What is real innovation?

In the book, The Game-Changer, Procter & Gamble chairman and CEO A G Lafley and business consultant Ram Charan explain why it is important to make innovation central to every driver of your business, and how it can help change the game, creating new markets and customers. An extract from the book.

To understand innovation, you first have to see the differences between an invention and an innovation. An invention is a new idea that is often turned into a tangible outcome, such as a product or a system. An innovation is the conversion of a new idea into revenues and profits. An idea that looks great in the lab and fails in the market is not an innovation; it is, at best, a curiosity. As Jeff Immelt once put it, “Innovation without a customer is nonsense; it’s not even innovation.”

Invention is needed for innovation to take place. But invention is not innovation. In many companies, inventions that result in patents are considered innovations. These companies are often touted as “innovative.” In fact there is no correlation between the number of corporate patents earned and financial success. Until people are willing to buy your product, pay for it, and then buy it again, there is no innovation. A gee-whiz product that does not deliver value to the customer and provide financial benefit to the company is not an innovation. Innovation is not complete until it shows up in the financial results.

Real innovation can change the context — the market space, the customer space, the competitive space, the societal space — in which a business operates. Changing the game, then, means not being hamstrung by the deep-rooted conventional wisdom of your business and industry, but rather seizing the initiative to imagine a new game or a new space and, thus, shaping and controlling your destiny. Game-changing leaders search for and execute ideas that put the company on a long-term path to prosperity.

For example, P&G created a new market space by introducing the disposable diaper; with the iPod, Apple likewise created an entirely new market space and changed the game for those who were not its usual competitors, such as music, media, and consumer electronics companies. Both P&G and Apple refused to be hemmed in by current conditions; instead, they redefined them. In the process, they forced the competition to play their game. It did not end there. The iPod, with its sleek design, built new capabilities within Apple and was a harbinger of the iPhone, which is changing the game for the cell phone companies.

There is an increasing advantage to being a game-changer — and higher risk for trying to survive on the defensive. Innovation enables you to be on the offensive. The speed of change is such that compared even to two decades ago, “innovate or die” is truly the name of the game. P&G’s core products are increasingly challenged by private labels and without continuous innovation would be threatened by commoditization. Commoditization drives down prices; the differentiation that comes from innovation carries an economic premium.

Moreover, the competition is tougher than ever — and only getting more so. Thanks to the Internet, there is more transparency than ever on prices, which reduces margins. A more-open trading system and more-efficient shipping have shrunk the economic globe; better communications and the Internet have tolled the death of distance. The development of venture capital and the rise of bold capitalists in places like China and Brazil have led to a host of new competitors. The only way to stay ahead is to keep innovating.

Why innovation matters
Innovation is the key idea that is shaping corporate life, helping leaders conceive previously unimagined strategic options. Take acquisitions, as an example. Most are justified on the basis of cost and capital reduction: for example, the merger of two pharmaceutical companies and the global rationalization of overhead and operations and the savings from combining two sales forces and R&D labs. You can, however, buy earnings through acquisitions for only so long; cost-control, however necessary, is a defensive strategy.

Innovation enables you to see potential acquisitions through a different lens, looking at them not just from a cost perspective, but also as a means of accelerating profitable top-line revenue growth and enhancing capabilities. For example, the innovation capabilities of P&G were enhanced by its acquisition of Gillette. Its market-leading brands (such as Gillette, Venus, Oral B, and Duracell) are platforms for future innovations; and core technologies in blades and razors, electronics, electromechanics, and power storage strengthen the technology portfolio from which P&G can innovate in the future.

Innovation also provides an edge in being able to enter new markets faster and deeper. In large part, it is P&G’s revived innovation capacity that is allowing it to make inroads into developing markets, where growth is double that in rich countries.

Innovation puts companies on the offensive. Consider how Colgate and P&G, effective serial innovators, have innovated Unilever out of the US oral-care market. The company that builds a culture of innovation is on the path to growth. The company that fails to innovate is on the road to obsolescence. The US domestic automakers and major companies such as Firestone, Sony, and Kodak all used to be industry leaders, even dominators. But they all fell behind as their challengers innovated them into second place (or worse).

Peter Drucker once said that the purpose of a business enterprise is “to create a customer.” Nokia became number one in India by using innovation to create 200 million customers. Through observing the unique needs of Indian customers, particularly in rural villages where most of the population resides, it segmented them in new ways and put new features on handsets relevant to their unique needs. In the process, it created an entirely new value chain at price points that give the company its desired gross margin.

Innovation, thus, creates customers by attracting new users and building stronger loyalty among current ones. That’s a lot in itself, but the value of innovation goes well beyond that. By putting innovation at the center of the business, from top to bottom, you can improve the numbers; at the same time, you will discover a much-better way of doing things — more productive, more responsive, more inclusive, even more fun. People want to be part of growth, not endless cost cutting.

A culture of innovation is fundamentally different from one that emphasizes mergers and acquisitions or cost cutting, both in theory and practice. For one thing, innovation leaders have an entirely different set of skills, temperament, and psychology. The M&A leader is a deal maker and transactionally oriented. Once one deal is done, he moves to the next. The innovation leader, while perhaps not a creative genius, is effective at evoking the skills of others needed to build an innovation culture. Collaboration is essential; failure is a regular visitor.

Innovation leaders are comfortable with uncertainty and have an open mind; they are receptive to ideas from very different disciplines. They have organized innovation into a disciplined process that is replicable. And, they have the tools and skills to pinpoint and manage the risks inherent in innovation. Not everyone has these attributes. But companies cannot build a culture of innovation without cultivating people who do.

Myths of innovation
The idea of innovation has become encrusted by myth. One myth is that it is all about new products. That is not necessarily so. New products are, of course, important but not the entire picture. When innovation is at the center of a company’s way of doing things, it finds ways to innovate not just in products, but also in functions, logistics, business models, and processes.

A process like Dell’s supply chain management, a tool like the monetization of eyeballs at Google, a method like Toyota’s Global Production System, a practice like Wal-Mart’s inventory management, the use of mathematics by Google to change the game of the media and communications industries, or even a concept like Starbucks’s reimagining of the coffee shop — these are all game-changing innovations. So was Alfred Sloan’s corporate structure that made GM the world’s leading car company for decades, as was P&G’s brand management model.

Another myth is that innovation is for geniuses like Chester Floyd Carlson (the inventor of photocopying) or Leonardo da Vinci: Throw some money at the oddballs in the R&D labs and hope something comes out. This is wrong. The notion that innovation occurs only when a lone genius or small team beaver away in the metaphorical (or actual) garage leads to a destructive sense of resignation; it is fatal to the creation of an innovative enterprise.

Of course, geniuses exist and, of course, they can contribute bottom-line-bending inventions. But companies that wait for “Eureka!” moments may well die waiting. And remember, while da Vinci designed a flying machine, it could not be built with the technology available at the time. True innovation matters for the present, not for centuries hence.

Another genius, Thomas Edison, had the right idea: “Anything that won’t sell, I don’t want to invent. Its sale is proof of utility and utility is success,” he told his associates in perhaps his most important invention — the commercial laboratory. “We can’t be like those German professors who spend their whole lives studying the fuzz on a bee,” he said. Generating ideas is important, but it’s pointless unless there is a repeatable process in place to turn inspiration into financial performance.

THE GAME-CHANGER: HOW EVERY LEADER CAN DRIVE EVERYDAY INNOVATION
Authors: A G Lafley and Ram Charan
Publisher: Penguin Portfolio
Price: Rs 399
ISBN: 9780143065173
Excerpted with permission