Think Small

By Rajan Varadarajan

March 3, 2007

When it comes to innovation, the conventional wisdom often tells companies to aim for home runs. But frequent singles can be just as important.

Home runs, in this case, are radical innovations—breakthrough products, anything from disposable diapers to cellphones, that introduce a new core technology and provide much greater customer benefits than existing products. Not only do scholarly literature and the business press exhort managers to pursue these big advances, they often admonish them for going after incremental innovations that simply refine, adapt or enhance existing products.

But the conventional wisdom carries a lot of risks. Radical innovations are certainly important. But incremental innovations can be critical to a business’s competitive strategy and its long-term outlook—especially since radical innovations come along so infrequently.

Incremental innovations can play a variety of important roles. Among other things, they allow companies to enter new markets by tweaking existing products for new customers. They also let companies pre-empt the market with variations on a core product, making it harder for competitors to introduce new products of their own. And they help companies create interim fixes for industrywide problems when long-term solutions are still on the drawing board.

What follows is a closer look at these and other ways that incremental innovations can help companies—as well as factors that can make incremental innovations a better or worse bet.

BOLSTERING THE BIG IDEA

First, incremental innovations can help support radical innovations. Managed effectively, every radical innovation can serve as a springboard for a series of incremental innovations—which can generate new revenue streams and prolong the revenue stream of the radical innovation itself. All of which can help finance the pursuit of new radical innovations.

Boeing Co., for instance, has kept its 747 airliner—a radical innovation when it came into service in 1970—in the sky for decades with incremental innovations. The company produced a stream of improvements on the basic design, offering new 747s with better aerodynamics, extended range and greater passenger capacity. So, Boeing has been able to boost revenue for its core product without a constant array of radically new airplanes. (Boeing’s latest radical innovation currently under development, the Dreamliner airplane, will likely lead to incremental innovations of its own.)

ENTERING NEW MARKETS

Incremental innovations also play a major role in helping companies enter new markets, by modifying existing products to suit new customers.

Consider the case of Scott Paper Co. In the mid-1980s, Scott decided it could no longer compete in the institutional toilet-paper market on price. Fort Howard Paper Co., which dominated the institutional market, made paper with a low-cost mix of wood pulp and recycled paper. So Scott cast around for new approaches and found one being used in Europe: a dispenser that held bigger rolls of paper. The company reasoned that the larger rolls would save on labor costs, since building staff wouldn’t have to replace them as often.

Scott made larger rolls of toilet tissue and initially provided the new dispensers free to institutional customers. Later, it made a similar move with paper towels for restrooms. Not only did Scott win over customers, but it was less vulnerable to competitors offering lower prices; the rivals couldn’t offer larger rolls and dispensers.

Fort Howard ultimately came out with its own version of a pilfer-proof dispenser, as did other competitors. Koch Industries’ Georgia-Pacific Corp., which now owns Fort Howard’s former operations, leads the institutional market. But Kimberly-Clark Inc., which acquired Scott in 1995, continues to command a sizable presence.

In much the same way, incremental advances allow companies to enter new geographic markets. Consider the case of shampoo companies such as Procter & Gamble Co., which have come up with packaging innovations to reach less-affluent customers in developing countries. Instead of selling their products in bottles—which many customers can’t afford—the companies offer the shampoo in less-expensive sachets intended for a single use.

TAKING CHARGE OF FRAGMENTED MARKETS

Some companies have used incremental innovations to take charge of fragmented industries—those with lots of small, regional competitors. Chesebrough Ponds in 1969 acquired a regional brand of spaghetti sauce—Ragu—and improved it with a number of incremental innovations, such as new flavors. Chesebrough Ponds, later acquired by Unilever, took the brand national and made it a powerhouse.

Similarly, companies have leveraged incremental innovations as potential pathways into commodity-product categories, such as common salt, edible oil and milk, which often have lots of competitors. Take the case of Hindustan Lever Ltd. In 1997, to combat iodine-deficiency disorder, the Indian government banned the sale of noniodized salt. But primitive storage and transportation conditions in parts of India often made standard methods of iodizing salt ineffective. Hindustan Lever, a subsidiary of Unilever, found ways of keeping the iodine content intact under the difficult conditions—an advance that made the company’s Annapurna brand one of the dominant suppliers of salt in India.

WINNING SHELF SPACE

Incremental innovations can also help companies on their home turf. For instance, in the face of intense competition for retail shelf space, companies can create variations on their core product by adding new features, taking up valuable shelf space and deterring the entry of potential competitors.

Johnson & Johnson’s Tylenol offers products targeted to adults, children and infants, as well as different combinations of conditions such as pain, allergy and sinus. The products also come in a range of package sizes and formulations. The breadth of offerings gives Tylenol a commanding amount of shelf space, making it harder for competitors to find a way into stores.

Such strategies are becoming a necessity these days. Retailers have much greater ability to measure the revenue and profit from specific categories and brands. So they’re less likely to give space to a company’s new products that are mostly line extensions that resemble current products too closely and lack incremental innovations.

