The 12 Different Ways for Companies to
Innovate
Companies
with a restricted view of innovation can miss opportunities. A new framework
called the “innovation radar” helps avoid that.
Faced with slow growth, commoditization and global competition,
many CEOs view innovation as critical to corporate success. William Ford Jr.,
chairman and CEO of Ford Motor Co., recently announced that, “[f]rom this point
onward, innovation will be the compass by which the company sets its direction”
and that Ford “will adopt innovation as its core business strategy going
forward.” Echoing
those comments, Jeffrey Immelt, chairman and CEO of General Electric Co., has
talked about the “Innovation Imperative,” a belief that innovation is central
to the success of a company and the only reason to invest in its future. Thus
GE is pursuing around 100 “imagination breakthrough” projects to drive growth
though innovation. And Steve Ballmer, Microsoft Corp.’s CEO, stated recently
that “innovation is the only way that Microsoft can keep customers happy and
competitors at bay.”
But what exactly is innovation? Although the subject has risen
to the top of the CEO agenda, many companies have a mistakenly narrow view of
it. They might see innovation only as synonymous with new product development
or traditional research and development. But such myopia can lead to the
systematic erosion of competitive advantage, resulting in firms within an
industry looking more similar to each other over time. Best
practices get copied, encouraged by benchmarking. Consequently, companies
within an industry tend to pursue the same customers with similar offerings,
using undifferentiated capabilities and processes. And they tend to innovate
along the same dimensions. In technology-based industries, for example, most
firms focus on product R&D. In the chemical or oil and gas industries, the
emphasis is on process innovations. And consumer packaged-goods manufacturers
tend to concentrate on branding and distribution. But if all firms in an
industry are seeking opportunities in the same places, they tend to come up
with the same innovations. Thus, viewing innovation too narrowly blinds
companies to opportunities and leaves them vulnerable to competitors with
broader perspectives.
In actuality, “business innovation’’ is far broader in scope
than product or technological innovation, as evidenced by some of the most
successful companies in a wide range of industries. Starbucks Corp., for
example, got consumers to pay $4 for a cup of latte, not because of
better-tasting coffee but because the company was able to create a customer
experience referred to as “the third place” — a communal meeting space between
home and work where people can unwind, chat and connect with each other. Dell
Inc. has become the world’s most successful personal computer manufacturer, not
through R&D investments but by making PCs easier to use, bringing products
to market more quickly and innovating on processes like supply-chain
management, manufacturing and direct selling. And Google has become a
multibillion-dollar goliath not because it has the best search engine, but
because it pioneered “paid search” — the powerful concept that vendors would be
willing to pay Google to match consumers with relevant offerings as a
by-product of free searches the consumers conduct.
Conversely, technological innovation in the laboratory does not
necessarily translate into customer value. For instance, high-definition
television is a radically new innovation from a technological perspective,
requiring new recording, transmission and receiving equipment, communication
frequencies and programming. But the result — an incremental improvement in
picture sharpness — is of limited value to the general consumer. One of the
most technologically advanced computers ever created was the NeXT Cube,
developed by Steve Jobs’ company NeXT Computer, Inc. The product featured a
host of technological advances, including clickable embedded graphics and audio
within e-mail, object-oriented programming, magneto-optical storage and an
innovative operating system. But the NeXT Cube was a commercial flop. Few
compatible software applications were available, and consumers balked at the
prospect of switching to a radically new system.
About the Research
We developed the innovation radar based on interviews from
managers responsible for innovation-related activities at several large
companies across a range of industries. Participants included Boeing,
Chamberlain Group, ConocoPhillips, DuPont, eBay, FedEx, Microsoft, Motorola and
Sony. We also reviewed the academic literature on innovation to help identify
and define the radar’s 12 dimensions. To measure those dimensions, a
comprehensive set of questions was compiled, following well-accepted best
practices in metrics and questionnaire design.i Two
distinct sets of measures were created for each dimension: (1) reflective
measures to obtain an overall metric for the actual level of innovativeness at
each dimension and (2) formative measures to gain insight into activities or
factors that contribute to the observed level of innovativeness.
