The Four Kinds of Corporate Innovation
By Jeffrey Baumgartner
April 2004
It seems everyone is talking about corporate innovation these days. Erkki Liikanen, the European Commissioner in charge of the Information Society and Enterprise Directorates General can hardly open his mouth without speaking of European business's need to be more innovative. Nevertheless, to look at all corporate innovation as being the same kind of innovation is dangerous. Defining categories of innovation not only clarifies the kinds of innovation necessary, but also points out approaches for promoting appropriate innovation within the organisation.
Corporate innovation can be divided into four categories:
1. customer oriented innovation
2. product innovation
3. process innovation
4. strategic innovation
Let's look at each.
1. Customer oriented innovation
“The customer comes first.” This is just as true with innovation as with anything else in business. If you cannot serve your customers cleverly, you might as well not bother with innovation at all.
Customer oriented innovation refers to all aspects of corporate-customer interaction, including: marketing, sales, delivery, customer service and everything in between. Although this comprises a diverse range of activities from advertising to after-sales service, the focus should always be the same: how to better serve your customers. Better advertising can provide more information to customers as well as remind existing customers that they made the right choice by your products. Better after-sales service can make all the difference between a making a single sale and developing a long-term relationship of multiple sales.
These days, as there is less and less to differentiate one product from another, customer oriented innovation is one area where your firm can demonstrate a real lead over the competition.
Moreover, every act of product or strategic innovation generally requires customer oriented innovation to ensure innovations are successfully delivered to the customers.
2. Product innovation
When most people think of corporate innovation, they think of product innovation, in particular, launching that stunning new product that brings in billions of Euro (or dollars or pounds or yen...), makes them industry leaders and puts them on top of Ingvar Kamprad and Bill Gates in the Fortune list of wealthy individuals.
While such innovation is nice, it is equally, if not more, important to solicit incremental product innovation from your company. Small improvements in your product are not only easier to come by, but can help keep you one step ahead of the competition. Moreover, small improvements are easier to sell and generally do not require big changes in your business.
But when that big idea for a radically new product - that will knock the competition's socks off - comes, be sure you have the means of recognising it (previous issues of Report 103 have looked at big innovations that big companies have made and lost because they did not recognise what they had invented).
A radically new product also demands an innovative marketing approach that will allow you to bring the product to market successfully. Introducing a radically new product to your customers is in large part about educating your customers to your product and helping them realise how much they need or want your product (see 1. Customer oriented innovation above).
3. Process innovation
Process innovation may sound comparatively dull, but it is the bread and butter of corporate innovation. In most large companies lots of people are involved in internal processes that allow the company to run smoothly and legally. These are the people in middle management, human resources, accounting, finance, administration, and the like. In general, they recognise processes that do not work well and have ideas about how to make those processes more efficient. Sometimes, of course, they are wrong. But often they are right. Their ideas improve efficiency and help companies save money. If a company has operational expenses of Euro 1 billion annually and an accountant comes up with an idea that shaves costs by 0.5%, it translates into a savings off Euro 5 million – nothing to sneeze at. Likewise, 1,000 employees each with ideas worth Euro 10,000 in cost savings each will save the company Euro 10 million.
4. Strategic innovation
Strategic innovation is rare because it is about fundamental changes in how a company operates. And in a large company, that is about the most difficult task of all. Strategic innovation requires an innovative CEO with vision and determination. Jack Welch transformed GE from an old fashioned American industrial company into a powerful global services company.
Jorma Ollila transformed Nokia from being a Finnish conglomerate with a forestry background into becoming the world's leading mobile telephone manufacturer.
While Messrs Welch's and Ollila's innovations involved all of four kinds of innovations, successful strategic innovation was central to their success.
Strategic innovation may not necessarily come from CEOs. But visionary CEOs are nevertheless necessary for implementing strategic innovation across the enterprise.
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