Innovation Strategy Explained, Create an Innovation Strategy for your Business

What is an innovation strategy?

An innovation strategy is a collection of business initiatives that seek the creation of new sources of earnings to maximize the value of an organization within a given period of time.

Innovation is very important when it comes to strategy. It can create superior business growth, reduce costs, eliminate competition and even create entirely new markets, but the term innovation has been so overused that it has lost its meaning.

Along those lines, we have broken down the entire innovation space into four groups of activities that executives can track and integrate as part of their business’s strategy.

The connection that many seem to miss is that innovation, just like any other activity in an organization, can only contribute to a company’s strategy if it helps differentiate the company’s products and services or reduce its costs.

Based on this idea, an innovation strategy can only help an organization in one of the following four ways:

1. Improving existing products: Taking existing products and increasing their performance along dimensions of value that matter to target consumers.
2. Developing new products: Creating new products and services to serve existing consumers or to target entirely new markets.
3. Optimizing revenues: Increasing revenues and profits by implementing new pricing options or business models.
4. Optimizing costs: Reducing costs and overhead by implementing cost saving initiatives and streamlining operations.

Innovation is a universe in itself, especially when it comes to the creation of new products and services, but in this article we will dive deep into the structure of an innovation strategy, its main components and the underlying processes involved.

By the end of this article, you will have a very good understanding of the components of an innovation strategy and its management process, so you will be ready to create one for your organization.

These are the innovation subjects that we cover in this article:

1. Fundamentals of an ‘Innovation Strategy’
2. Innovation as part of your Business Strategy
3. Product Innovation
4. Business Innovation and the Creation of New Markets
5. Optimizing Earnings: Improving Costs and Revenues
6. The Innovation Management Process
7. Examples of Innovation Strategies in Real Life
8. The Best Strategy and Innovation Books
9. References

We have also included tools, charts, links and other references that will help you deepen your understanding about innovation.

The content of this article is based on our best-selling book Strategy for Executives™ which you can now download free here.

Now let’s get to the innovation business.

Fundamentals of an ‘Innovation Strategy’

Many executives enjoy having the phrase innovation strategy in their arsenal and spread it around in earning calls and press releases, but they sometimes use it in ways that are completely meaningless for shareholders.

In fact, the word innovation has been so abused and overused that it has almost lost its meaning.

Ironically, although innovation is commonly associated with new products and services, some research suggests that launching new products is the least successful way to achieve growth, with a failure rate that exceeds 80 percent by some accounts (see references at the end of this article).

The thing is, as a process to bring new products to markets, innovation carries multiple risks, and not even the most experienced executives can predict with certainty which products will be hits and which ones will flop.

Google Glass, Sony Betamax, New Coke, Apple Newton, Ford’s Edsel model, the Facebook phone, Blackberry’s PlayBook tablet, HD DVD, McDonald’s Arch Deluxe, Google+, HP TouchPad, Windows Vista, Starbucks’ Mazagran soda, Life Savers Soda, Netflix’s Qwikster, Nike’s FuelBand, Ben-Gay’s Aspirin, Donald Trump’s Trump Steaks, the Iridium Satellite Phone, Watermelon Oreos, Cheetos Lip Balm and Colgate’s Kitchen Entrees are just a few of a large list of innovative products that their developers believed could work but didn’t.

To give innovators some credit, it is very hard to predict successful products because the only reference they have when creating them is existing ones.

The idea of “looking forward” is very difficult when it comes to innovation.

For example: If someone came to you 10 years ago with an offer to invest your retirement money in a new app that would create an “innovative platform to connect private car owners with people in need of a ride, and that the app will profit from making the connection”, would you have invested in it?

Back then, it was near impossible to predict that something like that simple app could eventually become what Uber is today, one of the most successful startups of all time.

Nevertheless, it would have been even more difficult to convince executives in a well-established taxi company to divert money and resources from proven businesses into that unproven innovation.

They would never have imagined that a simple platform model that doesn’t own any cars nor hire any drivers could put them out of business.

But that’s what innovation is all about.

When an innovative product or service succeeds, as in the case of Uber, it becomes an extraordinary source of growth for a company, but “betting on the right horse” is part expertise, part guts and part good old luck.

However, having a set of guidelines in place to originate and validate innovative ideas can improve your odds at succeeding and help you get luckier more often.

There are many playbooks out there on innovation strategies and the creation of new products.

For some, innovation efforts should focus on creating disruptive products that beat incumbents out of the market, while for others it should be more about creating entirely new markets where companies can reap first entrant advantage and enjoy low competition for a while.

For us however it is a simple decision: as an innovator, you need to pursue both, and then some. In our view you should never fall in the trap of theorizing around innovation frameworks or picking sides.

As long as you can create value and convert a piece of it into profits in a sustainable way, any opportunity is a good one for you. That’s it.

