Many companies list innovation as a goal or even a necessity for survival. Competitive advantage can be obtained or sustained through innovation, but it is important to focus the innovative efforts. Innovation simply for the sake of innovation is less likely to create competitive advantage. Michael Porter’s classic study of competitive strategy lists a few generic strategies to gain advantage. I would like to look at a couple of them, cost leadership and differentiation, and how innovation can be focused in service to strategy.
Cost Leadership
Cost leadership means obtaining a position where you can offer the best price to customers. It’s the classic race to the basement strategy where low cost relative to competitors creates your competitive advantage. Rather than a superior product, superior systems are necessary to obtain this position. According to Porter, there are five commonly required skills for this strategy. A company should thus focus its innovation efforts in these areas. 1) Access to capital. 2) Process engineering that leads to tight cost control and reduced overhead. 3) Intense supervision of labor, typically with incentives based on meeting strict quantitative targets. 4) Products designed for ease of manufacture (not to be best in class). 5) Low-cost distribution.
Differentiation
Differentiation is establishing a position where your product or service is perceived as desirably unique. This is what most lower-middle-market companies are attempting to achieve. There are seven commonly required skills, five of which provide opportunities for innovation. 1) Marketing (because it doesn’t matter how awesome your product is if it’s not perceived that way). 2) Product design/engineering. 3) Creative flair. 4) Basic research capability. 5) Strong cooperation from channels.
Sometimes combining factors creates advantage. Pixar’s innovation in productive dialogue between creatives and engineers (i.e., combining product engineering and creative flair) helped establish their early competitive advantage.