Harnessing change as the key to innovation dominance.

No one likes change.  Even the 15% of the population with the personality type that can thrive on change doesn’t “like” it.  Change causes pain – personally and organizationally.  And pain causes uncertainty, which makes everyone uncomfortable.  So we all try to avoid it, if at all possible.

But creating and managing change is the key to market dominance.

Change is going on all the time – and at an alarmingly increasing rate.  It is also what every C-Suite executive is tasked with driving in order to survive in the job.   It may be called “profit growth,” or “sales growth,” or “innovation,” but what it really comes down to is  the need to create “change.”  And it causes pain.

The good news is that change can be managed and controlled to your benefit, if you understand the Alpha Innovation model.  Most innovation creates little dynamic, profit-enhancing change; it just creates minor “noise” in the marketplace that briefly changes the focus of customers until some new “noise” occurs.  In most cases, it is either a reaction to another marketer’s efforts, or it is a simple extension of what you have been doing before that has not created dominance for you and won’t any time soon. 

These kinds of innovation are the most costly and the most painful, because they not competitively sustainable or defensible over the long term.  Competitors can create their own noise that redirects customer attention away from you, defeating your efforts and investment.  It takes a continual effort to be more creative than the last time to come up with something to create more noise to re-attract customers.

The most profitable innovation is the one that drives a new “thread” of future changes or innovations that increasingly focuses customers upon your offerings to the exclusion of your competitors’.  That is Alpha Innovation.  Alpha Innovation typically is less painful, because competitors actually make it easier for you.  They follow your lead, giving you control over the innovation thread for the entire category.

The secret is in understanding how customers view innovations.  There are three elements to their view of anything new:

1.     How it works (function)

2.     How it makes them feel about themselves buying or using your product or service (self-satisfaction)

3.     How they believe others view them using or buying your product or service (personal significance)

All innovators start with identifying an unmet functional need.  They spot something that could be improved functionally to make customer experiences better or more efficient or more fulfilling.  The trouble is that most innovation stops right there.

If I make a soap that cleans better than the leading brand, I have created a functional innovation.  I may have created a brief window of advantage.  My competitors find out what I did and create a way to make a soap that cleans at least as good as mine PLUS makes things smell nice, as well.  Suddenly, that competitor has a brief window of advantage.  And so it goes, on and on with one competitor gaining a brief advantage until another creates a brief advantage. 

Each one focused upon creating a functional innovation that one-upped the previous leader.  This innovation was costly, requiring retooling and investment in new marketing and perhaps even in new distribution.  The result was no sustainable advantage; just an on-going battle of one-upmanship that required careful management of backend costs to avoid losing whatever gains might have been generated during the window of advantage.

Now, add in the other elements of the Alpha Innovation model and a very different result is created. 

The rule is this:  “Satisfy function to the minimum; satisfy ego-satisfaction to the maximum.”

I create a soap that works at least as well as the minimum basic functional expectation of soaps in the category (among at least 80% of the current buyers in that category).  Instead of innovating further on the basic functional side of cleaning (unless I have discovered that no soap is fulfilling the basic functional need to the level desired by customers) and instead of just trying to reduce costs to make myself the low cost provider (that then puts me in a “who will charge less” game that no one wins), I start looking for satisfaction and significance opportunities.  (NOTE:  What I describe from here on is wildly hypothetical, so don’t go running out to create a new soap like this without competent Alpha model research to discover the real ego-satisfaction opportunities.)

For instance, I could start looking for any clues that might lead to benefits customers would spend almost anything to get.  What would make a customer say, “It’s the most expensive soap out there, but it’s worth every penny of what I pay?”  You may never reach that goal, but the insights you get will lead you to an area for focus of innovation that competitors will have a tough time beating.  Like l’Oreal’s, “I’m worth it,” you will discover things that, if you functionally innovated to provide them, would prove enough ego-satisfaction to make your product not just the one everyone aspires to own, but the one that customers will pay more for.

