Innovation, Survival, and Success

Richard Worzel December 13, 2007

Articles

August 2004

Innovation is the hot topic of the 2000s, and with good reason. An organization’s success at innovation will determine whether they pick up market share and thrive, or shed customers and go bust. It is the key to both survival and success. But much as ‘total quality management’ became the management buzz word in the late 1980s and into the 1990s, ‘innovation’ is in danger of becoming a fashionable management mantra, endlessly repeated, but poorly understood. Accordingly, let’s examine both the importance of innovation, and then delve into some of the techniques of innovation.

We marvel and complain about the break-neck pace of change, especially in technology. Yet managing or even forcing the pace of change is an excellent way to wrong-foot your competitors, pick up market share by re-shaping the marketplace, and increase the satisfaction of both clients and employees.

Dell includes the customer in design

The classic example of using innovation to disrupt your competitors and refashion the market is, of course, Dell Computer. When you order a computer from Dell, either by toll-free phone or through their website, Dell orders the components, puts the order in their processing stream, and builds and ships your individually customized computer within five days. It bills your credit card on shipping, yet only pays its suppliers after 45 days, which means it gets about a 40 day free ride on your money. As a result, Dell has a negative need for working capital; every computer purchased produces more cash that can earn interest for them. As a result, they can sell you a customized computer at a lower price than someone like Compaq can sell you a mass-production computer. This innovative use of superior management of information flows, cheap IT, redefining the business model, and completely re-engineering and integrating the ordering, manufacturing, and delivery of computers has allowed Dell to disrupt the market, and become the dominant supplier.

JetBlue, one of the more successful discount airlines in the United States, is using technology to turn its competitors’ assets into liabilities. Instead of creating call centers for customer service, requiring expensive buildings, real estate, and the acquisition of significant amounts of equipment, they set up a decentralized customer service system that allows their CSRs (Customer Service Representatives) to work from their homes, and uses VOIP (Voice over Internet Protocol) to distribute the calls across the Internet. JetBlue doesn’t pay for office or working space for their people, saving all of the money that would require, yet creates a situation where its CSRs can book and set their own hours,

and work in convenient and comfortable surroundings, with the result that morale is higher and turnover is lower. Moreover, study after study shows that happier employees produce happier customers, so higher morale translates into superior service. JetBlue’s workforce is also more flexible, since they can start and stop work whenever they want, and since they can be spread out all over the continent, they cover all the relevant time zones. JetBlue reaps lower costs, lower staff turnover, and higher customer satisfaction, while their traditional airline rivals are stuck with expensive assets and eroding morale.

Toyota’s Next Big Thing

Toyota perfected the ‘Just In Time’ techniques which resulted in both lower costs and higher product quality, allowing it to eat up significant market share, to the point where it is now the world’s #3 car maker. Now Toyota looks poised to repeat this coup by revolutionizing the industry once more. It placed a billion dollar bet that hybrid cars were going to be the Next Big Thing in the automotive market because of consumer concerns about global warming, and the desire to be environmentally friendly without giving up big cars. Accordingly, it leads the world in the development of hybrid engines, some of which it is now supplying to other manufacturers. Yet the core of its hybrid success probably lies with its building of a super-secret factory that produces customized microprocessor chips, which monitor and optimize the operation of its hybrid engines. This combination of superior foresight in assessing the marketplace, taking the lead in an emerging new technology, and doing it by the superior use of information technology will, I suspect, allow Toyota to gobble up even more market share. Indeed, Toyota’s Prius hybrid car has become the ‘must have’ car of early adopters, and has been the top-selling car in the U.S. for that last 10 months.

But technology, in and of itself, does not create disruption. Instead, it allows creative thinkers to see possibilities that never existed before. The disruption comes from innovation: perceiving how you can redefine your market, or who your clients are, or what they want and how they want it, or when the sales process starts and ends in novel ways, then exploiting technology and information in new ways to disrupt the sales process. This makes it hard for your competitors to keep doing business in the same old way, and forces them to change before they are prepared to do so. If you can manage change, and redefine the flow and conduct of business, then you can innovate your way to a significant competitive advantage.

What is innovation?

So what is innovation? Many management consultants have a grab-bag of tricks and techniques for brainstorming and for changing management processes, and they define this as innovation. But while innovation may make use of many of such things, it’s actually both more complex and simpler: innovation is a persistent state of mind. It is a conscious choice on the part of management to unsettle and redefine how business happens. This has many implications, only some of which I’ll touch on here. This is a broad and diverse subject, well beyond the range of a short article.

