What is More Important Process Innovation or Product Innovation?
The fast and easy answer is “they are both important.” However, what if this is not true?
Many companies have been successful by relying more on one approach than the
other. We could argue that one approach is better than the other, depending on the
circumstances. If so, then we need to look at the key factors that would lead one
approach to be better than another. I have put the following matrix together to illustrate
companies that have been successful using one or both approaches. I have also
included a column for service as it has distinct differences from product innovation.
Comparison of Companies Using a Combination of Process, Product and Service
Innovation
High Product
Innovation
High Process
Innovation
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Ford Model T
Low Process
Innovation
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Google
Low Product
Innovation
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Wal-Mart’s
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?
High
Service
Innovation
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Curves
Amazon
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Best Buy
Globe U
Low Service
Innovation
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Metro
Waste
Water
Treatment

?
Treacy and Wiersema in their book “The Discipline of Market Leaders” argue that
organizations can be successful by being either product innovators, service innovators
or process innovators but that they must focus on a primary objective and that this
objective will depend on the industry they are in. They used the terms operational
excellence (process), product leadership (product) and customer intimacy (service).
Thus, companies like Medtronic and 3M should focus on product innovation, with
perhaps a secondary objective on process innovation. If they reverse this order, given
the competitive nature of their industry they will not be successful. According to Treacy
and Wiersema, there is less value in their focusing on customer service. At the
Metropolitan Waste Treatment Plant in St. Paul, the primary objective was on process
quality (operational excellence) with a secondary emphasis on customer service. It was
accepted that there was little value in trying to come up with new and innovative waste
treatment products.
The Ford Model T
Most of us know the story of how Henry Ford invented the assembly line. This process
innovation streamlined the assembly of automobiles and led to a dramatic reduction in
the cost per automobile. Mr. Ford is also famous for declaring that you could have his
car in any color as long as it was black. His color comment and the standardization of
the Model T have led many to ignore the role that product innovation played in the
success of the Model T. According to Ralph Stein (The American Automobile), the
Model T was in many ways ahead of its time “With heads that were removable and an
engine, clutch, transmission and universal joint that all shared a common oil bath.”
These were conveniences for repair and maintenance that other automobiles did not
have. Product innovation added a distinct competitive advantage to that already
afforded by the assembly line process.
In the automobile industry, there are three factors that are usually indicated as
fundamental to success. They are:
1. Design of the product
2. Product quality/reliability
3. Distribution and maintenance networks
These factors easily fit into the product innovation, process innovation and service
categories or disciplines. People want a car that looks good, drives well and is easy to
get serviced. As opposed to the Treacy and Wiersema concept though, the automobile
industry has had to compete on all three disciplines. When the first Japanese cars
came over, the American automobile industry held a distinct advantage in the
distribution and design disciplines. The Japanese held the advantage in the reliability
and quality discipline. Their dominance here was driven by their relentlessness in
process improvement. As Dr. W. E. Deming often said: “If you improve the quality of
the process, you will decrease waste and rework, lower costs and gain market share.”
The Japanese took this message to heart and gained considerable market share with a
focus on quality and reliability. Nevertheless, no automobile company could be
successful today unless it was competitive in all three disciplines.
Deciding which factor(s) to compete on
Treacy and Wiersema describe very well factors that impact a company’s choice of
disciplines. Wal-Mart became the most successful retail company in history through
their focus on process innovation and operational excellence. They had the same
products as K-Mart, Target and many other discounters but their process innovations
allowed them to lower costs and capture the market. The same story was true for Dell
Computers. They had the same products but their mass customization gave the
customer more choices at lower costs. Thus, it appears that success can be based on
a single discipline.
