Two Questions that Star Businesses Need to Ask Before Deciding to Innovate

You're the CEO of RedBull - the energy drink. Your product managers and scientists have come up with a number of ideas for strengthening your company's leadership position. Which of the following innovations would you pick:

1. RedBull Cola
2. A sugar-free, low-caffeine version of RedBull (RedBull Lite)
3. A complementary product that allows people who drink RedBull to have better sleep when they actually decide to sleep (let's call the product "Peaceful Cow":))

If you picked RedBull Cola you've gone down a classic trap of line extension. You'll be confusing future generations about what Red Bull really is and how it's different from Coke or Pepsi.

If you picked RedBull Lite, you've changed the target market from hard-core party people and super-intense scholars and geeks to slightly more elderly or health-conscious people. You've also confused your basic message since RedBull = Energy Drink (which also implies that it must be healthy.)

If you picked Peaceful Cow, you've probably done a good thing. For one, you've reinforced the message that RedBull makes you into a raging, hyper-energetic animal. You've also created a complementary product whose sales may get linked with RedBull sales. So the more RedBull's people drink, the more Peaceful Cows they will want to consume to deal with the crash that comes after the spike in energy.

Many successful companies land up with one or two stars that throw off tonnes of cash. Examples include Microsoft with Windows and Office, Google with Search, AdSense and Adwords, Coca Cola with Coke etc. Using this cash, these companies set up innovation initiatives. However, it's easy to go wrong with innovation ... For example, Xerox spent plenty of money and invented the mouse, graphical user interface etc. and all of these innovations were monetized by other companies.

Here are some rules of thumb to help in your innovation decisions:

1. Does the proposed innovation make your business more different or less different?
2. Does the proposed innovation confuse your target market about your 5 second message?

If the proposed innovation makes your business more different without confusing your target market about your 5 second message, you can go ahead with the innovation. If, however, the proposed innovation makes you more like other products in the market or if it confuses your core message, then you need to avoid making the innovation.

For example, let's say Facebook decides to add in a word-processor application ... this is obviously a bad idea since it makes it look more like Google Docs or MS Office. Now, let's say they decide to come up with an entirely new innovation - say, a Facebook Phone that integrates very nicely with Facebook and Facebook apps. Even though there are other players in the space (iPhone, Nokia, RIM), the Facebook is still likely to do well because of the following reasons:

1. There is no target market sacrifice.
2. It acts as a complementary product for Facebook and feeds off the success of Facebook while contributing to it's differentness (the only social network with a dedicated phone.)

So while it's tricky and subjective, there is still some method to the madness.

Here are a few other things to keep in mind when an innovation comes to you (either in the form of a suggestion or a breakthrough invention):

1. Does the innovation make your business more different? Then you should go ahead and implement it right away (assuming that it does not confuse your five second message.)
2. Does the innovation make your business less different and more like your main market competitors? Then you definitely don't spend your resources on this innovation (unless it's a hygiene innovation described below)
3. Sometimes, you will need to come up with hygiene innovations - things that people will not notice unless it's absent. For example, let's say you've come up with a new kind of video sharing site (say, cooking videos with recipes), you probably will not need to implement some of the social features available in YouTube. But at the very least, you will need to bring up the streaming speed of your video to YouTube standard since that is the basic level of hygiene performance that people have come to expect.
4. Some accidental innovations will help to launch a new product (ex: Viagra, Twitter, Penicillin.) In this case, you need to be very alert and aggressive and willing to put your current business plan on hold. It is possible that this "Black Swan Innovation" can give you greater success than you ever can achieve in your current business.