What Drives Sustainable Innovation Advantage?

"You never know where a good idea comes from."

--Cornelius Vanderbilt

August seems like a good time to go back through the archives to see what "oldies but goodies" I might have missed from the strategy consultants I follow in this blog. It's also worthwhile to see how the ideas (and the cases cited to support them) that were presented years ago have actually played out since then.

Here's a really good one from Booz Allen Hamilton's strategy+business dated 5/11/2004 and titled, "Raising Your Return on Innovation Investment". The authors: Alexander Kandybin and Martin Kihn.

The article argues that returns from innovation investment are limited by the structure and process of your innovation value chain, consisting of four stages -- idea creation, project selection, development, and commercialization. If innovation isn't paying off like you want then you should both improve each of these stages individually and also improve how they work together as a unit. Some of that improvement can happen by outsourcing to get best-of-breed competencies in those stages that lend themselves to outsourcing -- i.e, idea creation and development.

I like this approach of "raising the curve" rather than just moving along it. I do however have issues with another idea presented in the piece - that of grouping all innovations into two key categories: "market based ideation" and technology. The former is about coming up with products or services that did not exist before (like Red Bull); the latter with coming up with new ways to produce or deliver existing products or services faster, better, or cheaper (like Dell laptops). The former are vulnerable to copycats; the latter to price cutting. Products that combine both approaches (like the iPod) deliver the highest return for the longest time. That's what the article says.

So, two years later, does this paradigm hold up? Yes and no. The article is right when it says technology leadership is not sufficient. But neither is it a requirement for sustainable innovation advantage.

For example, in 2006 Red Bull is still a category leader and I don't think it has to do with better technology. The same for the iPod, which is built entirely using parts and processes available to any manufacturer. What other player manufacturers don't have is iTunes or iPod's iconic industrial design. Even without Apple's closed digital rights management technology, FairPlay, iTunes would still seal the deal simply on an ease-of-use basis, creating as it does a seamless experience with the player. It's this ownership of the whole experience that really sets Apple apart -- for good or bad - and which is very hard to copy.

I do agree, however, that process innovation by itself is both too narrow and too weak a hook on which to hang sustainable innovation advantage -- because that advantage basically boils down to price. If that advantage ever goes away, what's left?