Complimentary aspects of Incremental & Radical Innovation Strategies Authored by: Tushar Bagla, PGP II, XIMB, [email protected]

Introduction In cricket or baseball, swinging the bat every time for a sixer or the grand slam respectively is glamorous. But does it serves the winning strategies of the team. Going after breakthrough innovations may be glamorous, but it should not be the only strategy of any firm.

Incremental innovations are driven by market demand. Generally the organisations understand well how to manage the incremental innovation efforts that consume most R&D budgets and keep their mid-to-large size firms moving forward, although with relatively slow pace and occasional hiccups. But they do not understand well how to manage breakthrough or radical innovation efforts, and this inability creates large failures.

Established companies spend 80-90 percent of their technology budgets on upgrades, modifications, extensions, and add-ons to present product lines. The strategy behind this is the conventional drive for continuity and reasonable growth of the existing businesses. The result is that most incremental innovation attempts succeed, but very slow increments in terms of market size and profitability. Often overdependence upon this strategy leads to failure of the product line and perhaps the firm.

In contrast, established firms devote a small fraction of their resources to trying to pull off big revolutions, they might be big in degree of market or technical change. Here, managerial understanding is weak and failure dominates. There is requirement of adequate number of full innovation teams of idea generators, entrepreneurs and champions, technical and market gatekeepers, project managers, and senior sponsors. The organization structures should be ideally large scale complex project groups, led by heavyweight project managers.

Incremental vs Radical Innovations Generally the breakthrough innovations, whether it might be the next blockbuster product or a next-generation business model, create a buzz in the boardroom while lesser forms of innovation go unnoticed. There is practical value in understanding the patterns in and the

differences between evolutionary incremental innovation projects and revolutionary radical innovation projects. This understanding can help firms to apply right management practices to different types of innovation projects and make the course of radical innovation shorter, less sporadic, less expensive, and less uncertain. Sun Microsystems, since its start in 1982, has developed a number of blockbusters-high-end computer workstations; the Java operating system, which has driven much internet software development; and the powerful internet file servers that are home to many corporate Web sites. During the dot-com bubble, Sun acted as if the Internet revolved around it. But since then, the company has been unable to keep the flow of breakthrough products coming. Even worse, in viewing itself as the industry's biggest innovator, the company eschewed many incremental innovations that could have generated significant growth, including application software and consulting, which rivals have used to lock in customers. Sales since 2001 have slid nearly 40%, and $5.1 billion in losses have piled up. The company has witnessed 94% of its stock market value vanish since the fall of 2000. This continued losses and customer pressure forced Sun to call a truce with Microsoft and make its products work in the Wintel world. Much of the innovation taking place today is incremental, so is its impact on growth with little ventures fetching little gains. While often firms, after years of incremental innovation, suddenly throw millions or even billions of dollars at ideas that are poorly conceived, poorly timed, and poorly executed, only to have near-catastrophic consequences. Radical innovation projects are associated with high levels of uncertainty, especially at early stages. Down the road, uncertainties influence the course of radical project development that requires flexibility and creativity in resource and competency acquisition, while incremental projects follow more formal and predictable route. Unique strategy and structure will be required for radical innovation, especially process adoption, while more traditional strategy and structure arrangements tend to support incremental process adoption. Specifically, radical process and packaging adoption are significantly promoted by an aggressive technology policy and the concentration of technical specialists. While, incremental process adoption and new product introduction tends to be promoted in large, complex, decentralized organizations that have market dominated growth strategies. In particular, centralization of decision making appears to be necessary for radical process adoption which

suggests that a greater support of top managers in the innovation process is necessary to initiate and sustain radical departures from the past for that organization.

Are incremental innovation strategies required in parallel with those of radical innovations? In cricket the best strategy is to have one batsman take risk and go after not so loose deliveries, while the batsman at the other end plays a sheet anchor role by taking runs continuously in singles, providing stability as well as fastness to the team’s scoring chances. Similarly, there is a need for dual strategy in organizations. An organization employing the strategy of continuous and incremental innovation tries to get the maximum advantage out of minimal innovation. Business innovation can be brought about in two ways: product innovation and business model innovation i.e. the model by which the company brings its offering to market. Every innovation is associated with two risks: a technology risk of whether the product will deliver and a marketplace risk of whether there will be adequate demand for the product. The technology risk involved in going after breakthrough product innovations is inherently high and there is the real possibility that no breakthrough will ever be made or even if such a breakthrough is made it might be too late to reap benefits out of it. And as the level of product innovation increases from incremental toward breakthrough, marketplace risk rises sharply as well. (Fig 1) Kodak had incurred huge costs to bring out the concept of digital photography but was beaten in the race by Sony.

