Innovation For Business Success. It is possible to be innovative in both large and small companies in Australia, and to derive significant business success from that innovation.
Innovation For Business Success
Acknowledgements My sincere gratitude goes to the many people whom I have spoken to and learned from over the past year, on the subject of innovation capability. This clearly includes the many people who are running hard with innovation in our case study set, who gave their time willingly to allow me to interview them and learn how they achieved and sustained their innovation capability. Thanks in particular are due to Michele Hamdorf of GRLmobile, Gus Balbontin of Lonely Planet, Heather Box from Toyota, Daniel Liepnik of Specialty Textiles, Andrew Logan of Newcrest, Tony Ward from Microsoft, Syd Schneider of Stetchtex, Christopher Janssen from GPC Electronics, Phil Butler of Textor, and Steve Plarre from Ferguson Plarre who were my primary contacts and interviewees in the case study companies included in this study. Thanks also to their many colleagues, too numerous to mention, who I was also privileged to talk to and learn from. Your personal innovation efforts and your organisations’ achievements in systematic innovation capabilities are in my view nothing short of heroic. These efforts and their outcomes collectively demonstrate and indeed prove that firms in Australia can successfully do more than just be an ordinary source of raw materials for the world, and that even in that endeavour, that innovation can be a real differentiator! You have shown how systematic innovation capability can turn the ordinary into the extraordinary. Thanks also to my colleagues who have directly or indirectly influenced my thinking and this work: thanks to John Grant, Damien Power, Tobias Schoenherr, Prakash Singh, Peter Cebon, Chris Thomas, Suzy Goldsmith, Sarah Samson, Jack Wacker and Christina Scott Young. I wish to also gratefully acknowledge the terrific assistance and support I received from Evan Read and Meg Crooks of the Department of Innovation, Industry, Science and Research on developing and supporting this project. Finally, I hope that readers will find the findings of this study and the case studies of innovation achievements as inspirational as I found the people and the organisations that are driving them.
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Contents
1. Executive summary 2. Introduction: the key role of innovation in enterprise success 2.1 The way ahead: innovation! 2.2 Going forward on innovation 2.3 Systematic Innovation: the ultimate in value adding 2.4 Strategy of innovation 2.5 Operating practices and resources 2.6 Measures of performance 2.7 Rewards and recognition 2.8 Behaviour and culture 3. Background review of innovation 3.1 Strategy and Innovation 3.2 Resourcing for Innovation 3.3 Innovation Measures 3.4 Rewards and recognition for innovation 3.5 Culture and Behaviour 4. Methods used in this study 5. Case study synopses 6. Findings: Principles common to systematically innovative companies 7. Managerial implications: How your organisation can drive forward on systematic innovation capability 8. Case studies 9. Bibliography 10. Appendix: project specification
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1. Executive summary
It is possible to be innovative in both large and small companies in Australia, and to derive significant business success from that innovation. These innovative companies have developed a systematic innovation capability, which assures them of a series of innovations that deliver business value. Innovation success starts with strategy and leadership, in which innovation is prioritised, as important to the business. Guided by this strategic direction, these firms resource innovativeness in their operations, including in their workforces’ creativity. They measure innovation and recognise it as important in their workforce, and some reward their staff for contributions to innovation. Through strong senior executive leadership of innovation, staff are encouraged to contribute to innovation and the behaviours and culture lead to a deep embedding of the innovation mindset and culture. This innovativeness is attractive in labour markets and allows these firms to attract and retain talented people. External relationships also reflect the innovation focus. These innovative companies generally match up with customers looking for innovative solutions, and prepared to pay a premium for such innovations. These innovative companies often work with their supply chain partners to extend the domain of their innovation efforts over a broader asset base. They mostly practise various forms of open innovation, meaning that they work collaboratively with a range of partners, with which they can achieve win-win innovation outcomes. Innovations can be in the form of new products or services, or cost-reducing process improvements, or innovative business models and methods. The benefits of innovation occur in all aspects of the profit/loss statement: innovators drive additional sales volume, achieve price premiums and reduce costs through process improvements. In addition to the financial benefits, innovation goes hand-in-hand with sustainable development initiatives, as both require progressive leadership and an appetite for change, combined with a tolerance of experimentation and some risk. For the companies we examined, the risks and the initiatives that did not work were more than made up for by the wonderful successes, in revenue, growth, price premiums and cost reduction. This report provides detailed case studies, from which we deduced common principles of systematically innovative companies.
