by Demetrios Sapounas
Part 9: Innovation
In the past decade and a half, I have had the opportunity to work on several new ventures and advise and mentor numerous entrepreneurs on their journey to building a successful company from an idea. Recently, I also began working as a business coach with the Small Business Development Center (SBDC).
A common theme with all these interactions is the emphasis on building a product. This includes: raising capital, developing detailed revenue models, recruiting a team and getting customers – not necessarily in this order. This is the “classical” approach of going about launching a new venture where the belief of “build it and they will come” still seems to influence early- stage activities.
Innovation is a concept everybody likes to talk about and boast about doing. The pace of business is such that you do need to continuously change and innovate to remain relevant. Innovation done right can create competitive advantages and propel a company to market leadership. But innovation is not something that just happens. First, organizations need to bring down the barriers that prevent people from rising to their true potential, and they need to empower their people to innovate. It is also imperative to realize that innovation is something that needs to be nurtured, become an integral part of the business culture, and requires focus and time to produce results. In other words, it requires a conscious investment. In today’s era of artificial intelligence (AI), innovation is more important than ever.
The dictionary defines innovation as “the act of introducing something new”. This also applies to introducing an improvement to something that already exists. When you started your business, you probably had an idea (your innovation or value proposition) that added value to your target client(s). This has been the driving force behind your efforts to get it to market, create a customer base, capture market share, build a successful company. This spirit, excitement, drive that got you to where you are now, needs to be sustained. Once you have proven something works and people want it, imitators will start popping up and will start taking market share away from you. They will also introduce innovations or enhancements of their own. Therefore, you cannot relax, feel you reached the top and nobody can get to you. Business is a cutthroat game and if you do not keep improving and innovating you will be left in the dust. The road is littered with once high-flyers who either lost their way or are out of business. Some well-known names include Sears, Radio Shack, CompUSA, Pets.com, Silicon Graphics, Lone Star Steakhouse and the list keeps growing. To stay in business, you have to balance the need to serve your customers and the need to keep innovating and pushing the envelope.
Many organizations see innovation as R&D and thus as a cost center. When you have to meet revenue targets or keep your costs low, you cut everything that does not directly contribute to revenue generation. This may work in the short term, but in the long term it can only cause issues. If your objective is to reach some level of growth and then exit, potentially you could ignore innovation. But if your plan is to build a long-lasting business, then you should embrace innovation and include it in all your planning. Innovation is not something you can turn on and off at will. Innovation takes effort, planning, time before it starts delivering value (Innovation could be synonymous to research and development (R&D)). It should be an integral part of everyday operations and should be guided and directed, so it aligns with your business strategy. You do not want to do innovation for the sake of innovation so you can say you have an innovation program. You want to do innovation so you can get benefits from it.
Innovation could take multiple forms. It is not only related to your products and services and the introduction of technological advancements that take you to the forefront of your market. There is also internal innovation that may look at your structure or processes, the systems you are using, how you run the business. Innovation could introduce automation and operational efficiencies, making you more agile, leaner, faster at responding to market changes or customers, reducing your cost structure. Internal innovation may not be as sexy as introducing a new technology that captivates the market and makes you the talk of Wall Street or a new business model that disrupts an industry. Its value should not be discounted, because its benefits can be substantial.
Some suggest that you need someone in the C-suite (possibly a co-CEO) who is entrepreneurial and focuses on innovation, because executives are primarily focused on running the organization. This approach ensures that innovation has the support and visibility at the highest levels. Others feel that innovation is something that happens organically. My position is that organic innovation is very difficult to achieve, because most people have milestones and tasks to deliver and very little time for anything else. One fundamental need for innovation is to have the time to innovate. I also do not feel a co-CEO is the best solution, because it can lead to friction, overlap of responsibilities with the other CEO, etc. I feel the solution is somewhere in between. There should be someone in the C-suite who is responsible for innovation (may be a Chief Innovation Officer), who reports directly to the CEO and the Board and who has the budget, and possibly the team, to run innovation for the company. I also feel the innovation leadership should not also be responsible for product management, business development or any other operational roles. They should work across the business and technology functions and should also get involved in customer interface. In other words, you should practice human-centric innovation. Others suggest that innovation should be the responsibility of lines of business. That may make sense, though what you need is strong leadership and direction, to be able to avoid overlap and duplication of effort. Having a function with the authority and responsibility to drive and manage innovation across the organization could result in better coordination, focus and results.
Innovation changes as an organization grows and matures. In the early stages, when the organization is small, entrepreneurial and fast moving, innovation is what drives outcomes. As the organization grows and matures, there is emphasis on execution, which is very different from innovation, it becomes bureaucratic, risk and change adverse, develops culture and processes that contribute to the reduction of entrepreneurial spirit and innovation. This organizational evolution necessitates renewed emphasis on innovation, to sustain competitiveness and continue producing new ideas. It becomes important to ensure innovation is free from the prevailing culture and processes and is allowed to operate free of constraints, so it can deliver. It is also necessary to understand that innovation is risky so to be successful it is important to accept and manage this risk.
You need to keep in mind that innovation is closely related to change and transformation. In other words, it represents exactly what many established companies shy away from, though they are in desperate need of it. Irrespective of whether it is internal or external innovation, it will effect change which could manifest itself as process, business model, product, technology. When that happens you do need strong leadership that is willing to make the tough, though right, choices to move the company forward. Loyalty and relationships should not be what drive decisions. This means that leadership and personnel changes are commonly needed to successfully adopt the changes required by innovation. It needs to be purposeful, decisive and rapid, so the organization can achieve its new desired state.
