Read an Excerpt
By Joe Tidd
John Wiley & SonsISBN: 0-470-09326-9
Chapter OneKey Issues in Innovation Management
'A slow sort of country' said the Red Queen. 'Now here, you see, it takes all the running you can do to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!' (Lewis Carroll, Alice through the Looking Glass)
'We always eat elephants ...' is a surprising claim made by Carlos Broens, founder and head of a successful toolmaking and precision engineering firm in Australia with an enviable growth record. Broens Industries is a small/medium-sized company of 130 employees which survives in a highly competitive world by exporting over 70% of its products and services to technologically demanding firms in aerospace, medical and other advanced markets. The quote doesn't refer to strange dietary habits but to their confidence in 'taking on the challenges normally seen as impossible for firms of our size' - a capability which is grounded in a culture of innovation in products and the processes which go to produce them.
At the other end of the scale spectrum Kumba Resources is a large South African mining company which makes another dramatic claim - 'We move mountains'. In their case the mountains contain iron ore and their huge operations require large-scale excavation - and restitution of the landscape afterwards. Much of their business involves complex large-scale machinery - and their abilities to keep it running and productive depend on a workforce able to contribute their innovative ideas on a continuing basis.
Innovation is driven by the ability to see connections, to spot opportunities and to take advantage of them. When the Tasman Bridge collapsed in Hobart, Tasmania, in 1975 Robert Clifford was running a small ferry company and saw an opportunity to capitalize on the increased demand for ferries - and to differentiate his by selling drinks to thirsty cross-city commuters. The same entrepreneurial flair later helped him build a company - Incat - which pioneered the wave-piercing design which helped them capture over half the world market for fast catamaran ferries. Continuing investment in innovation has helped this company from a relatively isolated island build a key niche in highly competitive international military and civilian markets.
But innovation is not just about opening up new markets - it can also offer new ways of serving established and mature ones. Despite a global shift in textile and clothing manufacture towards developing countries the Spanish company, Inditex (through its retail outlets under various names including Zara) have pioneered a highly flexible, fast turnaround clothing operation with over 2000 outlets in 52 countries. It was founded by Amancio Ortega Gaona who set up a small operation in the west of Spain in La Coruna - a region not previously noted for textile production - and the first store opened there in 1975. Central to the Inditex philosophy is close linkage between design, manufacture and retailing and their network of stores constantly feeds back information about trends which are used to generate new designs. They also experiment with new ideas directly on the public, trying samples of cloth or design and quickly getting back indications of what is going to catch on. Despite their global orientation, most manufacturing is still done in Spain, and they have managed to reduce the turnaround time between a trigger signal for an innovation and responding to it to around 15 days.
Of course, technology often plays a key role in enabling radical new options. Magink is a company set up in 2000 by a group of Israeli engineers and now part of the giant Mitsubishi concern. Its business is in exploiting the emerging field of digital ink technology - essentially enabling paper-like display technology for indoor and outdoor displays. These have a number of advantages over other displays such as liquid crystal - low-cost, high viewing angles and high visibility even in full sunlight. One of their major new lines of development is in advertising billboards - a market worth $5 bn in the USA alone - where the prospect of 'programmable hoardings' is now opened up. Magink enables high resolution images which can be changed much more frequently than conventional paper advertising, and permit billboard site owners to offer variable price time slots, much as television does at present.
At the other end of the technological scale there is scope for improvement on an old product - the humble eyeglass. A chance meeting took place between an Oxford physics professor developing his own new ophthalmic lens technology (and with an interest in applying it in the developing world) and someone with a great deal of knowledge of the developing world. This has led to a new technology with the potential to transform the lives of hundreds of millions of people in the developing world - a pair of spectacles with lenses that can be adjusted by the wearer to suit their visual needs. No sight tests by opticians are required, the special lenses can be simply adjusted to accurately correct the vision of large numbers of people. Mass production of the spectacles will soon be under way, with manufacturing designed to give high quality at low cost. In the developing world, where a severe shortage of opticians is a real problem, this innovation is likely to have an impact on a larger number of people than the celebrated wind-up radio.
