Innovation Strategy – Achieve Competitive Advantage Like a Pro
Innovation strategy is like a roadmap you need to make the most out of your future-oriented mindset.
Successful game changers prove it’s worth a lot. Here’s how IKEA, Netflix, and Amazon earned their “innovator” status.
“The best way to predict the future is to invent it,” said Alan Kay, one of the luminaries of personal computing, who dreamed up laptops and graphical user interfaces years before they were invented.
He proved his famous quote many times over, and he was not alone. Innovation has become a key business objective for many executives.
It is said that the most iconic companies in the world are creating the future while everyone else is trying to predict it.
They have many factors to thank for this, but one of the most crucial is probably their innovation strategy.
What is an innovation strategy?
A simple definition of innovation strategy is that it is “a system of business processes and initiatives designed to maximize the value of an organization within a specified time period.”
A more pragmatic definition is that an innovation strategy is a commitment to a mission of coherent, mutually reinforcing activities directed toward a specific goal. Strategy translates general ideas into concrete business concepts. Advancement in technologies or services is usually included, as is money. Yes, an innovation strategy requires that you invest money in building research and innovation centers and creating internal ideation programs that will help you achieve your objective.
The word “strategy” is critical here.
Innovation without structure and clearly articulated goals leads to flawed products and wasted resources.
Innovation initiatives often fail because companies do not align their efforts with business strategies. To succeed, they must develop a set of interdependent processes that determine how the company searches for new solutions, translates ideas into actions, and selects which ones to fund.
Why does innovation strategy matter?
The history of failed innovations is long. Xerox failed to make money on its two most important innovations – the computer mouse and the graphical user interface. Polaroid nipped the idea for a digital camera in the bud because it did not “fit” its institutional logic. In both cases, a missed opportunity meant financial losses and a shift to a reactive rather than proactive mode.
Of course, a failure can also be a valuable lesson about what does not work and a catalyst for later success. In Silicon Valley, clichés like “fail fast” and “fail forward” are repeated daily. Experimentation is an important part of any innovative business attitude, but a deliberate innovation strategy ultimately leads to a greater chance of success.
Key benefits of an innovation strategy include:
- Clarity about your goals and priorities. The strategy structures efforts around these goals and ensures that all departments of the company support them.
- Control of the outcomes. With an innovation strategy, it’s easier to monitor the progress and make agile adjustments throughout the process.
- Integration of processes and efforts. Without a strategy, all improvement efforts can fall apart and become isolated practices.
- Further development. An innovation strategy prevents a company from resting on its laurels or missing opportunities for innovation – as in the Polaroid example.
- Long-term success. Even the best ideas do not automatically get the buy-in of stakeholders and top management. With a strategy in place, it's easier and faster to bring them to the surface.
What can an innovation strategy look like?
No two innovation strategies are the same. There are also different approaches and categorizations of innovation strategies. In this article, we discuss more general types of innovation strategies and explain the basics. We also showcase some examples of major league innovators.
A general approach to innovation strategy
One of the most famous concepts of a strategy was developed by A.G. Lafley, former CEO of Procter & Gamble, and Roger Martin, Dean of Rotman School of Management, in their book Playing to Win: How Strategy Really Works.
The three pillars of their theory are:
- Strategy is about "making specific choices and consciously deciding on a set of activities that are different from those of competitors in order to provide unique value to customers." It's about deciding what to do and what not to do – and building the business around those decisions.
- There is no such thing as a perfect strategy. Crafting a successful strategy is about thinking logically about the future and making decisions that increase your chances of success, rather than trying to prove your strategy is right, because that's impossible.
- A successful strategy combines rigor and creativity. Strategy should be both creative and scientific, and involve making and testing hypotheses.
Model of disruptive innovation
The theory of disruptive innovation was introduced by Clayton M. Christensen in the mid-1990s and has been highly influential in business circles over the past 25 years.
The theory describes a process by which an expensive and complicated product is transformed into something much more accessible and affordable. It’s not the breakthrough technology itself – rather, it’s an innovation that makes products and services available to a wider audience.
The pillars of a disruptive innovation model are:
- Enabling Technology. An invention or innovation that makes a product more affordable and accessible to a wider population.
- Innovative Business Model. A business model that targets non-consumers (new customers who have not previously purchased products or services in a particular market) or low-end consumers (the least profitable customers).
- Coherent value network. A network in which suppliers, partners, distributors, and customers are each better off when the disruptive technology flourishes.
Business model innovation
Business model innovation requires making fundamental changes to the customer value proposition and the operating model at the same time.
It is a process in which a company reinvents the way it makes products or services and then brings them to the market. This may include changing the choice of target segment and revenue model. At the same time, it is about how these choices can lead to a greater profitability and competitive advantage.
Innovation mindset in action – five examples
Amazon Web Services
Amazon Web Services is a fascinating case of innovation outside the company’s core business that challenges many myths associated with the concept of diversification. The cloud infrastructure that began as a side business of Amazon has grown into one of the most successful cloud companies in the world.
At the beginning of the 21st century, Amazon, a company primarily focused on e-commerce, decided to develop its cloud computing solution for its own processes and rapid growth. This resulted in a highly competitive service that has revolutionized the IT industry.
AWS was a double innovation: Amazon turned its sunk costs into an additional revenue stream and was the first provider of modern cloud infrastructure that opened up to third parties. AWS still controls a large part of the market today.
IKEA has fully embraced digital transformation, successfully combining ecommerce and brick-and-mortar stores in its business model. To achieve this, the furniture giant modernized its delivery mechanisms, logistics, fulfilment, and inventory management. The company also redesigned the customer journey – both in-store and online. Thanks to these measures, IKEA increased its ecommerce growth from 7% to 31% within 3 years.
