by Dan Adams, founder of The AIM Institute and author of “Business Builders: How to Become an Admired & Trusted Corporate Leader“
Once upon a time, your company’s founder was laser-focused on delivering superior, differentiated value to customers. Those customers had specific needs, and the company set out to fulfill them better than anyone else. But as the years passed and the business grew, that intense focus, well… drifted. Leaders got caught up in other priorities — say, tweaking productivity or quality, forming a powerhouse sales force, or acquiring other businesses.
If you allow this to continue, you’re left with me-too products. Customers start noticing your products are interchangeable with your competitors’. They demand lower prices, and you must comply. You have to cut your R&D budget to keep profits up. (Ah, the perils of near-term financial thinking!) Now, you’re in the “Commodity Death Spiral”…and you’re not sure how to reverse it.
If you can relate to this grim scenario, you’re not alone — I’ve seen it happen over and over when companies fail to make market-facing innovation their top priority.
If you aren’t constantly working to create new products that deliver more customer value than competitors’ products, you’re eventually forced to compete on price. That way lies mediocrity, irrelevance, or even nonexistence. If you want to grow and thrive long-term, you’ve got to direct the lion’s share of your resources to market-facing innovation.
My research bears this out. In a survey of 654 publicly and privately held companies, I found that on average, senior leaders allocate just 24 percent of their resources to market-facing innovation (product development). They spend another 16 percent of their resources on exploratory innovation (technology development), which serves to feed their market-facing innovation.
Here’s the kicker: More resources are devoted to these two types of innovation at companies growing faster than competition (43 percent) than companies growing slower (36 percent).
Companies that emphasize market-facing innovation tend to be headed up by Builders. In my parlance, a Builder is a leader who still thinks like a founder: driving profitable, sustainable growth by delivering differentiated value to customers, as they brush aside fads, short-term distractions, and financial gymnastics. Other types of leaders — most notably the type I call “Decorators” — focus on looking good to investors, quarter after quarter after quarter.
So why is market-facing innovation so vital to long-term success? Here are three reasons:
REASON 1: This is what exceptional companies do.
For their book, “The Three Rules”, authors Michael E. Raynor and Mumtaz Ahmed analyzed data on over 25,000 companies spanning 45 years. From this, they identified 344 companies with truly exceptional performance. After extensive analysis, they were able to identify a small set of rules used at these companies, but not at lower-performing ones. These exceptional companies followed three rules.
According to Raynor and Ahmed, Rule 1 is “better before cheaper.” Their research showed the exceptional companies competed more on non-price factors like product performance, while low performers competed more on price. Rule 2 is “revenue before cost” — in a nutshell, it’s better to generate more revenue through growth than to try to cut costs. Rule 3 is “there are no other rules.” This confirms my findings: “Builders focus on innovating for their customers (better before cheaper) so they can grow faster (revenue before cost).”
REASON 2: We’re now in the Innovation Wave (so plan forward, not backward).
Recent history has brought us three “waves”: the Quality Wave, started in the 1950s (associated with Dr. W. Edwards Deming and Toyota), the Productivity Wave (which grew out of Toyota’s success and featured Lean and business product design), and the Innovation Wave — which is the stage we’re in now.
The first two waves applied to current operations, so they reached a point of diminishing returns. What do you do next if you have zero defects or a fully automated factory? You immerse yourself in the Innovation Wave, which impacts future sales and has unlimited potential. Figure this out and you reach that holy grail of business: profitable, sustainable growth.
The key is to plan forward. Many generals have been guilty of planning for the previous war. Quality and productivity improvements are fine, but they were the last century’s war. Today’s battleground is the Innovation Wave, and the key to winning is superior market-facing innovation.
REASON 3: Nothing else drives profitable, sustainable growth.
It’s a simple truth: Senior leaders have many initiatives to choose from, but only market-facing innovation can lead to profitable, sustainable growth. Consider how other popular initiatives fall short of such growth:
- Productivity increases can improve profitability, but they don’t impact the revenue line needed for growth. A point of diminishing returns is eventually reached.
- Quality improvements may help revenue growth, but not to the extent they did a few decades ago. Today, reliable quality is usually considered table stakes.
- Cost reductions, when carelessly applied, can damage a business’s growth capabilities and have a negative — not neutral — effect on sustainable growth.
- Sales training can boost revenue growth and lead to better pricing for increased profitability. But it lacks sustainability; if a business doesn’t keep delivering new value, customers will eventually buy from competitors’ well-trained salespeople.
- Acquisitions will boost revenue and perhaps profits. But if the business doesn’t know how to grow the companies it acquires, it’s just building an unsustainable house of cards.
I’ve heard leaders say, ‘Last year we implemented productivity improvements, and this year we’re going to focus on market insight for better innovation’. Market-facing innovation shouldn’t be an initiative you turn on and off. Understanding and meeting market needs should define your company. This is what Builders do.
So let’s say you suspect your company is in the Commodity Death Spiral. Is there anything you can do to turn things around? Yes —it won’t be easy, but you’ve got to start restoring the Builder’s spirit that brought you to the party.
It’s vital to breathe new life (and pour more funding) into your market-facing innovation efforts. This is non-negotiable if you’re to differentiate your offerings and stop competing on price. But also, you need to adopt the Builder’s mindset and start thinking long-term rather than trying to placate myopic investors.
This is a journey, not an overnight fix. But like the adage goes, every journey begins with a single step, and you shouldn’t wait another day to take yours.
Dan Adams is the founder of The AIM Institute and author of “Business Builders: How to Become an Admired & Trusted Corporate Leader“. He is a chemical engineer with a listing in the National Inventors Hall of Fame. Dan has trained tens of thousands of B2B professionals globally in the front end of innovation and works with senior executives on driving profitable, sustainable growth.
