How to produce defensible competitive advantage?
September 26th, 2011 | 
Author: How to produce defensible competitive advantage?
The challenge
Many companies tend to focus their strategic innovation efforts on product development which are often incremental and bring little new value. Other companies have their innovation efforts concentrated in R&D departments which can be a source of radical innovations. However, if a radical idea doesn’t produce defensible competitive advantage it may not cover the costs of its expensive R&D program. Of course intellectual property rights make barriers to imitation but these are often too limited and costly to guarantee a net profit from the R&D program. It may also be high indirect costs connected to being secretive and move in “stealth” for new companies. As a result, product managers may turn to unethical behavior or desperate marketing to cover huge R&D expenses. This may hurt the reputation of the company or long term sales. Another common feature of innovation is that number two to market ends up with the largest proportion market share. But how can a company produce defensible competitive advantage?
Meta-innovation
According to Gary Hamel, companies that are too focused on the product innovation neglect opportunities located elsewhere in the company’s resources, culture and network. By just launching a new product it might eat some market share, but is vulnerable to competitor’s response. By creating a new business model for the product, the company can avoid diminishing returns from hyper-competition. The more a company succeeds to integrate their unique features into their product, production and marketing, the more strategic the innovation will be. A defensible competitive advantage increases the valuation of the company. For experienced innovators, this article may just describe the obvious, for everyone else it is a useful checklist for innovation add-ons.
Core strategy
In his book “Leading the revolution” Hamel mentions four main areas that should be baked into the business model of the innovation to avoid hyper-competition. The first is the core strategy; how the firm will compete. The core strategy should include business mission with main objectives such as value proposition and strategic intent. You should use the strength of your already existing strategy, or adopt a new one. For example, Moods of Norway’s slogan is to design “happy clothes for happy people” mixed with a touch of Norwegian history, culture and traditions. In four years their income has increased from 50.000 Euro to more than 3.5 million Euro. How can anyone imitate that without ending up number two in the market? Core strategy should focus on market or where the firm competes, defining customers, geography and segment. To be strategic, the core strategy needs to be different from competitors’ and build on the company’s strengths and characteristics.
Strategic resources
Also, the company needs to look at its strategic resources. The core competencies of a company should measure what the company knows that is unique, valuable to customers and transferable to new opportunities. It might even highlight some areas of improvement and reorganization of existing staff. You might need to bring in new competence. One should also be aware of the current assets of the company such as brands, patents and infrastructure. These are often expensive to imitate as they tend to have huge sunk costs and would scare off competition. They may also bridge markets. For example, the Virgin brand has been elemental in gaining the company a foothold in a both the music, airline and insurance market. A third element is to map the processes in the company and use its strengths to improve the innovation.
Customer interface
A third area that a company should bake into their innovation is the customer interface, where the innovation meets the market. The company needs to identify type of channels, support and services it controls or are involved with that are available to enhance the value of the product. Also, the company must use its customer insight and use every opportunity both to increase market understanding and the market’s understanding of the company. To understand the information needs of key customers as well as their dynamic interaction with the company or product are crucial to strategic innovation. It is also a range of pricing strategies that you should consider as a new product might be able to change industry practices (think about how internet has changed the music industry!).
Value network
The final area that must be considered is the company’s value network, both up and down the value chain. Often a company gets a first mover momentum where it can attract more finances and better partnerships than its competitors. You can read more about that in Rob Day’s reflections here. The type of interaction a company has with its suppliers for example impacts opportunities for rapid changes, quality and price of a product. A company also has partners which can supply critical components and solutions to the product, or create symmetries or synergies to enhance sale. If innovation costs are high, companies might choose a coalition, even with a competitor, to radically change the market.
