The Difference Between Innovation and Strategy


Crossing the Chasm
Learning to differentiate concepts starts with defining the terms we use to describe them. Take for example, innovation and strategy:

Innovation is anything that breaks a constraint.

Strategy is about the constraints you embrace.

As we often do, we try to solve too many different types of problems with one solution (or worse, a meeting), when a structure based on sequential conversations would net us a clearer process and support better decisions. 

A few thoughts on breaking and embracing constraints.

Breaking constraints

When we look to innovate, we are working with new ideas. Some of these ideas might even be big. Big ideas could have big impact, but we need to create the conditions for them to hatch first. And we do that by starting small — with a proof of concept.

In his bestseller Crossing the Chasm Geoffrey Moore says, “Trying to cross the chasm without taking a niche market approach is like trying to light a fire without kindling.” By chasm, Moore means:

the rapid acceleration in market development followed by a dramatic lull, occurring whenever a discontinuous innovation is introduced — [one that] drives all emerging high-tech enterprises to a point of crisis where they must leave the relative safety of their established early market and go out in search of a new home in the mainstream.

These forces are inexorable — they will drive the company. The key question is whether management can become aware of the changes in time to leverage the opportunities such awareness confers.

The transition from new idea to pilot to going well to early market and then scaling the business impacts the organization itself — its structure, its business model, and the skills of the people in it. Tim Kastelle says “making a new idea work requires three distinct sets of skills”:

1./ Invention phase: creativity and invention to get the new idea to work

2./ Market creation phase: customer development and problem-solving skills to create a market with the early adopters

3./ Scaling business phase: transition to a business model that will scale with mainstream customers

The problem is that many organizations don't staff to the three different sets of skills. Geoffrey Moore described this problem in Crossing the Chasm:

The chasm is a drastic lull in market development that occurs after the visionary market is saturated and pragmatists will not buy into a discontinuous technology unless they can reference other pragmatists, thus the catch-22. Pragmatists with their stick-to-the-herd strategy need to see other pragmatists in their own industry buy before they buy. As a result, the market is stalled.

On the inside, “the challenge is to get your company aligned on the right approach by reaching consensus about current market state.” On the outside, the only reliable way to cross the chasm is “to target on the other side a niche market made up of pragmatists united by a common problem for which there is no known solution.”

In the updated third edition of the book, Moore addresses online adoption. The Four Gears for Digital Consumer Adoption he lists are traffic acquisition, user engagement, monetization, and enlisting “the faithful.” He says:

Tipping points are as key to consumer adoption as they are to B2B. Prior to reaching one, all efforts to scale require pumping in additional fuel — if you cut off the fuel supply, the system will revert to its original state.

But after you pass the tipping point, the system restabilizes around a new status quo, and actually pulls you forward to get you to your new 'right' position. You can still screw this up (just ask the investors at Myspace and Groupon), but it takes some real effort to do so.

In a later book, Dealing with Darwin, Moore expands his observations on this point when he talks about differentiation. The book is about the foundational models, the frameworks of the economics of innovation, the category dynamics that surround innovation laying the groundwork for understanding what works based on different points of maturity in a category, and business architecture and the contrast between high-volume and high-complexity business models.

“Innovation plays out very differently in these two environments,” he says. The main question he looks to answer in the Darwin book is — How do great companies innovate at every phase of their evolution? According to Moore, it comes down to two forces: 1./ managing innovation, and 2./ managing inertia.

Moore identifies four clusters of innovation zones — Product Leadership, Customer Intimacy, Operational Excellence, and Category Renewal. The challenge for decision-makers in any organization (regardless of its size or nature) is to select the innovation zone in which to establish and sustain “break away” separation from its competitive set.

There are problems with each type of innovation:

  • neutralization, when we make a product good enough to achieve parity with the competitive set — time to market to create competition is critical; many organizations build past the sale
  • productivity, when we improve certain areas of the business to lower cost and compete — repurposing the resources is a critical aspect of this; many companies resort to layoffs and write-offs, an inefficient, expensive, and highly disruptive method
  • differentiation, when an improvement helps achieve competitive separation in the marketplace — it's a calculated investment of resources, the key words here are focus and prioritization; many businesses however stop short, or don't go far enough in any one direction, leaders fail to prioritize

Any type of innovation that falls short belongs to the waste category. This is also where we find the innovation that is not tied to economic value. In many organizations, this category is by far the largest.

The most common reasons why companies stop short of the full implementation are a risk reduction mindset and lack of corporate alignment.

