Innovation, whether it is in product, process or business concept, enables the firm to step away from the pack and secure a greater level of control over the business outcomes. A business which does the same as every other business in the sector will ultimately be forced to compete on price.
Sooner or later, one of those businesses will develop a way of cutting expenses and thus be able to lower the price to the consumer. At that time the game is lost and the business, without the cost advantage, will fail.
To avoid this situation, a business needs to establish a basis of competition which can sustain it. This often means a focus on a niche market where some element of the business provides a meaningful added value to the target customer.
This is normally achieved through an innovation in the product or process (invention), or in the way the business operates (business concept). A significant innovation which can be protected over some length of time can often be the basis for a premium price and a sustainable foundation for a business.
Most new businesses are copies of similar businesses. They use the same products and services and compete along the same dimensions as their market counterparts. Therefore, they divide up a limited market between them. Where there are low barriers to entry into the target market, more and more firms will start up thus ensuring that most firms will fail to gain the traction needed to grow. In the end, they must compete on price to distinguish themselves and this ultimately brings them to a mere survival level of business.
Firms which have low growth generally have captured a leading position in a small stagnant market and secured it through customer loyalty, thus effectively denying critical mass to the next entrant. Alternatively, they have developed some level of differentiation and /or specialisation to gain a market share of a larger stable market and are able to continue to service that market with that advantage.
However, they fail to generate growth traction beyond a certain point because the overall market is too small or their differentiation only covers part of the potential market.
High growth comes from a significant innovation which either captures market share readily from existing firms or takes a significant share of the market growth.
The innovation is either very well protected or the firm has the ability to bring new innovations into the market at a rate which maintains its leading position.
Venture capital firms use innovation as a criterion for funding. They seek an innovation which has high value to customers, no close alternatives and a high degree of protection from copying or eroding. They are looking for a base from
which an advantage can be generated and exploited.
Most high growth firms are formed around new knowledge, that is, inventions.
Inventions provide a good basis for growth, especially when the distribution channels are in place and can take up increasing volumes of product quickly.
However, new business concepts can also provide a good basis for growth, providing the new method of doing business can be scaled quickly. That is why internet businesses had an advantage as they needed little back-end capacity to scale quickly.
The size or impact of the innovation is a metric which conveys information about the likely competitive advantage. A substantial innovation which significantly changes the cost structure of an industry, greatly improves customer value or opens up solutions to previously unsolved problems, provides the underpinning for high rates of growth. Obviously, the more unique the innovation and the more customers value the impact, the more it adds to the potential competitive advantage of the venture.
Few businesses can achieve sustainable growth on the back of a single innovation. Generally it requires a process of continual innovation to generate growth over a longer period of time. Some inventions will naturally spin out multiple products. Thus a breakthrough process might be used to create many end user products. However these situations are relatively rare. Most firms will need to develop new improved products over time to keep their competitive edge.
Innovation need not be limited to product or service utility or functionality.
New revenue can be gained in a number of different ways, each providing the firm with growth potential. Innovations in product, process or business concept can be used to further each of these revenue paths.
Innovation is not limited to invention, it can simply be developing a new way of adding value to the potential customer through the way the product is sold, used, serviced, replaced or disposed of after use.
High growth firms stay close to their customers. They seek to add value to the entire life cycle of the product or service experience. They are interested in many aspects of the sale:
At the same time that the firm is developing customer value, they are also putting effort into streamlining their own operations. In order to grow, the business needs to bring more units of output to market within the same unit of time or with the same unit of resource. Thus effort is put into design, assembly, packaging, shipping, installation and after sales support to gain increased productivity.
One of the hardest lessons of continual growth is that the business needs to cannibalise its own products. New technologies, new information, new customer needs and new regulations gradually undermine old products. While incremental innovation will provide medium term support for the business, ultimately a competitor, often a new entrant, will undermine the market with a new product or business concept which captures the mindshare of the target market. Often inroad starts in a fringe market where it gains credibility, stabilises its offerings and then gradually eats away at the market share of the established firms.
The successful high growth firm recognises that new product life cycles start as poor cousins to the established products. In their early stages, they offer fewer features and are less robust. However they often offer a product dimension which the established products do not and thus are able to capture a new market poorly served by existing products or are able to segment out a customer set which has a poor experience or fit with established products. This would have been the case with early portable disc drives, digital cameras and relational databases. But these products grew in functionality, reliability and value to undermine the mainstream markets.
Thus the high growth firm watches developments at the edge of their market and invests in emerging technologies and business concepts so that it is on the ground floor when the take-off happens.
Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia. A series of free eBooks for entrepreneurs and angel and VC investors can be found at his site here.
Smart Company is the leading online publication in Australia for free news, information and resources catering to Australia’s entrepreneurs, small and medium business owners and business managers.
Comments