Dream the future
The good thing about using the framework of a meta-innovation is that it challenges you to think beyond product features, processes or market. Also, the innovation does not have to be a high cost, R&D intensive product, but can also be a simple dream or idea. Again, look at Virgin, they did not invent something radical, they just did it in a new way, adding some humor, innovation and hard work. When baking as many as possible of all the features mentioned above into your product, it may be an inimitable, radical and disruptive cash cow. If you want to read the full chapter about business concept generation that goes more into details about meta-innovation, you can find Hamel’s book on Amazon here.
Lessons for Successful Long-term Innovation
THE CLOCK OF THE LONG NOW AND DIVERGENT THINKING
The lessons for Successful Long-term Innovation I have retrieved from reflecting on “The Clock of the Long Now“, written by Steward Brand in year 2000. The book challenges readers to go beyond daily thinking to take long-term responsibility for sustainable development. By trying to think in a 10.000-year perspective, the book stimulates the brain to think in new ways about how business can be conducted. It opens for divergent thinking, exploring possibilities based on a bank of ideas, limitations, instructions or thoughts. This stimulates creativity which again may give competitive edge for your business. Unfortunately most academic schools train students to perform convergent thinking for example by reasoning based on specific articles and instructions. This can hamper creativity later in professional work situations and lead to sub-optimal performance.
FIVE LESSONS FOR SUCCESSFUL LONG-TERM INNOVATION
The first lesson from the book addressing long-term innovation comes from Brand’s (the author) parachute free-fall experience (1. never count totally on equipment 2. always have a back-up and 3. look for an outside frame of reference). With innovations, things are likely to go wrong and accounting for the unforeseen can reduce costs and increase success. Deeper undersanding can be enhanced by consultation and in networks and the shoelace theory developed by Barnes & Kriger, where departments and people are knitted together and makes the foundation and understanding of the innovation more comprehensive.
The second lesson comes from connecting to the past; ‘if you are going to do something meant to be interesting for ten millennia, it almost has to have been interesting for ten millennia’ says Stuart Brand. Many articles are written about how leaders extract insight from crucibles in their own life. However, this can also be applied to organizations and industries, and innovators should learn from crucibles in the history of their disciplin to shape the business of tomorrow.
The third lesson is that short-term thinking and ‘progress’ may create sub-optimal solutions and embed innovations in ‘dead technology’. Long-term innovations meant to be sustainable must value resilence above brilliance and evaluate its technological foundation. Here software can be a good example when new editions of programs are built upon foundations of old coding with ad-hoc approaches to problems. Eventually it may collapse big time or be disrupted by products that are easier to understand and develop.
The fourth lesson is when moving beyond the short-term horizon a broader spectrum of innovative landscape becomes accessible. By entering the realm of chronos (the realm of long-term instead of kairos – the here and now) more innovative opporunities opens up that are less attractive in the financial world (that typically has a short term perspective, e.g. 5 years). This realm is more powerful than the short-term realm because it is more linked to sustainability, culture and values of people. It also avoids Moore’s law that is not sustainable in the long run.
The fifth lesson is to avoid a conceptual poverty of here and now. With broad thinking, one can create strong and flexible structures built to absorb and incorporate shocks and revolutions. This can be done by being open-minded, building networks and never stop dreaming.
FINAL PIECE OF ADVICE
Based on the book by Stewart Brand, it is clear that the whole is greater than the sum of its parts. The greatest good for the greatest number is the future good, as majority is yet to come. However, the future is always extraordinary and the best way to manage it is to preserve and create options. Still, future value needs to be addressed on a daily basis to be preserved (think about how religions are preserved because they are relevant in a wide set of circumstances). This creates an alignment between today and tomorrow.
Want to generate own insights based on the book ‘The clock of the Long Now’?
You can get your own copy of the book from Amazon by clicking here!
Does Delegation Increase Innovation?
Does delegation incrase innovation?
The answer to this question is not yes or no, but it depends! Below I will explain some factors that can help you understand how participative leadership and delegation will help you increase your organization’s innovative performance.
