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Top 10 Innovation Themes

(originally published by Booz & Company)

Does history repeat itself when companies seek ways to innovate? Are there patterns among the business strategies chosen by successful companies from one decade to the next?

To find out, we studied nearly 200 business strategies, most from the past 20 years, but some from a century ago. From this research we identified 10 essential “innovation themes,” which are repeated and proven over time.

We believe these themes are building blocks that companies, across industries, can use to achieve long-term success through business innovation. Innovation themes help executives to distinguish growth-oriented strategies with staying power from cost-driven operational measures such as total quality management (TQM) and Six Sigma, or from management fads, like the short-lived New Economy notion that a high valuation is a substitute for profits.

This is not to say that TQM and Six Sigma are not important competitive tools, but they cannot create sustainable value unless coupled with more innovative and forward-looking strategies. Consider the plight of the Xerox Corporation, a company that spent millions in the 1980s on TQM, and won the Malcolm Baldrige National Quality award in 1989, but never hit its strategic stride in the ’90s and is now struggling to survive.

We suggest executives use the following 10 innovation themes as a checklist to assess strategic options. The first five relate primarily to industry structure — relationships among companies and the channels of distribution they use.

1. Consolidation (rolling up competitors into a bigger, more powerful company). John D. Rockefeller merged 40 allied companies in the 1880s to create the Standard Oil Trust, a monopoly that controlled exploration, production, distribution, and marketing.

2. Bypassing (or cutting out the middlemen). Dell’s direct-to-consumer model, for example, bypasses computer retailers. Stephen King ignored booksellers and publishers alike when he self-published his novel Riding the Bullet on the Internet.

3. Value migration (shifting to a related but more profitable industry or niche). Consider Monsanto Company, which has transformed itself from a chemical concern to a life sciences company that competes against pharmaceutical leaders.

4. Teaming up (replacing vertical integration with alliances to create an end product). Auto manufacturers have allied with suppliers that provide entire “modules” for vehicles — engines, interiors, doors, electronics — which the manufacturers assemble and market. Magna International Inc. is one such supplier.

5. Digital delivery (providing online shopping, purchasing, and access to goods and services). Software companies like Adobe and Microsoft let customers buy and immediately download programs to their PCs. Online music distributors provide digital delivery and eliminate retailers and manufacturers.

The other five themes, overall, focus on the customer experience.

6. Deep connections (encouraging emotional attachments to products that go beyond the functional value to the consumer). The home-furnishing retailer Restoration Hardware exploited a niche in the home-improvement market, where instead of prosaic housewares, it sells nostalgia for an imagined, simpler lifestyle.

7. ASAP (delivering information or end products faster). Inventor Samuel F.B. Morse revolutionized communications by using his Morse code to send the first “instant message” via telegraph on May 24, 1844, on a line connecting Washington, D.C., and Baltimore. Wells Fargo Bank, a leader in online banking, performed the first recorded online transaction via the telegraph in 1864.

8. Customization (letting customers design the end product to their specifications). Mass personalization is associated with diverse products — computers, cars, cosmetics, clothing, and more. Levi’s Original Spin program, for example, lets shoppers choose from 1.7 million variations of fit, style, and color to create their distinctly personal jeans.

9. Mass-market (extending availability of a product from the elite to the average consumer). The average consumer was liberated from daily food shopping in 1918, when Kelvinator marketed the first truly practical home refrigerator. Frigidaire’s model followed in 1919, and General Electric offered the first hermetically sealed refrigerator compressor in 1926.

10. Fix-it-for-me (solving a pressing customer problem with a comprehensive solution or breakthrough product). Michael Bloomberg designed a total hardware/software system with Wall Street traders in mind. Thus, two monitors let traders see all the information they need at a glance, with no switching between PC windows. Built-in analytic capabilities allowed for rapid financial calculations, eliminating the hassles of data downloads and paper-and-calculator analyses.

How can you decide whether your company or industry is ripe for innovation? Which themes may be appropriate for your company? To answer these questions, start by looking for innovative approaches inside your industry, or within a company — your own or another. If you are considering a strategy theme that is not being utilized, ask yourself why it is not. Is it because of uninterested customers? Overly cautious executives? Lack of infrastructure?

Look at other industries, too. Often, an innovation will jump from one industry to another as its value becomes obvious. Mass personalization strategies are moving from clothing and computers to automobiles and even to foods such as cereal.

If an innovation theme is present in your industry, consider driving it to the next level. Can you shake up industry structures or make high-value consumer products broadly available, customized, or emotionally appealing? Push the scenarios; however implausible they may be at first, see if they really make economic sense.

And never assume you have reached the end of the line with a theme. Based on historical evidence, we believe it is much more likely that your imagination will run dry before the theme does.

David Y. Choi,
David Y. Choi is a fellow with the Global Leadership Institute at Harvard Business School. Mr. Choi has published articles on marketing and strategic management, and was a consultant with Boston Consulting Group.

Liisa Välikangas,
Liisa Välikangas is director of research at the Strategos Institute, an organization founded by the business thought-leader Gary Hamel to develop new management practices in the area of innovation.
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