Chapter 4: Systematic Innovation in:

Joachim H. Becker, Sven Pastoors, Ulrich Scholz, Rob van Dun

Towards Sustainable Innovation, page 79 - 104

A five step approach to sustainable change

1. Edition 2017, ISBN print: 978-3-8288-3903-8, ISBN online: 978-3-8288-6655-3,

Tectum, Baden-Baden
Bibliographic information
75 chapter 4: systeMatIc InnovatIon Rob van Dun Summary Innovation is the process of making an idea or invention valuable. To facilitate that process, systematic innovation is required, which entails the purposeful and organized search for changes and systematic analysis of the opportunities such changes might offer. The overwhelming majority of successful innovations exploit changes in any or more of the following seven sources for innovative opportunity. These seven sources can be divided into internal and external sources. Internal sources Characteristic for the internal sources for innovative opportunity is the fact that they are typically only visible to those operating within the company or industry. As a result, it is unlikely that non-experts or those individuals that lack knowledge of that specific sector are able to recognize these opportunities. 1. The unexpected successes, failures and outside events. 2. Incongruities. 76 Pastoors · Scholz · Becker · van Dun: Towards Sustainable Innovation 3. Process Needs. 4. Industry or Market changes. External sources In contrast to the internal sources, the external for innovative opportunity are not only visible to industry or company insiders, but to a broader public. 5. Changes in Demographics. 6. Changes in Values and Behaviour. 7. New knowledge and Technology. 4.1 Introduction to systematic innovation Finding a precise definition of innovation is difficult, as there exists a myriad of different opinions of what entails innovation and what does not. In this chapter, a rather extensive definition of innovation is used, in order to cover all different sorts of innovations with it: Innovation is the process of making an idea or invention valuable. Essential to this definition is that innovation itself is a process, rather than an outcome. It is a task that needs to be done, rather than the outcome of this very process. In popular use, “an innovation” is any new idea that is brought to the market or put into practise. Defining innovation as a process has the advantage of being able to influence it, defining a starting and ending point. For something to be called an innovation, the outcome of the process needs to be of inherent value. That value can be interpreted liberally, being either value that customers are willing to pay for, or a process innovation that improves entire processes or organizational innovations that create a valuable contribution to a company’s performance. Innovation includes all processes trough which new ideas are generated and con- 77 Chapter 4: Systematic Innovation verted into useful products, services, processes, ways of organization and business models that in some form are novel. In business, innovation often results when ideas are applied by the company in order to further satisfy the needs and expectations of the customers. Another prerequisite is that innovation must be economically feasible to put into practice or bring to the market. There is a clear difference between innovation and invention. Many of the prerequisites of innovation do not apply to invention. It does not yet have to be valued, nor economically feasible. Inventions are new scientific or technical ideas. The can be patented if they are novel enough, provide utility and are non-obvious. The only requisite of an invention is that it needs to work. Essentially, it only is the idea itself and does not have to satisfy a specific need and does not necessarily have to be commercialized. However, inventions often provide the basis for technical innovation through which new ideas are transformed into new technologies that can then be applied to new products. This book has a strong focus on sustainable innovation, either through means of process, product and service innovation. As such, it aims at both entrepreneurial “green” start-ups as well as established companies that feel the need to innovate in order to improve their (sustainable) performance – both in the short as the long-run. For entrepreneur’s innovation is the very tool by which they seek to leverage changes as an opportunity for different products and or services. It is capable of being presented as a discipline, capable of being learned, capable of being practiced. Innovation, therefore, is closely related to entrepreneurship but not limited to it. Entrepreneurs use innovations – of any kind – to seize opportunities in an ever-changing environment, either within an industry or changes in demographics, perceptions, values and knowledge (Drucker, 1985). 78 Pastoors · Scholz · Becker · van Dun: Towards Sustainable Innovation For the existing company, innovation is the deliberate application of knowledge, information on purpose to improve existing products, services, business models or ways of organization and seek opportunities to market new ideas through the creation of something valuable to (potential) customers. Also for them, innovation is of utmost importance, in some industries more than others, to sustain their competitive advantages. Consider the following relatively old quote from Chad Holliday, CEO of DuPont: “We will not be able to sustain our businesses over the long haul because they are based on two assumptions that no longer hold. One is that cheap, unlimited supplies of hydrocarbons and other non-renewable resources will always be available. The other is that the earth’s ecosystems will indefinitely absorb the waste and emissions of our production and consumption”. (Holliday, 2001). As the CEO of a petrochemical company, Holliday is aware of the changes within his industry and the overall environmental in an early stage and explains the need for his company to react to these changes through innovation. In order for DuPont to remain profitable in the long-run, they need to develop new processes and products in an early stage, or risk being overtaken by more innovative competitors that serve the same customers. 