Client Articles

Client Articles | Issue 16

Before you engage your next innovation consultant, it's worth stepping back to look at the big picture of innovation, and how successful companies are actually using innovation in today's business landscape to deliver sustained growth and profitability. To do that, we must define innovation in both global and regional terms, identify the market forces that make innovation an imperative, and outline a principle based framework for plotting the simplest course to sustainable success with innovation.

Investigating Innovation

Innovation can be simply defined as "the ability of people to define or develop new products that add value[3], and bring them to market[4]". Business Review Weekly's recent "innovators" flagship issue made a clear distinction between:

a) invention - the introduction or creation stage; and
b) innovation - the successful application of that idea in the marketplace for competitive advantage and generation of profits[5].

Global research by Forrester Group further divides the innovation stage into three distinct phases: transforming, financing, and brokering; each vital for innovation success[6]. Innovation can be small, like a new process that increases internal capacity, or big, like the development of a whole new market segment.

By any measure, the 'innovation industry' is now big business. Booz Allen Hamilton's Annual Global Innovation 1,000 studies report 6% growth per year in R&D spend since 1999, to $407 Billion[7] in 2005. But for Australia, recent statistics are not positive[8]:

1. We ranked 23rd in Forrester Group's international innovation survey[9];
   
2. It is claimed that $10 Billion in grants, government and private funding is spent on research that will never be commercialised;
   
3. Our tax-incentives for research and development are half those of New Zealand.

So if innovation is so difficult to get right, why is it attracting so much attention?

Two Innovation Imperatives

First, done properly, innovation is highly profitable. High leverage innovators in the Global 1,000 outperform industry medians in sales growth, gross margin percentage, operating income growth, total shareholder returns, and market cap growth - while spending less than their industry mean on research and development as a percentage of sales[10]. Finance Tech's Financial Services 40 Index showed that firms who deploy technology in innovative, customer-focused ways that are cost effective and ROI-focused have a competitive advantage in building market share and generating profits[11].

Second, advances in ITC have created a global marketplace of unceasing, real-time activity[12]. Your greatest competitor may be in China or India as opposed to around the corner, or from a totally unrelated industry. The buyers of the future are growing up 'digitally native', immersed in the 'connect and collaborate' world of Web 2.0. Speed, access, convenience and 'on demand' information/resources are mandatory for success in gaining and keeping new customers.

Some recent examples in Australia highlight these globalisation trends:

1. In the late 90's, Dutch investment company ING was virtually unknown in Australia. Today, ING Direct is now a recognised leader in pure-play, no-fee online banking with savings and loans;
   
2. In 2003, Virgin Money launched its 'anti-establishment' brand into credit cards, superannuation and home loans[13];
   
3. All major institutions are moving rapidly to deploy 'mobility' solutions that will allow for secure 'mbanking' and 'mpayments'[14];
   
4. Micro-credit, low interest loans in developing nations, are being offered by both non-profit[15] and corporate organisations as providing lower credit risk and better returns than many conventional lending products;
   
5. Bendigo Bank has evolved from a credit union, successfully and profitably applying its 'community bank' model to tap an 'unbanked' segment of the market[16].

Whether by technology, process, product, category or total business, innovation is constant and relentless - so the challenge every business faces is how to manage it.

Managing Innovations - Principles & Processes

One of the things that people find surprising about innovation is that it is in fact both repeatable and measurable[17].

Depending on where your business is in its lifecycle, the drivers for innovation success vary. For start up companies with a 'disruptive' strategy to create whole new product or service categories or potential industries, a strong advisory network, go-to-market strategy and product/distribution channels are mandatory to sustain them through the challenging early years to profitability.

However, while a company may start with one brilliant idea, in many cases it will go out of business unless that innovation process can be repeated over and over again[18].

For established companies, perhaps the even more surprising fact is that innovation does not actually require a dedicated research and development division. It has been statistically proven that 80% of ideas to improve a company come from staff members, and only 20% from planned improvement initiatives[19].

