An effective innovation culture can produce a steady stream of sustaining, breakthrough ideas. Innovations in strategy, processes, services, products, and business models can enable a company of any size, sector or industry, to create and capture value in entirely new ways, leading to continuous growth by design. This author describes the processes and an innovation DNA that will enable most companies to innovate for growth.
With the emergence of India and China as low-cost, high-volume producers of services and products for the global marketplace, companies in North America, Europe and Japan are being challenged to innovate to grow. According to the recent Cisco 2005 Innovation Study, which polled 635 U.S. information technology and business leaders, 53 percent said innovation is the critical success factor for competitiveness. Cisco president and CEO John Chambers commented: “The economic benefits of innovation, which include greater productivity and leadership in new markets, are what will ensure that global economies maintain their competitive edge. As countries, companies and even individuals make choices about where to invest; these results underscore the role innovation has in driving global competitiveness at all levels within an economy, from the government to education to private business.”
In Canada, recent research by think tanks and business schools highlights innovation as the prime driver of growth and productivity and urges government and business to work together to make this happen. The Conference Board of Canada’s Lawrence O’Keefe, director of human resources management research, says:” Training is a critical component of innovation, which leads to higher levels of productivity. Organizations need to align training investments with their overall learning strategy, so the dollars spent contribute directly to meeting business goals.” (Canada fell from 12th in 2002 to 20th in 2004 in the Institute for Management Development’s global competitiveness survey.)
With the need so clear, the pace of innovation is accelerating at warp speed. So much so that several major corporations have even outsourced design to Asian countries: for example, India’s Wipro has become the world’s largest contract R& D house for telecom, auto and electronics, while Taiwan’s Compal develops and produces notebooks and cell phones for Motorola, Toshiba, Sony-Ericsson and others. What’s becoming increasingly clear is that organizations of every size, sector and industry must innovate to successfully compete and grow in what’s being variously called today’s “creativity economy”, “innovation economy” and even ” empathy economy” (since understanding consumer emotion is key to good design). But what does innovation mean in a business context? In today’s global marketplace, the message is clear: If you want your company to grow, ramp up the power of design. This article focuses on how excellent design can help companies create and sustain a successful growth strategy.
The link between innovation and growth
According to a 2004 Boston Consulting Group (BCG) survey of 500 senior executives around the world, innovation means creating new products, services, or processes-or, as one CEO put it, “turning ideas into profits.” And, in a 2005 survey of 707 managers by Fast Company magazine, Egon Zehnder International and IMD, an overwhelming majority rated design as a pivotal strategic and competitive driver: Some 90 percent of respondents said top executives must champion design; 89 percent saw design as vital to connecting with customers; and 84 percent rated design as key to solving problems.
In fact, D-schools are outpacing B-schools in creating innovative masters of design – leaders and professionals who can close the innovation gap for organizations of all kinds in a variety of dimensions. For example, the Institute of Design at the Illinois Institute of Technology teaches design thinking and strategy. It recently launched a ninemonth Master of Design Methods (MDM) degree that focuses on design methodologies for user research and observation, prototyping new services and products, creating innovation systems, and connecting corporate strategy with user innovation. Stanford University has created a new D-school to help managers learn the dynamics of design. Imagination is the newest must-have competency for senior executives. As GE CEO Jeff Immelt recently said: “Creativity and imagination applied in a business context is innovation…We’re measuring GE’s top leaders on how imaginative they are. Imaginative leaders are the ones who have the courage to find new ideas, lead teams to discover better ideas, and lead people to take more educated risks.” Some companies, ahead of the innovation curve, have even added a new member to the C-Suite: the Chief Creativity Officer. Both Samsung and P & G have one. And J. Mays at Ford recently added this title to his other one at the company, group vice-president of design.
Another Boston Consulting Group study points to the different ways companies can be innovative. At the top, Apple Computer is recognized for combining an outstanding consumer experience with superb product design. 3M comes second because of its strong culture of creativity with formal incentives to innovate. GE makes the list for its management practices that put it ahead of its competition. How you innovate can be disruptive (if you create something radically new to the company and its market) or sustaining (if you make an incremental change to an existing line). The following table outlines how the type of innovation impacts three dimensions: product, process and strategy
The growth challenge
Whatever approach you choose to take, sustained topline revenue growth is a tough proposition. Several studies in the past five years demonstrate that about one company in 10 succeeds in achieving and sustaining year- over- year growth in revenues. In their book, Profit from the Core, (2001), Bain & Company authors James Allen and Chris Zook highlight that only 13 percent of 1,854 companies were able to grow consistently over 10 years. Also, in 2001, McKinsey consultants Sarah Kaplan and Richard Foster published Creative Destruction, their study of 1,008 companies between1962 and 1998. Of these, just 160 or about 16 percent managed to just barely survive during this period. Jim Collins in his book, Good to Great, (2001) examined 1,435 companies over 30 years (1965-1995) and discovered that just 126 or nine percent managed to grow for 10 years or more.