Defining Business Innovation
To avoid innovation myopia, we propose anchoring the discussion
on the customer outcomes that result from innovation, and we suggest that
managers think holistically in terms of all possible dimensions through which
their organizations can innovate. Accordingly, we define business innovation as
the creation of substantial new value for customers and the firm by creatively
changing one or more dimensions of the business system. This definition leads
to the following three important characterizations.
Business Innovation is About New Value, Not
New Things.
Innovation is relevant only if it
creates value for customers — and therefore for the firm. Thus creating “new
things” is neither necessary nor sufficient for business innovation. Customers
are the ones who decide the worth of an innovation by voting with their
wallets. It makes no difference how innovative a company thinks it is. What
matters is whether customers will pay.
Business Innovation Comes in Many Flavors.
Innovation
can take place on any dimension of a business system. The Home Depot Inc., for
example, innovated by targeting “do it yourselfers,” an underserved customer
segment. JetBlue Airways Corp. has succeeded in the U.S. domestic airline
market by offering a better customer experience that includes live satellite
television, leather seats and fashionably clad flight attendants. And Cisco
Systems Inc. has improved its margins through process innovations, such as the
company’s ability to close its quarterly financial accounts on the same day
that its quarter ends.
Business Innovation is Systemic.
Successful
business innovation requires the careful consideration of all aspects of a
business. A great product with a lousy distribution channel will fail just as
spectacularly as a terrific new technology that lacks a valuable end-user
application. Thus, when innovating, a company must consider all dimensions of
its business system.
The Innovation Radar
The innovation radar displays the 12 dimensions of business
innovation, anchored by the offerings a company creates, the customers it
serves, the processes it employs and the points of presence it uses to take its
offerings to market.
A 360-Degree View
The question then immediately arises: How many possible
dimensions of business innovation are there, and how do they relate to each
other? For three years, we have examined that issue in depth with a group of
leading companies, including Motorola, Chamberlain Group ADT, Sony, MicroSoft
and ConocoPhillips. Based on discussions with managers
leading innovation efforts at these companies and a comprehensive survey of the
academic literature on the topic, we have developed, validated and applied a
new framework called the “innovation radar.” This tool presents and relates all
of the dimensions through which a firm can look for opportunities to innovate.
Much like a map, the innovation radar consists of four key dimensions that
serve as business anchors: (1) the offerings a company creates, (2) the
customers it serves, (3) the processes it employs and (4) the points of
presence it uses to take its offerings to market. Between these four anchors,
we embed eight other dimensions of the business system that can serve as
avenues of pursuit. Thus, the innovation radar contains a total of 12 key dimensions.
The 12 Dimensions of Business Innovation
|
DIMENSION
|
DEFINITION
|
EXAMPLES
|
|
Offerings
|
Develop
innovative new products or services.
|
•
Gillette Mach3Turbo razor
• Apple
iPod music player and iTunes music service
|
|
Platform
|
Use common components or building blocks to create derivative
offerings.
|
•
General Motors OnStar telematics platform
•
Disney animated movies
|
|
Solutions
|
Create integrated and customized offerings that solve end-to-end
customer problems.
|
• UPS
logistics services Supply Chain Solutions
•
DuPont Building Innovations for construction
|
|
Customers
|
Discover unmet customer needs or identify underserved customer
segments.
|
•
Enterprise Rent-A-Car focus on replacement car renters
• Green
Mountain Energy focus on “green power”
|
|
Customer Experience
|
Redesign customer interactions across all touch points and all
moments of contact.
|
•
Washington Mutual Occasio retail banking concept
•
Cabela’s “store as entertainment experience” concept
|
|
Value Capture
|
Redefine how company gets paid or create innovative new revenue
streams.
|
•
Google paid search
•
Blockbuster revenue-sharing with movie distributors
|
|
Processes
|
Redesign core operating processes to improve efficiency and
effectiveness.
|
•
Toyota Production System for operations
•
General Electric Design for Six Sigma (DFSS)
|
|
Organization
|
Change form, function or activity scope of the firm.
|
• Cisco
partner-centric networked virtual organization
• Procter
& Gamble front-back hybrid organization for customer focus
|
|
Supply Chain
|
Think differently about sourcing and fulfillment.