Further, the more your business processes are focused on your customer, the more you will be attuned to their needs; both known and unknown, both verbalised and not. Identifying the customer's hidden needs - those that they don't know they have and are not talking about - is the sweet spot for innovation. Walkman users, for example, weren't asking for an iPod at the time, they were asking for a better walkman.

So, how to track and measure your innovation performance? While every consultancy has their models with varying degrees of complexity, Allan Ryan's innovation performance model[20] contains four broad phases which offer a helpful starting point:

1. Incubation - using insight and methods to generate ideas (Quantity).
   
2. Evaluation - using people and processes to select which ideas move forward (Quality).
   
3. Innovation - applying and managing resources to turn ideas into realities and test them for market acceptance (Efficiency).
   
4. Strategy & Structure - ensuring alignment between plans, roles and responsibilities (Effectiveness).

While this can all be done internally, some companies choose altogether different approaches: outsourcing their innovations, licensing proprietary technology through distribution channels, or acquiring companies for their innovation capability. Engaging external advisory firms may be useful in determining the best fit for your business both now and into the future (see resource list below).

Finally, no matter how fool-proof your process, strategy or methodology, it will not succeed without a culture that supports innovation. Booz Allen Hamilton have identified that truly innovative organisations have a 'resilient' profile, where speed, transparency and accountability are paramount. Assessing your organisational DNA prior to trying to drive innovation corporately may lead you to develop a cultural change program to move your organisation in the right direction[21].

Conclusion

When you study innovation closely, a few home truths become clear:

1. If you do not innovate as conventional thinking would dictate, it does not mean you will die. Companies want sustainable success - innovation is only one tool to achieve that.
   
   
2. While size may give you an advantage in scaling the cost of innovation, it does not guarantee your innovations will succeed in the marketplace. Without a ruthless focus on outcomes, significant resources can be wasted.
   
   
3. Insight from employees and customer-focussed processes are the best sources of ideas to improve your organisation. Implementing a disciplined system for managing and rewarding ideas can create a robust internal innovation capability without the expense of a dedicated R&D division.
   
   
4. Review your business strategy, models and growth plans to determine the best fit for innovation in your business. While internal innovation and customer focus contributes strongly to organic growth, innovation capability can also be acquired through strategic alliances or mergers/acquisitions. Each of these requires different skill-sets that may not exist within your business right now; knowing how and when to use them is crucial.
   
   
5. All of the above point to HR departments playing a significant role in supporting the innovation process. Driving annual cultural surveys to assess the innovation climate; developing and championing policies that reward staff for contributing ideas, and resourcing the necessary 'think time' for innovation development are just some of many areas where HR can empower innovation.

Although our nation's policy-makers may be badly lagging in creating a climate that allows our innovative capability to fully flourish, that should not stop business from continuing to take the lead. While the future is impossible to predict accurately, it is possible to organise your business to consistently improve its innovation capability, making it more predictable and profitable in the short to medium term.

Resources:

