When we innovate, does it always lead to improvement?

Not necessarily. In fact, it's easy for things to go astray. So much is at play when we innovate that nothing is guaranteed. It takes a lot of orchestrated effort to move the needle in improvement.

Take the case of Bytedance. Established in 2012, the company has produced so many apps that it has earned the nickname “app factory.” Among the most well‐known are TikTok and Toutiao. Its recent innovations have spurred on tremendous growth, including a 60% revenue increase in 2021.¹ That same year it was valued at more than US$425 billion.² Let's look further at how the innovations of TikTok and Toutiao have led to their significant growth.

Created in 2017, TikTok is a short‐video sharing platform. It has reached 1 billion users faster than any other social media company. TikTok's most substantial competitive advantage comes from its speed, ability, and AI technology, which together offer consumers a mix of products and services. For instance, the app features hashtags, audio and video editing, and image filters—all in one place. Previously, these elements weren't available in a single app. Users can easily grab what they need and seamlessly produce content.³

Toutiao (“Headlines”) is a news app that uses the same business model. It provides news and content from more than just official news agencies. Bloggers and influencers participate, too. This integrated app combines many pieces of information, which is highly appreciated by its users; users spend an average of 74 minutes every day on the app.

In addition to these, Toutiao incorporated a bot to write original news coverage for real‐time events such as the 2016 Olympics.⁴ It also has a localized feature to help find anyone who has gone astray, known as the “Missing Person Alert,” which sends out a push notification to all users within a certain radius.

From Bytedance, we can learn that innovation must focus on customer solutions to provide improvement for the company (see Figure 9.1). Its processes are based on desirability, feasibility, and viability.⁵ Consumers will want something only if it solves a problem for them. To make it feasible, the right resources, capabilities, and core competencies must be optimized.

Viable innovations lead to business growth, both in the short and long term. In the short term, this might include customer acceptance, higher levels of satisfaction among users, and the emergence of a lock‐in mechanism or loyalty. Long‐term growth is reflected by improved profit margins, which increase profitability. Affecting the community at large can lead to ongoing sustainability.

Certainly, Bytedance seems to have connected the bridge between innovation (i.e., providing solutions to customers) and improvement (i.e., increasing the company's profit margins). For best results, we can't have one without the other. In this chapter, we'll lay out the steps needed to tie these two together and, by doing so, build a competitive advantage. It starts with a 4C analysis.

The 4C Analysis

In Chapter 3, we discussed the five change drivers (technology, political/legal, social/cultural, economy, and market). These trigger creative ideas that, together with the company's internal sources, lead to solution‐oriented innovations. Someone with an entrepreneurial marketing mindset can see various phenomena in change. This becomes the basis for looking at opportunities (from the customer aspect) as well as the existing challenges (from the competitor aspect).

The entrepreneurial mindset approach emphasizes what innovative solutions we can provide to customers while simultaneously increasing the company's profit margins. At this stage, we can test the sharpness of implementing an entrepreneurial marketing mindset as indicated by the extent of our foresight in understanding the other three elements in the 4C model (customer, competitor, and the company itself). This exercise ensures the innovations produced are solution‐oriented.⁶ Here are the analyses we'll want to carry out.

Conservative Versus Radical

Whatever approach we take is not a matter of right or wrong. It is a choice and depends on the conditions we face. Regardless, companies can choose to be conservative or radical during these processes.

In a conservative approach, a company tends to play it safe by focusing on what competitors do and how customers develop. The company will then consider what the right solution is to provide. In this approach, the company is more reactive and follows the wave. Changes made by the company are incremental in nature and often market‐driven (see Figure 9.3).¹⁰

If a company takes a radical approach, it uses the analyses of the five drivers of change to identify what significant impacts might occur. The company then considers what solution will provide more disruption and creates new game rules that will affect other players and customers. When an organization carries this out, we often refer to it as a market‐driving company (see Figure 9.4).

Innovative Solutions for Improved Margins

As people with an entrepreneurial mindset, we cannot be satisfied with only nonfinancial outcomes. If the nonfinancial results that we achieve are pretty good, but the financial results are not satisfactory, then there is something wrong. We must look at the execution or operational aspects of the company.

