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Why 2014 will bring Innovation to the forefront?

The highly accommodative Fed monetary policy since the beginning of the great recession is coming to an end soon. This … >>>

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Why 2014 will bring Innovation to the forefront?

The highly accommodative Fed monetary policy since the beginning of the great recession is coming to an end soon. This policy has allowed firms to borrow cheap money and buy back shares over the last few years. It has been a critical driver of EPS growth and shareholder value. But with an increasing cost of money, this avenue will become less lucrative over time. Business will need another way to create shareholder value. Innovation will therefore come back to the forefront. 

Innovation is the old fashioned way of creating shareholder wealth and firms do hundreds of things as a part of their innovation effort. Firms create value for customers and thus demand premium for innovations. They use innovation to create value in many others ways including improving processes, realigning business models, transforming value chain, and improving logistics. All these decisions result in an innovation strategy.

A robust innovation strategy is one that creates high impact on business and shareholder value. You can ensure that your innovation strategy creates high impact by focusing on the two most important decisions in your innovation strategy. These decision are – where to innovate and how to profit from innovation. When these decisions are done right, they leads to superior innovation strategy. 

The first critical decision in your innovation strategy is ‘where to innovate?’. Kodak made mistakes in its where to innovate strategy. While it has all the needed technologies to create estate of the art digital cameras it directed its where to innovation efforts in photo CDs and photo CD players. On the other hand firms such as Canon and Nikon focused on creating superior digital cameras and renewing the SLR category with their Digital SLR cameras.  As a result, while Kodak innovated furiously towards bankruptcy, Canon and Nikon innovated their way to market leadership. 

The second critical decision in your innovation strategy is ‘how to profit from innovation?’. What if you are absolutely right in your where to innovate strategy and customers love your products but you make no money from the innovation? Clearly, it means that your innovation strategy isn’t great. TiVo succeeded in where to innovate decision and created a new category of digital video recorders. It created  a cult like following for its product. In fact people started to TiVo shows like they Google information today. Unfortunately, TiVo has never made money and this shows how important a deliberate strategy for making money with innovations is. 

How do you make great where to innovate and how to profit from innovation make superior where to innovate decisions. You make superior where to innovate decisions when you align your innovations with the deepest business needs. For example, digital camera customers didn’t want photo CD players but better cameras. Canon and Nikon linked their innovation efforts to this need and thus succeeded. Similarly, you make great how to profit from innovations where you erect barriers for imitators and / or control commercialization assets for your invention. TiVo neither protected its innovations not controlled the commercialization assets. As a result it made no money.

In short, 2014 will be a challenging year because the monetary policy is changing resulting in a changed environment. But your innovation strategy will be the arrow in your quiver that can help you respond appropriately.

Do you have a robust innovation strategy?