Lesson 3 UNDERSTANDING INNOVATION

“Innovation is the creation, development and implementation of a new product, process or service, with
the aim of improving efficiency, effectiveness or competitive advantage.”

Different meanings of innovation

“Innovation is the creation of something that improves the way we live our lives”
Barack Obama.

Innovation is something fresh (new, original, or improved) that creates value.

Jeff Dance.

“Innovation is any idea that adds value.”

Baxter Healthcare – Australia

“Innovation is significant positive change”.

Scott Berkun

“Innovation is change that creates a new dimension of performance.”

Peter Drucker.

“Innovation as executing new ideas to create value.”

Tim Kastelle

“Innovation is the commercialization of creativity.”

Anonymous

“Innovation is the creation, development and implementation of a new product, process or service, with
the aim of improving efficiency, effectiveness or competitive advantage.”
Government of New Zealand

“Innovation is the successful exploitation of new ideas.”

UK Department of Innovation and Skills

“Innovation is the successful implementation of creative ideas within an organization.”

Professor Teresa Amabile

Definitions of business creativity & innovation (as having a yin and yang quality):
Creativity is the ability to create new and potentially valuable ideas in any activity.

Innovation is the process of transforming these ideas into a commercial reality (i.e. testing, measuring,
learning & sharing).

Examples of product innovations:

Lego has been changing the materials of its famous bricks to biodegradable oil-based plastics. The first
electric vehicles introduced in the car's market were also an innovation, and new batteries with longer
ranges that keep coming out are also an example of innovation.
ROLE OF INNOVATION

What is the role of innovation in business?

Innovation Helps Companies Grow by rethinking your product or business model—or both. It is a
process that can lead to rapid expansion and allow your business to scale very quickly.

What is the role of innovation in the development?

One of the major benefits of innovation is its contribution to economic growth. Simply put, innovation
can lead to higher productivity, meaning that the same input generates a greater output. As productivity
rises, more goods and services are produced – in other words, the economy grows

EXPECTATIONS IN INNOVATION

Consumers expect innovation. As a result, stagnant brands lose consumer interest when they don’t
measure up to the demands of customer expectations. Today’s consumers expect brands to conform to
their preferences and deliver frictionless experiences. Innovation helps companies drive efficiency gains
and present new solutions to customers, while enhancing brand equity. When new experiments don’t
succeed, I’ve seen companies tempted to question consumers’ true appetite for innovation. But my
customer satisfaction research shows this diagnosis is misguided.

By Michael Fisher, Ed.D.

Innovation often delivers higher satisfaction rates among customers, who have more valuable
experiences. But it’s not all positive potential. Falling short of customers’ expectations for innovation —
or inadequate education on new products or features — can damage satisfaction and erode trust. For
instance, I used to prefer Starbucks coffee. But difficulties ordering through their app pushed me away.
Dunkin’s simple, customer-centric ordering experience pulled me in, earning my loyalty and,
consequently, my coffee preference.

With high risks and higher rewards, successful innovation requires that brands not only push processes
and technology forward, but also effectively communicate features to customers. Brands must be
proactive and place customers first if they want to fully harness innovation’s power. If consumers aren’t
aware of product developments, companies’ returns on investments risk falling short of expectations.

With high risks and higher rewards, successful innovation requires that brands not only push processes
and technology forward, but also effectively communicate features to customers.

In my experience, many companies lose their way when looking to enhance their brands through
innovation. But hope isn’t lost. I’ve pulled out four ideas from my research that can help polish your
image and keep innovation efforts on track.

1. Innovation Should be Customer-Centric

Consumers migrate to brands with reputations for pushing forward. But simply adding new technology
doesn’t earn an “innovative brand” badge. Innovations must revolve around customer expectations
while delivering experiences and features that address their needs.
Ultimately, cultivating a forward-thinking brand identity comes down to recognizing customer behavior
and responding to those trends. Consistently matching product development with customer preferences
builds up an advanced, customer-first brand image.

