What is innovation?
Innovation focuses on three core elements:
- Searching for new ideas and opportunities
- Building and refining an idea
- Creating value through the implementation of the idea.
It is the process of first recognizing an opportunity and then developing it and putting it into widely used practice.
Management thinker Peter Druker defined innovation as “the means by which entrepreneurs exploit change as an opportunity for a different business or service.” He was the first person to recognize the importance of innovation within business value creation.
Global markets are opening, business is continuously evolving, new competitors are entering the market and consumers are becoming more demanding than ever before. As a result, innovation has become key to value creation and sustained success in business.
But, how do business owners, particularly SMEs, embrace this concept in a meaningful and practical way that will result in growth and increased profits?
Innovators are constantly on the lookout for trends and changes that could affect their industry. To be an innovator, you need to search for opportunities. These could come from social, economic, technological and even demographic shifts. These changes then need to be translated into ideas for new business models, products or brands.
Note: True innovation isn’t simply coming up with a new idea. It requires implementing the idea so that its commercial value is realised.
One of the business world’s most prominent innovators is Apple. The company has experienced tough times and financial challenges, but it has maintained its position as a key innovator.
“You can't just ask customers what they want and then try to give that to them. By the time you get it built, they'll want something new.” – Steve Jobs
In the mid to late 2000s, Apple’s innovative efforts resulted in revenue growth of 37% over a five-year period, and net profit growth of 185% per annum. This was largely the result of product development that didn’t seek to give customers what they thought they wanted – instead, Apple showed customers what was possible with technology, creating new demands in the process.
What if you could do the same?
It’s important to note that Apple has also delivered exceptional customer experiences as a result of its innovation – in fact, it is consumer love for the simplicity, usability and beauty of the iPod, iPad, iPhone and MacBook that has made this company so successful, not to mention the introduction of iTunes, which recognized how the consumption of music was changing and created a new consumer model.
Becoming an innovator
It’s one thing for enormous corporations with huge research and development budgets to be innovative, but what about smaller businesses with little or no R&D budgets? Can they develop innovative new products and services that will differentiate them in their competitive market spaces?
First, you need to understand how competitive advantage can be achieved through innovation. Next, you need to examine the different types of innovation and the opportunities they present within your organization. Once you understand this, you can begin to identify new opportunities to innovate.
Jeffery Immelt, the current CEO of GE says: “The only source of profit, the only reason to invest in companies in the future is their ability to innovate and their ability to differentiate.”
Types of innovation
There are five types of innovation:
- Product innovation
- Process innovation
- Business Model innovation
- Branding innovation
- Management innovation
Innovations are also either radical or incremental. Radical ideas break away from what was done in the past: they’re different or new. Incremental innovations on the other hand are improvements or adjustments to the five points above.
1. Product innovation.This type of innovation focuses on the creation of new products or services, or on improving features of existing products or services.
Traditionally driven by R&D departments, this type of innovation seeks to find products that are more appealing and user-friendly than currently available products.
When is it important?If you’re in a fragmented industry or in the early stages of development, product innovation is likely to be important for the success of your business.
Examples of product innovation:
Radical innovation: The Kreepy Krauly completely transformed first the local and then the international pool care industry.
Incremental innovation: The Gillette razor has been through a series of constant, incremental innovations, systematically improving the product.
2. Process innovation. Creates and improves processes by which products or services are either produced or delivered.
Strips out costs, increases efficiency and improves the customer experience.
When is it important?If you’re in a more mature industry where speed of service and cost are relevant, then process innovation can significantly impact your bottom line.
Examples of process innovation:
Henry Ford reduced the assembly time of a car from 12,5 hours to 2 hours and 40 minutes through the creation of the assembly line. Previously, groups of two to three people worked on a car from start to finish. The moving assembly line meant one person did one task. The car hadn’t changed, but the speed through which you could get one most certainly had.
Dell Computers created a process where customers could order their computer, choose their own configurations and then pay at the time of ordering (because of the specific configuration, the parts had to be ordered.) The customer then received the computer ten days after it was ordered.
The process had huge financial benefits for Dell: it got its money before it built the product, it didn’t need to carry inventory, and as the manufacturer and retailer, it extracted the entire margin from the sale of the product. The customer was also happy because they got to choose the computer that matched their needs.
