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Home > Performance Management Best Practice > Innovation and the Path to Growth, Profitability, and Competitiveness

Performance Management Best Practice

Innovation and the Path to Growth, Profitability, and Competitiveness

by John Milton-Smith

Executive Summary

  • Disciplined managerial leadership and teamwork are keys to innovation.

  • Innovation should be driven by the end customer, not by R&D.

  • Aim to create unique market space and make competition irrelevant.

  • The 7Es innovation framework identifies seven essential stages in the innovation process.

  • The Cochlear case provides an instructive example of a structured innovation process.

  • Organic growth based on innovation is the surest path to sustainable growth and profitability.

  • Mergers and acquisitions (M&A) are a high-risk substitute for innovation strategy.

  • Innovation should be managed as an open process involving a variety of partners.

Introduction

As management guru Peter Drucker pointed out, entrepreneurial management and innovation were the drivers of the exceptional employment and profit growth in the United States during the 1970s and 1980s. Drawing on insights from this period, Drucker argued that innovation is due more to purposeful, systematic hard work rather than simply “a flash of genius”. It is, therefore, important to distinguish innovation from invention.1 Whereas creative ideas and discovery are at the heart of invention, innovation involves the creative management and application of invention. As companies such as 3M and IBM have demonstrated, innovation should be treated as a standard organizational function responsible for finding new sources of customer value.2

There are three major categories of innovation. According to Christensen, two of the categories—sustaining innovation and disruptive innovation—are complementary, but significantly different. Sustaining innovation is incremental, and reflected in continuous improvements to the safety and efficacy of pharmaceutical drugs, whereas disruptive innovation includes major breakthroughs, such as the automobile and digital photography.3 Some of the most successful disruptive innovations are products, services, processes, and experiences that apply or combine existing elements in different ways to produce radically new customer benefits and experiences. Examples include Apple iPod, YouTube, Star Alliance, and Starbucks.

The third category is “business concept innovation”. Because of the intensity of competition and turbulence in the market environment, Hamel argues that “companies must adopt a radical new innovation agenda”, and apply systematic innovation “design rules”.4 This view is endorsed by Bill Gates, who, warning of the risks confronting complacent incumbents, has claimed that “Microsoft is always two years away from failure”.5

Neither the iPod nor YouTube rely on disruptive technology, yet both have created new global markets. Whereas the iPod offers a unique experience through the quality of its design, customer interface, and product extensions, YouTube has invited millions of people worldwide to become amateur broadcasters by creating and sharing original videos. In the case of Star Alliance, a group of otherwise competing airlines collaborates to provide passengers with seamless global routing options, ticketing arrangements, and loyalty benefits. Starbucks, on the other hand, reinvented the traditional Italian coffee shop to create a global coffee culture and experience, based on market development, line extension, and mass customization.6 Once the focus is on the end-customer, every element in the design and delivery of the value chain becomes a potential opportunity for innovation. As in the examples given above, radical innovation lies in the bundling and branding of multiple value-adding elements, rather than in any single element.7

Service and experience innovation—easily the biggest generators of wealth-producing added value—are the areas most neglected by R&D communities and the “innovation industry”. Kim and Mauborgne (2005) use Cirque du Soleil as an example of a company which has created “the blue ocean of new market space”, and made competition irrelevant. In “achieving both differentiation and low cost by reconstructing elements across industry boundaries”, Cirque du Soleil invented a unique, live entertainment experience, involving elements of circus, theater, opera, and ballet. It is different from traditional circuses. There are no animals or star performers, and the target audience is sophisticated adults rather than children. New shows tour the world regularly, partly financed by regional sponsors and a loyal customer base.8

The 7Es Innovation Framework

Innovation is complex, involves risk, and cannot be reduced to simple templates.9 However, a systematic and disciplined innovation strategy has a number of common elements. Under the direction of a CEO who is strongly committed to organic growth and innovation, there should be an “open market for ideas, capital, and talent”.10 Innovation project team leaders should be given responsibility for critical functions and processes, including the following, which, the sake of convenience, could be designated “the 7Es”:

  • Explore by generating and vetting ideas from a wide variety of internal and external sources;

  • Evaluate by assessing and prioritizing options, making a selection and giving feedback;

  • Extend by involving and co-opting partners and opinion leaders, and progressively demonstrating “small wins”;

  • Experiment by designing, testing, demonstrating, and reviewing a prototype or pilot study;

  • Engage by winning the management’s support for a proposed business model;

  • Evangelize by publicizing, showcasing, celebrating, and involving all stakeholders;

  • Execute by implementing the business model, including launch and marketing strategies.

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Further reading

Books:

  • Hess, E. The Road to Organic Growth: How Great Companies Consistently Grow Market Share from Within. New York: McGraw-Hill, 2007.
  • Kim, C., and R. Mauborgne. Blue Ocean Strategy. How to Create Uncontested Market Space and Make the Competition Irrelevant. Boston, MA: Harvard Business School Press, 2005.
  • Lendrum, T. The Strategic Partnering Handbook. New York: McGraw-Hill, 2003.

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