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2. Introduction: the key challenges and role of innovation in enterprise success This study has been conducted to closely examine the factors that are associated with successful innovation at the enterprise level. Firstly we wanted to find companies that have consciously adopted a competitive strategy that is at least partly if not significantly based on their innovation capability. Second we wanted to find some 10 companies which have different approaches to innovation; hence we considered and examined firms in a range of industries and of various company types and sizes. For Australian companies wishing to achieve and sustain positions of success and profitability, there are some important facts to face into, in terms of competitive advantage. First is that we are an expensive country (in global terms) to operate in when it comes to the cost of labour in particular. Everyone from graduates such as accountants and engineers through to senior executives, shop floor workers, tradesmen, and our administrative support people cost much more to employ here than in a number of other countries, such as in most of Asia. So when it comes to considering global competitiveness, we can’t compete easily at all on labour cost in most industries (nor do we as a community and nation wish to be a low wage economy). And it’s not just labour cost: rent in our capital cities and other costs, such as travel, infrastructure, utilities, local component inputs, raw materials and services etc, and regulatory compliance costs of many types are all more costly in Australia than in countries such as India, China, Malaysia, Thailand etc. So if cost competitiveness is a tough challenge in Australia, one then wonders if it might be possible to achieve competitive advantage through service and quality. Whereas this used to be a way of getting and staying ahead, and still is up to a point in some market segments, it is reducing in potential. Engineers in India and China for example, who will work for much less than those locally, are able to do good design and are prepared to work extremely hard, including long and flexible hours, such that coupled with the internet for communication effectiveness, high levels of both service and quality can increasingly be obtained from such places, at lower cost. Such is similarly the case for software developers, call centre operations, information processing centres and for manufactured goods from China, Vietnam, Pakistan and Indonesia. Many Australian companies have decided that “If you can’t beat it, join it”, and have partnerships or offices in low wage countries, in order to ensure they can be cost and service competitive. This tends to reduce the potential for ‘value adding’ onshore, even if it keeps these businesses surviving for longer than would otherwise be the case. Even if it is possible for a firm to be competitive in cost and service/ quality, clients will not normally pay any significant premium for this, as it is becoming expected in most industries, and profit margins will not be sustainably superior. This is because these capabilities are relatively easy to replicate, so they are indeed widely replicated (including in low wage
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countries), hence clients ultimately become the main beneficiaries of improved service and costs/ productivity improvements as they sweep through the industry, and this includes cost reductions through ‘off-shoring’ to low wage countries. Advantages from these factors, even for first movers, can last only a small number of years. The good news is that sustainable advantages of another kind, however, are possible. This comes from true differentiation through innovation. And while no single innovation lasts forever, what can last for a long time is advantage through superior systematic innovation capability! To achieve this advantage, innovation needs to be the key focus of all the building blocks of your organisation, as is the case in leading innovation-oriented firms. Internationally, well known examples of this phenomenon include Apple, Google, Samsung, Sony and 3M. This systematic innovation capability means that: 1. Your business strategy must be centred on finding innovative solutions to your clients’/ customers’ problems. From proactively solving these problems, one creates business opportunities. Strategies need to include looking for new and different ways to solve problems for clients and new and different ways to conduct your own business processes. This means developing brand new products and services too. This work and orientation also allows your firm to win the ‘war for talent’, because most talented people have a natural affinity for innovation and will be attracted to firms which are sincerely trying ‘do’, meaning implement, innovation effectively. It also drives internal process innovation and leads to cost reduction. 2. Systematic innovation needs to be properly resourced, and processes must allow for some experimentation, thinking outside the square, and taking carefully judged and calculated risks when needed. This includes stimulating creativity in all staff, which is a training and skilling-up opportunity. Knowledge management is an opportunity here too, requiring systems capabilities and forums for exchanging ideas between staff. 3. If a firm is serious about systematic innovation capability as against just paying a ‘lip service’ approach, then innovation must be measured and be a central part of the business KPI (key performance indicator) system of the organisation. Remember the saying that is indeed a truism: “What gets measured gets done!” 4. The business innovation measures are even more powerful when they are then translated into personal incentives for all staff. This means that staff are recognised, rewarded and promoted at least partly on their contribution to innovation capability and innovations. Without this, staff can get away with not ‘buying in’ which can defeat the purpose, whereas with this factor in place, staff achieve personal gains while doing great innovative things in the business and for
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clients. When the business measures are strongly aligned with personal and team success drivers and incentives, a huge amount of energy is unleashed in the workforce! 5. Emphatic leadership of the behaviours and culture works wonders. When we see our senior executives demonstrating some thinking outside the square, trying new initiatives, demonstrating and encouraging some sensible appetite for risk and tolerating the occasional failure as a learning opportunity, then the fear is removed and people get on board with innovation, and it can become a reality. 2.2 Going forward on innovation One thing is for sure: an innovation capability will not develop on its own; it needs to be consciously formulated, resourced and driven into place. Some key questions are: Does your firm want to succeed through innovation? Do you have a strategy in place for innovation? Do you have the right resources, skills, and systems in place to achieve systematic innovation? Does your business measurement system include prioritisation of innovation measures, including inputs, innovation process intensity and innovation outputs? Are staff recognised and rewarded for their contribution to innovations? Do leaders talk and walk innovation, and lead innovation by example? We now present an examination of some other studies and publications on innovation, then our own findings, based on case studies of 10 Australian-based companies.
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2.3 Systematic Innovation: the ultimate in value adding This report examines both concepts and practices of ‘systematic innovation capability’ in Australia. We seek to answer important questions including: What business strategies do systematically innovative firms formulate and implement, and how do they go about this? How do these firms resource their innovation capabilities and activities? What measures of innovation and innovativeness are being used by innovation leaders? How do these innovation leaders reward, recognise and promote staff? How do these companies drive culture and behaviours towards innovation? What barriers exist to doing even better in terms of innovation? How much and how is sustainable development being applied and used in innovation oriented companies? Who in these firms are the critical contributors and catalysts of innovation? These questions are examined in a series of case studies, from which insights of common principles and practices, as well as some unique insights about these firms, can be drawn. Innovation means many different things to many different people. We are examining it from a value creation perspective in firms which engage in any of small to large changes to any of their products, services, processes, technologies, or business models, in order to create business value. We consider that innovation can occur as the occasional ‘lucky break’, which we are not interested in. Rather we studied the phenomenon of systematic innovation capability, with the view that such capability is likely to lead to a stream of innovations. It must be acknowledged that no firm is always successful with its innovations, including the global ‘innovation masters’ such as Apple, Samsung and Sony, due to the challenging and uncertain factors in introducing new products, services, processes etc. However, it is reasonably assumed that those with a robust and systematic innovation capability are more likely to have higher probabilities of success on any single new innovation activity, and significantly more such successes overall. Hence in these successfully innovative firms, such as Sony and Apple, Samsung and HP, there is a sustainable capability for the successes to more than fund the failures. Readers will be familiar with Sony’s Walkman, Discman and series of PlayStations more than making up for its product failures and similar is so with Apple’s Macintosh, IPod, iPhone, iTunes and Apple retail stores. Both these companies have had spectacular product flops, even once launched on to global markets, but the successes in their portfolio of innovations have given an overall business advantage which is substantial.
