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OVO Views
Conversations about Innovation
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November 2007
- Vol 2, Issue 5
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In This Issue
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Quick Links
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Greetings!
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As 2007 draws to a close, many firms are
finalizing their budgets and plans for 2008.
What impact will innovation have on your
planning and budget? We'll look at business
model innovation as the most important focus
for your business.
Next, we'll turn our attention to the
question of the value of innovation. Does
innovation provide a sustainable competitive
advantage that can be demonstrated to
management or to shareholders? The answer is
definitely "YES".
Finally, we'll look at the concept of
managing for innovation. Innovation can be
improved through management practices, but
one of the best concepts is to establish the
environment where innovation can
flourish.
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Business Model Innovation
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Gary Hamel, probably best known for
his book Competing for the Future, has
just
released a new book called the Future
of Management. While this book is
ostensibly about how management practices
should change, I think we should also
consider this book in the context of
innovation and how innovation approaches and
techniques should be applied.
What's Defensible
One concept I like a lot in this book is the
idea that some innovation is not really
defensible
- that is, operational and product innovation
is interesting but often quickly copied.
Hamel suggests that business model innovation
is probably the most interesting innovation
and the most difficult to mimic, providing
significantly more value over time. Most of
what we think about when we talk about
innovation is a new product or service -
Apple or Google being the exemplars. Our
goal in this article is to
consider the importance and impact of
business model innovation as a focus,
especially now, given the fact that many of
you are in the final planning stages for
2008.
You can
read my review of the book here.
New and Improved
The interesting thing about business model
innovation is just how little innovation
there has been in the way we manage work and
by extension the corporation. As I've
written previously, a caveman would feel
right at home in most corporate meetings.
They are held in a small circle, where the
team huddles around an instrument that
provides heat and light, usually in a dark,
windowless room where one individual does
most of the talking. With the introduction
of a few furs and perhaps a fire, what's
changed?
Likewise, most of our operational models for
the corporation were introduced around the
Civil War and haven't changed much. For the
most part we are still using a hierarchical,
command and control organization with
stovepipes and silos which make the firm slow
to change and slow to react. However the
workforce today is much more educated and
able to interact with customers
and the market than they were when these
models were built.
Yet, while business models haven't changed
much, customers, markets and competition have
changed dramatically.
New entrants are springing up everywhere,
and they win by changing the existing
business model (subvert the dominant
paradigm!). Your customers have changed and
matured, and expect different capabilities,
products and services, and more importantly
expect you to change with them. The
internet, instant messaging, cell phones and
social media have changed the way we interact
and obtain information. How has your firm
changed its operating model to address these
seismic changes?
Business Model Innovators
Hamel selects three firms as business model
innovators - Whole Foods, WL Gore and Google
- and evaluates what made them successful.
In these case studies he identifies the
importance of clear strategic direction from
the top and small, rapidly assembled teams
working to fulfill those visions.
Personally, I might have added in Dell and
Southwest Airlines as well. What these firms
have in common is that they disrupted an
existing business model, usually by changing
the dynamics of the existing market. These
firms have become in most cases the driver of
the way business should be done in their
industries, and their valuations reflect the
market's appreciation of their efforts. Note
that several of these firms participate in
the "old" economy - making PCs, flying jets,
creating fabrics and components. Older
business models are, by definition, easier to
disrupt because of the dramatic differences
between what they deliver and what the
customers or consumers expect.
Dramatic change - dramatic
opportunities
What can your firm do to disrupt or
dramatically change the operating model
within your industry? What are the fixed
barriers or "requirements" that the industry
has decided can't be changed or ignored?
What markets can you open that have been
ignored? Everyone of the firms identified
above changed the dominant business model in
their industry in some way, and the
competitors in those industries have
struggled to play catch up. The choice is
yours - get out ahead of your competitors and
change the market, or play catch up to the
firm that does.
Conclusion
Any innovation is valuable and important, but
business model innovation is the most
difficult and the most valuable. A product
or service innovation will eventually be
copied, but a business model innovation
forces an entire industry to take notice. In
the airline industry, even with the success
of JetBlue or AirTran, none of the discount
airlines
equals Southwest's reach, and the majors have
tried repeatedly to match Southwest's
operating model (Ted, Song, etc) and have
failed.
As Hamel notes in his book, business model
innovation is the most difficult to do, but
the most defensible and the innovation that
provides the most value for your company over
the long haul.
