Business Models, Strategic Innovation

Innovation is not a random event or some intangible initiative. It is a practice and a process. More specifically, innovation is best defined as “the process of creating economic value devising business ideas that addresses consumers’ unmet needs”. But there is a dilemma in understanding how ready firms are in embracing and executing on innovation. The first question often asked is – why do we need to innovate?

Idris wisely notes that “as the pace of innovation accelerates and expectations rise, executives are experiencing two other kinds of crises, 1/ declining bottom line results caused by the credit crisis and 2/ declining consumer attention as customers become increasingly desensitized and unresponsive to traditional marketing. The ones that are smart will look for ways to improve their innovation capability and process; within their organization, externally with specialists in the field of innovation and even with their consumers who can help them to detect early trends.” In this way, companies can manage this double-edged sword looming over them.

The becomes – “What types of innovation activities can and should companies partake in? The answer is – it depends. The most common types of innovation are differentiated by distinct characteristics:

1/ Innovation activities that are based on improving the underlying the process of producing or delivery of products and services that sometimes appear to be invisible to customers. The manufacturing world is rife with examples – think Toyota in the 50’s, Dell in the 90s. A great example today is Spanish retailer Zara’s “fast fashion” supply chain – with the ability to design and distribute current fashions in just 15 days.

2/ Innovation that encourages the adoption or co-creation of a new customer behavior through new technologies, new interfaces and new connectivity. Apple’s iTouch technology in conjunction with the App store epitomizes new technology driving customer adoption and usage.

3/ Innovation that focuses on radically rethinking the whole business eco-system and re-designing its role in the value chain. Generally this leads to business model innovation. A great example is Netflix which turned the traditional video rental industry on its head, changing the way consumer’s pay for and consume entertainment. Another example is Amazon’s Kindle – changing the way consumers purchase literature.

4/ Innovation that allows an introduction of a second or third bottom line – initiatives that are socially oriented, sustainable and ethical. Take Clorox Greenworks – the company’s first new line of products in over 20 years. It’s a shift away from traditional chemically based cleaners to products that are certified by the EPA through their Designed for the Environment program. American Apparel, by selling a simple collection of basic items being produced domestically in the US, also in some way creates a second bottom line.

5/ Innovation that allows the redefinition of players and co-creation of value among those players in the system, including the consumer. Streaming video platforms like Joost and Hulu are changing the game of quality media consumption. By cutting out cable networks in favor of direct to consumer delivery supported by shifting ad spend creates value for those players that remain relevant.

I’ve excluded marketing innovation and channel innovation as they are some tactical elements of the above. I’ve also excluded technological innovation as it refers to the advancement in R&D. What are the core values that support the development of a corporate culture that can be typified as innovative? Values such as room for play, the ability to look outside of traditional sources for inspiration, being future oriented, teamwork, respect, the ability to be self-critical, dedication, initiative, trust, open mindedness, the aptitude to view with multiple lenses, collaboration and most importantly, strong leadership that drives the organization to a common vision.

These values can often be found in companies that have a good innovation track record like Apple, Google Nokia, and 3M. In addition to embracing these values themselves, innovation leaders should always look for creative ways of embedding these values in a meaningful way in their organizations from HR policies to operations to front line customer service reps. Through my experiences working with large enterprises, including big Telco’, has taught me that it’s difficult to alter a firms DNA to move at the pace of innovation if the roots of innovation haven’t been planted. While that seems obvious, I’ve found that organizations often will begin to use words like “innovation” without any understanding of how to institutionalize and end up wondering why it doesn’t take hold. To make this real, they need to fully understand their current corporate culture through constantly asking questions such as:

1. How important does senior management think innovation is to the future of our company?
2. Are there clearly defined mandates for innovation?
3. What common behaviors do we see around us that would both support and detract from innovation?
4. How do we compare to other innovative organizations?
5. How well do we handle external shock?
6. How good of a picture do we have in terms of our different futures?
7. Which are the core values that drive our behavior?
8. What are the dogmas / unwritten rules of the organization?
9. What behaviors encourage innovation? What behaviors hinder it?
10. How open are we working with outside partners?
11. How much tolerance do we have for risk?
12. What are our expectations from innovation efforts?
13. Do we have a process for innovation?
14. What is the make up of your human capital?
15. Is there support from corporate finance to fund innovation-based projects that may have longer paybacks with larger ROI?

Ask these questions and it will become obvious whether an organization is “innovation ready”. Those firms that are, will be able to overcome the crises – those that cannot will continue to be at the mercy of external market forces.