BrandLoop #3, May 1997

Strategic Innovation

One of the pillars of Through the Loop’s research and development programme is understanding how consumers, markets and brands are changing. It is against this background that we must view strategic innovation. Much of Through the Loop’s current research is geared towards understanding innovation, not just in the area of new product, service and brand development but across the whole business spectrum.

Firstly, it is important to understand that strategic innovation is more than simply developing exciting new products. The process must form part of the mindset of the company. Innovation does not exist for its own right but is part of the company’s overall strategy. From the consumer angle, innovation may be visible in new products and services. It can, however, be far more wide-ranging than this. Innovation can exist in logistics systems, organisational structure, recruitment policies, communications and distribution channels and other areas. What should be noted though is that the adoption of innovation within a company’s strategy can result in developing a significant competitive advantage, especially if it is difficult for a competitor to copy. Otherwise, innovation may frequently lead to imitation. In an environment of hypercompetition and fast-moving markets it is no longer sufficient to follow the pack. In short, innovation is becoming increasingly important.

The Importance of "Unlearning"

One aspect of innovation is that it should define new category rules or sets standards. Too often development is viewed in terms of existing structures and this can only restrict innovation. For example, when Microsoft released its first version of Encarta, a CD-ROM encyclopædia, it broke many of the category rules. However, while its price significantly undercut that of existing print encyclopædia, the price was still benchmarked against these. For the second version of Encarta, the company realised that it was able to define the price point for this sector and it was set at around ¼ of the previous level. This move was one of the key events that has made Encarta the rule maker in the CD-ROM encyclopædia market.

The other side of this is that innovation requires more than conventional new product development. It requires a vision to look beyond this to where opportunities lie in the future. The current scenario should be clearly understood but, possibly, it should not act as a starting point for the innovation process. Through the Loop’s own approach is to match the evolving forces of change against possible consumer opportunities.

Needs Vs Opportunities

There is a clear difference between consumer needs and consumer opportunities. Consumers may not need a certain product or service. This does not mean that there is not a good marketing opportunity. Snapple was an innovative product that defined a whole new category of soft drinks. Clearly it filled a consumer opportunity but it can be argued that consumer did not actually need it. Similarly, consumers were not demanding air-filled running shoes although lightness with strength had a high potential for acceptance. Often consumers are not able to articulate opportunities and will benchmark perceived needs against what is already in the marketplace. An innovative company must look beyond today’s consumers in the development of products or services. It is less a question of what consumers need but more of where the opportunities will lie in the future. This illustrates the importance of understanding the Forces of Change impacting on the market whether they be from a consumer, market environment or a company’s own branded perspective.

One of Through the Loop’s own approaches is to look on the fringes of the market. This makes the assumption that innovation cannot take place by focusing purely on the current situation. The future of consumer needs is best identified by analysing the wider edges of the market, evaluating their relevance, coherence and likelihood of consumer take-up. The importance of the evaluation stage should be noted as this data tends to be more diverse and less "certain" than the core market data. An example of how this may work in practice is that companies which have focused on product development have discovered that future opportunities may lie in the service sector or in different product sectors to those that were being developed.

Innovation has to recognise or hasten a shift. This shift can manifest itself through a change in consumer behaviour or a change in market direction. One of the guiding principles behind strategic innovation is the importance of recognising the potential shift and developing the ability to exploit it. Shifts can result from a number of forces of change, such as:

• Technology.

• Regulation/deregulation.

• Consumer value changes.

• Cross-category brand transfer.

• Niche market recognition.

• Development of new channels of distribution or communication.

The analysis of the fringes is often the best way to identify these potential catalysts for shifts. However, recognition of the shift alone is not sufficient to create innovation. An innovation will only be successful if the market is right for it, i.e. there is a consumer opportunity. In short, shifts must have the potential to change the category rules or the business design and fulfil consumer opportunities. An example here is that many home shopping experiments have not been very successful in the past. However, Through the Loop’s new channels research has shown that the convergence of a number of Forces of Change is now able to meet a consumer opportunity at the right time. Consequently, the home shopping market is now forecast to grow. Those companies who chose to help to initiate the shift or exploit it first are the most likely to profit from this behavioural change.

