The Cost of *Not* Innovating

by Ruth Ann Hattori, partner, ThinkSmart, LLC.

Lots of people talk about the cost of innovation and ask questions about what innovation metrics to use.  The questions we hear most often are:  How can I measure the ROI of innovation?  What's the payback period?  How does it fit our Balanced Scorecard?

These are important, logical questions.  How do you really show that improved or increased efforts around new product or service development are actually yielding better results than if you had just gone on doing the "same old thing?"  Most innovation is relatively incremental in nature which makes it even harder to quantify the ROI.

While ROI is obviously important, we think there is another, perhaps even more important question:  What is the cost of *not* innovating? What happens when you don't innovate but your competition does? If management’s evaluation of the cost of innovation is only focused on ROI and doesn't account for the cost of *not* innovating, they are only seeing half of the picture and may be missing the half that's strategically critical for the future.  A simple ROI can never truly measure innovation because it does not account for the lost opportunities, such as AT&T missing the cell phone, Kodak missing the digital camera, and the radio companies that blinked while Sony brought the Walkman to market.  Business history is filled with examples of companies that paid a high price for not innovating.

This isn't about doing away with metrics such as ROI; it's about understanding their limitations. The ROI of innovation is much more complex and has a different time horizon than calculations for a capital equipment project or, indeed, any other project where the outcome is relatively predictable.  Innovation does not necessarily produce results on a timeline that fits a GANTT chart; a lot of innovation is about creating the future ... the long term future, not just next quarter's or next fiscal year's.

We recommend that business leaders think about the limitations of ROI-thinking when it comes to innovation. We'd like to see them put as much rigor into thinking about the cost of *not* innovating as they do the cost of innovation. To help that thinking, we've developed some questions to think about:

** In the past three years, have any of your competitors brought to market an innovative product/service that you had the capability to create?  (Think about how you would feel if you were a CD maker and noticed someone carrying a zip-drive (thumb drive, flash drive) on a key chain.)

** Has someone recently entered your market/industry with a new or novel business model?  (Think about the effect Costco's warehouse market concept had on grocery stores, pharmacies, appliance retailers and so on.)

** Have any of your competitors found a way to streamline or reinvent processes that you still struggle with?  (Think about amazon.com recommending new books to customers who might never hear about them otherwise.)

** Have your customers begun to drift to a completely new solution to an old irritation? (Think about the effect of TIVO on the television and video-player industry.)

The Cost of Not Innovating is the estimated dollar value your competitors have gained and that you have failed to capture through your own innovation efforts.  This goes beyond opportunity cost, which tends to focus on a single decision or event.  The cost of not innovating includes everything you miss when your innovation efforts aren't focused on your entire business process -- from business model to marketing, supply chain to customer experience.  Businesses are not lone islands floating in a sea of commerce.  They don't have the luxury of ignoring trends and changes in technology or customer needs.  What one business misses is simply an opportunity for another.  And, when that waiting entrepreneur or competitor picks up what you miss, it's a cost of not innovating ... a hidden cost that you never account for but which can be lethal.

We are trying to help organizations be more aware of this cost and are looking for real examples -- if you have examples of the Cost of Not Innovating in your organizations (or others that you’ve observed) please tell us about them in the comments section below.

Comments

[Armand Rousso]

It was extremely wonderful to read this new perspective in the domain of innovation.

We talk about opportunity costs all the time but it never struck me that viewed this way, the opportunity cost of no innovation was just so high....life is slipping past us. Look at me, i have come a long way after my first ecom venture (which also happened to be the first ecom venture ever) called the International Stamp Exchange.

This was an innovation of sorts and it didnt sink into my friends and colleagues as to how exchanging stamps via the net would prove any useful over trading them in auction houses.

But for me, it was a mustard seed of an idea and grew up to be a large tree offering me many a fruits which i am enjoying till today.

I shudder to think what would have happened had this innovative idea not taken shape...!