There was a time, not that long ago when companies didn’t necessarily have an innovation-related objective on their strategic agenda. Instead, they would, for example, be focused on reducing costs, expanding geographically or creating operational excellence. It wasn’t that product or service development wasn’t important, it was just that the level of detailed executive and organisational focus on this area of the business varied in line with its perceived relevance to the company’s growth ambitions.
As Bob Dylan once sang, though, things have changed.
Innovation is no longer a strategic alternative; it is a strategic imperative. It is impossible to gain and sustain a leading position in your market without a systematic and comprehensive commitment to innovation. You must be constantly adapting and changing at least as fast as your environment, raising the bar on your performance to find new ways to win, rather than simply relying on your perpetuating your existing successes.
Innovation is, of course, far more than product and service development. In corporate terms, innovation can be seen as the delivery of an important and original idea that provides you with new competitive advantages. When you take this wider view of innovation, you can quickly identify different types:
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Product and service innovation.
This is what most people mean when they talk about innovation. Dyson’s bagless vacuum cleaner, Apple’s iPad and Nespresso coffee capsules are all examples of product innovations that have fundamentally shifted the dynamics of their market. More than that, these products have expertly met customers’ latent and unmet needs and have created new market segments, enabling these products to deliver superior levels of growth and profitability. Even with patent, trademark and brand protection, however, the competitive advantages offered by these products erode over time through competition. Despite the new pulses of growth that are driven by new sub-brands, such as the iPad Air, the iPad’s share, for example, steadily declined from its launch in 2009 as competitors led by Samsung offered consumers a range of attractive alternatives. In other words, even with game-changing innovations, entropy will inevitably take over and your advantages, revenues and cash flows will decline. Relying on single-hit innovations, rather than a stream – or even a torrent – of new innovations, will not create sustainable success.
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Operational innovation.
Some companies drive innovations through their operating model, often led by investment in technology. During the 1980s and 1990s, for example, WalMart gained huge advantages against Kmart and its other rivals through the company’s massive and sophisticated investment in supply chain systems and technologies. Unlike product innovation, however, you are far less likely to be able to protect such innovations with patents and trademarks, unless you were willing to make the investment in proprietary technologies, and so any competitive advantage you accrue are at even greater risk of decay. Again, as your rivals catch up you will be required to find the next stage innovation if you wish to maintain or extend your operational advantage.
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Business model innovation.
It’s possible to innovate at an even higher level than product or operations. Ryanair and other low-fare airlines, for instance, have transformed the air travel market by creating and deploying an entirely new business model that traditional carriers find difficult to compete against. The limited service, use of less popular and costly airports, rapid turnarounds and use of a single type of aircraft (the Boeing 737 being most common) enables these companies to run at costs far below the bigger, full-service airlines that are focused on their hub and spoke business models. Product innovation can also go hand-in-hand with business model innovation. Nespresso, for instance, not only sells a range of coffee capsules but also does so through a system that the company either controls or strongly influences. The coffee machines can only use Nespresso capsules and the capsules can only be bought through company’s online portal or from its small chain of boutique stores; they are not available in grocers or other retailers. Innovations focused around entire business models are harder to copy than product or operational innovations, but are equally harder to develop and deliver.
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Organisational and cultural innovation.
Finally, companies can innovate around their culture and organisation. In the 1980s, for example, ABB created a high-growth business by breaking the huge engineering company into a series of smaller and entrepreneurial business units. Back in the 1930s, Alfred Sloan created a scientific, profit-focused and strategic approach to management at General Motors that shaped how generations of managers approached their own businesses. More recently, Toyota has developed a brand and business success on the back of a cultural approach to quality management at the auto manufacturer that puts the focus on the line teams to manage their own performance. And in 2009, Amazon paid $1.2 billion for a shoe retailer that only started trading in 2000. The rise of Zappos was driven by the relentless focus of its leadership team on customer service, and the development of an organisational culture that provides a great experience for its workers, encouraging them to go the extra mile for their customers. In other words, it is possible to create a serious competitive advantage through your organisation, management approach and culture that other companies can find hard to match.
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Using this broader view, you can immediately see that the potential for better and faster innovation in many businesses is huge. In most organisations, however, there is a yawning gulf between senior leaders’ rhetoric on innovation and the reality on the ground. Managers remain fixed on fixing issues with the current business rather than raising the bar and creating new opportunities for growth.
If you think about the innovation of your business across these four types of innovation, what further potential for growth can you envisage?
© Stuart Cross 2017. All rights reserved.