1. Peters, Tom "The Circle of Innovation". New York: Vintage Books, 1997, p.308 2. Hamel, Gary "Leading the Revolution: How to Thrive in Turbulent Times by Making Innovation a Way of Life", Boston: Harvard Business School Publishing, 2000, p.xii 3. Ryan, Allan "Innovation Performance"  4. Bordia, Rakesh, Dehoff, Kevin and Jaruzelski, Barry: Innovation's OrgDNA: September 4, 2005 www.orgdna.com 5. BRW Flagship Edition, June 28-August 1, pp.48-49 http://www.brw.com.au/viewer.aspx?EDP:%2F%2F20070628000019060103 6. The Forrester Wave: National Innovation Networks, Q4 2006 http://www.forrester.com/Research/Document/Excerpt/0,7211,38180,00.html 7. Bordia, Rakesh, Dehoff, Kevin and Jaruzelski, Barry: The Booz Allen Hamilton Global 1000: Smart Spending, Featured in Strategy & Business Issue 45, p.54., 2005 8. BRW Flagship Edition, June 28-August 1, pp.48-49 http://www.brw.com.au/viewer.aspx?EDP:%2F%2F20070628000019060103 9. The Forrester Wave: National Innovation Networks, Q4 2006 http://www.forrester.com/Research/Document/Excerpt/0,7211,38180,00.html 10. Bordia, Rakesh, Dehoff, Kevin and Jaruzelski, Barry: The Booz Allen Hamilton Global 1000: Smart Spending, Featured in Strategy & Business Issue 45, p.54., 2005 11. D'Antoni, Helen: "Tracking Innovation in Financial Services", Finance Tech Magazine, September 27, 2004. http://www.financetech.com/ 12. Harper, Philip, "The New Competitive Edge: Managed Innovation" http://www.microsoft.com/business/peopleready/innovation/insight/default.mspx 13. http://virginmoney.com.au/money/ 14. Boyd, Caroline; Jacob, Katy and Tescher, Jennifer: "Mobile Financial Services and the Underbanked: Opportunities and Challenges for Mbanking and Mpayments". Chicago: Centre for Financial Services Innovation, 2007 http://www.cfsinnovation.com/research-paper-detail.php?article_id=2906 15. Opportunity International http://www.opportunity.org.au/home.asp 16. Bendigo Bank - Community Bank Model http://www.bendigobank.com.au/public/community_bank/community_bank_model.asp 17. Professor Isaac Getz and Dr. Alan Robinson, "Innovate or Die: Is that a Fact?", in Creativity and Innovation Management, Vol 12, No.3, September 2003, pp. 130-136 www.blackwell-synergy.com/doi/pdf/10.1111/1467-8691.00276 18. "Australia Slips to 23rd in the World in Innovation", Media Release, 05/05/2007 Strategyn - Outcomes Driven InnovationTM Global Consulting Firm http://www.strategyn.com.au/content/Public/MediaRoom.aspx " 19. Professor Isaac Getz and Dr. Alan Robinson, "Innovate or Die: Is that a Fact?", in Creativity and Innovation Management, Vol 12, No.3, September 2003, pp. 130-136 www.blackwell-synergy.com/doi/pdf/10.1111/1467-8691.00276 20. Ryan, Allen: "Innovation Performance", Sydney: Managed Innovation, 2005 21. Bordia, Rakesh, Dehoff, Kevin and Jaruzelski, Barry: Innovation's OrgDNA: September 4, 2005 www.orgdna.com Further Reading: Events, Resources & Consultancies 2007 Melbourne Financal Services Symposium http://www.2007mfss.com.au/ (NB 2006 Symposium was on innovation - website unable to be accessed) 2007 Sydney Technology & Innovation for Banking & Financial Services Conference http://www.fst.net.au/confdetails.aspx?confid=5 2007 Retail Financial Services Conference http://www.retailfinancialservices.com.au/RFS_agenda.html http://www.onlinebankingreport.com/?gclid=CL3k8arE140CFRjBWAodzkW4mQ (Online Financial Innovations Report) Profitable Innovation in Financial Services - Boston Consulting Group Report, 2004. http://www.nubank.com/downloads/profitable_innovation.pdf Centre for Financial Services Innovation http://www.cfsinnovation.com/ Technology and Innovation in Financial Services: Scenarios to 2020. World Economic Forum. June 2007 http://www.weforum.org/en/initiatives/Scenarios/TechnologyandInnovationinFinancialServicesScenarios/index.htm Mindwerx International - Australian Creativity & Innovation Consulting Firm http://mindwerx.com/ Managed Innovation - Innovation Consultancy http://www.managedinnovation.com/ Innovation Dynamics - Innovation Consultancy with Australian Financial Services Licence http://www.innovationdynamics.com.au/ Macquarie Institute for Innovation (part of Macquarie University) Managed Innovation and Quest for Growth 2 Day Program http://www.mii.mq.edu.au/executiveprogram/program5.htm Innovaro - European Innovation Consulting Firm http://www.innovaro.com/