Viewpoint -- Innovation -- It Matters More Than Ever

Dec. 21, 2004
Small and midsize businesses, too, need to focus on the new.

Over the past few years, innovation has taken a back seat to cost reduction, expense control and keeping one's financial head above water for many small and midsize businesses. Given the economy, this was appropriate. Controlling expenses, re-engineering processes to reduce costs, and keeping an eye on the short-term financial ball were all necessary to survival in a challenging economy. But now the economy appears to be improving, and with that improvement customers are beginning to look at things differently. Customers are asking different questions than in the past. They often want to know "What's new?" Having a good answer matters for many reasons. Without one, you may miss a sales opportunity. More strategically, the innovation in your products and services matters now more than ever because:

  • It is much easier for competitors to develop alternatives to new products. Improved engineering capabilities coupled with new modeling technologies allow for easier reverse engineering. In the mid-1980s, the product life cycle in the personal computer industry was about a year from introduction to significant competition. Now that life cycle has declined to about three months. Having something new that customers want is critical to staying in the game.
  • Customers are looking for solutions and answers, but the answer is not always the cheapest product. Even in seemingly commodity products, customers are looking for new ideas. Consider Carolina Pad and Paper (now CPP International) a Charlotte, N.C.-based producer of notebooks and art supplies. It had long provided commodity notebooks to the mass merchant retail trade. As the pricing for these products became ever more competitive, making money became increasingly difficult. The management team decided to find a better way. The company initiated research and identified a potentially attractive market opportunity. This spurred the development of a new line of notebooks for pre-teens and teens that have quickly become industry leaders. The company has built on this success by introducing related products.
  • Innovation is critical to profitability and ultimately a company's value. Without innovation, the most important point that sales people discuss with customers is price, which ultimately affects margin and profitability. CPP is a good example. By most any valuation measure, the company is worth far more now than it was four years ago. Innovation really matters to the long-term value of a business.
How does your organization become innovative now? Too often, small business owners avoid innovation because they associate it with big investments in technology, plant and equipment. Yes, investment is part of many new ventures. At some point, significant resources of time and money must be devoted to them. Yet some of the most profitable innovations are smaller. One of my clients in the printing ink business had a problem serving smaller customers. It was too costly. Then managers realized that by simplifying some of the mixing technology, they could provide materials and let clients mix their own inks. This was a small innovation that created a win for both company and customers. How do you create an environment that's conducive to big and small innovations alike? A few suggestions:
  • Live innovation! Make it part of the culture (and perhaps your mission statement). Include measurable innovation goals for each key manager -- not just the technical development person. When people see they are going to be rewarded for being innovative, often they will become more innovative. In the innovation game, you are playing the percentages. Not all efforts will be successful. Some will be outright failures. Be prepared to learn from both successes and failure. Babe Ruth was, for a time, the home run leader in professional baseball. He also led the league for a number of years in strikeouts! He did not let failure get in his way. Making it part of the culture also means all managers understand the company's innovation objectives and desired outcomes. To ensure buy-in, keep everyone up-to-date regarding the results of innovation efforts. Be honest about successes and failures. If a project is not working and the prospects are not good, stop.
  • Create a process for innovation. Recent research from Bain & Co. shows that companies which were most successful at innovating and building new growth opportunities had one or two clearly defined internal processes that were followed when pursuing new innovations. One chemical process manufacturing company I know has such a clearly defined process. If it is a new but adjacent market (they are reluctant to pursue very new markets), they do extensive research and learn about competitors and key customers. If they are going to move forward, before any work is done in the lab, the marketing and sales organization must develop a value proposition and a plan for market entry. Once this is presented and accepted, then more extensive investment is made. This slow-but-steady process has worked quite well for this company over the years.
  • Establish milestones for the innovation project. Be able to measure forward progress. Piloting a plane over a dark ocean without any milestones makes it difficult to know if you are going in the right direction. This is true for innovation as well. If milestones are not being achieved, know when to cut your losses and be willing to do so.
  • Pay attention to service innovation. Many companies offer me-too products but offer service that is simply outstanding. Dell computers are quite similar to other computers that are available. Yet, this company has been a consistent winner because it has made it very easy to purchase. Amazon is a company selling me-too products if there ever was one. It wins by offering superior service so that customers keep coming back. Hendrick Automotive, a privately owned company, is another example. Perhaps best known for sponsoring Jeff Gordon's NASCAR racecar, this company is also a large dealer for several car lines. It recognized early on that the key to success was providing outstanding service coupled with reputable automotive lines. This company continues to win recognition, to grow, and to create a legion of satisfied car owners. Sometimes, innovation in service may mean doing what customers expect in the first place. We recently completed a research project with a family-owned industrial distributor, looking for ways to improve parts and service sales. The results illustrated the importance of building trust. As consumers trusted our client more, the client's share of repair-and-service business climbed. The more customers trust you, the more money you will make!
Why does innovation matter? With the changing economic environment, what matters to customers is changing. A narrow focus only on improving efficiency and reducing costs won't create a strategically strong and financially viable company for the long term. Growing organically must be on the strategic agenda for most businesses today. One critical way to do this is through innovation. In our competitive global economy, only those companies whose leaders are innovative will survive and prosper. The opportunity is there for small and midsize businesses -- just start looking. Make certain you can give a positive answer to your customers when they ask, "What's new?" Lynn Daniel is founder of The Daniel Group in Charlotte, N.C., which provides strategic planning, research, and sales training to middle market companies. His e-mail address is [email protected].

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