Innovation: Creating and defending new sources of value

So much has been written about innovation in recent times that it seems like nothing more than the latest management fad. This is probably because much of what is written in the mainstream and business press fails to be specific about what is meant by innovation, applying the term indiscriminately to anything that is new.

But to actually harness the potential of innovation, companies need to understand that innovation is a discipline, and one that - while integrative - still has specific and robust elements that can be embedded within organizations and practiced routinely.
So what is meant by innovation?

Innovation isn't just about coming out with a new product, yet companies routinely try to innovate by doing just that. Hot new products are often swiftly copied by competitors. To create a breakthrough, potentially disruptive and sustainable innovation, companies should look to incorporate more forms of innovation than just around the core features of an offering.

How can they do this? By using what Monitor calls the 10 Types of Innovation (refer graphic: '10 Types of Innovation'), a proprietary framework that helps broaden the drivers of value of a particular innovation along a much bigger spectrum than just what the thing "does". Breakthrough innovations almost always include multiple Types of innovation: at least 3 - 4.

What definition is actually useful and practical in business? How does the '10 Types of InnovationTM' apply in Indian examples? To find answers to such questions, Business Today and Monitor Group jointly interviewed key leaders at innovative organizations to study the reasons behind the success of their innovations. Each of the organizations in this special Business Today/Monitor Group innovation study, exhibited 4 or more of the 10 Types of Innovations. They each illustrate how true breakthroughs are usually a set of innovative elements that work together as a holistic system and reinforce the defensibility of the new offering.

We believe Innovation is about creating and capturing value through non-traditional approaches. It isn't only for rapidly changing, technology companies either: the traditional brick and mortar companies included in our study-from agri-commodities to print media-have each realized market success and impact in their industries from innovation.

The value creation for an organization through a particular Type of innovation depends on the quantum of effort in each Type, and is often inversely correlated to how common that Type of innovation is within the industry context. Hence, it becomes essential to be aware of the patterns of innovation within your industry, and where your efforts may yield a disproportionate benefit.
 
In some cases, innovation around product or other areas may have become de facto table stakes within a given industry (think of consumer electronics, for example). To differentiate, a company has to seek additional innovation opportunities across the 10 Types to complement the new technology it can bring to consumers.

The required investment to out-innovate competitors when a given Type is heavily used by an industry may be far greater than looking at lesser used Types - so for consumer electronics companies, looking to innovate around Product System, Channel, or Networking may yield much more impact in the market, for comparatively less cost in terms of innovation effort.

Monitor's point of view is that to be called an innovation, a new product or service offering must be proven by success in the market-place. This keeps us disciplined and introduces a way to measure the innovation efforts of a company that resonates across senior management, employees, the street and other stake-holders.
To this end, we selected a small number of organizations to profile in this study. Though they come from many industries-and even the social and government sector-each has demonstrated outsize impact in India based on their innovation efforts. We carefully edited the selection to only include companies whose efforts have not been as recently or extensively reported as some of the usual suspects (e.g., Tata Nano, Aravind Eye Hospital).

 
One notable commonality across the set is that every organization in the study exhibited substantial innovation around core processes. This means that to develop, launch or operate their new offering, they had to fundamentally alter existing ways of working, and in some cases they developed wholly new and even patentable processes. From executing large scale research to launch newspapers (Dainik Bhaskar) to changing ways in which education is delivered in India (Gyan Shala), these companies showed a willingness to first determine what was desirable, and then build a backend model to deliver it. It sounds simple, but this market - or consumer-centric mentality is rarer than it should be.

In contrast to companies that get bogged down in a particular model and whose blind spots grow the faster the market changes; having a bias toward listening to the pulse of the external world is a hallmark of companies that tend to be able to innovate repeatedly.

This is the difference between core competence driven planning and strategy, which builds from internal capabilities outward, vs. innovation planning, which requires the ability to look at the customer needs and the market potential. First see what is desirable, and then determine what is feasible based on how the organization can execute; whether by developing partnerships, building or modifying its own capabilities.

We also saw profound innovation around business model, network, product performance, and customer experience, each of which is described below. However, there is markedly less innovation among Indian companies around product system, service, channel or brand. Product systems and service (post purchase) can enhance customizability and cement ties with customers by engaging with them throughout the ownership cycle, not just at purchase. Though valuable, we observed that few companies are leveraging these Types. This suggests that there may be significant opportunity for differentiation for those companies that actively look for ways to innovate in these areas.

Understanding the 10 Types is the first step toward being able to use them in your own innovation efforts. The remainder of this article defines each of the 10 Types and provides illustrations. For more specific information about how each of the organizations in our study has created and successfully implemented innovations that cross multiple Types, please refer to the individual write ups on each organization.

