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Where innovation creates value

January 28, 2010 08:37 IST

Value innovation can help improve efficiency across the organisation and deliver better results, says Richard Lee.

In the second decade of the 21st century, it is imperative that governments increase the quality of life for their citizens, and companies drive sustainable, profitable growth to compete effectively in the global economy. They do this through innovation.

Innovation is critically important but is it clear what innovation is? It can be many things: Doing things differently, thinking out of the box, coming up with new ideas and products, taking risks, being creative. The ability of an organisation to innovate is not only a function of processes and tools but also the organisation's culture and stakeholder behaviour. It is easy to see why innovation is misunderstood.

There's a commonly held belief that innovation and R&D investment are linked. This is a myth. There are companies which do not invest in R&D but are very innovative. Examples include Southwest Airlines (now the largest airline in the world based on the number of passengers flown), Walmart and Virgin Group. There are companies that have made huge investments in R&D and have little to show for it.

Examples include Ford and GM. Both companies were the largest investors in R&D at their peak, investing Rs 36,000 crore (Rs billion) a year. Investment in R&D and technology enables innovation; it is not an innovation metric.

The best example is Apple. Most would agree Apple is the most innovative company in the world. Its products are very appealing, deliver great value and are user-friendly -- the iPod, iPhone and the new tablet, rumour has it, iSlate. Does Apple invest heavily in R&D? No. Apple uses technology from multiple sources to enable the innovative lines of products and services that it produces.

There are at least eight forms of innovation being practised globally today: Customer-centric, disruptive, management, open, outcome-driven, radical, strategic, and value. The three most widely adopted forms are: Disruptive, open and value innovation.

Disruptive innovation

Disruptive innovation has been described in three books by Clayton Christensen of the Harvard Business School. Christensen's contribution is that companies need to define their value chains, understand the jobs their products or services are hired to do and be aware of the technologies that enable higher-value solutions to a customer group's problems.

They could disrupt the existing market. We have seen disruptions in the past -- steam ships replacing sailing vessels, computers replacing typewriters, jet aircraft eliminating travel by ship.

Today we see disruptions occurring at a much faster rate: Tata Motors brought out the low-cost Nano for people who could not afford a car.

Is this a disruption? What are the implications for global automobile manufacturers? The print media is being attacked on all fronts, for example, by social computing and Google. The result is that major newspapers and periodicals are downing their shutters.

Low-cost, point-to-point airlines (Southwest Airlines and Ryanair) with no-frill service and very low fares are putting pressure on the major airlines who operate on the hub-to-hub model and have much higher operating costs.

Open innovation

Open innovation is probably the most popular form of innovation today. A recent development is that people are starting to question its real value. Henry Chesbrough of the University of California, Berkeley, is the leading proponent of open innovation and has published three books on the subject.

Chesbrough shows that today's organisations do not have the resources to do everything themselves. He recommends organisations put in the resources to access ideas from external experts, universities, members of the public, patents and scientific literature. Procter and Gamble's Connect + Develop programme is the most fabled example of open innovation.

Nabil Sakkab, the retired chief technology officer of P&G's fabric and home care business, claims Connect + Develop has allowed P&G to keep R&D investment flat, while significantly increasing contribution of new products to top-line growth. P&G's growth goals require it grows its top line annually by Rs 18,400 crore (Rs billion) with new products and services. Put in perspective, P&G needs to create a new Gas Authority of India every year.

Value innovation

Value innovation is the universal form of innovation. It is not restricted to just developing new products and services. It focuses on delivering value in any form and, therefore, has far less risk associated with it.

The term value innovation was first introduced by W Chan Kim and Renee Mauborgne in the early 1990s and was popularised in their bestselling book, Blue Ocean Strategy, published in 2005.

Today Value Innovations, Inc is at the forefront in delivering value innovation methodology to the global market.

Value innovation is defined as delivering exceptional value to the most important customer in the value chain all the time, every time. Unlike other forms of innovation, the most important customer can be internal or external to the organisation.

Exceptional value can be delivered in many other ways besides a new product or service. It could be a new process, a new way of going to market or business model, a new way of delivering the product or service, new packaging, or new services.

Any organisation of any size, whether for-profit or not-for-profit, an association, a government agency, a school board and so on can use the value innovation methodology. Support groups within an organisation such as IT, finance, purchase and human resource can use these tools to deliver much greater value to the most important customers in their business units.

In 2006, Don Paul, then Chevron's chief technology officer, brought in Value Innovations, Inc to determine if value innovation methodology and tools could help three Chevron technology subsidiaries deliver greater value to the business units, the internal customers.

A research project was selected to pilot the tools. With Value Innovations' facilitation and innovation tools, the project team collaboratively identified the most important customer, the asset manager. Value Innovations interviewed these asset managers using a contextual interviewing approach. A value curve with metrics was developed from the interview outputs.

It took just five months to reduce a very complex research project down to four primary areas of focus. The Chevron project team sees many benefits to using value innovation methodology.

More global companies besides Chevron are now using Value Innovations' methodology and tools with great success. They include Alcan Pharmaceutical Packaging, Bekaert, Genencor, Ingersoll-Rand, and Procter & Gamble.

Central to the successful implementation of innovation is an organisation's culture and stakeholder behaviour. Air Products & Chemicals, Alcan Pharmaceutical Packaging, Boeing, Milliken, and Solvay Advanced Polymers, partnering with the Center for Innovation Management Studies at North Carolina State University, focused on how the potential for value innovation could be assessed in an organisation.

The outcome was a robust, reliable and statistically validated 33-item, web-based, value innovation process assessment tool. This tool provides scores on nine statistically independent factors influencing an organisation's culture for innovation:

  • Meaningful work
  • Open communication
  • Risk-taking culture
  • Empowerment
  • Customer orientation
  • Business planning
  • Agile decision-making
  • Learning organisation
  • Business intelligence

The tool includes an open-ended question where respondents can provide additional thoughts. The conclusion, from the answers at Alcan, Milliken and Solvay, was the three most significant cultural and behavioural challenges in order of importance: Open communication, empowerment and risk-taking culture.

Risk is a double-edged sword. Organisations are at risk if they stand still but see themselves taking risks if they decide to innovate. The chairman and managing director must take the lead. The chairperson sets the tone and makes it clear the company will take risk. Steve Jobs at Apple, James Dyson at Dyson, AG Lafley at Procter & Gamble and Richard Branson at Virgin have made it clear that risk is a part of doing business.

An organisation that uses value innovation methodology is lowering the risk associated by focusing on delivering greater value to the most important customer.

To drive India's annual GDP growth at over 10 per cent now and well into the future, the Indian government and companies, from Navratnas to small businesses, must make innovation critically important. To do this, they must:

  • Assure that investments in R&D will enable value innovation in core and key growth industries,
  • Assure that government ministers and company CEOs champion innovation and understand the proactive role it plays in setting the right tone and expectations,
  • Recognise the significant impact an organisation's culture and people's behaviour have on promoting or inhibiting innovation,
  • Identify the cultural promoters and inhibitors in their organisation and minimise the impact of the inhibitors,
  • Make measured risk-taking acceptable at all levels of the organisation and reward those who take risks, and
  • Adopt the use of value innovation methodology to develop breakthrough new products and services, business models, processes, support services, delivery methods, processes and packaging concepts; and increase the value delivered by all support functions to their internal customers.
  • The author, a PhD, is President and Founder, Value Innovations, Inc.

    Richard K Lee
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