The ROI of Constant Innovation

Think of the world of business as a treadmill that’s operating at high speed. If you stand still, you will be flung off!

Innovation is how you stay on the treadmill. It’s the way to keep moving to survive and thrive in today’s competitive environment.

Turbulent business times require companies to innovate constantly to maintain their edge in the market. The direction of many business organizations’ thinking is leaning towards the concept of transient competitive advantage. This concept says that a business needs to continuously innovate to stay afloat in the market.

However, there is a catch here…

Innovation always entails certain risks. Well, that’s to be expected, isn’t it? After all, innovation involves betting on something that’s hitherto untried and untested…

But, what do you need to consider before plunging into innovation?

Can you afford to invest in innovation? Where will the money come from? What can constant innovation cost your company? Who will manage it?

Often, investment in innovation comes out of funds that would otherwise go into the company reserves strengthening the organization or be distributed as profits/dividends thereby making investors happy. Investing in innovation has an opportunity cost that needs to be quantified to see what ROI justifies the investment. However, not all aspects of this decision can be quantified.

You should invest in exploring innovative ideas only if you can provide the necessary resources and hold out until your idea turns profitable. There is no point in kicking off ambitious innovative projects only to slacken the pace midway due to financial constraints. All business ventures, especially innovative concepts have a gestation period. It takes considerable time to:

• Educate your audience about the features
• Convince them that the product works and delivers what it promises
• Penetrate the market and get sales going

There are also other important factors that affect the success of an innovative business venture:

• Market conditions – how conducive are current market conditions to make space for an innovative product like yours?
• Latent need in the market for such a product – do you sense a strong need in the market for your innovation?
• Can you consistently own a lion’s share of the market for your innovation?
• Premium: It’s likely that you are going to find others copying your innovation and maybe even improving on it in the months to come. Can you charge a premium for the innovation while you are still the first in the market so that you can quickly recoup some of the investment made in the innovation?
• Competitors’ position – Often innovation is a tool to create a buzz and a favorable image. It’s worth thinking about how your innovation will affect competition and use market intelligence to understand if your competitors are working on something similar that can counter or nullify your innovation.
• Your marketing strategy – how aggressive and sensitive is your marketing strategy? Is it inclusive of all the above factors?

Funding Innovation

Investing in an innovative idea is often worth its while. Creating a separate fund out of your profits, for exploring and supporting innovative ideas is a great way to ensure continued investment in innovation. If you do this, you wouldn’t need to dip into your profits every time someone in your organization comes up with an idea worth checking out. You can just use your ‘innovation fund’.

The Innovation Manager

An important factor that you need to consider is the employee in charge of innovation. The best person to manage innovation is someone interested in trying out new ideas and one who is not demotivated by the losses to the division that are inevitable till profits start rolling in.

Ideally, whoever is handling innovation should be remunerated so that he doesn’t pay the price for the long gestation yet is incentivized if the innovation is successful. Willingness to invest resources and absorb losses is imperative for success in innovation.

Let’s take a look at two examples of innovative products and their later modifications:

• The Apple iPhone was a revolutionary innovation. However, the later versions of the iPhone are not innovations in themselves. They are extensions of the original innovation, the iPhone.
• Another example is the luggage case, which was the innovation idea. The trolleys that are so common today are a modification of this innovative idea.

What is your opinion about innovation? Are there any other steps a business can take to ensure continued exploration of innovative ideas?

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