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A Vote for Process Innovation

| On 31, Mar 2008

Cass PursellThink of the most innovative companies in the world. Better yet, pick one. Focus on it. Get it firmly in mind.

How much of that company’s annual revenue is represented by new products? If it’s a young company you’re thinking of, that percentage may be quite large. If it is an established company, however, it’s likely that the percentage of revenue represented by new products has gotten smaller each year. Even in companies where new products still represent 40% of revenue each year, that leaves 60% that is represented by existing product lines. Sixty-percent of revenues, conservatively, that stand outside of the innovation intentions of organizations which have not employed a systematic process innovation strategy.

I’ve argued recently that the goal of an innovation program should be to assist in creating and driving sustainable growth. If we can agree on that as a goal, then I would further argue that process innovation is the most important innovation strategy of all in terms of sustaining growth and creating value.

If product innovation strategies are the engines that drive an organization up a steep growth curve, then process innovation strategies are the brakes that prevent the organization from slipping back down. Companies that employ systematic process innovation strategies have focused on improving the speed, reducing the cost, and enhancing the quality of the processes that support the delivery of their products or services. If they have been successful in implementing this kind of strategy, then this approach is built-in to their organizational cultures.

Process innovation strategies are so powerful because the resulting competitive advantage lasts longer than the competitive advantage derived from product or service innovation, which competitors are relatively quick to copy. Process innovations are comparatively difficult for competitors to duplicate, and are therefore arguably more disruptive than a new product or service. For an easy case-study, look at what happened to the automotive industry when Japanese manufacturers innovated their production processes – the then-dominant Big Three US car makers were caught flat-footed, and were not able to replicate the process innovations for nearly three decades, causing a complete realignment within the market.

Here’s a little thought experiment that can act as an acid test that anyone can take when comparing product innovation strategy to process innovation strategy. If Warren Buffet were to present you with a choice between two stock portfolios, one consisting exclusively of companies focusing on product innovation, and the other consisting exclusively of companies focusing on process innovation, which would you choose? It’s not an easy decision, and that in itself speaks volumes.