Innovation often involves cannibalizing the company’s own sales – a process that bean counters abhor and that senior management tends to reject because it hurts short-term profitability. Yet, cannibalizing your own sales is better than waiting until your competitors have done it, and then trying to win back former clients. I recently spoke for one of the major telecommunications companies in North America. They asked me to address the rhetorical question, ‘Is there a future for telecommunications?’ Clearly, this was supposed to be just a device to address the changes coming to the industry, but the answer I gave them caught them off guard: I told them that, no, there was no future for telecommunications, that they should be thinking of themselves as being in the communications business. Their long history in supplying ‘POTS’ (‘Plain Old Telephone Service’) had produced a natural tendency to think in terms of their traditional dedicated network, and the steady, reliable, recurring revenue streams that marked the old telecommunications monopolies around the world. But that’s not the future. Instead, I encouraged them to think of their business as conveying and packaging bitstreams by any and every means –in other words, communications rather than telecommunications.

Why a pop song looks like Aunt Minnie

With the switch from analog to digital transmission, which largely occurred in the last decade, a pop song looks like a movie, which looks like a photograph of Aunt Minnie, which looks like an e-mail message, which looks like a patient’s X-ray, which looks like a TV soap opera, which looks like a phone call: they’re all just strings of ones and zeros – a bitstream. The only difference now between one bitstream and another is how fast you need to receive them (i.e., the bandwidth of the transmission), and the appliance that interprets the bitstream at the customer’s end. How you transmit the bitstream is no longer important.

Whereas in the past telephone calls were delivered exclusively over a dedicated telephone network, now they are delivered by various kinds of wireless transmissions (cell phones and cordless phones), through coaxial cables via cable TV systems, and, increasingly, via the Internet by VOIP (‘Voice Over Internet Protocol’). This last is the most revolutionarymedium because it means wherever you can receive a broadband Internet signal, you can plug in your home or office phone, and receive phone calls. Hence, if you plug your Internet phone into your laptop while you’re in a hotel in Hong Kong, it will ring and receive the same calls as if you were sitting at your desk at home, and the callers won’t suspect you’re away. More-over, it will be a local (toll-free) call, just as if you were at home.

We are on the verge of flat-fee, worldwide calling, where the world becomes a local calling zone, and long-distance fees disappear. And when broadband Internet access becomes available on a wide-area, wireless basis (called ‘Wi-Max’) starting in 2005, cell phones will gradually vanish, replaced by wireless Net phones.

All of this means that the traditional telecommunications business is in the process of evaporating. Accordingly, if you are one of the original phone companies, you had better start cannibalizing your own revenue base before technological upstarts do it to you. Better to keep your clients, even at lower revenue and profit levels, than to surrender them to younger, more aggressive – more innovative – competitors.

The bitstream appliance

Recall that I said that telecommunications does not have a future, but that communications does, and that it will consist of conveying and packaging bitstreams. I’ve talked about the conveyance of bitstreams. Now let me focus on their packaging with two innovative examples: the Apple iPod, and the RIM BlackBerry.

The iPod uses a computer website to organize, sell, and distribute music in a useful and convenient format to a wide range of music-lovers. Once purchased, a song is down-loaded onto a small computer, complete with hard drive. The computer stores the music, organizes and catalogs it, and plays it back on demand, all in a convenient and stylish package. It has taken the music world by storm, and caused great consternation among other hardware and music vendors who are now desperately trying to play catch-up.

Meanwhile, the BlackBerry uses a range of available wireless networks to deliver bitstream voice and data to a handheld computer disguised as an e-mail device and phone. It allows users to stay in touch wherever they go in a seamless and convenient manner. It, too, has taken the industry by storm, and left companies as diverse as PalmPilot (now split into onePalm and PalmSource), Motorola, Microsoft, and Nokia in a position where they have to scramble after RIM.

In both cases creative thinkers have taken the same tools, digital communications and computer technology, and created appliances to interpret bitstreams in novel and useful ways. By doing so, they have re-defined their marketplaces, and picked up huge marketshares. Yet few people realize that these two apparently different devices actually perform the same functions – packaging bitstreams – for two differently defined purposes.

Indeed, the innovation here is not so much the clever devices as the ability to tame the technology so that the bones don’t show. The users of iPods and BlackBerries don’t think about the technology. Instead, they focus on the ideas and emotional experiences involved in doing what they want to do – listening to music, or sending and receiving messages. The innovation lies in finding ways of doing this so the technology disappears from the mind of the user, and becomes an unobtrusive facilitator of the user’s frame of mind.

You don’t get this by re-packaging what’s already out there. You get it by exercising intuitive insight about what’s new that the technology is capable of delivering that the user will want, and then doing your best to deliver a natural look-and-feel that changes the way business is done.

So innovation is not a grab bag of neat tricks. It’s a state of mind that causes you to see the world in a new way, and a means of harnessing intuition to redefine how business is done, and refashion the marketplace.