However, when a competitor decides to open up a new playing field, you may find
yourself playing catch-up. Wal-Mart and Target have both started to compete more
recently on the field of product innovation. Dell no longer has the advantage in process
innovation it once had. Competitors imitate you and the game resets to zero. Strategy
and innovation are moving targets. How then do we decide when to start competing on
another playing field? Another way to look at this decision is illustrated by the following
diagram:
Product
Innovation
Service
Innovation
Process
Innovation
The above diagram illustrates the point that innovation must be continuous. The world
does not remain stagnant and as Heraclitus (535 BCE) noted “You cannot step twice
into the same stream.” Steve Blank puts it the following way: “Over time, innovations
outside the company (demographic, cultural, new technologies, etc.) outpace an
existing company’s business model. The company loses customers, then revenues and
profits decline and it eventually gets acquired or goes out of business.”
http://www.businessinsider.com/author/steve-blank
A company may compete well on service innovation but the game changes when the
competition adapts the same or even better service innovations. Product innovations
only last so long and you can guarantee that the competition will soon come out with an
even better product at a lower cost. Process innovations are perhaps the hardest to
imitate, but they too can be copied and they are difficult if not impossible to patent or
trademark.
There are many different innovation cycles, but most describe a process for innovation.
I particularly like the concept of incremental innovations versus disruptive innovations. I
am not sure though how one goes about creating a disruptive innovation. They are
easier to identify after the fact. A “Cycle of Innovation” based on the three fundamental
types of innovation in the model above suggests that a company needs to focus its
strategy on continually innovating in all three areas. Granted, in some industries one or
more innovation disciplines might not be as important. Nevertheless, you cannot afford
to take your eye off the balls. Or as they say “You snooze, you lose.”
When we look for the causes of great business success, it is not difficult to find the
reason as being tied to one of the key innovation disciplines.
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Google destroyed Alta Vista with a better more innovative product - Easier to use
interface and higher quality results.
Amazon revolutionized the book industry by selling online and bypassing the
traditional book store - Better service with lower costs as well.
Wal-Mart radically changed how products were distributed - Operational
processes that lowered costs and increased turnover.
Curves created a work-out model for middle aged career women – Thirty
minutes a day any time during the day, and no “hulks” to stare at you.
The Geek Squad systemized and took the risk out of dealing with computer
repair people - Service that was standard and reliable.
Netflix almost single handedly put the neighborhood video shop out of existence
with both process and service innovations – No late fees, no return postage, no
waiting at the video store.
Honda and Toyota continue to dominate the automobile market by focusing on
quality – Improved quality of process leads to improved quality of service as well
improved quality of the product.
Conclusions:
In the final analysis, it may not depend on how well you do at any one of the innovation
disciplines, but on how well you do at all of them. A good case can be made that the
heart of all innovation starts with process innovation and that the core of a business
must be based on strong and continuous innovation in this area. However, I would not
want to be competing on the basis of a single discipline when somewhere in the world
someone is working on the next breakthrough and it will probably be in a discipline
where you are not strong.
Business books talk a great deal about organizational structure in terms of span of
control, hierarchy and division of labor. I have yet to see one business textbook talk
about responsibility for innovation or responsibility for imagination. Organizations need
to worry less about HR Departments, IT Departments, Legal departments and
Accounting Departments and more about Departments for Process Innovation, Product
Innovation and Service Innovation. If organization structure decides what gets done,
then it seems reasonable to me to have a department for each of these key disciplines.
Each department would be tasked with monitoring key innovation processes and
measures both inside of and outside of the organization. Every manager would have a
desktop information system with key metrics for how the organization was doing in each
of the three innovation disciplines. In addition, there would be metrics to show how our
key competitors were doing in each area and how our key customers currently were
viewing our efforts. Our suppliers and business partners would also be evaluated on
their contributions to product, process and service innovations. At the end of each
month, progress charts for each key discipline would be distributed to all employees in
the organization so that they could see how we were doing. Innovation groups would
be sponsored throughout the organization to discuss local innovations as well as cross
functional innovations. No employee would be left out of the discussion on product,
process and service innovations.