Barriers to Innovation

There are a number of issues that are likely to prevent or hinder the adoption of an innovative approach. The first of these is the attractiveness of the market. If an opportunity exists to develop within a new category, conventional wisdom will match the potential of this category against the company’s current market. If the current market is strong, this may often override considerations about the future. The opportunity should not be analysed using this approach. Fresh thinking based around an analysis of long-term developments will show how likely changes in consumer or market Forces of Change will impact on the market opportunity. A company must decide how it allocates resources between existing and future businesses.

This leads to the second barrier to innovation. A company may have deeply-held assumptions about the market. Again, the adoption of a new way of thinking may help to challenge these assumptions which may, or may not, be correct. In order to be innovative, it is important to challenge all existing beliefs and either justify them or remove them. Often market conditions have changed radically since they were made.

The development of an innovative approach may require new competencies. Here companies are faced with the decision of focusing on what they do best or developing new skills, possibly through acquisition. Often a joint venture provides the necessary skills from an outside party. The leading supermarket chains in the UK have entered the financial services sector in partnership with existing banks rather than attempting to develop a full banking service in-house.

One of the biggest barriers to growth is the existing business design either for a company or for the industry. Companies are used to operating within rigid structures, with established distribution systems and within known product or service categories. It is clearly conceivable that an opportunity is available that requires this business design to be overturned. It is here that companies must "unlearn" what they know.

Innovation as Culture

A company’s culture is an essential part of the innovation process. The culture has to allow and encourage a level of innovation. Ideas can be generated at any point of the company. A new idea may come from a sales force lead, from a technical development, from a customer or through a long-term scenario planning process. This idea then has to be nurtured and developed within a wide framework. The innovative company culture should be geared to encouraging this process.

The era of downsizing and delayering has discouraged innovation to a major degree. One pre-requisite for innovation is space. Too often companies are engaged in fire fighting and do not have the capacity for wider thought. Innovation requires redundant resources and the space to operate outside the existing constraints. This may or may not be achieved through the establishment of a separate research and development facility but this is a separate culture in itself. Innovation can occur at any point and, however it is achieved, the culture should be geared to recognising and harnessing the innovation.

"It takes all the running you can do to stay in the same place. If you want to get somewhere else, you must run at least twice as fast as that."

The Red Queen To Alice, Alice in Wonderland

Innovation can also occur within a culture that is not seen to be innovative. Here it is important to take a different approach. Snapple is again a good example. It was developed by a small company that took an innovative approach towards marketing and distributing the beverage. Its success attracted Quaker Oats which acquired the brand for $1.7 billion to sell alongside its existing Gatorade business. However, merging the Snapple operation into Quaker removed it from the innovative culture. In March 1997, Quaker Oats sold the brand for $300 million. The culture of Quaker Oats stifled the innovation of Snapple.

A similar approach but with a different result was taken by Midland Bank in the UK when it launched First Direct, a 24-hour telephone banking operation. At the heart of the innovation was a technology shift (call-centres) that allowed consumer opportunities to be fulfilled. Consumers were known to be unhappy with the level of service offered by traditional banks. However, the commodity nature of the service ensured that there was little to be gained by switching accounts. Midland Bank established a dedicated division for First Direct, which was then able to develop its own culture. The consumer recognised this as offering something different to the existing banking environment and success followed. First Direct now has a separate culture and image to the main banking operation. The different culture will help the innovation to continue and so it is vital that the division remains separate to the main Midland Bank operation.

Summary

Innovation is a continuous process. It should not stop with a product launch or a restructuring of the organisation. An innovation must continue to be innovative. Brands must be updated or upgraded at regular intervals to keep them contemporary. The forces of change that shaped the innovation will continue to change. Development must exist within this framework.

However, innovation extends beyond new product and service development to cover all areas of a company’s operation. In order to achieve an innovative approach, the company’s culture must be receptive to it and encourage it. While the right culture cannot be imposed on a company, it can be permitted to develop. To this end, innovation may have to be treated as a separate company or division, allowed to develop and harness its own culture. Innovation within a non-innovative culture may be suffocated.

During the innovation process there are numerous questions that must be addressed. For example, will the innovation leverage existing competencies or will it require the development or acquisition of new ones? Will it cannibalise existing products or will it create new markets? If it merely takes share from the company’s existing products it is probably not innovative.

Successful innovation changes the category rules. First Direct offered a new type of banking, Direct Line offered insurance over the telephone and lowered prices. Encarta changed the nature of the encyclopædia market. Amazon.com and CDNow offer new ways of shopping with a different experience. Sustainable innovation becomes a key company strategy for the future.