4.3 Innovation Strategies

Most companies fall into the complacency trap; some don’t. They know innovation is the key to survival. Not all innovation strategies, however, are created equal. Companies tend to pursue one of two paths to innovation (Figure 4.2). Let’s take a closer look.

Transformational Innovation

Transformational innovation is attractive because it changes the competitive rules, giving your company a dramatic competitive advantage. Transformational innovation relies on strategic leaps in process or product technology.

• Process Leaps. Netflix’s streaming platform, for instance, exemplifies breakthrough process innovation. Streaming helped Netflix bury Blockbuster video, the one-time industry leader.

• Product Leaps. Tesla’s electric cars typify transformational product technology. Electrification enabled Tesla to become the world’s number two automaker by market capitalization despite the fact that Tesla delivered only 936,172 cars in 2021 (by contrast, Toyota sold almost 8 million).

Beyond reputations for innovation—and transformational business models—Netflix and Tesla share a common characteristic: Stratospheric stock prices. Investors love transformational innovation.

But, transformational strategies come with a major drawback: They depend on strategic breakthroughs. What happens if you can’t “produce” a breakthrough? Think about the pharmaceutical industry. The industry has long relied on profits from blockbuster drugs. When patents on a blockbuster drug expire, low-cost generics siphon off as much as 90% of sales. The sales drop-off is so precipitous that patent expiration is known as the “patent cliff.” Innovation is the lifeblood of the industry. Yet, 19 of 20 drugs that reach clinical trial fail. Worse, most drug concepts never make it to trial stage. And each blockbuster drug costs three to five billion dollars to bring to market. Now, the key point: Strategic product and process breakthroughs are just as rare and expensive as new blockbuster drugs.

Consider one more point. What happens if a competitor achieves a strategic breakthrough you can’t copy? How do you close the competitive gap? Companies like Blockbuster never came up with an answer. The bottom line: Relying on transformational innovation is a high-risk, high-reward strategy.

Incremental Innovation

If you don’t want to take the risks inherent with transformational innovation, how do you stay on the cutting edge of innovation? Continuous, incremental improvement is your answer. Toyota is the standard bearer for continuous improvement. Incremental innovation strategies rely on creating a systemic capability. That is, improvements must take place everywhere and all the time.

Continuous-improvement companies therefore solicit innovation ideas through a variety of methods, from suggestion boxes to business plan contests to online brainstorming sessions. They know that everyone regardless of position or tenure must be involved in innovation. Innovation guru Gary Hamel argues that, “The real returns come from harnessing the imagination of every single employee every single day.”1 After all, good ideas are good ideas wherever they come from.

As powerful as continuous incremental improvement can be as a competitive lever, it’s hard to achieve. Consider three reasons why.

• Defining Innovation. Incremental innovation is tough because it requires a new sense of what innovation is. Innovation isn’t invention. It isn’t just new products. Sam Palmisano, former CEO of IBM explained, “Let’s be clear on the meaning of innovation. It’s a lot more than invention. Innovation is the intersection of invention and insight. . . . Innovation is focused less on things and more on ideas, collaboration, and expertise.”2

• Taking Risks. Incremental innovation requires a sense of urgency and a willingness to take a lot of risks. Art Collins, former Medtronic CEO, warns, “The tough part is that many times you’ve got to change before the real requirement to change is necessarily seen. That means people will make mistakes. You’ve got to give people the opportunity to make mistakes, to fail, and not to crucify them for doing that. . . . That’s easy to say, but hard to do.”3

• Cultivating Culture. Pursuing incremental innovation requires sustained investments to build a culture of innovation. You must invest in trust and promote the sharing of ideas. You need to encourage teamwork even as you nurture and value individual expertise. You need to set aside money to explore ideas, some of which are a little off the wall and some of which come from outside your company’s own walls.

Now, a question: Both innovation strategies have pros and cons. Which is more popular? If you said, “transformational innovation,” you got it right. Most companies would rather rewrite the competitive rules with big, bold ideas than cultivate a culture of persistent experimentation. Now, let’s shift gears and ask, “Which is more important?” In today's disruptive world, success depends more on continuous improvement than on occasional, dramatic process and product breakthroughs.

Besides, pursuing innovation through a series of small, incremental steps doesn’t preclude you from seeking strategic breakthroughs. In fact, the attitudes, skills, and technical competence needed to pursue continuous improvement will help you quickly adopt breakthroughs whenever and wherever they occur (see Figure 4.3). Disciplined Lean Six Sigma thinking helps bring transformational and incremental innovation together.