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A question we are asked quite frequently is:
does a focus on innovation add value to a
firm. Let's deconstruct that question by
looking at value from a number of
perspectives - assets, stock price and
margin. First, look at the US economy and
the value generated by innovation. According
to the CIA Fact book, the US Gross
Domestic Product was $13 trillion dollars in
2006, give or take a few hundred billion.
According to another study by economists
associated with the American Enterprise
Institute, approximately 40% of that GDP was
based on intellectual property value. In
other words, the value of our ideas,
concepts, intellectual property and content
is almost on parity with all the other goods,
services, products and value created in the
US. So the next time someone asks if you can
measure the value of innovation for a
business, I'd suggest that innovation can
deliver a significant value - to an
individual, a company or a nation.
Let's look more specifically at innovation
within a specific firm or industry.
What the CEO Wants
CEOs want what the average shareholder wants
- increasing revenues, strong margins,
defensible products and services, top line
growth and a rising share price. Can
innovation drive these metrics, and if so,
how can we determine that innovation was the
cause for the movement of the needle?
Let's look first at share price. As we've
already indicated, the GDP of the US is
almost twice as high as it would be without
innovation and intellectual property.
Likewise, firms with a large base of ideas,
knowledge and intellectual property are more
valuable than firms in the same industry with
less knowledge or intellectual property.
Intellectual Property - ideas, trade secrets,
knowledge capital and traditional IP - is an
asset and drives up the value of the firm.
Need proof? Compare Intel to Texas
Instruments. Both are in the same industry,
but Intel has the reputation for generating
more ideas, more intellectual capital than
Texas Instruments. Intel has a market cap of
$148B while Texas Instruments has a market
cap of $43B, but Intel is only 2.5 times the
size of TI in terms of employees and revenue,
while it has 3.5 times the market cap.
Clearly, some of this difference is made up
in the higher margin that Intel can command
for its chipsets over the older analog
products that TI still produces, but a
significant portion of that difference is
driven by Intel's intellectual property and
the perception that Intel will continue to
drive more ideas and intellectual property.
The difference in stock market capitalization
is the value Intel generates from its
innovation focus.
Do Innovators drive more value?
My simple comparison of Intel and Texas
Instruments is meant to highlight a point -
firms that are recognized as innovators and
can consistently create new products and
services are more highly valued than their
peers. For another look at this analysis,
see Sanjay Dalal's Innovation
Index. Sanjay has tracked a market
basket of firms from different industries
against the comparable market indexes for
several years. The firms in his innovation index
consistently beat the market averages,
demonstrating that innovators gain a market
advantage in stock price and in market
perception. Other market research reinforces
his market basket, demonstrating that
innovators have higher valuations than firms
that are not recognized as innovators.
Organic Growth
OK, so being an innovator over time, and as
recognized by the market can drive
shareholder value. Can innovation drive
higher organic growth within the firm, and
drive higher near term profits and margins?
Organic growth is defined as business
expansion through increases sales as opposed
to growing based on mergers or acquisitions.
Most experts suggest that innovation is the
best way to drive organic growth. Take a few
minutes to Google the words "innovation
organic growth". Articles and advertisements
from Wharton, Kellogg and Stanford will
present on the first page. The academic
community, as well as the business community,
recognize that innovation drives organic
growth, which drives revenue growth and can
drive profits.
How does a firm increase sales? Either by
selling more existing products to existing
customers, or by selling existing products to
new customers (segmentation) or by creating
and selling new products and services to
existing or new customers (innovation).
Margins
Do innovators have higher margins? I
wondered that recently as my wife ducked into
a Starbucks and I grabbed a cone at Ben &
Jerry's. How can a firm command $3.50 for a
cup of coffee that by their own admission
costs around 30 cents - or a firm ask $4 for
an ice cream cone? Innovators constantly
drive higher margins - they understand that
people are somewhat price insensitive to the
latest products, services and technologies,
and then become repeat customers even in
the face of higher prices. Whole Foods is
often nicknamed "Whole Paycheck" for a
reason, and Apple has never been known as the
low cost provider. Even Southwest
Airlines, competing in a very intensive
business with low fares, has consistently
grown and has never lost money, even in the
notorious airline industry! For further
examples, look at innovation bellwether P&G.
We tend to forget that P&G was "on the
ropes" financially in 1999 and 2000, with
rapidly falling
margins and several quarters of lower than
expected earnings. Only when Lafley refocused
the company on innovation did the revenues
and margins increase. In the case of P&G, the
increase in market cap and profit margin was
directly attributable to innovation.
The magic question - can we do it?
