Innovation Newsletter from OVO
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The costs of not innovating
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Counting the Costs In any initiative in any business, a “return on investment” analysis is required for a new product or service. When a firm creates a new product, it must first consider the potential market, the price and margin it can demand for the product, and the costs and investments necessary to develop the product. No one undertakes the development of a new product or service without a detailed analysis of the costs and potential returns. This approach works when the products and services your team plans to create are similar in nature to existing products and services, since the costs and risks are fairly well understood. The approach breaks down somewhat if a product or service is very different from internal knowledge and capabilities, but the analysis is still expected. The greater the difference between the new product or service from existing offerings, the more difficult it can be to develop a meaningful analysis, and without a quantifiable result that measures the benefits and risks, many innovations are shelved. We fully understand the costs of pursuing a new product, but we often fail to ask what is the cost of failing to create that new product or service? What is the opportunity cost of not innovating? Three CostsIf we think about this question carefully, it’s clear there are at least three potential costs associated with not innovating. The first is the cost of lost market share and lost revenue. The lack of new products and services can lead to hemorrhaging your customer base, and failing to attract new customers and new revenues and profits. Both of these outcomes have actual costs.The second cost associated with not innovating is the cost associated with responding. Many firms realize that the good ideas they neglected to pursue were implemented by another firm. Instead of leading the market, these firms are forced to play catch-up. While many firms will claim a “fast follower” mantle, in reality these firms are simply responding to market changes that they could have foreseen.
The third cost is not a monetary cost, but an image cost. On Wall Street, companies that are perceived as “innovative” command a higher stock multiple than their competitors that aren’t considered innovative. There is a marketing and awareness cost of failing to innovate that your team doesn’t take into account. Why these costs matterThere’s a definite “stick to our knitting” mentality in many firms, as if the world will stand still and will be satisfied to acquire products and services that haven’t kept up with the times, or consumers don’t expect and demand new and interesting products and services. The pace of change is accelerating, and with it customer demand and expectations are increasing. Word of mouth spreads like wildfire through social media. The demand for innovation has never been greater, yet the ability to determine appropriate risks and their potential rewards has not kept up with the increase in opportunities. The “do nothing” approach is always a viable opportunity, but is selected far too often. When reviewing annual reports, financial analysts will tell you one of the most frequently used words is: surprise. Firms are constantly surprised by market shifts, customer demands, new entrants.The costs of not innovating are real but rarely investigated or understood. Look no further than former innovation leaders who understood the potential opportunities yet doubled down on existing capabilities rather than exploring an innovating the potential future. Want to know the cost of not innovating? Let’s examine Kodak.
Kodak and the cost of not innovatingKodak demonstrates the cost of not innovating better than any other company I can recall. It’s not as though Kodak failed to see the switch from film to digital – Kodak created many of the digital imaging technologies and holds many patents. What Kodak didn’t do is take the next step and innovate its channels, products and most importantly, business models.Rather than innovate its operations and its business models to adapt to the coming shift from film to digital, Kodak doubled down on film, hoping consumers in emerging economies would acquire film. But many consumers in those countries simply acquired digital cameras. The shift to digital photography wasn’t going to “save” Kodak. What could have “saved” Kodak was the innovation they avoided – innovating their business models to determine how to make money in the digital world. The cost of not innovating their business model should be evident to all concerned – the firm that was considered the Apple of its day is filing for bankruptcy, and it is still not clear if Kodak has understood the need to innovate its business model.
Wait and SeeMany corporations are taking a “wait and see” approach with innovative new products and services. They want to see if the market unfolds or if customers demand a product before they create the new innovation. What good innovators know is that many customers can’t describe their needs effectively, so customers will rarely define a new product. Further, nimble new entrants can enter many markets quickly and chip away valuable customers before a large firm is even aware of the threat. Even with a good idea in hand, many large firms have ponderous product development processes, which means they can’t respond quickly and are forced to pay more to catch up rather than create a new market.
ConclusionIt’s easy to fall into a comfortable, consistent evaluation process and demand a clear payback for initiatives and projects. Where innovation is concerned, it is evident that annual planning processes and other decision making methods typically don’t countenance innovative ideas, and the ROI and payback metrics can’t be achieved. In these situations, many firms decide to shelve new ideas, never considering what the potential costs could be by failing to innovate.What should happen in the presentation of any truly innovative product or service is that the quantifiable costs should be balanced with estimates that account for the worst case scenarios if the firm fails to innovate. What happens if another firm develops this idea and beats us to market? What are the costs of “catching up”? Then, with that information in hand, balance the known investment costs with the anticipated costs of not innovating. In many cases the new information may help your team to make a different decision.