|
• Moen
ProjectNet for collaborative design with suppliers
•
General Motors Celta use of integrated supply and online sales
|
|
Presence
|
Create new distribution channels or innovative points of
presence, including the places where offerings can be bought or used by
customers.
|
•
Starbucks music CD sales in coffee stores
•
Diebold RemoteTeller System for banking
|
|
Networking
|
Create network-centric intelligent and integrated offerings.
|
• Otis
Remote Elevator Monitoring service
•
Department of Defense Network Centric Warfare
|
|
Brand
|
Leverage a brand into new domains.
|
•
Virgin Group “branded venture capital”
•
Yahoo! as a lifestyle brand
|
Offerings
Offerings are a firm’s products and services. Innovation along
this dimension requires the creation of new products and services that are
valued by customers. Consider the Procter & Gamble Company’s Crest
SpinBrush. Introduced in 2001, the product became the world’s best-selling
electric toothbrush by 2002. A simple design and the use of disposable AA
batteries translated into ease of use, portability and affordability. Moreover,
Procter & Gamble’s no-frills approach enabled the Spin-Brush to be priced
at around $5, substantially cheaper than competing products.
Platform
A platform is a set of common components, assembly methods or
technologies that serve as building blocks for a portfolio of products or
services. Platform innovation involves exploiting the “power of commonality” —
using modularity to create a diverse set of derivative offerings more quickly
and cheaply than if they were stand-alone items. Innovations along this
dimension are frequently overlooked even though their power to create value can
be considerable. Platform innovation, for example, has allowed Nissan Motor Co.
to resurrect its fortunes in the automotive industry. The company has relied on
a common set of components to develop a line of cars and sport utility vehicles
with markedly different styles, performance and market positioning. Nissan uses
essentially the same small engine block (a 3.5-liter V6) to power its upscale
models of a midsize sedan (Altima), large sedan (Maxima), luxury sedans
(Infiniti G and M series), minivan (Quest) and sports coupe (350Z). Clever
modifications of the common engine allow the production of anywhere between 245
and 300 horsepower, creating enough distinctiveness between the vehicles while
gaining efficiency advantages.
Solutions
A solution is a customized, integrated combination of products,
services and information that solves a customer problem. Solution innovation
creates value for customers through the breadth of assortment and the depth of
integration of the different elements. An example here is Deere & Co.,
which has combined an array of products and services (including mobile
computers, a Global Positioning System-based tracking system and software) to
provide an end-to-end solution to farmers who need to improve their sowing,
tilling and harvesting, as well as manage the business aspects of their
operations more effectively.
Customers
Customers are the individuals or organizations that use or
consume a company’s offerings to satisfy certain needs. To innovate along this
dimension, the company can discover new customer segments or uncover unmet (and
sometimes unarticulated) needs. Virgin Mobile USA was able to successfully
enter the U.S. cellular services market late by focusing on consumers under 30
years old — an underserved segment. To attract that demographic, Virgin offered
a compelling value proposition: simplified pricing, no contractual commitments,
entertainment features, stylish phones and the irreverence of the Virgin brand.
Within three years of its 2002 launch, Virgin had attracted several million
subscribers in the highly competitive market.
Customer Experience
This dimension considers everything a customer sees, hears,
feels and otherwise experiences while interacting with a company at all
moments. To innovate here, the company needs to rethink the interface between
the organization and its customers. Consider how the global design firm IDEO,
headquartered in Palo Alto, California, has helped health care provider Kaiser
Permanente to redesign the customer experience provided to patients. Kaiser
has created more comfortable waiting rooms, lobbies with clearer directions and
larger exam rooms with space for three or more people and curtains for privacy.
Kaiser understands that patients not only need good medical care but also need
to have better experiences before, during and after their treatments.
Value Capture
Value capture refers to the mechanism that a company uses to
recapture the value it creates. To innovate along this dimension, the company
can discover untapped revenue streams, develop novel pricing systems and
otherwise expand its ability to capture value from interactions with customers
and partners. Edmunds.com, the popular automotive Web site, is a case in point.
