4 Things Your Innovation Efforts Shouldn’t Focus On11 April, 2017 / Articles
Differentiation should be a prime motivator of any strategy; firms should always look to find an edge. But too often CEOs find themselves stuck in what I call an innovation plateau. They fall into chronic sameness, an inertia driven by a feeling that they must focus on cost, even cheapness, to remain competitive.
A main indicator of how widespread this plateau has become is the decline in corporate investment in R&D, the invisible infrastructure that supports true innovation. Investment in fundamental science, the R, has dropped from more than 2% of U.S. GDP in the 1970s to 0.78% today. The less science, the fewer ideas for new businesses.
If this myopia is going to change, CEOs need to be able to recognize when their strategic inertia is staring them in the face. In my research and consulting work, I have identified four symptoms that should warn executives that they are stuck on an innovation plateau. The four are born of good intentions, but ultimately they are self-destructive:
Obsession with low-cost reduction programs. Rather than paying attention to the numerator (increasing revenues), CEOs focus on the denominator (reducing costs). The excuses I hear for this imbalance are pretty simple: Executives say they want to grow the “quotient,” and attacking the cost side is always the easiest and quickest way to achieve it. I describe this symptom as akin to organizational anorexia. What’s striking is that this symptom is so widespread that firms resisting the race to the bottom now stick out in the crowd. Deere & Co — founded almost two centuries ago, and consistently the leader in what it does — have people dedicated entirely to “imagining” the future. Lean is a powerful management tool, but having the “exact” number for efficiently doing the “work” of today jeopardizes the future by not having “extra” people thinking on it. Efficiency is not innovation.
Obsession with listening to the customer. Almost all customers want their products to be as inexpensive as possible. So firms try to respond to this by delivering the value that they think their customers want. But great CEOs understand that the responsibility of defining greatness is the firm’s, not the customer’s. As Steve Jobs was fond of asking, Am I really going to ask customers if they want an iPad?
Obsession with incrementalism. The benefits of compounded marginal gains can be substantial. “Small ball” can be effective in the short term. But when asked about the future, CEOs almost always talk about their current portfolios. By what percentage will they rise or fall? Radical innovation, when a new dominant design emerges that can lead to a step-change in a company’s fortunes, is often absent in their agendas.
Obsession with acquisitions. When failing to innovate, CEOs acquire talent. Apple spending $3 billion on Beats, or Facebook paying around $19 billion for WhatsApp — this to me is indicative that the companies found themselves stuck on the innovation plateau. I have observed that the more innovative a firm is, the fewer acquisitions it makes. It develops the talent inside, focusing on a few great things. Jobs invested $150 million in developing the iPhone; Tim Cook has invested almost seven times that in Didi Chuxing. That is the tale of Apple during growth-driven-by-innovation, and Apple during innovation stall-out.
How do firms overcome the innovation plateau? Firms are discovering that customers don’t always want to shop on price — exploiting an emotional relationship can help escape the race to the bottom. Natura, a Brazilian cosmetics firm, produced a mother-baby product line that undercut Johnson & Johnson’s leading position in the baby market by linking Natura’s products with the Shantala method, a popular technique in Brazil for strengthening the bond between mother and infant through massage. The campaign allowed Natura to compete with Johnson & Johnson on something other than price.
Deepening the science behind the business, focusing on discovering higher-value market segments through new products and in new industries, and looking to expand globally will all keep the top line growing. For example, the small dairy cooperatives Tatua and Westland in New Zealand developed specialized ancillary products such as complex lipids and the world’s first goat milk with a long shelf life. Rather than trying to make the cheapest steel in the world, the Basques (of Basque Country in Spain) make steel for spacecraft. If firms trading in commodities such as steel and milk can climb the value chain, any company should have the imagination to discover global, high-value markets for its expertise — and remain buoyant even in a world of seemingly fleeting competitive advantage and strategic inertia.