Monday, July 23, 2007

Dimensions of Innovation

Recently a senior executive of a manufacturing company asked me a question "Should we pursue Radical Innovation or Incremental Innovation?" At that moment, I did not have a clear one line answer. Innovation is a complex subject and the choice between incremental innovation or radical innovation is never straight forward. Individual companies, or group or even employees can choose between the two depending on their strategy, risk tolerance and competition.

Innovation can be seen in two dimensions:

1 Competitiveness

2 Risk Tolerance

All the innovations that happen in industry today can be explained in terms of these four quadrants.


Competitiveness is an innate feature of the individual or that of the organizational culture. Some companies have a strong competitive nature. For these companies - status quo is not acceptable - and they not only want to win but also ensure that the competition loses.

In most businesses, the culture of competitiveness is primarily driven by the nature of the competition in the market place. If a business does not face intense competition, then over a period of time the culture of the company tends to fall into complacency - and tends to take a reactive action towards innovation i.e, they will innovate only if the competition does so. For example GM considered developing hybrid technology only after Toyota released Prius. Ford & GM are yet to develop the clean diesel engine technology - but Honda, VW, Toyota already have clean diesel engine cars in the market.

Another possibility that emerges with lack of competition - but with a high level of commitment to innovation is that company starts to engage in Anticipatory or exploratory innovation - mainly research. NASA, Bell Labs, a large part of IBM research, Lawrence-Livermoore Labs, Government funded research - all fall into this category.

Risk Tolerance

Risk Tolerance is often a measure of how much money (as % of revenue) a company is willing to spend on R&D without knowing how much benefits it will be getting back. Often company leaders have a higher risk tolerance - This is driven by their personal trait and that trait often rubs onto the entire organization as well. Companies such as Apple, Google, Tata Group, Arcelor-Mittal, Reliance Group, ICICI, Microsoft all have the company leaders driving innovation through their personality.
Sometimes, the high risk tolerance is built into the corporate culture itself. For example, Exxon-Mobil, Texaco, Total, KKR, Blackstone, Texas Pacific Group, (Private Equity firms) Norwest Ventures, Intel Capital, (All Venture Capital firms), Hedge Fund firms, IBM, HP, GE, Bell Labs are the best examples where the high risk tolerance has been built into the company culture.

The four Quadrants

  1. Reactive

  2. Incremental

  3. Anticipatory

  4. Radical

Reactive Innovation (Low Risk Tolerance & Low competitiveness)

This is probably the most common form on Innovation - often seen as imitation. Company A will do anything that the company B does. Coca Cola introduced Zero Calorie cola, Pepsi does the same, Pepsi introduces flavored cola, Coca Cola does the same. Another situation will be that the company innovates only when the regulatory norms change. For example Indian companies adapted 4-stroke engines only when the government enforced a stricter emission rules. It has been observed that most companies tend to fall into this category - this is mainly due to competitive pressures and low risk tolerance. Managers are often forced to react when the competition innovates. Often times managers simply get by imitation or outright copying just to stay competitive in the business.

However, being reactive is not a bad thing. Being a fast follower, one can avoid the mistakes done by the lead innovator and at the same time capture more market share or get higher ROI.
Japanese companies are the masters of imitation as innovation. Throughout 1960’s to 1990’s Japanese firms built their competitive advantage by imitating the best in US & Europe. It was during this imitation process, Japanese companies discovered their own advantages. Indian IT, Pharma firms: TCS, Ranbaxy, Dr. Reddy Labs, Wirpo, Cipla, Infosys, Satyam etc. are also following the reactive innovation process. This has ensured that they have a higher ROI. (see Indian style of Innovation).

Incremental Innovation

Incremental Innovation is primarily driven by very high competitive pressures and low risk tolerance. Companies that rely on technology based products (or manufacturing process) often tend to follow incremental innovation. Intel, Dell, Lexmark, Cisco, AMD, Lenevo, Nvidia, ATI, Adobe, Microsoft, Oracle, etc. survive solely on incremental innovation. Incremental innovation is best exemplified by Moore’s law (The number of transistors one can put in a chip will double every 18 months).

Intel follows Moore’s law to the word and has consistently come out with successful products: Pentium, Pentium-II, Pentium-III, Pentium-IV, Xeon, Itanium, Itanium-II, Centrino, Centrino Duo etc.

Another reason for incremental innovation arises when an imitator decides to leapfrog the competition by a series of incremental innovation. Toyota Lexus is a good example of incremental innovation designed to leapfrog competition.

A good think about incremental innovation is that the ROI on R&D investments can be predicted with reasonable accuracy. The entire computer industry today practices incremental innovation and companies which cannot keep pace with competition lose market share. The key to succeed with incremental innovation is to know what the customers want in the future and then provide it.

Anticipatory or Exploratory

Organizations which pursue anticipatory or exploratory innovation are often disconnected from the business. These organization have a very high risk tolerance and have a low competitiveness. Most government sponsored research labs - NASA, Lawrence-Livermoore labs, DRDO, NAL, ISRO, BARC, C-DAC, C-DOT, CPRI, CFRI etc. fall into this category. University funded labs - Caltech, MIT, etc. also fall into this category.