Whether the outcome is called an innovation, disruption or just an improvement should never be of our concern. What we need is finding sources of new earnings wherever they may exist.

That’s what we will call innovation.

Reviewing the existing innovation strategy frameworks for the ideation of new product opportunities was one of the most challenging tasks he faced in our research, especially when trying to reconcile them all into a unified ideology.

But at the end it was well worth it and our results speak for themselves. Our framework, which breaks innovation down to a group of ideas and applicable concepts, has simplified the innovation process for hundreds if not thousands of executives around the world who use our ideas to improve their bottom lines.

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Innovation as part of your business strategy

In a 2018 earnings call, Tesla’s CEO Elon Musk tried to downplay the value of “economic moats”, another name for competitive advantages, by saying “I think moats are lame…If your only defense against invading armies is a moat, you will not last long. What matters is the pace of innovation, that is the fundamental determinant of competitiveness.”

Elon Musk’s comments reflect a common misuse of terms like innovation, which are overly used in Silicon Valley and other high-tech business environments.

These disruptors and many respected business executives say that “innovation” is their strategy. They throw the word around to make status statements, without realizing innovation’s true connections to a business strategy.

Innovation is very important for organizations. It can help create growth opportunities, reduce costs, increase revenues, eliminate competition and even create entirely new markets.

But innovation by itself is not a strategy. Neither is disruption. In the same way, product development, market share, powerful brands or a good mantra are not strategies on their own.

Yet those words and many more are often thrown around as synonyms for strategy.

Saying that innovation is your strategy is like saying that good products or great people are your strategies.

Innovation can be an extraordinary source of growth for some organizations but is by far the most difficult one.

In fact, we mentioned earlier that innovation is the least successful form of growth with Harvard Business Review and others reporting a failure rate in the neighborhood of 80-90% of all new products launches.

The truth is that, as a process to bring new products to markets, innovation carries multiple risks. To start, innovation strategies demand resources from an organization that could be used in other profit-generating activities.

Second, when it comes to the creation of new products and services, executives are forced to make bets on things that they believe could work.

Take the race for online music streaming between Pandora, the pioneer of the space, and second movers like Spotify and Apple music for example.

Pandora bet on a future where online radio stations would be the norm therefore it designed its platform around music recommendations and the creation of personalized stations based on a few seed songs.

Spotify on the other hand made a different bet and gave users full control over what they wanted to listen to, giving users the ability to create personalized playlists and providing them with a huge music library where they could pick exactly the songs they wanted to hear.

In that race, Spotify’s turned out to be the right innovation bet and today its user base is 20 times bigger than Pandora’s.

In retrospective, many would argue that the right choice was evident and that the loser was dumb, but to be fair, like a good friend of mine likes saying “being a historian is way easier than being a prophet“.

Innovation, just like a good product or great people, can only help a company achieve its goals by helping differentiate the company’s products and services or by reducing its costs, as those are the only two ways to create a market position that is both profitable and defendable according to our updated strategy principles.

In an obvious disagreement with Musk’s statement, legendary investor Warren Buffett, who coined the term economic moats in 1999, and owner of See’s Candies since 1972, shot down the innovator’s argument by replying: “Elon may turn things upside down in some areas. [But] I don’t think he’d want to take us on in candy” in a clear reference to See’s Candies’ competitive advantages, or moats.

New business models and enabling technologies such as two-sided platforms, digital channels, data analytics and artificial intelligence(all concepts whose strategic implications we review in detail throughout the book) can only give you an edge in your innovation efforts as long they help you do one of those two things: create unique products or reduce costs.

For us, sustainable “Profitability”, not innovation per se nor market share, should be any business’s main priority. An innovation strategy can be of great help getting there, but it is not the whole story.

You must see innovation as a means to get to your goals, but it is not the goal by itself. It is a path, not a destination.

Strategy is not a zero-sum game of disruptors versus non-disruptors, or a line that separates winners from disgraced losers. Instead, you must see strategy as a perpetual marathon to always beat the market and deliver superior performance.

An innovation strategy is a plan to create new sources of earnings for the business through product improvements, the development of new products or the optimization of earnings (by increasing revenues or reducing costs) in any business.

Those are the subjects we cover over the next few sections.

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A Product Innovation Strategy

Through our research on product innovation strategies, we identified five different ways to improve your business’ existing products and services or create new ones:

1. Reverting the Value Proposition of existing products
2. Exploring the reasons behind consumption and non-consumption
3. Improving the customer experience cycle
4. Moving from products to “solutions”
5. Leveraging the power of digital business models

Each one of these approaches can help you realize innovation opportunities that may be hidden in your business. Let’s quickly go through them one by one.

Product Innovation Strategy #1: “Reverting” the value proposition of existing products

Part of the success of a product’s innovation strategy is in putting the right combination of benefits and features in front of the right customers at the right price.

Together, these three levers (product features, target customers and price) can be played around with to change the value proposition of any product or service.

