Driving Organic Business Growth: Actionable Strategies for Smart Innovation

Driving Organic Business Growth:

Actionable Strategies for Smart Innovation

David Youland

Driving Organic Business Growth: Actionable Strategies for Smart Innovation

Copyright ©2019 David Youland

All Rights Reserved

ISBN: 978-0-578-55103-6

First Edition

Book cover design by ebooklaunch.com

Editing by Deborah Dove

Dedicated to my family

Table of Contents

Introduction

Chapter 1: Innovation is Critical for Growth

Chapter 2: The Current State of Innovation

Chapter 3: The Limits of Incremental Innovation and the Downside of Disruptive Innovation

Chapter 4: Innovation Strategy - The Starting Point of All Innovation

Chapter 5: The Need for a Balanced Innovation Portfolio

Chapter 6: Growth Through Penetration of Existing Markets

Chapter 7: Growth Through Entry into Adjacent Markets

Chapter 8: Growth Through New Products and Services

Chapter 9: Growth Through Diversification and Business Model Innovation

Chapter 10: Customer Insights to Drive Growth

Chapter 11: Summary

References

Introduction

Russia is a riddle, wrapped in a mystery, inside an enigma…

- Winston Churchill, radio broadcast October 1939

Just as Russia confounded Winston Churchill, innovation and growth have been a confounding mystery for most managers and organizations. There is no area in all of business that is as devoid of meaningful insight, lack of understanding, and as full of contradictory advice as that of innovation and growth. Innovation efforts have an abysmal success rate—as low as 4 percent in one study with none claiming greater than 25 percent success rates across enterprises large and small and across industries.¹ For comparison, Six Sigma endeavors to refine processes so that they have 3.4 defects per million opportunities or operations. What other business function could exist today, other than innovation, with such poor performance? Despite this, innovation is at the top of most business leaders’ agendas, and advice on how to achieve growth is abundant.

Growth has been a perennial management concern. The issue of growth was first highlighted in the modern era by the late Harvard professor, Dr. Ted Levitt, in his classic 1960 Harvard Business Review article Marketing Myopia.

We all long to be like Apple, Google, or Amazon. But for every Apple, there is an Eastman Kodak, for every Google a Digital Equipment or Osborne Computer, and for every Amazon a Montgomery Ward, Kmart, or Sears. The history of innovation is littered with firms that pioneered and dominated markets but failed to capitalize on their leadership positions. Both newcomers and incumbents fail to innovate, and existing, seemingly stable business models are being upended by disruptive innovation and new business models that appear to come out of nowhere.

So, the answer is deceptively simple; we need to get out there and innovate more. Or is that the answer? Instead, many managers seem content to push the same innovation ball uphill in a Sisyphean manner, only to have it roll back downhill at the end of the day. And then to repeat the process over and over, ad infinitum, without any tangible results.

Of course, many well-meaning consultants offer a variety of innovation methods touting magic elixirs that will solve all innovation woes. I was meeting with an innovation leader who proudly displayed their innovation system that had been recently developed by a well-known consulting firm. It looked like a London subway map or a tangled bowl of spaghetti. When I asked a few questions about how this worked in practice, he was unable to provide a convincing explanation. When I checked in with him a few months later, the innovation system binder was sitting on a shelf collecting dust. The methodology or system was too complicated to ever put into practice.

Like many other managers, the issue of growth and innovation was incredibly frustrating both to me personally and to the organizations that I worked for. It bothered me that there wasn’t an easy answer. I was looking for something akin to the Gordian knot to solve the growth riddle. I wanted to find something that would quickly solve this complex and seemingly impossible problem (much like untying the impossibly tangled knot encountered by Alexander the Great) by finding a simple, yet bold solution that solved it once and for all.

In an attempt to solve this mystery, over a period of thirty-five years, I read just about every business book written about innovation and growth, over 200 in total. I also reviewed a similar number of practitioner articles in the business press, the Harvard Business Review, and in academic journals. I also reviewed scores of textbooks and case studies written on marketing, growth, strategy, and innovation.

I met with consultants of all stripes and persuasions, including well-known global strategy firms, more specialized boutique firms, and sole practitioners (including one who claimed to be the inventor of the value proposition) as the organizations that I worked for spent millions of dollars trying to crack the growth code.

I have seen presentations or had discussions with the heads of innovation at many Fortune 100 firms including 3M, Procter & Gamble, Colgate-Palmolive, Cisco Systems and with innovation gurus including Clayton Christenson, Bob Cooper, John Seely Brown, and Art Fry (the inventor of Post-It notes) amongst others. I have attended seminars and met with faculty at Northwestern’s Kellogg School, The Darden School at the University of Virginia, the University of Michigan Ross School, Harvard Business School, and the University of North Carolina-Chapel Hill Keenan-Flagler business school. I have also attended scores of conferences offered through the Marketing Science Institute, the Product Development and Management Association, the Institute for the Study of Business Markets at Penn State, the American Marketing Association, and the Society for Competitive Intelligence. I have hired or worked with MBAs and PhDs from Harvard, Yale, Princeton, MIT, the Darden School, UNC-Chapel Hill, and Duke, all who have sought similar answers.

