Innovation: a high value-added strategy

Systematically innovative organisations have new ideas coursing through the DNA of all aspects of the firm, and while not all ideas are successful, a culture of innovation will reap significant benefits

by Danny Samson

Listen to lecture - August 2008 (MP3 11.7MB)

Introduction

This article sets out some key ideas about innovation in organisations. It attempts to answer some important questions: what it is, how do you get it, and what is the business value of pursuing innovation. In its broadest sense, innovation is a business strategy that might be applied to broadly differentiate your firm from others or to assist it in a niche-based strategy of specialisation. It may be one-off – a software package that you have developed in-house, a new product or service offering, an analytical technique, or an efficient way to do your work. Such one-off innovations can create significant value, however nothing lasts forever. So truly excellent organisations, large or small, aspire to be systematically innovative – coming up with a stream of new products and services, processing and operating methods, or even business models. Systematically innovative organisations have new ideas coursing through the DNA of all aspects of the firm, and while not all ideas are successful, they get enough things right to provide an overall handsome reward.

Examples of well-known companies in this realm are Apple, Sony, 3M and Toyota. All of these companies have had their share of failures, because innovation means taking some risks, however carefully evaluated these might be. There is no reason why all companies cannot pursue a similar systematic innovation capability. Indeed, many are doing it and are delivering superior outcomes and performance to their stakeholders.

Innovation: what is it?

Innovation generally implies new things – but not necessarily new to the world. It can mean something new to a firm, or part of it; or new to a customer, client, industry or country. It is not confined to technical innovation or a new product or service line. Rather, it may be a new way of organising the internal processes of an organisation or an innovative business model or structure. The point is that the creation of innovation in any of these domains brings an opportunity to create new business value. The latest buzz word for this in ‘management-speak’ is Blue Ocean Strategy, which refers to the finding of a new market space for new products and services.

Innovation can refer to big things or little things, and in my view the best large organisation in the world that achieves both is Toyota. At the ‘big innovation’ end was the massive development project of the Hybrid Synergy Drive; while at the other end of the scale, in many plants, a substantial number of improvement suggestions come from employees. Each of these is a relatively small innovation – mostly process driven – and, after evaluation, the majority of them are worthy of implementation.

Innovation can occur in any and every industry, not just in high-technology product sectors. For example, there is tremendous innovation activity going on in the commodity industries of mining, oil and gas. In mining, for example, great process innovations are occurring, such as ‘block caving’ mining methods, and using biological methods (‘bugs’) to extract valuable minerals and metals from rock. There is plenty of innovation in services too, including everything from the use of the Internet for banking, retailing and travel, through to new service business ideas – for example, women-only gyms, premium seats in movie theatres, and downloadable music.

How to evaluate innovation and innovativeness

As the old saying goes, ‘If you want to lead and manage something, you have to be able to measure it.’ Driving forward on innovation requires a clear strategy, leading to resourcing of that strategy into operating activities, and clear expectations and measures of innovativeness. It is possible to measure innovativeness at three points: inputs, process intensiveness and outputs. An input measure would answer the following question: relative to a firm that is just pushing out standard solutions in standard ways, what total effort and dollar resource are we putting into differentiation through innovation?

Innovation intensity inside the firm is more difficult to quantify but it can be assessed qualitatively. Ask your staff whether their key priority is to push fairly standard solutions to client needs – with solid productivity and quality built in – or whether they can and do take the time to ‘think outside the square’, at least some of the time. And in terms of internal process issues, to what extent do they, and you, look for new and better ways to run your business operations, marketing activities, and so on?

As to innovation outputs and its performance impact, you can make a list of innovations that your firm has achieved and, as well as that, an aggregate that enables you to calculate a total financial return outcome. In other words, seek to ‘show me the money!’ On this measure, 3M has as one corporate measure the percentage of total revenue that comes from new products. 3M insists that its divisions achieve over 10 per cent of sales revenue from new products every year. For service firms, this does not mean new contracts or clients for whom the same or similar works and projects are being served up, but new lines of business, new techniques or new market segments. For example, you could ask, ‘What percentage of this year’s revenue comes from products and service lines that were not in place last year?’ If it is one or two per cent, then it is hardly a systematically innovative firm, but if it is more than 10 per cent then it is very likely.

Innovation: much more than invention

Innovation includes the creativity stage when new ideas are born, but it goes far beyond this. There is a great deal of hard work involved in bringing a new idea to market, no matter how brilliant the breakthrough might be. Innovation can be considered as the act of invention plus all that is involved in commercialisation. The full innovation cycle involves everything from having the initial idea to scaling it up to achieve commercial success, and turning the innovation into economic surplus, or put simply, wealth creation.