Growth by good design in the 21st century can be seen as the latest step on a continuum that began with Total Quality Management in the ’80s and was followed by Information Technology in the ’90s. But though growth by design is promising – and critical – it needs to be expertly planned and guided. In 2004, Forrester Research set out to investigate how ready companies are for growth by innovation by interviewing product development executives at 20 manufacturers in Europe, Asia-Pacific and North America. The results are suggestive: 80 percent considered their companies to be more innovative than three years ago, but only six percent were satisfied with how well – and how profitably – they were capitalizing on their innovations. This is where companies can benefit from expert guidance. The prevailing trend is to use innovation networks, a dynamic and integrated blend of internal and external design and innovation expertise.
To understand the growth challenges faced by large companies over the next three years, we undertook a survey of senior executives at 14 companies in North America with annual revenues greater than $1 billion across different industry segments. Our objectives were to:
- Understand the growth targets of companies over the next three years.
- Determine the metrics, drivers and strategies adopted by companies to achieve sustainable growth over the next three years.
- Identify the challenges to be managed by companies to ensure sustainable growth over the next three years.
We discovered that 64.3 percent of the companies with a defined revenue growth plan in place expect their threeyear top line revenues to grow between six percent and 25 percent. Their top three strategies for revenue growth over the next three years are:
- Focus on core products/services
- Revise pricing strategies
- Improve process redesign (i.e. doing things better, faster, more efficiently)
The last finding is especially significant. We discovered that an effective growth strategy is creating process and service innovations that fuel growth, which in turn fund new design and new growth, thus continuing the virtuous circle.
Creating the virtuous circle
When companies and creators talk about design today, their focus tends to be on new product development. Such a focus, however, generally leads to increasing complexity, higher operating costs and higher risk of failure, creating a vicious spiral that drives customers away and destroys shareholder value.
Process and service innovations do just the opposite, by creating a virtuous circle — attracting and retaining customers by improving convenience and efficiency, and using those gains to fuel more innovations. This virtuous circle drives sustained differentiation and competitive advantage.
The reality is that product innovation is easily replicated, but a design culture and process and service innovations are much harder for competitors to copy. In 2001, Sir John Bond, the chairman of HSBC, observed: “Product innovation gives less than three months’ competitive advantage. Process innovation gives at least 12 months’ competitive advantage.” Studies show that the average cost of bringing a new product to market has more than doubled in the past decade, with notoriously high failure rates, from 60 percent to 80 percent with a very small number producing a significant profit. A Deloitte study of the global financial services industry suggests most consumers don’t really care about new products. Their top three priorities are:
- responsive service
- being valued as a customer and
- convenience/ease of use. Products are not a keycriterion or differentiator: they are simply commodities that competitors can quickly and easily replicate.
Growth by design
“Every unit of the business should have clear responsibility and definite goals for innovation.” Peter Drucker, The Practice of Management, 1954.
Measurable revenue growth comes from organic, internal innovation. There are three main levers for achieving that kind of growth:
Process innovation, which focuses on the way work is done, making it better, faster and cheaper. Examples include value chain reengineering, performance-based incentives, brand management, marketing and sales force effectiveness.
Service innovation, which focuses on the customer experience, bringing a company closer to its customers and using that intimacy to deliver better service. Commerce Bancorp, for example, conducts about 70,000 mystery shopping tests on its stores each year to ensure customers are getting a good experience.
Creating an innovation culture, which focuses on CEO commitment and support, mastering design thinking and metrics, encouraging risktaking, tolerating mistakes, changing the structure (creating skunkworks), expanding design talent, creating innovation reward systems, communicating candidly and often, and leveraging innovation networks, inside and outside your organization.
Progressive Insurance in the U.S. is an example of a company growing through process innovation. Progressive’s proprietary processes and systems outperform those of its competitors in identifying and targeting the market’s most profitable customers, giving the company a distinct advantage over its customers. Other examples of process innovations that have driven down costs and driven up profits are outsourcing and offshoring. As a result, in a very short span of time, the economies of India and China have grown exponentially, transforming China into the factory to the world and India into a global software lab and call centre.
