Killer Innovations: reblog

Sometimes I find that charts and pictures are better at getting across business concepts then plain text.

EDS has an enlightening chart on innovation in its blog today, which I've reproduced for Smart Economy blog readers. Send us your comments below--Walter Derzko

The Innovation Economy

By: Joe R. Hill and Tom L. Hill (no relation)

In his book, Innovation and Entrepreneurship, Peter Drucker states, "Defending yesterday-that is, not innovating-is far more risky than making tomorrow." This observation has never been as true as it is now.

The following diagram illustrates the dynamics that make serial innovation essential to maintain market value. (Terms like core/context and GAP/CAP, are defined in Geoffrey Moore's book Living on the Fault Line; also, see "Outsourcing and BATOG" and "To Matter or Not to Matter").

1. The top line in this chart represents a company's differentiated core activities and the bottom line represents its non-differentiated context activities.

2. Innovation is required to create competitive advantage. The GAP is the advantage compared to the nearest competitor. This GAP is the source of profitable revenue growth.

3. The competitive advantage created by an innovation dissipates over time. The CAP is the Competitive Advantage Period, which is the duration of the advantage. The area under the GAP-CAP curve represents the economic value created by the innovation.

4. Once the CAP for the innovation has ended, new innovations are required to maintain the company's GAP.

5. It is important to outsource context activities so you can maintain your focus on core, value-creating activities.

6. CAPs are becoming shorter and shorter. Economic advantage disappears quickly in today's competitive global markets.

7. As a result, quicker innovations are required to maintain the company's CAP.

The various market value ratios, like price-to-vision, price-to-sales, price-to-earnings, and price-to-free cash flow, depend on the company's GAP and CAP and the market's perception of the enterprise's ability to defend them.

Information technology is having a significant impact on the economics of these trends. News of new things spreads quickly, which can improve the adoption rate of a company's innovation. But it also means competitors will know about the company's differentiators quicker. The global financial markets are more quickly aware of the company's GAP and CAP, and the economic value created by them. The markets are also aware of any changes to either the GAP, or the CAP, or to the company's prospects at maintaining them. This increased information often creates quick reactions, both positive and negative, to the company's shareholder value.

Peter Drucker must have been predicting this phenomenon when he said: "The business enterprise has only two basic functions; marketing and innovation. Marketing and innovation produce results [on the value chain]. All the rest are costs."

Bottom line, you can't rest on your laurels. Your day in the sun will be over quickly if you don't keep innovating.