Why do we not see many Bangladeshi organizations reach the level of global prominence that their counter parts in India or South Korea have? The answer to this question partly lies with our ability, or lack thereof, to exploit innovation. But before we can appreciate the role of innovation in corporate strategy, it would be helpful to arrive at a clear understanding of what is innovation.
Innovation is a commonly used buzzword. However, it doesn’t hold the same meaning to everyone. Clayton Christensen of Harvard University, an authority on innovation, defines innovation as anything that improves an entity’s existing resources, processes or values, or creates new resources, processes or values. At first, the definition may seem somewhat repetitive. But the distinction between improving something that already exists and creating something new is very important. In that distinction rests the two different types of innovation: incremental innovation and disruptive innovation.
Incremental innovations are improvements to existing products on dimensions historically valued by people. Aircrafts that fly farther or carry more people, computers that process faster, mobile phones that are smarter are all examples of incremental innovation. Also included in this category of innovation are reconfigurations of existing forms to serve other purposes. Repackaging shampoos into small sachets to make it more affordable or mobile phones with digital cameras are also examples of incremental innovation. Incremental innovations are characterized by modest levels of performance or cost improvement over a certain period of time.
Disruptive innovations, on the other hand, introduce new value propositions and offer something new to the world. They create new markets or radically reshape existing markets. Apple personal computer, Xerox photocopier, Wal-Mart’s discount retail store, Dell’s direct-to-customer business model are all examples of disruptive innovation. Such innovations are a departure from existing ways of doing things. In Bangladesh, the collateral-free lending mechanism mainstreamed by Grameen Bank could be considered an example of disruptive innovation. Disruptive innovations are characterized by significant levels of performance or cost improvement over a shorter period of time. In addition, disruptive innovations often actually change the performance or cost measures altogether. It has been shown through research, most notably by strategy expert Geoffrey Moore, that beyond incremental and disruptive innovations, organizations can harness several more types of innovation with nuanced but important distinctions based on what phase of a lifecycle a certain market is in. They vary depending on whether it is a growth market, mature market or declining market.
For growth markets, in addition to employing disruptive innovation, organizations can harness three other types of innovation: application innovation (by introducing new standards while leveraging existing value chains); product innovation (by focusing on existing markets for existing products, differentiating through features current products do not have); and platform innovation (by introducing a simplifying layer to mask an underlying layer of complexity so that next generation of products can focus on new value propositions).
For mature markets, organizations can employ seven types of innovation. Three of these are in the demand side of the market: line-extension innovation (by making structural modifications to existing products to create a distinctive sub-category); marketing innovation (by differentiating the interaction with a potential customer during the purchase process); and experiential innovation (by adding value in the experience of the product rather than differentiating on the functionality of the product). Four of the seven types of innovation for mature markets are in the supply side of the market: value-engineering innovation (by extracting cost from the materials and manufacturing of an existing product without changing its properties); integration innovation (by reducing the customer’s cost of maintaining a complex operation through integration of disparate elements into a single centrally run system); process innovation (by eliminating waste not from the product itself but from the enabling processes that produce it); and value migration innovation (by redirecting the business model away from a commoditizing element in the value chain toward one richer in margin).
Finally, for declining markets, organizations can employ innovation to refocus and renew a large portion of the resources on a new category while simultaneously optimizing returns for the remainder of the present category’s useful life, following a harvest-and-exit strategy. There are two types of innovation that can be employed in such cases: organic renewal innovation (by reconnecting with the most valued customers and finding new problems to solve for them, following the application innovation strategy discussed earlier); and acquisition renewal innovation (by exploring opportunities for mergers and acquisition). There are many strategies that can be adopted to leverage various types of innovation. However, for the sake of brevity, this article limits itself to four basic strategies: low-cost strategy, differentiation, customer relationship and network effect.
The key to success leveraging low-cost strategy is to deliver the customer’s expected level of value at a cost that assures an adequate level of profitability. In this strategy, the product is usually the same as the product offered by rivals, but the primary value-addition is derived at the price point. Retailers like the Wal-Mart are an often-cited example of this strategy. Low cost airlines such as Air India Express or Air Asia are other examples. Most of the types of innovation outlined under mature market may be exploited for this strategy.
Differentiation is expressed in some qualitative way that customers value. It is attained by deliberately setting a product apart from those of rivals in a way that generates value-add for customers. The auto industry provides great examples of differentiation. Toyota plays on its reputation for high resale value, Porsche plays on its high performance engineering value, and the new Tata Nano plays on its groundbreaking low-cost value. Innovation types outlined under growth market and mature market may be exploited for this strategy. Customer relationship strategy derives its success from the premium a customer is willing to pay when they value the personal relationship experienced in doing business with an organization. The relationship itself can take many forms: doing business with a familiar face, the fact that the vendors know the customers and their needs or the vendor’s willingness to explain a product and how to use it. Airlines such as Singapore Airlines, hotels such as the Taj Hotels, and automakers such as BMW provide great examples of this strategy. Value creation from this strategy is derived by simplifying customer’s lives, offering personalized services, developing customized solutions, enhancing personal contacts and ensuring continuous learning. Some of the innovation types outlined under growth market and mature market may be exploited for this strategy.
Network effect is a phenomenon in which the value of a product increases as more products are sold and the network of users increases. As a deliberate strategy, the network effect is relatively new. Success with a network strategy depends heavily on an organization’s ability to get out in front and become the dominant provider. The Microsoft Windows operating system and the eBay online trading platform are good examples of this strategy in action. Several of the innovation types outlined under growth market and mature market may be exploited for this strategy.
The various types of innovation and the associated strategies outlined above merely constitute a high level overview of the important link between innovation and corporate strategy. It is by no means intended to provide either an exhaustive look at the subject nor an implicit go-forward strategy for a specific organization to adopt. The business situation for each organization is unique, as are its risks, opportunities and strategies. Therefore, it is important to conduct a highly tailored assessment of current dynamics of a specific business for a specific set of products and services over a specific period of time to arrive at the most appropriate innovation strategies an organization can adopt
This article was written in 2011.
pi STRATEGY