Look at most company websites or mission statements and you will undoubtedly see the word “innovation.” Most times it is over-used and misused. It sounds good, and sure, every leadership team likes to think of themselves as innovative. However, the truth is most companies are not innovative, given their company’s performance. It is forecasted that more than half of the S&P 500 will be replaced over the next 10 years, with the biggest issue being the inability to innovate at an appropriate pace.
According to a McKinsey study, 96% of North American companies have innovation as a strategic priority in their business plans. However, only a mere 6% of these senior leaders are satisfied with their innovation performance. That’s a 90-point gap between desire and reality.
In that same study, 80% of senior executives think their current business models are at risk. Guess what? They are if these companies cannot change their mindset on innovation.
It is important to define what you are striving for when you say “innovation.” Many companies view product development as innovation. Product development in itself is NOT innovation. Webster’s Dictionary defines innovation as “the introduction of a new idea, method, or device,” but I think that definition, at least in the business world, is incomplete. Anyone can develop and introduce a new product. The bigger challenge is, is it relevant enough that someone will actually buy it? And will people see the value in it to pay the price the manufacturer puts on the sticker?
True innovation isn’t just about being new or different. It must add real value. That’s why my definition of innovation goes deeper: Innovation is the ideation, development and implementation of a unique product, process or service, with the aim of improving and advancing the current situation. Simply put, innovation needs to actually make someone’s experience a step change better.
If your company defines itself as “innovative” or “focused on innovation,” I challenge you to utilize this filter to see if you actually stack up to how truly innovative companies perform. It’s a simple analysis.
Based on a study of leading innovators, an innovative company is one that consistently delivers at least one-third of its revenues from new products that have been commercialized within the last three years. Another layer of this definition is around delivering profit. Innovative products should not be developed for and lumped into the good or commodity categories. They should primarily be your high-mix products, garnering the highest margin dollars. So, in addition to the revenue analysis, conduct a profit analysis, where your profit from new innovative products goal is at least 35-40% of your total profit.
Do these calculations for your company. How many times have you hit either of these goals? If rarely or never… take “innovation” out of your mission statement and website until you have a strategic plan, process and most importantly, the organizational innovation DNA to achieve this goal.
In today’s environment, innovation isn’t a “nice to have,” it’s a must-have in order to connect with your customers. Too many companies feel consumers only want the best price. In reality, only about 10% of consumers will buy strictly on price, while 65% prefer to buy products and services from companies that demonstrate continued commitment to innovation, especially when that innovation is relevant to their lives.
Innovation absolutely should drive your profits. And the proof is in the numbers. According to Booz & Company, innovative companies grow their top line (+11%) and bottom line (+22%) faster than other less innovative companies. More profit means more opportunity to reinvest in innovation, a self-fulfilling approach to profitable growth.
Most companies have some semblance of three tiers of offerings. In the simplest form, these offerings are: Good (commodity), Better and Best. In the building products industry, the typical spread is the following. How are you performing against this sea of sameness?
| Product Tier | % of SKUs | % of Revenue | % of Profit | Profit Impact from 1% Sales Increase |
|---|---|---|---|---|
| Good | 75% | 65% | 40% | 0.5% |
| Better | 20% | 25% | 30% | 1.5% |
| Best | >5% | 10% | 30% | 6% |
So do the math. If you increase your “Best” (most innovative/high mix) SKUs by only 1%, you will drive your bottom line by 6%. And as you continue to drive your mix a few percentage points at a time, you will see exponentially higher profit results without selling any additional units—benefiting your customer, their customer and you.
To digress a moment, it is always a head-scratcher to me when I talk with manufacturers during allocation timeframes (this happened during COVID’s supply problems), where they focus efforts on producing as many good/commodity tier products as possible and forgo the better and best categories. That’s a missed opportunity, as you should take that chance to put an enhanced focus on producing your better and best products and force your sales teams and distributors to learn how to sell them and get the industry used to selling, installing and paying for these better products. And the results can be lasting, as the market will shift some percentage of their long-term use to these higher mix products once they use them and see the benefit going forward.
