Lately I have been reading the book «The end of competitive advantage», by Rita McGrath.

The book has some good chapters. Chapter 5, «Building an innovation proficiency» is one of those. There you find the case of Brambles, a  company founded in 1875 that circulates and commercializes pallets around the world from its headquarters in Australia.

The case is interesting in itself. How do you transform a relatively immobile company into an innovation powerhouse? There are of course a lot of activities leading to the desired output, but one of the first obstacles the upper management had to face is the definition of innovation itself.

This is not a trivial issue. In order to being able of pursuing a new business opportunity any management has different tools at its disposal. However, if the management doesn’t correctly identifies the opportunity as an innovation as opposed to, say, a new exercise in operational efficiency, the wrong set of tools will be applied. The new offering will be trusted to silos and regular operations. It will then most certainly die there. The people that should have exploited the opportunity will be busy aiming for the operational parameters they are measured upon and will not invest enough time and effort in anything else than that.

I have written before about the importance of identifying the right type of innovation in order to match it with the strategic goals and resources of the company. You can find the classification matrix beneath and the blog post describing it in detail here.

 

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The four types of innovation at corporations

 

The following questions will reveal whether the new initiative presented to the management is an operational issue within the boundaries of organic innovation or a project that should be put under the governance of the innovation team. At Brambles, an affirmative answer to two of them classifies the new initiative as innovative for the company.

  1. Does the proposal represent a new operating model or business model? 
  2. Is it something that would open us up to new or different customers?
  3. Does the idea expose us to potentially new competitors or different competition?
  4. Would it require new skill sets  – do we need to recruit or train people to do it?
  5. Would it require new technologies or types of resources or facilities or whatever that we don’t know how to manage?

Concerning business models, from my experience any initiative that changes a box in the Business Model Canvas represented below is definitely suspicious of being innovative. In addition, the management has to be very aware of the power of this decision. To change business models is extraordinary difficult for any potential follower. Chances are that they will react too late and the first mover will dominate the market for a long period of time.

Read more about how some companies made it here.

 

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A simplified version of the Business Model Canvas featuring some companies that destroyed their competition by changing a single block of the model

 

Any initiative that will open your company to new customers or competitors is most probably innovative for your company and maybe the industry you operate in. You should however be aware of the implications. Changing customers and competitors imply potential new revenue models, billing and IT systems. It also implies challenging the value of your Key Account Managers for the company and even their incentive models.

Finally, new technologies, and therefore new skills, are an almost sure sign of innovation. However, in my opinion, the management should pose one more question in such case: Is the technology already known for some competitors in the industry? If it is, we are dealing wth organic innovation and the initiative should be transferred to the operative core of the company.

Innovation is not easy. Top managers have many other tools to increase shareholder value in the short and medium term that are far less risky. The management may hesitate when confronted with it. It is therefore imperative to have tools like these five questions to identify whether it is indeed an innovation and in such case act decisively upon. If not, chances are that an opportunity for  new growth and revenue will be wasted.

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