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DRIVING GROWTH THROUGH INNOVATIONHow leading firms are transforming their futures
By ROBERT B. TUCKER
Berrett-Koehler Publishers, Inc.Copyright © 2008 Robert B. Tucker
All right reserved.
Chapter OneWhat It Takes to Drive Growth
The old Borg-Warner would have said "you can't organize the innovation process, that's impossible." The new Borg-Warner says "we have a process for everything else, let's have one for innovation." Simon Spencer, Borg-Warner's first Innovation Champion
How will you drive growth in your company? That's really the key question, is it not? Of course, your company is growing—most firms today are. The challenge is that there's a gap between the rate of growth they've been achieving and the rate of growth they want and need to achieve to remain competitive.
A Corporate Strategy Board study reveals how few firms are growing at rates uncommon in their industry—and sustaining that growth—over time. Researchers analyzed 3,700 companies with half a billion dollars or more in annual revenues over a seven-year period. Of these, only 3.3 percent showed consistently profitable top- and bottom-line growth and shareholder returns. sustained this growth over the past two decades. These 21 companies didn't just grow top-line revenue; they also outperformed the Standard & Poor's index during the same period, with a 26 percent compound annual market cap growth versus 13 percent for average S&P companies.
Many companies today face their own version of the Growth Gap. They've realized that cost-cutting efforts and acquisitions of other companies, while important, cannot help them grow organically. If yours is among them, your challenge may be to help your company figure out a better way to deliver it. If you've been tasked with thinking of ways to drive revenue growth, you've probably been met with objections from others in your firm who want to:
Redouble your firm's efforts to cut costs and gain further efficiencies. Companies have spent the past quarter century driving costs out of their operations by reducing headcount, consolidating and optimizing operations, and introducing new technologies. The results in productivity and profitability have been outstanding. Yet such efforts have not and will not increase top-line revenue; therefore they cannot fuel profitable revenue growth.
Spend more to beef up marketing and sales. A winning advertising campaign or sales effort can boost sales, increase market share, and drive revenue momentum. But ultimately, marketing and sales can only take you so far if growth is your objective.
Acquire other companies. Certainly this method of growth has been widely adopted, but the downside of putting all your chips on growth through acquisition has become more evident in recent years. Among the pitfalls: trouble in melding often incompatible cultures and leadership teams, overcoming regulatory and shareholder objections, a huge drain of management's attention away from meeting customer needs, and the biggest of all, creating out of the merger/acquisition binge a slow-moving behemoth that cannot continue to grow from acquiring, and shows an incapacity to grow organically. Just 23 percent of acquisitions earn their cost of capital, according to a study by consulting firm McKinsey and Company that looked at deals made by 116 companies over an 11-year period. According to the report, the steep prices paid to capture other firms often lower growth rates rather than increase them.
Chances are you have already tried these methods and that is why you are ready to jump-start growth in a fundamentally new way. But you may be skeptical that revamping innovation in your firm is the best way to go. Will innovation actually lead to a higher rate of growth? Yes it will. You can bank on it.
Why Innovation Is the Best Way to Stimulate Growth
A landmark study conducted by PricewaterhouseCoopers' British Unit documents the connection: firms that master innovation grow faster than their peers and enjoy higher profit margins.
In analyzing the financial results of 399 companies based in seven countries, PWC found a significant "growth chasm" between companies it identified as most innovative and least innovative. Most innovative firms had more than 75 percent turnover of products and services introduced within the last five years. Those firms generated well above average total shareholder returns (greater than 37 percent, on average). The study found that:
The proportion of new products and services is a key indicator of corporate success both in terms of revenue enhancement and total shareholder returns.
There is a major gap between high and low performers. High performers average 61 percent of turnover from new products as compared to 26 percent for low performers. (Average for this seven-country sample was 38 percent of turnover from new products and services.)
Nearly a quarter of all companies were generating 10 percent or less of their turnover from new products and services. Growth-wise, they have stagnated.
The implications of this study are clear. High-growth firms do a lot of innovating, while low-growth firms do it only incrementally. High-growth firms obsolete themselves by coming out with new products and services and entering new markets; low-growth firms lag in these areas.
