Australian’s have a proud history of innovation. Things like the cochlear implant and wi-fi are among the inventions we have taken to the world. Yet, when times are tough, it can be hard to allocate capital to something that has no immediate benefit.
I was recently asked to reflect on what happens when we choose not to innovate. The obvious answer is that over time, it becomes difficult for customers to distinguish between you and your competitors. You have inadvertently adopted a ‘me too’ strategy.
In an undifferentiated market, each player will get its natural market share. That is to say that if there are ten such businesses, each can expect to gain roughly 10% of the total market.
Keen to grow, but unsure how to do it, these businesses resort to price competition. Soon, all players reduce their price in attempt to protect their market share. In doing so, together they ‘cannibalise’ the value of their market.
Ironically, this eventually forces companies back to the innovation table. Only now, it’s about survival. So, the focus tends to be on producing the product at a lower cost, not on value creation. Product quality is often the ‘sacrifice we had to make’.
So, what to do? I would argue that innovation should be an ‘always on’ part of your strategy. You might have a spending target – e.g. 3% of your revenue and that can flex a little with the operating environment. But that is only an indicator of allocated budget. It doesn’t tell you how effective that spend is/was.
3M always places an emphasis on innovation. They set targets that in X years’ time, Y% of our revenue will come from products that don’t exist today. That is, we expect real outcomes from the time and money we spend on innovation.
The other thing I like about the 3M approach is that forces their innovation to be customer centric. They have to address real needs, in a way that has the possibility of generating a commercial outcome for the company. No room for ego projects here.
The bottom line is that in a small market like Australia, you need to stand out. That means you need to innovate. The good news is that the R&D tax incentive can help subsidise your spend on innovation.
If you’re not sure how you can innovate, how to de-risk your innovation activities, or which innovative ideas are likely to have the greatest impact on your business, please reach out to Northern Strength for some help.