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4 Rules for Fostering Innovation in Your Business

Innovation is one of today’s most popular business buzzwords.  Most small and growing businesses – and especially startups – say they want to innovate. But most never get there because they are focused only on cost and efficiency, and not creativity, leaving little room for fresh ideas. In fact, many businesses today are actually anti-innovation without even knowing it, says Ed Hess, a business professor at University of Virginia’s Darden Graduate School of Business.

In today’s “do-more-with-less” environment, innovation can be too messy and inefficient to take root. Many business owners seek stability through structure and predictability rather than less-predictable innovation. But the mechanisms that help grow a business are much different from those that simply keep it from falling apart. In order to grow and innovate, you have to be willing to explore a little and put up with some uncertainty and ambiguity.

To instill a mindset of innovation at your business, you’ll need to adopt some different ways of thinking. Here are four “rules” for fostering innovation in your business:

1. Efficiency and scale don’t always rule the day: Typical business management practices in companies of all sizes favor efficiency and avoiding risks.  But being innovative requires taking some risks and trying lots of different things. And that, of course, means that some won’t work out. But those “failures” are like down payments on the things that do work and that will help your business grow.

2. Not everything needs to be certain: The fundamental nature of innovation is that nothing is certain.  Businesses that are best at innovating are dominated by ambiguity and change.  You just have to get used to it and create an environment that allows for experimentation, invention and exploration. It might be nice to talk about achieving near “perfect” performance, but growth experimentation often produces much the opposite. Variance – the enemy of efficient, cost-effective operations – is the norm when it comes to innovation.

If you want an innovative business, be careful about how strongly you insist on efficient, waste-free execution. You can easily end up killing any and all inventive ideas, as the path to innovation is not a straight line.

3. Innovation does NOT have to be revolutionary:  Sometimes, thinking smaller is the best way to foster innovation. All too often, entrepreneurs think that innovations – and just about any goals for that matter – must be big and audacious. They don’t. Get over it.  Setting – and achieving – small, proximate goals and innovations is a better way to keep the ball rolling.  In fact, most innovations are small, incremental things that are close to the core activities of your business – be they products, services, processes or all of the above.

Innovations can and should build on things that have already been done – they don’t have to be revolutionary. Says Hess, “The kind of ideas businesses should want to generate are all about creating new value for customers.”  We shouldn’t care if it’s already been tried, looks like something old in a new package or is borrowed from another industry. What’s most important is that it creates value for your customers that no one else has yet offered them.

Remember:  The best innovators learn how to combine existing things differently or transfer concepts from different industries or domains.

4. Innovation and effective execution can co-exist: Sure, innovation is often a messy process that is prone to failure. But don’t try to isolate it within certain places or people in your business. In other words, don’t feel like you need to segregate innovation from the rest of your business, where you have people who “execute” and others who “innovate.” They can go hand in hand, and the bridge that helps connect them is learning, according to Hess, who is co-author along with Jeanne Liedtka of The Physics of Business Growth (Stanford University Press, 2012). When you encourage employees – and yourself – to learn about new things and avoid “my way or the highway” type thinking, you will foster innovation in your business.

Finally, says Hess, understand that “growth experimentation” is a game of probabilities and the sooner you get customers actively engaged in your experimentation game, the more likely you will be to win.

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How to Counter the New Culture of Free

Free is a powerful force in the marketplace; especially online.  A fast-growing, Internet-inflamed “Culture of Free” is leaving more and more businesses in all industries and areas reeling in profit pain.  Companies large and small are seeking answers to a question that once seemed odd:  What can you do when your products or services are more popular than ever, but consumers don’t want to pay for them anymore?

Surprisingly, perhaps, there are some good answers.  Saul Berman, a partner in IBM Global Business Services who wrote the insightful new release Not for Free: Revenue Strategies for a New World (Harvard Business Review Press, Feb 17, 2011), argues that companies in nearly every industry are vulnerable to five profit-piercing threats that have facilitated the culture of free:

1)      High customer expectations for personalization, control, relevance and timeliness

2)      Low cost, saturation-level communications

3)      Bountiful, low-cost band width

4)      Plentiful, real-time data processing power

5)      Rapid-fire technology and competitive innovation

These trends and expectations affect even small local businesses.  Customers now instantly communicate local buying experiences; they expect restaurants, dry cleaners, health clubs and others to offer personalized, relevant offers and experiences.  And they have unprecedented access to price comparison and other competitive information.

Businesses are being forced to squeeze out revenue in new ways as markets shift.  But the changing landscape, Berman argues, creates new opportunities to grow revenues “organically” without expensive advertising or marketing programs, by simply changing your approach.  The key is this:  It’s not about creating killer new products or latching onto the new technology du jour.  It’s about understanding customers and delivering value.

How?  Start at the beginning – with your customers.  But be careful.  Most business owners, entrepreneurs and companies in general still view customers through an outdated mass segmentation lens based on age, income, gender or geography.  Such segmentation is dead; done in by technology.  In its places there’s a new type of segmentation based on how buyers actually behave – how they use your products, services and information.  This in turn sets the table for building revenue in new ways:

1)      Pricing innovation: It’s not just “how much” but also “when.”  No product is free – ever – notes Berman.  Someone always pays for it. So the answer is not to price your product at zero, but to innovate around the amount of money charged, and the point (or points) in time when you require customers to pay.  Successful approaches include: subscription plans, variable pricing, by-parts pricing, bundling, and rental models.

Rent The Runway, launched in late ‘09 by two Harvard Business School students, is a great example of pricing innovation.  The founders (Jennifer Hyman and Jenny Fleiss, shown in photo) took a traditional “buy-only” product (designer dresses) and reinvented it via subscription and “rental model” pricing.  Rent The Runway is a membership site (think “subscription”) that rents designer dresses to members to wear at all of life’s special occasions for less than 10% of what it would cost to buy one.  Women can outfit themselves in a different, cutting-edge designer fashion for every event they attend throughout the year for less than what they would have paid to buy a single dress in the past.

2)      Payer innovation: Sometimes the customer who pays is not the consumer of the product. Berman calls this “let’s have a (third) party.”  Since nothing is free, and somebody always pays, the trick is to think of alternative “somebody’s” who might pick up the tab, or part of it.  A classic example is TV shows.  They’re free to you – the advertisers pay.  Sponsorships and while-labeling are two other examples.  “While labeling allows product companies to sell outside of their traditional market without having to drum up demand themselves.”

3)      “Package” Innovation:   Don’t take “package” too literally. It’s not about the wrapper; it’s about all the benefits and features of a given a product or service.  Today’s most innovative companies are expanding revenue opportunities by changing the form an existing product takes.  There are three basic ways to think about it:

a.       Breaking the product down into components

b.      Integrating different pieces of the value proposition

c.       Extending value in new ways

Understanding the underlying elements of pricing, payer and packaging can help you rethink and reformulate your revenue strategies, and find new ways to keep customers paying today and in the future. For the latest updates, bookmark BizBest, or subscribe to the BizBest news feed.

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