If you're determined to jump-start growth in your company, PWC's research provides proof that your efforts will pay off, will truly make the difference. If you take two companies with equal revenues and equal growth rates in the marketplace today and you upgrade the approach to innovation in one of the firms, while the other goes about business as usual, what happens? Over time, the innovating company is likely to benefit from a higher growth rate than its competitor. On average, the innovating firm, if it brings about a 10 percent increase in the percentage of new products and services introduced, this correlates to a 2.5 percent increase in that firm's rate of revenue growth.
Other studies provide similar proof that innovation has the power to fuel growth. Boston Consulting Group, in conjunction with Business Week magazine, now compiles an annual list of the World's 25 Most Innovative Companies. Apple, Google, 3M, Toyota, Microsoft, GE, P&G, Nokia, Starbucks and others topped the 2006 list. When compared against the Standard & Poor's 1200 Global Stock Index, the Most Innovative Companies (MICs) had a mean margin growth of 3.4 percent annually, compared to a .4 percent increase among the total index. MIC stock returns averaged 14.3 percent, compared to 11.1 percent for the mean index.
This book is not meant to be an academic treatise on innovation, but rather a practical guide to leading your firm towards a higher growth future. But first we'd better define what we're talking about with this all-purpose word "innovation."
What Innovation Is, and What It Isn't
In its simplest rendition, innovation is coming up with ideas and bringing them to life. Hatching ideas is the "creative" part; bringing them to life successfully in the form of a new product or service or management method is what makes a raw idea an innovation.
To use "innovation" as a way to stimulate growth means that you offer customers something new. Something they cannot get anywhere else, something that solves their problem in a superior way or provides unique or exceptional value. To stimulate growth, you must come out with products and services and business models that cause customers to buy more of what you sell. To do that you'll need to go after new customer groups with existing offerings, and in some cases, new customer groups with new offerings. Doing these things is the essence of innovation.
Because it's such a multifaceted subject, we'll analyze the various types of innovation in greater detail later in this chapter. For now, let's acknowledge that you and your firm are already doing some of these things. In fact, if you're like the majority of companies, you've probably already taken steps to improve the practice of innovation in your firm—most companies have. But also consider for a moment how innovation gets "practiced" in your organization today.
Despite it becoming a more urgent need, the way most firms go about innovation is still pretty similar to how they went about it yesterday. The approach is piecemeal, departmentally driven (R&D, new product development and marketing handle it), it's ad hoc, seat-of-the-pants, and by no means comprehensive. I've often compared it to pandas mating: infrequent, clumsy, and quite often ineffective.
As a result, innovation has probably been primarily incremental and mostly concentrated on process innovation: operational efficiencies, cost-cutting and staff-reducing measures. Initiatives with names like Reengineering, Lean, Six Sigma, TQM, Lean Sigma, etc. are all forms of process innovation, and are concerned with improving the bottom line by increasing the spread between gross and net. As such, they cannot increase top-line revenue; they cannot fuel growth. Because no one has really been in charge of innovation, or of upgrading approaches in this arena, the focus is likely to be on delivering short-term quarterly results, minimizing risk, and executing better and faster.
Don't get me wrong. There's nothing wrong with process innovation. As we'll see, it's essential to organizational effectiveness, and always will be. There's nothing wrong with product line extensions and filling in adjacencies and all the other things associated with incrementalism. Let's acknowledge that operational excellence is what got your firm to where it is today. But you and others in your firm realize that what got you where you are isn't what's going to get you where you want and need to be to rev up growth.
The Purpose of Innovation: Create New Customer Value
To deliver growth from innovation requires that your idea do something that benefits customers: your new idea creates new value for the customer, unique value (they can't get what you offer anywhere else but from you) and exceptional value—(you do more for the customer than other providers). Value encompasses the quality and uniqueness of the product or service, and the degree to which it satisfies the customer's need or problem. Value is also the customer service and add-on services provided as part of the sale, together with the price of the offering or service.
The purpose of innovation is to create new customer value. If customers perceive value in your new offering, they'll pay you for it. This is the challenge companies face with respect to innovation: How do you develop ideas that indeed create new value for customers? Before we address that question, we need to further differentiate the types and degrees of innovation.
