Blog

Innovation - Is Big Better?

"Companies in a commodity market don't need innovation!"

 This was a comment made to me recently by an old friend. It is a widely held belief and show a complete misunderstanding of the nature of innovation. Many people see innovation as being radical new products that change the world. That is certainly one aspect of innovation but there are other ways to change the world. For a company in a commodity market, radical, "quantum leap" innovation is difficult and probably not desirable - their customers don't expect it and often won't accept it. On the other hand, even in a commodity business, companies have to differentiate themselves from their competition and this can only be done by price or innovation. Assuming the company wants to continue in business, competition on price alone is not enough. So how can a commodity company innovate if innovation is not accepted by their customers?

 The answer is that the focus of innovation has to be different. In this area prices tend to be fixed by the market and so the only way maintain margins is to reduce cost so the company has to focus innovation on making a lot of small innovations in process (technical and organisational) each of which has only a small impact but the cumulative benefit can be sizeable (as we say in Scotland, "many a mickle maks a muckle"). However, there are limits to what can be done by simply trying to reduce costs.

 One of the hot topics over the last few years has been business model innovation with books llike "Blue Ocean Strategy" by Kim and Mauborgne becoming best sellers. However, many companies tried to use the ideas presented to find new, world-beating concepts. For commodity companies not used to innovation, this is probably too big a leap. A better starting point is probably the book "Business Model Generation" by Osterwalder and Pigneur (and 470 others). They introduced the concept of 9 business model building blocks. Commodity companies can get a lot of benefit from even small changes in each of these.

 Customer segments: Does the way the company segments the market make sense? E.g. a chemical company might segment the market based on the chemical type of the product whereas segmenting on what the customer uses it for might make more sense.

 Value Proposition: What value does the customer get from the product? Why should they by one product rather than another? Are buying decisions only made on price? Or do other factors such as delivery, credit, support, training also have an impact? Can the company improve the offering to the customer by looking in these additional areas?

 Channels: Can the company improve its communications with customers and the market in general? Should they sell direct? Or is it better to sell through local dealers?

 Customer Relationships: How can the company improve its relationship with customers? Does the company know what its relationship is? How does the customer/market perceive the strengths and weaknesses of the company and can this be changed?

 Revenue Streams: Is the way in which the company makes money from its Value Proposition the best for it and its customers. Is an alternative revenue stream more appropriate (e.g. leasing instead of selling)? Can the company benefit from working with different revenue streams?

 Key Resources: Does the company make most efficient use of its resources? Can raw materials be used more efficiently? Can waste be reduced? Do they have the skills and expertise needed?

 Key Activities: Does the company do things right first time? If not why not and what can be done to improve? Are all the things they do adding value? (Not only doing things right but also doing the right things).

 Key Partnerships: Does the company have the right partners to fill the gaps in its own capabilities?

 Cost structure: How could costs be reduced? Where are the biggest cost blocks?

 As can be seen, there is plenty of scope for innovation even within a commodity company. However, don't make the mistake of thinking that it is easy because it is "just" incremental innovation. Breaking away from the comfort zone of day-to-day business and seeing (and implementing) the possibilities for small improvements can take as much focus and effort as the radical step that changes the world (or bankrupts the company).

 In summary, it is not the size of innovation that matters, it’s how you use it.