By Andrew Patterson
Innovation has become one of the leading, if slightly overused buzz words in management speak these days.
The ability to take an idea or a process and completely remodel it has become the ultimate goal for businesses in their quest to maintain their competitive advantage.
While Apple is the global brand that we most closely associate with innovation, local business champions such as Air New Zealand have also embraced the concept in virtually every aspect of their business model from seat design - think cuddle class - self–check-in facilities, online booking systems and even their yield management with products such as grab-a-seat.
Wikipedia’s definition of innovation usefully points out that it differs from invention in that innovation refers to the use of a better and, as a result, novel idea or method, whereas invention refers more directly to the creation of the idea or method itself.
Even the Government is joining the party incorporating the term in its newly created super ministry of innovation, building and employment.
Understanding the innovation process
U.S. based academic Dr Peter Wilton, who has undertaken extensive study of the innovation process, believes that it has become one of the key determinants of business success and failure in the twenty first century.
Based at the Haas School of Business, University of California, Berkeley where he teaches strategy, marketing, and international management he has also served as a visiting professor at Stanford University’s Graduate School of Business and the Australian Graduate School of Management.
He believes that true innovation requires a paradigm shift in the way that businesses have traditionally approached product development and process improvement as companies such as Apple and Google have readily demonstrated.
“One of the big differences is they don't view innovation as an outside activity or an add-on activity and they don't view it as a project. Instead, it's core to their operating model, it's the reason they exist. So for organisations like Google and Apple it’s a case of innovate or die. It's the very nature of their business. Effectively they say: we're all here to create value for our customers and stakeholders and we have to keep doing that.”
“To me it's really core to their operating model. Where businesses find this a challenge is when you think of innovation as an add-on function, either as a separate function in itself or an addition to the normal activity of businesses. It's not an addition to the normal activity of business, it is business. I think that's what makes them different.”
An integrated model
Perhaps for too long innovation has been seen as the domain of the R&D department or the product development team rather than being fully embraced across all spheres of the organisation.
Matching the advent of the start-up, infused with a culture of innovation from day one, has become the new challenge for established businesses dealing with constant disruptive head winds from all sides.
“When you look at what drives start-ups they’re there because they've found an overlooked or under-served need or aspiration in a market. People buy products for one of two reasons. They buy them either to solve a problem, that is to remove pain or to pursue pleasure, or instead to fulfil some kind of unfulfilled aspiration. What allows start-ups to emerge is they can identify those opportunities. But they're also not encumbered by particular investments or past technologies or past core competencies. They can approach it with a completely clean slate and they can build the capabilities that are necessary so they’re able to pursue those opportunities without any existing encumbrances.”
“Most organisations, most incumbents, most established businesses need to tackle both of those problems. One way is to totally rethink the customer problem and aspirations they're trying to meet and address as there are always unfulfilled problems and aspirations of customers that haven’t been recognised.”
“That goes to the core of things like segmentation. How have we segmented the market? Which customers are we targeting and what needs do we think we're addressing? Once those needs get entrenched it's really hard to rethink them.”
“The first part involves standing back and, while being mindful of the customers you’re targeting, identifying where the unfulfilled problems and aspirations are that you could go after to keep the start-ups out? The second aspect involves asking questions like what are the competencies we've built to do that, what are the products we're building, the assets we have, the skills we have, the capabilities we have. Are they still relevant? Of course, core competencies live longer than products, but they don't live for ever.”
Wilton talks about it in terms of moving from what he describes as the ‘red line’ – continuing to do things in a functional way as they’ve been done in the past – and switching instead to the ‘blue line’ which involves adopting a whole new approach that places a greater emphasis on performance.
“The lines refer to the rate at which an organisation is improving performance and creating value for customers. The red line is called the red line because that's the dangerous one. The danger line is too much sustaining innovation, incremental innovation, trying to continuously improve what already exists. We need to do that, every company needs to continuously improve, but at some point if you do too much continuous improvement and you're not looking for entirely new ways of creating value for your customers then it becomes a danger to your organisation. You can have companies like Kodak who became completely irrelevant because somebody else found a new way of creating value.”
“The blue line is reference to reframing, or disruptive innovation. The nature of disruptive innovation is it's an attempt to create value for customers in ways that weren't possible before. The problem with it is, as it starts out, is it always looks inferior to the old way of doing business. Kodak had a digital camera; it only had one megapixel of resolution. They showed it to professional photographers and they said: that's inferior, why would you build that?”