4.2 concept of systematic Innovation Systematic innovation consists of the purposeful and organized search for changes as well as the systematic analysis of the opportunities such changes might offer. The overwhelming majority of successful innovations exploit changes in any or more of the following seven sources for innovative opportunity. 79 Chapter 4: Systematic Innovation Those sources can be separated in internal sources, that are only visible within the company or an industry and some more general external sources in the macro-environment which are visible to everyone. • Internal sources (within enterprise or industry) 1. The unexpected 2. Incongruities 3. Process Needs 4. Industry or Market changes • External sources (outside enterprise or industry, in society or globally) 5. Changes in Demographics 6. Changes in Values and Behaviour 7. New knowledge and Technology 4.3 Internal sources for Innovation Characteristic for the internal sources for innovative opportunity is the fact that they are typically only visible to those operating within the company or industry. As a result, it is unlikely that non-experts or those individuals that lack knowledge of that specific sector are able to recognize these opportunities. The Unexpected According to Drucker (1985), what he refers to as “the unexpected” is one of the most predictable sources for innovation. He distinguishes between unexpected successes, failures and outside events. For all three of those, something that happens unexpectedly is a symptom of changes that have already occurred. The fact that an outcome is unexpected indicates that the cause and effect relationships that some companies and their managers have internalised are no longer true. Without them noticing, something has changed that 80 Pastoors · Scholz · Becker · van Dun: Towards Sustainable Innovation causes an outcome to occur that disrupts their reality that is unexpected. In short, possibly the best source for successful innovation is from an Unexpected Success or Failure. Exploitation of this requires analysis simply because an unexpected success is a symptom. Suppose a competitor is having unexpected success in a particular market segment. Management must find out why this is happening, asking themselves what it would mean to them if they exploited it. (Swaim, 2011)15 The unexpected success Every now and then, companies find themselves wondering why some of their own or their competitor’s products are such a surprise hit among customers. This is especially true if a new product or service is bought by customer groups that were previously unidentified or believed not to be interested. Something within that product causes it to be attractive to them. The same is true for a competitor’s product of which everyone “knows” that it is a lousy idea and no one in his or her rightful mind should want to buy those products or services. When the competition shows that they were actually right, it might be hard for companies and its managers to acknowledge that they were wrong instead. When something is an unexpected success, it is indicative of a change in expectations, values or buying behaviour of a considerable number of customers. The customer, in the end, is always right. Managers and experts need to accept that they had not previously recognized these changes in order to use this specific source. The changes in the market place simply happen, whether they like it or not. Rather than dismissing them, managers should seek to find out what exactly has changed and if possible for what reason. Al- 15 81 Chapter 4: Systematic Innovation though this might make them vulnerable, it might allow them to innovate based on these changes that seem to have happened. Once they have figured out what has changed, it is a fairly easy task to innovate further. After all, the product or service is successful already. A question that needs answering is what this specific success means for the company’s other products, business units, target groups and most importantly their understanding of the market place. The problem with unexpected successes is that they are often overlooked. Unlike with failures, successes might not ring any alarm bells and managers that focus merely on problem-solving might take them for granted too easily, without feeling the need to understand why they did not expect the product to succeed in the first place. This is one of the reasons why entrepreneurial management is important for both the existing as the new company. Its policies and practices should help managers spot those opportunities and should foster a more entrepreneurial mind-set. Unexpected success is sometimes overlooked because of managerial hubris. Thus, it happens quite often that the initial innovator is not the one that is most successful on the market. When they don’t endeavour to understand, what has changed underneath but a competing company does, the latter might be the one exploiting it. Hence, in many cases aware competitors are able to exploit the success instead and outperform the initial inventors in the end. This phenomenon is demonstrated by a Swiss pharmaceutical company that started to sell medication – developed for the human body – to the veterinarian market after the companies who had developed these medications refused to sell the drugs as veterinary medications because they felt to noble to do so (Drucker, 1985). Another and fairly old example dates back to the early days when Marriott (nowadays one of the biggest hotel chains) was still a restaurant chain. Management observed that one of their restaurants in Washington, DC was outperforming all others in their chain in 82 Pastoors · Scholz · Becker · van Dun: Towards Sustainable Innovation terms of monthly revenues. Upon investigation, they found the restaurant was located across from the National Airport. This was before airlines served meals on planes and they discovered that airline passengers would stop by the restaurant and purchase sandwiches and snacks to take on the plane with them. Marriott met with the old Eastern Airlines and suggested they provide food to be served on the plane – thus the beginning of the airline catering business. Of course, now many airlines, in an attempt to control costs, have eliminated meals and passengers are left to bringing