With this in mind, if you have a new idea for a new product or service, what tests should you apply in order to determine the feasibility of turning that concept into reality? The following list of seven key tests may help in your assessment of its viability:

The functionality test: 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 terms that customers or clients can appreciate?
The mass production test: 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 prototype, but when it came time to scale up, they failed to be ‘mass-producible’ or proved to be prohibitive from a cost perspective.
The 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.
The intellectual property control test: you have to make decisions around your IP, and either buy, own or licence-in the core technologies involved.
The leadership test: do the people involved in this initiative have the knowledge, skills, experience and courage to take it through to fruition?
The 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.
Finally, more and more, new concepts must pass the corporate social responsibility test. 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, and where possible are advantaged by producing positive bottom line outcomes on these dimensions.

A new product, service, technology or business process must pass all of the above tests and must be compelling in the level at which it clears the hurdle on most of them. These tests are useful for inventors, but also for investors who are considering the merits of underwriting a new invention, or for banks which are considering lending money to fund the development of a new service or product.

Managing the intellectual property in the venture

It is important to plan and execute a strategy for how to preserve the core knowledge involved in a new idea as it is taken to the world. There are four generic strategies for attempting to control and maximise value from an invention in taking it through to commercialisation. First is to ‘run’ – meaning to simply keep ahead of the competition, by continually updating technology and designs, such that by the time competitors have learned and perhaps copied or adapted your invention, you have already moved it into a new and better phase. Apparel designers often use a ‘run’ approach, knowing that their work will be copied, and rely on continually coming up with new ideas for the market.

It may be possible in some circumstances to ‘hide’ the core knowledge in an innovation. Famous examples of this are KFC and Coca Cola. They have kept their recipes secret for many years, and their distinctive edge has remained very profitable while they have kept their IP under control.

A well-known strategy for protecting knowledge is to ‘block’ others from using it by using legal means such as patents, trademarks and copyright laws. These laws exist to provide incentives for firms and individuals to take risk and invest in innovative activities, and can be effective in providing protection. However, they require significant investment, especially when taking out patents in a substantial number of countries.

The fourth IP strategy is to form a network of cooperating firms in order to use combinations of technologies, which can be called ‘teaming up’. In some industries such as biotechnology, while a single firm may only have a part of the technology needed to solve a problem and pass the functionality test, there may be advantages from teaming up with other companies that satisfy other tests.

Encouraging innovation in organizations

For an organisation to be systematically innovative, there are some clear and important requirements. First, strong leadership to implement strategies and policies, offer resources to make it happen, and develop a rewards system to focus staff on innovation. 3M does this very well. Another key ingredient is the organisation’s valuing of new knowledge, its creation and exploitation. This goes with the tolerance of
risk, because the innovative firm must acknowledge that not everything it tries will work.

Indeed, firms that succeed with systematic innovation will manage a portfolio of investments in new activities, and these are professionally project-managed so that effective ‘go/no go’ decisions are taken at critical stages of development. Finally, culture and behaviour are important. Staff in innovative companies are well trained and expected to think outside the square, take calculated risks when appropriate and to show initiative and tenacity in problem-solving. They are customer and benefit focused.

What benefits arise from innovation?

Many great advances come from new services, products and technological processes. Society-wide benefits are clear and valued. For example, most of us have benefited from penicillin derivatives at some time of our life. But let us consider the benefits of innovation from the supply side – what are the benefits to those bringing the innovation to market? First, there is obviously the revenue growth that comes from the innovation. For example, think of the monetary gains had by Google, Microsoft, Facebook, 3M’s PostIt notes, Apple’s Ipod and iPhone and the Toyota Hybrid Synergy Drive.

A further benefit often comes with a company’s reputation for innovation, in the form of a price premium. Apple’s design capability and its unique products allow it to command such premiums over products that are technically as good, yet don’t carry the innovation credentials. Likewise, some services companies, such as architects, engineers and research firms, have innovation reputations and so can charge a premium price relative to those competitors that trot out only standard solutions and designs. Futhermore, being an innovative organisation helps firms to win the ‘war for talent’ in the labour market. Most people would rather work in a firm that is doing interesting and exciting things by investing in new knowledge, than work for one that is not. Finally, there is a lot of evidence over a few decades, which shows that when innovation is done well, there is a sound return on investment to firms that are innovative. Such firms are often 20 per cent to 50 per cent more profitable than the market.

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A condensed version of his Alumni Refresher Lecture delivered at the University of Melbourne on 20 August 2008.

Professor Danny Samson is Professor of Management in the Department of Management and Marketing at the University of Melbourne. Comments to d.samson@unimelb.edu.au

Volume 4 NOV 2008