2. Sales Aren’t Always the Answer

Over-promotion bogs down brands across industries. From 10% discounts to free shipping, offers flood
my inbox daily. But these deals quickly become white noise, compromising companies’ ascension to
innovator status. How can you align with customer expectations when the expectation isn’t deals and
low prices?
Money savings may not be the most important factor for every audience. Companies that deploy one-
size-fits-all strategies neglect considerations like time or family events, missing out on the chance to
deliver value beyond day-to-day engagement. Marketing innovation requires new techniques, not
defaulting to discounts every month. Von Maur is one retail chain I see that understands this concept,
providing a unique service to customers through interest-free charge cards. This type of program turns
heads and separates the innovators from brands lingering in the past.

3. Great Experiences Win the Day

While traditional marketing tactics like case studies may seem like an ideal way to assert innovation,
these techniques can turn off customers. Consumers respond better to meaningful stories and
experiences that supplement innovative offerings. This is why digitally native brands like Warby Parker
are opening physical locations. In-person experiences differentiate their brand, creating a distinct value
proposition that isn’t possible when department stores lump together all eyeglasses brands. Consumers
want environments aligned with them, not a merchandise mix meant for the masses.
Through seasonal events and anniversary sales, retailers like Nordstrom and Dillard’s excel at creating
experiences that customers expect and even anticipate. These strategically deployed events show the
power of consumer-driven innovation. When retailers build experiences around customers’ wants, they
don’t need to beat their chests as “innovative brands” — shoppers naturally see them as such.

4. Education Will Save You

Even the greatest new feature is neutralized if customers don’t know how to use it. To truly establish
themselves as innovators and industry leaders, brands can’t take customer adoption for granted.
Companies must make it clear that developments are crafted with customers in mind and designed to
solve their specific problems. Consumers should be able to easily discover how to extract value at a pace
that’s comfortable for them.

In my view, Acura has accomplished this in the realm of autonomous driving. Rather than overhauling
cars with technology that customers aren’t ready for, they’ve slowly introduced autonomous features.
This incremental strategy solves real problems without overwhelming customers, who gradually learn
how advanced driver-assistance systems (ADAS) improve their driving experience. My research validates
the importance of education, showing that innovation delivered to user communities that don’t know
how to extract value is dead on arrival.

To benefit from premier brand status, companies must innovate with customer expectations in mind.
Running full-steam ahead into futuristic technology without gauging customer desires can quickly derail
your strategy, because innovation for innovation’s sake is worthless. When customers understand that
companies made decisions to improve their experience, it increases consumer satisfaction and cements
the company’s reputation as an innovative brand.
ROLE OF INNOVATION IN TOURISM

innovations related to the tourism product depend on two main elements; (A) providing completely
new tourism products and services: when operators of a destination realize that over time new products
or services should be offered to tourists because the competitiveness of the destination as a whole as
well as o f the individual tourist institutions depend on the ability to stimulate the tourist experience by
offering something distinctive, and naturally this will keep visitors as long as possible; (B) boosting key
tourism products: by developing the original products in a balanced manner to maintain the authenticity
of the tourist product or attraction and enhance its value on the one hand, and improve the tourist
experiences on the other

TYPES OF INNOVATION
10 types of innovation:

# Innovation Type Description

1. Profit Model How you make money

2. Network Connections with others to create value

3. Structure Alignment of your talent and assets

4. Process Signature of superior methods for doing your work

5. Product Performance Distinguishing features and functionality

6. Product System Complementary products and services

7. Service Support and enhancements that surround your offerings

8. Channel How your offerings are delivered to customers and users

9. Brand Representation of your offerings and business

10.Customer EngagementDistinctive interactions you foster

From Theory to Practice

What does innovation look like in practice?

Let’s see how well-known businesses have leveraged each of these 10 types of innovation in the past,
while also diving into the tactics that modern businesses can use to consistently make new product
breakthroughs:.

Innovation Types #1-4: “Configuration”

According to Doblin, the first four types of innovation center around the configuration of the company,
and all the work that happens “behind the scenes”.

Although innovation types in this category are not directly customer-facing, as you can see in the
examples below, they can still have an important impact on the customer experience. How your
company and products are organized can have a crucial downstream effect, even enabling innovations in
other categories.
Two of the most interesting examples here are Google and McDonald’s. Both companies made internal
innovations that empowered their people to make important advancements further on downstream.

In the case of McDonald’s, the franchisee insight that led to the introduction of the Egg McMuffin
spearheaded the company’s entire breakfast offering, which now accounts for 25% of revenues.
Breakfast is also now the company’s most profitable segment.

