Many people define innovation in business to mean the development of new products. Let’s expand that description to include some of the gradations that should not be lost in this normally black-and-white polarization. There are shades of gray which all bring value in their own way.
A comprehensive approach to innovation should yield all of the following, and the benefits seem to appear in this order:
- Cost Reductions.The lowest-hanging fruit of innovation is the improvement in how you spend money. Why is this important? Because of the sales-equivalency of a dollar saved.Ben Franklin was actually wrong. A penny saved is more than one penny earned. Consider the following math: If your company’s net profit margin is 20%, meaning your profit is $200,000 on $1,000,000 in sales, every innovative idea that saves $1 in expenses is worth $5 in sales. In other words, the $1 you save will go straight to the bottom line, but only 20% of the $5 sale (your net profit margin, or $1) will hit the bottom line. So, your cost-reduction of $1 has a sales equivalency of $5.
- Process Improvements.While cost reductions can show up immediately, process improvements normally take a little longer to take root. This is because they require more study to propose and more effort to implement. But once they are in place, everybody wins. Employees have a lighter workload, owners get operational efficiencies, and customers notice better timing. In my experience, almost all processes can be improved. It’s a matter of engaging employees who are involved in those processes to propose improvements. The enemy of improvement is the deeply rooted notion that because “we’ve always done it this way,” we should just continue to do so. Wrong. Good leaders will constantly challenge the status quo, knowing that there is always a better way.
- Customer Experience Enhancements.With the inside work of cost reduction and process improvement under way, it’s time to shift attention to what customers are thinking, feeling and wanting. This is not as easy as the first two, but it can be far more important. This type of innovation demands that one get inside the shoes of customers to know what would bring the next level of satisfaction and loyalty. Raving fans are born of experiences that are worthy of raving about. Just today I had lunch with Jon Jensen, COO of ILS, a loan servicing company. ILS receives around 100 letters per month from customers ranting about how well they were treated and how respected they felt after their interaction with representatives at ILS. Consequently, ILS’s default rates are the lowest in the industry. How do they do it? That’s the subject of a future article on ILS, but you need to find a way to evoke that kind of response from your customers.
- Creation of New Products/Services.New offerings take the most time and resources to launch , so they are naturally the last fruit to show up on the innovation tree. And if you follow the steps of innovation shown here, you will have created the necessary budget to launch those new offerings through #1-Cost Reduction; streamlined your operations to provide the added capacity to produce those offerings through #2-Process Improvement; and, learned exactly what those offerings should be through your Customer Experience work in #3.
The moral of this innovation story is: Don’t rush to step 4 without building the budget, capacity and knowledge available in steps 1—3.