Turning ideas into profit

C&I Issue 13, 2009

The modern business climate is constantly changing and evolving. In a recessionary change, such as now, business failures increase. Experience shows the main causes to be, in order of importance, loss of markets, lack of finance, bad debts and management shortcomings. A business that is not growing through new or improved product and service introduction is likely to be more vulnerable.

While business growth can be internal and organic or by acquisition, as many as two thirds of acquisitions result in loss of value through overpayment, poor merging or assimilation of different business cultures and loss of management focus. In addition, if external finance is used, the debt burden can be difficult to manage. The simple view is that internal growth, financed internally, is the most controllable and the least risky.

However, the old model for business success, of mastery of capital and labour, is no longer enough. Successful companies also show great proficiency in the new skills of:

  • Understanding market/customer needs through customer intimacy;
  • Accessing knowledge/skills and ideas through networking;
  • Innovating by turning ideas and creativity into new business.

Innovation is ‘the successful exploitation of new ideas’. For new products and services, success means that they are purchased in significant amounts. However, innovation can also be applied to a company’s business model and business processes and operations. For example, innovation can be applied to reducing costs and overheads, thereby making more finance available for investment in growth. It can also be applied to harnessing the innate creativity of all staff and developing an organisation where innovation and creativity become applied to everyday activities.

The evidence shows that businesses that focus on innovation deliver above average sales growth and profitability. These businesses typically operate with targets such as 30% or more of sales from new product/service introductions made in the past three to five years.

New skills
Innovation is often seen as a technical activity, but ultimately success is measured by acceptance in the marketplace. A potential new product or service must have a customer perceived value or price that is significantly more than the costs of providing it, since there will inevitably be unexpected additional costs of provision and price erosion through competition.

Customers or consumers are seldom able to consciously express their latent needs, although they will usually recognise the solution when shown it. Listening to customers is, therefore, not sufficient to understand what they might want. Customers and market immersion involves closely observing what they do with current offerings and creatively identifying what is either missing, not satisfactory or could be improved. There is considerable evidence that in-depth immersion leads to intuition and ideas, which can be turned into the foundations of innovation. It is critical to test any promising idea by turning it into a prototype that can be looked at, played with and commented upon by the potential customer, as soon as it is practicable.

Business networks, whether local, sector or technology based, are excellent sources of ideas, knowledge, support and encouragement and possible collaborators or partners. A university may be used as a source of tacit knowledge (consultancy), a gateway to leading edge explicit knowledge or a place to generate new required knowledge (collaborative research). The best and most productive interactions are built up over time, with trust and respect for each other’s needs. Other useful and valued interactions that lead to good quality knowledge transfer are placements, recruitment and licensing or spin-outs of intellectual property.

Knowledge transfer is mainly a tacit person-toperson process. Tacit knowledge offers potential competitive advantage since it is not normally available to others and is tailored to the interacting parties. It has been shown that three quarters of the most important contributions of academic research to technology development are tacit.

Most businesses innovate without necessarily realising that they are doing so. A planned approach to innovation depends on their strategic purpose and direction, their capability, their market understanding and the amount of finance available. For new products, innovation can be categorised into six types in order of increasing expense (Table 1). The first three can be said to be subject to market pull and the latter three as technology push.

Research and Development is often an important part of innovation, and there is a well-established correlation between R&D investment and sales growth and market value. R&D can provide technology, knowledge and expertise, but this can also be obtained elsewhere.

An important prerequisite is to have the necessary skill to recognise, translate and apply the knowledge wherever it comes from. It is often said that: ‘Research turns money into knowledge, whilst innovation turns knowledge into money’.

Exploitation process
The process may be described as a linear set of four sub processes or stages: idea capture, evaluation, development and value realisation. In practice, many activities often take place together, or in a different order, and may require recycling. In general, the front end of the process is more chaotic and the back end more defined. Value is added to the potential new product or service as each stage is completed. Necessary investment increases significantly at each new stage, and therefore it is important to clearly decide on progress or abandonment at the end of each one.

Ideally, a business should always have a living pipeline of innovation projects with some redundancy, so that a project that fails to meet the desired criteria can quickly be replaced by another that potentially does. It is also important to prevent pipeline constipation, by taking decisions as early as possible.

When a project reaches the development stage, it should be managed formally by a project manager, against a project plan that extends to value realisation or market entry, to ensure that it successfully meets its technical, time and cost expectations. Value realisation can be achieved by a direct offering to the market. However there are a number of other ways to realise value such as the sale or licensing of the project at an appropriate stage, the spin off to a new independent organisation or ‘Newco’, or partnership with an organisation bringing a missing piece of the exploitation strategy such as finance, market position, technology etc. These latter strategies can help to reduce the risks, but also commensurately lower the potential reward.

Leadership and culture
The creation of an innovative organisation, where creativity and innovation are embedded from top to bottom, requires vision and ambition, attention to the culture and values of the business and, above all, leadership. An innovative organisation will be connecting with customers and markets, and inspiring all its staff to create and develop new ideas.

Top leadership must develop and communicate a clear and simple vision of the future and the strategy for achieving it. An organisation capable of successfully harvesting its peoples’ potential and their ideas can be thought of as an ‘Unlimited Company’ with a culture where ‘ordinary people can achieve extraordinary things’. An organisation that provides innovation as a key output must couple creativity, calculated risk, and entrepreneurial spirit with business and project delivery disciplines. An innovative organisation is, therefore, always a subtle and shifting balance between the two different cultures of creativity/freedom (inspiration) and control/delivery (perspiration). This balance is the art of innovation leadership.

Innovation leaders are change agents. They must create an entrepreneurial climate, be catalytic in creating new ideas and support and protect those who take risks to be innovative. The more power is concentrated, the less easy it will be for the organisation to be creative and to adapt to external changes. Therefore empowerment or the distribution of power within the organisation is an important way to increase its adaptability to external change and encourage it to be entrepreneurial. People cannot, however, be given empowerment instead they must be encouraged to actively take it. They will usually take it when they accept the goals and recognise that both freedom and support are available. Empowerment engenders personal leadership. This personal leadership is about understanding oneself and hence others, controlling and using emotions constructively, building relationships and communicating, and lastly adopting an entrepreneurial mindset. This mindset is characterised by the recognition that change creates opportunity and that innovation is a way of life. It also includes the acceptance of risk and the belief that failure is not an option.

Inspirational leaders are visionary, ambitious, committed, demanding, confident and courageous. They are also lateral thinkers, rule benders, risk takers, and customer obsessed. They lead by listening, involving, trusting and caring about others. They also try to ensure that as many as possible of the four key motivators: achievement and success, personal development, recognition by their peers and reward are satisfied. Experience shows that reward is always the least important.

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