Innovation is for everyone – society, government, companies and the individual. It is a new idea that builds a new revenue stream. Innovation helps differentiate as against commoditisation and also helps fight price warriors. Yesterday’s thinking cannot solve today’s challenges.
One, innovation is traditionally seen as a product/service game. It has moved to process in the last few years. Business model innovation is going to bloom with the advent of digital technology. Any industry where the trade margin is more than 20 per cent will be ripe for digital destruction. It has happened in books, movies, and the airline industry. The lesson for middlemen is to provide value to justify the margin.
Three, innovation happens when people think ‘possibilities’. This is where organisations are at the crossroads. Every company has a secret recipe and the stock market expects them to repeat that secret recipe and rewards them for it.
It is difficult for successful firms to keep their current recipe on one side and cook a new recipe. Possibility thinking is about ‘what can happen if… we did it and didn’t do it.’ This is not wishful thinking but a reality based on an assessment of what’s changing with consumers and technology.
Cultural enablers
Fourth are cultural enablers to innovation – they tend to be diversity of workforce, inclusiveness, humility and patience. Diversity is more than the ratio of men to women in an organisation.
Humility is the ability to learn from mistakes and still try the next innovation. Patience is the ability to tweak the innovation and give it wings to fly since no innovation flies with the first prototype.
Fifth are cultural killers of innovation – hierarchy, size, rules, and punishment. Big never beats small, it is the fast that beat the slow. Hierarchies slow organisations. A hierarchy where everyone wants to hear what the boss thinks is the surest way to kill innovation. Innovation doesn’t happen because the boss thinks it is a good idea, it happens because the consumer thinks it is a great idea. Promoting failed experiments is good for future success and creates a safety net for experimentation.
Sixth, it is easy to start innovation, very difficult and emotional to kill innovations that are not doing well. Leaders need courage to stay on the innovation course and ramping it up needs leadership judgment. The start-stop-ramp up cycle is something leaders need to get good at.
Incremental revenue
Seventh is the metrics for innovation. A good innovation must deliver at least 10 per cent incremental revenue. If this hurdle rate is not applied, a company will get many small innovations and that will suck up precious common resources.
The chicken’s neck in an innovation process is common resource like market research or insights, packaging, distributor cash, development resources. Setting up the 10 per cent hurdle rate will force teams to think big ideas.
Eighth are the financial time lines. If the innovation is in a new category, then it must break even in 3 to 5 years. If it is a variant of an existing product line, then it must turn positive in year 1, else revisit the assumptions. Wall Street or Dalal Street do not have patience beyond these time horizons.
Leadership
Ninth is leadership. It is the glue that will hold the innovation process together from clarity on strategy to allocation of resources to reviewing execution. The leader must lead the way in the learning and unlearning process. He must also be the face to the external ecosystem and help in building partnerships with educational institutions, the scientific community, industry bodies and the technical institutes. In innovation discussions, the leader must ask the tough clarifying questions.
Tenth is the brand. The first realisation is that all brands cannot pull off innovation. You need to be clear where to house an innovation. Brands win trust by being consistent. Innovation provides excitement and interest to consumers to try or repeat a brand.
A common mistake companies do is to run an innovation across all brands in their portfolio. This leads to quick commoditisation of the innovation itself. Pick the right brands for innovation. Price led or value brands can rarely move up the value chain and become premium offerings, the reverse is, however, possible where premium offerings become consumer accessible.
Innovation is a must-win activity for a company if it doesn’t want to die.
D. Shivakumar is Managing Director, PepsiCo India