"Now my friend, the first-a rule of Italian driving.
[Franco rips off his rear-view mirror and throws it out of the car]
What's-a behind me is not important."
- From the scene in the movie, “The Gumball Rally.”
Today we hear and read about innovation everywhere, whether it is in the media, quarterly earnings call, products we purchase, advertisements, business speeches and politicians. They are all talking about innovation because they know that today it is well understood that in order to grow today, you either innovate or die. It is quite cruel, but then when you look at companies that once had a dominant position not too long ago are now struggling or have become irrelevant, such as Nokia, RIM, HP, and Yahoo to name just a few. Some of them are trying hard to get back in the game but it is going to hard once you lose your edge.
Though people understand the importance and willingness to innovate, it is extremely difficult to do it, even for companies that have a proven track record at innovating. Succeeding with innovation is like threading a needle. Lot of things have to fall in its place, some of it is directly under your control and some of it is not. In this blog, I explain two types of innovation, and why innovation is so difficult.
What is Innovation?
Before I go over why innovation is so difficult, let me first explain that there are two types of innovation: disruptive innovation and sustaining innovation.
Disruptive innovations, as Scott Anthony of Innosight describes in his book, "The Silver Lining," consist of bringing something that is different, not better, than what their competitors are doing. This type of innovations focus on simplicity, affordability, accessibility and customizability. Whereas sustaining innovations consist of bringing something to the market that is better than what the competitors offer, such as adding a fifth blade on a razor, making a TV WiFi enabled, or increasing the battery life on a cell phone.
Sustaining innovation is very important for companies as it tries to generate profits through differentiation, but it does not create new growth and typically the advantage they have through differentiation is short lived as competitors quickly catch up. And if companies can not continuously sustain innovation, then they end up competing on price only, which is not very profitable.
A disruptive innovation, however, consist of product or service that is initially not as good as the product it is disrupting, but it is good enough. Its main advantages are that it tends to be simpler, affordable and accessible, customizable, and then companies work on making it better once it starts gaining adoption in the market.
In this article, when I talk about innovation, I am referring to disruptive innovation, since they have the effect of transforming a market and create tremendous growth. To understand disruptive innovation, I have provided some examples of companies that have done this..
Nintendo, a video game maker, was in a tough fight against Sony and Microsoft in the competitive video gaming industry. Rather than taking them on by making its product better and more appealing to the gamers, it went after non-consumers with its hand held product (Wii) targeted at the Baby Boomers who wanted to remain active as they got older. They created a new growth engine where none existed before by making their Wii product simple, accessible and targeted the video game for the non-users.
Google, a search engine company, changed the game with online advertising and turned itself into a powerhouse. They made advertising simpler, affordable, accessible and customizable. Suddenly a small player can compete against bigger, well funded rivals through online advertising.
This was doing advertising totally differently through inbound advertising rather than the traditional outbound advertising that is not only expensive but difficult to accurately measure its effectiveness. With Google AdWords, small companies suddenly can generate business from anyone with an access to the Internet.
Minute Clinics, walk in health clinics, are an example of how they are disrupting the health care industry. Their business models uses nurse practitioners in walk-in office in a convenient location where they can diagnose or treat close to 20 medical problems such as ear infections, strep throat infections and prescribe generic drugs that can be obtained at the same store. People prefer going to Minute Clinics since they are convenient, affordable and provide high quality and well coordinated with the primary care provider.
Spanx disrupted the hosiery industry by again not doing it better but doing it differently by developing a footless pantyhose. Sara Blakely, founder of Spanx, got so frustrated with the existing pantyhose that one day she took a scissor and cut off the feet of the pantyhose and the idea was born and started a revolution in women’s hosiery business.
Why is Disruptive Innovation so difficult?
All of the examples above make innovation look very easy, so then why is it so difficult for established companies to innovate? There are three main reasons why companies struggle with innovation. First, there is the expectations game on which CEOs are measured that makes innovation a lower priority; second, established companies are geared for performance, not innovation, so it is difficult to apply performance metrics to measure innovation; third, even if a company was successful in innovating a product or service, the overall success is still dependent on building and nurturing an innovation ecosystem. I will cover each of these below.
“It is difficult to get a man to understand something, when his salary depends upon his not understanding it.”
- Upton Sinclair
One of the reasons CEOs find it difficult to innovate is the whole expectations game that investors play where the investors are only interested in the performance of the stock and not its overall business performance. When the expectations gets high, CEOs focus on meeting the expectations and don't have time to spend time on innovation.
The expectations game, as Roger Martin explains in his book “Fixing the Game,” makes it very difficult for CEOs to focus on disruptive innovation which is non-routine and uncertain and unlikely to increase its stock performance over the short horizon. The CEOs job then is to drive short term profits to increase the stock price---the only metric that most investors care about.
Another reason why CEOs focus on driving stock price higher is that their compensation is directly tied to the performance of its stock price and, thus, it is in CEOs' financial interest to do what will increase the stock value in the short term than focus on its long term performance. What we see is that compensation is dictating the behavior of the CEO on their priorities.
"Performance, and performance alone, dictates the predator in any food chain."
- SEAL Team saying
If the CEO has done a good job in keeping the investors satisfied, then he has probably done it through improving its business performance such as sales, marketing, product development, customer service, and efficiency. Since he can measure all of these business functions, he constantly is looking to improve its performance that results in growing the profits.
Vijay Govindarajan explains in his book, “The Other Side of Innovation, that a company that is a well oiled performance engine can’t innovate with the same approach that drive performance. They are in conflict. Innovation is non-routine and uncertain, whereas performance is repeatable and predictable. Established companies are built for performance, not innovation. For example, you don’t put a jockey on a horse that is not ready to win the stakes. Innovation is like getting horses trained for stakes, so hopefully few will be well trained to race and win. To train horses, you need horse trainers and to win the horse race, you need jockeys. They are not interchangeable. Similarly this is same when it comes to innovations versus performance in a company.
"Our success has really been based on partnerships from the very beginning."
- Bill Gates
Some CEOs are able to satisfy shareholders and create a real performance engine and are able to innovate, but still fail to create growth. One of thing that they often tend to overlook is that they focused on innovation but not on building an innovation ecosystem. Innovation ecosystem as Ron Adner explains in his book, “Wide Lens,” consist of a company “creating an alignment of partners who must work together in order to transform a winning idea to a market success.”
Having a great product is not enough to create growth. Success depends on building partnerships across the entire innovation chain. Many companies overlook that their innovation’s success hinges on other companies also innovating or adapting with their innovation. If companies are good at innovating but lack skills in partnering, they become vulnerable to another company that develops a competitive product but ends up winning the innovations game through building and nurturing the innovation ecosystem.
Though it is an imperative for all companies to innovate, it is very difficult to pull it off for the reasons mentioned above. Unless companies develop a core competency in coming up with a disruptive innovation, they will not be able to create growth, but rather survive through performance as long as they can hold off their competitors Success in business today is all about creating continuous innovation. Those who do it well will lead and those who don’t, will follow or disappear.
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