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Innovation has been variously defined as: “The commercial or industrial application of something new, a new product, process, or method of production; a new market or sources of supply; a new form of commercial business or financial organisation (Schumpeter, 1983) “Intersection of invention and insight, leading to the creation of social and economic value (Council of Competitiveness, 2005) Innovation covers a wide range of activities to improve firm performance, including the implementation of a new or significantly improved product, service, distribution process, manufacturing process, marketing method, or organizational method (European Commission, 2004) Innovation – the blend of invention, insight and entrepreneurship that launches growth industries, generates new value and creates high value jobs (Business Council of New York State, 2006) It is clearly possible to implement innovation effectively, and to do so systematically, or not. There are firms in Australia doing it systematically well, and herein we examine how they achieve this. The aim is to observe closely the managerial factors that make up systematic innovation in these successful firms (of various ‘shapes and sizes’), then to deduce from these current successes a set of generic elements, which we term as principles, of managerial practice that can be valuable and instructive to other companies which aspire to such success. Our approach is to examine key building blocks, and these are set out in overview in Figure 1. We examined how these firms drive their activities in each of these areas of activity, and importantly, how they connect them up to achieve a powerful, company-wide innovation focus.
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HIGH LEVEL SUMMARY STRATEGY •Positioning INNOVATION in a market, fit INNOVATION with business environment and INNOVATION capabilities BEHAVIOUR AND CULTURE Performance oriented for the business : PEOPLE THINKING AND WORKING ON INNOVATION
OPERATING PRACTICES •Production and various support activities DRIVE AND RESOURCE INNOVATION
REWARDS & RECOGNITION •Pay, promotion, recognition BASED ON INNOVATION
MEASURES OF PERFORMANCE Eg operating and business performance, PARTICULARLY INNOVATION
Figure 1: Systematic innovation capability requires a focus on innovation in every one of the key building blocks and the connections between them First let us define each of the building blocks in Figure 1 and comment on some of the connections in this organisational ‘system’. 2.4 Strategy of innovation A precursor for a systematic innovation capability is to consciously and purposively engage in such as a strategy. Then and only then, it will achieve enough resources, priorities and company-wide attention. Strategy is usually best made plain and explicit so that staff and indeed all stakeholders can understand and align with it, hence we would expect to see systematically innovative companies ‘talking the talk’ of innovation at all levels of the organisation, on the way to ‘walking the walk’ of innovation. This is certainly the case in 3M in terms of product and service innovation that leads to revenue growth, and similarly in Toyota in terms of process innovation that brings increased productivity and quality. In this aspect of strategy and ‘mindset’, some companies have the dynamism of innovation ‘in their DNA’, and some simply don’t, with all shades of grey existing in between these extremes. In summary, it is possible to recognise the extent to which innovation is central to a business’ competitive strategy. If it is not a key part of its stated competitive strategy, then that is the first building block to work on, assuming that systematic innovation is a desired outcome.
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2.5 Operating practices and resources Operating practices that are the implementation processes of innovation include research and development, creativity and thinking outside the square, qualified risk-taking (as against pure conservatism and a ‘don’t change’ attitude), and an approach of ‘let’s go for new value’ as against ‘same-old same-old’. Problem solving activities would encourage creativity and new ideas. Ideas for improvement of processes and customer value creation would come bubbling up from the shop-floor of the company, and be accepted and valued as such at the top floor. Similarly, the board and senior executives would lead with careful risk taking and willingness to experiment and think and work ‘outside the square’. And the necessary resources that must be committed in order to convert strategic intent and talk into innovation deeds is evident in firms like Toyota, which even in the recent Global Financial Crisis, continued to commit substantial resources to new product development, process improvement and related elements of progress. These resources can include time for staff to work on innovation ideas and projects, money spent internally on such projects, training, and resources spent on external partnerships related to innovation and progress. 2.6 Measures of performance Although the details are always different in terms of specific measures, the old adage of: “What gets measured gets done” still applies. A critical measure of performance would be the progress in creating value through innovation. Further, innovation inputs would be monitored and carefully allocated and controlled, as they would be seen as important and scarce assets, to be used wisely. Within the organisation’s processes, innovation intensity would be assessed/ measured. In some companies, key measures include number of new ideas, revenue from new market offerings, or process improvement rates and productivity increases or cost reductions through innovation. 2.7 Rewards and recognition In systematically innovative companies we would expect to see staff recognised and rewarded explicitly for their innovation contributions. Such rewards may be monetary, or be in the form of other tangible benefits, or be psychological. Some firms pay their staff for innovations and continuous improvement ideas, some give additional benefits as monetary or non-monetary bonus elements, and some have powerful recognition systems, which may be formal or informal, depending on their style and culture. Perhaps the adage above “What gets measured gets done” can be extended to “What gets measured and rewarded gets done, hard!”
