Corporate innovation - asking the right questions
The word “innovation” has been overused in recent times. The Wall Street Journal recently reported that Apple used it 22 times in their last annual report, and Google, 14 times. Well, you might expect that with Apple and Google, wouldn’t you? But what about P&G (22 times) and Campbell Soup (21 times)? In fact, this over-enthusiastic use of the term has led innovation guru and author of The Innovator’s Dilemma, Clay Christensen, to decry companies’ use of the word as a means to “somehow con investors into thinking there is growth when there isn't”.
Some people are now clamouring for the term to be reserved only for earth-shattering inventions like electricity or the telephone or, more recently, the Internet. But should this be the case? What makes one product innovative and another an improvement? Can a new way of doing things be considered an innovation?
In this article, we answer some fundamental questions to help us understand better what innovation is and can do. This will be helpful for those who are just being introduced to the concept of innovation (where have you been these past 20 years?) or those looking to find new angles to make innovation work for them!
What is innovation?
According to Merriam-Webster, innovation is the introduction of something new; a new idea, method or device. So by sticking to this simplistic definition, all new ideas are innovations.
Unfortunately, there is no way this definition can be used in business. All staff, all executives and all owners have new ideas about their business every day! To call them innovations would be a stretch. Hence, there is a need to refine that definition. Going back to the Christensen quote, the underlying assumption for all innovation is its impact on growth. If an organisation is unable to achieve any form of growth from its new product or service, it cannot be considered an innovation. Hence, an innovation must meet a customer need. Using that as the backdrop, we put forward our definition of innovation as “a new, or improved, product or service that meets the needs of customers in a unique manner that hitherto has been unmet.”
Is innovation a product or a process?
It is both. By definition, we label the new product or service that serves a unique customer need as an innovation. Yet, to get there, we need to embrace what Jeanne Liedtka of the University of Virginia calls the hypothesis-driven process. In effect, all new innovations start off as a hypothesis and we need to test the assumptions embedded within them in the marketplace. There are four tests: customer value, execution, scalability and defensibility (I wrote about the 4 Tests in a previous article, so will not repeat it here) that the company will need to conduct to bring their ideas to bear in the market. Pass these 4 tests, and your product or service will likely be an innovation; fail any of the first 3 tests, and you’re back to the drawing board. Hence innovation as a process will lead to innovation as a product.
What types of innovation are there?
You can focus on product, process or business model or any combination of these. Product innovation, as the name implies, is to produce something new for your customers. It could be a continuous-improvement model, or a disruptive model. Your Toyota Corolla/Altis is on a continuous-improvement model. However, the Prius, is on a disruptive model. The disruptive models are more innovative because they tend to start “revolutions”.
Process innovation is not new. It has come in many different guises before like business process re-engineering, operational excellence or Six Sigma. While realigning your processes and bringing them into greater control is extremely important, it seldom impacts top-line growth. It is a bottom-line implement. Of course, cost is very important; a company that can offer the same product at a much lower price will often edge out the competition. Yet innovation is not about finding ways to offer your customer the same thing cheaper. Going back to our definition of innovation, it is supposed to lead to revenue growth. Top-line. So while a company can still embark on cost cutting, we should heed the words of Tom Peters who once said, “You can’t cost cut your way to greatness.”
Business-model innovation is interesting. Looking at your value-chain and weighting it in different ways often lead to opportunities that may be overlooked. Perhaps there is a supplier who has a new technology that you can exploit for your customers? Perhaps you can develop deeper channels to get your product further afield? Perhaps you can outsource non-core competencies to speed up your time to market? While these are not disruptive means, and they don’t all lead to top-line growth, there is an element of newness that pulls our thinking away from costs and onto the value chain. By doing things differently, a company may enjoy revenue or profit growth.
Is innovation in-born or can it be taught to anyone?
It can be taught, but that does not mean that everyone would become an innovator. The difference is in the person’s mindset. According to Stanford University’s Carol Dweck, there are two opposing mindsets: the fixed and the growth. Her research has shown that most executives display the fixed mindset; as well they should. When a company is riding within an established environment, when the variables are known, and when competition is intense, they cannot risk what’s working. Hence they must maintain the status quo and fixed mindset people do this very well.