Innovation can happen in many areas, but we mainly address five types of innovation. The most common types of innovation referred to is product innovation and process innovations. However, also organizational innovation, environmental innovation and market innovations can give substantial benefits for an organization. The problem is how to best organize your business for innovation to happen?
A lot of theorists in the field claim that delegation and participative leadership are crucial for innovation as employees involvement improves total contribution to to the outcome. This is often based on the view that sub-ordinates are closer to the areas where innovation improves performance and sooner will detect needs for change. However, the level of situational control at work can stop them from taking action and making improvements. If this happens, the organization fails to take advantage of its richest source of information and knowledge generation that will improve future innovative performance. However, by empowering employees, the organization can enter a positive cycle of increasing innovative performance.
A study by Gebert, Boerner and Lanwehr from 2004 shows that unless certain conditions are in place (employee orientation, consideration and trust), delegation and employee empowerment can actually lower a company’s innovative performance as it can lead to an overload of sub-optimal solutions, too much time spent on exploration rather than exploitation (see previous blog posts) and sub-ordinate conflicts. This can lead to a negative cycle of innovation and initiative in the organization, impacting both culture and organization environment.
Consistent with the study above Adler, Goldof and Levine (1999) examined factors that made New United Motor Manufacturing Inc (NUMMI) by far outperform competitior in the car industry. The study highlighted at least three contextual factors; trust, training and goal-congruence as crucial to improve the innovative capability of a company and create a virtuous cycle of innovation.
TRUST
It is essential that the organization have a high level of trust for delegation to work at all. Trust can include both the trust of subordinate’s willingness to do the right thing and competence to be able to do the right thing. Trust should not be “good-will” trust, but be fair and just. By trusting the employees they become the heart of the operation. However, it is also important that sub-ordinates can trust their bosses and management. Only then can they dare to take initiative for innovative solutions.
TRAINING
Closely related to trust is training, because only be training can employees develop competence to efficiently explore innovation. When and how to explore innovative solutions should be built into company policies, for example by creating innovative project groups or allow a certain percent of work-time for exploring new solutions. By training the management can be confident that employees have the tools they need to efficiently develop the organization.
GOAL-CONGRUENCE
Employees and management must have the same objectives for the organization to efficiently perform their roles at work. In the study of NUMMI, this was done by management making policies “as if” they were acting in the employees’ best interests. This included a non-lay-off policy, strong union collaboration and fair treatment of employee requests. If proved far more efficient to be a bit generous and create goal-congruence than to constantly make decisions based on the small margins.
Of course, there can be many other contextual factors both general and specific to your organization that will influence the innovative environment. Contextual factors work at a personal level and therefore can vary fron one sub-ordinate to another. It is most important that you create a culture of innovation where the above elements should be central. This is critical for the long-term success of any company.
For more information about innovation at google, click here or see Google’s nine rules of innovation here! For more general information about the success of Toyota innovation management, check this out!
The image above is freely retrieved from Freefoto.com
Posted in Innovation Management | 
Tags: Delegation, Innovation, participation, Participative leadership | 
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A business site with all the resources you need
Hello again, now I want to tell you about something that you will really benefit from looking into whether you are a student or a manager of innovation. It may sound like promotion and it is.I really want to promote good and useful websites out there that I know a lot of people will benefit from using in their innovatio work.
The site I want tell you about now is http://www.businessballs.com/ that has a lotsof useful stuff for anyone looking into strategic innovation, organizational development, and business training. Among the useful things you find are PEST analysis, Porter’s Five Forces Model and SWOT analysis with useful information and nice templates helping you to analyze where and how you should focus your strategic resources.
You also find useful stuff for business plans and marketing strategies. In addition the website has lots of useful stuff for icebreakers, career planning, business networking tips and ideas, leadership tips and stress management etc. The site practically touches upon all the resources you need for being successful in innovation management. So you should really bookmark this page, sooner or later it will come in handy. Great thanks to Alan Chapman for making such an awesome site!
