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August 23, 2005

Business Enhancement and Constructive Innovation

This just in from the 23 August 2005 Member Edition of the McKinsey Quarterly: McKinsey surveyed what global executives think about technology and innovation. Their results stated:

"Fifty-three percent of CIOs and CTOs cite the ability to innovate as the most important capability for growth... [but] 33 percent of technology executives see improving their companies' current products as the key driver of growth -- a significantly higher proportion than the 19 percent who favor developing new products..."

In other words, when growth is the objective, improving existing products is more effective than developing new products, so is "innovation" -- the top tool -- primarily important for product improvement, instead of for new product development?

This is interesting largely because of the persistence with which the business value of IT is debated. Looking at overall business spending on IT, various analysts (collectively) calculate that only 10% to 30% of the spending on IT is dedicated to what is generally termed "new initiatives" as opposed to "sustaining initiatives"... On the surface, it would seem that IT is already doing what the business wants!

But that makes us wonder what IT organizations consider to be "new" -- because we want to know what part of that "new" is about growth: a little of it, or most? And does "sustaining" include improvement? Or do budgets actually leave out improvement as a target? Meanwhile, where does "improvement" best fit in: with "sustaining", "new" or both? Sorting it out looks like this:

This larger perspective helps to organize our questions and formulate better ones. For example, now we know to also ask how both new and sustaining activities contribute to growth, and we can imagine that they contribute to other objectives as well.

In fact, a better and higher-level unifying theme for the language of IT's business impacts is the idea of strategies for business enhancement. The importance of this phrasing is that it separates the problem of how something is getting done from why something is getting done.

In the case of the McKinsey survey finding, "growth" is the "why" of what people want to get done. The exact point of interest in McKinsey's findings is that the folks who "run IT" believe that the reason why products should be changed is that it will cause the business to grow. Although it doesn't initially seem like it, the baseline contrast to consider in those findings is the emphasis on products rather than on something else -- not so much about whether development is more important than improvement. What do we do about products, to drive growth?

And yet, development versus improvement is still a big issue, because those are two pretty different types of capabilities. More importantly, they are two different types of responsibilities to charge to the business managers, who either way will look for support from IT. The business, not IT, needs to establish the case for why one or the other offers the better competitive advantage that we can assume will foster growth.

II.

One of the most basic management beliefs is that growth comes from "competitive advantage". This idea means that the company's most significant difference to its customers and partners is preferable to the difference offered by other companies. Furthermore, it means that achieving the particular differentiation must be a sustainable capability if it is to be realized as a critical success factor in the business. Sustainable need not mean "permanent" -- but it does mean consistent throughout the period of need.

The secret in understanding this position, however, is that the "difference" can be of type (characteristics offered) or of amount (supply offered).

Strategically, in the customer's eyes, dissimilar offerings (e.g., products) are different in approach to their needs, while similar offerings are different in quality provided.

Meanwhile, for the provider, what the idea of "advantage" always includes is a gap of one kind or the other between its offering and other companies' offerings. The challenge in business enhancement is how to create and preserve the most opportune kind of gap.

Approach and quality are paths to two different kinds of value, so either one can be a source of advantage. This indicates key ways to think about how products are handled.

Development seems obvious as a way to tackle "approach". A new kind of product is probably the default example of "innovation". Improvement, likewise, seems to be the default for "quality". A product upgrade is a normal example of this.

In both cases, the customer or partner envisions being able to do something "practically" unprecedented due to the particular product; and the distance between the old ability and the new one is the value gap.

In fact, we should appreciate that in both cases, the value gap does not exist primarily because something hadn't been thought of before, but instead because it hadn't been available before. This is why we need an expansive definition of "innovation"...

Meanwhile, what really lies behind the notion that products can drive growth? In reality, "Growth" reflects the market taking advantage of the availability, while "advantage" reflects the supplier finding a way to expose and leverage the gap when other suppliers have not.

Therefore, consider the fact that without changing the product at all, using it in an unprecedented way might generate value where there had not been value before. The context of the product is actually more basic to value than is direct change to the product.

Said differently, if the circumstances are right, new value can be generated without a change to the product. But in turn, this means that the ideal reason for a change to the product is to increase its relevancy to the circumstances into which it is introduced. At the least, we need to master our identification of the circumstances.

III.

Taking a cue from the popular saying that competitive advantage is gained through something that "changes the rules of the game", we can imagine modeling the product's circumstances as the set of perceived rules and/or the apparent system presented by the dynamics of the circumstances.

From there, it's really a question of how we use what the model shows us.

We should assume that the model describes why availability is deficient -- but, that the problem is just an illusion that can be dispelled with one of the following:
- an alternative model (such as a different perspective);
- by closer inspection of the existing one (revealing a "loophole");
- or by high-speed iterative refinement (eliminating interference).

Thinking along those lines, here is a possible breakout of business enhancement options.

Innovation - change the rules and/or system.
Offer Choice - displace the value gap in the current model, by presenting a different model with equal viability. (Transistors versus vacuum tubes; DVDs vs. VHS)

Renovation - reinterpret the rules and/or system.
Offer Resilience - circumvent the value gap in the current model, by combining the boundaries of its given expectations in a different way. (Ali's Rope-a-Dope against George Foreman; Annie Hall's wardrobe)

Optimization – master the rules and/or system.
Offer Quality - close the value gap in the current model, by eliminating barriers to delivering prescribed features. (High-mileage SUVs; synthetic diamonds)

All three of those options can generate a value gap between the supplier and its competitors. But what is equally important is to understand what value gap currently exists in the market (i.e., the mind of the customer or partner), according to the model of the market, and then to choose the best of the three options for attacking it -- Choice, Resilience, and Quality.

In reality, because value is determined by context (the stakeholder's circumstances) more than by anything else, each of those above possibilities might be addressed through either development or improvement -- whichever is more necessary for the targeted context.

But where business growth is the issue, and growth is built on the value, is innovation primarily important as a path to product improvement instead of to development?

Our answer is threefold:

- Growth can be triggered by identifying a new kind of customer. Matching the product to the new "customer-context" might require invention and/or modification. When the customer attributes value mainly to the "new", we are saying that innovation is an effect -- but the approach to that effect might not be innovative...

- Where growth is concerned, product improvement should be seen not just in terms of quality but also relevance and availability. The point is to make the difference that is important at the time to the paying customer. In order to literally make the necessary difference, an innovative approach might be necessary, and there we are thinking of innovation as a cause.

- Distinguishing innovation-as-a-cause from innovation-as-an-effect can profoundly affect the identification of related activities and their priorities. The concept of "whole product", which includes all the issues that surround an item and successfully fit it to the customer, tells us that since customers decide the value, they practically define the idea of the product that is the set of key characteristics to be invented and/or modified.

This warns us that when we are working on operational investment objectives, the most logical generic semantics of "innovation" are that it is one approach to meeting requirements.

Innovative development and maintenance of products in their lifecycle is one level of consideration. Innovation can help meet product requirements at any point in the product lifecycle, from concept to upgrade or retirement.

But as to whether "new products" are more important to business growth than are "improved products", the matter is one of whether business innovation is necessary to meet market requirements.

Posted by Malcolm Ryder at August 23, 2005 4:41 PM

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