But innovation thrives in an uncertain environment. There is no fixed path, no predictability, no stability. Because we don’t know what we don’t know, we need to embrace the growth mindset; one where we learn by doing. We need to get out there and test our hypotheses. We must embrace failure as a tool to make innovation a success. In the fixed mindset environment, failure is looked upon with disdain. In the growth environment, it is embraced. Indeed, we might sometimes need to deliberately fail in order to succeed. Can everyone stomach this? The research says no. An organisation will therefore need both sets of mindset in their people and employ them in the correct position: have the fixed mindset folks deal with the current business, while the growth mindset people deal with future business.
And the CEO needs to juxtapose both.
Is innovation slow and risky?
We know the baseline information on new products or new businesses. Innovation success seems stacked against the norm. So in many people’s mind, innovation is slow and risky. But it need not be. Innovation starts with a series of small steps and culminates in a big push into the market. One company that does this extremely well is Samsung. When Samsung Electronics moves into a new product category, their first step is to start small: make a key component for that industry - ideally one that is very expensive to make as that becomes a natural barrier to entry (c.f. the defensibility test) - and then supply it to the major players. This gives them an insight into how the industry works. Then, when the time is right for them to expand, they scale up very quickly and compete directly with the companies they have been supplying, muscling them out by way of their financial strength. Case in point: in 2012, Samsung devoted $21.5 billion in capital expenditure, twice more than Apple. To many, of course, spending $21.5 billion is way too risky. Yet, they have mitigated that risk by starting small and failing fast. They have built up their position over time, all the while understanding the market better. Without that knowledge, Samsung would not have had the confidence to place the big bet. And how fast did they achieve all this? In 1994, they started doing flash memory devices for iPods and smartphones. Today, they control it all! Twenty years to world domination! That is pretty fast!
How does culture impact innovation?
In every way. Innovation is a strategic tool and like all forms of strategy, you need to continuously effect it from the top. Your communication plan needs to feature innovation. You need to have a means to measure the success of innovation; in a sense, you need an “innovation scorecard”. Your scorecard should track the number of projects on hand, the number that are shelved, the number that are on trial, the number that have gone to market and the returns of those projects. It should also note the number of people who are involved, and the cross-functional makeup, including the senior managers who are sponsoring these projects.
Management should also articulate what is expected of staff including the growth behaviours that they expect to see. These should be included into the annual performance review to cement their importance.
Learning should also be given priority. There should be a knowledge management system to store all the information and encourage company-wide collaboration. Empowerment is key as each successful team fans out and starts new teams, cross-pollinating ideas and experiences. This will have the effect of increasing the overall repertoire of the company, allowing it to increase the speed of innovation over time.
Culture, system and mindsets; these are major elements that management will have to look into to make innovation work.
If you could distill innovation into one word, what would it be, and why?
If by our definition innovation is to lead to growth, then there is a need for greater wallet share. That means that we need to maintain greater customer focus. Indeed, if we are able to connect deeply with our customers, we can uncover hidden opportunities that can lead to a great innovation. Take the Swiffer for example. The Swiffer was born from a strategic question: “There must be a better way to get clean floors!” This led to an ethnographic study on how people cleaned floors and they found that the ladies (it’s almost always a lady) spent more time cleaning the mop than the floor! And when there were some specks of dust, they saw the ladies using a wet tissue to pick them up. Seeing all these, they realised that customers did not need better detergents; they just wanted a better mop! And so was born the Swiffer. By seeing how your customers interact with your product, you can find new opportunities!
The key to innovation, therefore, lies with your customers. But don’t simply ask them what they want; they don’t know what they want. If given a choice, they will say they want it better and cheaper. These are not what a company wants to hear. But if you applied ethnography and followed your customer around as they used your product or service, you will see new opportunities to make your product so much better and start fulfilling a current need.
That is how you get innovation to market – through your customers!