Innovation is of course not confined to manufactured products; examples of turnaround through innovation can be found in services and in the public and private sector. For example, the Karolinska Hospital in Stockholm has managed to make radical improvements in the speed, quality and effectiveness of its care services - such as cutting waiting lists by 75% and cancellations by 80% - through innovation. In banking the UK First Direct organization became the most competitive bank, attracting around 10 000 new customers each month by offering a telephone banking service backed up by sophisticated IT. A similar approach to the insurance business - Direct Line - radically changed the basis of that market and led to widespread imitation by all the major players in the sector. Internet-based retailers such as Amazon.com have changed the ways in which products as diverse as books, music and travel are sold, whilst firms like e-Bay have brought the auction house into many living rooms.
1.1 Innovation and Competitive Advantage
What these organizations have in common is that their undoubted success derives in large measure from innovation. Whilst competitive advantage can come from size, or possession of assets, etc. the pattern is increasingly coming to favour those organizations which can mobilize knowledge and technological skills and experience to create novelty in their offerings (product/service) and the ways in which they create and deliver those offerings. This is seen not only at the level of the individual enterprise but increasingly as the wellspring for national economic growth. For example, the UK Office of Science and Technology see it as 'the motor of the modern economy, turning ideas and knowledge into products and services'.
Innovation contributes in several ways. For example, research evidence suggests a strong correlation between market performance and new products. New products help capture and retain market shares, and increase profitability in those markets. In the case of more mature and established products, competitive sales growth comes not simply from being able to offer low prices but also from a variety of non-price factors - design, customization and quality. And in a world of shortening product life cycles - where, for example, the life of a particular model of television set or computer is measured in months, and even complex products like motor cars now take only a couple of years to develop - being able to replace products frequently with better versions is increasingly important. 'Competing in time' reflects a growing pressure on firms not just to introduce new products but to do so faster than competitors.
At the same time new product development is an important capability because the environment is constantly changing. Shifts in the socio-economic field (in what people believe, expect, want and earn) create opportunities and constraints. Legislation may open up new pathways, or close down others - for example, increasing the requirements for environmentally friendly products. Competitors may introduce new products which represent a major threat to existing market positions. In all these ways firms need the capability to respond through product innovation.
Whilst new products are often seen as the cutting edge of innovation in the marketplace, process innovation plays just as important a strategic role. Being able to make something no one else can, or to do so in ways which are better than anyone else is a powerful source of advantage. For example, the Japanese dominance in the late twentieth century across several sectors - cars, motorcycles, shipbuilding, consumer electronics - owed a great deal to superior abilities in manufacturing - something which resulted from a consistent pattern of process innovation. The Toyota production system and its equivalent in Honda and Nissan led to performance advantages of around two to one over average car makers across a range of quality and productivity indicators. One of the main reasons for the ability of relatively small firms like Oxford Instruments or Incat to survive in highly competitive global markets is the sheer complexity of what they make and the huge difficulties a new entrant would encounter in trying to learn and master their technologies.
Similarly, being able to offer better service - faster, cheaper, higher quality - has long been seen as a source of competitive edge. Citibank was the first bank to offer automated telling machinery (ATM) service and developed a strong market position as a technology leader on the back of this process innovation. Benetton is one of the world's most successful retailers, largely due to its, sophisticated IT-led production network, which it innovated over a 10-year period, and the same model has been used to great effect by the Spanish firm Zara. Southwest Airlines achieved an enviable position as the most effective airline in the USA despite being much smaller than its rivals; its success was due to process innovation in areas like reducing airport turnaround times. This model has subsequently become the template for a whole new generation of low-cost airlines whose efforts have revolutionized the once-cosy world of air travel.
Importantly we need to remember that the advantages which flow from these innovative steps gradually get competed away as others imitate. Unless an organization is able to move into further innovation, it risks being left behind as others take the lead in changing their offerings, their operational processes or the underlying models which drive their business. For example, leadership in banking has passed to others, particularly those who were able to capitalize early on the boom in information and communications technologies; in particularly many of the lucrative financial services like securities and share dealing have been dominated by players with radical new models like Charles Schwab. As retailers all adopt advanced IT so the lead shifts to those who are able - like Zara and Benneton - to streamline their production operations to respond rapidly to the signals flagged by the IT systems.