What many don’t realize is that you could come up with entirely different products and even radical innovation ideas just by changing the sequence in which you approach each of these three levers in the exploration of new products.

For example, you could start defining the customers you want to target, and from there figure out the benefits and the price that would make that specific customer segment buy a product.

Alternatively, you could reverse the sequence and instead start by defining a target price at which you would like to sell a product, then see what other solutions are available within that price range, what features they offer (and which they don’t) and who buys them.

There are many ways to go about it. What you want at the end is a complete offer that specifies product characteristics (benefits, features, etc.), target customer and price, but you can play around with each of these, trying them as entry points and coming up with entirely different combinations. 

Product Innovation Strategy #2: Explore both the consumers and the non-consumers of the market

Sometimes you can find innovative ideas for product improvements or for new products and services by exploring the reasons why the consumers of an industry select one product over another, and why the “non-consumers” of the industry are not buying the incumbent products.

Let’s start with the consumers. What makes them buy a particular product? Which features, factors or functions make them select one product over another? What are the things they value the most in those products? Is it price, a particular job the product does, or is it something else?

The answers to those questions can help identify the factors for which buyers really pay, and focus your innovation efforts on amplifying those in some way.

Then flip your attention to non-consumers. Why do people who could be customers decide not to consume the products available? Is it because they don’t have the skills, time or money to use them? Or is it because the products are not available to them?.

Non-consumers fall within one of three buckets:

1) People who have intentionally decided not to use the solutions that are currently available (they are aware of the products but don’t use them),

2) People who prefer a solution from another industry (an alternative), and

3) Those that have never been considered a customer of the industry, but for whom the product, or a component of it, could be valuable.

By exploring the reasons why sizable groups of people are not consuming the products of an industry, you can try to envision solutions that eliminate the barriers to consumption, converting non-consumers into consumers and capturing that demand right off the bat.

That could turned out into another powerful innovation strategy if you can find ways to capture those untapped markets.

Product Innovation Strategy #3: Improve buyers’ experience cycle

An easy way to come up with innovative ideas to improve or even create new products is by exploring the series of interactions that your customers experience as they go through the different stages of their experience with your products, from product purchase to final disposal.

You can do the same analysis on your competitors’ business. What can you learn from their buyers’ experience cycle? how important is that experience for your competitor’s innovation strategy?

This exploration can help you find a number of innovative ways to improve your customers’ experience through product enhancement or by incorporating additional services.

The existence of key complements or substitutes, for example, might uncover opportunities to improve a particular product by incorporating additional functionality that eliminates the need or importance of those other solutions.

Similarly, products that need customer support can become a source of additional revenue by implementing new maintenance or membership models.

Picture the entire journey of your buyers from the moment your product first shows up in their lives through purchase and final disposal of the product, and try to identify areas where you could make improvements.

Product Innovation Strategy #4: Move from products to “solutions”

Sometimes you may find opportunities for innovation by pushing existing products into fully-wrapped solutions.

When compared to a standalone product, a solution offers a more comprehensive offer which may include some things that your customers need to get a product up and running such as installation, as well as other complementary components like monitoring, maintenance, disposal and others needed to get the full benefit of the product.

If well designed, solution-based offers should be a win for both sellers and buyers. Sellers get to sell their products, sometimes more of them, and buyers get a fully optimized application of something they need.

Product Innovation Strategy #5: Improve existing products through digital business models

Nowadays, more and more companies find success from implementing new business models leveraging the power of digital technologies such as Multisided Platforms, Online Communities and Gamification, concepts whose implications for an innovation strategy we review in some detail in the book.

When there’s potential for one- or two-way value exchange, especially of information, a Multisided Platform model may come in handy as part of your product innovation strategy.

Businesses where a direct conversation between customers and their brands could improve revenues and retention, might find Online Communities to be a great complementary resource.

Finally, if the offer could benefit from customer engagement and loyalty, then a Gamification effort may be a good choice.

These digital models are here to stay and are becoming more usual over time, so they should become part of your innovation book of tricks to improve your products and services.

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Business innovation and the creation of new markets

Originating ideas for the creation of new markets is with no doubt the biggest challenge in your innovation strategy since it entails thinking about products and services that don’t exist yet, for customers that we don’t know who they are, and to satisfy needs they don’t know they have – yet.

Think about the market that Pfizer created with its Viagra product. The product was so different from any other existing drug that that it created a new category of lifestyle drugs when it launched.

What many people don’t know is that Pfizer’s success with Viagra was not the result of a deliberate effort. In fact, the effects of sildenafil citrate, the active component in Viagra, were discovered almost by chance while they tested the drug to treat hypertension and some types of heart disease on male subjects.

While there’s no good process to guarantee the successful creation of new markets, there are a few ways that can help you to explore the unknown and come up with a few good ideas to add to your innovation strategy playbook.