The company generates revenues from an array of sources, including advertising;
licensing of its tools and content to partners like The New York Times and
America Online; referrals to insurance, warranty and financing partners; and
data on customer buying behavior that are collected through its Web site and
sold to third parties. These various revenue streams have significantly
increased Edmunds’ average sales per visitor.
Processes
Processes are the configurations of business activities used to conduct
internal operations. To innovate along this dimension, a company can redesign
its processes for greater efficiency, higher quality or faster cycle time. Such
changes might involve relocating a process or decoupling its front-end from its
back-end. That’s the basis of the success of many information technology
services firms in India, including companies like Wipro Infotech and Infosys
Technologies Ltd. that have created enormous value by perfecting the model of
delivering business processes as an outsourced service from a remote location.
To accomplish this, each process is decomposed into its constituent elements so
that cross-functional teams in multiple countries can perform the work, and the
project is coordinated through the use of well-defined protocols. The benefits
are flexibility and speed to market, access to a competitive pool of talent
(the highly educated and relatively low-cost Indian knowledge worker) and the
freedom to redirect resources to core strategic activities.
Organization
Organization is the way in which a company structures itself,
its partnerships and its employee roles and responsibilities. Organizational
innovation often involves rethinking the scope of the firm’s activities as well
as redefining the roles, responsibilities and incentives of different business
units and individuals. Thomson Financial, a New York City-based provider of
information and technology applications for the financial services industry,
transformed its organization by structuring around customer segments instead of
products. In this way, Thomson was able to align its operational capabilities
and sales organization with customer needs, enabling the company to create
offerings like Thomson ONE, an integrated work-flow solution for specific
segments of financial services professionals.
Supply Chain
A supply chain is the sequence of activities and agents that
moves goods, services and information from source to delivery of products and
services. To innovate in this dimension, a company can streamline the flow of
information through the supply chain, change its structure or enhance the
collaboration of its participants. Consider how the apparel retailer Zara in La
Coruña, Spain, was able to create a fast and flexible supply chain by making
counterintuitive choices in sourcing, design, manufacturing and logistics.
Unlike its competitors, Zara does not fully outsource its production. Instead
it retains half in-house, allowing it to locate its manufacturing facilities
closer to its markets to cut product lead times. Zara eschews economies of
scale by making small lots and launching a plethora of designs, allowing it to
refresh its designs almost weekly. The company also ships garments on hangers,
a practice that requires more warehouse space but allows new designs to be
displayed more quickly. Thanks to such practices, Zara has decreased the
design-to-retail cycle to as short as 15 days and is able to sell most
merchandise at full price.
Presence
Points of presence are the channels of distribution that a
company employs to take offerings to market and the places where its offerings
can be bought or used by customers. Innovation in this dimension involves
creating new points of presence or using existing ones in creative ways. That’s
what Titan Industries Ltd. did when it entered the Indian market with stylish
quartz wristwatches in the 1980s. Initially, Titan was locked out of the market
because the traditional watch retailing channels were controlled by a
competitor. But the company took a fresh look at the industry and asked itself
the following fundamental question: Must watches be sold at watch stores? In
answering that, Titan found that target customers also shopped at jewelry,
appliance and consumer electronics stores. So the company pioneered the concept
of selling watches through free-standing kiosks placed within other retail
stores. For service and repair, Titan established a nationwide aftersales
network through which customers could get their watches fixed. Such innovations
have enabled Titan not only to enter the Indian market but also to become the
industry leader.
Networking
A company and its products and services are connected to
customers through a network that can sometimes become part of the firm’s
competitive advantage. Innovations in this dimension consist of enhancements to
the network that increase the value of the company’s offerings. Consider how
Mexican industrial giant CEMEX was able to redefine its offerings in the
ready-to-pour concrete business. Traditionally, CEMEX offered a three-hour
delivery window for ready-to-pour concrete with a 48-hour advance ordering
requirement. But construction is an unpredictable business. Over half of
CEMEX’s customers would cancel orders at the last minute, causing logistical
problems for the company and financial penalties for customers. To address
that, CEMEX installed an integrated network consisting of GPS systems and
computers in its fleet of trucks, a satellite communication system that links
each plant and a global Internet portal for tracking the status of orders
worldwide. This network now allows CEMEX to offer a 20-minute time window for
delivering ready-to-pour concrete, and the company also benefits from better
fleet utilization and lower operating costs.
