INNOVATION 101

Read my professor’s column last Tuesday (July 4) at Businessworld. Professor Cruz’s latest article is entitled “Managing Innovations”. The article is all about Massachusetts Institute of Technology’s Sloan School of Management’s latest study on innovation penned by Sawhney, Wolcott, and Arroniz and is entitled, “The 12 Different Ways for Companies to Innovate”. The authors defined business innovation as “the creation of substantially new value for the customers and the firm by creatively changing one or more dimensions of the business system”. They go on to list 12 dimensions that are subject to innovation. A few points should be emphasized here. Innovation is not equal to new invention or breakthrough technology. Rather innovation is about in my interpretation of the article, redefining value, i.e., what is valuable to customer or better yet restructuring the value offering into a more superior value for customer. Furthermore, innovations can be made in several dimensions, which include not only the product but also the entire business. In layman’s term, there are many facets or “fronts” in the businesses where innovation could be made to offer customer a much more superior value that they needed. These dimensions are:
1. Offerings,
2. Platform,
3. Solutions,
4. Customer’s (Need and Satisfaction),
5. Customer Experience,
6. Value Capture,
7. Processes,
8. Organization,
9 .Supply Chain,
10. Presence,
11. Networking,
12. Brand.
My professor ended his article here (Of course, he defined each of them). But being a business school graduate, I can’t help but be amazed by the power of this new framework on innovation. Of the 12 dimensions, I felt that I could classify them into 4 broad but interrelated categories (I’m no genius by the way, so if you have other opinions please let me know). These categories are Product and Services (#1 – 3), Customer Relationship (#4 – 6), Process Efficiency (#7 – 9), and Distributions/Marketing (#10 – 12).
Offerings, the first dimension simply refers to the product and service offerings of a company. It is fairly obvious that innovation of this type can happen by simply introducing new product variants or a better improve version of the existing products. An example of the former would be the introduction of new flavors to an existing food product or beverage while for the latter; the higher “speed” of Pentium computers would be a great example.
Platform, the second dimension refers to the base technology from which all subsequent new products are created. The example that came to my mind is the computer CPU chip. Currently, the available processor chip in wide use is the Pentium chip but a new chip is being marketed now, the Xeon chip, which functions like a dual core processor, an entirely different technology from the Pentium.
Solutions refer to the combination of end products and services that a company offers to help solve customers’ needs. An example of an innovation in solutions is event management. Used to be, people or organization had to do it themselves in order to stage an event like call up the catering, reserve a place, set up the props, etc. Now with event management, a single entity would be doing all the legworks and people or organization just call them up. Of course, there are other examples of “solutions” out there and the most popular now is the call center.
Customer, which in my understanding refers to the discovery of untapped customer needs. However, this is not that simple. It is possible that the product or services is already present but the customer is unaware of the features of the product offering due to poor attention given or people aren’t aware of the “creative” features of a product or technology. A classic example of innovation of this type would be text messaging. The technology and the feature are already present then but firms and the market aren’t able to fully exploit its potential but once it did, the outcome is far beyond everybody’s imagination.
Customer Experience refers to the total sensory and emotional stimulation that the customer had while “consuming” the product or services. The advent of fast food is one such example. Before McDonalds came into the picture, food service is not only slow but also inconsistent and expensive in some cases. McDonald’s offer of quick service, cleanliness, and quality revolutionizes the entire food service concept.
Value Capture, according to the article is about generating new revenue stream while offering value product. The example I could think of relating to innovation of this type is SM malls. Everybody knew that SM is in the real estate business of selling/renting out commercial spaces inside a gigantic mall to different retailers and merchants. Their primary source of income is in the rentals. However, lately, one could find billboard ads conspicuously littering the place to take advantage of high volume of traffic. Of course most of the ads are related to the retailers the mall host but that is a new revenue stream for a real estate company. This is an innovation in the sense that not only it offers customer information but in the process, it also generates revenue for the company. Internet web sites are prime examples of this innovation. Most web sites gave content away for free but generate revenue through ads viewed or what the industry termed as “clicks”.
Processes refer to the set of activities related to internal operations. By internal operations, it doesn’t merely meant production processes. It also encompasses other activities like accounting, customer support, etc. The idea of innovation at this stage is to improve efficiency and thus lower cost.