In South Africa, Ster-Kinekor reduced the tedium of standing in line to buy movie tickets simply by introducing online ticket buying, which could be retrieved at a touchscreen at the cinemas.
3. Business model innovation. The creation of new business models (or an element of the business model) that enhances a company’s performance in delivering benefits to shareholders and customers.
This usually involves large-scale change and disruption, and it affects the entire industry because it changes the rules of the game.
When is it important?Business model innovation will be important in declining industries where you are looking to rejuvenate or radically disrupt the industry.
Example of business model innovation:
Outsurance changed that business model for short-term insurance. It cut out brokers, allowed customers to interact directly with the company, and rewarded them for not claiming.
Netflix did the same for DVD rentals, giving customers the opportunity to watch unlimited movies and TV episodes over the Internet for one low monthly price, and changing the way people rent movies.
4. Branding innovation. The creation of value through the development of a powerful brand.
While this is one of the newer forms of innovation, it can have a significant impact on the creation of value within a business.
When is it important?Branding innovations are useful in industries where consumers are highly critical.
Examples of branding innovation:
The Virgin Group of companies offers products that resemble their competitors, but they’ve specifically done so to challenge customer service that they believe is lacking. They’ve recognized areas where customers are not properly looked after and come into the market with an improved offering.
For example, in South Africa, Virgin Mobile was the first company to challenge the dominant practice of not being able to keep one’s number when switching to another mobile provider.
This focus on customers has led to Virgin being ranked one of the most innovative companies in the world. Why? Because everything is delivered to the customer in a unique, distinct way – under the umbrella of a very recognizable and powerful brand.
In South Africa, Kulula.com copied the business models of Ryan Air, Southwest and Jetblue, but its bright green branding, humorous advertising and approach to air travel has set it apart from the industry and created a highly recognisable brand.
5. Management innovation. The discovery and implementation of new ways of leading, organising, motivating and coordinating employees.
When is it important?Management innovations can have a significant impact across different industries in businesses at various stages of development.
Example of management innovation:
Ricardo Semler, CEO of Brazilian based manufacturing firm Semco and author ofMaverick: the Success Story behind the World’s Most Unusual Workplace,is arguably one of the most innovative business leaders of the past two decades, having devised a way for employees to motivate and manage themselves.
Here’s how he transformed his leadership style and management practices:
- All information is shared, eliminating secrets. You can’t expect employee involvement to flourish without an abundance of information being made available to everyone.
- Trust is demonstrated by eliminating symbols of corporate oppression as well as the perks of status
- Business units are small. Everyone involved understands everything that is going on and can influence the outcomes.
- Every six months bosses are evaluated by their subordinates and the results are posted.
- Salaries are public information unless the employee requests that they not be published.
- Employees set their own salaries. They are encouraged to consider what they think they can make elsewhere; what friends with similar backgrounds make; what others with similar skills and responsibilities make in the company; and how much they need to live on.
- 23% of pre-tax profits are shared with employees. Employees vote how the pool will be split and must determine the manner of each quarterly distribution. In practice they always vote for equal dollar shares.
- Eliminating policies and rules wherever possible.
- Job rotation; 20% of managers shift jobs each year.
- Setting up workers in their own businesses as suppliers to the company.
Since implementing these changes, Semco grew from a $4 million to a $212 million business over a 24-year period and has withstood some incredibly tough economic downturns in the Brazilian economy.
The process of innovation
Understanding the types of innovation will allow you to recognise the areas in your business where you are able to innovate, but what about the actual practice of innovation. How can you, as a business owner, approach innovation that will radically differentiate you from your competitors?
Here are four practices that can help you foster innovation:
- Open innovation
- Pet project innovation
- Driven innovation
- Methodical innovation
1. Open Innovation. The key to open innovation is to continually scan not only your own industry or market, but look for other firms with whom you can partner to creatively solve customer problems.
- Read and explore widely
- Build and leverage a strong network
- Promote openness to external ideas, within yourself and your employees, suppliers and even customers
- Distribute ideas to everyone in the organisation for screening and follow up
2. Pet Project Innovation. Not only should you have a few of your own little ‘pet projects’, but you should encourage your employees to emplore their pet projects too. Google started off as the pet project of two Stanford PhD students. Today, Google employees dedicate 20% of their time to work on a project that falls outside the scope of their regular activities. Google Maps, Google News and Google Desktop have all been the result of such ‘pet projects’.
