Like any framework, this one comes with some caveats and instructions for use. First, I want to emphasize that although we talk about these as types, there can be quite a bit of variance within any given category. Not all routine innovations are identical to one another. The same is true for the other categories.
Second, where a particular innovation falls into this matrix depends partly on the inherent nature of the innovation and partly on the choices made by firms. That is, innovation types are not “God given” but instead are endogenously determined by firm decisions and strategies. The Innovation Landscape Map can help you see the different strategies and possibilities for pursuing innovation. Consider autonomous driving vehicles, an innovation you’ve been reading a lot about these days. Google and several other companies, including major auto companies, are working on these types of vehicles. Where does the autonomous vehicle fit into the Innovation Landscape Map? Technologically, these are quite novel systems. No one, after all, has developed a fully operational, commercially feasible autonomous vehicle yet. It is a new configuration of various technologies (sensors, artificial intelligence, etc.) and creates completely new functionality. So, is this an example of a “radical” technological innovation (the lower right quadrant)? That depends on how it is commercialized. Let’s assume that someday, when the technology is ready, a car company like Ford decides to offer an autonomous vehicle. The company decides to sell it through its existing dealers for $45,000. You can buy or lease it. You bring it to your dealer for service periodically. You use the car much like you use your car today, except you don’t actually have to drive it. You just jump in, tell the car where you want to go, and then sit back like a passenger. Under such a scenario, the autonomous vehicle is a radical innovation. Although it embeds a very new configuration of technology, it is commercialized through a traditional automobile business model.
Now consider a scenario where Ford does not sell you the car at all. Instead, it maintains a huge fleet of these autonomous cars for use on a per hour basis. Whenever you want a car, you just use an app on your phone to call one, and, within three minutes, a vehicle arrives and takes you wherever you want to go (around the corner or across the country). If Ford were to pursue this approach, it would be attempting an architectural innovation. It would be developing a novel business model to commercialize a novel technology.
Or Ford might decide that it wants to be a ride-sharing company but not a technology innovator by buying autonomous vehicles from another company (say, Google). In this case, Ford would be pursuing a disruptive innovation strategy. Ford could also decide to enter the ride-sharing business through its existing internal combustion human-driven cars. (This is not far from reality: Audi has been piloting its own ride-sharing service in selected US locations, called Audi on Demand.5 These are regular Audi cars that you can rent by the hour.) The Innovation Landscape Map framework allows you to consider and compare the possibilities and ask questions about how much value can be created and captured through different combinations of innovation.
The Challenge of Innovating Outside the Home Court
Sports teams tend to have a better winning record when they have the home court advantage. Playing at home is more comfortable. You do not have to travel. You know the arena or the field. And you have a friendly crowd rooting for you (and harassing the competition). Everyone would rather play at home. The same preference also applies to innovation. Routine innovation is the “home court” for most established organizations. It is where they are most comfortable. It is where they have developed and honed their capabilities. It is where they understand the technical and market risks best, and where their prior experience helps them avoid blunders. It is where they understand how to create and capture value from innovation. Innovation, even routine innovation, is never easy, so playing on the home court is a nice advantage.
The problem, of course, is that companies can also get trapped on their home courts. Unlike sport teams—who normally have to follow a schedule of home and away games set by their league—companies can choose their venue of play. And, unfortunately, the comforts of the home court can prove all too seductive. Proposals to explore outside-the-home-court opportunities for radical, disruptive, or architectural innovation can have a hard time gaining traction. Within an organization, many processes, structures, and management behaviors act to reinforce the home court bias. Existing project selection processes and criteria, management incentive systems tied to short-term performance metrics, pressures to utilize existing factories or distribution networks, demands from business units to address urgent competitive needs, and the technical biases of R&D personnel blow like prevailing winds toward the relative safety of home court innovation. Unfortunately, it is this very dynamic that makes established companies vulnerable to the gales of creative destruction described by Schumpeter.
And this why an innovation strategy matters. An explicit innovation strategy is required to counterbalance the automatic tendency to focus on the home court. Recall the example of the contact lens company at the outset of the chapter. They were victims of these prevailing winds. This is not to say that routine (inside the home court) innovation is bad. As I discuss in the next chapter, it is not. It can be quite valuable. The issue, though, is one of making explicit choices around the trade-offs that work best for the company given its unique strategic circumstances. Effort should never be allocated to innovation by default. Good innovation strategy is about finding the right mix of projects across routine, radical, disruptive, and architectural categories. Coming up with the right balance for your company requires an analysis of technological opportunity and market dynamics. This is the subject to which we turn in the next chapter.
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NAVIGATING THE ROUTE
Creating Your Innovation Portfolio
Strategy is where you spend your money and time. Strategy is not about intent or vision or aspiration. It is about action. Skip the dense PowerPoint presentation. Just tell me how resources are allocated and how you spend your time, and I can pretty much tell what your company’s real strategy is. The same principle applies to innovation strategy.