Innovation does not have to be a large initiative. You can start small, test and iterate and once you find a model that works for your organization you can adopt and expand. You need to be willing to explore the unknown and become comfortable with experimentation. One important thing is that it is always good to define what the expected outcomes are from innovation. Most executives want to be able to derive more value from investments in innovation and they want to be able to measure the results, so defining metrics becomes important. The metrics would vary, based on the organization and the focus of the innovation initiative. It could be number of patents, revenue increase due to new products, cost reduction due to new processes, etc. McKinsey defines two simple metrics for product innovation, (a) the ratio of how the R&D spending is converting into new-product sales, over a period (in number of years which varies by industry) and (b) the product-to-margin conversion for new product sales. Both of these metrics are looking to capture the ROI at the portfolio level and could be good indicators for smaller initiatives.
When you have a portfolio of innovation projects, you need to manage the portfolio. You need to evaluate and determine whether projects should continue getting funding. For example, if you have a budget of $50M for a project but after $5M you realise things are not working, that is a success, not a failure. You did not spend $45M, which you can now use for other innovation. This approach is extremely important. You do not want to continue supporting projects which do not have any chances for success. You need to be objective and terminate projects, so you can reallocate the remaining funding on other, hopefully more successful, projects. It is necessary to be able to develop the judgement to determine what to do, when and how. The metrics will help you make a well-informed judgement.
Quantitative metrics should be paired with qualitative metrics, to be able to get a better understanding of your overall innovation program. Such metrics may include (a) how engaged the staff involved in innovation feel and are, (b) how well innovation aligns to corporate strategy and objectives, (c) the market response based on the innovation results and so on. Measuring your innovation process and outcomes is a good practice and enables to use the metrics data to evolve and improve your processes, so you can maximise the value from innovation. Bosch is using such an approach on their innovation portfolio. They start projects with a small investment and want to see evidence of viability before follow-on investment is made. This way they kill 70% of projects, while backing the remaining ones. Thus, they are not wasting a lot of money on projects that do not seem to be viable, plus they continuously back and include new projects in their portfolio.
Small businesses usually innovate in house. As companies grow, they find it beneficial to get external perspectives and input that can help with their innovation. Some of that can come in the form of partnerships and collaboration with other entities, which could lead to better and faster innovation. These entities could range from customers to vendors and suppliers. Others find it easier and simpler to acquire innovation, by buying innovative companies and teams. While this is a reasonable approach for quick successes, in the long run the integration (assimilation) of these groups into the corporate environment reduces their innovation drive and start becoming more like the rest of the organization.
A number of years ago I was at a small organization that got acquired by a large corporation. At the beginning that was a positive change. We got exposure to new markets and clients and got feedback which helped improve the product. Over time the emphasis changed from product improvement to achieving quarterly and annual sales targets and group profitability, which also meant keeping costs low. This impacted the product and enabled smaller and more nimble competitors to start capturing market share.
More recently I was at a corporation that had an M&A strategy for the acquisition of revenue and technology (innovative technologies, products, applications). The company was looking at acquiring technologies that could complement and extend its internal capabilities, so it could offer its clients more feature rich and comprehensive products. Acquiring businesses with revenues not only enhanced its own bottom line, it also provided a new set of customers for its own (existing) products.
Larger companies could also establish incubators or accelerators, offering entrepreneurs the resources they need to innovate, giving them a customer (the company itself) for their innovation and encouraging its staff to get involved with the entrepreneurs, not only to coach them and advise them on the company’s needs, processes, opportunities, but also in getting more actively involved and participating in the innovation process. Done right, this could have transformative influence to the whole company.
A few years ago, I was working with a company that was in the process of establishing an incubator for the local entrepreneurial community. The company was interested in entrepreneurs who would work on problems and technologies which could add value to the company. In exchange, the company would provide the physical space for the entrepreneurs to work and collaborate, offer some seed investment in exchange for some equity in the business. In addition, company staff could allocate some of their time to work and collaborate with the entrepreneurs, which would introduce them to entrepreneurship, innovation and new ideas.
Many large corporations do realize that innovation needs support and that internal innovation is not sufficient to maintain market lead. Corporations like Google, Samsung, BMW and others have venture arms and incubators through which they invest and bring together disruptive start-ups whose innovations they hope to be able to leverage in the future.
Innovation can take many forms, though the common theme across organizations is that innovation is needed to remain relevant and competitive. While each organization approaches innovation differently, having an innovation culture and support for empowered and continuous innovation is necessary, to be successful.
Resources
Every Company Needs an Entrepreneur in the C-Suite: https://hbr.org/2020/10/every-company-needs-an-entrepreneur-in-the-c-suite
How to Take the Measure of Innovation: https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/how-to-take-the-measure-of-innovation
On Pioneers, Settlers, Town Planners and Theft: https://blog.gardeviance.org/2015/03/on-pioneers-settlers-town-planners-and.html
What is Human-Centered Innovation?: https://medium.com/innovation-sweet-spot/what-is-human-centered-innovation-ea7a44a0167
Why the Empowerment of Innovation is now a Universal Imperative: https://www.i-cio.com/innovation/human-centric-innovation/item/why-the-empowerment-of-innovation-is-now-a-universal-imperative