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Whether you’ve recently gotten to “Stage 2” or you’ve been there for decades, innovation is an important part of business survival and growth.  Lots of business leaders are creative, but having a systematic innovation process requires that you mix in something very different:  discipline and structure.

 

WHAT IS INNOVATION

Innovation is the process of creating something new – with the intent that it improves your business’ performance (i.e., that it has commercial value).  There are 4 levels of innovation:

  • Continuous improvement – small adjustments that some people don’t consider significant enough to call innovation

  • Incremental – changes that make existing things work better

  • Expansive – meaningful changes and new ideas that take a product or business into a new space (market, customer, technology, product category)

  • Disruptive – significant changes and new ideas that change the rules for a product or business

 

WHY IS INNOVATION NEEDED

Markets, customers, and needs are constantly shifting.  To keep pace with those shifts – or to anticipate and lead them – you need to think critically and creatively about your current products and processes to find improvements and whole new ways to serve customers.

 

Gross margin is a measure of your ability to innovate because it is a measure of your ability to meet needs better than others can.  Competition lowers gross margin, so the trend in your gross margin will tell you how strong your innovation is.

 

Although all industries need more innovation than they did in the past, some industries need more than others.  This is especially true for technology companies that feel the constant influence of rapidly increasing capabilities expressed by Moore’s Law.

 

BENEFITS OF INNOVATION

Innovation provides a number of benefits to a company:

  • Customer connections:  new ideas, methods, and products are a great way to deepen and expand connections with your customers – changing the discussion from “same ol’ same ol’” to much richer exploration of possibilities, goals, and needs.

  • Growth:  new products are a great way to find new customers and new markets 

  • Employee growth/energy:  your most productive employees like working on new ideas and new growth.  Innovation provides an outlet for their creativity – and creates new paths for their career growth.

  • Profitability:  innovation in all its forms is the path to improved profit margins.  Expansive and disruptive innovation improve gross margin by providing unique and valuable products, and continuous improvement and incremental innovation improve operating margin by increasing productivity.

  • Valuation:  a business will attract a higher valuation multiple if it has a reliable and repeatable process for identifying, developing, and selling unique and valuable offerings.

 

ELEMENTS OF INNOVATION

Innovation has several components:

  • Creativity and ideation:  Innovation is about new ideas and doing things differently – small or large.  That requires creative thinking and brainstorming.  For small changes in continuous improvement, that might just involve having a curious person on the team who constantly asks questions, or it could be 15 minutes during a monthly team meeting when the group discusses, “What isn’t working?”

  • “Technical” development:  Whether the innovation is advanced new technology, a simple new product, or even a service, the first step is to develop a rough version of it.  At this stage, you’re not focused on how a customer will use it…you’re just trying to get the new tech to work at all.

  • Product design and development:  Once you have the technology, product or service to a point where it works (more or less), then you should focus on what you need to add to it to make it work for a customer.  Very few people eat a burger patty all by itself – it’s wrapped in a bun with condiments, cheese, and often a side of fries.  That’s the difference between a technology and a product.  What do you need to add to your technology, or how do you need to tweak it, to make it something customers want?

  • Market and customer development:  once you have a product (the Lean Startup methodology would say, a “minimum viable product” – the simplest version a customer could test to see what it’s like to use), then your focus needs to turn to developing the market and customers.  Often, initial sales are driven more by sales (1:1 conversations) than by marketing (1:many broadcasting).

  • Business development:  As you gain momentum in the market, and sales increase, you should turn your attention to building the business – adding processes, staff, equipment, admin, and other pieces that you need to operate the business.

 

Many small companies innovate without giving it much thought – it’s an intuitive process that comes naturally to them (often people choose small companies so they can be more creative).  However, many small companies do a poor job Innovation Management – having a disciplined approach to how innovation happens.  Having a poor Innovation Management process is fine…until it isn’t – perhaps there’s one Big Idea that keeps sucking investment with no end in sight, or the company is developing 5 ideas and they’re starting to distract from the core business.  That’s when the lack of Innovation Management becomes a problem.