Before entering academia, I worked for thirty-five years at companies mostly in business-to-business markets ranging from a Berkshire-Hathaway subsidiary, a global Fortune 500 corporation, two technology companies listed on NASDAQ, a $20 million employee-owned firm, and privately held ventures. My positions ranged from Market Development Manager, Global Market Research Leader, Director of Marketing, National Sales Manager and Vice President Marketing in industries ranging from semi-conductor manufacturing, plastics processing, specialty chemicals, energy services, embedded software, and Internet-based career services. In those positions, teams and I launched scores of products, some of which were well thought out that met or exceeded expectations, others that merely imitated competitive offerings, and more than I care to admit that were outright failures.

But first a caveat: this book is a working draft, and more work needs to be done in the future. However, the more I studied innovation from a variety of angles, the more convinced I became that there are common patterns that will improve innovation success, if not to Six Sigma levels.

Successful innovators try to understand the nuances of innovation in their industry. In much the same way, I analyzed patterns in the innovation literature and amongst successful innovations and innovators in an attempt to answer the innovation and growth question.

This book is divided into several chapters. Much like the nature of novel business models, and like much of innovation in general, some of the content you will read about (and many of these ideas) have been developed and tested by others. I have tried, to the best of my ability, to adapt, modify, and simplify those that provide the most value.

In chapter 1, we will review the current state of innovation and make the case that innovation is critical to driving future growth. Growth and innovation is the lifeblood of any organization and the goal of every business, regardless of size, age, or ambition. Most managers claim to understand the importance of innovation but find it challenging to get their arms around the topic. We’ll also look at the current success and failure rates of innovation.

In chapter 2, we will explore the different approaches to innovation today and uncover some of the issues with popular business books that claim to offer the magic bullet for growth. We’ll also explore how our own cognitive biases impede decision-making.

Chapter 3 delves into the nature of disruptive innovation and points out the limitations of incremental innovation. By continuously innovating with existing technologies/products/ services and overshooting what the market needs, innovation can become irrelevant to customers and, as we will learn, this also sows the seeds of demise for many organizations.

Chapter 4 makes a case for having a purposeful and clear innovation strategy to more effectively focus both the generation of ideas as well as their validation and screening. Running an innovation program without a clear plan or intent is like running a warship without a military strategy. There’s no rudder, there’s no direction, you drift at sea, and the results are unsatisfactory.

Chapter 5 introduces the critical concept of a balanced innovation portfolio and how the Ansoff Product/Market Growth Matrix can provide managers with a simple approach to generating options for diversification. Asymmetry in perceived risk explains common risk-averse attitudes toward innovation and the resulting plethora of incremental, low-risk projects. Studies have shown that businesses that allocate a higher proportion of their portfolio to breakthrough projects realize disproportionate gains from those projects.

Chapters 6 through 9 highlight each of the growth quadrants in the product/market matrix in greater detail and explain their importance and role in a balanced portfolio. For each, we will discuss the benefits, trade-offs, and best practices in how to apply them.

Chapter 10 discusses the critical issue of customer insights and the role that market research can play in successful innovation. We will highlight several methods that can be used to obtain customer insights in more detail as well.

Finally, chapter 11 ties all of the discussion together, summarizes where we have been, and presents several case studies of successful innovators who have successfully transformed their core businesses and business models, thus defying the odds.

Let’s get started by discussing why innovation is essential and what the current innovation landscape looks like.

Chapter 1

Innovation is Critical for Growth

"Every organization – not just business – needs one core competence: innovation."

-Peter Drucker

Growth and innovation is the lifeblood of any organization and the goal of every business, regardless of ambition. Growth provides for the welfare of the corporation and its shareholders and drives product or service innovation. Moreover, growth is no longer a choice, if it ever has been; today, it is imperative. For most companies, no area is as devoid of insight and understanding as growth and innovation. Growth is what every CEO desires but finds elusive, much like intrepid explorers searching for El Dorado, the mythical lost city of gold. Many managers find that growth is like trying to catch laser beams; it is easy to imagine, but difficult to grasp, and sometimes you get burned by the intensity. The drive for growth has been fundamental to business viability for centuries. If businesses have a primal urge, it is the need for profitable growth. Today’s business environment is fundamentally different. We are experiencing radical change, the speed and magnitude of which is, in turn, creating the need for increased innovation. In such a time, businesses need to heed the words of the philosopher Goethe, He who moves not forward, goes backward.

