15

Designing and delivering innovation

What you will learn in this chapter

• The power of innovation
• Different types of innovation and innovation portfolio
• How to use Product Life Cycle to manage innovation in your organisation
• The innovation process: funnel versus agile
• Which behaviours encourage (and discourage) innovation

Innovation is something every organisation hankers after but few actually master. I have often been responsible for innovation in my various business roles. There is nothing more exciting than the feeling of creating something new and successful with a team of people – be that a new product launch, or a new way of measuring customer benefits. Equally, there is nothing more frustrating than ‘stymied’ innovation – as when the CEO cancels something on the eve of a test market because he’s decided innovation is simply too risky. Most organisations say they are innovative, but few actually are, because many traditional ways of managing discourage the risk-taking that innovation needs to thrive.

You cannot have successful innovation without failure. I encourage you to focus on the common characteristics that make innovation successful, and accept that these same characteristics can and will cause innovation to fail. Only when you acknowledge that innovation fails more than it succeeds will you begin to get somewhere with it.

Different types of innovation

‘Innovate or die.’

Tom Peters

No organisation can survive without innovation. This is especially true in today’s world, where technology is changing so rapidly. There are many stories where failure to embrace new technologies quickly enough has resulted in the demise of previous market leaders: Encyclopaedia Britannica, Kodak, Yell and HMV all failed to adapt to the digital revolution. That’s why so many leading innovation authors, like Clayton M. Christensen in The Innovator’s Dilemma¹ and USC’s Gerard Tellis in Unrelenting Innovation,² advocate setting up units that will aim to cannibalise existing products before the competition does. Apple did this with the iPad (cannibalising the iPod). And Toyota did this with Prius, which was conceived by a separate unit to avoid being swamped by the demands of keeping the best-selling Camry going strong.³

Usually when people talk about innovation they assume you are talking about a breakthrough product or service. But there are many different types of innovation. As you think about innovation, consider: is the degree of change in what you are offering big or small? And second, is the thing you are changing an input or process, a product or service, or a positioning or channel? Think about the degree to which you are innovating as well as what you are innovating.

The degree of innovation: low, medium or high?

Low: sustaining or incremental innovation

These are small improvements to existing products, services and processes. Making your broadband faster, your packages easier to open, or your bills easier to pay online, getting your seats allocated on budget airlines, or improving the seat comfort on the aircraft are all examples. Sometimes you can join up a series of these small advantages to build a big advantage.

Medium: category or broadening innovation

This is extending the impact of what you are doing by launching new products, processes or services in adjacent categories or to adjacent customer groups. For example: this might be about launching a new form of diet Coke – Coke Zero – to appeal to men and young people; or extending your skincare brand into shampoo or deodorant.

High: transformational, disruptive or breakthrough innovation

Creating something new that changes the rules of the game. Fast fashion is one example: Zara translates fashions from the catwalk to the masses in weeks. Disruptive innovation can literally reinvent entire categories of goods and services through harnessing technology to create new opportunities and ways of doing things. Technology has completely disrupted the way we produce and consume so many things like music and news information.

What you are innovating?

Are you innovating:

• A product or service?
• A system, process or organisational way of working – for example, by going directly to your customers instead of through a retail channel?
• The way in which your existing products or services reach the external market – for example, targeting a new group of customers?

It is important to understand where innovation will make a difference to the value of what you are doing and where it won’t. For example, if you are a newspaper owner and you have the best possible content, that wins more prizes than any other paper, that’s great. But if the channel to market is shifting drastically from paid-for newspapers to online and free, then it won’t help you, as many newspapers have found.

Equally, you need to understand the impact of the positioning of your brand. For example, you might think that Special K Cereal is just a cereal, but by positioning Special K as a female ‘healthy indulgence’ weight loss brand, the cereal has been able to expand into crackers, bars and other snacks.

When you analyse your innovation portfolio you should aim to have projects in every area of the matrix, as remember, many of them will fail. The higher the degree of change they involve, the more likely they are to do so. Have one or two projects in the high degree of change area, but don’t overlook the other areas.

Incremental innovation has a high degree of success, and encourages high participation. It’s also likely that the rewards achieved from many small improvements can be substantial when added up. Similarly, category innovation may require extending into new markets or targeting new customers but it’s also essential for growth and can build your brand and enable you to boost your margins as well by offering more profitable products and services.