Innovative solutions must increase the company's profitability margins. This includes the gross margin, operating margin, net profit margin, and EBITDA (earnings before interest, taxes, depreciation, and amortization) margin. Thus, we must look at our profit‐and‐loss report or the company's income statement for results. Let's consider how we innovate and the financial impact it can have.

Ways to Innovate

A company can innovate its business model, product, or customer experience.¹¹ By changing its business model, an organization can secure a stronger position in a business ecosystem. For example, Rolls Royce, which manufactures jet engines, created a pay‐by‐the‐hour subscription service for airlines. By paying a flat hourly rate to Rolls Royce, airlines receive installation, check‐ups, maintenance, and decommissioning.¹²

In terms of customer experience, innovation can be delivered through omni‐channel, service, brand, and so on. 23andme provides an easy way for individuals who wish to know their DNA and genome tests. Their first service, Ancestry + Traits Personal Genetic Service, helps people understand their true selves in terms of their origins. 23andme sends the package to collect saliva from individuals, and then sends the test results via email. Customers share what they learned through online conversations. People love to know themselves better, and DNA tests, as they claim, are indeed a personal experience.¹³

Not all innovations can be carried out by a company due to limited resources, capabilities, and even competencies. Therefore, many innovations are also made possible through collaboration with various parties. For example, take N26 banking, LEGO's crowdsourcing, and AXS Lab. N26 Bank collaborates with Transferwise to provide better service in money transfer across the bank, and across the globe.¹⁴ LEGO's crowdsourcing is a winning way for a brand to deliver the most popular products by directly interacting with their customers.¹⁵ AXS Lab, in partnership with PwC, collaborates to deliver a map for disabilities.¹⁶

The Three Strategic Suitabilities

We need to consider three conformity requirements in applying the entrepreneurial marketing mindset approach to ensure the achievement of innovative solutions.

• Problem–Solution Fit

  This customer‐centric approach is an essential foundation for applying solution‐centric principles. We must understand real customer problems from the customer's perspective. We want to fully understand the customer's problem and then provide the right solutions to the right customers. With the compatibility between the problem and the solution, our products can become the answer customers seek.

• Product–Market Fit

  Companies offer a wide‐ranging variety of products in a very crowded market. Therefore, the products we offer must be the most appropriate for a specific market segment. We can create the highest perceived value through differentiation, best quality, unforgettable customer experience, and even very competitive prices.

• Get–Give Fit

  The greater the product the customer gets in terms of functional and emotional benefits, and the less money they spend to buy and own the product, the more highly preferred the product will be. However, these customer preferences must also create value. So, a company should understand what level of sales it can achieve and at what cost to ensure significant value creation (see Figure 9.5).

Incremental Versus Drastic Change of Profit Margin

Given that an innovation carried out by a company is already oriented to providing relevant solutions for a customer segment, we must evaluate how strong the differentiation generated by the innovation is, and how hard it is for competitors to imitate. If the differentiation is strong, the company can become a price maker. Conversely, if the differentiation is weak, the company must become a price taker.

In this regard, we can identify four conditions of profit margin that a company can achieve.

• Short‐Term Low Margin

  This condition occurs if the resulting differentiation is not too significant compared to other solutions that are already available. The price offered for the differentiation is not too high, and therefore it produces only a slight profit margin. In addition, if the differentiation becomes easily imitated by competitors, we will not enjoy the margin for the long term because the imitation will lead to commoditization in a short time. Finally, we have to sell at market prices with increasingly depressed profit margins. So, profit margin may increase incrementally but only in the short term.

• Short‐Term High Margin

  The profit margin may increase drastically, but only in the short term. This condition occurs if the resulting differentiation is significantly strong compared to the various preexisting solutions. The price offered for this differentiation can be pretty high and will therefore generate a large profit margin. However, if the differentiation turns out to be easily imitated by competitors, then we will not enjoy this large margin for a long time. Rapid imitation will lead to commoditization, which eventually pushes back to market prices with smaller margins.

• Long‐Term Low Margin

  This condition occurs if the resulting differentiation is not strong compared to the various preexisting solutions. The price offered for the differentiation is relatively low and therefore results in a small profit margin. However, if competitors do not easily imitate the differentiation, we can enjoy this thin margin for longer. Thus, the process of commoditization does not occur quickly. The profit margin increases only incrementally but can last for quite a long time.