the snacks with them again16. The unexpected failure Failures, unlike successes, cannot be rejected and are usually noticed. Unexpected failures occur when something happens that does not comply with the assumptions about reality everyone in an industry had been making about consumer behaviour. Although they might be noticed a lot more than the unexpected success, they still need to be investigated to expose the underlying changes. Innovators need to discover trends and customer values: they need to observe, analyse and listen. Innovation itself is perceptual meaning that it does not happen in a vacuum with one genius inventor cranking out one innovation to the next. It demands of the innovator to find out what happens in the market place, what customers want, how they react to things, why they act the way they do. The unexpected failure should be a starting point for managers and expert to figure out why a new product or service failed, even though they all knew it was going to be successful. That also applies to competitors as one company’s failure might be turned into an opportunity by another. 16 Taken from Peter Drucker. Innovation and Entrepreneurship (1985). Page 327. 83 Chapter 4: Systematic Innovation In Innovation and Entrepreneurship (1985) Peter Drucker illustrates how the unexpected failure needs further investigation with the example of the Ford Edsel: “Ford Motor Company developed a new automobile, the Edsel, in 1957. The auto’s design stemmed from extensive market research about customer preferences in appearance and styling, yet the Edsel became a total failure immediately after it was introduced. Barely a soul wanted it. Instead of blaming the “irrational consumer”, Ford’s management decided there was something happening that was not in line with general automobile industry assumptions about the reality of consumer behaviour. After reinvestigating the market, they discovered a new “lifestyle segment” to which they quickly responded by producing the superbly designed and produced Thunderbird model – one of the greatest successes in US auto history. Will the highly acclaimed innovation, the GM Chevy Volt follow in the footsteps of the Edsel?”17 Incongruities Incongruities are best defined as gaps between what reality is and what is expected to be reality. The reason for an incongruity is often not understood but it is considered a fact that incongruity occurs due to certain underlying faults. An incongruity is a symptom of change; a symptom of an opportunity to innovate. Like the unexpected event, whether success or failure, incongruity is a symptom of internal change within an industry, a market or a process. The incongruity might be visible to the people within or close to the industry, market, or process. Yet, it is often overlooked by the insiders due to a missing willingness to accept the change, which is why it is a source for innovative opportunity to start with. Solving the problem of incongruity, which in practise means aligning what actually 17 Taken from Peter Drucker. Innovation and Entrepreneurship (1985). Page 327. 84 Pastoors · Scholz · Becker · van Dun: Towards Sustainable Innovation is with the assumptions about the industry itself, enables managers to seize the opportunities that unfold before them. Wasted efforts Every now and then, the efforts of industry insiders do not seem to solve a particular problem. When that is the case, either the problem is unsolvable, or the efforts are directed towards a symptom, rather than a problem. Whenever reality is not fully understood, the assumptions of company insiders and even experts about what the problem consists of, is off. As a result, the efforts they undertake are futile. That individual that truly understand where the problem lies and thus has a good perception of what reality actually looks like, can get rid of this incongruity and solve them problem differently, leaving grant opportunities to innovate. A striking example of the industries wasted efforts is that of traditional encyclopaedias. For hundreds of years, the encyclopaedia was the main source of knowledge and information for the majority of individuals. In its effort to include as much of it as possible, the leading publishers and perhaps most notably Encyclopaedia Britannica tried doing this by making them thicker, costlier and updating them more often to keep up with the rapid pace of developments and an ever-increasing interest in the global domain of its readers. All of the traditional companies focused on creating an ever-increasing volume. But that did not solve the problem, which was only solved when a new company challenged the established ones when it started creating an online encyclopaedia, with far more and always upto-date articles, millions of contributors and billions of visitors. It is this disruptive innovation that caused the Encyclopaedia Britannica to cease being printed in 2012, finally realizing their defeat. The best thing, this “new” online version is free of charge and accessible to everyone, greatly furthering the knowledge of every individual on the planet. The wasted efforts of an industry give way especially to disruptive innovations, typically introduced by newcomers, rather than industry incumbents. When everyone else was focusing on 85 Chapter 4: Systematic Innovation printing even larger volumes at even higher costs, the solution to the problem was printing nothing and making it free for everyone. You might have guessed it; Wikipedia is the company that saw an opportunity to remove the incongruity between the industry’s efforts and what the problem actually consisted of. Obviously, it was new technology that gave way to this innovation too. The misinterpretation of value One of the most commonly occurring incongruities is the mismatch between what companies believe their customers value and what customers actually experience as valuable. This might seem unbelievable at first, but many companies have a poor understanding why their customers even buy their products. Sometimes, they even have a completely different opinion of what customers buy. This is most common in high-tech, where sophistication is often believed to be equal to value, although the opposite may be the case. Products can be (far) too