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2.8 Behaviour and culture Finally to close the loop on innovation (see Figure 1), it is not machines that do innovation, but rather people. Once the business measures of innovation are in place, based on strategies and operating resources focussed on innovation, then the rewards and recognition will lead to a collective mindset and set of behaviours that drive innovation. From this comes the energy to turn strategy and operating resources and priorities into action and success! An innovative culture can be created, where it becomes systematically second-nature for employees to creatively attempt to find innovative solutions to challenges, to constantly strive for continuous improvement, and to know how to evaluate risk and return of new activities. In such firms, innovation becomes embedded as part of daily work, not an addendum on “Friday afternoons”. After some time at this state, innovation becomes a matter of conscious competence, and then when it really becomes maturely and systematically ingrained, it can become an unconscious competence. We would expect that relatively few firms have achieved company-wide ‘unconscious competence’ in systematic innovation, however, even if it is far away on the horizon from where ‘your’ organisation is currently, then it represents a very worthwhile long term goal, and we propose that the journey towards it, when well led and managed, should be highly value creating and satisfying in itself. To achieve the company wide innovation behaviours, role modelling by senior managers is a critical symbolic behaviour. When staff see their managers and leaders being innovative, and taking some risks, then they will likely follow. Conversely if staff see ultra conservatism, actions and resources only ‘inside the box’, then they will follow that lead and innovation ideas will be thwarted. We now examine some of the existing knowledge base of innovation, and then use that knowledge as a lens for studying ten Australian business case studies of innovation.
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3. Background review of innovation In this brief review of ‘what is known’ about systematic innovation, we examine innovation through the lens of the framework shown as Figure 1, examining each component in turn. 3.1 Strategy and Innovation To achieve successful systematic innovation, there must be small, continuous efforts, as well as large breakthroughs where possible, which run through every aspect of a company’s activity set. There are many elements of innovation, and research shows that these should be considered together, not in isolation, for success in fostering innovation. This is ‘innovation as competitive strategy itself’, including setting and articulating direction, led by senior executives who role model innovation behaviours and resourcing of the creativity, experimentation and risk taking. This applies to large new product or service developments as much as to smaller process or restructuring innovations. According to McGregor (The Weekend Australian Financial Review, June 9-12 2006, pg 46, “Take Courage, imagination, and mix for innovation”), innovation is about more than just developing new products, “it is about reinventing business processes and building entirely new markets that meet untapped customer needs … and it’s about selecting and executing the right ideas and bringing them to market in record time”. Companies that have strived for this, and achieved this, include IBM, Proctor and Gamble, Apple, Google, Toyota, and 3M. These companies prioritise developing and creating new value, and it is a key part of their short and long term strategy. Toyota has an almost obsessive focus on creating and developing innovative products, and the Toyota Prius is a sound example of this. Prior to the launch of the Prius, Toyota had been considered to be a relatively conservative and risk-averse company which focused on processes and productivity improvement rather than new radical products. However, with the introduction of the Prius, the world’s most successful hybrid vehicle offering an alternative to the purely internal combustion engine, Toyota can consider itself one of the world’s great manufacturers and great innovators (Taylor, 2006). Toyota worked feverishly, and against the odds (and it had many critics), to develop a leading car in a new market segment, and was the first to successfully launch a large-scale, hybrid mass market vehicle to the market. Toyota however achieves much more than the occasional breakthrough innovation such as the Hybrid Synergy Drive, however successful it has been. It is also the master of continuous process innovation. These process improvements increase value to its customers and shareholders, both by reducing cost, and simultaneously increasing customer benefits. Toyota is not without its problems as seen in the 2010 product recalls; however these can be put in perspective as part of
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what comes with being on the edge of innovation. Apple too has had its quality problems, and in services, Google has had similar service glitches and difficulties. However these companies are very high performers in every way including their long term job creation and wealth creation, including factoring in their problems. Customer focus practices are important in guiding product and service innovation efforts. Researchers have found that many commercially important products are initially thought of and even prototyped by users rather than manufacturers/ suppliers. Second, they discovered that such products tend to be developed by “lead users” –which can be companies, other organisations, and individuals. 3M is a company that has been at the forefront of innovation, through adopting a “lead user” strategy into some of its divisions, many of which had not had breakthrough products or ideas for some time. One example was in 3M’s Medical / Surgical Markets Division, which was trying to create a breakthrough in the area of surgical drapes, which are the materials/ systems preventing infections from spreading during surgery. The lead user strategy aims to collect information around possible developments and enhancements for a particular product, which can eventually lead to a breakthrough in product offering which leads to a competitive advantage. In this instance, observation of lead users who adapt or make do with non-optimal ways to satisfy an important need (not spreading infections during surgery), led to the development of a specific new product or service which clearly and valuably satisfies that exact need. Such a process is needs driven, and highly likely to ensure that the developed innovation has a market, rather than become a ‘solution looking for a problem’. There are four key phases to the lead user strategy; Laying the foundation – define the problem and get key stakeholders on board Determining the trends – find out trends from experts in the field Identifying the lead users – a networking process to identify and learn from users at the leading edge of the target market, and related markets. Ideas and problem solving may contribute to development of a breakthrough product. 4. Developing the breakthroughs – move preliminary concepts towards completion. Members of 3Ms Medical Surgical Markets Division met with what it considered to be the lead users in the market, including surgeons in hospitals and members of the medical profession from all over the world, as well as more unlikely lead users, which included people in Hollywood. Makeup artists are experts in applying materials to skin that do not irritate and are easy to remove – which are characteristics and attributes that were needed in the design of infection control materials that were to be applied to skin during surgical procedures. We note the lateral - outside the square- thinking and creativity that is applied here.
