In a nutshell
Innovative companies use strategies, processes and corporate culture to turn ideas into innovations. Ideas come from every level of the organization, but winning ideas are more likely to be generated inside companies that value employee development.
Paving the way to innovation with employee development
Continued innovation is the holy grail for every company that wants to survive and be successful in the long run. Quite simply, innovative companies are more profitable (Minor, Brook & Bernoff, 2017), and it is no surprise.
Going back to the definition: innovation is not invention. Invention is a creative activity, but innovation is the very real, tangible activity of introducing something new or different. Innovation involves strategy and execution, and you just need to look at the Ansoff matrix to understand why innovation leads to more profits. It just expands a company’s ability to introduce new products and to target new markets, hence growing the pie instead of having to fight for a larger slice. It also allows companies to steer away from the dangerous strategy of aiming for cost leadership, and to instead apply a differentiation strategy which allows price premiums (Porter, 1998).
There can be only one cost leader in any market, so continued innovation is what most companies should be aiming for, but what’s the path to success? A large amount of academic and business research has been done on the topic, and although there is no single magic recipe, there are strong similarities in the processes that were implemented by the most reputedly innovative companies.
Transformational or disruptive?
Innovations typically come in one of two forms: transformative or disruptive. New technology or business models usually lead to transformative innovation, whereas a market approach is the surest way to lead to disruptive innovation. Christensen (2015) noted that trying to go against incumbent competitors head-on has a 6% chance of success, but pursuing a disruptive strategy allows entrants to enjoy profitable growth because of the price umbrella that incumbents bring to the industry or sector.
What Christensen (2003) calls the “innovator’s dilemma” is when the entrant’s disruptive trajectory meets the incumbent’s market. As an incumbent with a long-established revenue model and fixed costs scaled to your market, should you continue in that direction as your profits erode, or should you pivot and get in line with the entrant’s innovation? The middle ground approach seen by many industry leaders is to use the cash surplus afforded by their current position to acquire entrants.
Processes for innovation
It would be impossible to discuss innovation in organizations without mentioning Eric Ries (2011) and his insights about MVP (Minimum Viable Product). The most innovative start-ups use a process similar to his Build-Measure-Learn loop to iterate through ideas and make a decision on whether to pivot or persevere, and they use innovation accounting to measure real progress.
For established organizations, realizing that innovation must be the result of a process is key to making it repeatable. Ideas need to be screened and tested on a continuous basis. Organizations that are successful at continuous innovation have processes and committees to act as an engine for innovation, and use a system like the Stage-Gate system designed by Cooper (2001).
So innovation is a process, and there are well-known processes to implement it. At the heart of it are ideas, and the processes are there to screen out the bad ideas and to back the right ones. But how do those ideas get generated?
Product marketing 101 would point out that they should be derived from insights from listening to the target audience, and preferably aim at bringing solutions to problems they experience. Although a sound way to get ideas, this strategy might be limited in its effects. A modern and more holistic approach is to apply the framework designed by Keeley, Walters, Pikkel, & Quinn (2013): ten types of innovations, which they call the building blocks of breakthrough.
So, we know that innovation leads to more profits, that it needs processes to be repeatable, that you would be better off targeting a market strategy if you are an entrant in an industry and that you can focus on the less taxing technology or business model innovations if you are an incumbent, while keeping an eye on entrants. We also know that ideas are at the heart of innovations, and we know how to get them to form. The only remaining question is: who in the organization should formulate those ideas?
Gone are the days when ideas only came from the top. Companies that are successful at continuous innovation know that they need to encourage and consider ideas from everyone in the organization, especially from the people who are the closest to the technology, to their clients and to their own processes. This leads to two challenges: encouragement of staff to share their ideas and alignment with the company strategy.
Alignment with corporate strategy
Innovations that align with the company strategy are more likely to get attention and resources dedicated to their execution. The all-powerful recipe for alignment is OKR (Doerr, 2018): Objectives and Key Results. OKR is the legacy of Andy Grove, former CEO of Intel, and is now deeply entrenched in companies like Google, Intuit and the Gates Foundation. It is an adaptation to the open world of the 21st century of Peter Drucker’s Management By Objectives (MBO), and it is designed to bring focus and alignment to an organization.
The high-level concept of OKR is simply for top executives to define objectives, as measured by key results, and to make them public for everyone in the company to see. This way, employees at every level can choose their own public objectives, as measured by their own key results, to contribute to and align with the overall objectives. The transparency of the system acts as a catalyst for alignment, and a focus on stretched goals and accountability allows organizations to leap forward.
