innovative?"
The answers usually revolve about some of Apple's greatest hits: the Mac (and its fantastic use of the graphical user interface), or the smartphone, or the iPod.
Truly, these are all great products but --and here's the thing-- Apple didn't invent any of the technologies behind those products. The GUI was famously invented by Xerox engineers at the PARC, the smartphone (including downloadable apps) came years before (I had an early Nokia smartphone and even downloaded an app from Ovi -so there), and MP3 players were available on the market much before the 5GB iPod made its debut.
"So what are you saying," I hear you ask, "that Apple isn't technologically innovative?" Not at all. Apple is tremendously innovative but the the way it consistently creates value through innovation centers less on inventing new tech and more in creating an environment with tech that is easy to use, appealing, and available.
Creating innovative value by leading the market in product development is just one way to go about it. Twenty-five years ago the Harvard Business Review published a short paper by two researchers, Michael Treacy and Fred Wiersema, in which they proposed a useful way to look at value creation. Rather than concentrate exclusively on inventing new stuff (product leadership) companies should also look to making improvements in how easy it could be for customers to buy and use a product or service (operational excellence), and in being able to know and meet customers' needs in better and better ways (customer intimacy). They called them "value disciplines."
Every company competing successfully in the market will excel at one of the three disciplines and be pretty good at the other two. Very occasionally a company will excel at two disciplines. Truth be told I cannot think at the moment of any company that is consistently good at all three of them (if you know of one, please let me know).
There are no successful competitive companies that suck at all three.
Think of the value your company creates as a tricycle with the leading wheel being the discipline your company does best and the two back wheels being the other two disciplines. While you might have a really nice front wheel, shiny and new and wonderful, if your back wheels are low on air you will not get very far. The important thing here is that no matter what your leading wheel is your company can and should be able to innovate in all three disciplines.
Apple's genius when launching the iPod revolved around being able to bring together elements of all three disciplines into one coherent whole that created an enormous value for the consumer (and for Apple itself). I used to own a rather mediocre mp3 player before the iPod came out. My player had 512MB of storage and there was no convenient way of getting music in it. I had go buy a CD (or steal the songs on Napster of course), rip it on my computer, then pick and choose which songs to transfer over to the player. If I wanted a new song that had just come out I had to repeat the process all over again.
Compare that to the iPod. Plug into the computer, pick which songs you wanted on iTunes, sync, done. If a new song came out I could just get it with a few clicks and I didn’t have to buy the whole album to get to that one cut that I liked. And the storage, the storage! Five gigabytes was an enormous amount back then. No need to carefully select songs because you were limited by storage. Heaven.
How did Apple build that heaven? Apple didn’t invent large storage disks. That 5GB was large for an mp3 player, but it wasn’t an extraordinary amount of storage at the time. Apple didn’t invent the mp3 storage format. Apple didn’t invent the… yada, yada, yada. You get the idea. What Apple did was to make it exceedingly convenient (operational excellence) for me to get my hands on the music that I wanted. That has been it’s leading wheel for much of its existence. Granted, the iTunes store was a new product but even that was not all that innovative, certainly there were other online stores before iTunes. What was innovative about it was the ability to legally purchase a single track online. It was a stroke of brilliant customer intimacy, breaking with a decades-old paradigm of how music was sold to meet the users' real needs. It was the ability to put all of these things together that made the early iPod such a success.
Most people conflate product leadership and innovation. What new feature, what snazzy new functionality will create value and bring in profit? A new product is not always innovative, and disciplined innovation depends on bringing customer intimacy, operational excellence, and product leadership together.
The so-called "first mover advantage" is oftentimes simply jargon, case in point: Segway. The streets of many large cities are beginning to get crowded with electric scooters. A strong case can be made that all of those scooters are derivatives from the original Segway. But you don't see Segways clogging the sidewalks. The new scooters are simpler, cheaper, and less safe than Segways to be sure, but getting one doesn't entail shelling out thousands of dollars, or going to the store and buying one, or worrying about where to park it when you go into your meeting. It turns out that people don't really want a large, safe, technologically advanced, gyro-stabilized scooter. They want a cheap and convenient way to go short distances quickly and without sweating. Customer intimacy and operational efficiency trumped product leadership in this case.
When planning your innovation strategy ask yourself what is our leading value creation discipline. You might know your customers' needs better than they do. You might be geniuses at delivering the product with minimal fuss. If either of those things are true, shifting your priorities to a product leadership strategy will require a large and costly realignment of the way you do business.
While you're at it, ask yourself if your trailing disciplines are up to par. Perhaps you have a truly feature-rich product that is difficult to deploy. Or you might have a product that is easy to buy and use but that is based on outdated technology. Value disciplines are a useful lens in making the shift from simply innovating to crafting a long-range innovation strategy with a chance for success.
If you've enjoyed this article, please consider commenting or sharing it. I can always be reached at benjamin (at) kivati (dot) net.