Why Should Companies Innovate?

Published by MBA Skool Team, Published on January 01, 2013

What is Innovation? If you ask a lay man he might say Innovation is the act of introducing something new to the world. This something could be a product, a service or simply an idea. And if we ask experts, well then we will have innumerable definitions to pick from. The simplest definition according to me is “Innovation is executing new ideas to create value” (Tim Kastelle, 2012).

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The ability to innovate is a vital core competency that one must possess as an entrepreneur or manager in order to build profitable business. At the same time managing innovation is one of the most difficult processes that one guides. It is a combination of high risk and high return, mission-critical importance that makes innovation and innovation management ever so challenging (Maital, Seshadri, 2007).

Innovation Management is the process of creating and implementing a business design surrounding a creative idea, with the goal of transforming an invention into innovation, and ultimately to achieving sustained competitive advantage leading to growth and profit in the market place.

The biggest question that pops in our head is “Why should an organization Innovate?” when it is sitting comfortably at a good position in the market. There are many reasons as to why an organization should innovate as given below:

1) Survival of the Craziest: Innovation is coming up with crazy ideas which no one else thinks of and implementing on it. This gives a company the first mover’s advantage and gives it an edge over competitors. Had Nintendo sat comfortably snug watching Sony(Play Station) and Microsoft(Xbox) take away its share of market the face of gaming would have been totally different as what we see today. Wii has captured markets that Sony and Microsoft didn’t think even existed. By including wireless controller and fitness aspect with gaming it has converted even Non Gamers to Gamers.

2) To Conquer New Markets: Product innovation is required especially for Global players to suit the taste and requirements of different markets. Sometimes a product needs to be redesigned for a market and sometimes a totally new product needs to be developed to suit the needs of the customers. Had McDonald’s not come up with the Maharaja Macs and Aaloo tikki burgers they wouldn’t have been half as popular in India.

3) Customer Benefits and Loyalty: When a new innovative approach, product or service gives customer a new benefit, their lives are improved and satisfaction quotient goes up. When a customer finds a company’s product or service outperforms competitive alternatives, the company gains Loyalty points (Kuczmarski, 2001).

4) Benefits to the society: Almost all Innovation benefits the mankind. Some in a relatively more humble way as compared to others. Innovations like Steam engines revolutionized human existence and gave way to Industrial revolution.  E.g. JUSCO (Jamshedpur) has developed a road which is completely made of plastic. This is a scalable innovation which is gives a very environment friendly solution of putting waste plastic to use. These roads are durable and help keep earth clean and green.

5) Cope with changing trends: Surviving changing business environment needs re-evaluation of the current strategies of an organization. Talking about the transformation of business from the time human being started the phenomenon of producing and selling we can divide the eras into the following:

Product Era was the era when anyone that had a product to offer to the market was successful. This was followed by a change in consumer behaviour. The customer’s now demanded for cheaper products. This gave birth to Production era in which primary goal of many corporations was to lower manufacturing costs. Had Ford not innovated and created Assembly line, cars would have cost much more. Similarly in today’s digital scenario when social media marketing is becoming increasingly important, companies come up with whacky new ways of engaging with their customers over the internet or other digital media.

E.g. Meatpack the online division of Berkshire Meat Traders Ltd, a meat wholesaling and retail in the UK has come up with a new way of Hijacking customers from competitors stores. They’ve created a promotion that tags at its core fan base with GPS. With the app Hijack, they created an innovative way to give discounts. Every time a customer enters a competitor’s store, he/she receives a messages noticing that the discount countdown will start. A discount starts at 99% and decreases by 1% every second. The countdown stops when the customer reaches the store. The last number on the countdown is the amount of discount the customer gets.

6) Employee Benefits from Innovation: Employees get expanded employment opportunities when an organization builds a culture of innovation. It creates an energized, creative and enthusiastic environment in the organization and camaraderie between employees. This in turn leads to increased employee satisfaction. Google employees are one of the most satisfied employees and part of its reason is its 80/20 policy which encourages them to spend 80% of their time on core projects and 20% on “innovation” activities that speak to their passions.

7) If you don’t do it someone else will: To summarize this section I would only add that if your organization doesn’t innovate to make value, some other company will  and enjoy all the aforementioned benefits of innovation.

Types of Innovation

A company can innovate across various different functions. There are 12 types of innovation as shown in the figure below (Sawhney,Wolcott,Arroniz, 2006):

The first step for an organization is to identify in which of the above mentioned dimensions it needs to innovate. Google not only keeps spinning off new innovative products but also releases new platforms like Android.  By keeping Android as an open source Google has gained a huge chunk of market share. It had a worldwide smartphone market share of 68% at the second quarter of 2012 (Huffington Post, 2012). A little more emphasis on what these different types of innovation are-

  1. Offering: Develop a new Product or service that a company offers its customers. Apple provides MP3 Players (I-Pods) that are more expensive and has less features than their competitors.  Yet customers flock to the Apple stores because of their elegant designs and ease of use.
  2. Platform:  Use common components or building blocks to create derivative offerings. Aadhar UID will become a platform for Banking, healthcare and a lot of other things in the future.
  3. Solution: Create integrated and customized offerings that solve end-to-end customer problems.  Microsoft Office bundles a variety of specific products (Word, Excel, PowerPoint, etc) into a system designed to deliver productivity in the workplace.
  4. Customer:  Discover unmet customer needs or identify underserved customer segments. Nintendo Wii targeted a completely new segment of health conscious middle aged people who don’t play Video games.
  5. Customer Experience: Redesign customer interactions across touch points and all moments. Starbucks provides unique customer experience by customizing the beverage for all its customers.
  6. Value Capture: Redefine how company gets paid or create innovative new revenue streams. For instance Amazon came out with Kindle to leverage on its existing business of selling e-books. With Kindle more people buy books from Amazon.
  7. Process:  Redesign core operating processes to efficiency and effectiveness.  Wal-Mart adds value through core process innovations such as real-time inventory, aggressive volume pricing, etc.
  8. Organization:  Change form, function or activity scope of the firm. Constant innovation has made Mahindra biggest conglomerate in India. Mahindra that started off as a steel trading company in 1955 now has businesses like Automobile, IT, Hospitality in its kitty.
  9. Supply Chain: Think differently about sourcing and fulfilment. In the mid-1980s  FedEx went developed a new computerized tracking system that provided near real-time information about package delivery. Outfitting drivers with small handheld computers for scanning pick-ups and deliveries, a shipment's status was available end to end. The Fedex system really drove the idea that "information was as important as the package itself," (Gilmore,2010)
  10. Presence: Create new distribution channels or points of presence, including the places where offerings can be bought or used by customers. Bands selling their soundtracks to Video games companies to market their music
  11. Networking: Create network-centric intelligent and offerings. Flipkart leveraged on its existing distribution network for books and went on to adapt it to be able to sell electronic goods as well.
  12. Brand: Leverage a brand into new domains. Johnson’s baby products have been known and loved by moms and babies for decades. After discovering that some moms were also using the Johnson’s baby products, the company reconsidered its target market and soon re-defined the brand for adult use as well.

This article has been authored by Deeksha Nigam from NMIMS Mumbai.

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