Open innovation and real life…
In the university, we learn the models for innovation, such as open innovation (Chesborough) and the salmon model (Orjasaeter). However, in real life, these models are more complex and harder to make work. In an interview, James Todhunter from Invention Machine says that in real life, most organization find it hard to derive value from open innovation, and that co-operation starting out with good intentions, the programs stall. Knowing how to avoid this is a key feature of innovation management.
He further says that innovation is everyone’s job at a company, and that open innovation is useful for making employees initiatives being viewed as opportunities and not threats. However, innovation do not “just happen”, and an innovation department is essential to create a culture and a context where innovation can happen. Communication, flowing in all directions, he lists as the key element to make open innovation work.
When the ideas are gathered, deciding what options to pursue, Todhunter uses the 3F method; fit, feasibility and finance. The innovation must fit your need and differentiate your product. It must be feasible for your organization’s business model. It must be financially rewarding. Hence innovation is not just about net present value, but strategic goals.
For a company to increase its innovation, it must commit on every level. This means giving employees training and tools for innovation, as well as managerial commitment. Putting strategic innovation into the business model is rewarding, but takes up a lot of resources. Critical thinking and learning skills will be the main building blocks for successful innovation in the future.
The full interview can be found by clicking here.
Modern strategic innovation includes innovation in business model
In an ever-changing economy, just relying on product innovation is simply not enough. Innovation is a wide field, including process innovation, social innovation, environmental innovation – but also very important organizational and business innovation. Companies focusing on growth by product innovation can easily become locked into their current business model. Investment based on current business model reinvents the current model, which can later be outcompeted due to disruptive technology and cycles of technological development. Institutions and value chains can serve as major reasons for inertia in your organization.
According to business strategist, Rowan Gibson, “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.” I certainly agree with him on this one, check out his article on http://www.business-strategy-innovation.com/2009/09/innovation-goal-growth-or-strategic.html
Posted in Strategic Innovation |
Tags: Innovation, innovation business model, Innovation Management, Strategic Innovation |
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Strategic Innovation
Company- and product lifecycles today are shorter than any time before in modern history, and strategic innovation is the only solution to stay on top of the industry in the long-term perspective. A study performed by McKinsey’s researchers demonstrates how companies on the S&P 500 has had an average lifetime of only 15 years in 2000, compared to 50-60 years in the 1920s (Foster and Kaplan 2001). Furthermore, life expectancy in Japan and Europe is now only 12,5 years (Burns, 2001). It is clear that companies aiming for a long-term future needs to deal with change and constantly produce new product cycles (innovate) to stay on top of competitors and markets.
Innovation is often described as a “black box” where one cannot predict the outcome of the input. Because variables the processes of innovation differ, it is hard to create a recipe for innovation. However, by putting preconditions in place by having plan for strategic innovation, one opens for innovation to happen. By learning about the process of innovation, and how to utilize this in the individual company, one gains competitive advantages that will outperform emerging competition.
On the input side, it is clear that learning is a central topic in innovation, and process and knowledge are vital elements that go before innovation. This learning occurs in a range of situations and is result of human interaction. Networks and organizations are therefore vital instruments to create a platform for learning. However, learning also takes place in a context, and at a certain location. There are many more variables that impact the learning process, and a strategic innovation plan is therefore needed to guide these variables towards a favorable context.
On the output side of innovation, there are many obstacles that prevent learning to become innovation. One major obstacle throughout history is that innovation has been the duty of R&D departments, and that new fancy solutions have been lacking a sufficient market to sell the product. Furthermore can organizational culture stop good ideas to reach the market due to lack of experimentation or inadequate incentive systems. Therefore, the management must make sure the organizations are prepared for innovation.
This website will help you understand innovation, so that you can have a killer advantage to battle the market in a time where change is the only constant. By implementing strategic innovation in your organization, your company will be prepared for long-term profit maximization, as well as social and environmental challenges in years to come.