An innovation strategy is ultimately a commitment to an allocation of resources across project types. Alphabet, for instance, has a policy of allocating 70 percent of its resources to its core search business (Google), 20 percent of its resources to ancillary businesses (such as cloud services), and 10 percent of its resources to “moonshots” (like autonomous vehicles) that could potentially bring the corporation into completely new technology and market spaces.1 Corning’s strategy and capital allocation framework specifies a target allocation of the company’s R&D and capital investments across its core technologies (glass science, ceramic science, optical physics), its four engineering and manufacturing platforms (vapor deposition, fusion, etc.), and its five market areas (e.g., optical communications, mobile consumer electronics).2 The purpose of this framework is to help the company make trade-offs between near-term routine innovation opportunities and longer-term opportunities outside its home court.
Executives often ask me, “What’s the ideal proportion of resources to allocate to routine, radical, disruptive, and architectural innovation?” After all, if the 70:20:10 rule is good enough for Google, why shouldn’t it be right for your company? There is, of course, no magic formula or golden rule that applies to all companies. What’s best for Google or Apple or Amazon is not necessarily what is best for you. Like any strategic question, optimal resource allocation is company specific and contingent on factors such as technology trends, market dynamics, competition, the company’s capabilities, and environmental conditions. In this chapter, we examine how to take these factors into account in creating an innovation strategy that works best for your company.
Value Creation and Capture as Your Compass
If you go to innovation conferences or read the business press, it is easy to get the sense that “real innovators” do not do routine innovation. Radical, disrup
tive, and architectural innovations are viewed as the key drivers of growth. Routine innovation is denigrated as a sign that a company’s leadership lacks vision and is trapped in the past. As noted in the previous chapter, companies can overcommit to routine innovation if they are not careful. But the notion that routine innovation is somehow inferior to outside-the-home-court innovation is simplistic and often just plain wrong. Innovation is not a beauty contest. The right way to judge the merits of any innovation (and an innovation strategy) is value created and captured.
Looking at innovation through a value lens, we can see that routine innovation can be extremely attractive. Let’s take some examples. Since Intel launched its last major disruptive innovation (the x386 chip), in 1985, it has earned cumulatively more than $260 billion in operating income, most of which has come from next-generation microprocessors.3 Microsoft has often been criticized for milking its existing technologies (like the Windows operating system) rather than introducing true disruptions. But this strategy has generated $395 billion in operating income since the introduction of Windows NT, in 1993 (and $353 billion since the introduction of Xbox, in 2001).4 Apple’s last major breakthrough (as of this writing), the iPad, was launched in 2010. Since then, Apple has produced a steady stream of upgrades to its core platforms (Mac, iPhone, and iPad), generating more than $400 billion in operating income.5 Do not let anyone tell you that routine innovation does not generate economic value!
The point here is not that companies should focus solely on routine innovation. Routine innovation, as part of a balanced portfolio of innovation programs, can be quite profitable. Where companies get themselves into trouble is when they lose the appropriate balance. For instance, trying to “milk” a routine-innovation cash cow too long can leave a company vulnerable to major shifts in technologies or markets (a challenge that both Intel and Microsoft have experienced in recent years). In contrast, a company that introduces a transformational innovation but gets stuck on “generation 1” because it cannot follow up with a stream of routine performance-enhancing innovations will likely not develop the market or keep new entrants at bay. EMI pioneered the CAT scanner in the early 1970s but was unable to sustain its position when GE Medical Systems proved far better at making the routine innovation needed to enhance performance, increase manufacturing capacity, and reduce cost.6 MySpace, a pioneer in social networking, failed to fend off Facebook because it could not make the stream of routine enhancements required to improve the user experience.
Architectural, radical, and disruptive innovation are analogous to financial options. They create future opportunities to invest. Routine innovations are akin to exercising those options. If a company cannot create options through architectural, radical, or disruptive innovation, it will eventually run out of opportunities to exploit routine innovation. But, likewise, a company that is great at architectural, disruptive, or radical innovation but cannot follow up with a stream of routine innovations is unlikely to thrive for long.
While there is no simple rule for deciding, there are some principles that can serve as guideposts. Specifically, there are four critical questions you need to ask to figure out how best to allocate your resources among different types of innovation opportunities: How fast is your core market capable of growing? What are the unmet customer needs? How much potential does your existing technological paradigm offer for improvement? Where can you create barriers to imitation?
How fast is your core market capable of growing? Just as some oil fields have more potential for exploitation because of higher in-the-ground reserves, some markets have more potential for demand growth. Consider Google. Between 2002 and 2017, Google’s revenues (most of which came from advertising) grew at an eye-popping compound average annual rate of 53 percent. It now dominates the Internet search market with 63 percent share but still looks to have plenty of headroom to grow in its core market.7 Its 2017 advertising revenues of $95 billion are indeed impressive but constitute only about 17 percent of the total global market for all advertising.8 Google’s core business looks to be the equivalent of a newly discovered, massive oil reserve. What do you do if you are sitting on top of the equivalent of a newly discovered, massive oil reserve? You exploit it—you keep drilling wells there. If you are a company like Google that has a strong position in a fast-growing market, routine innovation that builds and exploits the core advertising business makes a lot of sense. It is how you exploit your growth options.
