What is the return on innovation?
One of many buzzwords in the present dynamic and competitive business world is innovation. Regardless of industry, company size or structure, innovation has become essential for the survival of any organization. However, companies struggle to recognize what to invest, where to invest and when to invest their scarce resources in innovation and therefore fail to achieve competitive advantage. Fundamental in the discussion about innovation and why companies innovate, is to understand the return on innovation.
In the book “Dealing with Darwin”, the American author and theorist Geoffrey Moore identifies and investigates the returns on innovation. In an interview, Moore emphasize, “The biggest challenge is understanding that there are three types of return on innovation which are largely incompatible with one another, and the importance therefore of declaring which type of return you are seeking”.
In addition to the three more desirable returns on innovation – differentiation neutralization, productivity – Moore identifies the less desirable, however still inevitable outcome of innovation, waste.
The first possible outcome of innovation is differentiation, which, in this context, is the ultimate aim to achieve competitive separation. Although the result of differentiation gives the highest reward to the organization, it is nevertheless difficult to achieve. It requires focus, prioritization and commitment.
The second objective of innovation is neutralization; the company’s ability to keep up with the competitive dynamics and to eliminate negative returns. The momentum of neutralization is “good enough, quick enough”. It is often minor resources that are required to balance any competitive advantage.
Although the above outcomes to some extent are incompatible, differentiation and neutralization are both an interconnected process in the marketplace. One company innovates and differentiate themselves; the competitors then need to innovate with the goal to neutralize this advantage by implementing a comparable product or service.
Moore states that productivity improvements are “essential to evolutionary adaptation because it frees resources that other forms of innovation can use”. Through an intra-organizational perspective, productivity improvements do not directly affect the competitive footprint, like differentiation and neutralization. However, it increases the return-on-investment through effectiveness and by eliminating waste.
The final outcome of innovation is waste. Although it is an unwanted result, it is also unavoidable. Any attempt on differentiation, neutralization and productivity that is unsuccessful, can be counted for as waste.
Moore underlines that innovation for differentiation must be bold enough to succeed. However, along with a more valiant approach comes a higher degree of risk. Therefore, some degree of waste has to be calculated for. In the context of differentiation, a too risk averse behavior tend to diminish the competitive advantage that where asked for.
Innovation Portfolio Management
Our experience is that most organizations fail to create competitive separation. We witness the knowing-doing gap within too many organizations. That is, business managers more or less knows what to do, but they just do not do it. All too often it is the lack of a structured approach of innovation that puts a halt to the necessary action.
Based on Moore’s framework, Googol claim that to be able to reach your company growth targets, all of the three outcomes are important. And you constantly have to minimize the waste. In a simplified way growth is a function of productivity (A), neutralization (B), differentiation (C) and waste (D).
Since 2010, Googol have assisted its clients to apply the principles of Innovation Portfolio Management, to more effectively respond to business strategy and goals. The processes and tools of Innovation Portfolio Management support managers to make more informed decisions about what, where and when to invest their scarce resources.
- In what way do you structure for innovation?
- What are your ratio of productivity, neutralization, differentiation?