The Three Types of Innovation
The matrix in Figure 1 shows the three types of innovation: product, process, and strategy. In the highly competitive, rapidly evolving environment of the 21st century, achieving rates of growth that are uncommon in your industry (uncommon in your region of the world), means that you must be able to manage innovation in these three distinct arenas. Each arena is critical, and being adept in only one of them is likely not sufficient to achieve the growth you seek. Let's take a careful look at these arenas.
Type 1: Product Innovation
Products have traditionally been defined as tangible, physical goods or raw materials ranging from toothpaste to steel beams, from computers to industrial adhesives, from jet aircraft to automobiles to soybeans. All the objects around you at this moment that were manufactured by a company constitute products.
But to confuse matters a bit, in recent years, service sector firms (healthcare, insurance, financial services, professional services, to name only a few) have begun to refer to their offerings as "products" as well. When Merrill Lynch introduced its highly successful Cash Management Account in the early 1980s, this "product" vaulted this service company to the top of its industry.
Adding to the breakdown in traditional boundaries, product manufacturers increasingly surround their products with services, for instance, when car manufacturers offer emergency roadside assistance. General Motors sells cars, but its customers buy certain automobiles with services as part of the deal. OnStar, an onboard global positioning satellite-enabled communication channel, gives GM customers the ability to know exactly where on Earth they are, and to summon emergency help if they need it.
Despite the recent trend of service firms and manufacturers alike to use the term "products" to describe their offerings, services and service businesses' "products" tend to be different. Foremost among them, they can often be intangible as opposed to tangible and physical (an insurance policy as opposed to a snowboard). They also tend to be produced and consumed at the same time and to involve a higher degree of human involvement in their delivery (think health care and hospitality). And they tend to be difficult or impossible to stop imitation through the use of patents.
So while there are differences, products and services have common traits, especially when it comes to the subject of innovation. We will use the term products to describe the offerings of both types of firms.
And now for the definition: Product/service innovation is the result of bringing to life a new way to solve the customer's problem that benefits both the customer and the sponsoring company.
Type 2: Process Innovation
Process innovations increase bottom-line profitability, reduce costs, raise productivity, and increase employee job satisfaction. The customer also benefits from this type of innovation by virtue of a stronger, more consistent product or service value delivery. The unique trait about process innovations is that they are most often out of view of the customer; they are "back office." Only when a firm's processes fail to enable the firm to deliver the product or service expected does the customer become aware of the lack of effective process.
For manufacturing companies, process innovations include such things as integrating new manufacturing methods and technologies that lead to advantages in cost, quality, cycle time, development time, speed of delivery, or ability to mass-customize products, and services that are sold with those products.
Such innovation is important and will continue to be.
Process innovations enable service firms to introduce "front office" customer service improvements and add new services, as well as new "products" that are visible to the customer. When Federal Express introduced its unique tracking system in 1986, customers saw only a tiny wand, used by drivers to scan packages. Yet while the rest of this sophisticated system was invisible, customers could "see" immediately that they could now track their packages at every point from sender to receiver, and this added value to their service experience and gave Federal Express a decided advantage.
Process innovation will continue to be vitally important to company growth for the simple reason that without process excellence, product or strategy innovation is impossible to implement. Indeed, while thousands of books have been written about varying methods of process improvement, the innovation process, in most firms has, thus far, received short shrift.
Type 3: Strategy Innovation
Strategy innovation, sometimes called business model innovation, includes all the things you do that surround your product to add value to your customer's experience. In contrast to process innovations, which are largely unseen by the customer, strategy innovations directly touch the customer and add tangible new value.
Strategy innovation includes new approaches to marketing or advertising your offerings, introducing new sales methods, new approaches to customer service or positioning your brand. Strategy innovation results when your firm changes the customer groups it targets and how it "goes to market," meaning how it distributes its offerings to end customers (Figure 2).
Excerpted from DRIVING GROWTH THROUGH INNOVATION by ROBERT B. TUCKER Copyright © 2008 by Robert B. Tucker. Excerpted by permission of Berrett-Koehler Publishers, Inc.. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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