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

Process Innovation or Product Innovation?

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:

Process Innovation or Product 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.”

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:

  • 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 systematized 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.

A Guide to Open Innovation and Crowdsourcing

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John PersicoDr. John Persico is a partner with Ms. Peg Peck-Chapman in the Minnesota Consulting Alliance. Dr. Persico has been in management consulting since 1986. He has worked with organizations in both the profit and non-profit sector.

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One Response to Process Innovation or Product Innovation?

  1. Pingback: Process Innovation or Product Innovation? « Lundsten | Consulting & Innovation

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