These are our top five:

1. Contextualizing around the “jobs” that are being done
2. Finding dissatisfactions with existing products  
3. Diverting from current solutions
4. Using your value chain to enter adjacent markets
5. Taking advantage of industry shifts

Although these five paths are not an exact science, they should put executives at least on the right track to uncover new markets.

Let’s quickly expand on each suggestion as we did before.

Business Innovation Strategy #1: Contextualizing around the “jobs” to be done

When a product’s functionality is seen in light of the “job” that it does, an entirely new universe of opportunities for product and market innovations arises.

Focusing on the jobs that need to be done (aka JTBD) means that the unit of analysis for the creation of a new product or service is not the customer, as marketers usually use, but instead is the “job” that the product is designed to do.

The JTBD framework honors what marketing professor Theodore Levitt once brilliantly said: “People don’t go to a hardware store to buy a quarter-inch drill. What they want to buy is a quarter-inch hole in the wall!” 

A low-carb diet for example could help a young woman lose weight quickly, but we could also say that the “job” the diet does for her is to make her look in better shape for a wedding next month.

That alternative thinking helps you see how diets then compete with products from other industries like apparel, corsets, make-up and other solutions that could also make the target consumer look better within a short time, opening the doors to the creation of new innovations.

The lesson here is that you can study the nature of the “needs” that existing products satisfy through the lenses of the JTBD framework and try to come up with better ways to meet them, even if that means creating an entirely different solution.

For example, if you found that movie theaters were competing with high-end restaurants and live performances as “night entertainment for adult couples”, you could come up with an idea for a new type of live entertainment that incorporates fine dining options and comfortable seats.

Business Innovation Strategy #2: Finding sources of user dissatisfaction with existing products

Another way to identify opportunities for innovation in business is to spot sources of customer or incumbent dissatisfaction with the incumbents’ products.

Users’ dissatisfaction may be discovered by observing customers using existing solutions and trying to understand the problem they are trying to solve with them.

This is how Akio Morita, the legendary chairman of Sony, led the creation of the company’s most successful innovations including the first portable pocket transistor radio, the first portable black and white television and the Walkman.

Morita was well-known for devoting a lot of his time to observing customers interacting with products, and from his observations came the insights that he would later use to create those powerful consumer products.

To spot these opportunities, you must scan the market for customers and users who are not happy with the incumbents’ solutions within an industry, or that have to reluctantly use the existing products.

Customers’ hesitation may be due to the complexity, the price or the inconvenience of purchasing and using incumbents’ products.

It is from those observations that great innovations are many times created

Business Innovation Strategy #3: Diverting from incumbents’ solutions

Another powerful way to uncover ideas for market-creating innovations is by looking at the factors on which incumbents are competing and then either focus on doing different things than them or in doing things differently. As the old say goes when they zig, you better zag.

A powerful way to come up with ideas for innovative products is by using a Strategy Canvas and looking at the factors that a few of the products compete on trying to think about how a divergent solution could create value for a particular set of customers.

By looking at the canvas you can quickly see which factors incumbents believe customers value the most, so by looking at them, you may try to come up with ideas for products with a totally different value proposition that serves a particular set of customers within that market.

While looking at your strategy canvas, keep thinking about the reasons why people consume these products and why non-consumers don’t.

This exercise can help you find new ways to create value and an entirely new product category or market like Pfizer did with Viagra, one of the greatest market-creating innovations of the last decades.

Business Innovation Strategy #4: Evaluating adjacent industries where you can use your Value Chain

Another good way to explore opportunities for innovation and the creation of new markets is to look across your company’s Value Chain for overlapping capabilities that you may share with adjacent markets or industries.

Put simply, you want to look for adjacent industries where you could use any part of your existing value chain to make money.

Adjacent industries are those that sit right at the edge of your current market, where incumbents exhibit similar capabilities to those that you have.

The idea then is to find a few of them where you can leverage the people, assets and processes that you already have in place.

For example, in the early 2000s, Amazon.com needed a lot of computing infrastructure to run its ecommerce operations.

In a typical Amazon move, they found that there were other industries that could use the same computing platforms, and that’s how Amazon Web Services (AWS) and the whole cloud services division, now one of Amazon’s most important business units, came to be.

It was an innovative and successful expansion into an adjacent market, using capabilities they already had in their value chain.

That allowed Amazon operate this piece of their value chain at a scale they couldn’t have reached on their own.

Business Innovation Strategy #5: Taking advantage of industry shifts

Product innovation opportunities come and go, and only those paying attention can jump ahead of the pack and get a piece of the action while enjoying pioneer advantage.

For more than a hundred years, all power grids around the world have been operated in real time, with energy being produced at the same time that it is consumed.

That makes the grid the world’s largest real-time supply chain, all based on the fact that the cost of storing the energy (just in the same way other supply chains store commodities) was so prohibitive that producing the electrons every time you flipped a switch was the most economical way of running the grid.