All those tools and concepts are well researched, backed with data, and constitute a sure formula to foster and steer innovation. This is well and good, but the very fact that they are well researched means that they are accessible by every company, which means that they cannot be a source of competitive advantage.
Corporate culture to support innovation
This is where corporate culture comes into play. Increasingly thought of as the only lasting source of competitive advantage, it is also the only way to consistently encourage staff to share their ideas. Jeff Bezos, Amazon’s CEO, famously said that “you need a culture that high-fives small and innovative ideas”. Companies that have implemented the OKR framework generally also implemented the transformational system that comes with it, which is a blueprint for continuous performance management (as opposed to annual reviews). This system is centred around an instrument called CFRs: conversations, feedback, recognition. It champions transparency, accountability, empowerment, and teamwork, at all levels of the organization (Doerr, 2018).
We have established that innovation comes from a number of processes that can be implemented and from the right corporate culture. OKRs clearly state what is important to the company, and CFRs and other cultural elements create an environment that nourishes and recognises innovative ideas.
Let’s use Andy Grove’s definition of culture: “a set of values and beliefs, as well as familiarity with the way things are done and should be done in a company”. Many factors impact a company’s culture, but it also means that it can be steered or adjusted. There are several levers that top management and HR can use to foster an innovative culture. Those are generally considered to be leadership, structure, staffing, communication, measurement, reward and development. For example, innovation requires risk taking, which should be decoupled from rewards to decrease the fear of failing.
People with the right knowledge
With all the processes in place, and corporate culture steered in the right direction, all that is left for the innovation journey to begin is that the right people have the right ideas. Bad ideas will be filtered out, and good ideas will move along the systems and be transformed into innovative products, services or business models.
This just leaves one question: can people generate winning ideas without a good understanding of the systems or markets they are supposed to bring innovation to?
If we go back in time, would Henry Ford have designed the affordable Model T that transformed the car industry without an in-depth understanding of how cars and engines worked? Would Bill Gates and Paul Allen have achieved their dreams of a computer in every home if they had not known how a computer works? Would Steve Jobs have made Apple what it is today if Steve Wozniak had not had a good understanding of electronics? Of course not. Even with the best process in place, winning ideas are not generated in a vacuum.
Companies that design today the future of payment technology, and that will be successful tomorrow, are the ones that invest in their staff development so that they can be experts in today’s technology, so that they can understand its shortcomings and come up with ideas to adapt to the changing markets. Ideas that can bridge existing systems with new technology or business models are more likely to be winning ideas because they can be transformed faster and at a lower cost.
All it takes for a company to execute on the innovation that will make it a market leader is the right idea. And that right idea is more likely to come from a company where employee development is valued.
About PayTech Academy
PayTech Academy was created from the belief that everyone in the payment industry should be allowed to reach an expert level in the areas that they are interested in. We understand that access to experts is difficult, even when you work in the same company, because those skills are rare and make those people extremely busy.
We strive to provide a solution for two major issues in the payment industry: recruiting experienced staff in a market where the barrier to entry is high and therefore has a shortage of those people, and upskilling people who’ve moved internally within an organization.
Our aim is to provide the world with hands-on courses that take our students from where they are to a level of deep technical understanding in very specific areas.
Sources
Christensen, C. M. 2003. The Innovator's Dilemma. Harperbusiness Essentials.
Christensen, C. M. 2015. Disruptive innovation? Harvard Business Review.
Cooper, R. G., & Edgett, S. J. 2012. Best Practices in the Idea-to-Launch Process and Its Governance. Research Technology Management, 55(2).
Doerr, J. 2018. Measure What Matters: OKRs: The Simple Idea that Drives 10x Growth. Portfolio Penguin
Keeley, L., Walters, H., Pikkel, R., & Quinn, B. 2013. Ten Types of Innovation: The Discipline of Building Breakthroughs (1st ed.). John Wiley & Sons.
Minor, D., Brook, P. & Bernoff, J. 2017. Are Innovative Companies More Profitable? MIT Sloan Management Review. https://sloanreview.mit.edu/article/are-innovative-companies-more-profitable/
Porter, M. E. 1998. Competitive Advantage: Creating and Sustaining Superior Performance. Free Press.
Ries, E. 2011. The Lean Startup: How Constant Innovation Creates Radically Successful Businesses. Portfolio Penguin.