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Innovating like Bell Labs
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Innovation LabThe New York Times ran an articleon Sunday, February 26th about Bell Labs, describing Bell Labs as the archetype of an innovation lab. The article, extracted from a book by Jon Gertner, describes all the innovations that Bell Labs created, and opines that more firms today should emulate Bell Labs as they attempt to innovate.To a certain extent, we agree. Bell Labs demonstrates a model that was very successful historically, and has much to teach us about the methods and culture of successful innovators. However, the Bell Labs model represents a model that was successful in the past. For innovators today, we need to adapt what was successful for Bell Labs and add to that model new features and attributes that respond to new needs and expectations today. No firm can adopt the Bell Labs model in its entirety and expect success.
What’s Right about Bell LabsThe innovation model that Bell Labs demonstrates has several key factors that any successful innovation engine or competency will want to replicate. There are four attributes in particular:
Let’s look at each of these points. |
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Reducing Innovation Risk
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Acknowledging RiskThere are plenty of reasons to avoid innovation. It is often unplanned. It doesn’t follow defined processes or methodologies. Few people understand how to do innovation well. But to my mind these are symptoms of the real reason so few firms innovate consistently. I think the real reason so many firms fail to innovate is the amount and scope of risk associated with innovation.Everything about innovation is risky. It is unfamiliar and uncertain. Even good ideas may fail in the marketplace. It distracts from well-defined, existing processes and methods. Innovation requires change and doing new things that differ from existing standards and processes. A recent article on the HBR website demonstrates risk is the real elephant in the room, the real issue behind every excuse.
Restoring Risk/Reward BalanceWhat’s happened is that many firms have lost their perspectives about risk. Entrepreneurs embrace risk – without risk there is no opportunity. As firms mature they grow more accustomed to defending what they have and honing their models and processes rather than implementing new methods or targeting new customers. Risk is something to be managed, and eventually, eliminated. Too many firms have shifted so far in their thinking that risk is seen as an enemy, rather than a signal. We need to restore the balance between risk and reward. Just as any product development team has a product portfolio, your firm should plot its ideas and initiatives on a risk/reward portfolio, to determine if there are gaps, or if all the activities and ideas are clustered in the low risk quadrant.
Reducing Innovation RiskBy its very nature, innovation is risky. That means we can’t eliminate innovation risk, but we can reduce it. There are two methods to reduce innovation risk.Reduce the size and scope of ideas
The first approach is the easiest, constrain the idea. This is what inevitably leads to incremental innovation. No matter how disruptive or original the ideas are when they are generated, the ideas are simplified, chipped away and rounded off to reduce risk. Improve capabilities and strategies The other method to reduce innovation uncertainty is to recognize that the IDEAS need to be risky but their paths should be transparent. If we do a better job building and sustaining innovation skills and processes, create clear goals, communicate the importance of innovation and seek to discover customer needs, we can reduce innovation risk through improving the means and the process. Making the shiftAs should be evident, innovation is only going to increase in importance and frequency. As competitive barriers are reduced and customer expectations and demands increase, new products will enter your markets like never before. Innovation will become a way of life.To grow effectively and to sustain differentiation, you’ll need interesting, valuable, unique ideas that are converted into products and services that customers need. This will mean embracing more innovative ideas. This means your teams will need to either simplify the ideas or remove innovation risk from the process. Clearly, the focus must be on improving the process, improving skills and creating a clear innovation goal. These actions are what will allow you to become far more innovative while balancing risk and reward more effectively.
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Innovate Carolina Conference 2012
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Innovation ConferenceI’m pleased to announce that for the 3rd year in a row the Carolinas Chapter of the PDMA will host its Innovate Carolina conference, a conference focused on innovation in the Southeast US. This conference has proven to be very successful, attracting almost 200 people last year in Charlotte, NC.
Why you should comeWe have excellent speakers, great sponsors and a wonderful keynote. The networking opportunities are excellent. Learn from firms of all sizes about their innovation successes and lessons learned.
Speakers We are pleased to have Stephen Shapiro, a noted author and innovation evangelist as our opening speaker. Stephen is an innovation consultant and has written extensively about innovation in his books Best Practices are Stupid, Personality Poker and 24-7 Innovation. Leading Companies In addition we have speakers from the Department of Commerce and the University of Chapel Hill, to talk about innovation in government settings and academia. Great PartnersWe are proud to be part of a growing system focusing on innovation in the Carolinas. Our partners in pursuit of more innovation include:
Details and more informationWhat: Innovate Carolina Innovation ConferenceWhere: Long View Center, Raleigh, NC
When: April 20th, 2012 Who: You, your friends and colleagues For more information, visit the Innovate Carolina website or the Carolinas PDMA website. |
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OVO Innovation 