• Long‐Term High Margin

  This condition occurs if the resulting differentiation is significantly strong compared to the various preexisting solutions. The price offered for the differentiation can be pretty high and favorably generates a large profit margin. If competitors do not easily imitate the differentiation, we can enjoy the considerable margin for the long term. The commoditization process does not occur quickly, and profit margins will increase drastically and last for the long run (see Figure 9.6).

Entrepreneurially, we should continue to look for opportunities where we can obtain high margins based on these descriptions. From a marketing perspective, we should create strong differentiation that provides relevant solutions for customers. We'll want the solutions to be difficult for competitors to imitate over the long term.

Reciprocal Relationship of Innovation and Profitability

In the omnihouse model, there is an arrow going back and forth between the elements of innovation and improvement for the depiction of a reciprocal relationship between the two aspects. An innovation produces solutions relevant to customers. At the same time, it is expected to improve the company's profitability margins.

That explains the arrow from innovation to margin improvement. But how about the other way around? Do not let the increase in profitability occur, but put aside investment in innovation capabilities that are in alignment with the company's core competence. On the contrary, the company should allocate more to the budget to maintain or strengthen its innovation capability with a better margin.

Using a study from PwC (The Global Innovation 1000), we can see the company's revenue, R&D expenditures, and R&D intensity (depicted in Figure 9.7 in the form of a bubble), which is the percentage of R&D expenditures to total revenue. We use this data to indicate the commitment level of a company in maintaining its innovation capabilities. We only selected 25 companies from the PwC list, which were also included in the Best Global Brand list released by Interbrand.¹⁷

From the reprocessed data, there are several exciting points to make. We can divide the 25 companies into three groups. The first group is tech‐based companies, the second group is automotive, and the third group is a mixture of companies from different industries, most of which are consumer products.

In the tech‐based companies group with revenues below US$200 billion, the R&D intensity is about 10–20% regardless of the total revenue of the companies (see Table 9.1).

In the tech‐companies group, only Apple has a relatively low R&D intensity (5.10%) compared to other tech‐based companies (see Table 9.2). With an R&D value of almost US$12 billion, it is ranked number 7 out of the 25 selected companies because Apple's revenue exceeded US$200 billion. Samsung, whose revenue is also above US$200 billion―with a broader product range including mobile, TV, and home appliances―has an R&D intensity slightly above Apple, which is 6.8%, but in R&D value, it is ranked fourth with expenditures of more than US$15 billion.

For the automotive group, the R&D intensity ranges from 2% to almost 10% (see Table 9.3). However, we should note that Nissan showed an immense R&D intensity, but was at the bottom of the 25 selected companies in terms of revenue. Even the closest company to Nissan in terms of revenue, namely, Adobe, has more than four times more revenue than Nissan. Excluding Nissan, the R&D intensity of the automotive group averages about 4.5%. The higher the revenue, the higher the R&D expenditures.

In the last group, which consists of various companies, the R&D intensity is generally below 5% (see Table 9.4). Only Philips is close to 10%, but we should note that the company's revenue is the smallest in this group.

Of those three groups, there are some interesting takeaways. Generally―apart from the R&D intensity―we can see that the greater a company's revenue, the greater its R&D expenditures. This finding indicates a positive relationship between revenue and budget allocation for innovation. Those companies show their commitment to having a strong innovation capability to maintain competitiveness.

To innovate well, a company will allocate the required resources and direct efforts toward solving customer problems. Through changing how business is done, creating new products that fit a niche, or solving specific issues that are important for customers, revenue and profit margins can increase. A positive relationship between innovation and profitability will support a company's growth and build its competitive edge.

Key Takeaways

• To ensure that the innovations produced are solution‐oriented, analyses on customers, competitors, and the company itself can be carried out. Both inward‐looking and outward‐looking approaches, along with conservative or radical takes, are useful for these assessments.
• To innovate, a company can change its business model, product, or customer experience.
• In entrepreneurial marketing, innovative solutions will be evaluated for three conformity requirements: problem–solution fit, product–market fit, and get–give fit.
• Innovations can generate four types of profit margin: short‐term low margin, short‐term high margin, long‐term low margin, and long‐term high margin.
• The relationship between innovation and profitability is reciprocal.