In my brother Geoffrey Moore’s new book, Escape Velocity – Free Your Company’s Future From The Pull Of The Past, he lays out a very compelling framework on how companies can significantly increase the ROI on their innovation investments. This framework presents three different ways a company can generate meaningful returns as illustrated in the diagram below.
The first way is to create an “unmatchable offer” that your key reference competitors can’t or won’t replicate and that your customers will pay you a premium for because there is nothing comparable on the market. The secret here is to make sure you go far enough so that the market clearly sees the differentiation. Many companies stop to soon believing that “best in class” is the goal. What they ultimately find out is that best in class is a “sucker’s bet” because the market won’t pay up for it.
The second way is to neutralize offers from your reference competitors that have features your product doesn’t have. The secret here is to get a comparable offer from your company to market as quickly as possible. The two mistakes companies make here is first they move too slowly and second they spend too much money trying to outdo the competitive offer. In this case, the goal is to get to good enough fast enough so you don’t lose any competitive ground.
The third way is to task a project team to go identify and reclaim resources that have been dedicated to efforts that are not yielding good returns. The challenge here is to make sure that you don’t let any “sacred cows” off the hook in this cost optimization exercise. In this case, best in class is a good target to shoot for.
The other major mistake companies often make is to tie differentiation and neutralization initiatives together in one work stream which guarantees that they won’t maximize the potential value and returns from either one. Each one should have its own work stream as illustrated by the diagram below.
Having said all this, I want to raise another opportunity and that is the potential to conduct both differentiation and neutralization initiatives at the same time while keeping them in separate dedicated work streams. Apple’s recent actions once again provide a good template for how to do this well.
It has been well documented that Apple successfully launched 3 next generation products in the last decade. It should be noted that the iPhone was not released to the market until the iPod had successfully generated material new revenue and profits for the company and similarly the iPad was not released until the iPhone was producing material new revenue and profits.
What has been overlooked by many observers of this decade long unprecedented set of accomplishments is that while the new products were coming to market Apple was also developing lower cost models of each to neutralize competitive offers at much lower price points. The iPod Shuffle and iPod Nano along with the iPad Mini are examples along with the recently rumored launch of a lower cost iPhone.
While there is always a danger of these new lower cost offers eroding the industry high margin rates Apple enjoys, the greater risk is to do nothing and see their market position evaporate like what has happened to Palm, Nokia and RIM.
As I said earlier, it is important to remember that you need good organizational and operational processes in order to drive parallel differentiation and neutralization work streams at the same time. Each one will have its own separate cadence, timetable and set of deliverables. Each will also require different leadership skills to get the desired outcomes. As such, HR should play a strong role in helping to identify the strongest candidates to lead each one.
In the end, in order to maximize the ROI on your innovation investments, I think the message is clear. First, you need to separate your innovation initiatives into three separate work streams with three clearly defined deliverables. Second, even after you’ve successfully launched a truly differentiated offer, you need to immediately begin thinking about how you can protect that offer from lower cost alternatives.