Brand
Brands are the symbols, words or marks through which a company
communicates a promise to customers. To innovate in this dimension, the company
leverages or extends its brand in creative ways. London-based easyGroup has
been a leader in this respect. Founded by Stelios Haji-Ioannou, easyGroup owns
the “easy” brand and has licensed it to a range of businesses. The core
promises of the brand are good value and simplicity, which have now been
extended to more than a dozen industries through various offerings such as
easyJet, easyCar, easyInternetcafé, easyMoney, easyCinema, easyHotel and
easyWatch.
Putting the Innovation Radar to Work
The various examples of Nissan, Virgin, Edmunds.com and others
help illustrate the many possible avenues of innovation, but companies can reap
greater value by thinking of those dimensions as intertwined within a business
system. Consider Apple Computer Inc. Its famously successful iPod is more than
a nifty product. It is also an elegant solution for customers (simple,
integrated buying and consumption of digital music), content owners (secure pay-per-song
model for legal music downloads) and its manufacturer (the discovery of new
growth markets). With respect to the innovation radar, Apple attacked not only
the offerings and platform dimensions but also the supply chain (content
owners), presence (portability of a customer’s entire collection
of music, photos and videos), networking (connecting with Mac or Windows
computers), value capture (iTunes), customer experience (the complete iPod
experience) and brand (extending the Apple brand).
In our current research, we are investigating how companies can
use the innovation radar to construct a strategic approach to innovation.
Specifically, the radar could help a firm determine how its current innovation
strategy stacks up against its competitors. Using that information, the company
could then identify opportunities and prioritize on which dimensions to focus
its efforts. For example, we have worked with a top global bank to benchmark
its innovation profile against that of its top three competitors in a major
Latin American country. Such analyses can reveal the strengths and weaknesses of each
company as well as any promising opportunities, particularly those overlooked
by the industry as a whole.
Innovation Profiles of
Four Leading Latin American Banks
Benchmarking the innovation radars of competitors can reveal the
relative strengths and weaknesses of each company.
Traditionally, most firms’ innovation strategies are the result
of simple inertia (“this is what we’ve always innovated on”) or industry
convention (“this is how everyone innovates”). But when a company identifies
and pursues neglected innovation dimensions, it can change the basis of
competition and leave other firms at a distinct disadvantage because each
dimension requires a different set of capabilities that cannot be developed or
acquired overnight. And innovating along one dimension often influences choices
with respect to other dimensions. Brand innovation, for example, might require
concurrent innovations along the dimensions of customer experience, offerings
and presence. As such, selecting and acting on dimensions that define a firm’s
innovation strategy requires a deliberate, portfolio-based approach that must
be communicated clearly within the company as well as to external constituents.
All of that takes considerable effort and time. So, for instance, when
Enterprise Rent-A-Car Co. began placing rental car locations in the
neighborhoods where people lived and worked rather than at airports (thus
innovating along the dimensions of customers and presence), entrenched
competitors Hertz Corp. and Avis Corp. found it difficult to respond.
As we continue to expand our database of radar profiles, we will
be able to test a broad set of hypotheses. For example, our research to date
supports the notion that successful innovation strategies tend to focus on a
few high-impact dimensions, rather than attempting a shotgun approach along
many dimensions at once. Ultimately, the innovation radar could guide the way
companies manage the increasingly complex business systems through which they
add value, enabling innovation beyond products and technologies. In doing so,
the framework could become an important tool for corporate executives,
entrepreneurs and venture capitalists — anyone seeking growth through
innovation.
Mohanbir Sawhney, Robert C. Wolcott and Inigo Arroniz
https://sloanreview.mit.edu/article/the-different-ways-for-companies-to-innovate/?social_token=6dbb3cc0c7bef9768f2ae4a3512bf7f2&utm_source=twitter&utm_medium=social&utm_campaign=sm-direct
THANKS TO PUSHKAR GHANEKAR
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