That belief changed a little over a decade ago when a handful of companies started experimenting with large-scale grid energy storage systems, originating an industry that’s now worth several billion dollars.

These pioneers saw that advancements in lithium-ion batteries were making energy storage a viable solution for power grids. They first started out with 15-minute storage applications, and nowadays it is very common to see multi-hour systems being deployed in power grids around the world.

In many cases, the intersection of multiple trends is what creates the potential for innovation and the creation of new industries.

For energy storage systems, it was a drop in the costs of advanced-battery systems combined with an increased performance in smart inverters. For smartphones, it was an increase in portable computing power along with the rise of applications like email, digital calendars and others that digitalized the corporate life. For artificial intelligence it is the convergence of cheap cloud computing and advancements in data intelligence, and for self-driving cars it is a combination of improved machine learning algorithms, mobile platforms and sensor technologies.

In each one of these cases, it was not just one trend that gave foot to a new industry but the convergence of a few that made them possible.

There are conventional beliefs in many industries with roots that go back many decades, even centuries. But those fundamentals need to be continually challenged under current conditions and with the new possibilities, because at some point they’ll stop being truth, but only those paying attention will profit.

That’s how innovation opportunities are spotted.

When working on your environmental analysis, look for signs of trends that are irreversible and that could produce powerful changes ahead.

Project the future of those and other trends over the next 5, 10 or even 15 years, and complement your analysis with scenario planning tools if necessary, then reason backwards to see if you can realize there is an innovation path that your business should be pursuing now.

That’s how you start creating the future, today. Literally. But you need an innovation strategy for that.

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Earnings Innovation: Improving Costs and Revenues

The profit equation only has three variables: Price, Demand and Costs. Therefore, any strategy can only help a business succeed as long as it can help increase revenues (through higher prices or more demand) or reduce costs.

This fact is so trivial but also so often ignored that executives often overlook the fact that their operating businesses can sometimes hide golden opportunities to grow a company’s bottom line, even when the business is showing good numbers.

This is what we call effective earnings innovation.

Earnings innovation, must be a relentless optimization of “profits”, where you always try to find new ways to increase revenues and reduce costs, and it must be a central part of any innovation strategy.

For example, you could find innovative ways to increase revenues by experimenting with new business models and pricing options, or through changes to the product’s Value Proposition.

On the cost side, you may find other inovative ways to cut by improving debt and taxes, or through administrative reorganizations, aiming to eliminate positions that have lost relevance or that don’t create much value any longer.

The continual search for improvement is like a discipline that executives must religiously practice and over time get better at.

Let’s cover a few of these optimizations in a bit more detail.

Earnings Innovation Strategy #1: Finding growth by improving revenues

A few years ago, Rolls-Royce launched a pay-per-use program for their jet engine products called TotalCare, where customers are charged for every hour of “uptime” delivered, rather than selling them the engines for a large upfront cost.

Under this model, Rolls-Royce collects operational data and performs preventative maintenance on the equipment to maximize uptime and minimize disruptions.

This is a good example of how an innovative business model made Rolls-Royce’s products available to a market that couldn’t stomach hefty upfront acquisition fees but that could swallow a more digestible pricing model, increasing Rolls-Royce’s revenues along the way.

In a similar move, some companies use price to penetrate a market segment that would be otherwise unreachable. Apple, for example, offers its Music service to students in eligible schools at half the regular price, helping Apple compete with Spotify and Pandora for the young adult space.

Arguably, a good portion of those students will eventually convert into permanent users of the service after college.

Recent advancements in data analytics and predictive models are now making it easier to experiment with multiple options and customize pricing based on a buyer’s particular characteristics.

For example AXA, the global insurance company, is using machine learning and other types of innovations to analyze drivers’ data like age, residency and vehicle type along with the user’s driving history to predict the chances of having large loss accidents and are pricing insurance policies accordingly to effectively reflect those risks.

They train their deep learning algorithms with more than 70 variables of historical data from real drivers including age range, geography, and car age, and are already achieving a 78% accuracy rate in their estimates.

The following chart shows the end result.

To learn more about how some companies are using machine learning to improve revenues, watch this session from Google.

Earnings Innovation Strategy #2: Grow your bottom line by tackling costs

On the cost side, you must always be looking for opportunities to innovate and improve your overall business performance and find better ways to use the resources of your organization, especially people and money.

What we mean by innovation on costs cost is to actively looking for ways to reduce costs in a meaningful way, making your operations leaner and producing a positive net effect on your bottom line.

Sometimes a cost innovation might imply a drop in productivity, but as long as the tradeoff delivers a positive effect to your bottom line – meaning that what you get is more than what you lose – then strong reasons will exist to execute such a cost reduction.

