6 - The Bisociations of Strategic Innovation
There is a melodramatic tone to the rhetoric of "innovate or die," but in a competitive environment it may be entirely warranted. Few firms have retained the ability to dominate their customers, who are increasingly inclined to simply take their business elsewhere, to competitors who are much less arrogant and inflexible.
Without creativity, strategy cannot be innovative. Focusing on efficiency leads to price competition and commoditized products, a game in which there can only be one winner. Creativity can be an escape from the commodity trap, to serve a market segment that will be profitable and fiercely loyal to the unique and distinguishing characteristics of a brand, for which they will happily pay a premium over the low-cost commodity.
The Importance of Being Innovative
The author mentions globalization and information technologies as major forces for innovation, as firms were once protected by geographic boundaries or the limitations of logistics. In the present day, consumers do not need to settle for the best that is available from local producers. Goods produced on the other side of the world are available in the local market, and when local retailers won't stock the goods they want, customers can order online.
This is less true of certain services - you cannot import a haircut or hire workers from Bengal to mow your lawn (EN: actually, you can, but it's cost-prohibitive for most customers. In the luxury market, it's entirely feasible to bring craftsmen from Europe to remodel your home), but some services are entirely transportable, such as online banking.
Consider the music industry as an example: prior to the advent of recorded music, there was a good living to be made as a local musician - playing at music halls, giving concerts, performing private functions. While there are still some local bands, there is so little demand that musicians do not make a steady or respectable living.
All of this means that there is an unprecedented level of competition in the market, and companies must be very attentive to the needs of the customer (and even offer features they might not have expected) in order to win their business.
There has also been considerable debate over whether globalization would lead to standardization. Specifically, that the "best" product would create a global standard and eradicate the character of local markets. It's been almost thirty years since the suggestion was originally raised (Leavitt 1983), and the effect has not been as pronounced as some feared: while there has been some convergence, local tastes are still strongly influential.
It's also noted that what happened at the same time was an advance in production technology that made customization of goods easier and less costly, making it easier for firms that entered into the global market to accommodate specific tastes - and as such there was no incentive to attempt to push a standardized product on customers worldwide. Additionally, globalization has led to the consolidation of niche markets - there may not be a sufficient number of individuals with specific interests, needs, or tastes in a given community, but the Internet aggregates them into a sizable market.
There is also some indication that firms that attempt to standardize products find that their revenue declines over time. The authors cite Nattermann, whose study shows that a decline in product differentiation within an industry leads to declining financial performance.
While standardized practices make production more efficient, it leads to products that are less desirable to customers. There are certain staple products to which customers are largely indifferent and seek to purchase a standard product at the lowest possible price, but in general consumers reject commoditized goods where customized goods are available and the premium is not excessive.
A smattering of other evidence in support of creativity is provided:
- A 2001 study of Dutch firms found that those with a design focus had lower employee turnover, better sales, and higher profits.
- A 2003 study found that firms where design was listed as a core strategic issue had gross revenues that were 22% higher than the average of all firms
- A 2002 audit of British firms found that leadership in export sales was correlated to investment in design
- A 2005 study found that companies that were growing tended to attach greater weight to creative design than average growth firms, and that a much lower percentage of design-intensive firms felt driven to compete on price.
Defining Strategic Innovation
The standard definition of innovation pertains to changing business practices to adopt new patterns that generate value. In this sense, virtually any change can be said to be innovation - even if the firm is adopting standard practices that its competitors are already using. As such, the authors attach the qualifier of "strategic" to suggest that some innovations are transformative of a firm and differentiate it from its competitors.
A strategic innovation is likened to an art movement. Consider that Picasso's work changed fundamentally when he began experimenting with Cubism - and while other artists joined the movement afterward, none were as acclaimed or closely associated to the movement. In the same way, the Blair Witch Project was a film that was highly innovative, and which imitators were unable to surpass. In less artistic terms, American Airlines' frequent-flyer program was an innovation that gave the firm significant competitive advantage, and while competitors have attempted to imitate it, the first-mover advantage has been tremendous.
Copying the idea of another firm is less risky, but there tend to be diminishing returns if the original idea was well executed - consider the way in which the motion picture industry has taken to making multiple sequels to a successful film, and that some of the audience drops off each time. (EN: I looked into this, and it is not strictly true. The first sequel to a popular movie makes more revenue than the original film, because people who chose to see the original film on video will come to the cinema for the second film if they were sufficiently impressed. The third, fourth, etc. in a series show a decreasing stream of revenue as the novelty wears off.)
The authors fumble a bit with the distinction between the act of invention and that of innovation. In essence, it's like the difference between pure science (which discovers something new but doesn't recognize its value) and applied science (which takes the outcome of pure science and finds a way to put it to practical use).
As a result, it is not always the inventor of a concept may not gain the greatest benefit, but the firm that is most successful in finding a way to apply it. The most famous example of this is the GUI that replaced the command-prompt for personal computers, thereby making them usable for laymen. Xerox invented the GUI in a research lab, but Apple capitalized on the idea by making it useful and relevant to the consumer.
Some details about the western intellectual tradition: "creation" was described as far back as the Greeks to be mankind's effort to replicate a perfection that exists in the realm of gods, which has led to an implicit preference for efficiency over creativity. And from a religious perspective, science was long prevented from branching out to consider alternative ideas, but instead was relegated under threat to merely come to better understand that which is known. To make matters worse, once the religious tether was removed, the "creative" arts drifted away from the "practical" ones and into the realm of imagination and irrational whimsy.
(EN: This goes on for quite a while, which is an interesting dawdle through history but of little additional importance - essentially, what the authors are trying to say, in far too much detail, is that creative and practical concerns have long been divorced in the western mind.)
In this sense, the present day interest in applying creativity to practical concerns is new, unusual, unfamiliar, and uncomfortable - but at the same time those who depart from the traditional rules of imitation and incremental improvement have made astounding progress and inspired others to question traditional approaches to problem-solving.
It's also noted that efficiency tends to be short-lived: it does not spread in the same way that innovation does. An innovative idea stimulates more innovative ideas - but even if it fails to do so, its adoption creates a ripple of change as its implementation improves efficiency and effectiveness across a broad range of participants.
The authors chase a couple more squirrels - namely Edison and Tesla, whose famous fallout represented a difference in the methods of creativity. Edison's claim that inspiration is 99% perspiration reflected a methodical approach, as reflected in the legendary story in which he attempted hundreds of different alloys to find the best one for the filament in his electric light bulb. Tesla, meanwhile, was a visionary and an idealist who felt that theory and calculation can pare down the discover process by eliminating unlikely options rather than going methodically though them all. These two men embody different modes of creativity that can be productive on their own, but are likely better off working together.