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INNOVATE

Debunking the Myth of Innovation

Too many ideas could actually hurt your business.

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Nearly everywhere you turn these days, you are exhorted to innovate, disrupt, or otherwise prove yourself a game changer. It's enough to make you feel that if you haven't put a couple of Fortune 500 incumbents out of business this week, you've taken your eye off the ball.

There's nothing wrong--and plenty that is right--with trying to innovate. But what if innovation is not the panacea it's said to be? Can't you simply work hard, heed your customers, and manage your business very, very well?

To answer that question, we pored over academic studies, talked to innovation experts and entrepreneurs, and turned to some unlikely sources (including racecar teams) to get beyond the rhetoric and find the reality behind six of the most common myths about innovation. The conclusion: You probably need less of it than you think.

MYTH: Innovation is disruption.

FACT: Small steps are more likely to spur success.

In the wake of Clayton Christensen's influential book The Innovator's Dilemma, many people have come to equate the idea of innovation with disruptive innovation. But the fact is that for most businesses, placing big bets on high-risk ideas is not only unfeasible, it's unwise. "The real question is, How much disruptive innovation do you really need to advance your business goals?" says Robert Sher, founding principal of the Bay Area consulting firm CEO to CEO.

Not that much, suggests a 2012 report by innovation consultants Bansi Nagji and Geoff Tuff. In a survey of publicly traded companies across the industrial, technology, and consumer-goods sectors, they found that the most successful businesses allocated resources across three distinct categories of innovation in a particular ratio. On average, the most successful companies devoted about 70 percent of their innovation assets (time and money) to "safe" core initiatives; 20 percent to slightly more risky adjacent ones; and just 10 percent to transformational, or disruptive, ones. Such companies outperformed their peers in terms of share price, with price-to-earnings premiums of 10 percent to 20 percent.

Core innovation involves making incremental changes to improve existing products for existing customers--think selling laundry detergent in capsule form. Adjacent innovations draw on a company's existing capabilities and put them to new uses--see Procter & Gamble's Swiffer, a reenvisioning of the old-fashioned mop to attract a new set of customers. Transformational (a.k.a. disruptive) innovations involve inventing things for markets that don't exist yet--say, iTunes or Starbucks.

The 70:20:10 ratio isn't set in stone. Depending on your industry, your competitive position in it, and your stage of growth, you may need to make adjustments. Tech companies, for example, tend to spend less time and money improving core products because their market craves novelty, and so they may put more effort into risky ideas. VC-backed start-ups have to go all in with a disruptive strategy. Consumer-products companies with established product lines tend to focus mostly on incremental innovations.

Of course, when a disruptive innovation succeeds, the returns can be enormous. Nagji and Tuff also found that when it came to return on investment of innovation, the success ratio was flipped, with 70 percent of total returns coming from breakthrough initiatives, 20 percent from adjacent ones, and 10 percent from core improvements. Bottom line: Every business needs some practice coming up with ideas that will change everything, but it is unwise to let the pursuit of the breakthrough overshadow the many smaller initiatives that sustain a business over the long run.

MYTH: You can't have too many ideas.

FACT: Sure you can, if you don't know what to do with them.

Coming up with ideas isn't nearly as hard as determining which ones are any good and figuring out what to do with them. Small companies can be crushed under the weight of too many ideas. A big part of your job as CEO is to kill the weak ones.

But most companies lack processes to decide which ideas to pursue, much less ways to measure their success. Picking the right ideas starts with being clear about your company's mission. A cool idea that excites your engineers should never become a working project until someone can articulate how it actually solves a pressing problem that your customers have. The business case for pursuing an innovation should include an indication of how to measure its impact, says Sher. "The goal could be increasing brand awareness, customer satisfaction, customer retention," Sher says. "Make sure you measure something crucial to your outcome."

Just as you can't drink from a fire hose, a company can't "do something" with every idea your people come up with, not even every good idea. "You never have enough resources and time to attack all your opportunities," says Sher. "You want to focus on the best ones, so you can finish them first. Two nonessential ones get done, the important ones don't, and there's no value created."

MYTH: It pays to be first.

FACT: Better to be a smart follower.

Innovation is often associated with the visionary, who invents something new and is first to market. And that's a great strategy--if you're patenting a blockbuster drug. But if your aim is to sell more-quotidian goods and services, research tells us that there are advantages to arriving late to the party.

This is especially true in emerging industries or sectors, where you don't have to look far for cases of second and third movers that let pioneers beat a path, only to come in and blow them away: Nintendo vs. Atari, Amazon vs. Book.com, Google vs. Yahoo. In a 2010 study, University of Chicago researchers Stanislav Dobrev and Aleksios Gotsopoulos found that companies that enter new industries at an early stage actually have a first-mover disadvantage, failing at a much higher rate than those that wait. It turns out that first-to-market pioneers suffer from higher costs that eventually overwhelm their profit advantage. As a result, over the long term they are less profitable than second- or third-generation followers.