The really amazing thing is that that the basic core functional performance of most products that address innovation in this way may not be much better than competitors’, but the effective value customers place on that product is dramatically higher than that of competitive products.

Apple’s iPhone is a great example of this.    I compared the original to RIMM’s Blackberry.  In many ways the Blackberry’s performance was better, especially for anyone used to typing with two fingers using their tiny keyboard.  The iPhone’s user interface was much prettier, and certainly the internet looked significantly better on an iPhone than on a Blackberry.  The cost of the iPhone was much higher than the Blackberry (even at its “new lower” price flowing its original introduction at almost $600).

So why did more than 3 million iPhones get purchased?  It was more than the “new” factor.  It was more than the “sexy” graphics and interface.  It was even more than the media hype that made it sound like the greatest thing to hit planet Earth.  What made it so different were all the non-functional things that Apple so adeptly built-in that did not really affect the functional performance.  For instance, the tactile feel of it – it just feels great to hold in your hand.  Or the black glass screen that covers the entire front.  It looks like something from another planet, or at least from three generations of Earth time from now.  For me, it was the “feel.”  Holding it made me smile.

I bought one.  I love it.  Even now that generation two is out, I still have people stop me and ask to “see” it, which means, “Let me touch it, feel it, etc.”

Apple could have just innovated like Blackberry and one-upped them functionally.  The result would have been a more and more costly war of functional improvements.  Instead, they focused upon the ego-satisfaction side, ignoring the fact that their functionality was only comparable to Blackberry’s, and the result was that they are out there alone, leading the pack.  Competitors are trying to mimic the iPhone, but they all fall short because they are focusing upon functional innovation and missing the ego-satisfaction hold that Apple has gained.

The innovation thread now is open for them and will take a completely new set of ego-satisfaction elements to be addressed by a competitor to overcome it.  Apple’s newer generation iPods (the original was certainly a “disruptive” innovation, but it could have been overtaken functionally by competitors, even with iTunes being the core element of the disruptiveness) have followed the same innovation thread.  They have taken the design and feel of the iPhone to another level with Nano – small, wonderful to feel in your hand; it even feels good in your pocket.  Then came the MacBook Air that reminds me of a big Nano in feel and design.

While their competitors are beating their brains out on functional improvements, Apple is using the ego-satisfaction elements that they now “own” to increase profitability, sales, and stock value.   While “tech-heads” are busy extolling the benefits of their super-dooper PC laptops tat only they can understand and use efficiently, people are paying more for the MacBook Air and are being swamped by people in airports, coffee shops, and the office to touch and see it.

This recognition of the “value” customers place upon ego-satisfaction over function is critical to becoming and remaining an Alpha.  It’s how Apple is making itself (finally) into an Alpha.  It’s how Harley-Davidson became one.  It’s how Victoria’s Secret became one.  It’s how John Deere became one.  It’s how Intel became one.  It’s how Mercedes and BMW became one. 

It’s even how Wal-Mart became one.  They certainly don’t fit the profile of the others, but their hold on the retail industry has been based totally upon customers wanting to believe that they are making the smartest shopping decision.  No other general merchandise retailer has done what Sears did in the past – making itself the trusted place to go for household items, no matter what anyone else’s price was – so Wal-Mart has made retailers become followers in their “price is everything” model.  The funniest part of this is that Wal-Mart is not and never has been the lowest-price provider.  They just make sure that they provide enough functional proof of that idea to be able to make their claim of lower prices believable and trustworthy.

So the trick to managing change is to use the Alpha Innovation model to create change that focuses everyone (customers and competitors) upon your offering.  The way to do that is through functionality that at least meets the minimum basic functionality required AND that proves that the customer will gain more ego-satisfaction by buying your product or service.

Deliver ego-satisfaction.  Prove it with function.  Become the Alpha.