Why Bother with Innovation?

Innovation is risky!

Innovation is a risky business. A very risky business.

Innovators have to deal with many different kinds of risk throughout the development process:

• Market risks – are there customers for my new product or service?
• Commercial risks – are there enough customers at the right price?
• Technical risks – will the product work?
• Financial risks – will we have enough money to get the idea to market?

And there is no certainty, or even probability of success. Most innovations fail. Some estimates put the failure rate for new ideas that actually get launched into the market at 80%-90%, and for the best innovators it is never more than a 50:50 bet.

Surely there are other strategies that a business can follow? Perhaps the resources directed to innovation would be better spent on improving sales performance or driving a marketing campaign. Perhaps acquiring another company that has already done the innovation. Or attempt to be a fast follower; someone who spots a new idea in the market and quickly copies the idea and executes it better than the originator.

All of these options look like they carry less risk than trying to innovate.

Does innovation actually help growth?

But everyone says that innovation is critical! There must be a good reason; some evidence that innovation really helps to drive innovation?

At the level of the overall economy, the evidence does exist. Many studies have shown that over time innovation is a major driver of improved productivity and economic growth, as new techniques and equipment ripple through the economy. But for an individual firm, the evidence of a direct link between innovation and success is not so clear.

There is some good evidence that innovation and company success go together. For example, firms that consistently invest in R&D have higher productivity, 13% higher than those with no R&D spending and 9% more than firms who occasionally invest in R&D. They also achieve better value added per employee, and more exports.

Unfortunately, we don’t really know whether successful businesses invest more consistently in innovation, or whether innovation genuinely drives productivity!

More usefully a study from Nesta shows that businesses that consistently innovate double their rate of sales growth and new employment. This effect can be tracked over time so we know that it is the investment and commitment to innovation that leads to the faster growth. There is also a virtuous circle where innovation leads to both growth and an increase in the capacity to innovate. The growth provides the resources to use that increased capacity for further innovation and further growth.

Innovation as survival tactic

So some good evidence that in pursuit of growth innovation is worth the risk. But innovation also has a key defensive role, because the world does not stand still and neither can you.

Even if you have a strong position in the marketplace, satisfied customers, great products and services, a good cost base, it will not last. The economist Joseph Schumpeter put the idea of ‘creative destruction’ at the heart of his analysis of how economies evolve, with new ideas and innovations constantly picking away at the position of incumbent players.

• Your once new ideas get copied.
• Competitors find a better, cheaper, faster way of meeting your customers’ needs
• New technology somewhere in the system makes your solution less attractive or even obsolete
• Customers shift in what they demand and what they value
• Costs increase because of changes to price and security of supply for key raw materials
• Changes in government regulation make your offer less viable

All these pressures are constantly nibbling away at your market position. As the Red Queen said in Through the Looking Glass  “…it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”

The need for constant reinvention

The only known route to a secure future for your business is constant innovation. You must:

• Innovate to find new niches and new customers you can delight.
• Innovate to constantly improve the performance of your business.
• Innovate to replace the sales lost through ‘creative destruction’.

As Andy Grove said in Only the Paranoid Survive – “The greatest danger is in standing still”. Or in the words of the songwriter Neil Young; you have to constantly reinvent yourself “…’cause rust never sleeps”.