Sometimes inefficiencies get so embedded in the culture that we miss good opportunities for cost improvements. A serious effort to continually cut unnecessary costs seeks to find and exploit those opportunities.

Our recommendation to spot cost improvement opportunities is that you imagine a very cost-conscious investor buying your business for big dollars. If that was the case, which costs would that investor immediately get rid of to justify the high acquisition price tag? How would that investor optimize the way things are currently done?

When you see the business through the eyes of an external observer whose job is to improve the way things are currently done, you can move beyond personal and emotional attachments that may be preventing you from seeing better ways of doing things.

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The innovation management process

Innovation is hard, and the rate of failure is of heart-stopping proportions, but the rewards of a systematic, well-implemented innovation management system can be an extraordinary source of value and lead to a superior growth of your company’s bottom line.

A well-executed innovation strategy serves two main purposes: first, it creates awareness about future threats that might be materializing around your markets and second, it serves as a source of ideas for improvement of your existing products and the creation of new ones.

Our recommendation is to maintain a balanced portfolio of innovation initiatives across multiple markets, business units and products which could be launched at different times in the future and “map” it to see how far are those initiatives from your core business and to have a better idea for their timing.

By creating a map of your pipeline you’re basically creating a visualization of your innovation strategy, where you can easily keep track of opportunities to improve existing products, to capture dissatisfied customers or to create entirely new markets, better balancing resources across each of them.

To help finance your innovation efforts, we recommend reserving a portion of the earnings generated by successful innovations to fund emerging ones. Part of those funds could go towards the improvement of the products’ own ecosystem and the rest to the development of new solutions.

You must try to keep your innovation engine always running at high speed, managed by a systematic effort with clear governance and stages.

That’s how innovation strategy can become a source of business initiatives that are both profitable and defendable.

When it comes to managing different business units, you may (and probably should) adopt a portfolio mentality, where you seek to maximize the value that the portfolio creates as a whole over a period of time. 

That will help you better balance innovation efforts across the different business units and make better capital allocation decisions.

You can do this by placing business units in a four by four matrix based on their competitiveness and the growth potential of their markets.

Those familiar with classic strategy tools will note that this is an updated take on the Growth Share Matrix introduced by the Boston Consulting Group (BCG) in its early days, where we are using competitiveness and market potential as proxies for the original dimensions to better fit your innovation efforts.

Following BCG’s naming convention for each of the quadrants, we can define each business unit as one of these:

1. Cash cows: Businesses with a strong market position in a low growth market. These units produce a healthy cash flow that can be used to fund other businesses.
2. Stars: Units with strong positioning in high growth markets. These businesses usually need lots of cash to retain their share of the market and will eventually become cash cows when the market reaches its maturity. Because of their strong position, they yield high returns on the company’s money, so they must be an investment priority.
3. Pets: These are business units with a weak position in a low-growth market. Pets usually yield a low return on the company’s money, the reason why many experts call them “cash traps”, so by Jack Welch’s rules these business units should be either sold or closed.
4. Question marks: These are businesses with a weak position in a strong market. They need cash injections to fund its growth, but that investment won’t yield high returns until the business achieves a stronger position. By Jack Welch ’s rules they should be fixed (e.g. fund their growth) or sold.

To select where each business fits in the matrix you can assess its competitiveness based on its ability to defend a profitable position in the foreseeable future, something that’s usually related to factors like margins, size, recent growth, market share, profitability, technological position, intellectual property, reputation, image, brand strength and people.

The power of allocating businesses in this matrix is in helping you see how the different units can help each other to produce the maximum growth as a whole and optimize your innovation strategy accordingly.

For example, the cash flow coming from cash cows is best used to finance the growth of stars and question marks. The question marks that are not selected for growth money then must be sold to other companies for which they could create some synergies.

The question marks quadrant is also the best candidate for mergers and acquisitions. Since those units are performing poorly in a market that shows strong potential, a quick way to gain the strengths you need to make them a star is through strategic M&A or JVs.

Pets are units that are performing poorly in a weak market, so unless they are strategic in nature (e.g. being used to develop a key technology) they should be closed or divested. Alternatively, some pets could be repositioned to target a different market where they could perform better.

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Examples of innovation strategies in real life

The road from idea to market is many times a long one and even a great product can’t guarantee commercial success by itself since in any innovation strategy there are many other factors at play that could turn the whole effort into a failure.

However, despite the challenges, many companies have managed to get it right. Here are a few examples of companies that have succeeded in creating innovative products and new markets which highlight many of the lessons that we have introduced throughout this article:

Innovation strategy example #1: How Chobani captured new customer segments

A company can expand its business and grow its bottom line by making its products more appealing to different “segments” within the same market.

For example, yogurt maker Chobani, has introduced different presentations for its yogurt offers that go well beyond its popular “fruit-in-the-bottom” product.

It now features Flip®, a yogurt-based snack that students and office workers can grab “on the go”, and a yogurt drink that has amassed avid fans among sport enthusiasts who consume it as a post-workout drink.