Don’t overlook the potential of positioning innovation. Offering pet food in vets’ offices, for example, comes with an implied endorsement, so people will pay more. Similarly, skincare sold only in pharmacies has a higher price point and margin than skincare sold in drugstores. The Harvard Business Review can take its case studies and course contents online and monetise them to a brand new audience who may never set foot on Harvard’s college campus. Selling bundled services such as broadband, TV and telephone is a practice widely used by communications companies to boost customer loyalty and spend with their service.

Process innovation can also be important. Zara dramatically reduced the lead times in designing and producing its clothes, and this advantage enabled it to copy trends much faster than its rivals.

Managing innovation

It is helpful to think about innovation in terms of managing a portfolio. You will need to have examples of most kinds of innovation to be successful. You do need to encourage people to innovate existing products and services, processes and positioning. You should also plan for new emerging services and processes to continue to grow and build your presence in your category. And finally, you should probably have one or two more radical approaches going on. We could try to visualise this using a matrix, or innovation map.

Sometimes it can also be helpful to plot your innovations in a matrix, looking at which areas are existing and which are new. Ansoff is often used see Chapter 10 on Strategy. You want to look at innovating within existing as well as new products and markets – but not all at once. It helps you think about your innovation portfolio and the various strategic aspects of it. Where it says markets, think about customers, channels or positioning. Where it says products, think about products, services or processes.

Once you have built your innovation map, map it onto Ansoff’s matrix. Are you reflecting the various innovation strategies you can use? If not, why not?

Product Life Cycle and innovation rhythm

Consider the innovation rhythm in a particular category. How often do you need to come up with something new? How often do successful businesses bring out new products or services? In online media, the answer is many times a day. In cosmetics, you need to launch a new product every month and cover eyes, lips, nails and face. But in other areas, the pace may be slower – bicycles or bank accounts, for example.

Understanding the rhythm can prevent ‘over-innovating’ where you are moving on to the next big thing before you have properly exploited your existing portfolio. This is a common problem: imagine a sales force trying to sell over twenty different products to a small business in one half-hour visit, or asking a supermarket to stock some 6,000 pet food items which turn over less than £5K – and add to that the cost of manufacturing, warehousing and distributing all those products. You also need to manage your product portfolio, so that you review and kill products as well as launch new ones. ‘One in, one out’ is a helpful principle. In businesses with a fast pace of innovation, the items replaced annually by new ones will exceed 30 per cent. In fashion this is even higher. On the internet, the cost of maintaining the ‘long tail’ will be very low, but may still lead to suboptimal results. With websites, people often add in new content without replacing current content and it becomes cluttered.

The Product Life Cycle is a concept that helps manage your innovation and product portfolio. New products require innovation; they then become adopted by the trendsetters. Then you need to make the transition into the mass market – this may mean broadening distribution, investing in sales and marketing capability and channel innovation. You then move to the late mass market and finally the laggards – here you may wish to look at process innovations that will offer your product more cheaply, or morph it by extending into adjacent areas. Finally, the product or service needs replacing, to start the life cycle anew.

Figure 15.1 Product life cycle

Source: Courtesy of Jim Riley (www.tutor2u.net).

Innovation process: funnel versus agile

There are many different processes for managing innovation, but generally speaking they fall into two different types: the funnel and the agile. The innovation funnel, or pipeline, starts with a lot of ideas and whittles these down to a few that are actually launched (Figure 15.2). It is typically used in large corporations but can also be valuable for smaller organisations that have many different departments, functions or stakeholders. Agile innovation has grown in popularity with the rise of the entrepreneurial techno community and is typically used in software development. It uses frequent, informal sessions to get to a prototype as quickly as possible, put it to test in the market with customers, and then carry on iterating it or modifying it according to user acceptance until it either succeeds or fails. Both types are valuable.

The funnel

Figure 15.2 The innovation funnel

Source: © The British Standards Institution 2010.

• Stage 1 The funnel starts with a stage that is about looking at customers, markets, research and competitors to generate ideas. It may also come from many people involved in the work who have ideas on how to improve goods or services or processes.
• Stage 2 The ideas are evaluated. Quickly. This can be done by a group of employees or by management, but it should be an objective and transparent process. There have been really successful examples where databases of ideas have been created for evaluation by employee task forces and not just management or money.
• Stage 3 The ideas that are successful move to a fuller design of a proto-type and a business case to go along with it. This is where you start to spend money. The strategy, risks and rewards are documented to try to get an idea of the size of the prize and to add greater rigour and focus to the idea. The success factors are defined.
• Stage 4 The successful ideas go to a pilot in market where they are put to the test, typically for six months. This is also known as a test market or a proof of concept. Do people take up the new offer? Does the new process lower cost or improve productively? Research is often carried out. Importantly, the KPIs are measured – is the project achieving its agreed measurements of success?
• Stage 5 New successful pilots are expanded and launched more broadly into other markets, taking the learning from the pilots and shaping them to refine the launch plans.
• Stage 6 The results are further monitored and fed back into the beginning of Stage 1, creating a continuous feedback loop.