KEEPING FICKLE CUSTOMERS

A broad array of differentiated brands also helps if the product category has low brand loyalty, or if consumers frequently switch brands in search of variety. Having multiple brands under one roof means consumers will be less likely to switch to a competitor. Consider P&G, the U.S. market-share leader in household laundry detergents. In addition to Tide, its flagship brand, it offers a host of brands differentiated by incremental innovations, such as Cheer, which protects against fading and wear, Era, which is billed as tough on stains, and Ivory, which offers mild cleansing.

The strategy is particularly effective with customers who switch brands looking for the best deal. By spreading the price promotions over its flagship and supporting brands to draw cost-conscious customers, a company can avoid diluting the image of its flagship brand.

RAISING PREMIUMS

In the face of pricing pressure and squeezed margins, incremental innovations can also help a company increase the price premium on its products. Energizer Holdings Inc.’s Quick Switch flashlight, for instance, can be used with two AA, C or D batteries, instead of just one type. The flashlight retails around $16.99—while regular flashlights sell for as little as $1.99 in some cases.

Despite the cannibalizing effect of its incremental innovations, Gillette has been able to maintain its market-share leadership as well as command increasingly higher prices for its replacement razor blades over the years. In 1971, it introduced the Gillette Trac II, a razor with two blades. This was followed by the introduction of the Gillette Sensor with spring-mounted blades in 1990, the Gillette Mach III with three blades in 1998 and, most recently, the Gillette Fusion with five blades in 2006. The going retail price for replacement cartridges for the Gillette Fusion is around $3 each—about triple the inflation-adjusted price for Trac II cartridges in 1971.

DEFLECTING ATTACKS

Incremental innovations can also help companies neutralize the impact of competitors’ innovations. More than 20 years ago, in an attempt to nurture customer loyalty, AMR Corp.’s American Airlines introduced a rewards program for frequent fliers. It proved so successful that competitors had to launch matching programs. Most airlines tied the rewards to miles flown, as American did. But Southwest Airlines Co. took a different approach—an incremental innovation aimed mainly at the business-travel segment of its customer base. Southwest, which offers primarily short-haul flights, tied its program to the number of flights taken instead of miles. The approach won lots of business among business travelers, who often fly the same short-haul routes repeatedly.

MEETING CHANGE

Finally, incremental innovations can help companies respond to big changes in their industry. Often, radical solutions are the only long-term solutions to industry shake-ups. But if the breakthrough innovations are far down the pipeline, incremental innovations can help fill the gap. In the automobile industry, for instance, high fuel prices have meant rising consumer demand for alternative-fuel vehicles. But there’s no nationwide network of stations to service such vehicles. So it may be an imperative for companies to pursue incremental innovations, such as hybrid vehicles that can be filled up at regular gas pumps, at the same time as radical ones, such as electric vehicles and hydrogen fuel-cell-based vehicles.

 

It’s also important to consider various factors in the market—and the company itself—that may make incremental innovations more or less important.

For instance, there’s the maturity of the product in question. Products such as toothpaste, bath soap and detergent are in a “perpetual maturity” stage—they show low growth but have little chance of decline. Products of this kind often benefit from a focus on incremental innovations, simply because all the big, radical advances have already been made.

Consider an incremental packaging innovation by General Mills Inc. for its venerable Bisquick brand: the Shake ‘n’ Pour pancake mix, which comes in a plastic jug. Cooks pour water directly into the jug, shake it up and pour the batter onto the skillet. This advance doesn’t reinvent the wheel, but it does eliminate some typical problems associated with pancake mix, such as adding too much water or too little water.

Regulatory conditions are also important to consider. Government rules may make a focus on incremental innovations easier and more profitable for some companies. Take the pharmaceutical industry, where stringent requirements make it difficult and expensive to get new drugs approved. So, many companies have pulled in big profits with incremental innovations instead: introducing newly patented versions of older drugs whose patents have expired.

Customer characteristics are also important to consider: How many of a company’s customers are early adopters, who seek out radical innovations? Many consumer-electronics customers, for instance, want cutting-edge products such as cellphones loaded with a digital camera, music player, Internet browser and keyboard. Other segments of the market might be intimidated by lots of bells and whistles.

Service industries, meanwhile, often can’t make a radical change unless a related goods industry makes a big change. Take airline service. Airlines couldn’t radically change their routes by offering long-haul flights until aircraft makers developed fuel-efficient planes with multiple tanks. (Of course, the aircraft makers wouldn’t have developed such planes unless they sensed there was demand for long-haul service.)

Finally, it’s important to look at the culture in a company itself. A company that focuses too hard on incremental innovations may need a shake-up—after all, radical and incremental innovations are critical to a company’s health.

Researchers have pinpointed a number of problems that arise from short-term vision, such as the familiarity trap (favoring familiar ideas), the maturity trap (preferring tried-and-true approaches) and the propinquity trap (looking for new solutions near existing ones). By experimenting with novel techniques and emerging technologies, firms can overcome these problems and create breakthrough inventions.

Leave a Reply

You must be logged in to post a comment.

Comments posted on this site must be signed with your full, real name. Please see our Comments policy for details.