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Innovation in a Networked World

Introduction
No business leader today will question the value of an organisation’s ability to innovate. The networked economy has forced innovation further up the agenda of many CEOs. A Gallup survey of 500 CEOs confirmed that realisation, the majority agreed that 'newcomers take best advantage of change in their industry' and success was due to 'changing the rules of the game and not superior execution'. Continued success, delivery of shareholder value and customer satisfaction needs to be approached in new ways over and over again.

The internet, cheap mobile telephony and wireless computing has opened up endless opportunities for communication and transaction with new customers. Disturbingly, for incumbent players, new competitors with creative and difficult to replicate business models emerge rapidly. Where competitors appear from and the impact they will have on your business is becoming increasingly unpredictable. Offline companies are caught off guard too. Did Royal Dutch/Shell foresee a supermarket chain entering the petrol pump business? Of course, Tesco’s rise to UK’s largest retailer of petrol could have been second guessed with hindsight.

The art is being one step ahead of the competition and in a position to rapidly counteract any unpleasant surprises. Otherwise, a sharp minded upstart watching your industry, from the inside or out, will eventually, launch a targeted assault on your core business. In recent years Booz Allen Hamilton have seen a growing demand from coporate clients for stategic advice based on 'war gaming'. Competitive scenarios are created and teams of players react to changes in the business landscape, the eventual 'winner' is deemed to have the strongest strategic position.

There are rewards for those that seek to lead rather than follow their industries. Jonash and Sommerlatte of Arthur D Little have researched the concept of the ‘innovation premium.’ Their research demonstrates that companies that consistently demonstrate growth through innovation are valued higher by Wall Street. Over 95% of Wall Street analysts reported that more innovative companies enjoy a share price premium. Innovation can have an impact on top and bottom line growth is something that investors will pay a premium for, more than they will for leadership change, M&As or additional corporate cost reduction programmes.

The changing nature of innovation
Historically, the fruits of innovative thinking have been incremental. Strategic objectives focused on maintaining growth, improving existing products, streamlining business processes, company wide cost cutting and reducing inefficiencies. Indeed, this remains the playground of the private equity barons who continue to reap their rewards through a value creation which is far from innovative. Opportunistic, self serving and sometimes ruthless, as the enemies of private equity may argue. But if everyone, including your competitors, are following the same best practice examples, analysing the same financial ratios and worshipping at the feet of the same industry guru, surely the result is strategy convergence? If no one does anything truly novel to create a step change in income and profit figures then the slope to price wars and advertising battles is slippery, steep and downwards. This leaves the goal wide open to nimble competitors and sharp eyed new kids who are are ready to address your customer needs and plug gaps in your market.

Of course, there is still a role for product and marketing innovation to ensure that value creation is maximised from well loved products, services and brands. Take Tetley's seemingly pointless round tea bags which played an important role in differentiating it from a highly commoditised product in a crowded marketplace in the 1990's.

The business environment fuelled by the networked economy now demands innovative thinking at board level, no longer the comfortable domain of R&D or marketing. New business models and organisational alignment to objectives are a strategic concern. The ease of information and knowledge transfer and customer proximity enabled by the internet has compressed the lifecycle of products and services. Organisations need to learn or acquire the DNA to innovate quickly and continually. Skills to create ideas, live with risk and embrace change are essential.

Intel was one of the first to realise an opportunity at a time when silicon chips were becoming a commodity. Intel spotted a growing home PC customer base and wanted Intel to be the chip of choice for every home PC that was manufactured and sold. Marketing innovation through the creation of the "Intel Inside" brand identity created a demand for Intel chips (essentially a commodity product) and transformed Intel into a household name. The impetus for this innovation was a competitor’s right to copy Intel’s microchips and hence the need to differentiate Intel’s chips from the competition. Price competition was not an attractive option but Intel recognised that there was a growing number of first time PC buyers who needed reassurance that their investment in a PC was rewarded with quality and high-tech know how. These values were communicated through Intel’s advertising and the chips commanded a price premium. In addition, new PC manufacturers started buying Intel and at one point Intel chips held a 75% market share.

Intel achieved a 42% CAGR of its shares over the last decade to 2002. Intel demonstrated the ability to create value throughout the value chain through efficiency and creativity across the business:

• Technological innovation in crystal lithography and chip technology was achieved through investment in research and horizon technologies
• Manufacturing process innovation through the building of partnerships and alliances with computer manufacturers

Amazon.com is yet another excellent example of a networked economy market innovator. Months before there was a critical mass of home internet browsers or a clear demand for online retailers, Amazon embarked on a mission to become the global online book distributor (and eventually many other products) of choice. Through the development of new distribution channels, lower prices and excellent customer service, Amazon had become the gold standard of pure play retail brands. Amazon continues to innovate through the introduction of new features and customer service elements, eg. Creation of a wish list; "others who bought this book also read…". However, these features appear on competitor sites as quickly as Amazon can dream up its next trick.

