I’ve had discussions around whether efficiency is at odds with innovation. The discussions are typically along of the lines of cost-cutting measures and continuous improvement are employed to drive bottom line revenue rather than investment in blue-sky initiatives.
My opinion is the two are not as far apart as they may seem. I like the framework Bansi Nagji and Geoff Tuff put together in the Harvard Business Review article “Managing Your Innovation Portfolio.”
In the article, Nagji and Tuff explain the focus of innovative ideas and where they reside on a continuum from familiar to the unknown. Innovating around your primary business is considered core innovation, stepping into new markets for your company but existing markets to other competitors are adjacent innovations and those radical, blue-sky ideas are part of transformational innovation.
I put efficiency, cost savings and “no brainers” in the Core category. They definitely have an impact on the business in a positive way and they should be pursued.
Interestingly, CTOs that I talk to were either historically, or still are, constrained to this category. Budgets and goals were allocated a year in advance. The goals of the business for servicing existing customers and markets, as well as improving on legacy systems were pretty well defined. Innovation was welcome but only in this narrowly defined area of optimizing the business.
Where innovative companies allocate 70% of their budget to core innovations, companies focused on efficiency are placing 100% of their bets here. It’s constrained innovation and to make that the only innovation strategy can be costly in the long run.
The blue-sky impression of innovation, however, may be putting too much emphasis on the “eureka” moment and mad scientist imagery. Disruptive is now a regular word in business. Often enabled by technologies, the unthinkable is proving far more common than is comfortable.
Which speaks to the necessity for businesses to look at adjacent markets as well as transformational opportunities. The 10 – 20% premiums innovative companies enjoy on their share price comes from these more aspirational approaches to business growth.
Innovative companies, on average, are spending 20% in adjacent innovations and 10% on transformational efforts. Those big shots need to be taken as they represent 90% of the incremental returns seen from innovation efforts.
As a member of a company that spends a lot of time in the transformational realm, I probably lean toward the risky side. That doesn’t mean I don’t hold a balanced portfolio of my own investments. The same is true for a company. A balanced approach to innovation will generate the highest returns at the lowest risk.
Efficiency and innovation both have a role in our corporate growth strategies. Finding the balance that is right for our company and our industry is where the work is.