Innovation strategy example #2: How Nestlé increased growth with Nespresso

One way in which some companies have been able to find new growth through innovation is by developing complementary products that help increase demand for their own products.

Think about the success of Nestlé with its Nespresso machines, which multiplied sales of its coffee products and helped the company leapfrog in the very competitive coffee space.

Nespresso turned out to be a great “vehicle” to deliver Nestlé’s products, making them a perfect match for each other, reminding us a little of the success of Gillette’s famous razor and blade business model.

Innovation strategy example #3: How Intel found growth through complements

The strategy around complements may take multiple forms which can’t be all described here, but one of the most fascinating examples comes from Intel, the computer chip manufacturer, known for its “out of the box” innovation strategy.

In the late 1990s, long before corporate venture capital (CVC) was in vogue, Intel created an investment arm to fund companies whose products required increasingly powerful computing capacity such as complex video, audio and graphics hardware, in an effort to accelerate the obsolescence of computer microprocessors and stimulate sales of Intel’s Pentium chips.

When brainstorming ways to grow your core business organically, take a look at the entire life cycle of your products and see whether there are opportunities to develop complements that could help you increase or capture a sizable piece of the market.

Innovation strategy example #4: How Amazon productized its value chain

Another area that’s usually ignored but that could offer serious innovation opportunities is what we came to call the productization of your company’s value chain. That is, taking something that your company is very good at, and offering it to third parties as a standalone product or service.

Amazon Web Services (AWS) is a good example of this model. The service allows companies around the world to use Amazon’s vast array of servers and cloud computing tools for their own purposes.

AWS leverages a technology platform that Amazon already needed anyway to run its own operations, and made it available for third parties to use for a fee, giving Amazon the opportunity to scale this operations to levels it would have never reached on its own.

The computing systems of many large organizations, including Netflix, Amazon’s competitor in the content streaming space, run on AWS.

Innovation strategy example #5: Shifting focus from customers to buyers and vice versa

You may find space for innovation by exploring the relationships between buyers and users that exist in your markets. In the healthcare space, for example, some providers of consumer medications have stopped promoting their products to doctors, as most providers do, and have refocused their efforts to target patients directly through targeted advertising and promotional efforts.

If the people who buy a product or service are different from those who use it, you should explore whether switching from one to the other can give you better results.

For example, if you sell office supplies you may want to target procurement managers in large organizations rather than the final users.

Innovation strategy example #6: Entering a market from the bottom

Through his work on disruption, Harvard professor Clayton Christensen explain how some innovative companies have been widely successful with products that started out attacking the “low-end” of a market (less demanding customers), with products that seemed poor at the outset, but that over time improved so fast that they “disrupted” the incumbents.

For example, when Amazon.com launched its online bookstore, it became the preferred choice for customers looking for out-of-print titles and books in obscure niches.

The internet, with its inexpensive cost of inventory, provided a perfect platform for a business model that offered a large selection of low-demand titles, contrasting with the strategy of brick-and-mortar bookstores like Borders and Barnes & Noble, which focused on selling a limited number of high demand titles.  

But Amazon’s platform improved its reach, efficiency and popularity so fast that by the time Borders and Barnes & Noble realized that the future of book sales was online, they were already late to the party.

Barnes & Noble, although still around, was left behind in the dust and hasn’t been able to catch up with the giant since, while Borders went out of business in 2011.

Innovation strategy example #7: Entering a market from the top

Just as with their low-end counterparts, high-end disruptive innovations improve their business model over time to make it more accessible to mainstream customers, usually through lower prices and simpler products.

For example, FedEx first entered the parcel delivery space with an overnight offer (a novelty at the time), priced higher than regular mail. Corporate customers, for whom time is critical, were delighted to pay more to get important documents delivered the next day.

Similarly, when Amazon introduced its Kindle Reader, a solution of far superior performance to existing e-Readers, it was priced at $399 at launch, way above the existing solutions at the time.

Following the usual disruptive innovation trajectory, both FedEx and Amazon later introduced new solutions targeting more mainstream customers. FedEx introduced a two-day delivery option priced lower than its overnight offer, and Amazon launched a lower-cost Kindle device sold at $79.

Innovation strategy example #8: Capturing the “non-consumers” of a market

Sometimes companies can find success by using innovation to convert the non-consumers of a market into “their” consumers.

Consider credit card processing service Square, a company that became popular for enabling small businesses to accept credit card payments from mobile devices by inserting a small card reader into the audio jack of any smartphone or tablet.

Before Square, credit card payments were exclusively handled through networks like Verifone and others that charged businesses high processing fees. These fees were too high for some small businesses, with some of them operating at margins so low that they couldn’t afford accepting cards at all.

Square created a new market around the existing credit card processing market, by pulling a lot of non-consumers into their Value System.