With all the importance put on innovation, according to Harvard Business Review, 90% of new products in North America still fail. There are over 30,000 new products introduced every year, and only 3,000 make it. Of that 30,000, 25% never make into the market, and 65% don’t come close to hitting the financial forecasts companies put into their pretty PowerPoint slides justifying the CAPEX investment. The insanity is that these companies continue with the same broken process year after year, strategic plan after strategic plan. It’s obvious to the outside world that they are not innovative no matter how many times the word appears on their website.
The issue for most failing companies is clear… they have not developed a deep innovation process nor embedded the DNA of innovation into their organization. Their teams for the most part are good at maintaining and tweaking their current and historical process and products, using the past to define what will work in the future.
Most of these companies merely define new products as what they can make on their existing lines with existing raw materials, again merely tweaking current offerings.
The hard truth for most companies is that it’s not the product that is failing, it’s the process behind it; the team, the customer understanding (or lack of), the mindset. In fact, bad product design accounts for only 10% of product failures. The biggest reason new products fail? They aren’t actually relevant to the customer because the company doesn’t know their customers deeply.
Developing a new product for new product’s sake merely adds yet another product option in the myriad of products already over-populating in-person and online stores. Innovation does NOT start with R&D and manufacturing. This is where most companies get it wrong. Their R&D or Innovation Group (I use that term loosely) spends its time trying to figure out what other products they can make from their standard raw materials to fill out their existing operational capacity. Then they try to push this into the market and onto customers with irrelevant product benefits and unrealistic pricing. No wonder these companies lose the innovation game. There is too much inward focus on engineering and product design, and not enough time spent on truly understanding customer needs.
An innovative product’s job is to enhance the end-user’s experience. Your process should always start with establishing a comprehensive understanding of your customer. Then you must profile those that best fit your strategy, deeply understanding their needs, pain points and triggers in their personal or work life. And then connect to trends happening out in the world to help define your go-forward innovation strategy.
The process you utilize to innovate is also critical. For years, companies have used the long and drawn-out Stage Gate process. While I like the diligence, it handcuffs itself with extended timelines, constant check offs and too many people making decisions. Today, change happens quickly. By the time you get halfway through an 18-month Stage Gate process, the market has changed, or your more agile competitors have leveraged the opportunity by commercializing a more meaningful product. So, to me the key word in the innovation process is AGILE. And this is the reason many companies are adopting the agile (sprint, scrum) approach to innovation. It’s a constant, iterative process, with fewer check-ins and check-offs, and more real-time, data-driven decisions. Most importantly, it can take the product development process from 18 months to 18 weeks.
It’s ironic, when I talk with senior leaders about switching to a more agile process, they scoff and usually say “It’s not as diligent and we will get more failure.” And then I remind them that they probably already have a 90% failure rate.
One of the other big misses on innovation teams is that they lack true disruptive thinking in the meetings. Disruption force-feeds new thinking. I use the word “force” because when you are up against 99% of an organization, all watering down an idea with past experiences and living where they are comfortable, you must break some things to get to true innovation.
In my experience on a typical “innovation” team with marketing, sales, operations and finance, someone in operations will say “we cannot make that on our lines,” and then someone in sales will say “our distributors or dealers will never buy that, they don’t think of us that way.” You must exclude these types of “innovation prevention” conversations and the best way is not to invite them to the meeting.
Here are some recommended team members to have in the room instead:
Innovation is hard—and it should be. After all, you are doing something that hasn’t been done before. You are changing someone’s life with your product or service, and ultimately transforming a category or an industry in the process. Be comfortable living in the uncomfortable, as true innovation only comes when you commit to disrupting your own process, your products, your team and your mindset. And then reap the rewards of being one of those companies driving their bottom line 22% stronger than competitors.
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