“Innovation” Becomes A Useful Term When Put into the Right Context. A Pragmatic Approach
Being an engineer by training this is not a new situation for me. There are some terms in physics that cannot be defined further by asking “what is <term>?”.
Example “force”: the question “what is force?” does simply not make any sense. When an engineer (not a scientist!) reaches that point, he would rather change the question to “what does force?” and then he is in business. Lots of practical answers can be given from there: forces can deform bodies, can accelerate them, can keep them at a stable position, can decelerate them, etc. etc.
Now apply this technique to the term “innovation”: ask the question “what does innovation?”.
The immediate answer is: Innovation provides growth.
And when we talk about „growth“ then we mean “increment over time”.
In other words, innovation happens when you do something that is
b) generates profit
and all that
c) done in a short amount of time.
That means also that if something does not provide growth then it cannot be an innovation.
Applied to our daily inventions: anything that does not fulfill the criteria b) and c) is „inventing as a hobby“ only.
Growth In Business In Terms Of The Ansoff Matrix
The well-known Ansoff Matrix is a simple 2×2 matrix that is used to determine the risks that come with different approaches to commercial growth:
In very short words: growth with new products in new markets is riskier than growth in the existing market with the existing product.
It goes without saying that the returns in the existing market with the existing product are smaller than the returns that come with a riskier approach. And if you think that you can stay in the existing market with the existing product then, at one point in time, you will experience no growth anymore.
The Ansoff Matrix can be used to decide which growth strategies should or should not be applied, depending on where a company is in its lifecycle and its ‘risk tolerance’.
The Four (4) Growth Strategies Of The Ansoff Matrix
- Growth strategy 1: increase market penetration by selling more existing products to existing markets.
Do this by: Decreasing prices to attract new customers, increasing promotion and distribution efforts, acquiring a competitor in the same marketplace, and others.
- Growth strategy 2: Push product development by developing new products that better meet the need of existing markets.
Do this by investing in R&D to develop new products, by acquiring a competitor’s product and merging resources to create a new product, by forming strategic partnerships with other firms to gain access to each partner’s distribution channels/brand, etc.
- Growth strategy 3: Push market development by finding new markets for existing products.
Do this by catering to a different customer segment, by entering into a new domestic market (expanding regionally) or into a foreign market (expanding internationally), etc.
- Growth strategy 4: Push diversification by developing new products to sell to new markets.
This is considered to be the riskiest strategy because it requires both MARKET and PRODUCT DEVELOPMENT. You can expect at least 30% growth or 30% costs savings when you follow the diversification strategy.
Do this by ‘related diversification’ where many of the company’s capabilities and know-how, and synergies can be leveraged in an adjacent market space, or by ‘unrelated diversification’ into a completely white spot on the market map.
In a side note only: there is also ‘geographic diversification’ which is the same as ‘market development by expansion’ (Growth Strategy 3). This has nothing to do with ‘diversification’.
And credits to Rich McDonnell and Matthew Walrab for highlighting the and discussing the Ansoff Matrix with me. Thank you!
Innovation Meets The Ansoff Matrix
We have above outlined two definitions of growth.
The first definition of growth comes as the result of Innovation, and the second definition of growth comes in terms of business strategies.
Now let’s match the two definitions, taking my own 4×4 Innovation Strategy as an example. Download my FREE book if you want to know more about the 4×4 Innovation Strategy (click here).
And this is the outcome, a comparison table of terms:
When you read my book “The 4×4 Innovation Strategy” you will see that I am talking about product and market development, as well as about diversification. It was my goal to provide an umbrella for innovation.
You are now ready for my recorded talk of 26 December 2021
Innovation is a buzzword. Don’t use it if you cannot explain what it stands for.
Explain instead what innovation does when asked for a definition.
Martin “4×4 Innovation” Schweiger