When we think of a business having a competitive advantage, we still tend to think of traditional economic moats such as a low-cost structure, economies of scale, or perhaps a more intangible moat like a strong brand.
While all of these are still extremely desirable assets, they no longer guarantee a sustainable competitive advantage for most companies. Or as Professor McGrath puts it, the era of sustainable competitive advantages is – for the most part – over, thanks to increased globalization and a world that keeps moving faster and faster.
So, what can you then do to build a lasting position as a successful business? It’s simple, really. You need the ability to adapt to change, and innovate, faster.
Thus, for most businesses, the only truly lasting source of competitive advantage these days is the pace of innovation.
You might then ask what that means in practice and how to accelerate your pace of innovation. Well, that’s what we’ll talk about today.
Why does pace of innovation matter?
In a nutshell, the pace of innovation is simply the speed at which an organization can improve their existing products and services, but also at which it is able to introduce new ones to capture the needs of the constantly evolving markets they operate in.
In the last few decades we’ve obviously seen many examples of companies with competitive advantages that seemed impossible to overcome completely break down in a matter of few years. Nokia, Kodak, and Blockbuster are probably the most famous of these. There’s plenty of great material out there covering those stories, so we won’t go into these in more detail today.
However, what we will do is explain why pace of innovation is so critical.
“Pace of innovation refers to changes that you’ve actually implemented and brought to market, not just things that you’ve developed.”
But before we do, it is crucial to understand that pace of innovation refers to changes that you’ve actually implemented and brought to market, not things that you’ve developed. The difference is profound, as you’ll soon see.
To cut to the chase, the big thing here is that any improvements you make to an existing product, service or business, essentially has compounding returns.
I’ll illustrate this with an example using an imaginary company in an imaginary industry.
First of all, if the company doesn’t do anything, they won’t get better, which is represented with that grey dotted line in the chart above.
So, if they don’t get better, they’ll be left behind and will inevitably lose market share because their competitors, which the blue line represents, will always get better in a capitalistic environment. That should be pretty obvious, and most people certainly get this.
However, what most people don’t understand is how much your pace of innovation, in other words, your rate of improvement actually matters.
In this imaginary example, the industry will get 0.5% better per week at whatever it is that they do for their customers.
However, if we were to double that rate of improvement to 1% per week, the difference is dramatic.
In just 5 years, this company will be 13x better than the baseline, and almost 4x better than the industry average. And that is still with a pace much less than the commonly used Kaizen target of 1% day.
That’s because your pace of innovation, or your rate of improvement, has compounding, exponential, returns and thus a clear competitive advantage.
As long as you keep improving at that consistent pace, your competitors can only catch you if they move even faster – or if they change the game entirely by disrupting the market.
“It’s been said that compound interest is the most powerful force in the universe, and the most powerful force in business certainly is the pace of innovation!”
And that is very much what the Flywheel of Growth framework that I’ve previously covered, is all about. Once you accelerate your Flywheel to a rapid pace, and keep pushing it, your momentum will only keep increasing.
So, just like it’s been said that compound interest is the most powerful force in the universe, the most powerful force in business certainly is the pace of innovation!
Key benefits of a rapid pace of innovation
But, let’s dive a bit deeper and look at what those benefits of a rapid pace of innovation are in practice.
As you saw from the above chart, pace of innovation is obviously crucial in incremental innovation, but many make the mistake of thinking that it’s only relevant for the incremental kind, and not so much for the disruptive and breakthrough kinds of innovation.
In reality, it’s arguably even more important in these cases, and here’s why.
Reducing uncertainty and mitigating complexity
The fact of the matter is that when you’re working on something new, or something complex, it’s usually impossible to perfectly plan out everything in advance. And, even if you try to do that, it takes a really long time, and when you expose your plan to reality, something will still go wrong.
I’ve seen time and again how people in many organizations, both big and small, try to come up with the perfect solution, that often doesn’t exist in the first place, and only end up having solved the wrong problem.
On the other hand, if you were to simply move ahead quickly with something that creates real value and solves at least some of the problems, you’ll see which of your assumptions and concerns are real, and which aren’t. You’ll also see which problems you can work around, and which ones you simply have to address directly.
This obviously eliminates a lot of uncertainty and reduces the complexity associated with solving the problem, which again helps you focus your innovation efforts on what matters – creating real value.
Thus, the bigger and more complex the problem, the more important it is to take this agile and modular approach that focuses on the speed of making tangible progress.
The perfect example of this is SpaceX. They’re working on one of the biggest and hardest problems out there – building a human colony on Mars – but they didn’t just start working on that out of the gate.
They obviously realized that it would be too difficult and expensive, so they chose a phased approach where they’re working on solving a much smaller number of easier (relatively speaking) problems first, and then using those capabilities to reach gradually bigger milestones such as delivering cargo and humans to the International Space Station.
This approach allows them to:
- Deliver meaningful value to customers
- …which drives revenue and funds future investments
- Allows them to test and prove that their technology is working in real-life conditions
- Builds their operational capabilities so that the company isn’t just an R&D effort
Creating and capturing value faster
One of the key benefits of a rapid pace of innovation is that when you actually bring changes to market, you’ll be creating a lot more value a lot more quickly.
And, if you do create value for customers, you can expect to capture some of that value as revenue.
And, as we all know, money is worth more today than it is in the future. So, capturing some money right away with a 100% certainty, is always better than capturing a bit more in the future, because that money will be worth less, and there’s always uncertainty involved when it comes to future revenues, as so many of us have had to realize during the current pandemic outbreak.
And, any gross margin you generate can of course be funnelled back into your business to help you innovate even faster, which makes this a virtuous cycle. Furthermore, if you wait longer to bring things into market, you’ll not only give up revenue and profit now, but also incur more and more expenses and allow the competition to gain market share in the meanwhile, which again makes the benefits of launching sooner even bigger.
There are of course situations where the price of any kind of failure is simply so high, that you have to have very high confidence before you can bring something to the market, but if SpaceX can move so quickly in the extremely costly and complex rocket launch business where there are also lives at stake, the odds are you could innovate much faster too.
Ability to adapt to change faster
There is another big advantage to a rapid pace of innovation that we actually already referred to in the introduction to this post.
When you have the processes and the culture in place to bring new developments to market quickly, you can naturally react to changes in the market much faster than the competition. And, because you are already in the market with your innovations, you are likely to have a much better of idea of what’s happening there than the competitor who’s just stuck in their R&D lab.
This ability to both identify changes and react to them quickly is a key capability in today’s rapidly evolving and global industries. It has both offensive and defensive benefits.
First, when you can react more quickly to changes, you are naturally less likely to be disrupted than the companies that are just sticking to their guns and doing what they’ve always done. That is partly a matter of mindset, and partly a matter of practical capabilities. Companies that have a rapid pace of innovation, by definition, have both of these covered.
And if you do spot trends or shifts in the market before the competition, your ability to react quickly naturally allows you to go on the offensive and capture market share and profits from the competition with an offering that is better suited for those changing needs.
Breakthroughs are not just one big thing
Now, in reality, even the biggest breakthrough innovations aren’t usually singular innovations, but a serie