 

Innovation Management has 3 major components

 

  • Opportunity management:  the process of describing and qualifying an opportunity to plan how much investment would be needed, what the likely return is, and whether an investment is a good idea

  • Portfolio management:  the process of defining the investment pool available for innovation ideas, and then balancing that limited pool across the various opportunities that the company is working on – and updating that thinking on a regular basis

  • Development process:  a disciplined “stage-gate” method for managing the uncertain and rocky development that’s needed for each innovation, so that the company has some sense of whether the innovation is on track or not, despite unclear signals.

 

WAYS TO MANAGE INNOVATION

  • Business cases:  your innovation should rely on a “business case” – a description of the opportunities, risks, investments, plan, and expected outcomes of the idea.  The thinking required for the plan will ensure there is some discipline around the rationale and development of the idea.  In addition, the document can be shared around the business to make sure everyone knows about the idea.

  • Annual planning/investment pool:  once a year, you should look at your cash-on-hand and expected profit and determine a “pool” of money and time that’s available for innovation.  Doing this during the annual planning process makes a lot of sense, so that you look at how your innovation fits into your goals and strategies.

  • Horizons:  The Alchemy of Growth describes 3 horizons that businesses should use to manage their innovation – in my work with clients, we supplement that with 2 other horizons that we have found useful to track.  Using a framework of different horizons enables you to assess where your innovation investments are going and helps ensure they align with your strategies.

  • Review cadence:  I have seen many examples of companies launching an innovation idea and then letting it run without checking on its progress in any kind of disciplined way – and wasting hundreds of thousands of dollars before belatedly realizing that the idea wasn’t going to work.  A regular and structured review process – in general, quarterly for companies above 25 employees, and semi-annually for companies smaller than 25 employees – is important to making sure your innovation portfolio gets pruned and stays healthy.

 

THE RISKS AND ROADBLOCKS OF INNOVATION

  • Not knowing when to cancel a project.  Most of the time, innovative ideas are not clear winners or losers – rather, they have a murky mix of potential and risk.  Navigating that is hard – it requires different perspectives, in thoughtful discussion, on a regular basis.  And an overriding focus on customer experience and managing risk.

  • Knowing it’s time to cancel a project – and not doing it.  Why would a team know that a project needs to be killed…but not?  Because of politics – because the leader of the initiative holds some kind of leverage that prevents the team from making the natural decision.  A disciplined process can help with this problem.

  • Competing initiatives without clear priorities.  Your business strategy should inform and direct your innovation efforts.  It’s OK to have a small part of your innovation portfolio not aligned with your strategy – take a flyer and see what happens! – but if your innovation isn’t connected to your strategy then you’re likely to have initiatives headed in too many different directions.  Even if they get to a point of having a product that works, the business may not be able to support the new idea if it’s out of sync with where the company is.

  • Not understanding how dynamic your investment pool is.  In an ideal world, companies would set an innovation budget at the start of the year, put that money in a bank account, and draw that down over the year.  But that rarely happens in small businesses (especially those in Second Stage).  Rather, the “budget” is funded through the year as money comes in and profits accumulate.  If you don’t manage the investment pool in a dynamic way, you’re likely to have people spend money before you really have it, or have plans get out of sync with available budget.

  • Trying to generate initial sales with marketing.  This opinion is somewhat controversial – if you talk to marketing people – but I stand by it.  Conventional wisdom is that you need to blast out a message about your new product to the market, to look far and wide for prospects.  That usually has a substantial marketing budget associated with it.  My experience has shown that that usually doesn’t work.  Instead, initial sales need to be handled by the sales team – it’s more of a 1:1 effort than the broad blast that marketing can do.  Why?  Because when you start selling your product, you don’t really know who buys, and why.  So it’s premature to develop a broad marketing message.

 

THE ROI OF INNOVATION

  • Innovation generates a return on investments – if properly managed – in several ways

  • Gross margin:  innovation has a direct impact on gross margin, because it creates differentiation.

  • Expansion with existing customers:  innovation gives you new things to talk about with your existing customers, and new paths to revenue

  • New markets and new customers:  innovation can put you into new markets and put you on the radar of new customers

  • Reduced costs:  innovation can increase productivity, streamline production, and reduce customer acquisition costs