The Strategic Innovation Blog

Posts Tagged ‘Innovation’

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.

Technorati Tags: Competitive advantage, defensible competitive advantage, Innovation, meta innovation, Strategic 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

Technorati Tags: Delegation, Innovation, participation, Participative leadership

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.

Technorati Tags: change management, Innovation, Innovation Management, open innovation, salmon model, Strategic Innovation

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

Technorati Tags: Innovation, innovation business model, Innovation Management, Strategic Innovation