Disruptive innovation adds enormous value and margins to companies. If a company can create a new industry, this growth is exponential. Yet, few companies do it well. Yet, within it, innovation holds its own paradoxes: regular innovation creates expectations from investors and customers. Once the rate starts falling, the company is almost penalised for it, disproportionately. Most companies pay lip service to innovation. By remaining young at heart, a company can make the fundamental changes required to become innovative, outside of anecdotal changes that will be short-lived and that will not lead to a high innovation index.

1. The Paradoxes of Product Innovation &
Why we Must Remain Young at Heart in Business
The global reaction by investment analysts, industry commentators and the
media about the rate of innovation at Apple since the death of Steve Jobs, begs a
few important questions about innovation in business.
It is a fact that Steve Jobs, more so than any CEO is recent history, made
innovation take-up centre stage as paramount to the growth in company value
and profits. Innovation, a word often used by CEO’s - yet rarely actually
practised, simply became a lot more salient, exactly because Steve Jobs was able
to drive such enormous equity and profit margin growth through innovative
products.
For the vast majority of companies, innovation is incremental, at best, and that
also corresponds with a slightly above or below average growth in equity and
profit. Dramatic increases in profit margins outside of an upsurge in economic
growth cycles, for most businesses, are low.
Yet, for highly innovative companies, high margin growth is the norm.
From research, it is clear that so-called “disruptive innovation” makes a company
leapfrog competitors:
• the top 20 companies in the Fortune 2010 list of fastest growing
companies received $3,40 in incremental market capitalisation for every
$1 of revenue growth.
• for the companies that created new categories, this was $5,60!
In South Africa, we have seen how the high innovation rate of FNB, created
customer growth and shareholder value beyond that created by the other banks.
Yet, we have also seen how the share price of FirstRand responded negatively to
the announcement that Michael Jordaan will leave as CEO.
Yet, within itself, innovation holds paradoxes:
Can any product, like an iPhone, continue to be improved in significant
ways, or will it reach a point where innovation will merely be incremental -
as it been in the recent past (hence why Apple is being criticised now).
Moreover, does the average consumer expect dramatic improvements all
the time?
Some years ago, Microsoft was criticized for updating its Windows
platform so often that its users started lagging far behind in their own
applications of the platform: they were simply receiving more features
than they needed. Customers were also often forced to upgrade, even
when they could not afford it - or it made no logical sense in required
applications or investment.

2. The paradoxes go further, did Apple create such high expectations with its
series of disruptive innovations, that investors and consumers became spoilt
to expect a forever-increasing spiral of new products with revolutionary
capabilities that deliver exceptional equity and margin growth?
Did Apple therefore, unwittingly, create a rod for its own back? Will its own
inability to retain its rate of innovation undermine its very success through
innovation to date?
Does this mean a company should rather accept lower equity and revenue
growth, than to “expose” itself and create high investor, industry and
customer expectations it may not be able to meet at some point in future?
If we assume business is ultimately about the leveraging of scarce resources to
create investor and customer value, surely these issues must lie at the heart of
most companies? Increasingly, we see innovation, as rated by CEO’s, stated as
one of the most important issues in business. Just last week, a report listed
“critical thinking” and “problem solving skills” as becoming the most important
attributes large companies look for when appointing staff.
Despite these issues being paramount to the ability of a company to create value
beyond its peers, they are hardly ever practised actively in the pursuit of product
innovation. I believe most companies do not even think about what innovation
within their context actually means.
Today, “innovation” is less about incremental innovation and more about
disruptive innovation. Most serious new business developments over the last
twenty years have been about creating new industries (i.e. Google; Amazon.com;
Facebook) rather than about updating current one’s (i.e. Hyundai; Emirates;
Embraer). These new industries have by far outpaced the growth in the value
value of companies. The traditional companies, with their regular product
updates – often merely “facelifts”, now lag far behind. Where traditional
companies did break the mould, like Nestle with Nespresso, these innovations
have created disproportionate value.
Disruptive innovation expects a new way of thinking and doing within an
organisation. As Prof Gary Hamel, recently rated as the most influential thinker
in business by the Wall Street Journal, states it, a serious new strategy “is the
most intellectually challenging thing any organisation can do”.
Hence, I was pleasantly surprised when recently, speaking to students at a
leadership conference at the University of Stellenbosch, a second year
engineering student raised this question: “Can a company indefinitely innovate
with a given product, or is there a time when innovation can no longer create
substantive increases in value for customers?” What amazed me is how few CEO’s
or executives that I ever came across even mooted this question! Yet, here is a
junior student who already came to this conclusion: one that took me many
years of experience to get to.

3. Is this because the very way most companies operate make innovation – of the
kind that add dramatic business value - almost impossible? Is it because most
large companies become like old people, where they are too scared to think
differently, let alone “do” differently? Why do companies like Unilever and
Proctor & Gamble buy or create small offspring companies to bring the kind of
product innovation into the company they may themselves find difficult to do?
How can a student ask a question many executives never ask?
I was inspired by this student as he made me realise how remaining “young at
heart”, will make our thinking and doing in business a lot simpler and easier. We
become the victims of our own constraints. Once we get trapped in them, they
take-on a life of their own – even if they are devoid of reality, the needs of
customers or the opportunities offered by our insights and capabilities.
It is only when we fundamentally question, that we can start making the changes
that will create new contexts altogether. Becoming highly innovative takes a lot
more than vision statements, brainstorm processes or staff “fooling around” for
10% of their time. Neither are they “Eureka moments” devoid of any substantive
executive direction or an underlying support structure and ecosystem.
After all, when Akia Morita of Sony conceived of the Walkman many years ago, or
when Steve Jobs conceived of the iPad, they were essentially young at heart –
they kept an open mind in how they looked at consumers; interpreted that
within their own skills-set and did something that was clearly “out there”.