Business Today

What global winners teach us

Print Edition: Dec 11, 2011

While innovation is a key lever for enhancing competitiveness, as a discipline it remains narrowly understood. Innovation is not just about coming out with new products, where successes are notoriously few and even if achieved, are often copied by competitors. For a real breakthrough - disruptive and sustainable innovation - companies must look beyond products and core offerings, and incorporate innovations across multiple aspects of the business.

Monitor 's proprietary Ten Types of Innovation Framework enables organisations to innovate in Finance, Process, Offering or Delivery. These have been further sub-divided into Business Model, Networking (Finance); Enabling Process, Core Process (Process); Product Performance, Product System, Service (Offering); and Channel, Brand and Customer Experience (Delivery). Thus, for instance, Apple iPod's continued success goes beyond its novel product line and encompasses multiple types of innovation that have helped create and defend its sources of value.

Last year's Business Today-Monitor Group study - 'How innovation really works' - introduced this framework and drew on insights from some leading Indian organisations. There were a number of Business Model innovations: Dainik Bhaskar's research at scale prior to launching a new newspaper, for instance, or education provider Gyan Shala's distinctive approach to the way education is delivered to the bottom of the pyramid. Examples of Product Performance innovation included ITC's e-Choupal offering, a web-based platform to procure from and sell to farmers, or Tata Consultancy Services's use of cloud computing to provide affordable branchless banking facilities in rural areas. However, we unearthed few innovations around Product System, Service, Channel or Brand.

Successful innovations do not need numerous ideas. Fewer ideas based on the organisation's capabilities and customers' unmet needs are more critical

Each one of the ten types of innovation is valuable and the value creation through a particular type depends on the quantum of effort in each type. It is often inversely correlated to how common that type is in the industry. Putting it simply, if a majority of competitors are innovating in one dimension, it becomes difficult for any one of them to gain disproportionately from that innovation.
Hence, it becomes essential to remain aware of the patterns of innovation within an industry, and where a company's efforts may yield a disproportionate benefit. In our third annual issue on innovation, we wanted to introduce the 'key principles of innovation' - insights into what makes organisations innovate successfully. These principles are based on Monitor's experience and expertise in the field and are illustrated using examples from across the globe.

Often, innovation is anchored in something other than the core product performance. For instance, Toyota launched Scion - a brand specifically conceived for Gen-Y customers. Scion leveraged its dealer network to offer personalisation, used innovation in pricing and financing to facilitate customisation, and communicated this through segment appropriate messaging and media vehicles.

Successful innovations are not predicated on germinating numerous ideas - fewer ideas based on the organisation's capabilities and customers' unmet needs are more critical. Incremental change is where conventional innovation tends to take root. However, companies that aim to conquer a new market or want to radically reshape their position need to be brave and think big.

Innovating is often believed to be expensive, but there are examples of exemplary innovations that were brought about by leveraging existing resources

Computer gaming giant Nintendo managed one such transformation. Having dominated the computer gaming scene at one point with offers like Gameboy, it later lost out to the "quicker" and more "graphics-heavy" systems such as Sony's Playstation. Nintendo walked away from a performance fight and instead developed Wii based on insights on what 'play' means to customers.

This simple but intuitive concept allowed Nintendo to activate an erstwhile untapped consumer segment by allowing customers to experience games, such as bowling and bridge.

While many organisations subscribe to the "if it ain't broke, don't fix it" philosophy, fast evolving market dynamics often warrant revisiting the status quo. Innovative companies succeed by defining new business models and finding new ways of creating and/or enhancing value for their customers. These changes are among the most powerful types of innovation, and fundamentally shift the competitive dynamics within an industry.

'Path-breaking' innovations are not restricted to developed economies alone. For example, Hollard Group, an insurance company in Johannesburg, succeeded in making 'micro-insurance' work for low-income customers. In a market with a tradition of hosting expensive funeral services, Hollard focused on providing funeral insurance that was until then only provided by informal societies. By partnering with PEP, a popular low-end clothing retail store, Hollard separated the sales and distribution elements from the costly insurance processing, making it more affordable. Hollard challenged the prevailing business model, transitioning it from a contract value focused game to a volume one, and opened up a new market.