1. 2. 3.
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After all of the lead users met and spent many hours brainstorming and sharing their expertise, a final workshop generated six new product lines and a breakthrough new general approach to infection control. Three of these were presented to 3M senior management and as a result, a discovery centre was set up to further develop and implement the breakthrough product lines which the lead users came up with. Further, as a result of this successful process in creating breakthrough products, 3M has now implemented the lead user method in eight of its 55 divisions (Von Hippel, 1999). The lead user strategy for breakthrough and innovation is an extremely important and useful source of information for companies, because there are usually many more innovative product users compared to innovative product developers. Simply put, it is highly cost efficient to implement lead users as a spark in innovative developments, as well as highly effective in achieving sound outcomes. Sony used this to its advantage when it set up a web site to support hackers who were interested in developing and exploring new types of games that could be played on the Sony PlayStation. This website attracted approximately 10,000 participants, a number far exceeding the number of in-house software developers employed by Sony. Sony’s vice president of external R&D, Phil Harrison, said “many of the ideas were expected to be breakthrough ideas that could overcome what was holding Sony back today”. (Von Hippel, 1999). This also introduces the idea of ‘open innovation’, in which innovation is not seen and managed as being completely held in a closed and often secretive environment in the laboratory or in the firm’s deeply held bank of secrets, but rather quite the opposite. 3M went to Hollywood to get input for its new surgical products, opening up its ideas and product developments, rather than hiding them until launch. Sony went to the Internet to invite ideas about its PlayStation, and recognised that any price it possibly pays, through making its product development intentions known to competitors, is more than made up for through the almost free creative contributions that come in from the outside world. Open innovation can be very powerful. While the above examples demonstrate how innovation can be sourced externally, many companies have been able to successfully source innovation ideas internally. One approach certainly does not preclude the other, and a sound balance is best. According to Timmerman (John Timmerman, “A Systematic Approach for Making Innovation a Core Competency”, The Journal for Quality and Participation, January 2009, pg 4-10), “innovation can be grown internally through strategic research and development or more informal processes that encourage benchmarking and employee ideas”. Companies which have successfully developed an internal and well established core competency of innovation include Disney, Corning Incorporated, Cisco Systems Inc, and the Ritz Carlton.
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Ritz Carlton have been able to successfully implement a four-step innovation process, which is aimed at fully engaging employees’ creativity to craft service experiences that delight customers. The four steps include: 1. Inspire vision 2. Foster the right environment 3. Stimulate ideas 4. Test ideas For any such new ideas, we have developed and collated in Table 1 the key ‘tests’ that can and should be applied to filter and screen the best ideas from the many that will not lead to value creation, and hence should be discarded. Table 1: Tests of a new product or service
Test 1. Valuable benefits test Meaning Does the new product, service, technology or process provide benefits in a manner that is clearly superior to existing services or methods? Can you articulate the ‘value proposition’ of what is new and why it is better in value terms that customers or clients can appreciate? Can the concept be mass-produced in volumes and with the consistent quality to its specification in order to satisfy the market need? There have been many ideas that made it to the prototype stage, but when it came time to scale up, they failed to be ‘mass-producible’ or production proved to be prohibitive from a cost perspective.
2. Scale up test
3. Marketing test
Have you determined or assessed demand, and do you have a channel to the client or consumer base? Many inventors end up with a garage or warehouse full of their products, because they did not do their homework on the marketing test. The whole marketing mix must be planned as part of the commercialisation process. This includes design, branding, pricing, distribution, sales, and other factors. Do the key people involved in this initiative have the knowledge, skills, experience and courage to take it through to fruition? You have to make decisions around your IP, and either buy, own or licence-in the core technologies and other elements of IP involved in the innovation.
4. Leadership (team) test
5. Intellectual property control test
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6. ROI (return on investment) test
This represents the financial bottom line of the innovation. Will it pay? The new concept must generate enough profit to make it worthwhile, including accounting for risk and the time discounted value of money. This is also sometimes referred to as the sustainable development or sustainability test, and refers to the environmental sustainability of the initiative and also the social/community outcomes. Products, services and technologies must now at least not harm the environment and community, or do so minimally, and where possible are advantaged by producing positive bottom line outcomes on all these dimensions. Leading companies often find a way to make progress on all three dimensions of value creation outcomes (financial, environmental, and social), with their inventions and innovations. Is the new initiative (product, service, process, technology, business model), consistent and aligned with our firm’s overall business strategy?
