Continued innovation can help you build profitability and staff engagement – here’s what you need to know
Innovate, innovate, innovate.
You can hear the mantra running through the minds of business owners and managers as they seek to remain relevant and adapt to the changing needs of their customers. Their competitors appear to be making strides and building market share by making significant changes to the way they operate and disrupting the status quo.
The payoffs from innovation are seen in the results of recently released research and a number of academic studies, which support the connection between innovation and better business outcomes.
But what exactly is innovation? What is the process through which innovation is achievable, significant improvements made, and competitive advantage captured? What are the key steps along the road and how are the gains retained and advantage maintained?
The good news is that research shows there is a clear pathway toward innovation and that, if followed, it can result in increased profitability. At the same time it can also foster staff engagement and satisfaction, increase retention rates, and increase sustainability of the business over the longer term.
And the best part is that there’s a positive feedback loop and acceleration function for repeat innovators.
When a business owner or manager has seen the results it is only a short step to an understanding that innovation can aid profitability and business growth.
First, managers need to understand what innovation is and how the right organisational culture can help generate the ideas that enable it to compete in a changing economic and business environment.
This linkage was highlighted in a recent study from Australia’s Department of Industry, Innovation, and Science, which looked at “the relationship between Australian business innovation persistence and growth performance over the period 2007–08 to 2013–14”. To assess innovation for the purposes of the research, it was defined as a new or significantly improved good or service, operational process, organisational/managerial or marketing method.
In this study, the authors Luke Hendrikson, David Taylor, Lyndon Ang, Kay Cao, Thai Nguyen, and Franklin Soriano found companies that continue to innovate after an initial innovation, and do it over many years, grow faster than those that do not, and “persistent innovation generates a disproportionate contribution to economic growth in Australia.”
The authors highlight studies which show that it is not just innovation but the persistence of innovation which helps drive a growth differential over other, non-innovative, businesses through time. Indeed, they said European studies show “strong correlations between innovation persistence and growth in profitability, sales, employment and/or productivity growth.”
The authors highlight in their own study of Australian businesses that growth rates were impacted by the level and persistence of innovation noting, “the largest effects were found in the ‘persistent innovator’ category where businesses innovated every year. The less regularly businesses innovated over a three-year period, the weaker the differences between innovator and non-innovator growth rates became”.
Clearly, businesses and managers need to keep innovating and stand to benefit from innovation across different areas of their business.
As the authors of the Australian study said, “our data also supports the argument that the performance advantage of persistent innovators also reflects the compounding benefits of several types of innovation being introduced together.”
We know innovation works, but how can you implement it in your business
Sounds easy right, just go and innovate and you’ll reap the rewards for your business, its owners, staff, and customers.
Hedrikson and his colleagues reiterate again that innovation requires the right culture to foster the ability to make the necessary changes and as a result, suggests that this aspect of innovation should form a focus for Australian government.
“Helping businesses develop an early innovation orientation or culture is more important to economic success than an ongoing subsidy of innovation activity, particularly in older businesses that are more likely to shrink than to grow,” Hendrikson and his colleagues said.
“The first five years of consecutive innovation appears the most critical to establishing an innovation culture.”
What the Australian study shows pointedly is that culture is at the heart of innovation and there is a positive feedback loop from innovation. That begs the question of exactly how to create such a culture.
In the McKinsey Quarterly in September 2017, Dr. Waguih Ishak, division vice president and chief technologist at Corning Research & Development Corporation, suggested a big part of this is busting hierarchical constraints.
He said managers need to open up “organizational space to allow innovators to bypass barriers and hierarchies that often sap creativity.” He also said innovation idea generation must go beyond “brainstorming” with managers encouraging “the truly impractical in some situations.”
Despite these views, he also warns that the conventional wisdom that organisations can be starved of ideas might be misplaced, suggesting, “in reality, they are much more likely to die of indigestion. A surfeit of projects with inadequate staffing makes delivering on anything less likely”.
A study of 5 year’s worth of data, from 154 companies covering 3.5 million employees, conducted by Dylan Minor, a professor at the Kellogg School of management, showed that businesses need to have competing ideas within the business and then have staff vote on the ideas to determine those with merit.
Making innovation work
But having built the culture, empowered ideation, and the competition among these ideas, how then does a business get its innovation process to work effectively?
In the MIT Sloan Management Review, Jürgen Stetter, a Munich-based partner in Oliver Wyman’s digital practice, said that “Global companies pour roughly $1 trillion yearly into innovation; we estimate at least 10% of that sum — $100 billion — is completely wasted.”
To aid in the fight against innovation wastage he suggested finding the “tools and structure that fit your company’s needs, strategies, and culture.” And to do this he suggested four key areas of focus:
- Identify the kind of innovation you need – are your challenges technical and internal or are they market-facing and customer focussed? Determining which of these (among the many permutations) your business needs will guide the optimal approach.
- Find the best source – or sources – of new ideas – innovation doesn’t just come from an internal group or innovation team. Rather, Stetter reinforced the notion that “your existing staff have a deep understanding not only of your customers and their needs and desires, but also of unexploited capabilities and opportunities within your walls.” He then suggested ideation competitions. Equally “tapping external sources of innovation can also be helpful,” he said.
