How to Define Your Innovation Strategy
Highlights
- The two dimensions to grow your business are products and markets. Improving or expanding your products or markets in various combinations creates revenue growth.
- Aligning innovation types and strategies creates the most direct and powerful combination to accelerate business and revenue growth.
- Managing an innovation portfolio with a mix of types and methods lowers risk, creates synergy and produces the most predictable and recurring financial results.
There are three types of innovation (product, process and business model) and three methods (incremental, transformative and disruptive). The combination of these types and methods defines your innovation strategy.
The most effective strategies focus on improving, expanding or creating products or services within existing or new markets. The below table shows the combinations of product and market expansion. Each quadrant defines a business growth strategy to choose from.
Incremental Innovation
This strategy advances an existing product in an existing market. It typically focuses on finding increased differentiation or value proposition. It may also include things like new simplicity, capability, flexibility, performance, reliability, durability, or support. Most companies do this as a matter of routine product evolution by making their products better, faster, or cheaper.
Benefits are short term and minimally competitive. This is an approach that correlates with customer loyalty. If customer lifetime value or customer retention are in decline, your incremental investments are likely delivering improvements considered irrelevant or unimportant to customers.
Virtually all companies improve their products or services on a regular basis. Therefore, even companies that succeed at this strategy, but at a pace less than their competitors, incur market share loss. Both risk and payback are low with this method.
Product Innovation
This strategy extends or reinvents your existing products to attract additional business with your existing markets. It is most often accomplished when applying core competencies to create complimentary solutions or add-ons to core products.
The goal is to create a new product category and increase customer share with existing customers. For example, Gillette's core competency in making razor blades led the company to create shaving cream. These two products have a highly correlated demand and sell well together.
For this type of innovation strategy, product risk is moderate to high, but market risk is low. The product risk can be mitigated with customer co-creation and an agile prototyping process backed with customer acceptance testing.
Market Innovation
This is an option to penetrate new markets by adapting existing products to those markets. It transforms existing products to new customer markets for market expansion.
For example, Tesla applied its core competencies in electric car manufacturing to create solar panels and enter a new consumer market. With this method, product risk is low to moderate, but market risk is high. Market risk can be mitigated with market research and a firm understanding of buyer insights and customer intelligence.
Disruptive Innovation
This is a big bet option to create new products for new markets. It most often produces immature and inferior products that deliver new customer value propositions. Those new innovative solutions are then followed by successive, quick iterative releases.
Disruptive innovation may create a new category or market. It often disrupts or eliminates one or more existing categories or markets. These innovators include the likes of AirBNB, Amazon, Apple, Netflix and Uber. The innovator creates a new business model and when successful achieves a first-mover advantage.
This is the most difficult undertaking and incurs the most risk. But as part of the risk-reward equation, it generates the breakthrough products or services that create new high margin revenue streams and deliver skyrocketing growth. Allocating a portion of your budget to transformative concepts is an innovation best practice.
So, which innovation strategy is the best?
Every company's appetite for risk and reward is different, but for most companies a balanced mix of strategies makes the most sense. A well-structured innovation portfolio allocates budgets, people and other resources to multiple methods in a way that each collectively contributes to the company's growth strategy.
An orchestrated combination of incremental to transformative lowers risk, creates synergies, delivers a steady stream of new offerings, and produces the greatest financial upside.
What's the best innovation strategy? The answer lies on a 4 quadrant table that shows the combinations of product and market growth opportunities.
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