How does Innovation Affect Strategy?

By its nature innovation is a strategic process and there is a close association between the type of innovation a business might seek to commercialise and the type of strategy it should adopt to see this project brought successfully to market.

In an earlier article for the Business News I explained that our research into the strategic behaviour of small firms had shown at least four generic strategic planning responses. These were the “Shopkeeper”, “Administrator”, “Salesman” and the “CEO”. Each of these is a response to a given set of conditions relating to the uncertainty found within the firm’s environment and complexity associated with its operations.

The Shopkeeper has a simple structure or product and a certain market environment. Their strategic response is to fine tune the business. The Administrator has certainty in the market, but a high level of complexity in their organisational structure or process. They need to focus on structured operational level planning. The Salesman has a fairly simple product or process, but faces an uncertain market. Their strategic response needs to be a marketing and sales focused intuitive strategic planning. Finally, the CEO faces both uncertainty in the market and complexity in their product. Structured strategic planning is their best response.
 
Research being undertaken by the UWA Business School with partners in 11 other OECD countries is investigating the relationship between innovation and strategy. At time of writing we have collected a database of 567 cases of firms seeking to commercialise an innovation. These innovations have been assessed using a simple screening framework that evaluates the anticipated return to investment in the innovation. This measures the anticipated sales, profit margin and life cycle of the product. Together these three variables generate a simple formula to initially screen the type of innovation being developed.
 
Our analysis suggests that there are several broad types of innovation that emerge from this framework. Each of these types of innovation has different market and product characteristics that require a different strategic planning response. For example, one innovation (the “Shrimp”) has modest sales, profit and a relatively short lifecycle. This incremental innovation is probably best managed using the “Shopkeeper” strategic planning response, with its focus on informal, operational planning.
 
At the opposite extreme is a radical innovation known as the “Champion”, which has substantial sales at a national or global level, with significant profits over a long lifecycle. This type innovation poses substantial challenges to the business seeking to commercialise it and demands a structured, strategic planning response as typified by the CEO.
 
A third type of innovation is the “Gadget”, so called because it has modest sales and a short lifecycle, but generates a high rate of profit. This type of innovation is best dealt with by employing a “Salesman” strategy involving strong marketing and sales efforts to take advantage of the short market window of opportunity.
 
Another type of innovation is the “Joker”, one that has high sales and a long lifecycle, but a low profit margin. This is best managed with the planning response of the Administrator, where the focus is on cost reduction to ensure that whatever profit can be secured from the innovation is as large as possible. The Administrator is about operational efficiency and process innovation aimed at lowering cost.
 
This research project is ongoing, but it highlights the importance of matching strategic planning to the innovation. Of concern is our finding that many firms with a “Champion” innovation are seeking to employ “Shopkeeper” planning behaviour in their commercialisation process. This is particularly the case in small firms where intuitive, ad hoc planning is common.
 
If you are seeking commercialise an innovation ask the following questions:
 
  • What will this new product or service generate in future sales and over how many years?
  • How profitable will this new product or service be?
  • Have you fully researched your customer’s willingness to accept this new innovation?
  • Do you have appropriate protection of your intellectual property rights?
  • Do you have the necessary skills and resources to launch your innovation into the market?
  • Is your approach to strategic planning appropriate for this type of innovation?
 
This article was first published in WA Business News.
 
©Tim Mazzarol (2010)