Diminishing law of innovation returns and the problem with “better”

Every company thinks that they can innovate by making their product better.

But eventually, this concept of “better” begins to become irrelevant.

If an entire industry is trying to innovate in the same way, eventually progress will become almost impossible to notice from a customer’s perspective and innovation will plateau.

This is not to say that there is no more technological progress being made, but rather that each incremental improvement (better) becomes less noticeable from a human perspective. Or rather that each step brings less perceived value than the last change.

And ultimately, innovation will begin to hit a set of physical limits that no longer show any improvement at all, or even reach limits where no more improvement is possible (the elusive attainment of “perfection“).

I call this the diminishing law of innovation returns.

In economics, Diminishing returns, also called law of diminishing returns or principle of diminishing marginal productivity, economic law stating that if one input in the production of a commodity is increased while all other inputs are held fixed, a point will eventually be reached at which additions of the input yield progressively smaller, or diminishing, increases in output.

In the classic example of the law, a farmer who owns a given acreage of land will find that a certain number of labourers will yield the maximum output per worker. If he should hire more workers, the combination of land and labour would be less efficient because the proportional increase in the overall output would be less than the expansion of the labour force. The output per worker would therefore fall. This rule holds in any process of production unless the technique of production also changes.

This can be approached from a different angle when it comes to innovation, in a similar way to the standard S-Curve which is used to describe how innovation works from a technology performance perspective against the effort it took to get there.

Diminishing law of innovation returns

When it comes to developing a new technology, usually development passes through four stages:

• A – Slow Progress: A technology is still at early development stages, often early in the research phases. At this point, it may have a small number of early adopters but it does not meet the perceived value criteria of the mainstream. Significant amounts of additional effort are required to produce a perceptible improvement in the value proposition for a customer. Example: Graphene research with no mainstream applications yet but significant potential
• B – Rapid Progress: A technology which is beginning to find its feet and gain a foothold in the market. Here, progress appears rapid as small additional improvements in the technology are noticed by the customers as a real improvement in performance/value. This is where most people would say innovation is most visible. Example: Battery technology and range in electric cars.
• C – Technological maturity: A technology or type of innovation which has been developing for a while, often in a mature market with numerous competitors, and where incremental changes may still be possible from a technological standpoint, but the changes are not as noticeable from a customer perspective. Here, the additional effort to innovate begins to yield significantly less real-world improvement, and companies may resort to marketing the technology performance as more important than the perceived performance. Example: Shaving razors, where the difference between three blades, five blades, and five blades with a ball-swivel hinge are imperceptible.
• D – Plateau: A product, technology, service or other innovation which is so mature that it is almost impossible to incrementally improve further while still providing a perceptible value addition. Some companies would think that this means that they have reached “perfection” and cannot be improved, or attempt to risk changing a winning formula. But I’ll show why these companies are usually disrupted by new types of innovation. Example: Heston Blumenthal’s “perfect” Triple Cooked Potato Chips 

In my view, some of the most interesting innovations are the ones which are trying to push back the plateau which is set by our own limits of human perception, and therefore perceived improvements.

For example, smartphones have been trying to improve the resolutions of their screens over the last decade. However, while the iPhone’s retina display was a groundbreaking change from the previous version, the human eye cannot continue to see the differences between smaller and smaller pixels.

In fact, for a full-size TV in a living room, it becomes almost impossible for a human eye to see the difference between standard resolution and the new 4K screens which manufacturers are producing. See the chart below for more information:

A similar effect is multiplied when the pixels are made even smaller to fit into the 5 inches of a smartphone screen. The human eye cannot tell the difference between Full HD and 4K, yet manufacturers keep making the screens higher resolution because the technology is capable of incremental improvements, even if we can no longer notice them.

Similarly, laptops which strive to become continually lighter. Eventually, consumers will not be able to notice a few grams lighter here or there.

Just because you think your innovation is better than the last version, it does not mean that your customers will also think so.

Eventually, in order to perceive additional value, a new type of innovation comes about which provides a different type of value, or addresses customers’ needs in a new way.

Take for example the extension of the S-Curve model of innovation below, where two different types of technology or innovation are fighting for a customer’s attention.

To start with, Innovation 1 will yield the better results as it provides a higher perceived value than Innovation 2.

But as time progresses, Innovation 2 may eventually overtake the perceived performance of Innovation 1 as the performance improvements in Innovation 1 mature and plateau, allowing the additional perceived performance improvements of Innovation 2 to continue growing.

Eventually in this case, the customer will reach an inflection point where they will see a higher perceived value in Innovation 2 than in Innovation 1.

This is one of the ways in which companies and entire industries become disrupted.

When all competitors are trying to squeeze out incremental improvements, a different way of innovation (such as one a startup or new technology offers) may actually end up providing a much higher perceived value from the customer’s perspective, enabling them to overtake the established companies.

Sometimes, it takes time for a new technology or discovery to mature enough to overtake an established one. This is exactly what happened in the data storage industry, where tape was replaced by floppy disks, which were replaced by CDs, which were replaced by DVDs, which were replaced by USB flash drives, which were replaced by SD cards, and which were in turn replaced by cloud storage on the internet. Along each interchange, the next generation of technology was just around the corner, but wasn’t offering the perceived value to the customers quite yet.

So if you notice that your innovation efforts are becoming more and more incremental, with less improvement coming each year, this could be a good indication that your industry is reaching an innovation plateau and may be ripe for disruption by a new competitor who is willing to try things in a new way.

So what do you think about your industry? Do you see rapid rates of innovation improvement?

Or has the growth matured, and what new innovations will future customers expect?

Let me know in the comments below.

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Nick Skillicorn

Chief Editor, Founder & CEO at Improvides Innovation Consulting

Creativity & Innovation expert: I help individuals and companies build their creativity and innovation capabilities, so you can develop the next breakthrough idea which customers love. Chief Editor of Ideatovalue.com and Founder / CEO of Improvides Innovation Consulting. Coach / Speaker / Author / TEDx Speaker / Voted as one of the most influential innovation bloggers.

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