Organization refers to the reporting relationship between units. It also refers to the structure in which “work” is divided, i.e., to roll out a car, several work should be done, production, accounting, sales, etc. and the people - units that handle those work. Innovation of this type would mean to simplify the communication line such that responses could be made not only immediately but also accurately. Decision time would also be trimmed. Furthermore, “work” procedures would be simplified, streamlined, and made efficient as well as cost effective.
Supply Chain refers to the activities relating to the transmission of information on product requirement from the end customer to the primary suppliers and the delivery and transportation of the materials and products from the suppliers to the end customers. Innovation of this type centers on simplifying, reducing the communication link between the end users and the suppliers while at the same time improving the reliability, quality, and the speed of delivery of products from suppliers to end users. The last 3 types of innovation can be categorized as innovation on efficiency. Here, innovation is not merely about introduction of the expensive and latest technology but rather it is all about better control and coordination. There are many tools to identify possible “innovation” on efficiency. Tools like TQM, Reengineering, Six Sigma, Lean Manufacturing System are some of the prime examples.
Presence refers in my view to the visibility of the product or service to the target market. Presence in my understanding has two forms, namely, market presence and presence in the mind. The former deals with distribution while the latter talks about advertisements. Innovation in distribution refers to the use of creative alternative means of distribution like selling through the World Wide Web. Advertising innovations would be using new mediums other than the established ones like tri – media campaign, sponsorships etc. An example I could think of is internet advertising or being advertised/incorporated in a popular movie, e.g., James Bond’s favorite car, BMW.
Network as I understand refers to the “link” that connects the company and it’s products to it’s intended customers. This is not simply referring to distribution. It could also encompass co – marketing arrangements like promotion, partnering, co – branding etc. Innovation of this could also come in the form of “creating” new distribution channel aside from the existing channels. An example would be sports shoes. I remembered when I was young sports shoes are sold in department stores. Nowadays, sports shoes can be seen in sports equipment stores or fashion boutiques catering to a sporty lifestyle crowd.
Brand refers to the imagery conjured by the buyer that conveys the promise of the provider of what to expect from the use of the latter’s product or services. It is a promise made by the supplier to the customer. Innovation on brand in my view pertains to the creative way of positioning the brand either by extending it or rebranding it. An example of the former is the extension of sports shoes brands into sports apparel. As for the second case, an appropriate example would be the creation of the “mass luxury” market and the repositioning of some luxury brands into that category.
From a Strategic Management perspective, the list of dimensions to innovate afforded the strategy maker a focus for them to design their strategy. Using Michael Potter’s 5 forces framework on competition, the competitive forces in the industry conspire limit the maximum prices that a company could profitably charge, in short, a price ceiling while at the same time, these forces tend to establish a price floor (cost pressure) below which the company would experience a loss. The difference between the price ceiling and the price floor is the average profit potential that a company in the industry could reasonably expect given the host of competitive pressure. When the price ceiling collapses and the price floor is forced upward due to cost pressures, companies in the industry would felt literally feel the squeeze in their profitability. Michael Potter proposes 3 generic strategies to neutralize the squeeze. The first is Differentiation that is how to convince buyers that the company’s product is unique and therefore deserving of the price it dictates and not what the competitor dictates. This strategy negates the price pressure by “pushing” the ceiling higher. Of the 12 dimensions to innovate, the strategy maker should focus more on the Customer relationship category. Other categories are important too but the emphasis should be how the customer feels about the product or service, specifically, how it felt different from the other offerings. The second strategy is Low Cost, which is finding ways to lower the “overall” cost of the company, not only production cost but also overheads. This strategy negates the cost pressures and hence lowers if not maintains the price floor. Obviously, the efficiency category of the 12 dimensions is useful for the strategy maker to focus his attention on. The third strategy according to Potter is to focus on a certain segment of the industry (by the way, this is not the niche in marketing terminology). The idea of the strategy is to focus on a segment of the industry where the competitive pressures are the weakest and hence the company would feel “less squeeze” on it’s profitability. The strategy maker in this case should focus more on innovating the distribution and marketing side. For an aspiring entrepreneur, the 12 dimensions of innovation would help them figure out what to offer in a highly competitive market. One of the possible ways for entry available to an entrepreneur is to provide innovative products and services on the table that buyers really dig and makes existing player run for their money. Sawhney et al’s framework can help do just that by focusing the would – be entreprenuer’s mental prowess towards figuring out what to innovate. It is really difficult to come up with a new idea, a new innovation from the existing offerings by the established players that really offers superior value to customers. However it would be easier if one has something to start with.