Product Innovation and the Red Queen Effect

I’m back from vacation and staring at an inbox that brings to mind the Red Queen from Through the Looking Glass – a metaphor that comes up with greater and greater frequency in my conversations with executives. So, I was especially vulnerable to a videoblog posting from Dave Bayless, at Evergreen Innovation Partners, on "Innovation, Clockspeed & the Red Queen Effect."

Basically, Dave constructed a highly simplified model to demonstrate what happens when the average product life in a business declines by a relatively modest 10% per year. In fact, this is roughly the rate of decline occurring in recent years across a broad range of industries. It may seem like a relatively modest decline each year, but the compounding effect means that product lives shrink in half every seven years. Dave’s model quantifies the Red Queen effect in a particularly compelling way.

There are some other effects that Dave doesn’t address that make life even more challenging.  For one, a steady decline in product life cycles also significantly increases the level of uncertainty in a business.  In Dave’s simplified model, each new product produces a predictable revenue stream. In real life, each time a new product is introduced, the company takes a big gamble – will the product succeed or will it fail?  In increasingly competitive global markets, product success rates are likely to decline. Even if the products succeed, the margins generated by the new products are likely to be squeezed.  His model focuses on maintaining steady revenue levels.  If the goal is to maintain steady operating margins, the hurdle becomes even more challenging.

One quibble I would make is with Dave’s definition of innovation as "the adoption of products by customers".  This is a product-centric view of innovation and ignores the impact of process innovation (which also includes innovations in work practices).  In fact, process innovations are ultimately much more powerful in terms of generating business value because, if done right, they can generate a compounding effect of their own – they keep on giving, in contrast to most product innovations where the tyrrany of product life cycles limits the potential value creation.  Rapid incremental process innovation combined with aggressive leveraging of third party resources may in fact hold the key to diminishing, if not overcoming, the Red Queen effect.

By the way, Dave’s reference to "clockspeeds", prompts me to recommend the excellent book that really developed this concept in a business context – Charles Fine’s Clockspeed: Winning Industry Control in the Age of Temporary Advantage.