For another example of process innovation, let’s take alook at one of the recent winners in Deloitte’s annual 50 Best Managed Companies in Canada program – Spin Master Ltd. of Toronto. So what does Spin Master do? Just about everything you could ask of an innovative children’s products company. It has grown rapidly with global sales of $160 million and an increasing international presence through innovative deployment of strategic alliances: from inventors to toy brokers to manufacturers to retailers to brand licensors. It’s a great example of growth through creative alliances rather than bricks and mortars. Dave Fuhrer, head of Funanuf in the U.S., says of the company’s three co-founders: “They roll up their sleeves and say, ‘How do we make this happen?’ They’ll do it, even if it doesn’t fit the business model of the company. There’s a culture of How do we do this? not Why we can’t do this. It’s really refreshing.” Professor Ken Wong of Queens University’s School of Business credits the abilities of Spin Master’s leaders to trust their instincts and listen to all available external inputs, rather than formal, conventional market research, in forging their consistent success.
Commerce Bancorp is one of the world’s fastest-growing financial institutions, with an innovative retail model that has made it one of the 25 largest banks in the US. “Commerce is a retailer, not a bank,” says Vernon J. Hill Commerce Bank’s CEO. “Retail philosophy is an antibanking mindset.” Commerce prides itself on being “America’s most convenient bank”, delivering banking services in new and innovative ways. It has created a fun environment and convenient and free services and giveaways, such as change-counting machines available to the public free of charge. “The average Commerce store gets 60 percent more foot traffic than the average McDonald’s,” says Hill. Commerce’s unique retail strategy has given it sustained competitive advantage. Deposits have increased an average of 39 percent every year since 1998 and net income and EPS have increased by more than 30 percent for the past three years. And Commerce’s shares regularly outperform the S&P 500 by a wide margin.
Another high-performing innovator is Four Seasons Hotels, which grew from one small motor hotel in Toronto to today’s leading luxury hotel group worldwide, inducted recently into the Fortune 500 magazine’s Hall of Fame. One of the key drivers of this success and growth, according to chairman and CEO Isadore Sharp, is service innovation: “We knew we had to set ourselves apart. We had already upgraded five-star standards: aesthetics, convenience, comfort: every aspect of every room, from the softest towels to the quietest plumbing. We became the leader in innovation, the first in many things. Like 24- hour room service, shampoo, bathrobes, make-up mirrors, hair dryers, overnight laundry and shoe shining and many, many, more.”
But you can also win big by thinking small. ABSA in South Africa is another leading innovator that is currently enjoying success with its breakthrough strategy of microfinance-providing financial services to people generally considered not wealthy enough to serve profitably. Through its finely tuned systems and processes, ABSA is generating significant earnings from a high volume of very small transactions. At the end of the day, a company’s ability to innovate isn’t driven by size, sector or market value. It’s driven by mindset.
Creating an innovation culture: Embedding innovation DNA
So how can a company create that mindset, so that innovation percolates throughout all areas, increasing its chances of growth by design? Our firm takes a totalenterprise approach. Transforming a company into an innovative enterprise is a huge challenge that touches everything: strategy, systems, people, processes, partners and more. For innovation to thrive, it must be embedded into the DNA of the organization. First of all, you have to identify your company’s DNA. As Jim Collins says in Good to Great: ” Great companies first build a culture of discipline…and create a business model that fits squarely in the intersection of three circles: what they can be best in the world at, a deep understanding of their economic engine, and the core values they hold with deep passion.”
Here are some approaches currently being used by global leaders in innovation such as Procter & Gamble and GE to imbed innovation in their company’s DNA :
- A culture or innovation audit can often be useful in identifying people’s mental models about innovation, its value and their role in the design process.
- CEOs should lead and champion innovation and relentlessly communicate its value to the company.
- Get out there and find out what’s new, what’s happening in design and innovation: bring in and bring together design and business innovation experts and profit from their expertise.
- Prototype early: avoid analysis paralysis —think by doing.
- Build capability: bring in an array of dedicated design talent, plant designers throughout thebusiness, create skunkworks
- Create new incentives: reward people for new ideas, processes, products, and services that increase top-line growth.
- Observe consumers: look for their unarticulated needs and wants.
- Use the right metrics to measure what contributesto growth and profits.
By tying all these together, you’ll be on your way to creating a virtuous circle of continuous innovation driving continuous growth. An effective innovation culture can produce a steady stream of sustaining and breakthrough ideas. Innovations in strategy, processes, services, products, and business models can enable a company of any size, sector or industry, to create and capture value in entirely new ways, leading to continuous growth by design.