In a previous post I explained that the innovation process consists of three phases and two conditions. In this post I want to focus iStock_000019592501XSmall-Croppedon one of those conditions—the condition of having an innovation strategy.

Let’s start by asking and answering a two-part question—what’s an innovation strategy and why should you have one? In simplest terms, an innovation strategy specifies where your company will focus its innovation efforts. Having one enables an organization to devote its limited human and financial resources to the innovation initiatives that will have the most impact on its performance.

But this raises a further question—how do you determine which innovation initiatives will have the most impact on performance? The answer exists in your strategic plan. Or at least it should. To make sure that it does, listen to what Harvard professor Michael Porter has to say about strategy. In Porter’s view, strategy is first and foremost about competitive strategy. All the other elements of strategy—growth strategy, value recapture strategy, innovation strategy—should be subordinate to, and driven by, an organization’s competitive strategy.

Porter proposes a two-part process for devising a competitive strategy. The first part involves deciding on your company’s product-market scope, i.e., the product or service offerings you will provide and the market segments you will provide them to. For example, in the lodging industry, some third-party management companies limit themselves to property management services, while others offer both property management and asset management services. As for market segments, some property managers target the owners of select service properties, whereas others focus on the owners of upscale and luxury hotels.

The second part of devising a competitive strategy has to do with gaining competitive advantage.  According to Porter, there are two general strategies for gaining advantage. The first, and most common, is what I like to call the “same-but-better” strategy. Like a series of gymnasts performing the same gymnastic routine, companies using the same-but-better strategy perform the same activities in the same way, but each company tries to do a better job of it. For example, most property management companies perform the same property-level activities (e.g., housekeeping, marketing, cost control, etc.) in more-or-less the same way. They attempt to compete with one another by devising “best practices” that enable them to perform these activities more effectively or efficiently than their rivals.

There are two problems with the same-but-better approach. First, it fails to achieve a significantly different competitive position–in the customer’s eyes, everyone looks pretty much the same because they are all doing pretty much the same thing. The second problem is that it is hard to maintain a sustainable competitive advantage because it is so easy for everyone to copy everyone else’s best practices.

The second means of gaining competitive advantage is what I term the “different-and-better” strategy. With this approach, a company delivers superior value by performing activities differently or by performing different activities altogether. Consider, for example, how Apple used iTunes—an entirely different activity—to differentiate the iPod from MP3 players. Or reflect on all of the things that Southwest Airlines does different than other airlines in order to provide lower costs and more frequent departures. Or take a stroll through your local Ikea and ponder the many things that Ikea does differently as compared to a traditional furniture retailer. In each case, the companies are using a different-and-better strategy to stake out a competitive position that is substantially different than its rival’s positions and more sustainable because it is difficult for competitors to copy.

So how does one go about creating a different-and-better competitive strategy? The long answer will have to wait for another post. The short answer is that there are two parts to devising the strategy. The first part has to do with devising your key differentiators, which are the aspects of your product-service offering that make it different from, and more valuable than, your competitors’ offerings. For example, one of Southwest Airline’s key differentiators is that it provides more frequent departures than its competitors.

The second part is to use an activity map to design your activity system. An activity map diagrams the system of activities that will enable your company to realize its key differentiators. Southwest Airlines provides more frequent departures by turning its planes around faster than its competitors. It is able to do faster turnarounds because of a system of activities that includes faster boarding by not having seat assignments, faster provisioning by not providing meal service, and flight crews that clean the planes.

Which brings us to the point where we can provide a more complete answer to our central question—how do you determine which innovation initiatives will have the most impact on your company’s performance? In order to get the most bang for your innovation buck, focus your innovation initiatives on defining your product-market scope, on identifying your key differentiators, and on creating the activity system you will use to realize the differentiators. In short, let your competitive strategy drive your innovation strategy.