'Finance' Innovation*: Re-inventing business models and creating extended networks

There are perhaps no more fundamental truths that a company holds about itself and its nature as a corporation than "How we create value" and "The role we play in our value chain defines the boundaries between us and other entities." Yet sometimes market dynamics warrant revisiting these truths and finding ways to challenge an industry's often decades-old assumptions or "orthodoxies."

Innovative companies are the ones who succeed by defining new economic models and in today's world, create a more permeable sort of enterprise: one that aligns incentives across a broader network to create and capture new value.

These kinds of changes are among the most powerful types of innovation, and when they happen, they create fundamental change in the competitive dynamics within an industry-a paradigm shift in the industry model itself.

For instance, Moser Baer created a disruptive change in the Indian home entertainment industry by changing the basis of competition along with their economic model. For many years a fragmented industry persisted, with many small players producing high cost VCDs and DVDs.

Collectively they faced the threat of pirated discs with shabbier content, but much lower prices. Moser Baer shifted the entire price-performance curve and set a new standard for the industry by applying technology developed for other purposes to drastically reduce the retail price of high quality movie VCD and DVDs.

No longer was selling high quality discs the only way to compete with low-cost pirated discs - Moser Baer innovated a new business model with their singular cost position and pricing approach, and protected this new model by adding a complementary new distribution approach and aggressively developing a wide content base to consolidate market share in an unprecedented manner.

Moser Baer's success exemplifies why utilizing multiple Types of innovation is critical not just to break through, but to create a defensible new offering that can't be immediately copied by competitors.

Companies can also be radically successful innovators when they reconsider the role they play in the ecosystem of their industry. For the majority of the 20th century, organizations usually sat at a discrete point in a linear value chain. Then came vertical integration, which can sometimes reduce costs or improve quality control. Now, innovative companies are finding new ways to position themselves within a non-linear network. Networks provide a way for companies to leverage each other's offerings, customers, and capabilities.

Network and alliance innovations reflect a clear definition of each partner's strength and weaknesses, have well-crafted shared operating processes and technology, and rock-solid governance (usually with one of the partners taking the lead on some or all of the network management areas).

During the study we found compelling examples of organizations in India using networking innovations to gain sustainable competitive advantage. Fabindia draws its strength from close financial and operational ties to 17 community-owned companies which form the supplier base for their handcrafted products. Through these tie-ups, Fabindia is able to consistently deliver high quality products and make artisans a part of the wealth they help create, aligning incentives with entities beyond the formal boundaries of Fabindia as a corporation.

We also observed organizations using networks to accomplish two other important goals. First, networks can act as a direct source of revenue especially in B2B arrangements, as with the case of ITC's evolved e-Choupal platform. Secondly, we saw organizations leveraging the technical expertise of network partners to create open innovation networks.
TCS has created an "extended co-innovation network" which constitutes apart from employees - TATA group companies, academic institutions and other strategic partners. This network has helped TCS create numerous marketable innovations.

'Process' Innovation: Guts and Imagination

The activities a company performs or the capabilities it leverages in order to deliver its product or service are categorized into two Types: Enabling Process innovations and Core Process innovations.

Enabling process innovation supports the enterprise's primary work, value delivery, and workers. Good enabling processes innovation can help attract talent to the organization and help people do their work faster, more easily, more efficiently, and more profitably. These processes are often the "infrastructure" that enable market-facing processes and offerings, and deliver streamlined support.

The research intensive approach adopted by Dainik Bhaskar to launch its Gujarati daily provides a good example of how enabling processes can positively affect the outcome. Whereas most media companies rely on internal expertise to develop the content strategy for their offerings, Dainik Bhaskar used a form of "crowdsourcing" to get inputs from a large number of potential consumers in order to structure the content of its new newspaper. This not only enabled the creation of a successful product but also helped in building a customer connect that subsequently resulted in high circulation.

Core processes are the capabilities proprietary to an enterprise that others can't duplicate. For product companies, this often involves their R&D, manufacturing, and marketing capabilities. Core process innovation typically involves dramatic changes in "business as usual." Depending on the industry, the new process might help the company create value when they deliver blistering speed-to-market development; allow the enterprise to quickly allocate or shift resources around new opportunities; foster rapid prototyping and testing, or institute new cost-saving processes such that the company can then realize market-leading margins.

Gyan Shala, a one of its kind budget private school in India, has innovated significantly in its core process: pedagogy. It creates detailed teaching manuals with step-by-step instructions for each minute of each day, including answers to probable questions that students may have. This disaggregated and much simplified manual enables paraskilling-the splitting up of complex tasks so that each component can be performed repeatedly, with greater precision, and by lower skilled employees, which substantially reduces labor costs.