With the rise of the Internet the scope for service innovation has grown enormously - not for nothing is it sometimes called 'a solution looking for problems'. As Evans and Wurster point out, the traditional picture of services being either offered as a standard to a large market (high 'reach' in their terms) or else highly specialized and customized to a particular individual able to pay a high price (high 'richness') is 'blown to bits' by the opportunities of Web-based technology. Now it becomes possible to offer both richness and reach at the same time - and thus to create totally new markets and disrupt radically those which exist in any information-related businesses.
The challenge which the Internet poses is not only one for the major banks and retail companies, although those are the stories which hit the headlines. It is also an issue - and quite possibly a survival one - for thousands of small businesses. Think about the local travel agent and the cosy way in which it used to operate. Racks full of glossy brochures through which people could browse, desks at which helpful sales assistants sort out the details of selecting and booking a holiday, procuring the tickets, arranging insurance and so on. And then think about how all of this can be accomplished at the click of a mouse from the comfort of home - and that it can potentially be done with more choice and at lower cost. Not surprisingly, one of the biggest growth areas in dot.com start-ups was the travel sector and whilst many disappeared when the bubble burst, others like lastminute.com and Expedia have established themselves as mainstream players.
Of course, not everyone wants to shop online and there will continue to be scope for the high-street travel agent in some form - specializing in personal service, acting as a gateway to the Internet-based services for those who are uncomfortable with computers, etc. And, as we have seen, the early euphoria around the dot.com bubble has given rise to a much more cautious advance in Internet-based business. The point is that whatever the dominant technological, social or market conditions, the key to creating - and sustaining - competitive advantage is likely to lie with those organizations which continually innovate.
Table 1.1 indicates some of the ways in which enterprises can obtain strategic advantage through innovation.
1.2 Types of Innovation
Before we go too much further it will be worth defining our terms. What do we mean by 'innovation'? Essentially we are talking about change, and this can take several forms; for the purposes of this book we will focus on four broad categories (the '4Ps' of innovation):
'product innovation' - changes in the things (products/services) which an organization offers;
'process innovation' - changes in the ways in which they are created and delivered;
'position innovation' - changes in the context in which the products/services are introduced;
'paradigm innovation' - changes in the underlying mental models which frame what the organization does.
For example, a new design of car, a new insurance package for accident-prone babies and a new home entertainment system would all be examples of product innovation. And change in the manufacturing methods and equipment used to produce the car or the home entertainment system, or in the office procedures and sequencing in the insurance case, would be examples of process innovation.
Sometimes the dividing line is somewhat blurred - for example, a new jet-powered sea ferry is both a product and a process innovation. Services represent a particular case of this where the product and process aspects often merge - for example, is a new holiday package a product or process change?
Innovation can also take place by repositioning the perception of an established product or process in a particular user context. For example, an old-established product in the UK is Lucozade - originally developed as a glucose-based drink to help children and invalids in convalescence. These associations with sickness were abandoned by the brand owners, SmithKline Beecham, when they relaunched the product as a health drink aimed at the growing fitness market where it is now presented as a performance-enhancing aid to healthy exercise. This shift is a good example of 'position' innovation.
Sometimes opportunities for innovation emerge when we reframe the way we look at something. Henry Ford fundamentally changed the face of transportation not because he invented the motor car (he was a comparative latecomer to the new industry) nor because he developed the manufacturing process to put one together (as a craft-based specialist industry car-making had been established for around 20 years). His contribution was to change the underlying model from one which offered a handmade specialist product to a few wealthy customers to one which offered a car for Everyman at a price they could afford. The ensuing shift from craft to mass production was nothing short of a revolution in the way cars (and later countless other products and services) were created and delivered. Of course making the new approach work in practice also required extensive product and process innovation - for example, in component design, in machinery building, in factory layout and particularly in the social system around which work was organized.
Excerpted from Managing Innovation by Joe Tidd Excerpted by permission.
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