Innovation Types #5-6: “Offering”

When most people think of innovation, it’s likely the offering category that comes to mind.

Making improvements to product performance is an obvious but difficult type of innovation, and unless
it’s accompanied by a deeply ingrained company culture towards technical innovation, such
advancements may only create a temporary advantage against the competition.

This is the part of the reason that Doblin recommends that companies focus on combining multiple
areas of innovation together—it creates a much more stable economic moat.

Apple has a reputation for innovation, but the product ecosystem highlighted above is an
underappreciated piece of the company’s strategy. By putting thought into the ecosystem of products—
and ensuring they work together flawlessly—additional utility is created, while also making it harder for
customers to switch away from Apple products.

Innovation Types #7-10: “Experience”

These types of innovation are the most customer-facing, but this also makes them the most subject to
interpretation.

While other innovations tend to occur upstream, innovations in experience all get trialed in the hands of
customers. For this reason, intense care is needed in rolling out these ideas.

In the early days of the internet, online shipping was precarious at best—but Amazon’s introduction of
Amazon Prime and free expedited shipping for all members has been a game-changer for e-commerce.

Executing on such a promise was no small task, but today there are 150 million users of Prime
worldwide, including some in metro areas who can get items in as little as two hours.

Four Types of Innovation

Innovation Type 1: Sustaining Innovations – Keep The Lights On By Keeping Existing Customers Happy

Sustaining innovation is arguably the most common type of innovation in capitalist, market economies.
A sustaining innovation is defined as an incremental improvement to an existing solution that further
satisfies existing customers.

The images below illustrate the path of a sustaining innovation relative to the distribution of needs in a
market. Clayton Christensen developed this model and explained it very well. In general, people with a
need for a job to be done form a market. Among those people in a market are segments of users with
needs ranging from sophisticated to basic. The people with sophisticated needs for that job to be done
are willing to pay a higher price for a high performance solution.

For example, there is a global market for smartphones. While smartphones do many jobs well, the
primary job to be done could be described as “Communicate with others and help me speed up daily
tasks while on the go.” For some users, doing this job well means just having the ability to run a limited
set of functions such as phone calls, text messages, email, music and web browsing. These are basic
needs that would satisfy the lower-end segment needs. For other users, doing this job well means
having a gorgeous screen to look at, powerful speakers to play music out loud with and advanced
security features to make it easy and convenient to authenticate you as the rightful user. These are
sophisticated needs that satisfy the high end of the market.

Over time, the needs of people in a market will inflate gradually and what people used to think was
novel and unique will eventually become expected across the board. With smartphones, this has
happened already with screen size. In 2007, when Apple launched the iPhone (arguably the world’s first
true smartphone), the screen was 3.5″. Other smartphones that came out were around that size as well.
Several years later Samsung introduced the Galaxy Note with a 5.3″ screen size. Over time the entire
market began to prefer screen sizes of at least 4.5″-5″ or larger.

To keep pace with these most demanding customers, companies create sustaining innovations to meet
their needs. The goal of an existing provider in a market is to sustain their current business model and
meet the needs of the most demanding customers who are willing to pay a premium for the added
performance.

In the iPhone’s case, lately Apple has been very aggressive about pushing the market into higher and
higher performance (and prices). The risk they run is in alienating the average or low-end user base with
products that are overkill and too expensive for their desires.

Innovation Type 2: Disruptive Innovations – A Low Cost Alternative Enabled By New Technology

During the 1980’s and 1990’s, large corporations that failed because someone else out-innovated them
were usually blamed as having incompetent managers. In his seminal work, The Innovator’s Dilemma,
Clayton Christensen defied that common storyline by positing that these big company managers were
making very rational and shrewd decisions (such as investments in sustaining innovation) given their
market position and the requests of customers.
That said, the risk they run is in going too premium, too fast and thus creating an opportunity in the
market for someone else to provide a more focused, lower cost solution that appeals to the basic need
segments in the market.

Innovation Type 3: New Market Innovations – Modifying Existing Solutions For New Markets

Another important type of innovation that companies have deployed is one in which they take an
existing solution and modify and sell it for use in a different market. The goal of a new market
innovation is to target non consumers and expand their existing market.