So perhaps by now you agree that innovation
can drive real value. The most important
remaining question isn't whether or not
innovation can add value, but whether or not
your firm can grasp the value that innovation
presents. We've demonstrated that innovation
directly impacts market capitalization, stock
price, revenue growth and margins. Any firm
can add value to their top
line, bottom line or share price through
innovation, but it will take commitment to
sustain the focus for some time period. None
of the firms we've examined achieved their
success through occasional innovation or
throw-away activities, but through consistent
focus and management commitment to leading
their respective industries as innovators.
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Lately it's become almost de rigueur to talk
about managing innovation more effectively.
This is a new concept in many firms - the
fact that an organization can manage
innovation - how it happens, why it happens
and where it happens. This thinking also
exposes another management trap. It's
important to "manage" innovation, but it's
more important to manage for innovation.
Let's look at the differences.
Managing Innovation
Just the recognition that an organization can
become more systematic in its management of
innovation is a welcome addition. For years,
it seems most innovation happened on the
fringes of larger firms or in entrepreneurial
firms. Innovation, especially managed
innovation, was the provenance of the R&D
lab, nothing more. Today, we hear more and
more about managing innovation in any part of
the business.
There are several concerns with this concept
of managing innovation. First, the
overriding emphasis is on "managing", which
means controlling, reporting and analyzing.
While we do want formal, sustainable managed
innovation processes, we need to be careful
not to overly investigate or critique the
innovation effort or approach. The value is
added in the development of a sustained,
formal approach, not in adding addition
reporting layers. Second, if we aren't
careful, managing innovation become very
similar to managing a project - it becomes a
discreet, one off, one at a time concept.
There's a start and stop, beginning and end
concept embedded in that thinking.
Finally, managing innovation implies that
someone is riding herd on a single idea or
concept, with all energy and interest on that
one solitary idea. While that amount of
focus is good, it can preclude exploration,
divergent thinking and place too many eggs in
one basket.
Managing for Innovation
Let's consider a new concept - managing for
innovation. Rather than a single individual
or an anointed class, anyone can manage
innovation, but what's really important is
developing the environment in which
innovation can flourish. Rather than
immediately creating very narrow project
plans and managing a few ideas in great
detail, managing for innovation creates the
necessary ingredients, opportunities and
environment for innovation and encourages a
lot of ideas and interaction. This requires
a very different, lighthanded approach to
innovation rather than the more traditional,
project and task management suggested
above.
Now, in many cases this concept is in direct
opposition to many mental models that
currently exist about how to "manage".
Managing for innovation requires a
philosophical and cultural approach that's
different from managing for process
excellence. Different attitudes, different
skills are required.
Convergent or Divergent
In most of the things we do in business, we
want to quickly get to the "convergent"
thinking - that is, we want to settle around
one outcome or alternative. That approach is
reasonable when there are clear actions and
processes. However, that approach is
difficult to follow in an innovation context.
As innovators, we need to experience the
divergent thinking first, to explore,
investigate and examine ideas, before we
select and "converge" on an answer. Most
managers, and management philosophies will
encourage rapid convergence, but when you are
managing for innovation, your approach should
be to encourage divergence, then
convergence.
Managing for innovation requires divergent
and convergent thinking, which suggests a
different philosophy and perhaps a cultural
shift to one that expects innovation and is
open to the possibilities rather than one
that is executing against the only idea that
is available. This approach will fly in the
face of what many managers believe they are
paid to do - get involved, provide direction,
execute and demonstrate results. Instead,
what is needed is the ability to foster a
climate for innovation and encourage
exploration, investigation and synthesis
before rushing into the discrete management
tasks.
Conclusion
For many of us, managing is something we do
to optimize the value of a team or product.
Managing requires eliminating risks, creating
the "right" opportunities, building the best
teams and identifying necessary resources.
When you are called on to manage an
innovation initiative, or, more importantly,
to manage an innovation capability, your role
is much broader. You need to manage for
innovation - creating an environment that
supports expansive thinking, exploration and
reduces the fear of risk and failure.
Managing for innovation is less about any one
idea, and much more about creating the
potential for many great ideas.
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If you'd like to discuss how OVO can work
with you
to improve your innovation strategies, ideation
sessions, innovation processes or software,
contact us today at our website
or
(919) 844-5644 x789.
If you enjoyed this innovation newsletter, please
pass it along to your friends. If you wish to
unsubscribe, please see the link below.
Sincerely,
Jeffrey Phillips
OVO
phone:
919-844-5644 x789
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