Companies can also be successful innovators by reconsidering their role in the industry's ecosystem. In recent times, organisations have made a conscious decision to move away from sitting at a discreet point in a linear value chain to positioning themselves within a non-linear network. An interesting example is the tie-up between Japanese laptop manufacturer Toshiba and UPS, the global parcel-delivery behemoth. Witnessing declining share in the US market, Toshiba needed to reduce customer downtime by providing quick repair service. UPS's certified technicians would repair returned Toshiba laptops at the UPS shipping hub. This initiative helped Toshiba dramatically reduce repair turnaround time, and helped UPS generate an alternate revenue stream.

Typical go/no-go investment decisions for new projects can often be boiled down to financial viability. In case of incremental innovation, there are typically enough similar examples to provide data for assumptions in the business case.

However, for genuine innovations, organisations need to imagine what it might require to meet evolving consumer needs or emerging market opportunities. Rapid prototyping is a way to achieve this by bringing to life future offerings and services, and defining future experiences. These prototypes can be externally oriented around the offering, customer experience, or internally oriented to give executives a feel for how the business will operate. Most importantly, prototypes help de-risk the concept in the earliest stages and enable organisations to learn and iterate the business concept.

Following the prototype phase, companies may choose to first pilot their innovation into the 'real world'. For example, initially, Toyota restricted the availability of Scion to California. This allowed the company to test the product within a specific geography and consumer segment and the "scarcity" associated with the product helped in creating an additional buzz across the country prior to the launch. Innovating is often believed to be expensive; however there are several examples of exemplary innovations that leveraged existing resources. Cemex, the global cement major in Mexico, created a new business model for affordable housing at minimal incremental cost.

In the mid-1990s, with the Mexican economy in a crippling economic crisis, Cemex witnessed a sharp decline in its regular business and decided to cater to its construction segment. The poor, who relied on self-construction of homes, were finding it increasingly hard to gain access to affordable construction materials, technical advice or financing. Besides providing access to building materials - cement, concrete blocks, and steel - Cemex provided microfinancing, technical advice, and logistical support at minimal cost, by leveraging its network of local distributors and community-based women promoters.

The leaders' way

Here is how leaders enable innovation in their organisations

  • They use context to mobilise and catalyse organisational action
  • They set a clear level of ambition for the innovation effort with appropriate permissions
  • They commission cross-functional teams whose members work as an integrative, multi-disciplinary unit
  • They challenge orthodoxies the industry or the company may have adhered to over the years
  • They refuse to think innovation is an accident or the result of a stroke of insight

Creativity is important, but creativity without discipline is detrimental. In an innovation exercise, leaders need to diagnose their situation and declare the innovation intent. Is it category reinvention - such as Nintendo did with Wii- or is it serving new needs and categories, like Safaricom's use of its existing mobile technology to provide banking services for a large unbanked populace in Kenya?

Similar discipline is required during the design and implementation of the innovation. At the design stage, discipline is required to get genuine insights and build compelling concepts instead of a laundry list of ideas. Toyota's research led to insights about its new consumer segment's (Gen-Y) yearning for individualism and guided development of an offering with high 'ease of customisation' (accessed online).

On the other hand, point ideas that address known issues or sources of dissatisfaction do not yield an advantage to the innovator. They increase costs of implementing the point idea, but often do not have sufficient power to let the organisation gain share or command a price premium. It is only when multiple elements - backed by insight - are combined together in a reinforcing system, that they provide a sustainable advantage.

In conclusion, as markets mature and become more competitive, innovation has become an imperative for firms to survive and win. Organisations have to think beyond 'just product' and ensure that the innovation, while rooted in a particular aspect of the Ten Types, spans multiple other aspects. The global examples demonstrate this and highlight the key principles that help an organisation innovate across the Ten Types: focusing on fewer, bolder concepts; challenging of industry orthodoxies; leveraging of internal and external networks; de-risking through prototyping; adopting a disciplined approach; and thinking beyond product.

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