- Determine how much of the innovation you need to own – this is analogous to finding the best sources of new ideas. Companies don’t always need to own the innovation. If it is a patent then certainly ownership is important, Stetter said, but “in other cases, ownership may make little difference or actually count as a disadvantage, especially if ownership increases cost while adding little to the benefits of a new development.”
- Create a process – “innovation is a powerful force in business, but it isn’t magic,” Stetter said. Rather businesses need to “understand that an innovation, like any other business output, requires a process. The innovation process won’t necessarily resemble a traditional workflow — it will likely involve more interaction, iteration, and feedback. But there are still discrete steps that need to be taken, starting with the selection of priorities and proceeding through implementation,” he said.
Given we know that persistent innovation is as important as innovation itself, Stetter has a way to kick off the process noting companies should, “first, identify low-hanging fruit.” That means a business and its managers should internally look for “straightforward problems in your existing business that you can solve with internal resources” and then build from there.
Which brings us to the Commonwealth Bank’s FY19 National Business Insights Report (NBIR) on innovation in Australia, which surveyed more than 2,400 Australian businesses and more than 2,700 staff on the behaviours and benefits linked to innovation.
Australian business is changing – can you keep up?
Crucially, the NBIR highlighted that with innovation becoming more commonplace among Australian organisations, it is now an embedded part of the business landscape. The report notes that “Since FY17 the percentage of innovation-active companies has increased by more than 30%. Regardless of size, location and industry, innovation is now far better understood by companies that seek to remain relevant and competitive.”
The report goes on to demonstrate that innovation-active organisations share common traits. They are more confident in their ability to adapt to change, have a growth orientation and display a greater awareness to the opportunities and threats around them.
And when it comes to performance, the report finds that not only do innovative businesses report a brighter revenue outlook, but that “innovation-active companies are also more likely to benefit from non-financial, less tangible rewards gained from implementing significant change. For example, there is a virtuous cycle around their workforce.”
So, the general behaviours of innovative organisations and associated benefits are evident, but what is driving increasing business innovation? The report notes that “of all the factors driving businesses to implement change, the one that stands out is the imperative to meet evolving customer expectations and to improve the customer experience. This is also influencing the skills and capabilities that they seek to access to ensure their organisation is future-fit”.
It’s all about staff, quality and skills
The NBIR brings out one clear reality – innovative organisations are more likely to focus on people, staff and skills development as they strive to prepare for the future. While innovative organisations are more likely to place a premium on technology, businesses are seeking a mix of soft and technical skills to ensure their organisation is future-fit.
“Despite a clear desire among Australian businesses to develop technology skills, the research finds there is equal, if not more, emphasis on the so-called soft skills. Businesses want employees who are flexible and adaptable, who communicate well and can manage and lead others,” the report said.
This is also clear in the behaviours and benefits of innovation identified in the survey of Australian business. These are – in many respects – the physical and real-world manifestations of what the academic research says should result from iterative and persistent innovation.
The NBIR details key characteristics of innovative organisations and their perspectives of their staff in relation to the approach they take to operational outlook, approach to skills development and prioritisation of technology.
The NBIR shows that decision-makers at innovative companies are more aware of the challenges around implementing change. Employees that consider their employer to be innovative are also more confident they have the skills and capabilities their organisation needs for the future.
First, it’s clear from the research that innovative organisations have a much stronger focus on business growth as the catalyst for developing new skills. They are more inclined to need creativity and problem-solving skills, as well as look for technology and leadership capabilities, to support their future needs.
To secure these skills, innovative businesses are prioritising certain training and development programs. They use personalised development plans and formal coaching more than their peers, are more likely to replace staff who can’t adapt, and to seek new skills to diversify the workforce’s capability.
Innovative companies are also significantly more likely to support employee wellbeing, and their employees consider that their skills are being more fully utilised.
While there is a focus among innovative companies on culture and organisational benefits, the fact respondents to the NBIR survey see technology as important enabler of change should not be understated.
Both employees and decision-makers at innovative companies place more importance on the role of technology in maintaining a competitive edge. This supports the finding that innovative companies are also significantly more likely to invest in emerging technology than other businesses.
Innovation drives profitability and business continuity too
The overarching theme in the results of the NBIR is that there is a virtuous cycle of innovation breeding a more cohesive workforce and business culture, which then nurtures further innovation, better productivity, and thus more ideation and innovation.
And what flows from this is a better competitive position and improved profitability.
But it is 2019 and business owners and managers need to go beyond this. In a world where Norway, one of the largest exporters of oil, is walking away from exploitation of some of its offshore oil fields and where central banks and banking regulators are talking about climate change, businesses need to think about business continuity and longevity.
The good news, at least insofar as it makes the decision easier, is that recent research suggests that management and technological innovation means companies no longer have to think about a trade-off between sustainability and profitability.
Yongan Zhang, Umair Khan, Seoyeon Lee, and Madiha Salik from the College of Economics and Management, at the Beijing University of Technology find that combined management and technological innovation, “significantly positively contribute to sustainability and organisation performance.”
They said their research “confirms a significant positive influence of sustainability on financial performance – hereby supporting value-creating theory while opposing value-destroying theory.”
In other words, managers can use innovation, and the improvements that innovation brings to a company, to positively contribute to both profitability and sustainability.
It’s just another example of innovation’s virtuous cycle and positive feedback loop for companies, their owners, managers, and staff.