Knowledge and innovation
The networked economy has set new standards for innovation. Producing a groundbreaking product every few years is no longer enough to satisfy your shareholders or customers. In addition, the accessibility of information databases, industry knowledge and customers has made the output of innovation less proprietary. The barriers to entry are low and physical assets almost a disadvantage. Amazon may have taken a lead but has yet to make a profit and needs to continually stay ahead of followers ready to replicate the model and steal a share of the market.

There are fewer opportunities to create intellectual property through patents and trademarks, and the policing of IP infringement is a tough task. Licenses, IP and distribution rights have been totally disregarded by Napster’s music sharing network. Napster realised that no one will argue with "free" and built an immense peer-to-peer network which bypassed the entire music industry. The established music and media giants responded with legal might and force, but they can't deny that they failed to see the Napster threat approaching.

The value and source of innovative concepts now resides in an organisation’s people, systems and networks. With knowledge so widely dispersed and variably expressed throughout an organisation the challenge is recognising the knowledge and converting it into commercially viable business models, products and services.

Innovators reside in every company and can be characterised by their ability to listen well, probe, ask questions, identify problems and develop alternatives. They remain independent of silos and political forces in order to maintain open and fluid co-operation within teams and across the organisation. Identifying innovators, building teams and progressing ideas to market will be the next challenge to face organisations.

The challenge for organisations
Understand the value of a solid business model – this requires a deep understanding of an organisation’s core strategy, resources, customers and, internal and external networks. Understanding and comparing the business model with your competitors’ is step 1 and enables you to identify where there is true scope for differentiation, novelty and improvement.

Expand your personal network - Productive strategic thinking will come from speaking to people outside the board room, ie. your customers, staff, competitors. Look outside your industry for examples of success and failure, understand these and build on experiences. The creative process is not stimulated by routine or interacting with networks of like minded people.

Strategy convergence – avoid looking like your competitors. Your strategy should be distinct from your competitors’ missions. Strategy is not a planning exercise, it should be creative, active and involve an element of serendipity. Capture opportunities for non linear jumps along the curve of continuous improvement.

Lead don’t follow – by the time you have implemented best practice and gold standard methods your market and industry will be looking at the horizon for future opportunities and business models. Instead take the lead do something surprising and different, in this way customers will be enthused and engaged.

Efficiency trade off – squeezing out costs and increasing efficiency in processes is a costly exercise in terms of resources. Optimisation is short lived and effort focused on creating radical innovations will buy plenty of time to optimise business processes and systems.

The above factors together present paradoxes, large organizations need to be process driven and structured for business success. Yet innovative thinking and ideas are often the product of an individual’s creativity and knowledge leading to a desire to disrupt existing methods, processes or products. There is a need continue 'business as usual' while nurturing an environment that supports innovation. Strategic value creation will often materialize as a result of questioning the validity of current practices and accommodating systematic challenge to status quo can be difficult at best and dangerous at worst.

Many managers see the spinning off of innovative parts of their organization into separate entities as a solution. However, this can foster a disruptive ‘them and us’ culture where the core organization becomes resentful and excluded through the creation of a 'special case'. It remains a challenge for many management teams to create a truly intrapreneurial culture that permeates throughout the entire organization without the need to hive off units.

Conclusion
The networked nature of communications, knowledge and hence the economy has altered the pace at which the business environment changes. Incremental product innovation is no longer sufficient, innovative business models, operating regimes and organisational strucutres are required.

There is value attached to an organisation viewed as innovative. Innovation is about creating new wealth not redistributing wealth or making efficiency savings, these should be by-products of effective and continual innovation. The ability to innovate continually is indicative of a mature and confident organisation. One that recognises its strengths, understands the environment it operates in, is inspired by the breadth of experience beyond the corporate walls and has the capacity to recognise great ideas internally and launch great products in the market.

The challenge is to maintain the momentum and being brave enough to accept stimuli from sources you wouldn't have dared to consider in the past.

"Wealth is the product of a man’s capacity to think" - Ayn Rand

Written in 2002 and revised in 2007.

© Kavita Copas 2007 All rights reserved