Innovation Type 4: Integrative Innovation – Multiple Jobs to Be Done In One Elegant Solution

The main thesis of “Integrative Innovation” is the idea that a market’s ability to adopt more
performance and absorb higher prices will increase according to the number and value of jobs to be
done that have been integrated into one device in a way that is simple and easy to use. Christensen’s
theory of disruptive innovation assumes that in order to be disruptive, products must focus on one job
to be done, start at the low-end, improve performance over time and eventually become good enough
to capture a large portion of the market. Integrative innovation is the opposite of that. Instead of
starting out as not good enough and moving up in performance and cost, Integrative Innovation is about
combining multiple jobs into one and creating a very high-performance/high-cost solution to begin with
and quickly moving down in cost to capture large portions of the market.

KEY SUCCESS FACTORS IN INNOVATION

Key Success Factors for Innovation Management

1. Constant improvement

Have you ever mastered a skill without a systematic plan and hours of practice?

Succeeding in innovation management is all about continuous improvement both as a company and on a
personal level. To be able to compete and successfully drive desired progress, you need become better
than you were yesterday.

The question is: where to start?

Fortunately, constant improvement doesn’t have to be insurmountably difficult. As in any other project,
start by assessing your current state, and in which areas you’d like to see improvement.

Next, set a clear goal and build a plan that will help you to keep moving to the right direction. Develop
your skills by gathering relevant experience, set clear expectations and standards and look at
measurable results. You should also make sure you improve your strategy as you grow.

Keep in mind that constant improvement doesn’t necessarily mean you have to start running faster.
Even though your company needs to be able to react to changes quicker than before, running fast may
hurt you in the long run. Instead, you need to be able to work smarter.

If you decide to focus on becoming better each day and constantly improving all of the aspects related
to innovation, you’ll eventually get great results without a doubt. It's the compound interest for
constant improvement that matters the most as the greatest results are achieved in the long run. You
may not see much of a progress in a month, but even 1% weekly improvement will truly make a
difference in a year or two:
Focus on constantly getting better, both as a company and on a personal level.

Another concrete area of focus is your infrastructure. If we look at Facebook, a great example of a smart
company, we can identify some top-notch qualities.

Facebook has succeeded in building an agile infrastructure and has the ability to make quick changes to
their platform by introducing and testing new ideas to a limited audience to see what works and what
doesn't. This enables faster development of new features and guarantees that the business is constantly
moving to the right direction.

Facebook's approach to a scalable business is successful because it allows them to move fast while
constantly maintaining quality. Through agile testing, the risk of doing wrong things decreases whereas
the ability to create value as a function of time increases.

2. Create value for your customers

Second, and one of the most important success factor for innovation management is the ability to
constantly rethink how to operate to keep creating as much value as possible.
Whatever you decide to focus on, ask yourself and your team: “Is this really creating more value for our
customers?”
How you do it depends on the situation as there are different ways to achieve this. It is, however,
inevitable for you to know your customers well to be able to acknowledge and respond to their needs.

If you're not familiar with what your customers want and are willing to pay for, you need to begin
somewhere, which means that you may have to do more market research and service design compared
to those, who know the market like the back of their hands.
But is the best value really created by listening to your customers?
Not necessarily.

Religiously focusing on just doing what the customers are telling you isn't necessarily the best way to
achieve this. Even though your customers are, and should be a top priority, you should focus on keeping
the right balance between their feedback and your vision. If we look at for example Steve Jobs or Bill
Gates, both of them succeeded because they were aware of the customers’ needs, yet they believed in
their vision.

It’s not clever to run around chasing after hundreds of different opinions. In the short term, relying on
customer feedback and listening to all of the possible requests might make you think you are customer-
focused, but can, in the long run, slow you down, because customers have a tendency to focus on
urgent, everyday issues instead of looking at the big picture. Besides, depending on your capabilities,
you probably know your market better than your customers do.

“If I had asked people what they wanted, they would have said faster horses.”
Henry Ford

To see what works in practice, it’s smarter to prefer testing instead of listening to every single request of
your customer. Regardless of how skillful of an interviewer or ethnographic researcher you might be, it
can be dangerous to make decisions based solely on your customer’s opinions. People tend to say one
thing and do the opposite. Therefore, actually testing your assumptions will give you more reliable
information about the behavior of your customers.
To summarize, keep control, know your customer extremely well and have a clear understanding of
what type of value you want to create and for whom. By doing this, valuable and relevant feedback is
quick to emerge.

