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Monday, September 07, 2009

Innovation Goal - Growth or Strategic Renewal?

by Rowan Gibson

Innovation Goal - GrowthWhat exactly is the goal of your company's innovation efforts? "Oh, that's easy", senior managers usually reply, "We need to grow the business." The line of logic here is relatively simple: "Innovation leads to wealth creation leads to growth" - which, of course, is fair enough. Based on this logic, companies of every stripe are now racing to pursue the kind of innovation that generates organic growth, new revenues, and wider profit margins.

However, while it's clear that these goals are absolutely critical and that innovation is the only viable option left for attaining them, the case for innovation actually goes a lot deeper than that. Indeed, there's an inherent danger to focusing most of a company's innovation efforts on growing the top line or improving profits (e.g. by cutting more costs out of the system). The danger is that product innovation or operational innovation may take overwhelming priority over innovation at the level of the core business strategy. In most cases, these more superficial kinds of innovation lead only to short-lived success, and in the worst case they may be followed by disastrous failure.

Take Kodak, for example. Back in the 1980's, the company launched the single-use, disposable film camera. It was a radical innovation that made Kodak a ton of money through the 90's and right into the early years of the 21st century. At one point, over 200 million of these cheap and cheerful little cameras were being sold each year, representing an incredible 20% of all photographic sales. So, did innovation lead to wealth creation lead to growth? Of course it did.

Expiration DateExcept that, next morning, photographic film was dead - or at least pushed from the mainstream to the margins - as digital cameras and camera phones became ubiquitous. Kodak has been struggling ever since.

In other words, innovating within the context of a company's existing business model can be a good thing, and for a while it can certainly push revenues and profits into a steep growth curve. But in an age when disruptive change happens at breakneck speed, business models have a much shorter shelf life than ever before.

Consider the telecom industry. A few years back, most telecom companies were giving plenty of thought to innovation in things like products and pricing (coming up "friends and family" packages and so forth), but how many of them were thinking about telephony switching to a completely different kind of network - like VoIP?

Likewise, most airline companies were focused some years ago on how to innovate in things like their loyalty programs, or their onboard catering, or their First Class seating, but how many were thinking about the possibility of a completely new, low-cost business model for the airline business?

Strategic RenewalThat's why the true challenge facing companies today is not growth; it's perpetual growth - it's ensuring that the organization continually prospers, year after year, decade after decade, despite massive and ever-increasing turbulence in the external environment. Companies need to develop the capacity to anticipate and adjust to the fundamental change forces at work in the world, dynamically reinventing their core business models and strategies as circumstances alter, and as new threats and opportunities emerge.

A company that has done this really well is Britain's Tesco. Over the decades, Tesco has not only continuously innovated within its traditional supermarket business, but has also feverishly innovated around its core business model - adding a string of non-traditional businesses, from petrol sales in the mid-1970s to financial services, travel, legal advice, telecom and internet services, music downloads, gas and electricity, and online grocery today. This ability to perpetually reinvent itself and its industry has helped turn Tesco into one of the largest and most successful retailers in the world.

Here's the point: the conventional line of logic - "Innovation leads to wealth creation leads to growth" - is in urgent need of an update. Executives need to understand the deeper insight that "Innovation leads to strategic renewal leads to perpetual growth." Only by developing this understanding can companies fully appreciate the role that innovation should play in shaping their destinies. Only then will they commit to making radical changes in the core business itself, before the case for change becomes desperately obvious - as it has, for example, in the photography industry, or the telecom industry, or the airline industry, or the supermarket industry.

Perpetual growth requires perpetual renewal. It's the only way to maintain continuity in a discontinuous world. And the fuel for renewal is innovation. Not merely innovation at the margins but deep, strategic innovation at the level of the core business model.

Rowan GibsonRowan Gibson is a global business strategist, a bestselling author and an expert on radical innovation.

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Anonymous Davd Locke said...

Most companies come into existence by doing a radical innovation, creating a market, creating a category, and doing sustaining innovation from then on. Once 50% of the market has been consumed, it's time to do it again.

The only problem is that company has institutionalized, and the people who did it the first time are gone. They actually do not know how to do it again.

Continuous innovation requires a different organizational structure, so the mature business doesn't interfere with the w business. But, it goes further than that. Cost structure and policy base would be different in each business.

The business has to regularly pump out a new radical innovation, which will sell only to new customers in brand new markets, and not the existing customers.

The company would actually have to keep its technology adoption lifecycle organizations staffed, instead of moving people to the next phase, or laying them off.

A company trying to achieve continuous innovation has much to do before they move their next technology to market.

10:35 PM  
Blogger Marc said...

You might also want to consider my innovation map when defining innovation goals and outcomes.



6:49 AM  
Blogger Canada-US MBA said...

I definitely think the Innovation goal of strategic renewal is a valid one, but I feel growth should be the overriding goal. Using the Kodak example, they were very successful at growing for a long period of time. During the digital camera shift, there innovation efforts did not properly account for this change in the environment and the result was shrinking growth (and later shrinking revenues).

Point is that if they truly viewed successful innovation is tied to growth, they would have quickly realized that they were missing the mark when growth began declining.

I feel Kodak was more the case of the goal of innovation was to create technological advances. And their definition of technological advances was shaped by their view of the world. It's works if that is what your customers want, but you quickly get in trouble if their is some sort of shift in your industry.

Good post. Keep up the good work.

8:05 AM  
OpenID joyandlife said...

I agree with Davd, that most companies came into existence as a result of an innovation. The kind of culture and environment in which that innovation took birth was very different from the institutionalised organization it in turn gave birth to.

The child can not be the creator of the parent.

Leaders will need to recognize that in order to foster innovatino, they will need to create an environment and context outside of the regular, rule bound, organization. There is nothing wrong with rules, they help manage the chaos of a large organization and are essential. But such an environment is not conducive for innovation.

By it's very nature, Innovation cannot exist in a rule bound environment. At most you will have incremental innovation i.e. product enhancement/feature improvement, for radical innovation, you don't just have to think out of the box, you have to BE outside the box!

So what questions does this then pose for organizations/leadership teams, who are attempting to build a culture of innovation?

9:04 PM  
Blogger Jin said...

Innovation (continuous or disruptive) does not happen by brute force. In general, innovations are not timed and therefore cannot be triggered by observing growth.

The companies that continues to be successful are the ones which are judicious about which ideas to pursue and dedicated in putting adequate resources to sustain the effort to take them to the next step.

11:41 PM  
Anonymous michael@nosco.dk said...

To even enhance perpetual innovation the way forward is to get away from "restrictive" innovation. Most corporate R&D`s are innovating on basis of existing products/services and are not using the potentials in looking out of their daily environments and scope.
And why is that ?...mostly due to the culture within the processes of innovation - from ideation to R&D to management - a "blinkered" process in many corporations...Easiest way to change that is to start out with broadening your ideation audience - include employees, customers, partners, suppliers, your community - even family!;-)...This way you will be able to tap in on a wealth of collective intelligence, and thereby get new angles, twists and perhaps brand new innovations or product ideas you wouldnt have dreamt off...
All in all my - current -take on innovation is;"wanting to know things, you didnt know , you wanted to know"

3:34 AM  

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