The Incremental Innovation Trap
Does it seem that your company rolls out feature after feature for your products (to the point that you can not keep track of them all), all the while wondering why revenue and profit growth has slowed to a crawl? It is likely that they have hit the incremental innovation trap. I am not saying incremental innovation is a bad thing; in fact incremental innovation is an incredibly important part of the innovation process. It helps round out a product line to capture all profit available in a market, but it exposes the company to some bad habits. The image below does a great job illustrating this point.
Initially, when a great product is released and captures market share the returns on investment are very high (or atleast they should be or you should be considering discontinuing the product). During this time you round out the product with new features or great product extensions - all incremental innovations. These incremental innovations are great because they are low risk (your product and market is already established) and deliver high returns (these are innovations that you know your customers will love and pay for).
Alas, this will not last forever. Soon you will pick all the low hanging fruit and try to release new features or extensions that only a small subset of your customers want or that all your customers want but for which they are reluctant to pay more). Your ROI will shrink to below your cost of capital. Cost of capital is the return that your investors expect from their investment in your company. For a large public company this could be around 12-20%; for a start-up with VC funding it is more along the lines of 50% or more. Once below your cost of capital, incremental innovation is not adding value for its shareholders.
That's were other types of innovation come in. They don't need to be disruptive. You should be looking to the adjacencies as advocated by Chris Zook in Beyond the Core. That is look for a new vertical or geographic market to sell your existing product, add a new product or service that will complement your current offering, or repackage your current offering in a way that delivers a leap forward in value. Well executed, these are moves that will reignite revenue and profit growth. I am not going into the detail about Chris' book in this post, but these are moves that you need to think about and evaluate well before you sail past the Cost of Capital line.
The problem is that the ease of incremental innovations and often the long duration that they reap rewards creates a bad habit for the company. Like a siren's call, the company begins to assume that new features will always equal new revenue. When it doesn't happen, they assume it was just the wrong feature and immediately look to build another new feature - failing to recognize that the current product has matured and new features will not deliver the returns that they remember so vividly. They are stuck in the incremental innovation trap; destined to run into the rocks.
So how does your company do balancing the ease of incremental innovation with the need for long term planning?
