Innovation is the solution to company growth and high ROI. We all know that! All we have to do is have a great idea and the worlds our oyster! While I would like to agree with that, in reality it isn’t always that simple. In fact, following an innovative and brilliant idea could well doom your company to failure!
The key is understanding your current position in the market and what type of innovation you have before deciding what to do with this new great product. Trying to make this simple, I will split the market into two types, incumbents and new market entries. Innovation can be categorised in many ways, but for now lets look at sustaining and disruptive. Sustaining innovation adds value to existing product lines in an existing market. Disruptive innovation usually initially provides something that is cheaper, easier to use and often provides a lower level of service. Consumers that historically couldn’t afford to have this kind of product now can and those at the bottom of the market may well be tempted to move.
Incumbents have a fantastic position in the fact that they are making profits from the current market. They also have a problem that they are making profits from the current market. A strange statement you may think, but what I am trying to say is that any change in the markets they are working in will potentially cannibalise the very resource stream that keeps their business alive. Not only that they are optimised for the existing market and usually have high overheads requiring good margins. Think of Kodak and digital cameras. They were the technology leaders but reluctant to move that way because it consumed their existing revenue streams. We all know what happened there.
Now consider the market the incumbent is working in as well. The high end of the market has the great profit margins and the place the incumbent wants to continue to work in. Its hard to make profits in the low end where they have to create trimmed down products to make them only barely affordable to the lower level consumers. So sustaining innovation is pretty good as it supports or boosts current market position. Disruptive innovation hits the lower end of the market where incumbents don’t usually enjoy playing with lower profit margins.
For new entry companies it’s the other way around and disruptive innovation is very attractive. They have no existing market to cannibalise, have low operating costs and they are looking to enter the market at the lower end the incumbents don’t feel is too attractive for them. So they find it very difficult to challenge and often simply don’t even try. The problem for them is technology changes rapidly and the disruptive entry can mature pretty fast and become attractive further up the market into the territory where the incumbent is interested. With a newly created extended market dominated by the new entry, the middle ground becomes a battlefield with the incumbent relying on a big war chest and market reputation and the new entry flying the flag of revolution with the popular masses cheering them on. The inherent advantages offered by the paradigm shifts of disruption are often telling in the long run.
This all makes sense to me. Using a simple analogy, its like a dinosaur (read incumbent) having a territory he dominates and then a little dog (new entry) turns up. The mammal has many advantages over the reptile and we already know how things will play out in the end. Two options for the dog. Challenge the T-Rex and go for the big game or start eating the little things the alpha predator can’t usually be bothered to chase. If the dog challenges the T-Rex it could be a short life for our furry newcomer. But if he sticks to the low end of the market and thrives, he may well evolve into the sabre-toothed wolf pack that can give the T-Rex a run for its money. In a similar vein, if the T-Rex starts to compete aggressively with the dog for the little mouthfuls, it will be challenged by the smaller more agile competitor.
In the end, all things change, usually for the better. The challenge is being at the right place at the right time. Early days of market entry are very hard just keeping alive and it’s all milk and honey tomorrow. Dominating a high-end market is rather pleasant but probably a transient position. The real skill is working out when to jump from one flagging growth curve to the next rising star.
So before you charge forward with your great innovation think of the best way forward. If its truly disruptive, if you are an incumbent maybe a spin off is a great way forward of if you’re new to the market then you may be ready for that rollercoaster start-up journey. But if it’s a sustaining innovation, incumbents may do well, but for noobs, well maybe you could sell the idea to one of the big boys instead of starting a battle you won’t probably survive. The same great idea can reap great rewards for some people and bring doom to others. Its all about where you sit in the market and the type of innovation you have.