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Meaningful Differentiation – The common goal for both Strategy and Innovation

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A good Strategy is critical to creating a successful business. Likewise, Innovation plays a key role in the long term success of most profitable businesses.

However, neither Strategy or Innovation are an end in themselves. Both are methods for achieving something far more important: Meaningful Differentiation.

Meaningful Differentiation occurs when customers see a worthwhile difference between your products/services/brands and those of your competitors. This differentiation can occur through a strategy that creates a new value proposition for your customers. It can also occur  if you create innovative products that deliver more value to your targeted customers than your competitor’s products. Often the best companies use a combination of Strategy and Innovation to Meaningfully Differentiate themselves.

We see many examples where Meaningful Differentiation results in long-term sustainable profitable results. Southwest Airlines is a great example. Southwest follows a different strategy than its competitors by flying one type of plane, avoiding hub and spoke operations, minimizing add-on fees, and focusing on efficiency. They also encourage innovative ideas from their employees to perpetuate their strategic advantages in cost and customer service. The result is an airline that over the long term has been more profitable than all of their US competitors combined. The reason for this outstanding performance is that they have used Strategy and Innovation to achieve Meaningful Differentiation in the eyes of their customers.

Apple is another great example of Meaningful Differentiation. Their strategy of creating a closed system of hardware and software (OS) is different than their competition. Their product innovations with design, new product categories, and more useable user interfaces; have all further differentiated Apple from its competitors. The combined result of their Strategy and Innovation is Meaningful Differentiation, and it has driven outstanding results.

In each of these examples, the past performance of Apple and Southwest are no guarantee that they will continue to be Meaningfully Differentiated in the future. However, clearly both companies have demonstrated the ability to achieve this goal for a sustained period of time, despite being in very competitive markets with numerous commoditized competitors surrounding them.

Often we hear debates on whether a company truly has a good Strategy or whether their products are really Innovative. The real litmus test for both, is whether it can be said that the company has achieved Meaningful Differentiation. If the goal is achieved, then long term profitability will follow. Debating whether their Innovations are “breakthrough enough” or if their strategy has a unique enough value proposition is missing the point. If the end result is a clear Meaningful Differentiation in the eyes of the customer, then the important goal has ben achieved. If on the other hand, the company and its products are commoditized (like the major US airlines or the majority of computer manufacturers) then it is irrelevant how “breakthrough” their Innovations seemed or how unique their Strategy appeared.

Focusing on Strategy and Innovation is important for business leaders. However, we must all remember that neither of these is an end in itself. As we refine strategies and strive for innovative products, we must always measure the results on a scale that ranges from Commoditization up to Meaningful Differentiation. Those who differentiate meaningfully will survive. Those who do not, will find themselves in a dangerous place.

Meaningful Differentiation is the goal. Strategy and Innovation create a path to reach the goal.

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#CCGInnovationTop5 – #Innovation and Disruptive Trends in #Retailing

This post is the first in a series examining disruptive influences on the horizon for different industries and product categories. Each of these potential changes will create winners and losers in the market. A good business strategy with an integrated innovation strategy, can position a company to benefit from, and even lead, the evolution in its market.

DISRUPTIVE INNOVATION & EVOLUTION IN RETAILING

The retail environment is no stranger to seismic changes, having been through many disruptive eras in the past. Examples include the disruptive impact of retail consolidation into mega-retailers (Mom & Pop stores -> Sears -> Kmart -> WalMart) and the impact of internet retailing (Amazon or eBay). Given that innovation never stops, it is interesting to look at where the next big disruptions in retailing may come from. In many of these cases, it may already be here lurking in front of us. Notably, innovative business models play as big a role as new technology in most of these cases.

1) The brand-building store – The Apple store is of course a great example of what happens when the manufacturer of a product decides that they need to be able to connect directly with the consumer. Increasingly, the powerful product brands are going to want direct connections with their consumers. There is an inherent tension between traditional retailers (who want to stock multiple product brands and emphasize both the brand of the retailer and the breadth of their product offering) and product brands (who want their brand presented to the consumer, unfiltered by the retailer). Product brands may either demand a store within a store (the Apple section at Best Buy) or create their own retail environments to get their message directly to the consumer. The stores owned by the product brands create an opportunity to offer higher levels of service because they do not have to split the margins with a third-party retailer. However, as product brands are then able to differentiate on service in their retail environments, it is reasonable to expect traditional retailers to accelerate their pace of buying or creating their own brands so that they may differentiate themselves with unique products. Retailers and product brands are going to have to evolve their relationships to deal with an environment where they may simultaneously be partners and competitors.

2) The walled ecosystem – The iTunes store is a great example of a marketplace that was created with a strict set of rules that define what may be sold and how. What is interesting is that the model relies on the retailer defining and policing the rules, but it puts a large responsibility on the company developing the product. Imagine a bricks and mortar version of this system, where a physical store is built with rules for general product assortment, merchandizing, product safety, and packaging; but where the manufacturer is then responsible for stocking the stores and managing inventory (an extension of the Frito Lay model used in grocery stores). The store would be responsible for setting rules that result in a desirable retail environment for the consumer, and for creating a unique shopping experience (driving traffic to the store). The manufacturer would be responsible for interpreting those rules and determining the best products to sell to the consumer traffic in those stores (closing the sale). This could significantly change the nature of the relationship between manufacturer and retailer.

