31 strategicmarketing June–July 2014

Dr Thomas Oosthuizen on the paradoxes of disruptive innovation and why we must remain young at heart in business.

DISRUPTIVE INNOVATION

When we become victims of our

own constraints

businesses in the Fortune 2010 list of fastest growing companies received US$3,40 in incremental market capitalisation for every $1 of revenue growth. Yet, for companies that created new categories, this figure was notably higher – US$5,60!

In South Africa we have seen how the high innovation rate of FNB created customer growth and shareholder value beyond that created by the competitor banks. We also saw how the share price of FirstRand responded negatively to the

announcement that Michael Jordaan, who was widely seen as its innovator-in-chief, would be stepping down as CEO.

The innovation paradoxYet, within itself, innovation holds paradoxes. Can any product – like an iPhone, for example – continue to be improved in significant ways? Or will it reach a point where innovation will merely be incremental, as it has been in the recent past when Apple has been subject to criticism.

THE GLOBAL REACTION BY investment analysts, industry commentators and the media to

the slowing rate of innovation at Apple since the death of Steve Jobs begs a few important questions about innovation in business.

It is a fact that Jobs, more so than any CEO is recent history, made innovation centre stage paramount to the growth in Apple’s value and profits. Innovation, a word often used by CEOs yet rarely actually practised, suddenly became a lot more salient – precisely because Jobs was able to drive such enormous equity and profit margin growth through developing truly ground-breaking products.

But, at most companies, innovation is incremental at best; a factor that tends to correspond to profits that are either slightly above or below average. The likelihood of achieving a dramatic increase in profit margins – unless aided by an upsurge in national or global economic growth cycles – is generally low.

Achieving high growthBy contrast, at highly innovative companies strong profit margin growth is the norm rather than the exception. From previous research studies done over the years, it is clear that so-called ‘disruptive innovation’ makes a company leapfrog competitors.

As a way to illustrate this: The top 20

At highly innovative companies strong profit margin growth is the norm rather than the exception

32 strategicmarketing June–July 2014

DISRUPTIVE INNOVATION

June–July 2014 strategicmarketing 33

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DR THOMAS OOSTHUIZEN HAS A DOCTORATE IN MARKETING COMMUNICATIONS. HE IS AN HONORARY PROFESSOR IN BUSINESS MANAGEMENT AT THE UNIVERSITY OF JOHANNESBURG, A BOARD MEMBER OF THE INDEPENDENT INSTITUTE FOR EDUCATION AT THE JSE-LISTED

ADVTECH GROUP, AND AN ADVISORY BOARD MEMBER OF THE VEGA BRAND SCHOOL.

Moreover, one of the big questions that must be answered is whether the average consumer actually expects dramatic improvements all the time?

Some years ago, for example, Microsoft was criticised for updating its Windows platform so often that its users started lagging far behind in their own platform applications; they were simply receiving more features than they needed. Customers were also often forced to upgrade, even when they could not afford to do so, or it made no sense in terms of what they wanted the system to do.

The paradoxes go further. Did Apple create such high expectations with its ongoing series of disruptive innovations that investors and consumers eventually became conditioned to expect a forever-increasing spiral of new products with revolutionary capabilities that delivered exceptional equity and margin growth? Did Apple therefore, unwittingly, create a rod for its own back? Will an inability to retain its remarkable rate of innovation undermine its very success to date – all of which has been achieved through innovation?

And does this mean that a company should accept lower equity and revenue growth, rather than seek exceptional innovation that may ‘expose’ the organisation and create high expectations which it may not be able to meet at some point in future?

If we assume business is ultimately about the leveraging of scarce resources to create investor and customer value, surely these issues must lie at the heart of most companies? Increasingly, we see innovation, as rated by CEOs, stated

as one of the most important issues in business. Just recently, an industry report listed “critical thinking” and “problem solving skills” as becoming the most important attributes large companies look for when appointing staff.

Despite these issues being paramount to the ability of a company to create value beyond its peers, they are hardly ever practised in real life in the pursuit of product innovation. Indeed, I believe most companies do not even think about what innovation within their business context actually means!

Disruptive innovationToday, ‘innovation’ is less about incremental innovation and more about disruptive innovation. Most serious new business developments over the last 20 years have been about creating new industries (Google; Amazon.com; Facebook) rather than about updating current ones (Hyundai; Emirates).

These new industries have by far outpaced the growth in value of the traditional companies. The latter, with their regular product updates which are often merely facelifts – now lag far behind. However, where traditional companies do break the mould, like Nestlé with its Nespresso coffee machines, these innovations have created disproportionate value.

Disruptive innovation expects a new way of thinking and doing within an organisation. As Professor Gary Hamel, recently rated as the most influential thinker in business by the Wall Street Journal newspaper, states: a serious new strategy “is the most intellectually challenging thing any organisation can do”.

Being young at heartHence, I was pleasantly surprised when speaking to students at a leadership conference at the University of Stellenbosch recently. A second year engineering student posed this question: “Can a company indefinitely innovate with a given product, or is there a time when innovation can no longer create substantive increases in value for customers?”

What amazed me is how few CEOs or executives that I have come across over the years even mooted this question! Yet, here was junior student who had already come to this important conclusion – one that had taken me many years of experience to get to.

Is this because the way in which most companies operate makes innovation – of the kind that adds dramatic business value – almost impossible? Is it because most large organisations become like old people; too scared

to ‘think’ differently, let alone ‘do’ differently? Why do global giants like Unilever and Proctor & Gamble buy, or create, small offspring companies to bring the kind of product innovation into the organisation that they themselves may find difficult to do?

How could a student ask a question many executives never think to ask?

I was inspired by this student as he made me realise how remaining ‘young at heart’ will make our ‘thinking’ and ‘doing’ in business a lot easier. We become the victims of our own constraints. Once we get trapped in them, they take on a life of their own – even if they are devoid of reality, ignore the needs of customers, or fail to capitalise on the opportunities offered by our insights and capabilities.

It is only when we fundamentally question the status quo that we can start making the changes that will create new contexts altogether. Becoming highly innovative takes a lot more than vision statements, brainstorm processes or staff ‘fooling around’ for 10% of their time. Neither are they ‘eureka moments’ devoid of any substantive executive direction or an underlying support structure and ecosystem.

After all, when Akia Morita of Sony conceived the Walkman many years ago, or when Steve Jobs came up with the iPad, they were essentially young at heart. They kept an open mind as to how they looked at consumers, they interpreted that within their own skills-set – and then went off and did something that was clearly out of the ordinary!

Nestlé created disproportionate

value by disrupting the

market with its Nespresso coffee

machines

We become the victims of our own

constraints