- Create time for you and your employees to experiment, play and tinker on projects that are not part of day-to-day business
- Provide financial support and emotional encouragement for projects that appear to have commercial promise
- Encourage everyone to discuss their pet projects widely within the organisation to get everyone interested in the good ideas
During the course of running and growing your business, you will need access to both short-term and long-term cash savings to pay salaries, suppliers, or even to save for a future project or large payment. Standard Bank provides a range of flexible Savings and Investment solutions, with competitive interest rates, to help you meet your business’s savings and investment needs.
3. Driven Innovation. As a business leader, you can formulate specific frameworks and timeframes for new product development. Give your employees a challenge that they can run with.
- Use a short planning cycle of six to 18 months. This creates a flexible organisation with a planning horizon that’s imminent to all
- Set specific and clear deadlines for the launch of new products
- Link product innovation with the creation of new and innovative processes
4. Methodical Innovation. Once you’ve innovated once, chances are you will be able to replicate that process, provided it’s implemented in a methodical way.
- Observe – go out and understand the consumer experience
- Brainstorm – engage in intense, high-energy and idea-generating sessions with rules designed to enhance the creativity of the group
- Prototype – develop a model of the proposed solution to quickly turn ideas into reality
Innovation in practice
Not all types of innovation suit every business. As a business owner, first consider which types of innovation are most relevant to your business. This will tie in with the vision you have for your company and its future. Next, work at developing and driving a maximum of two or three types of innovation.
TIP: Albert Einstein gave three simple rules of work that we should live by – and which are a highly relevant to this process - out of clutter, find simplicity; from discord, find harmony; and, in the middle of difficulty lies opportunity.
Find your company’s vision by:
- Changing and adapting your vision until you have a reliable and repeatable way to acquire customers.
- Changing and adapting your product or service until customers are beating down your door.
- Changing and adapting your cost structure/pricing until there is enough profit to fund growth.
- Not starting any heavy investment into your business until you have proven that all of the assumptions of your vision fit with reality.
NOTE: Visions should be broad, flexible and able to change. Visions are molded by interactions with the real world, and the real world is constantly changing. The key to your business success may not be sticking doggedly to your vision, but rather changing it repeatedly on your path to success.
Finally, follow a four-stage process that can help you turn innovation into a reality.
Phase 1: The Assessment Phase
As a business leader, you create the time and environment that makes innovation happen. Evaluate the various types of innovation that exist, determine the shape of your business’s DNA and choose the area of innovation that you would like to focus on.
Phase 2: The Positioning Phase
What do you want to accomplish in your commitment to innovate? You should be able to break this down into a few simple sentences that capture your end goal (what you want to achieve).
What does ‘winning’ look like to you? Again, this can be one sentence. For Apple, it was creating the most user-friendly operating system for personal computers.
Phase 3: The Planning Phase
How do you get there? This phase must be information driven. Create a team that will brainstorm the innovation, and most importantly, give them the resources they need to develop a plan that can be implemented by a specific date.
Phase 4: The Implementation Phase
How do you ensure the ‘big idea’ is now implemented? This is the most important phase. Without implementation, there is no innovation. This is also the stage when many innovative plans and thinking fail.
A critical and underestimated part of any implementation is alignment: are the factors that impact people (resources, incentives, processes, structures, skills, authority) all aligned with the key goal?
It’s not just alignment amongst your management team that counts – your entire organisation will in one way or another be responsible for implementing the plan. You need to implement ‘commitment building’. Be sure to structure regular communications and engagement with employees: information, input and involvement build commitment.
You need to ensure that implementing the plan stays on track:
- The leadership team should meet for a few hours every month to track and manage the implementation process
- The leadership team should meet every 90 days to recalibrate the plan – reality changes, and you don’t want your plan to become irrelevant
- Every three months you should question the assumptions on which the innovation plan was built and make and necessary adjustments. Ask yourself these key questions: Has a new competitor come into the market? Have you lost a key customer? What has changed the reliability of your supply chain? Has a promising investor pulled out?
TIP: It may seem counter-intuitive, but discipline is the key to successfully implementing innovation. When a company vigorously adopts a disciplined strategic management process to ensure a positive outcome of the innovation idea, it’s much more likely to achieve the goal.