3) The evolution of the app and the mobile device – We are already multiple generations into the evolution of mobile devices in the retail environment. As this trend continues, location barriers will cease to exist. Already, a consumer who is inside one store frequently decides to make a purchase from another one on their mobile device. This creates a question of what it means to be “inside” a retailer. That used to give the retailer a certain degree of control of the purchasing process. Now a consumer can be physically inside a store while being virtually inside another one at the same time. Retailers must consider what value they can deliver to avoid competing solely on price. Equally important will be how that value is delivered. Value delivered prior to the sale decision (i.e. product information, access to physical product samples, expertise of sales people) may not result in that consumer sticking with the same retailer to make the purchase. Value delivered after the sale  (i.e. additional warranty, training, discounts on related products, or other ongoing services) may make a bigger difference in the purchase decision because it requires the consumer to go through with the purchase and not just use the physical retailer as a catalog for the virtual one.

4) Virtual reality – This is actually a very old trend in retailing in the broadest sense of virtual reality. Physical stores have had to compete with mail order, catalog, and internet companies as the virtual world evolved from black and white print, to color, to TV infomercial, to internet product demo. Each new technology made it easier for consumers to get the feel for a product without actually coming to the store to see it. However there currently remains a significant gap between the online experience and a truly great in-person retail experience (Lego store, Cabella’s, Bass World, Apple). However, we can’t assume that this will always be the case. If virtual reality gets to a point where consumers can experience a product in their home, the same way (or in better ways) than in retail, this is a significant risk to physical retail. Imagine a physical camera store competing with a virtual reality store that not only demos the camera, but allows you to try it out while standing at the rim of the Grand Canyon on a virtual vacation.

5) In-home rapid prototyping – This innovation is in its infancy when it comes to consumer use, but we are decades into its evolution in the R&D environment. The ability to quickly manufacture real parts for testing in product development, was a huge revolution when it happened. Early in my career, it was typical for this equipment to cost $500K or more. Now higher performance systems can be found for $25K or less. If this trend continues for 5, 10, or 20 more years, we may have affordable home-manufacturing systems that can be refilled with raw materials (or recycled materials) such that new items can be made at home with no need for factories, distribution systems, or physical retailers. The owners of the IP for the product design, and the manufacturers of the equipment will control the value chain in that environment. This revolution may not be far in the future. MakerBot already sells a system for under $2,000 that has some of this functionality:

http://store.makerbot.com/replicator-404.html

 

Chanute Consulting Group specializes in working with our clients on developing strategies for growing their businesses and increasing their innovation pipelines. Contact us to discuss how to identify potential disruptive trends that could impact your business, and use that knowledge to refine your business and innovation strategies.

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The Medici Effect – where to find the greatest potential for Innovation

In the book The Innovator’s DNA; by Dyer, Gregersen, and Christensen; one of the five skills of disruptive innovators was Associating, the ability to bring together previously unrelated pieces of information to create something new. This is closely related to the topic of another very good book: The Medici Effect, by Frans Johansson.

Johansson explores the concept of “Intersections” between different fields, industries, disciplines, and cultures and the impact these intersections have on disruptive innovation. For several centuries the House of Medici created an environment where innovation and new ideas flourished, by bringing together the best minds in different fields. Their acts had a significant impact on the birth of the Italian Renaissance.

However, this concept isn’t just a historic one, it is evident in current business trends and in innovative new products. The biggest ideas are rarely contained within one industry or product category. Examples include the combination of computer hardware, software, and music; that led to the iPod at Apple. Many of the most interesting advances in biotechnology are the result of the intersections between medicine, engineering, and the sciences.

Whether you are an individual innovator, or a company working to create an innovative environment, you will be more successful by reaching beyond your own industry and looking for intersections with other businesses, technologies, and markets.

This is not just about adjacent markets, businesses, or technologies; it also includes the combinations of radically different elements to find a productive intersection between them. The more diverse intersections you explore, the higher the chances are that radical innovation will emerge.

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Questioning & Associating Skills and Innovation

This is the last in a series of posts on the book: “The Innovator’s DNA” by Dyer, Gregersen, and Christensen. They identified five skills for disruptive innovators: Observing, Networking, Experimenting, Questioning, and Associating.

Questioning – In innovation, asking the right questions in the right way, is as critical as finding the answers. If the right questions aren’t being asked, then the answers aren’t going to be terribly useful. The book covers tactics to use to create an environment where the right questions get asked. One interesting point is that it can be very productive to engage in thought experiments where questions are used to either remove or impose constraints. What if an additional constrain were added to your situation? How would you deal with it? What if an existing constraint were removed? What would then be possible? Innovators are always asking why products/services/business models are the way they are, and why they can’t be made better.

Associating – The best innovations often happen at the crossroads between two disciplines. Great innovators are able to connect different technologies or ideas together inner ways, to offer products that have never before existed. Also, some of the best innovators are people or companies that have expertise in multiple areas. For example: engineering and medicine, software and hardware, biotechnology and computing. Great innovators and innovative companies are able to pull together seemingly unrelated concepts to deliver radical results. There is also a great book by Frans Johansson called: “The Medici Effect” which goes into more detail on the power of working at the intersections between different fields.

As an individual product developer, it is critical to build the two skills of Questioning and Associating. As an innovation leader, you must ensure that these two skills are part of the culture you build in an organization to create an environment where radical, disruptive ideas can emerge.

Anyone either leading innovation or working in an organization where innovation is important, should read “The Innovator’s DNA.” The concepts are simple and there is a lot of common sense behind them, but they are also concepts that are frequently forgotten or underdeveloped. Mastering these five skills will add value for either individuals or organizations.

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