In a 2012 McKinsey global survey, 86 percent of CFOs and 72 percent of other c-level executives cited growth as their biggest challenge. In the same study, only 27 percent of c-level and 13 percent of CFOs believed that their companies were very or extremely effective at innovation.¹ A similar survey conducted by Cheskin and Fitch found that two-thirds of executives consider innovation to be critical or very critical to their companies’ success. This study confirmed that business leaders were similarly disappointed with their overall new product results, with 79 percent revealing their businesses new products effort didn’t meet their annual profit objectives.² Without growth, companies can’t deliver the increases in revenues and returns that shareholders want. A study from consulting firm Arthur D. Little showed that enhancing innovation capabilities is viewed by CEOs as the number one lever to corporate profitability and growth.³ Investors take competence, operational excellence, and effective delivery for granted, and discount them; what they want to see is performance above GDP levels. Market leaders must repeatedly innovate, engage customer networks, sense the proper flow of new products, and share responsibility for growth throughout the firm. Companies that have emerged from a period of cost cutting and operational excellence now focus on sustained organic growth. But where will this growth come from? Will the lack of innovation in the past be a prologue to the future?

In a study of the origin of growth and the evolution of sixty-six markets over 150 years, the primary reason for firm failure is an inability to innovate unrelentingly.⁴ As a result, there are few permanently dominant firms or permanent market leaders. Decline happens, but that doesn’t mean that it is preordained. While innovation fails most of the time today, it doesn’t need to. To further complicate matters, while the term innovation is typically reserved for an initiative that can produce a viable new business concept, it has fallen into everyday use as an organizational buzzword used in many cases to satiate investors. A word that can mean anything has lost its impact. To give meaning to a concept as important as innovation, one has to draw lines, marking off what it denotes and what it does not.

The discipline of innovation is emerging today because operational excellence is no longer enough for a healthy organization. Every good business has operating excellence, and we have pushed Six Sigma to the farthest reaches of the enterprise. Senior managers and investors realize that no corporation ever downsized itself to greatness, despite their best efforts to try to do so in recent years.

Companies may be legal entities, but they are disturbingly mortal. Many companies that do produce growth eventually find it slipping through their fingers. The natural lifespan of a corporation could theoretically be as long as two or three centuries, but the reality is that companies usually die young. The right of any corporation to exist is not perpetual and must be continuously earned. Companies such as the Japanese Sumitomo Group (founded in 1615) are the rare exceptions. A Dutch survey indicated that 12.5 years is the average life expectancy of all Japanese and European firms.⁵ Only thirty-nine of the original Forbes 100 from 1917 survived to 1987. Of those, only eighteen were in the top 100. Many that survived did not perform, including GE, Eastman Kodak, DuPont, Sears, Ford, GM, Westinghouse, Citibank, and USX.⁶

A comparison of the Fortune 500 of even twenty-five years ago with the current list will confirm how many of today’s leaders often become tomorrow’s also-rans – if not losers. In 1928, the average lifetime of a company on the S&P 500 was seventy-five years. In 1958, the average length of time a company remained on the Fortune 500 was fifty-seven years. By 1983, it had dropped by thirty years, in 2008 it was just eighteen years, and it was down to twelve years in 2019.⁷ And for the lucky firms that beat the odds, survival alone does not create shareholder value; only two of twenty-seven companies in the Forbes 100 in 1934 that have survived have outperformed the market.⁸

Within two years of publishing the best seller In Search of Excellence, a number of the companies profiled had slipped into oblivion. Two-thirds of the identified model firms in the book Built to Last had fallen from their industry leadership positions within five years of its publication. Deficiencies in some of the visionary companies spotlighted in Built to Last have come to light; much of their success was due to industry sector performance rather than the companies themselves. In Fred Wiersma’s book, The New Market Leaders, he similarly identified a list of leading companies that have since fallen into corporate oblivion, including AOL, GE, and Yahoo.

Companies are set up to serve a short-term need in a dynamic world. Management guru Peter Drucker stated that Every organization…has a theory of business. Some theories of the business are so powerful that they last for a long time. But…they don’t last forever. Eventually, every theory of business becomes obsolete and then invalid.⁹An entire industry exists today to trade in the assets of dying companies. Vulture investors, like carrion in the wild, perform a valuable service in making efficient use of assets that might otherwise languish. In any given year, the number of business failures totals roughly 40 percent of the company formations that take place during the same period.¹⁰

Corporate failure is an alarming problem. A focus on profits lies behind the failure rate. Accumulated setbacks and false starts can erode financial strength and individual spirit. If they don’t fail, many enterprises atrophy into insignificance and irrelevance. Only about a tenth of 1 percent (0.10%) of US firms ever achieve revenues of more than $250 million, and a tiny 0.036 percent will grow