However, the real innovation took place beneath the surface. Barbara Martin Coppola – a veteran of Google and Samsung who led IKEA through its digital transformation – said in one of the interviews that the process was like an iceberg. “At the top of the iceberg, we have customer needs and customization – we are reworking everything around customer interaction and new ways of shopping. Under the surface, we are making big changes to our business and operating model. And what’s below the surface is a much bigger change than what we see above,” she admitted.
IKEA admits that these changes have broadened the scope of the company’s strategy – they are taking place on many levels at once and therefore require a multi-layered approach and clear priorities. “We have spent 78 years earning the trust of consumers (...) and we want the same level of trust, if not more, in the digital world,” Coppola said.
IKEA developed through multiple innovations, and some of them were a response to a particularly competitive environment. They are a pioneer in many areas, such as in-shop food courts and cartoon-style manuals. Other highlights include the iconic IKEA catalog, world-famous flat packaging, self-assembled furniture and interchangeable parts.
As an organization highly committed to sustainable business growth, the retailer is often quoted as a leader in responsible governance of supply chains.
With their efficient inventory management, streamlined in-store logistics and proprietary tools that help assess the environmental impact of their products, IKEA sets the pace in long-term environmental responsibility.
The goal is to achieve 100% renewable energy throughout the entire value chain and implement a circular approach to the entire product lifecycle.
Southwest Airlines’ business model represents an example of “disruptive innovation” and is based on the market niche of people who look for low-cost travel. The company placed itself in the lower end of the market, typically overlooked by incumbents, which opened a gap to selling cheaper tickets. The lower fare and the frequency of flights made it attractive for customers, who were ready to accept a lower “quality”.
The company’s strategy involved extremely efficient operations, low-cost pricing, and innovative logistics solutions. Some of them included:
- Maximized Aircraft Utilization. At one point, SWA flew twice as many flights as its competitors.
- Standardized fleet. SWA flies a single type of aircraft, which means pilots and crew can replace each other when necessary.
- Open seating. Contrary to standard practice, Southwest passengers select their seats as they board the aircraft. This saves boarding time and simplifies booking.
- Single class. Again, SWA has simplified the booking process and boarding by offering only one class.
- No food. The company concluded that meals are not a priority for most passengers. The airline only offers snacks and drinks.
- Independent sales. If you want to fly with Southwest, you have to buy from the airline – this helps reduce costs and lower ticket prices.
Those solutions were later copied by other low-cost carriers, such as Ryanair or EasyJet.
Netflix is a great example of a company that has changed the way we watch movies and successfully transformed its business model multiple times.
The company’s story began in 1998, when software engineers Reed Hastings and Marc Rudolph started renting DVDs through mail. This was a game changer in the video rental market and a big risk. At the time, only 2% of American households owned a DVD player. Netflix’s first business model was to let customers rent videos by selecting them online and having them delivered to their homes. Next, Netflix introduced a subscription model where customers could rent DVDs online for a fixed fee per month.
After the first year, Netflix had 239,000 subscribers. By 2003, that number grew to 1 million. Today, there are about 209 million users worldwide.
Netflix has built its strategy of disruptive innovation on four principles:
The CEO of Netflix, Reed Hastings, has always followed his big idea. Even when he was building the DVD rental business, he was guided by his thought that “people want to rent movies from home.” Shipping DVDs to customers was just a waystation on his path to online video streaming.
Hastings continued to experiment and pursue this big idea for 10 years before Netflix finally offered a streaming-only option for about half the price of a subscription to DVDs by mail.
Hastings started with a lot of small projects that helped him prepare for the big leap. He spent millions on research and frequently launched small tests to offer streaming video – only to quickly scrap the projects when he realized they were not feasible.
The first “watch online now” option appeared in 2007 and included about 1,000 titles - about 1% of Netflix’s physical library of 70,000 videos.
“Innovation involves a lot of failure,” John Ciancutti wrote on the Netflix TechBlog in 2011. Cianutti spent 12 years at Netflix, including 5 years as Head of Global Product Development. He used to say, “If we never fail, we are not trying to achieve anything beyond what we are doing today.”
For this reason, failure is perfectly acceptable at Netflix. The only real failure would be the failure to innovate.
Scale fast and make money
Netflix managed to stay ahead of the competition and maintained agility as it scaled. As the company grew, innovation continued to advance – and Netflix always focused on improving its model for both consumers and investors. One of the innovations which Netflix has been testing recently are solutions limiting password sharing. If you’re enjoying the same subscription with your mum, 2022 may change that.
Samsung’s strategy is based on incremental innovation, that is, “small but meaningful improvements to your products, services, and other ways you do business.” It focuses on improving existing products and making them better, smaller, faster, more powerful or different – the foldable mobile phone screens are the best example.
The company’s action plan for innovation in recent years has been to diversify its portfolio. Its R&D division is exploring AI, digital health, the Internet of Things, autonomous mobility, data center infrastructure, security, privacy, and more. Samsung is also strategically investing in a number of external initiatives to help shape businesses.
Just as there are no two identical companies in the world, there are no two identical innovation strategies. The above examples of innovative solutions can be seen as inspiration – and are by no means an exhaustive list.
They have one thing in common: they are clear and easy for everyone to understand. Simplicity us what makes an innovation strategy great. “Strategies should be simple and clear. They should not require a 75-page presentation,” said Professor Gary Pisano of Harvard Business School.
A great strategy can boil down to answering three questions:
- Where are you now?
- Where do you want to go?
- And: how do you want to get there?
If you answer these questions, you have a great chance to create an innovation strategy that will be your map that everyone in the company can read and follow to get to your goals.