7. Corporate social responsibility test
8. Strategic fit test
The first two steps in Ritz Carlton’s approach are the responsibility of senior management and other leadership team members. These are aimed at ensuring that employees believe their ideas will be considered and valued (even if they are not all implemented) and that an environment that fosters innovation and ideas is created. Once the environment that fosters creativity and ideas is created, management should then take steps to encourage the creation and development of those ideas. This can be done by ensuring there is a well diversified talent pool within the organisation that can be stimulated to study customer behaviour and ask thought provoking questions. Ideas should then be tested and evaluated, which can be done through company developed evaluation matrices, or other decision tools. Table 1 presents a useful way to consider and test a new idea for a product, service, process, or new business model. These various categories of feasibility should be the ‘chapters’ of a business plan proposal. According to Timmerman, through the implementation of this 4 step process (which was developed from a research based approach by analysing the current body of knowledge from resources including Harvard Business Review and the American Society for Quality), “The Ritz Carlton was able to successfully implement this 4 step process, and can now leverage employee ideas effectively and efficiently, improving its ability to create exceptional experiences for its customers”. Much research has also been conducted to attempt to discover why some companies can achieve sustained revenue growth, and why some are not successful in achieving this. A study completed by Kim and Mauborgne and presented in an article called “The Strategic Logic of High Growth” in a 1997 Harvard Business Review article, found that companies which discard conventional methods of a product or industry and do not necessarily focus on their
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competition or matching or beating their rivals, performed better in terms of revenue and profit growth. This evidence points again to ‘thinking–and doing- outside the square’. For example, in 1980 the news broadcasting network CNN introduced a new and innovative news service, being the first to introduce 24 hour real time news, for one-fifth of the unit cost of one hour of network news. It chose not to follow the traditional format of news delivery, and broke away from what its competitors had been doing; not letting competitors set the parameters of their strategic thinking. Rather than take the industry conditions as given and set a strategy accordingly, CNN decided not to follow suit and opted out of the race to compete for big-name news anchors. Kim and Mauborgne found that “even though value innovators do not set out to build advantages over the competition, they often end up achieving the greatest competitive advantages”. Kim and Mauborgne believe that “competition should not be monitored as a benchmark in the strategy of innovation”. Instead, their stated objective of innovation is to “make competition irrelevant by offering fundamentally new and superior value in existing markets and by enabling a quantum leap in buyer value to create new markets” (Schlegelmilch et al., 2003). Many companies have been able to successfully adopt this philosophy by changing and altering existing ‘rules of the game’ in an industry, and being able to break the trap and explore more innovative and more efficient strategic areas of focus. GE, Wal-Mart, and Dell were all able to create a competitive advantage through making strategic changes to their logistics businesses which saved costs, promoted service quality to customers and increased revenues and profits. These were new process and business model innovations, much more than new products or new services. There is also a theory, developed by academics and known as Enterprise Innovation System (EIS), which is a “set of conditions, rules, processes and techniques in all firm related activities, which innovators rely on in order to implement critical change on factors and conditions of production, usually by a means of technical invention, management discovery, market opportunity and commercial success” (Shen, H. et al., 2009). This theory is specifically aimed at and applied to logistics companies. According to Shen et al, “EIS is constituted of six elements – strategic innovation, organizational innovation, cultural innovation, products innovation, process innovation, and marketing innovation”. Innovation cannot be considered as a single function in that approach, but instead is a network which interacts with all value chain activities. Different parts of the organisation need to interact and provide feedback, in order to support and foster innovation. For example, logistics services and product innovation may depend on other innovation elements to achieve output and benefits, and marketing measures always alter according to the modifications or extensions of the consumers’ needs (Christopher, 1993).
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EIS is a framework under which logistics firms can assess their processes according to best practices, and by focussing on the six EIS elements, will avoid more unnecessary failures than if they were focusing on single elements of innovation in isolation. Furthermore, in the process of innovation, managers should aim to achieve a deep insight into the organisation’s resources, capabilities, and potentially uncertain environment. “Whether the resources and capabilities within the environmental context can be managed effectively and efficiently will determine the implementation process of innovation system and achievement of organizational goals” (Shen et al, 2009). Shen et al certainly have strongly supported the idea of innovation being a broad strategy, requiring a firm-wide systemic approach. We would argue that their approach is consistent with the building blocks offered in Figure 1 above. Skarzynski and Gibson (2008) believe that the key to creating and fostering innovation within an organisation has less to do with increasing personal creativity, and “more to do with assembling the right sorts of insights to provoke business breakthrough”. They believe that great innovators are able to uncover new opportunities by viewing things from four perspectives; challenging orthodoxies, harnessing discontinuities, leveraging competencies and strategic assets, and understanding unarticulated needs. For example, IKEA challenged orthodoxies when it internally questioned why home furniture needed to be delivered custommade and already fully assembled. Another way to approach the creativity aspects of innovation, meaning the invention spark, is to consider constraints in existing products, service or processes, or tradeoffs and contradictions acting in the world. For example, the inefficiency of the standard internal combustion engine in vehicles (only about 30% of the energy in petroleum gets to the vehicles wheels to create motion), and the unacceptable greenhouse gas contribution of these, has been a constraint for 100 years, with only quite minor improvements occurring over that time. There are tradeoffs in engine and vehicle design that we can all see, between acceleration rate and power on one hand, and fuel efficiency. To breakthrough this frontier of tradeoffs, and move it significantly forward for users, a radical outside the square solution has occurred, namely the petrol-electric hybrid, essentially doubling fuel efficiency in city traffic, through recapturing and storing as electrical energy, some of the previously wasted energy/ inefficiency. And innovation is never ending, so the next even better generation of engine technology is rapidly developing. Once we can effectively store energy and power vehicles with acceptable performance via electric motors, the contradiction of wanting effective vehicle motion and low greenhouse gas production can be overcome via separating the electricity generation from the vehicle: so we then get the fully battery powered car. The electricity can then be generated anywhere, by any feasible means, coal, wind, nuclear, gas, hydroelectric etc, and transmitted to the car’s battery system using existing electricity transmission infrastructure. So the need for using dwindling and expensive liquid petroleum in many millions of inefficient car engines can be eliminated, and the energy can be remotely
