There is really a lot of talk about innovation and how it is on everyone's lips… that we must rethink everything we do, that everything changes, etc, etc. But beyond the philosophy in this article, I would like to talk about innovation from a practical point of view, that is, about how to become more successful in developing new products and services.
Drucker says “more than genius, innovation is hard work”, and that is the concept that we want to develop in this article… It is very common to speak with the directors of companies related to fashion (textiles, footwear, bathroom, etc.) in the one they tell you "is that so and so is the person who has the ideas"… This is precisely a serious strategic problem for companies and what we are going to develop here is how to be more methodological and less artist in the development of new products / services?.
Indeed, having ideas is simple, having good ideas is more complicated, but what really constitutes a strategic challenge for companies is to continually generate good ideas and turn them into successful products and services on the market. This is what we call “innovation”.
Furthermore, the strategic importance of innovation is clear. In an environment where it seems that organic growth is a key lever for creating value and where one of the most important levers for organic growth is innovation, it seems reasonable to conclude that innovation is a key element for creating value.
In our experience working with a multitude of companies from different sectors, if we visualize the entire product launch process and quantify their “lost” income (sales that have not been achieved, loss of positioning, etc.) and their associated costs (I + D, opportunity cost, dedication of senior management, logistics, marketing costs, sales costs, etc.) we find that a medium-sized company can have a cost center with a budget (almost never calculated) of several million euros, we could have a positive impact on the income statement of a few million euros. According to different international studies, this figure is between 4 and 9 points, although our experience in medium-sized companies is between 3 and 8 points of profitability on sales.
But nevertheless the reality of what happens in the companies of our environment is very different. According to our own experience and that reflected in various international studies, around 50% of managers are not happy with the profitability of their investments in innovation for various reasons.
After having seen the importance both from the point of view of income and costs and that the process is obviously complex, let's begin to see which is the ideal model in product / service development, the usual weak points as well as the lines work to improve them.
If we analyze this process, really the biggest weak points that we find are the following:
- The generation of "ideas", that is, not enough ideas are generated within the organization
- The methodology to "refine" the ideas that are generated
- The indicators and objectives of the process
- The alignment of this process with the strategy and the definition of strategic objectives
- Senior Management's commitment to the process
- The methodology for putting the new product / service on the market
Good practices
Let's start by defining the decalogue of good practices that will radically improve results:
1.- The innovation strategy must be integrated into the strategic objectives of the company and must be a commitment of the senior management
2.- Objectives must be defined based on the strategy as we will comment below in the indicators section.
3.- The culture must be oriented towards innovation and each one of the people in the organization must be committed to it.
4.- The organization must be open to external collaborations as a source of ideas.
5.- Innovation objectives must be integrated within the Balanced Scorecard and management control.
6.- The process must be supervised in all its areas: resources, process and results.
7.- It is necessary to use computer tools to make the process as collaborative and efficient as possible.
8.- The organizational chart and responsibilities of the organization must be oriented towards product development, using an organization by processes if necessary.
9.- There must be resources assigned to innovation and there must be a variable remuneration based on innovation results.
10.- There must be a formal process of product development and putting the product on the market and that it is strictly followed.
Indicators and objectives
Although the development of the entire process is key, we propose as a first step the setting of process indicators. In later articles we will go into other threads such as the generation and filtering of ideas, the development process or the launch process.
Our experience and some studies say that the simplest indicators for the organization to understand (and which are the most interesting for beginners are):
- Sales of new products
- Investment in innovation / Turnover
- Time to market
-% of sales of new products over total sales of the organization
-% of contribution margin of new products over total sales of the organization
Also, at Improven we like to use an indicator called “Return on Innovation” which basically measures the benefits obtained from the innovation against the dedicated resources. This is an indicator that must be defined for each specific case, although conceptually it is quite simple to define.
In more advanced organizations in this area, the indicators to be used should be separated into the three main areas: resources (what resources do we assign to the process), process (quality of the process) and results (what results do we obtain with the process)
Some examples are:
Means:
- Capital:% of the budget allocated to innovation,
- People:
o% of people dedicated to innovation or who have innovation as a strategic objective
o% of people who have received training on innovation (tools, processes, etc.)
o Number of entrepreneurs in the organization (number of people who have started a business before joining the organization)
Processes:
- Time to market (average time from idea to market launch)
- Number of ideas proposed
- Ratio of successful ideas to total ideas
- Number of “dead” projects in each phase
Results:
- Number of new products / services launched
-% of revenue from new products
-% of contribution margin from new products
- Cannibalization of sales of new products against existing ones
In conclusion, the process of developing new products / services is key to competitiveness in many sectors and we cannot leave its success to chance, so the methodology and a cultural change is necessary to remain competitive.
