Innovation Doesn't Always Mean Disruption
Anke, Assistant Vice President for Research and Innovation - L'Oreal USA R&I [Source: http://www.youtube.com/watch?v=-BBBCubLltQ]
Part of any innovation journey is to create a major market disruption, right? Well, you don't have to be quite as dramatic as many of us have believed.
There's nothing wrong with redefining the marketplace and introducing new products and services. But the most effective and lasting innovations are relatively small and methodical over the long haul. A vast majority of us are people who constantly innovate but haven't necessarily developed earth-shattering ideas that redefine the market.
One of the statistical givens of the world of finance is that the greater risk you take, the greater the reward. It's why some huge financial institutions give great leeway to their proprietary trading desks. Those financiers are experts at trolling the capital markets for arbitrage opportunities. They can make enormous returns when they buy the right security or take the right position.
I use this example from the world of finance because there are parallels between financiers who work on prop trading desks and organizations whose mission it is to innovate. Sometimes an enterprise will make a huge bet that an invention will transform the market. They put a lot of funding and energy behind its development. If the idea catches on and succeeds, then the enterprise might have a lucrative, new business line on it hands. If it doesn't make a splash, however, the organization faces the reality that it spent a lot of money and time on something for which it might not see returns.
Looking at a large sample of publicly traded companies across major sectors and industries, it seems that the most successful enterprises are those that attain a certain percentage of big bets on innovation. Just as prop trading desks at banks might make several trades a day that are relatively safe and make them modest margins, companies are most successful when they allocate a fairly large share (about 70 percent) of their time and money to modest innovation initiatives.
These companies allocate about 20 percent of their energies toward more risky projects where the assumed payoff is larger. They only spend 10 percent on the big-ticket projects that are aimed at transforming or disrupting their market. It's a bit counterintuitive, isn't it? For some years now, management theorists have rallied around the belief that true innovation is more of an all-or-nothing scenario. The enterprise that moves mountains, so to speak, is the true innovator. Yet it's really those steady, smaller steps that pay off.
The modest innovation initiatives that account for 70 percent of a successful company's activities often involve looking at existing products or services from a fresh perspective. Think about the major fast food chains that sell pizza. A few years ago some of them introduced fresh breadsticks to their menus. Doing so wasn't a major market disruption. They merely took the pizza dough they were already making in their restaurants and packaged it into a different form for diners. These restaurant chains didn't reinvent the wheel (or in this case, the pizza!).
All industries have unique characteristics and challenges. But for the most part, successful enterprises innovate on the assumption that the financial return on riskier innovations is more lucrative. Again, it's not unlike high-profile traders at financial institutions. The ten percent of innovation activity that's allocated to the big-ticket, transformative items can result in 70 percent of a company's returns.
It stands to reason, then, that when the big-ticket items succeed and account for 70 percent of a company's total returns, then the modest initiatives account for only 10 percent of returns. But as we all know, those riskier projects don't always pan out. If they did, we'd all be throwing caution to the wind and actually discouraging modest improvements and ideas.