Every generation and every year companies and people are looking to find out what is next? how to ensure companies continue to innovate? what procedures help innovation? what procedures need to be changed for they do not help? The answers are hard to come by because for all the research, it is still hard to do. One of the many books which help is The Innovator’s Cookbook by Steven Johnson published by Riverhead Books, 2011. Mr. Johnson asked a number of researchers and professors to write about innovation and also interviewed some serial innovators. Each writer has something good to help you understand and do innovation.

One of the writers is Professor Clayton Christensen of Harvard who has some wonderful you tube videos which you may wish to listen to, particularly about the steel industry. In his chapter Mr. Christensen writes about the Rules of Innovation and he has 4 categories which then need further analysis. The 4 categories are: (1) taking root in disruption; (2) the necessary scope to succeed; (3) leveraging the right capabilities; and (4) disrupting competitors not customers.

Taking Root in Disruption.   If you look at successful companies of the past and look at the names of the leaders now, there are differences. One of the reasons for the changes is successful companies that are well managed – they listen to and satisfy the needs of their best customers and they focus investments at the largest and most profitable tiers of their markets. This they do very well and many innovations appear. The problem is when disruptive technologies emerged, the well managed company gets toppled. Why? disruptive technologies are products or services that are not good enough for established markets. They have other attributes – simplicity, convenience, and low cost. The low cost means low margin; most companies are searching and investing for higher margin items.

The large players typically let the low margin items for new companies, and there are two tests to consider: (i) Does the innovation enable less skilled or less wealthy customers to do for themselves that only the wealthy or skilled intermediaries could previously do? and (ii) Does the innovation target customers at the low end of a market who don’t need all the functionality of current products? And does the business model enable the disruptive innovator to earn attractive returns at discount prices unattractive to the incumbents?

These two tests allow companies to start with the low end of the market and move up, as it moves up the established companies tend to

Pick the Scope Needed to Succeed refers to the integration.  Highly integrated companies make and sell their own proprietary components and products across a wide range of product lines or businesses. Non integrated companies outsource as much as possible to suppliers and partners and use modular, opens systems and components. Each style has advantages and disadvantages. In markets where product functionality is not yet good enough, companies compete by making better products.

When the functionality or the standardization has happened, companies must compete through improvements in speed to market, simplicity and convenience, and the ability to customize products to the needs of customers in ever smaller niches.

Leverage the Right Capabilities refers to managing innovation. Management needs to ask 3 questions (i) do I have the resources to succeed; (2) will my organization’s processes facilitate success in this new effort; and (3) will my organization’s values allow employees to prioritize this innovation, given their other responsibilities?

Beyond technology the resources that drive innovation success are managers and money. Both have good and bad things associated with them. Managers are often give assignments from being a success in the core business, however the rules are different in innovations. It requires different strategies for they need to find new customers and what there basic needs are. The problem with money is if there is too much – a flawed strategy will waste money for a longer period of time; if there is not enough – the needs of corporate treasury are more important than the innovation. The other concern is patience should not be a virtue, the patience should be about the size of the market not about making money. Values of the organization must be aligned with new business and making money which is why it is often easier to start with new sales forces, distributors and retailing channels.

Disrupt Competitors, not Customers    If an innovation helps customers do things they are already trying to do more simply and conveniently, it has a higher probability of success. If it makes it easier for customers to something they were trying to do, it will fail. The best method to understand what customers are trying to do is watch them. What they say they would like to do, can be different that what they really want to do.

Linking to dividend paying stocks, every company will spend money on innovations and will share the success with shareholders. As a shareholder, you need to evaluate what they doing to ask a few questions. Professor Christensen gives you a framework to ask those questions and if you disagree, as the company still looks after its best customers to keep high profit margins, it will time to look for alternative companies which you can begin to move your investments to.

There are more questions than answers, till the next time – to raising questions.