Innovation = Cost Reduction?

Ever wondered what lies at the core of innovation? Well, I think all innovation is in the end based on cost reduction. Let me explain my reasoning.

First, we need to differentiate domains of innovation. There are two top-level domains in my experience: product and process innovation. Process innovation is all about efficiency and effectiveness, fancy words for “lower cost”. So, a huge chunk of the innovation space is actually directly related to cost reduction. Normally, people I talked to about my idea concede this part without a fight. It is, however, the core for most economic engines. Think “horse & carriage vs. railroad”, “letter vs. telephone”, the whole gamut of Christensen’s steel mill examples, “in-person vs. online banking”, “hand-writing vs. movable type printing”.

The product innovation part is usually where a lot of debate happens. Here arguments fly around the topic of “hidden needs”, “unfulfilled wants”, the works. In my experience, these are all arguments based on the idea that industry, especially marketing/advertising, can “create” new needs.

Well…

Is that really so? Can you really influence the feelings of another human being to that extend by offering a product? Or is the simpler answer not that the need was latent, unanswered, or suppressed? Let’s take a look at a few need-creating products and see how they fare:

Email and all later social-network "miracles":
An ungodly amount of money is being poured into the most elaborate schemes in which to get people to talk to each other. In the end, this is the further sophistication of a basic need: to be part of a social group. Call it whatever you want, most of us need to be part of something bigger than just us (with the exception of a few folks that are either very clear or very foggy about this aspect of the human condition).
Anyway, FaceBook, blogs, wikis, they all are vehicles to be seen and heard by others, and potentially being respected by them. Typical users still do not listen well, they just shout very frequently and economically. Social networking makes it possible to find and have "friends" that are remote, otherwise unavailable, share the same interests, what have you. They lowered the transaction cost of talking to a large group of people, thus being able to find those with a close match to our preferred person.
Sorry, FaceBook is at its core cost reduction.
Amazon and online retailing:
The ability to buy basically anything online is often given as break-through innovation. Yes, we can compare easily, check out the opinion of others (that we will never meet or ask again), have a large range to browse in, and do all that without leaving the comfort of our home.
For me, it is cost reduction, again. We could go out and check book stores and their catalogs. We could ask folks in the same aisle what they think. We could, but it would be rather expensive. We would have to go to a lot of stores, spend a lot of time going through catalogs, not to speak about the unnerving idea of talking to a fellow shopper cold.
Amazon reduces our transaction cost. That is all. There is no latent need (people are actually reading less books now), there is only the cost / aggravation / stress of do the same thing in the real world. That cost, Amazon has lowered.
Clayton's Coffee Example:
Clayton's talks in his book about the reasons why people spend a lot of money on their morning coffee: to stay warm, to be distracted / amused, to distract / amuse somebody else... basically a lot of needs that have very little to do with the fact that they bought coffee. So is this creating new needs? No.
It only serves those existing needs with lower cost, either directly by not having to buy a newspaper or gloves or toys. The need not to be bored and fall asleep and miss the exit was there before the product, it simply could not be filled as economically. Sorry, this one goes to cost reduction as well.

Let me conclude: I really do think that focusing on "cost reduction" instead of fancy "need creation" will serve innovators well. Call a spade a spade, we are in the business of taking on fractional cost, aggregating them in form of processes / products and generate cost reduction effects because of the aggregation. Remember: "Everything counts in large amounts"? That is the economic engine behind most innovations. It is the lowering of what constitutes "large amounts" that causes profitability.

I want the folks that listened to me on this one, especially Tim Kee, who had the same sneaking suspicion that I had.