Innovation absolutely needs to be a key part of every firm’s long term focus. It is corporate strategy 101: Innovate or your firm will die.
Does this sound extreme to you? It’s not. Markets change and so do people’s wants and needs. Unless your firm adapts it simply will not survive the test of time. We find proof of this in corporate history. After all, how many firms are still around today that existed in the 1600s? Not a whole lot of them.
When it comes to innovation there are two types, radical and incremental. While many companies choose to do both, incremental innovation is by far the more common choice.
What exactly is incremental innovation and how can it save your firm? Read more to find out.
Imagine for a second your typical business success story. A company has launched and against all odds managed to grow into the powerhouse it is today. Sales are steady and costs are acceptable.
The owners are happy because they’re living the good life. Employees are happy with their stable jobs and good income. Is everything utopic? Not quite. Ladies and gentlemen, may I introduce you to the Product Life Cycle
The product life cycle shows what happens to products and companies over time. Sales will grow through a maturity phase before falling into decline. It’s up to a company to figure out ways to manage and reduce this eventual drop.
Innovation stacks on top of the existing growth curve. Rather than reaching maturity and then falling into decline we can keep the momentum going either upward or parallel through innovation.
We see in the above that incremental innovation has allowed us to extend market sales and therefore overall profitability.
Coca-cola is a fantastic example of a company that has continually modified its product to stay competitive. Initially a drink sold in pharmacies, the brand realized the direction it needed to go and shifted. The end result? It’s (a) legal to be sold since it doesn’t have coca leaves in it anymore and (b) it has stayed relevant to market forces over decades.
A recent example of Coca-Cola’s desire to stay competitive was shown when there were concerns about the caramel color in their core products containing a carcinogen. While there was no clinical evidence that this would affect humans, Coke intelligently decided to change its recipe (in America). This was to prevent legal backlash as well as consumer discontent.
This kind of shift and catering to an audience may seem dramatic but it’s actually a critically important part of staying relevant in the market. Imagine Coke refused to make the changes. They would have instantly had a "this product may contain cancer" label put on their bottles in California further drawing attention and bad publicity to their brand. This would lead to mass devaluing and likely extended boycotts.
The market forces changed and Coke innovated their recipe to find an alternative that was not linked to carcinogens. That’s smart strategy.
A classical business model is Porter’s Five Forces which describes the powers that impact a business (Kotler et al., 2007). They are:
These five forces exert pressure on a firm’s margins and sales. If left unchecked they will lead to the collapse of the company.
It is critical that a firm do all it can to reduce the pressure from these forces. Continual incremental innovation yields additional competitive advantages but also reduces the power of those five forces.
Imagine for a second the buyer. A technology firm delivering products to consumers will find that as time goes on the buyers will pressure them to lower the sales. We have seen exactly this happen in the laptop market where prices keep dropping and so does quality to match.
This is why Intel is leading the "Ultrabook" drive, a laptop with additional features (an innovation) that allows manufacturers to charge over 1000ドル for a laptop while justifying those prices.
This is exactly the kind of innovative move that companies should perform in order to reduce the pressure of the five forces. See where margins or demand are shrinking and produce or modify a product that perfectly counters the trend. It’s as easy as that.
When it comes to fighting against the five forces one of the greatest stories is that of Southwest Airlines. The firm was founded with the absolute minimum amount of money required and when financial difficulties hit just after launch they were forced to figure out cheaper ways of doing business or go under.
Southwest cut the turnaround time for their planes to half an hour (50% of the industry standard time). They decided to put emphasis on labor flexibility which allowed for higher productivity and the ability to perform more tasks than competing airline employees. Plus they decided to purchase only one type of aircraft to keep costs down and served only airports with low landing fees (Morris, 2006).
The end result? Southwest grew rapidly and continues to do extremely well in comparison to the rest of the industry.
This is the importance of innovation. Without it a firm will eventually collapse. With it that same firm will experience continual growth and profitability. It’s an easy choice to make.
One very real fear is that of choosing incorrectly but that’s the advantage of innovation: by definition you’re making your product or service better so there is no real fear of having a devastating loss occur. Worst case the market doesn’t reward your improvements. Best case you reset the product life cycle. Innovate or die, that’s the mantra.
Bibliography
Kotler et al. (2007). Marketing. Frenchs Forest: Pearson.
Morris, L. (2006). Permanent Innovation. Walnut Creek, CA: Innovation Academy.