The first group of non-consumers Square was appealing to were small businesses and independent professionals who found the fees charged by the incumbents excessive and had intentionally decided not to accept credit card payments.

For these consumers, Square offered a very attractive value proposition compared to their alternative: not accepting credit cards.

A second group of non-consumers that found Square attractive were individuals needing to send money to other people. Those in particular were never considered target customers of incumbent credit card processing services, but they turned out to be a great market for Square.

Over time, as Square was gaining traction and becoming more and more popular, they started to pull users of the incumbent products into their vortex, eroding the customer base of incumbent players.

The company later expanded into person-to-person payments and other financial applications, leveraging its already increasing user base.

To capture opportunities to create new markets you have to continually explore the reasons why people are not consuming the products of an industry (or not consuming as much as they could), and come up with an innovation strategy that brings the same benefits but in a way that they can afford and access.

Market opportunities are not easy to find and may require some lateral thinking, but those who can seize them can open the doors to massive value for customers and for the company itself.

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The best strategy and innovation books

The content of this article has been extracted from Strategy for Executives, a book that provides a fundamental, but practical, framework to understand and create a good strategy from scratch, applicable to the dynamic conditions that modern executives face in pretty much every market today.

There are many great innovation strategy books to choose from, including our all-time favorite The Innovator Solution by Clayton Christensen, but why go through all these different frameworks and ideas, some of them outdated, when you can get a unified map to strategy that incorporates all of them in a single framework?

Strategy for Executives, which is now free to download here, is based on extensive multi-year research, where we broke down the most popular strategy frameworks of the last 40 years, extracted their core ideas, and tied them all together into a single didactical and self-contained body of knowledge.

The research was led by Sun Wu, a seasoned Fortune 500 executive with more than 15 years of real-life experience, complemented by a thorough revision of more than 300 books and research papers, and over 500 hours of videos, interviews and formal training.

The result is a combination of fundamental concepts and a concise map to the strategy choices that modern executives have to make to thrive in today’s highly competitive markets.

Every concept in the book is explained from scratch so that, plain and simple, this is the only strategy book that you and your teams will ever need. 

Author: Sun Wu

References

Sun Wu’s Strategy for Executives can now be downloaded free here.

Buffett, Warren; Loomis, Carol. Mr. Buffett on the Stock Market. The most celebrated of investors says stocks can’t possibly meet the public’s expectations. As for the Internet? He notes how few people got rich from two other transforming industries, auto and aviation. Fortune Magazine archive. November, 1999.

Wengel, Rob. How to flip 85% misses to 85% hits: Lessons from the Nielsen Breakthrough innovation project. The Nielsen Company. June, 2014.
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Kim, W. Chan; Mauborgne, Renée. Blue Ocean Strategy, Expanded Edition: How to Create Uncontested Market Space and Make the Competition Irrelevant. Harvard Business Review Press. Kindle Edition.

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Christensen, Clayton M.; Dillon, Karen; Hall, Taddy; Duncan, David S. Competing Against Luck: The Story of Innovation and Customer Choice. HarperCollins. Kindle Edition.

Reeves, Martin; Moose, Sandy; Venema, Thijs. BCG Classics Revisited: The Growth-Share Matrix. Boston Consulting Group.
URL: https://www.bcg.com/en-us/publications/2014/growth-share-matrix-bcg-classics-revisited.aspx

Constantinos C. Markides; Geroski, Paul A. Fast Second: How Smart Companies Bypass Radical Innovation to Enter and Dominate New Markets. Jossey-Bass. Kindle Edition.

Industry Focus (Podcast). CG: “Estee Lauder Stock Surges on the Back of Prestige Branding”. The Motley Fool. April 10, 2018.
URL: https://www.fool.com/podcasts/industry-focus/2018-04-10-cg-estee-lauder-stock-surges-on-the/

Del Rey, Jason. Surprise! Amazon now sells more than 70 of its own private-label brands. recode.net. April 2018.
URL: https://www.recode.net/2018/4/7/17208804/amazon-private-label-brands-list

Rolls-Royce TotalCare: https://www.rolls-royce.com/media/our-stories/discover/2017/totalcare.aspx

Sato, Kaz. Using machine learning for insurance pricing optimization. Google Cloud website. March 2017. URL: https://cloud.google.com/blog/big-data/2017/03/using-machine-learning-for-insurance-pricing-optimization

Chesbrough, Henry W. Making Sense of Corporate Venture Capital. Harvard Business Review, March 2002.

Sherman, Leonard. If You’re in a Dogfight, Become a Cat!: Strategies for Long-Term Growth. Columbia Business School Publishing, Columbia University Press. Kindle Edition.

Kim, W. Chan; Mauborgne, Renée. Blue Ocean Shift: Beyond Competing – Proven Steps to Inspire Confidence and Seize New Growth. Hachette Books. Kindle Edition.