Innovation Trumps Cost Cutting

Innovation Trumps Cost Cutting

During the last three decades Chinese, Indian, and Korean manufacturers became major providers of low-cost and low priced goods, and rivals to North American manufacturers. Their competitive advantage was derived from low cost labour. In response, North American organizations focused on cost management and process excellence. Management's 90's religion was Six Sigma, process improvement, right sizing, outsourcing, and cost cutting. This did not create a sustainable cost advantage. By 2005 it became obvious that survival as a low-cost low-priced rival to Asian manufacturers was not sustainable. Then, in 2008 companies were pushed by the violent transformational recession into rethinking how they could create sustainable competitive advantage.

What Underlies Innovation

The option to being a low-cost low-price provider is product/service differentiation. Underlying it is innovation. Innovation consists of:

  • improving and developing services that customers value
  • refining internal processes that impact the customer, and
  • causing rivals to respond to new service or an incremental improvement rather than to a price reduction

How to Develop Innovative Services/Goods

Organizations do not lack innovative ideas. They simply are not harnessed. To develop innovative services an organization needs a process which:

  • provides a better understanding of customer needs
  • generates new services
  • incrementally improves existing services
  • identifies process improvement that impact on the customer, and
  • captures, develops, rewards, and brings to market the best ideas

Becoming an Innovative Organization

In a global market, to remain competitive Canadian business needs to innovate more than it has in the past. To achieve this goal business must:

  • install repeatable and sustainable innovation processes
  • remove the barriers to innovation
  • install a corporate culture which supports innovation, and
  • promote values which support entrepreneurial risk taking behaviour

Firms must adopt a compensation structure which promotes and rewards innovation. The innovation process must not be episodic, a "bolt-on" grafted to the organization. Leaders also need to align corporate strategy and innovation.

Reasons for Failure

Typically, innovative programs fail because:

  • it lacks corporate sponsorship
  • the leadership is not engaged
  • leaders do not communicate the importance of innovation
  • the process by which individuals submit ideas is arduous
  • the process does not encourage participation
  • the culture of the organization resists innovation
  • the company has little tolerance for uncertainty and risk
  • the firm does not foster entrepreneurship, the engine of innovation, and
  • leaders have a poor understanding of what is needed to support sustainable innovation

Elements of Innovation

In the accompanying side bar are the elements required to achieve repeatable, sustainable innovation capabilities. Elements 1 to 5 focus on building a platform for innovation. The next four elements seek to institutionalize the innovation process while the last three are growth goals that an organization would put in place once the innovation initiative is sustainable.

Innovation Elements

Build a Platform

1.    Align innovation to corporate goals
2.    Bring the leadership team on board
3.    Create an idea management process
4.    Define the funding and approval process
5.    Define the roles and allocate people

Institutionalize Innovation

6.    Define and build an innovation oriented culture
7.    Adapt the organization chart
8.    Establish innovation metrics – process and outcomes
9.    Create and use systems and databases

Maturity and Growth

10.     Provide opportunities to gather ideas from  other sources
11.    Create an innovation portfolio
12.    Innovation is expected - it is a way of life

Source: Adapted from Phillips, J. Make Us More Innovative, p. 6

The Choice

The choice is between seeking constant opportunities to cut cost versus becoming an innovative organization that forces rivals to follow your lead and play according to your rules. Choosing the path of innovation is what successful firms such as Intel, Apple, Progressive Insurance, TD, Caterpillar, and countless other innovative companies have done. The choice is between long term sustainability and a slow decline into obscurity and failure.

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