Fig 1: Risk associated with innovations Incremental product innovations can be particularly good at locking in current customers. And every point of reduced customer churn is an additional point of revenue growth. While, radical innovation is long-term corporate success linked to the ability to innovate. It is a product, process, or service with either unprecedented performance features or familiar features that offer potential for significant improvements in performance and cost. Although corporate investment in improvements to existing products and processes does bring growth, it is new game plan that will launch company into new markets, enable rapid growth, and create high return on investment. Radical innovation, concerned with exploration of new technology, is fundamentally different from incremental innovation that is concerned with exploitation of existing technology. It creates such a dramatic change in processes, products, or services that they transform existing markets or industries, or create new ones Many firms have been implementing incremental technological changes in their production systems. But now it is being believed that incremental innovations are no longer enough.

Instead, radical innovations in industrial production are necessary for achieving high-level sustainability goals. This can be exhibited in the following case study of Nokia.

Case study of Nokia Nokia, the Finnish phone giant had little choice but to wade into new waters. Although the company has been selling amazing number of handsets each year, fierce competition and sagging prices have pushed mobile-phone revenues down. It was not just that garden-variety handsets were becoming commodities. The stale and very slowly improving product portfolio cost it nearly a fifth of its hard-won 35% global market share and pushed revenue growth into reverse. To get Nokia's engines revving again, research and development was redirected to areas like radio technology and mobile-phone software. Nokia spent more than $4.8 billion per year on R&D, 60% of that for software. At 12.8% of revenues, Nokia's R&D spending was three points higher than Motorola and about twice the R&D ratio of Sony Corp. But the scramble to find growth through innovation carried huge risks. Nokia was racing into unfamiliar markets, where it faced competitors ranging from Microsoft and Apple Computer to Samsung and Sony. The top management at Nokia has created two new business units that require higher levels of R&D and market development. One handles multimedia devices -- camera phones, game machines, and mobile TVs -- and the other sells devices aimed at businesses. Thus the basic cell phones manufacturing has been farmed out to a division whose main job is to deliver mass-market units at the lowest possible price. That group still represents 63% of revenues and 87% of operating profits, but its contribution is expected to decline as new initiatives catch on. Another division, accounting for 22% of revenues, sells wireless networks to operators. Hence Nokia is casting a wide net for high-margin opportunities outside conventional handsets, especially in the hotly contested convergence arena. Nokia's new multimedia group, for instance, offers gadgets that take pictures, play games and music, shows digital TV. Thus Nokia has devised a model which is aimed at reaping benefits of both continuing incremental innovation at slow but steady pace, as well as going for risky but attractive ventures.

Conclusion Hence the lesson that can be learnt from the experiences of some of the big organizations is that the time to launch big innovations is not when they are necessary for one’s business but when they're essential to the marketplace. If these are forcibly foisted on a market that is not ready for them, big innovations can take years to catch on. Videophone providers have been learning that lesson for more than 25 years. Breakthrough innovations can generate enormous wealth just as last ball sixes can certainly win cricket matches. But constantly swinging for the fences does not make good sense, not when many singles and twos can generate robust growth. The innovation portfolio provides visibility that allows the firms to pace the introduction of new products and services. They should balance the introduction of revolutionary products with incremental improvements in others so as to maintain a steady flow. By having a comprehensive view of their initiatives over time, firms can avoid either overwhelming or underwhelming the marketplace.

Reference:

1. Treacy, Michael. Innovation as a Last Resort, Harvard Business Review, 00178012, Jul/Aug2004, Vol. 82, Issue 7/8 2. Will Rewiring Nokia Spark Growth? Business Week, February 14, 2005. 3. Radical Innovation: The Key Driver of Growth, Profitability, and Competitive Advantage. E-Coach, Innovation Management, Venture Strategies, http://www.1000ventures.com/business_guide/innovation_radical.html 4. Radical Innovation versus Incremental Innovation: High-Risk-High Return versus Low-Risk-Low-Return Projects, http://www.1000ventures.com/business_guide/innovation_radical_vs_incr.html 5. Continuous Improvement Firm (CIF): A Firm Continuously Improving on Customer Value Due to Improvements in Productivity and Quality, http://www.1000ventures.com/business_guide/im_cif_main.html,

6. John E. Ettlie, William P. Bridges And Robert D. O'keefe. Organization Strategy And Structural Differences For Radical Versus Incremental Innovation, Management Science, Vol. 30. No. 6. June I9M 7. Managing Invention and Innovation Revisited, Research Technology Management, Jan/Feb2007, Vol. 50 Issue 1, p46-47 8. Xiaozhi Cao, Eric N. Hansen. Innovation in China's furniture industry, Forest Products Journal, Nov/Dec2006, Vol. 56 Issue 11/12, p33-42 9. Dismukes, John P. Information Accelerated Radical Innovation from Principles to an Operational Methodology. Industrial Geographer, Fall2005, Vol. 3 Issue 1, p19-42 10. Moors, Ellen H.M.; Vergragt, Philip J. Technology Choices for Sustainable Industrial Production: Transitions in Metal Making. International Journal of Innovation Management, Sep2002, Vol. 6 Issue 3, p277

Complimentary aspects of Incremental & Radical ...

In contrast, established firms devote a small fraction of their resources to trying ... next-generation business model, create a buzz in the boardroom while lesser forms of ... computer workstations; the Java operating system, which has driven much internet software ... sagging prices have pushed mobile-phone revenues down.

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