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created from the point of vehicle motion, in a relatively efficient manner, which can be energy efficient and environmentally less damaging (depending of course on the energy source and the transmission efficiency). The simple petrol engine, a breakthrough of 100 years ago, is rendered essentially redundant through breaking through the constraints and contradictions of efficiency and pollution that it locked in. From a business perspective, there is a massive opportunity for those who participate in winning new technologies and products/ services existing in and around discontinuities, and a grave threat to those who try to overly persist with the old. Such discontinuities, whether technological (eg the internet), social (consumers caring greatly about the ethics and sustainability practices of businesses they buy from), environmental (consumers caring about the pollution and work conditions in factories) or in markets, or regulatory regimes, cannot be ignored, and in successful business are not just a matter of correctly reacting to them, but rather being out front of the curve of change and profiting from that front position. Innovation requires proactive approaches to customer needs, technical matters and internal business systems and culture. Skarzynski and Gibson define discontinuity to be “a pattern of trends that has the potential to dramatically change competitive rules or industry structures, opening up substantial new opportunities”. Nokia was able to identify a discontinuity when after the emergence of a global youth culture in the 1990s it sent a team to Venice Beach in California, King’s Road in London, and Tokyo’s Roppongi district to gain insights into developing their mobile phones, allowing it to gain a competitive advantage and huge youth appeal. This was again a way of getting lead user inputs as a stimulant to their innovation processes. Disney has leveraged competencies and strategic assets as well as any other company in the world. Following the success of its brand in three-dimensional (3D) entertainment, it realized it had exceptional skills in set design, costumes, story-telling and performance arts. It thought about where else these skills could be adapted, and decided to branch out into live theatre production. Beauty and the Beast and The Lion King are now amongst the most successful live musicals in the world, playing Broadway, London’s West End and many other places. This embodies systematic thinking about capabilities and their exploitation, in creating and meeting new market needs and opportunities. As much as for tangible products such as the fully electric car, Disney’s newest entertainment services must pass the eight tests as in Table 1 above. Radical innovators are also able to understand and feel the unvoiced needs of customers. In the most extreme of positive cases, they can recognize and see customer needs, which the customers themselves don’t even see yet. For example, nobody was asking for a global overnight courier service, or a way to buy a custom-built, made-to-order computer directly over the phone or internet – yet companies such as FedEx and Dell were able to address needs and solve problems through serving customer requirements which people did not yet know they had
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(Skarzynski, 2008). The average consumer or even the lead user might not have been able to tell Akio Morita, then president of Sony, about their desire for a portable cassette player, yet when Walkman was launched, we lined up to buy it at premium prices. The spark of radical innovation and associated creativity may well come from a ‘creative genius’ anywhere, at any level, inside the organization, or outside, or perhaps more often, be a result of intertwined interactions of inside and external influences and inputs. However it does require the organisational conditions in which such ideas will ‘get a voice’ and be encouraged, nurtured and developed. In summary, there must be a strong and undying strategic imperative in a firm for innovation for it to have any chance of ‘catching on’ and becoming wholly or partly systematic. This begs the whole question of leadership of the innovation initiative and capability, which we will address later in this publication: suffice it to say now that leadership is both the motivator and the glue, and the stimulant of that strategy, and the allocator of resources that will embody implementation of the innovation strategy. 3.2 Resourcing for Innovation Innovation may be sourced from a number of different avenues, and some research indicates that the inventive source of innovation is irrelevant. Many companies have been successful in sourcing innovation from external sources (i.e. through merger and acquisition activity, or buying/ licensing in technologies), and from technology partners through ‘open’ innovation, and some from internal sources. Many companies attempt to develop and acquire innovation through acquisition of other companies. In fact, in 2008, there were a record number of mergers and acquisitions, and according to Roger Martin, the Dean of the Rotman School of Management, much of this merger and acquisition activity was in an attempt to source innovation externally (Vella, 2008). Examples of companies which have successfully been able to source innovation through mergers and acquisitions are IBM, SAP, and Cisco. Cisco is a very large company, and its strategy is to wait for venture capitalists to capitalise companies with promising technologies that it can benefit from, then Cisco purchases the companies which succeed. IBM (and Cognos) waited for other companies to innovate and succeed, and then both purchased their key innovations through acquisitions of Cognos and Business Objects respectively. The key to successful innovation for many large companies has been to “let the little people invent”, then these large companies can come in and commercialise inventions, creating valuable innovations with scale of resources and capital (Vella, 2008). A small start-up company which develops a way to make the internet run a little faster, or reliably, or securely, cannot solely scale up the benefits and profit from them, but Cisco certainly can. Hence we see the ordered market and process for inventions and the small start-up companies that own them
