Part 2: “Innovation is the conversion of knowledge and ideas into new or improved products, processes, or services to gain a competitive advantage.”

By breaking up the above definition of Innovation, in a series of Question and Analysis, I shall analyze the true meaning of Innovation.

Question: “Innovation is the conversion of knowledge and ideas…” What does this mean?

Analysis: Knowledge and ideas often stay within the individual unless it is shared. Ideas may emerge from anyone at anytime.

Often your main source of ideas come from your frontline employees and even from your existing customers in the form of complaints or survey feedbacks. The question is “What is being done to capture these knowledge, ideas or complaints?” Many organizations focus more on business generation and development: go get more customers. But there is a lack of attention to the point of neglect in area of idea management. Failure to manage this often means loss of knowledge and ideas which could have lead to the golden opportunity to innovate.

Large global organizations have begun to take notice and try to compete to retain existing customers. It is often stated, that repeat business from existing clients is more profitable and also cost effective, they say 80% of your sales come from 20% of your customers. But there is another truth. Does 80% of your profit also come from 20% of your customers? I doubt that it is so. Often the bigger the customer the smaller the profit margin, which means these customers are keeping your operations busy. So how do you turn this high turnover of customers to churn higher proportion of profits? The answer is to innovate with these customers. After all, it is cheaper and less time consuming to sell a product or service to a repeat customer than to find a new customer and make a sale. Customer retention is a strategy that is a necessity to implement in order to compete in today’s business world. Customer loyalty is beginning to sound like a cliché when organization talks about organic growth. Now it’s time to bring customer retention to the next level by maximizing profitability through innovation.

Question: “…conversion ….into new or improved products, processes, or services” What does this mean?

—Analysis: If your organization has not yet implemented any idea management, it may be a blessing as it would be easier to start it right than to correct a wrong implementation. Even if your organization does have idea management in place or act on customer complaints through the customer care system, how many of these ideas or complaints really made it through to reality? Big or small ideas are encouraged and may get deposited by employees in large quantities. But the truth is, one by one of these ideas get killed in the elimination funnel before it can be innovated and turned into cash. Before long, employees would feel discouraged to submit their ideas again since their ideas may not even see the light of day.

A very important avenue to consider is the opportunity to form partnership with existing customers based on their complaints or feedbacks. These are valuable pathways to innovate the products and services that they are buying. Since long term relationship with the customers has been formed, it will increase the ‘stickiness factor’[1] through forging alliances with these customers.

Also, the lack of strategic direction and weak execution within the organization to follow through to deliver great innovative ideas can become a barrier. Companies that have deployed process improvement methodology such as Six Sigma, Lean or PDCA a structured methodology may have better chance to improve the efficiency and effectiveness of the organization’s products, services or processes. In short, opportunities to develop innovation will become more apparent.

Question: “… to gain a competitive advantage.” What does this mean?

—Analysis: Firstly, we need to understand what the definition of “competitive advantage” is.  The textbook definition states that “competitive advantage comes from formulation and execution of strategies that are different from, and create more value than the strategies of competitors”[2]

Therefore, the keyword here is “formulation and execution” which means to innovate so that the product, services or processes can create more value above that of the competitors.

Therefore, innovation is a business process that can help transform creativity, knowledge, and ideas into value and gain competitive advantage.

[2] Robert E. Hoskisson, Michael A. Hitt, R. Duane Ireland, Jeffrey S. Harrison, “Competing for Advantage” (2^nd edition, Thomson), at Chapter 1: Introduction to Strategic Management, pg 2