Tuesday, January 16, 2007

24/7 Innovation = Hype?

Reading marketing and technological innovation literature, it is easy to get the impression that businesses today cannot survive without completely satisfying customers’ needs by continuously innovating processes and technology that new product features and new products are based upon. Market share can only be guarded from competitors’ probes by offering innovative products, reasons traditional literature. Yet, is never-ending innovation really the key to the ultimate success?
It seems that truly successful businesses know better. Having interviewed senior executives of some of the most innovative Slovenian companies, I was struck by two of the answers. On the question of rate of innovation and measuring the innovation process success, the Executive Director of Development in a manufacturing company argued:

“Sure, we do set goals, we do measure and we do assess the rate of innovation. But this is only for incremental innovation, small ideas that improve daily working practices and result in minor product changes. We are situated in a mature industry with narrow profit margins and products with approximately 5 to 10 years of shelf-life…. So our development goals are not oriented towards rapid renewal of product lines and our activities are not labeled with aching urge to replace existing products. Rather, we are harvesting our crops from well-designed products throughout the life-cycle…We are nevertheless working hard on figuring out the future trends and steadily and prudently updating our product portfolio – when the time is right and with the features and products that are aligned with customers’ needs and which promise the best margins.”

On a similar question of innovation efforts, rate of innovation and innovation measures, Director of Products and Solutions of a telecommunications company responded: “As we are smaller than our competitors, we can only engage i.e. 1.000 man-years per development of a product for which our bigger multinational competitors will engage 5.000 man-years. In terms of product characteristics and features, I admit that due to lack of resources we don’t offer everything our competition does. However, we are nevertheless experiencing better results on the market. Why? We are more focused on nurturing only the truly value-added innovations. Besides, we don’t deal with so many complexity issues in the development, production, sales and after sales stages."

These responses echo Gottfredson and Aspinall’s article in Harvard Business Review on the Innovation versus Complexity topic (2005). They suggest that companies can identify the point at which product innovation maximizes both profits and revenues and argue that for most firms, number of product and service offerings that would optimize profits and revenues is considerably lower than the number they offer today. Continual launches of new products and line extensions add complexity throughout a company's operations, and as the costs of managing that complexity multiply, margins shrink. Organizations that fail to check proliferating product lines and overly-customized services lose efficiency and confuse their customers.
Instead, organizations must figure out their zero-complexity baseline and justify additional offerings one by one: “What would your company look like if it made and sold only a single product or service? Answering that question is important for two reasons. First, virtually every complexity reduction exercise we have seen that does not do this has failed to break through organizational resistance.... [Second, only] by stripping away all the products, options, and configurations do managers get a clear sense of the extent of the complexity and its costs,” (Gottfredson & Aspinall, 2005).

For example, custom truck builder Navistar found that most consumers would opt for a generic model if Navistar could deliver it cheaply, quickly, and reliably. It introduced a modular design and realized a 25% assembly savings. The few customers who still wanted customized configurations went to Navistar’s competitors, who picked up the complexity and costs of providing that customization. Burger King saw that several products were complex and costly to handle as some of the ingredients required special manufacturing (bake, freeze), distribution and handling in outlets. They replaced those products with – from the customer perspective – similar ones, for which all of the ingredients could go through the usual supply chain, inventory management would be simpler (not requiring costly frozen storage). Sales did not drop; the complexity and the costs were driven down.
After thinking about this, “24/7 innovation” seems like hype, or maybe even dogma. It appears that the best advice is to make competition irrelevant by redesigning buyer value to expand existing markets and create entirely new ones (as suggested in influential (Kim & Mauborgne, 1997) article), rather than seeking the Holy Grail of eternal products and upgrades.

Gottfredson, M., & Aspinall, K. (2005). Innovation versus complexity: what is too much of a good thing? Harvard Business Review, 83(11), 62-71.
Kim, W. C., & Mauborgne, R. (1997). Value Innovation: The Strategic Logic of High Growth. Harvard Business Review, 75(1), 103-112.

[Summary by: Peter Baloh]

No comments: