Innovation…Don’t be Misguided part 1

It was Peter Drucker (1988, p.76), renowned management consultant, who suggested that “the single most important thing to remember about any enterprise is that there are no results inside its walls. The result of a business is a satisfied customer… results exist only on the outside.” When evaluated from a global perspective, including the continued growth of new and existing business threats, this sentiment clearly highlights the difficulty companies often face when trying to compete effectively. Moreover, competing effectively can only be considered as partial success. Achieving a sustained competitive advantage is clearly the true goal of any organization that wishes to realize even the smallest amount of market share. In this sense, achieving a sustained competitive advantage through innovation is paramount to strategy.

Whereas strategy is often viewed as an action plan for running a business and even conducting operations (Thompson et al, 2010), this view can potentially displace strategy with operational effectiveness. In contrast to this view, real strategy relies on developing a unique and valuable position, which includes utilizing a different set of activities (Porter 1996). This entails the formulation of a market-driven strategy based upon customer value. Within industries young and old, there is often times very little information available to manufacturers, suppliers and integrators indicating trends among customers and end-users, or what is generally perceived as value. Casual observation would suggest that manufacturers quite readily dictate value, in the sense that products and services contain an innate value that travels from the supplier to the end-user. As competition grows, suppliers must look toward a level of co-creation and increasingly engage end-users with the processes of both defining and creating value (Prahalad and Ramaswamy 2004). Running the business and conducting operations should be considered only the beginning of this strategic innovation process. Suppliers and integrators need to understand operational effectiveness as strategy is not conducive to this co-creation experience.

Operational effectiveness is not strategic innovation

By suggesting that strategy can be confused with operational effectiveness, concepts such as positioning, value, competitive advantage, or value chain activities can lose their significance. These activities are clearly driven by choices, trade-offs, and an organization’s deliberate attempt at differentiation. Although operational effectiveness is not necessarily based on choice, it rests with activities a company should be doing anyway (Hammonds 2001). Michael Porter (1996) succinctly describes this difference by suggesting that operational effectiveness revolves around a company performing similar activities better than rivals, whereas strategy rests on performing different activities from rivals or at the very least performing similar activities in a different fashion. For many suppliers and integrators this difference begins simply by engaging the end-user or customer with regard to project requirements or what the final deliverables may be. Furthermore, exploring the alternatives and the solutions customers are currently using will provide opportunity for suppliers to perform different activities from rivals, or as Porter suggests, performing similar activities in a different manner.

Porter (1996) suggests that, despite the drive for operational effectiveness, many companies fail to turn such gains into sustained profitability. It seems that the current mind-set of many executives revolves around innovation as concepts geared to improving efficiencies. Arguably, some of the most powerful and lasting management methods focus companies on new ways to manage costs and grow (McGregor 2009). Examples including six-sigma, outsourcing, re-engineering, and total quality management are perhaps some of the more common concepts to be embraced by management over the recent past. Kaizen, a principle rising out of Japan in the 1990’s and 2000’s, is akin to total quality management and represents another tool aimed at efficiency and gained prominence. It has been defined as “the process of gradual and incremental improvement in a pursuit of perfection of business activities” (Imai 1986 quoted by Al Smadi 2009, p.203).

Although these management techniques are tools for improving efficiencies within an organization, the ultimate goal of these tools is to produce high quality products at a low cost or to consolidate their industry (Hammonds 2001). Heavily employed by various suppliers, these activities are popular in management circles. Although the importance of operational effectiveness should not be discounted, it cannot and should not be mistaken for or used in place of real innovation strategy. “The attempt to cut costs, improve processes, and reduce errors is important but alone may easily take an organization to efficiency as it surely heads to irrelevancy” (Secor and Swords 1998, p.432). Manufacturer’s and suppliers should not consider themselves immune to this truth.

References:

Al Smadi, S. (2009) ‘Kaizen strategy and the drive for competitiveness: challenges and opportunities’, Competitiveness Review: An International Business Journal, 19(3), 203-211.

Drucker, P.F. (1988) ‘Management and the world’s work’, Harvard Business Review, 66(5), 65-76.

Hammonds, K.H. (2001) Michael Porters Big Ideas [online], available from: http://www.fastcompany.com/magazine/44/porter.html [Accessed: 13 April 2013].

McGregor, J. (2009) ‘There is no more normal’, BusinessWeek, March 23 & 30 (4124), 30-34.

Porter, M. (1996) ‘What is Strategy?’, Harvard Business Review, 74 (6), 61-78.

Prahalad, C.K. and Ramaswamy, V. (2004) ‘Co-creating unique value with customers’, Strategy & Leadership, 32(3), 4-9.

Secor, J.R. and Swords, D.A. (1998) Transforming the organization, part 2 strategy: Moving beyond operational effectiveness’, Library Acquisitions:Practice and Theory, 22(4), 431-438.

Thompson, A., Strickland, A., & Gamble, J. (2010) Crafting and Executing Strategy. New York: McGraw-Hill Irwin.