Many large companies usually have dedicated a certain % of their annual revenue for R&D and these R&D projects were not usually tied to any products or to any particular time line. These R&D labs also fall into this category. Examples of these are several.

One of the best examples is Bell Labs. While all the cutting edge research was done by Bell Labs - an this was all anticipatory innovation. R&D work done at Bell Labs during this phase were highly exploratory and had little commercial implication. As a result Bell Labs spent several billions of dollars with very little to show in terms of benefit to the customers. For all the money spent by Bell Labs - it completely missed the Internet revolution and it also missed the cell phone revolution. But Bell Labs deserves the credit for developing several path breaking innovations in Fiber Optic technologies, Digital technologies, UNIX etc. These innovations were purely anticipatory - i.e., the rational driving these innovations is that Bell Labs expected the technology to move in that particular direction.

Another good example will be Xerox’s PARC. Palo Alto Research Center was created with a certain budget - but with no clear mandate. Xerox’s business managers were expected to pickup some of the technologies developed by PARC and commercialize it. Over a period of time PARC developed several innovative technologies: Ethernet, GUI, Mouse, Post Script printing etc.

Radical Innovation

Radical innovation is probably the rarest kind. Mainly because of the factors that drive it - high risk tolerance and high competitiveness. But in the recent times, there has been lot of radical innovations - the Silicon Valley’s tech sector thrives on radical innovations.
Radical innovation is not easy. It requires high risk tolerance and a high market competitiveness. The company leadership should have a high competitive spirit, must intimately know the market requirements, have the right kind of technological capabilities and have a huge appetite for risks - and also the ability to manage the company is the product/service fails in the market. All these characteristics at the same time is difficult to manage and sustain for a long period of time. Often times radical innovations need a completely different business models. Even highly successful companies find it difficult to sustain radical innovation over a period of time.

The best example of Radical innovations are: Apple Inc., 3COM, Palm Computing, Juniper networks, @Home, Casio, SMART car, Google, Pixair, Segway, Disney Studios, IDEO, Illumination & Light effects, etc. Even these companies find it difficult to sustain radical innovations over a period of time. The biggest challenge in sustaining such radical innovations is managing failures - when a product fails, shareholders revolt against the management - thus killing potential future radical innovations.

Companies in developing countries - BRIC (Brazil, Russia, India & China) today are looking at radical innovations as the means to become globally competitive. In India, Tata Motors has launched an ambitious project to build passenger cars for less than $2500 (Rs 1 lakh) - this is a perfect case of Radical innovation. Ginger Hotels have also developed a radically different business model for a completely self service hotel. ICICI bank has developed innovative services to cater to India rural masses, Reliance Communications and Bharti have developed radical solutions to manage their communication network - which offers the world’s lowest cost of cell phone communication services - and being highly profitable at the same time. Cemex in Mexico has developed a radically innovative business model to sell cement to small & medium customers.

Implications for Indian Firms

Indian companies have to realize that the competition for them has increased exponentially. Market deregulation and globalization has altered the competitive landscape completely in the last decade. Indian firms - mainly manufacturing firms are slowly realizing that if they need to survive they need to innovate. Their old ways of doing things are no longer valid. Companies need to find ways to innovate - and being innovative is going the critical factor for success. It does not matter if you are reactive, incremental, anticipatory or Radical - all types of innovations are better than no innovation.

Indian IT firms - mainly TCS, Infosys, Wipro have developed a radical business model for Global IT service delivery - the "on-site, offshore model" and today are experimenting with several new ways of delivering service.

Indian pharma & Medical companies are developing new & innovative methods to deliver medical services to patients worldwide. If these experiments succeed, India will become a global center for medicine and medical services.

On the other hand, progressive Indian businesses have adapted Radical innovation wholeheartedly - Tata Group, ICICI, Reva, Reliance Group, Bharti Telecom etc. have developed new business models to meet the requirements of radical innovation.

Yet, there are thousands of Indian companies that are yet to wakeup to the new world of competition through innovation - and these companies are in real danger of dying.

Closing Thoughts

The dimensions of Innovation model was conceived to help companies and managers understand their core abilities and develop innovation strategies which is more inline with their capabilities and market conditions. The model helps companies understand their best chances of success with different styles of innovation - and can help leaders/managers build the necessary capability to manage innovation - both in terms of technology development and business models.

Leaders & managers can look at other firms which fall under their innovation models and learn how to manage more effectively. For example, If the company wants to pursue radical innovation - then its managers are better of studying about Apple or google and then mapping the factors/capability required to develop radical innovations - i.e., build capabilities to know and intimately understand customer’s future requirements, learn how to overwhelm competition with new products, manage high risks etc.

Leaders and managers must understand that innovation projects within their company can fall into several quadrants - but the overarching goal/objective or guiding principle of innovation can lie in only one quadrant. Knowing which quadrant is most beneficial for them is critical for long term success.

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