What Every CEO Should Know About Innovation

The word "innovation" is one of the most used and abused terms in the modern business lexicon. Every organization, every leader and every consultant seems to have their own definition of what innovation is. That is not necessarily wrong, since each undoubtedly has different resources, cultures, timelines and goals. But if any part of the value chain in an organization has differing definitions or no definition at all, that is a problem. If you are running a large organization and your goal is generating growth through innovation, you need a common language to communicate with your team as a prerequisite to establish accountabilities and define metrics to measure your ultimate progress.

Based on over 10 years of extensive research by Innovators Equation articulated in the World Database of Innovation, there is a 64% correlation between organizations that are successful innovators and ones that have fully formed and socialized definitions of innovation. The data also suggests that companies which produce reliable, repeatable growth through innovation split their opportunity pipeline into three or more types based on the specific market they intend to capture, the related revenue and margin growth desired and the time and resources required to succeed. Innovation types are usually imagined on a continuum from simple, iterative changes to an existing product or service on one end of the spectrum to world-changing breakthroughs on the other. The number of gradations along that spectrum usually ranges from three to as many as seven or more. The number of gradations is less important than having everyone in your organization on board with the same definitions. For simplicity we will focus on three commonly used categories.

Incremental or iterative innovation can be defined as changes made to an existing product or service being sold to existing customers through an existing marketing channel. Examples would be an additional feature or service option on an current product. Think of changes to an existing make and model automobile from year to year. McKinsey refers to these as “Staying in the Game” or “Winning the Game” in an existing market. They are typically executed in a one to three year time frame and may increase revenue and gross profit contribution marginally. But these improvements are easily copied or reverse engineered by the competition and therefore the impact is short-lived. Incremental innovations are less costly to implement and quicker to market but also offer less return.

The next level on the continuum is Platform level or “New to the Industry” innovation. Platform level innovation often leads to the practical application of fundamental innovations where the product or service are launching pads for entirely new product lines, businesses or industries (1). A good example is Microsoft Office, which has produced numerous spin-offs and secondary products and applications. This type of innovation often involves a new or modified business model. New to the Industry level innovation requires more time and resources to develop than incremental ones, but typically yields larger and longer lasting revenue growth, gross margin gains and higher ROI.

The third, and most elusive category is Breakthrough Innovation (Brinnovation), also referred to as "New-to-the-World" or Disruptive Innovation. Breakthrough Innovation creates changes in human behavior on a large scale which involves paradigm shifts in human thinking and social activity or norms. This level of innovation can even contribute to human evolution as a species. Breakthrough innovations are not always disruptive, however. Revolutionary ideas, products or business models are only disruptive if they significantly alter human behavior in an existing value network by displacing established companies, products, services and relationships. Breakthrough Innovation often takes five to 10 years or more to fully develop but it’s impact on markets, revenue, gross margin and society as a whole can be significant and long term.

Companies that want to develop a robust innovation program must first establish a set of definitions and then insure these are socialized throughout the organization. As part of this process it is important to define not only what innovation is, but what it is not. Definitions become the foundation of a common language that allows the creation of metrics to measure success, identify failures, build timelines and establish individual and team accountabilities.

Steve Snider is Principal of Sunstone Growth (www.sunstone-growth.com), a consulting firm specializing in building innovation departments that produce reliable, repeatable growth.

(1) Praveen Gupta, Global Innovation Science Handbook (IAOIP), p.417