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to be acquired by mainstream larger companies. Referring to Table 1, it is a case of which of these companies is better placed to pass various of the eight tests (with flying colours!), and in respect particularly of tests 2, 3 and 4, it is the mainstream firm with a significant footprint in the industry concerned, not the start-up, or university, that is best positioned to take inventions forward. Other companies have implemented “innovation competitions” which encourage and reward innovation. For example, Tata, a large and successful Indian company, has developed several initiatives aimed at encouraging and spurring innovation, including an annual competition known as Innovista, in which teams from all of Tata’s groups and subsidiaries may apply and present innovation projects to a team of judges. Tata was hoping and expecting to achieve around 1,000 entries from teams worldwide, however received over 1,700 entries from Tata’s seventeen companies. Sunil Sinha, who is Tata’s Chief Executive of Total Quality Management Services believes “the more projects there are, the more people are inspired to participate and are encouraging their peers to do so, and that healthy competition drives innovation” (Scanlon, 2009). Having the “right” people as a critical resource in an organisation is also a key to whether innovation will be successfully created within a company. There has been much debate over the type of people that companies should look to hire in order to develop innovation within organisations. Most problems that companies face may be beyond the scope of one particular individual within an organisation, however a team of cross-disciplined individuals is much more likely to come up with a successful solution. Buxton (2009) believes that companies wanting to foster and encourage innovation should look to hire people “who do not require predictability and stability in order to be effective”. Microsoft has implemented and believes in a process of hiring “T-Shaped” people. The vertical aspect of the “T” represents depth, and the horizontal bar is breadth. So a T-shaped person has basic literacy in a relatively broad domain of relevant knowledge along with real depth of competence in a much narrower domain (Buxton, 2009). When looking to develop new products or services, Microsoft tries to involve at least three “T’s”, reflecting levels of competence and creativity in three areas: business, experience, and technology. And finally in respect of resourcing, it appears that “you get what you pay for”, if you are effective in using innovation resources. The most successfully innovative companies commit ongoing and substantial budgetary resources to innovation. Toyota ploughs a large amount of money, meaning a substantial proportion of its profits into Research and Development. Others who are systematically successful do similar. This money is spent in combinations of many different ways, such as: Technical developments Environmental scanning and lead user interfacing
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Staff training on creativity, problem solving and teamwork New product / service testing. Process improvements We should all appreciate the substantial level of effort, determination and resourcing required to ‘break new ground’, whether it’s a smallish continuous improvement process, or the billion dollars that went in to the Hybrid Synergy Drive. 3.3 Innovation Measures Innovation can be a difficult element to measure within an organization, and if only measured based on short term returns and influence on stock price, could lead to companies not investing enough into innovation and research and development. This is because some believe that “stock markets respond positively to announcements of immediate earnings but negatively to announcements of investment in innovation that have an uncertain long-term pay off” (Stood et at, 2009). A study completed by Stood and Tellis (2009) used the efficient markets hypothesis as the underlying assumption, and aimed to measure the effect that announcements of innovation projects (and updated announcements throughout the development and commercialisation phases) had on stock prices. Some of the key findings of this study were that markets tended to react more during the developmental phase than to the commercialisation phase, which shows that the stock market is not just short-term focused in its outlook. As a result, Stood and Tellis recommend that because markets reward firms for making announcements of innovation initiatives in the development phase, firms should be open to the market and to keep it informed and up to date of progress of all innovation projects. More generally, innovation can be measured in at least three categories of ways: Input measures of innovation measures the resources that are applied, such as the ratio of R&D specialists to total staff numbers. Clearly this also can refer to budgets allocated to innovation activities and staff time. An example is the proportion of sales or profits reinvested into innovation activities such as new product development. Innovation process intensity is a measure of the quantity and quality of innovation activities, in a sense measuring the breadth and thickness of the pipeline of innovation activities, between the input (resourcing) end and the performance outcomes. Innovation outputs can be in terms of direct outputs, such as patents, new products and services developed, or the ultimate business outcomes of these, such as the sales and profits from new offerings or the costs reduced by process innovations. We would argue that if you want to manage it well, and to systematically drive it, that a measurement system, at least of key performance indicators (KPIs) of innovation, is a necessary ingredient. Part of systematic innovation capability builds in systematic measurement
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and tracking, and importantly feedback and reporting to all stakeholders of the innovation achievements. 3.4 Rewards and recognition for innovation Developing and maintaining an effective reward and recognition system is a key aspect of maintaining and encouraging innovation. The basic premise is that people generally behave, at least partially, according to the rewards system and non-monetary incentives imposed upon them. As a result of the recent global financial crisis, there have been calls to rationalise, review and possibly reduce the pay and rewards for executives in some industries. However, much research has shown that limiting pay for performance schemes may not be the best way to encourage and develop innovation within companies. We would argue that when rewards are partially linked to strategic imperatives and resource priorities, that a powerful additional motivational force can be unleashed, in addition to those that are already in place, comprising ‘normal’ levels of business logic and emotion or passion for a business and for success in the workplace for individuals, teams and companies. In numerous organisations in which powerful direct linkages between rewards and recognition systems motivate staff to provide almost every ounce of ‘discretionary effort’ to achieve challenging goals, the ‘hardwiring’ of individual and team outcomes to strategic goals and business outcomes is an ingredient of this ‘high performance’ workplace. Applying this to a company which strives to be systematically successful through innovation, the signals should basically promote and recognise, and even perhaps pay for great contributions to innovations. In a recent study, Gustavo Manso, from MIT's Sloan School of Management has conducted considerable research looking at compensation and its relation to innovation outcomes, and reported that the results of his studies show: “that compensation schemes that tolerate early failure and reward long-term success promote innovation". He argues that "One way to implement such a compensation scheme is with the combination of golden parachutes and longterm stock options. Therefore, policies that restrict the use of some of these instruments may have adverse effects on innovation." In addition to golden parachutes, Manso argued that tenure and debtor-friendly bankruptcy laws are other examples of compensation schemes that promote exploration and innovation by shielding people from potential failure (Manso, 2009). Quinn and Rivoli (1991) argue that a key contributor to the success of many Japanese firms (particularly in processes innovation and continuous improvement) is due partly to the Japanese-style system of employment and compensation. Analysis completed in a study by Quinn and Rivoli concluded that employment and compensation systems deserve a top spot on the list of attributes that matter for innovation, and that this should always be considered in
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