3. Implement The Lean Startup Model

It’s important to understand that not all great ideas make great businesses. If you’re either working on a
small incremental idea or a more disruptive innovation, The Lean Startup Model can help you to assess
customer demand fast to find the product market fit as soon as possible.
Instead of planning a new business model for years, Lean Startup Model is a technique that emphasizes
the speed and urgency in idea search and execution and is designed to address market risk fast.

It is, however, important to keep in mind that this particular model isn’t ideal for all types of businesses.
If you already have evidence for your product solving a particular market need, it doesn't make sense to
use the Lean Startup method. For example, businesses operating in highly regulated industries, such as
the pharmaceutical industry, can't usually effectively implement this model. However, for most new
business ideas, it can give you a good starting point for building a clear understanding of what you want
to accomplish or focus on.
Build-Measure-Learn Feedback Loop is the core component of the Lean Startup Model for building and
testing new ideas at blinding speed. Based on the feedback, you’re able to identify what can be done
better and whether to pivot to the new or preserve existing.

The main point in Build-Measure-Learn Feedback Loop is to launch a new idea or concept to the market
as quickly as possible to gain experience and gather feedback for further improvement. It is crucial to
remember that instead of testing an existing product, you should start by testing the value proposition
and core assumptions regarding the demand of your product or service.
After you have validated your idea, this loop can be repeated as many times as needed, constantly
testing and improving the previous version of your product. You will quickly learn what works and what
doesn’t, and you can direct your efforts towards the right areas without having to invest millions.
If you focus on testing an existing product, you fail to see if the business concept actually makes any
sense, and if it doesn't, it can be extremely slow and expensive to make major changes later on.

4. Allocate resources properly to support your strategy

As there are countless possibilities, it’s vital for you to find the right areas of focus and allocate your
resources to support your strategy. Evaluate your assets (both human and financial) and utilize them
where they have the most potential.
Managing your innovation portfolio is all about finding the right balance. While growing companies may
take greater risks and seek bolder radical opportunities, you should allocate your resources according to
your strategic goals, unique capabilities and chosen portfolio management principles, such as your
investment period, target returns and willingness to tolerate risk.

“Regarding time and funding, I think the number one item to consider is goals and clarity.”
Samuel Pavin, Consultant, former IBM innovation program lead

Depending on the organization’s nature, its maturity and the industry it operates in, the so-called
Google’s golden rule, the 70-20-10 model, can work as a solid framework for allocating your innovation
resources. Google spends 70% of their time on core initiatives, such as the development of their search
engine and AdWords advertising platform, 20% on adjacent businesses, such as Google Earth and the
rest 10% on transformational initiatives that focus on creating something completely new such as the
"moonshot projects" that Google X is working on.

When allocating resources, consider the time horizon (during which you’d like to see results), the
willingness to take risk and your abilities for being able to outperform the competition.
If we take Coca-Cola company as an example, their creative risk is minimal as they have successfully
continued to improve their existing product by allocating most of their resources to their core initiatives.
In addition, Coca-Cola company has strongly expanded their product portfolio to other sodas, waters
and sports drinks in the last decades. In fact, they currently produce tens of different soda flavors and
have managed to adapt their product portfolio to meet different geographical preferences. Yet,
according to the innovation strategy of Coca-Cola company, there aren’t many transformational
activities in sight at the moment.

KPI’s and measurements

It probably doesn’t come as a surprise that in addition to your leadership style, you should choose
your KPI’s and measurements carefully and align them with your overall strategy and goals.
As simple as it may sound – you get what you measure. Your goals and KPI’s direct your efforts and
activities towards them, making untracked activities easily forgotten. In other words, measuring wrong
things will give you wrong things as your measurements have a huge impact on behavior.
Innovation metrics are typically divided into two main categories; input
metrics (investments) and output metrics (results). In the beginning, it might make more sense for you
to measure inputs rather than outputs, as you probably don't make much profit yet. A good starting
point is to focus on the performance of your product and how well it fits the market.