Look, in contrast, at a company like Goodyear, one of the world’s oldest and largest tire manufacturers. Between 2001 and 2017, Goodyear’s compound average annual growth rate was about 0.5 percent.9 This is not because Goodyear is a bad company or badly managed—it is not. The market for tires is relatively slow growing. Certainly, routine innovation in tires helps Goodyear keep and even grow its market share, but it is unlikely to spark significant growth—tire demand is constrained by the number of cars and trucks on the road. If you operate in a market like this, then you need to think about innovation in business models that can create more value or even potential radical innovation in technology that can lead to a massive share jump. Goodyear does a lot of routine innovation in areas such as improved and environmentally sustainable materials, self-inflating tires, better tread designs, and many manufacturing process technologies. But, to its credit, it has also innovated outside its home court by evolving its business model to include a range of services such as retail tire and auto service centers, roadside assistance, fleet maintenance solutions, retreading services for trucks, and direct-to-consumer online retailing.
The Goodyear versus Google example illustrates how the right mix of innovation projects will vary considerably across companies depending on the growth prospects of their respective markets. It is important to emphasize, though, that very rarely should a company’s portfolio of innovation projects be limited to only one type. Despite the spectacular prospects for growth in Internet-based advertising, Google’s parent company, Alphabet, is exploring radical and architectural innovation opportunities such as autonomous vehicles. Alphabet’s leadership is smart enough to realize that someday Internet advertising could look a lot more like tires, and they want to build other options for long-term growth. Likewise, despite the fact that the tire business is tough, slow growing, and competitive, Goodyear still pursues routine innovation in that space. As in any portfolio decision, the issue is one of mix and balance, rather than all of one or the other.
It is also important to recognize that growth potential in any given market is not completely exogenous. Google’s market is rapidly growing because of Google’s innovation efforts—Google is not just along for the ride; it’s been paving the road. Industries, unlike living creatures, are not doomed to follow a natural progression from vibrancy and growth to decline and mortality. An industry can, in fact, “de-mature” through innovation.10 Back in the 1980s, cars were considered a classic mature industry. The basic technology and product concepts were fairly well established, innovation was incremental, and competition increasingly favored companies (like Toyota) that could manufacture efficiently. Today, the auto industry lies at the intersection of transformative innovations in powertrains (electrification and fuel cell), computer science and artificial intelligence (autonomous vehicles), and business models (ride sharing). The same story could be told of consumer electronics (think about RCA vs. Apple) or retail (e.g., Amazon). Ironically, companies are often told that if they are in a mature industry, they should either divest or just focus on incremental, cost-reducing innovation. This is horrible advice because it ignores the potential for reinvigorating an industry through transformative innovation. So-called mature, slow-growing industries may be exactly those most ripe for transformative innovation.
What are the unmet customer needs? Innovation—whether routine, radical, architectural, or disruptive—creates value when it solves a “problem” for someone. Routine innovation that solves an important (or expensive) problem is going to be much more valuable t
han a disruptive innovation that doesn’t (and vice versa). Your decision about how to allocate your efforts to different types of innovation really depends on where you think there are valuable problems to be solved. Routine innovation will continue to create value as long as your existing technologies and your existing business model are capable of addressing customers’ unmet needs. A better Internet search that reveals more about our potential purchasing plans is valuable to us as consumers and valuable to advertisers—so improving Internet search algorithms is a good (routine) innovation for Google to make. For the past few decades, we all craved faster, more capable personal computers, and we were willing to pay more for a machine with a faster microprocessor. So, introducing a new generation of microprocessor every eighteen months was good (routine) innovation strategy for Intel for a long time.
The challenge, of course, is that our needs are not unlimited. There are diminishing returns to how much we are willing to pay for any one dimension of improvement. It’s something I think about many mornings. Since age fifteen, I have shaved with a Gillette razor. When I started shaving, I used a Gillette Trac II, which was the first twin-blade shaving system. Over the years, my Gillette razor has evolved—it got lubricating strips, a pivoting head, batteries to vibrate the head, and most of all more blades. The current Fusion ProGlide contains five blades. In men’s shaving products, Gillette has had a clear and coherent innovation strategy: invest in technologies and designs that provide a closer, more comfortable, and safer shave. Judging by the price premium Gillette gets for its Fusion ProGlide (about $3.29 per unit on Amazon) versus an older design like the twin-blade Sensor (about $1.30 per unit on Amazon), the company has clearly created (and captured) significant value from this routine innovation strategy.
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