INNOVATION I came across this during the week thanks to my friend Jill. It is worth a read.
By Göran Roos The Art of Getting Paid Twice 9 Jun 2011
Goran Roos is Managing Director of ICS Ltd and Chairman of VTT International in Finland, Honorary Professor at Warwick Business School in the UK, Visiting Professor of Intangible Asset Management and Performance Measurement at the Centre for Business Performance at Cranfield University and Senior Advisor, Asia Pacific at Aalto Executive Education Academy.
Göran is the founder or co-founder of several companies and has worked as a consultant in 50 countries as well as having served in management positions in several European and US-based corporations and presently sits on several corporate advisory boards.
Göran is one of the founders of modern intellectual capital science and a recognised world expert in this field as well as a major contributor to the thinking and practice in the areas of strategy and innovation management as well as industrial and innovation policy. He is the author and co-author of over one hundred books, book chapters, papers and articles on Intellectual Capital, Innovation Management, Strategy and Industrial Policy many of which have been recognised with awards.
Göran was named one of the 13 most influential thinkers for the 21st Century by the Spanish business journal “Direccion y Progreso” and have been appointed Thinker in Residence by the South Australian Premier for 2011.
Is the emphasis on research misguided?
According to Goran, Innovation has almost nothing to do with scientific research. eg the Victorian Government has spent AUD$600M to a AUD$1B on Biotech research over the last 10 years, with almost no result. There is no thriving Biotech industry, just university spinouts that are effectively research projects with an ABN number, waiting around to have their Australian taxpayer funded research sold off to a foreign multinational.
20% of “innovative” business link with a university at some stage, of which 50% actually engage in a project and only 20% of those get a positive result. This means that around 98% of innovative companies have nothing to do with the University sector.
University's design their venture spin-off agencies to support academics, however 97% of all start-ups are created by the Students, not the Academics.
So what is Innovation?
There are three types of innovation
- Technical Innovation
- Design Innovation
- Business Process Innovation
Innovation is the process of not just creating, but capturing value. Most companies fail not because of high costs, but because they become irrelevant and no longer provide value.
Technical and Design Innovation create value, and Business Process Innovation captures it.
On Technical Innovation
Technical Innovation delivers the potential to change business model or to meet design objectives.
The ability to integrate multiple knowledge domains is the key to product innovation today. For example the Nespresso Coffee machine is a product of food innovation, precision engineering and packaging innovation. Therefore Technical Innovation is now team process, not an individual creativity process.
The print industry was one of the first industries to go digital. It created a new ecosystem. Those companies that embraced the new ecosystem and the new technology have thrived, those that have hung on to old technologies have failed or are just surviving. Those embracing the new technologise also shifted their business models to capture the new value. For instance print on demand. In Manufacturing the 3d printer is looking like it will have a similar impact. Although some people are relegating it to a prototyping niche, the same things were being said about digital printing.
On Design Innovation
Design isn't about jewellery and fashion its about changing users behaviour and making them better off. Good design with poor technology wins (eg the iPhone's battery life just sucks) , but good technology married to bad design is a loser.
With good design, everyone in the ecosystem wins. For example the iPhone is a win for hardware resellers (product sale), app developers (software sale) and Telco's (data fees). All members of the ecosystem are happy.
Good design normally involves trade off's between different attributes.
1. Form versus function.
2. Surface Context versus Deep Context. Surface context is begin able to do something easily, eg read email (its function) – Deep Context is the “what else needs to be going on” ie. Does the user need to read a manual to do the work.
Most design methodologies follow a similar path, namely
- Observe
- Brainstorming
- Rapid prototyping
- Refining
- Implementation
Observation is normally preferred to market research as the starting point of design, as human's have a tendency to believe we are experts in areas where we have lots of activity. But if there is little interest or focus, the opposite is true. For example the average man considers he is an expert in shaving, and usually estimates he shaves his face in 43 strokes in a set pattern. The truth, as ascertained by observation, is that the average is around 120 strokes in an almost random pattern.