Although many of the examples in Dealing with Darwin are dated (it came out in 2006), the principles are still applicable. Parts two and three should be required reading for anyone in general management and product strategy/marketing.

We resist new ideas, which is why many successful innovations build on something that already exists.

An example of good innovation is On directorship. The idea builds on an existing process to redefine the balance between corporate governance regulation and education, puts a name to the value creation aspects of board work and complements the other functions required to run a company. It spells out the mechanics of adding the framework for “doing the right things” to “doing things right.” 

Embracing constraints

The Harvard Business Review has a collection of ten articles on strategy development and execution, from Micheal Porter's What is Strategy? to the Five Competitive Forces that Shape Strategy, to Clayton Christensen and colleagues on Reinventing your Business ModelTurning Great Strategy into Great Performance, and Who Has the D? How Clear Decision Roles Enhance Organizational Performance.

Anyone with “strategy” on their job title should read these ten articles (and think about them beyond the surface) to start. Some of the articles deserve a deeper investigation and most of the authors have also published books on the topic.

In the introduction to what is strategy? We learn that there are three key principles that underlie strategic positioning. Strategy:

1./ Is the creation of a unique and valuable position, involving a different set of activities. Strategic position emerges from three distinct sources:

  • serving few needs of many customers (e.g., just oil change)
  • serving broad needs of few customers (e.g., only high net worth)
  • serving broad needs of many customers in a narrow market (e.g., a movie theater operating only in cities with fewer than 20,000 people)

2./ Requires you to make trade-offs in competing — to choose what not to do. Some competitive activities are incompatible; thus, gains in one area can be achieved only at the expense of another area.

3./ Involves creating fit among a company's activities. Fit has to do with the way a company's activities interact and reinforce one another. Fit drives both competitive advantage and sustainability: when activities mutually reinforce each other, competitors can't easily imitate them.

What is not strategy? Operational effectiveness is not strategy, it's necessary, but it's not sufficient, because strategy is based on unique activities. When he talks about emerging industries and technologies, Porter shows us the transition from innovation to strategy and differentiation. He says:

Developing a strategy in a newly emerging industry or in a business undergoing revolutionary technological changes is a daunting proposition. In such cases, managers face a high level of uncertainty about the needs of customers, the products and services that will prove to be the most desired, and the best configuration of activities and technologies to deliver them.

Because of all this uncertainty, imitation and hedging are rampant: unable to risk being wrong or left behind, companies match all features, offer all new services, and explore all technology.

This describes the neutralization category of innovation.

During such periods in an industry's development, its basic productivity frontier is being established or reestablished. Explosive growth can make such times profitable for many companies, but profits will be temporary because imitation and strategic convergence will ultimately destroy industry profitability.

The companies that are enduringly successful will be those that begin as early as possible to define and embody in their activities a unique competitive position. A period of imitation may be inevitable in emerging industries, but that period reflects the level of uncertainty rather than a desired state of affairs.

In tech industries, this imitation phase often continues much longer than it should.

This is where companies begin to wade into waste category of innovation — packing more unused features into their products, slashing prices, and yes, holding onto freemium models that may not help them growth. 

Rarely are trade-offs even considered. The drive for growth to satisfy market pressures leads companies into every product area. Although a few companies with fundamental advantages prosper, the majority are doomed to a rat race no one can win.

Ironically, the popular business press, focused on hot, emerging industries, is prone to presenting these special cases as proof we have entered a new era of competition in which none of the old rules are valid. In fact the opposite is true.

In Good Strategy Bad Strategy: The Difference and Why It Matters Richard Rumelt says “the most basic idea of strategy” is “strength applied to the most promising opportunity.” He says today we call these strengths advantages:

There are advantages due to being a first mover: scale, scope, network effects, reputation, patents, brands, and hundreds more

But he says this misses two very important sources of natural strength:

1. Having a coherent strategy — one that coordinates policies and actions.

A good strategy doesn't just draw on existing strength; it creates strength through the coherence of its design. Most organizations of any size don't do this. Rather, they pursue multiple objectives that are unconnected with one another or, worse, that conflict with one another.

2. The creation of new strengths through subtle shifts in viewpoint.

An insightful reframing of a competitive situation can create whole new patterns of advantage and weakness. The most powerful strategies arise from such game-changing insights.

“Good strategy is unexpected,” says Rumelt, and helps “discover power.” Many organizations and leaders have mistaken views about what strategy is and how it works. That is what takes them off course.

 

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