Instead of relying on teacher training that happens early in an educator's career and then leaves considerable discretion (and thus variation) to the individual teacher, Gyan Shala's model is demonstrating the impact of core process innovation in even the perennially challenging arena of education.

'Offering' Innovation: Breakthrough change, not continuous improvement

Changes to the functionality of the product/service are nearly always where conventional innovation teams start. And there is an important role to play for incremental innovation - refreshing a product or service on an annual or more frequent basis can keep customers returning and take advantage of ongoing technology advances. However, companies that aim to conquer a new market or radically reshape their position need to think bigger-and differently.

In the organizations studied, Monitor found that companies that innovated substantially on product performance started with a deep understanding of customer needs or industry shortcomings. They showed a willingness to look outside of the company's internal capabilities, and beyond their existing customer base. Since this often means trying to deeply understand the needs of new audiences that are not currently served by the company, this challenge may require an explicit mandate to be set forth internally since it's typically no one's day job to try to understand people who are not current customers.

In our study, this is illustrated by how the financial services business unit of TCS started out by striving to understand the banking requirements of the rural Indian. Later, by leveraging their extended co-innovation network, they were able to create a branchless banking platform that was scalable in rural areas with poor infrastructure and connectivity to bricks and mortar facilities.

Product system innovation demonstrates the ways in which several individual products connect with one another to create a larger system, which can lead to enhanced functionality. These innovations often bridge the needs gap between constraints imposed by production complexity, and helping individuals fulfill unique requirements. Modular offerings or systems that permit easy customization are one such example. For instance, Microsoft Office bundles a variety of specific products (Word, Excel, PowerPoint, Outlook, etc) into an overall system designed to deliver productivity in the workplace. As a result, the Office platform is very hard to compete with.

Closer to home, ITC e-Choupal's recent improvements to its well-established village kiosk model of agri-commodity procurement creates a platform that offers new consumer goods partners a cost effective way to "plug in" to the rural consumer. At the other end, the resulting wide range of products helps address a number of unmet needs of farmers. In this case the product system actually spans the offerings of multiple companies, linked together by a distribution model that leverages one proprietary channel.

Companies also innovate on the value they provide to customers that follows the purchase the core product. This is the domain of service plans, customer service, information and education, and warranties/repairs. Service innovation is typically focused on helping customers receive the full value of the products they purchase and use. For example, FedEx not only promised reliable overnight delivery, they innovated around the entire usage context to create automated tracking and integrated billing. (Competitors have since caught up to these specific advances.)

In India, we see relatively fewer companies innovating around post-sale service. Premium products, such as watches, hotels, and high-end consumer electronics are beginning to be sold along with opportunities to join customer loyalty programs, receive guarantees, and interact around personalized information. However, there is clearly room to offer a wider audience a rewarding, full lifecycle experience.

We believe innovation has been hampered in this area for two reasons. First, the fast pace of macro-level growth has allowed companies to grow continuously through organic customer acquisition as incomes rise. Second, the high employee churn that characterizes many industries due to the explosion of opportunity and frequent job shifting mean that few employees stick around long enough for deep training on providing high quality customer service.

However, as norms change and Indian consumers come to demand the enhanced level of service from companies, there may be significant opportunities for new contenders or nimble incumbents to grab market share and define a new baseline of consumer expectation. In the same way that Moser Baer redefined the price-performance frontier in home entertainment, India is ripe for a redefinition of the price-service frontier in any number of B2C settings.

'Delivery' Innovation: The customer connect

How a company gets its product to the customer is the domain of delivery. There are three facets of delivery where innovation can yield disproportionately better results - Channel, Brand and Customer experience.

Channel innovations encompass all the ways that a company gives a customer access to its offering. Successful channel innovations use an ideal mix (retailers of all sorts, wholesalers and warehouses, distributors, call centers, catalogs, internet, home delivery, etc.) to permit customers to buy what they want, when they want it, and how they want it. For example, Nike has created eye-wateringly expensive retail cathedrals called NIKETOWN stores to use as product showcases.  What most people don't know is that these get their primary use as training facilities after closing!

Brand innovations are ways that companies use their brand in novel and powerful ways. For instance, through extension to try to incite customer reaction in a new area - the way that Virgin has used its brand to enter an extremely wide range of industries (air travel, mobile phones, music) and convey a similar value proposition to customers across each one.

Other examples of brand innovation could be co-branding or private labels, depending on the industry and market context. In the Indian context, TATA is synonymous with "TRUST". This brand has not only enabled TATA to penetrate new markets faster but also forge better relations with its suppliers and internal stakeholders (employees).

ITC e-Choupal is able to regularly add and successfully market new product and service categories through network partnership. For this, they leverage brand e-Choupal which has, over time, built cache in the rural economy.