Market Research also tends to skew reporting. Outlier answers are generally ignored and the “other” category is normally ignored as its hard to analyse and normally only a minor response. However new trends always start in the “other” category. Additionally, answers are regularly made up as we may not wish to admit we don't know why we made a decision, or not want to clearly articulate the reason (eg a pretty girl at the sales counter).
Observation gives different answers to market research. It shows what we actually do, not what we think we do.
In Australia, we are one of the lowest users of design in industrial applications. Design sits with architecture, not manufacturing. Designers follow the money and wont go where its not valued, so there is little pressure to change the current situation
Interestingly though, all studies ever undertaken indicatee that good design = increased profitability.
On Business Model Innovation
Business Model Innovation is about changing the way you do business to capture new areas of value, that you and your competitors haven't traditionally.
Business Model Innovation requires you to truly understand who your customers are and why they purchase from you. For Example:
Black and Decker customers don't want 1/4” drills, they want 1/4” holes. So near the drill bits, some shops advertise home handyman services to drill the holes for you.
Harley's Davidson's customers are Accountants who want to to dress in black leather on weekends and make people feel afraid. Consequently they open their stores in good suburbs, open Friday to Monday and have additional services such as washable, temporary tattoos.
With business Model Innovation you have a trade off between Operational Risk (it won't work) and Social Risk (people hate it). Steve Jobs takes social risks, not operational risks “I cant ask them what they want, because they don't know”. Politicians take operational risks, because they cant take social risks.
The consequence of changing your technology and not changing our business model is always bankruptcy. For Example:
L.A. Times. Introduced a free digital version. They reacted to reduced revenues, by reducing their costs (sacking editors). The quality was reduced and eventually it died.
Pearson Group introduced digital content into its news group. They provided different subscriptions for the summary content versus the in depth content. The in depth content linked to other relevant in depth content for a separate fee. The journalists had to become very clever. The journalists then started writing books, speaking at conferences and providing training. Sales and profits grew. Their “news” profits are now well above the revenue stream of their newspapers.
Apples iPhone. In three years they took 6% of global phone volume. This wasn't what was impressive. What was impressive was that in that period they commanded 45% of profits in the sector, by changing the business model for phones.
So how do you get paid twice?
Getting paid twice is catchy phrase for implementing innovations that allow your business profits to exceed your traditional revenue. But increasing profits is rarely about cost cutting, which normally ends up severely damaging, if not killing a business after a short-lived improvement in profitability. Getting paid twice is about doing two things:
1. Asking for an unreasonable outcome, such as $2 profit from every $1 sale. This sets creative juices flowing and makes your team think outside the box.
2. Looking to access new profit pools, rather than try to increase your share of existing ones. This means that you can have your profits exceed the values of your core sales.
So it appears that the key to increasing your profits is really understanding who your customers are, who all your potential customers are, and how to turn your suppliers into customers.
For example.
Ryanair – Although you can technically fly for free with Ryanair if you purchase your tickets early enough and obey all their rules, Ryanair has generally become the most profitable airline in Europe. They will charge you penalties if you book late, haven’t printed out your boarding pass, want to check luggage, want to make a change, or want food and drinks on board. They charge airports to deliver passengers/customers and have advertising everywhere. Their costs are cut to the bone using second hand equipment, using staff from countries with high unemployment rates and even making staff bring their own pens if they feel they need to use one.
Costco - Who use their membership fees to cover their fixed costs. They then make their real profit not on the low-margin goods they sell, but in their banking as they receive immediate payment from customers, but pay suppliers at around 270 days. Effectively they are a bank!
Mills & Boon – Who in the 60′s ended up making $1.25 profit for every dollar of revenue they made selling books. The key to this was selling (80,000 copies of) a writers manual to potential authors. This level of profitability ended once Mills & Boon changed hands.
Pearson Publishing – Every article gets written both as a summary and an in-depth piece. The journalists become subject matter experts and write books, give speeches and provide training. So the one piece of creativity ends up having 5 or 6 different revenue streams attached to it. Interesting to compare them to the L.A. times that reacted to reduced revenues (due to the internet) by cutting editorial staff, which led to a quality reduction and eventually a death spiral.
