Product innovation plays a very important role in a company’s success, and therefore, for the investor. From my third book I took this excerpt that reflects my view about the importance of product innovation:
“The product innovation is at the core of every company activity. Every company starts with some added innovation to an existing product or even with a completely new product or production process. This means that the future of the company depends a lot on keeping the innovation stream alive and healthy. Wh
en in connection with the sales department, the product innovation achieves the best results. The sales department is able to evaluate and feel the needs of the customers and passes this information to the technical staff, in the R&D department, which leads to applied development of products that have better chances of success, since there is a potential market for them. This is important because it will avoid commoditization of the product portfolio of the company. Having products differentiated from the competition usually allows a company to charge premium prices, and this way keeps or improves profitability.
However there are other dimensions to this advantage, a company focused in keeping a stream of new products is usually more driven and motivated, which avoids crystallization of the organization in the long-term. This motivates the R&D staff that continuously searches for improvements, giving an intangible edge to the company. On the other hand the sales department is motivated to have proximity relations with the clients improving the dependence of this customers to its supplier. This is what happens in the best case scenario, something that a company is only able to keep for a couple years before it starts degrading. The best companies in history were only able to keep this environment for brief moments because the success, usually, is the seed of future failure. The companies are too proud of themselves and start thinking that they do everything right, this vanity dilutes the honest self evaluation, which usually is the starting point of the fall.”