Finally, how your customers/consumers feel when they interact with your company and its offering can be a powerful source of differentiation that creates a long lasting emotional attachment. Often a very holistic and challenging type of innovation, this is about understanding your customers so well that you are able to provide them with experiences that delight and enrich their lives, often by addressing their unmet needs and deep-seated aspirations.

One classic global example is how Lexus managed to move from no place to first place in customer satisfaction rating in the very first full year of their operations - an astonishing achievement up against entrenched luxury brands like BMW, Mercedes and Porsche. They did this mostly by reinventing not the cars, but how they were sold, serviced, and supported.

In India, Moser Baer was able to reduce the home movie release window from 6 months to 10 days in some cases - a feat that exceeded prevalent customer expectations. This was accomplished by making home entertainment revenue stream relevant to film producers by commoditizing movie VCD/DVDs.

What can leadership do to help?

Developing and launching a new offering-especially one as big and bold as the examples we studied-is no mean feat. While pursuing innovation using a disciplined approach can reliably yield powerful results, it takes both courage and coordination (often across multiple parts of the organization) to do it well.

Senior leaders play a particularly crucial role. They set the organizational context in which innovation must occur. They provide a set of permissions that empowers individual employees or specially commissioned teams to stretch beyond the current paradigms of how the company delivers value.

Unlike day-to-day operations, which can be routinized, efforts around innovation require employees to think beyond the company's current capabilities, and imagine what it might require to meet consumer needs or market opportunities that can't yet be quantified or proven using familiar techniques. To create the latitude that must be given to think in that way and avoid prematurely shutting down big ideas, most companies create some form of specialized mechanism that sits outside of the normal day to day processes.

For example, when faced with the threat of extinction due to changes in the competitive landscape, ITC commissioned four cross-functional teams to focus on different aspects of the business model. These teams were tasked with discovering customer needs, leveraging capabilities from different parts of the organization, and synthesizing the findings to design new customer interfaces and back-end procurement arrangements.

The effort was branded internally as "Project Symphony," to emphasize the degree of coordination across the organization that would be required to implement. This is what led to ITC e-Choupal.

Another route is to create a shared services model, where the responsibility-and deep expertise-for innovation is embedded in a permanent unit that serves many parts of a larger company. TCS uses this model.

A third approach comes when a chief executive is widely regarded as a visionary, and the organization builds on and executes his ideas. Steve Jobs at Apple can be seen as this kind of "benevolent dictator;" this model works as long as the "golden gut" of the CEO remains infallible. The long-term sustainability of this approach is questionable, however.

One contrasting approach is that of a "free market" innovation model, exemplified by a handful of companies like Google who allow employees to pursue ideas in which they have individual conviction during part of the work week. By institutionalizing this practice they have found ways to capitalize on the doggedness that their workforce of engineers applies to exciting problems.

Importantly, this is distinct from the generic and superficial messaging used by many companies who claim that innovation is "everyone's job," which may actually mean that it is no one's job, no resources are assigned to it, and no specific permissions are established that allow individual employees to stretch beyond the current models. Google has created an explicit model that is supported by leadership and integrally connected to the nature of their workforce and their overall HR strategy.

In all of these examples it is clear where innovation lives within the organization, and the organization can align around resource allocation, processes, and an internal participation approach that supports the chosen model.

Regardless of the model, leaders who enable innovation in their organizations do the following:

• Use context to mobilize and catalyze organizational action, whether it's a specific project mandate or an urgent competitive threat,
  Establish a clear level of ambition and for the innovation effort to set the appropriate permissions about the degree of stretch that the organization is willing to make as a result of the initiative
• Commission cross functional teams whose members do more than "represent the voice" (and usually the concerns and fears) of various functional areas, but actually work as an integrative, multidisciplinary unit to cross organizational silos,
• Challenge orthodoxies (and reward team members who identify and confront them) that the industry or the company may have developed over the years, and
• Refuse to accept that innovation is an accident or the result of a stroke of insight-robust analytical frameworks like the 10 Types of Innovation show that using a disciplined approach is a lower risk route to developing and implementing breakthrough offerings and protecting the company's new position

In conclusion

This initiative sought to define more precisely than before exactly what innovation is, and provide an analytical framework and common language that senior executives can use when thinking about and acting on innovation. The examples-drawn from the corporate, social and government sectors-demonstrate the value of the framework and the messages for professionals: get beyond products, use many Types of innovations to make them defensible, start with a market and customer-centric view, think synthetically and challenge orthodoxies.

*In the 10Types Framework, Finance Innovation does not refer to new types of financial instruments, but rather to the basic business model that defines a company's core activities, as well as the formal economic arrangements it makes with other entities