What's more, first-mover advantages are on the decline. Why? For one thing, the pace of follow-on innovation has increased dramatically. In "The Myth of First Mover Advantage," a study published last year by consulting group IHS, business analysts Erik Darner and Justin Pettit found that in the past century, the average span between introduction of an innovation and follow-on competition has fallen from 33 years to just 3.4 years. What's more, Darner and Pettit's research found that unless first movers enjoy one of three conditions--a significant learning curve for followers; the ability to preempt competitors for scarce resources, whether raw materials or a specific talent; or high customer-switching costs--there is no advantage to going first.

By contrast, followers have a multitude of ways to topple pioneers, including improving or simplifying a product, offering superior service or an alternate format, or simply outmarketing them.

MYTH: Innovation is about stuff.

FACT: Try a business-model revamp instead.

Most companies focus most of their innovation efforts on new products and product extensions, according to research by the consultancy Doblin. But these kinds of innovations, it turns out, are the least likely to return their cost of investment, with a success rate of only 4.5 percent. Instead, Doblin found, companies get the highest return on investment when they focus on things such as improving business models, internal processes, and customer experience.

"The most valuable innovations are platform-level innovations," says Larry Keeley, a director at Deloitte and the author of Ten Types of Innovation. Though Apple is rightly famous for well-designed devices, he says, "Apple's most valuable innovation is the iTunes store." Almost as integral to Apple's success have been the company's aggressive tax-avoidance strategies--such as creating offices and subsidiaries in low-tax locales such as Nevada, Ireland, and the British Virgin Islands. "It's created a very advantaged business model," says Keeley.

Similarly, Amazon makes little money on Kindle sales. The device's real value comes from the way Amazon has linked it to its massive inventory of e-books. Other examples of nonproduct innovation include the collaborative-consumption models of Zipcar or Airbnb, Zappos's positioning of itself as "a service company that just happens to sell shoes," and the values-driven strategies of Patagonia and Whole Foods.

Rather than obsessing over your next new product or service, it might be smarter to work on a new profit model or a better customer experience. Opportunities abound for CEOs who recognize that the next big idea just might come from the CFO rather than an engineer.

MYTH: You must innovate constantly.

FACT: Innovation is cyclical.

In certain industries--entertainment, advertising, and fashion, for example--customers expect new things all the time, and the businesses that can deliver novelty on a regular basis are the ones that win. But for most businesses, it's important to time innovation efforts more carefully. "When your last innovation is proven and you've started to scale, you want to focus most of your people and energy on grabbing that opportunity," says CEO to CEO's Robert Sher. "If you're doubling every year, you want to devote 90 percent of your efforts to reaping that opportunity. When you're a couple of years into rocket-ship growth, but competitors have shown up...that's when you want to add to your innovation percentage."

Broader industry trends and developments--new regulations, say, or the emergence of new technologies--also need to be taken into account when determining whether it's time to innovate. That's the finding of a study of Formula One auto-racing teams by Paolo Aversa of the Cass Business School in London. Formula One races are essentially competitions between prototypes, each aiming to be the cutting edge of automotive technology. But teams also must follow a strict set of rules handed down by the sport's governing body, FIA, designed to increase safety, spur creativity (such as asking for more-efficient engines), and reshuffle the competition so the same teams don't always win.

Aversa found that in years when the FIA mandated major technical changes instead of the usual minor tweaks, the teams that followed an adaptive strategy--simply making their car fit the regulation perfectly, without introducing any additional optional innovations--consistently beat historically strong competitors that overinnovated. Aversa believes his findings apply beyond the racetrack. After all, rules, standards, and technologies change all the time in the business world. When they do, even the smartest companies can get overextended when they try to do too much.

MYTH: Innovation is costly.

FACT: Spending has little to do with results.

In its annual Global Innovation 1000 study, the consulting group Booz & Company has consistently found no correlation between a company's research and development spending and how innovative it is ranked by peers. What's more, it has found no relationship between R&D dollars and financial performance. In Booz's most recent survey, from 2012, the top 10 R&D spenders actually underperformed their industry peers in terms of both market capitalization and revenue growth.

Apple, ranked as the most innovative company for the past three years, spends just 2.2 percent of its sales on R&D efforts. That's well below the industry average of 6.5 percent for computing and electronics and far less than rivals such as Google, Samsung, and Microsoft. In fact, Apple ranks 53rd among the 1,000 top R&D spenders in all industries.

"There's a logic fallacy that if you spend more, you get more innovation," says Michael Schrage, a research fellow at MIT and an adviser on innovation to companies such as Procter & Gamble and Herman Miller. Measuring innovation properly, Schrage says, means getting away from looking at inputs--that is, your R&D dollars--and focusing on the outputs that your efforts are generating with customers. "Unless you can show that customers and clients are getting more value from your new offerings," Schrage says, "it's less likely to be innovation and more likely to be waste.

IMAGE: *saxon*/Flickr
From the September 2013 issue of Inc. magazine

ADAM BLUESTEIN is a frequent contributor to Inc., writing about health care, innovation, and new technology. He lives with his wife and two children in Burlington, Vermont.
@AdamBluestein




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