In addition, you might want to focus on:

 Organizational Capabilities metrics

 Structures metrics
 Culture metrics
 Leadership & Strategy metrics
 Business & Product metrics
5. Create an innovative company culture

Innovation management is a group sport and you need other people to succeed. In fact, you need
the right people to succeed.
The companies that have got innovation right have created a culture of innovation where people are
excited to improve everything and are willing and capable of seeing ideas through execution. Trust and
openness is the key here, because the ones who don’t trust others will eventually fail.
According to an Innovation leadership study, the most important element that constitutes a culture of
innovation is the openness to other people's ideas and the willingness to share their own. This means
that all ideas are equally welcome and none of them are disregarded without merit. Enhance trust and
openness by making sure people are allowed to see failure as an opportunity to learn.
It’s a general misconception that your team should consist of just visionary innovators. The most
valuable team players aren’t necessarily the ones who are the most innovative, but the ones who are
smart and able to get things done.
Everyone in the organization has ideas, but even the greatest ideas don’t really matter if they are not
put in practice. When building a world-class team, consider gathering a team of people with cross-
functional skill sets, as different skills make the team stronger. Make sure your team consists of people
who are not only good at creating new ideas, but also capable of advancing, refining and executing
them. It is, in the end, the execution that matters, not the idea.
As already mentioned, a great team does not necessarily consist of the most shining stars but rather of
those who share similar values and motivation to work hard towards common goals. A brilliant example
of a successful team is Vegas Golden Knights, an NHL expansion team that consists of “misfits”, in other
words, just the players that the other teams didn’t want to keep. Against all odds, this “leftover” team
made it to the the Stanley Cup finals in their first NHL season.

They did a lot of things right, but the big one was that from day one, they focused on creating a culture
where everyone is first and foremost a team player that trusts the process and does their best to fill
their own role regardless of what they'd personally prefer. The team also has a tremendous group spirit
and everyone in the team commits to always giving 100% every single day.

6. Stay focused
Many companies make the mistake of doing too much and losing focus from what actually works and
what really matters in the long run.

But how do you then maximize growth while making sure you still keep focus?
By focusing on things where you have a realistic chance of becoming the best in the world.
A classic dilemma of an ambitious leader is to have a grand vision of “let’s do everything for everyone”.
While you can still cling on to that grand vision as the mission of your company, it definitely can't be
your strategy. The problem lies in trying to do too many things at once. It's simply not realistic for any
organization to be the best in the world for everyone in anything, let alone everything. The transition
needs to be done step-by-step.

Other companies can learn from Amazon, which is now the undeniable market leader in tons of
different areas, as they first started by selling books and became a market leader specifically in that
before expanding to other markets.
Keep in mind that while you can (and often should) expand to other promising markets, just don't try to
accomplish everything at once.
From a leadership point of view, you should keep in mind that for your team to stay focused, you need
to give your team a framework and a clear goal but also enough freedom to create and test their ideas.
Limiting the scope to what your company is good at and what you can do well is smart but it’s also
necessary to understand that keeping focus and micromanaging your team are two completely different
things. Succeeding in keeping focus is mostly about finding the right balance between control and
freedom.

Know how to work smarter and what to prioritize

Successful innovation rarely happens overnight. It requires patience, a clear vision and lots of testing to
see what works and what needs to be improved, constantly aiming for becoming better both as a
company and on a personal level.
You should keep in mind that succeeding in innovation management doesn’t necessarily rely on the
most brilliant, revolutionary idea. Many leaders mistakenly seek quick wins – a golden, world-changing
idea, failing to understand that successful innovation is, indeed, a continuous practice that should be at
the very core of what you do.
To master any skill, you need to commit to your goal and work extremely hard towards it. As the famous
quote often attributed to Thomas Edison states:

"Genius is 99% perspiration and 1% inspiration."

When developing the first practical light bulb, Edison failed approximately 1000 times before finally
figuring it out. This strongly indicates that his success had very little to do with inspiration. Instead, the
secret to his success was that he was dedicated to his goal and worked hard to succeed in what he
wanted to achieve.
Similar approach can work for you. Just keep pushing your vision forward, work hard and make sure
you’re constantly focused on the right things.
If you keep aforementioned things in mind and focus on finding your own best practices for innovation
management, you’ll eventually get there.
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