“However, the issue with the blue line is it's going to improve at a much faster rate than your traditional business, and at some point it can even take over. We’ve seen that with the likes of digital photography, it's also done it with Voice Over Internet Protocol (VOIP) telephone calling and it's about to do it with digital wallets, which will eventually replace ATMs so that we no longer need them in the future. But what about the banks that have made huge investments in their ATM network, they’re stuck with them and don’t really know what to do about it. How much do they sink capital into digital wallets versus protecting their ATM networks? This creates a dilemma and once it falls into that dilemma it gets confused and paralysed and the business becomes slow to react.”
The risk paradigm
So how has all this impacted on the risk paradigm given that we know every new idea isn’t going to deliver a long term dividend?
“Risk is actually a double-edged sword. The risk in doing something disruptive or reframing involves a lot of uncertainty. We're never certain about the way the future market is going to evolve, the way customers are going to evolve, the way technology is going to evolve. A lot of managers believe that is the key risk to manage and therefore they stay away from being disruptive. The lessons learned however are if you stay with certainty and you stay with things you know, and assets you understand and business models and frameworks you understand, ultimately the risk is you become completely irrelevant. You just leave the door open for someone else to provide the disruptive innovation which will probably be a start-up.”
“Today at Microsoft for example, public enemy number one is Google. They never would have predicted they’d be their number one enemy. That's because Google of course introduced the importance of search as part of a computing experience and not something that Microsoft was even thinking about at the time. Now of course they do, and they’re trying to reverse engineer it but as we know the follower always has a hard time reverse engineering anything. The assumption being, that you can learn what the first mover did, that you can work out a way to do it better and that eventually you can catch up. However, that’s not proving to be true for someone like Microsoft.”
“So there’s risk in everything and there’s risk in not being not being disruptive. Just substituting one set of risks for another isn’t right either and a proper risk management strategy says that you will have a portfolio of products. So you’ll have some products that you’re trying out (reframing) and you’ll have other sustaining products that you’re improving. The trick is not letting the sustaining model prevent you from playing to win in the future."
So has Apple come as close as possible to creating the perfect model and more importantly can this be sustained into the future? While there are plenty of doubters beginning to emerge, Wilton isn’t one of them.
“Apple has created a pipeline of innovation that creates value in multiple ways so that if someone comes after them in one dimension there are still two or three other dimensions that they have to address before they can overtake Apple. So the model of innovation is quite simple. It’s the right combination of reframing and sustaining innovation together. What makes Apple special is that they have a very deep rooted commitment to being unique. So they have to be relevant to the customer but they also have to do it in a unique way that generates advocates and pro-active supporters of your organisation.”
“Being unique is just as important as being relevant and Apple perhaps understands that better than anyone. So when they do innovation it has to pass very strict tests that set it apart from everyone else."
"For instance, they’ll make a piece of hardware but it will be unique because of its industrial design. Then they’ll focus on the other side of the innovation equation which is reframing. They’ll solve a problem that either wasn’t solved or not solved well enough. For example, the ipod got around music rights by creating itunes, then the smartphone created downloadable apps from the app store and allowed customers to individualise their phones while the ipad created the ultimate in computer portability by combining the features of the earlier products.”
“When you look at Apple they very cleverly bundle everything together so that some things they are reframing and others are sustaining but they do it in a way that delivers a very consistent brand experience. Then, every so often, they add another product to the mix that creates a new platform or a way of creating value.”
“We know that great companies rise and fall but I don’t believe we’re close to seeing the fall of Apple because they understand innovation and the process it involves which is deeply rooted in everything they do.”
The market however, is fast becoming impatient. That’s what happens when you create addictive and loyal customers.
Dr Peter Wilton has received numerous awards and fellowships for his work in management, including from the National Science Foundation as well as the Marketing Science Institute.
He has been the recipient of the Australian Overseas Fellowship in Management and the Market Research Society of Australia Prize. In the U.S. where he’s based at the University of California, Berkley he has been recognized by Business Week magazine as one of the country’s leading business instructors. In addition to his teaching activities, through his private consulting company ORBIS Associates, he also provides a range of strategic management and executive development services to a list of clients representing diverse industries and regions of the world. Among others, his global clients include Cisco Systems, Sun Microsystems, Apple Computer, Johnson & Johnson, Merck & Co. Inc. and Rockwell International.
Dr. Wilton holds a Bachelor of Commerce (1st Class Honours) from the University of New South Wales in Australia, and a Ph.D. in Management from Purdue University in the United States.