Most big organisations will use a funnel. The upside is that it is a visible process that can be tracked and objectively managed, and is transparent and measured. The downside is it is very difficult to do well unless your organisation is very schooled and skilled in innovation. There can be a tendency to over-manage the stage gate process so that nothing gets through. Or under-manage it so that everything gets through. It can also become very complicated. See also the behaviours that encourage innovation later in this chapter.

Agile

Agile innovation has become very popular with the rise of the digital economy. Because it doesn’t cost much to try out in digital innovation, people often just put ideas out there and see if they catch on, and modify them until they do. Agile came from a way of doing software development project management and incorporates aspects of lean management. Agile focuses on outputs, not process, and on quick prototyping and continuous feedback, frequent product iteration and adjustment. ‘Trial and Error’ or pilots are other forms of this approach. The main point is to get it out there quickly so customers and users can interact with it and you can respond to this in an iterative manner.

Agile has its fans and can help companies produce products and services more quickly; however, it is best suited for discrete projects as it can be difficult to approach the entire portfolio in this manner. It is also easily misunderstood; when poorly executed it can lead to higher costs and less success. And it is obviously less suitable for products and services that have long supply chains and require heavy capital investment in plants and equipment.

Behaviours that encourage and discourage innovation

Behaviours and cultural characteristics are as important as processes and strategy. Recently, a group called Management Innovation Exchange sponsored a contest for companies to share their case studies of successful innovation. The ten winning examples (from over 140 entries, chosen by judges from McKinsey and the Harvard Business School⁴) are striking in their similarities of what worked – and chime closely with my own experiences.

1. Innovation starts with innovating culture and behaviour You have to encourage employees who want to get involved. Many employees don’t do this because they feel they don’t have time, or that they will not be listened to, or their suggestions will fail and they will get fired. So you need to make clear that you welcome their participation – perhaps have some sort of kick-off event, and a clear output and reward programme.
2. Innovation is more successful the closer people involved are to customers This is one of the principles of agile innovation that really also applies to the funnel approach. Many of the big companies like P&G and Unilever institutionalise this. (See also Chapter 16.)
3. Collaborative, diverse and cross functional beats hierarchical, similar and siloed Getting departments and different areas of the business to work together collaboratively is key to producing better results. It also helps to have a diversity of backgrounds, functions and views. In one example where people were competing for funding, they learned to peer review and peer judge the ventures that obtained funding. And apparently got returns as good as other more traditional methods where the money men make the calls.
4. Celebrate failure not just success – this is fundamental Many more innovations will fail than be successful. Even in the biggest companies success rates will rarely rise above 50 per cent. A.G. Lafley, the P&G CEO famed for stimulating innovation, said that if the success rate rose above 60 per cent it meant that the company wasn’t taking enough risks. The trick is to fail fast, cheap and often. And to learn from your failures. One organisation even published a failure report!⁵
5. Learn by doing. Keep doing, keep learning Innovative active companies accept that innovation is a continuous process and encourage everyone to share their experiences and learn from them. Often this can spark new ideas that will turn into innovations in their own right.

Top tips, pitfalls and takeaways

Top tips

• Win big, fail fast, cheap and often.
• Fake it ’til you make it.
• Innovation is 1 per cent inspiration, 9 per cent evaluation and 90 per cent perspiration.
• Get close to customers.
• Be diverse, argue and have fun.

Top pitfalls

• Over-managing innovation.
• Risk aversion: stopping stuff because you don’t like it.
• Innovating too many things at once.

Top takeaways

• Everyone needs to innovate.
• Build and manage a portfolio of innovation.
• Encourage a culture of innovation.

¹ Christensen, Clayton M., The Innovator’s Dilemma, HarperCollins, first Harper Business edn, 2000.

² Tellis, Gerard, Unrelenting Innovation: How to Create a Culture for Market Dominance, J-B Warren Bennis Series, Jossey Bass, 2013.

³ http://business.time.com/2013/01/29/innovate-or-die-wisdom-from-apple-google-and-toyota/#ixzz2PITckoVb

⁴ http://www.mixprize.org/blog/announcing-innovating-innovation-challenge-winners

⁵ http://www.mixprize.org/m-prize/innovating-innovation