sophisticated, leaving customers clueless about how they are supposed to use it. For some reason, many companies believe that more is more. Adding all sorts of features should be valued, in their opinion, because only then customers have it all. Take a look at the outdoor industry and the often times overly featured products they make. Although some customers might be able to understand what all features on a backpack are supposed to do, many of them have no clue and never use ice-axes and crampons and by no means have the need to use those. However, those overly featured packs seem to sell, basing it on the number of backpacks that have so many cords and loops the user needs to be careful as to not get tangled. In essence, a backpack is a rucksack that sits on your bag comfortably and enables the customer to haul gear from place A to B. All the features on those packs support none of that and only seem to make them cumbersome and heavy, whereas simplicity and lightweight are for many customer important values. 86 Pastoors · Scholz · Becker · van Dun: Towards Sustainable Innovation It happens rather often that companies simply fail to understand what actually represents value to the customer. In the end, they believe that they are the experts? They know what is best for the customers. The fact that those irrational customers do not get it is not their fault, it is a lack of knowledge. Right? Not at all! Companies are not paid to reform customers, but to satisfy their needs. The customer is always right. If many of them do not understand what a product is supposed to do, well, it means it does not convey value to the customer. Companies only get paid for providing value and in order to do that, they need to do something really well. Why else do customers pay the profit margins of those companies? On the contrary, many customers get much more value from some products than companies even seem to realize. According to economic theory, their willingness-to-pay should be at least equal to the purchase price, giving them a surplus. They are happy and do feel anything but indifferent to the product or brand. Their manufacturers seem to truly understand what value is for that specific target group. The companies that succeed in the market are those who align what the customer buys and what is being sold. Although this might appear silly, there often is a discrepancy here. Many readers will understand that a car is not merely a means of transportation from place A to B, it represents freedom, a certain lifestyle, and certain values. They are willing to spend fortunes on this, because the value it represents is far greater than what it technically is. On the other hand, who cares about the brand of a permanent marker? A marker does probably not mean anything to the customer, all he or she buys is a means to write something that does not wash of easily. The cheaper, the better probably. 87 Chapter 4: Systematic Innovation To illustrate how great the innovative opportunities are, the airline industry serves as a good example. Within that specific industry, customer loyalty is a rare feat, especially for shorter trips. Their customers do not even buy them directly from the “shop” or airline website. Instead, they look for the best offers on websites that make a fortune on comparing airline fares. They will most likely select the cheapest option and switch from one provider to the next for as little as €1 or $1 difference. This is what made Richard Branson, one of the wealthiest Brits, so successful. He started Virgin Atlantic mostly out of frustration with the other airlines and realized that customers were probably willing to give up some “quality” in exchange for lower prices. He started out with only one Boeing 747 and now dedicates his life to adventurous and hyper-ambitious products that further the limits of what men is capable of through the fortune that he made in the airline and record industry. A wildly successful entrepreneur that was able to provide what true value is to the customer. In similar fashion: Linux was a great operating system, stable and relatively fast. But, hard to operate. Microsoft Windows on the other hand was easy to use. Guess who won in that industry. The company that understands what truly represent value have started the race with a head start, as they can innovate in that specific direction, amplifying everything that they do and create a competitive advantage that is very hard to beat and what customers are willing to pay for. Processes without progress “That’s just the way things go down here” or any similar quote hinting at unnatural and frustrating processes that are too easily taken for granted. Its users or operators have at some point in history accepted that it is part of the deal and do not longer look for alternative ways to do it. A while ago, they might have found themselves wondering how on earth anyone could work with something that counterintuitive, cumbersome or time-consuming, but did not find a way to solve it or did not care to try. Many people have come across those situations, assuring themselves and the people around them 88 Pastoors · Scholz · Becker · van Dun: Towards Sustainable Innovation that there is a better way. Yet, nothing has happened. When the logic or rhythm of a process is off, there exists an incongruity within that process. It is the symptom of change waiting to happen. A process needing to be innovated. A superior solution that almost sells itself. Of course, only industry or company insiders that work with that process understand them and those innovative and creative enough can turn their frustration in very rewarding process innovations. The incongruity within the rhythm or the logic of a process can easily be eliminated and converted into an opportunity when focusing on understanding the customers’ needs and working on improving the process/the product accordingly (Drucker, 1985). Process Needs Just like the Unexpected and the Incongruities, the Process Need occurs within the process of a business, an industry or a service. Contrary to the first two sources, the process need is task-focused, rather than situation-focused. It aims to improve an existing process. Many insiders, experts and employees that use or work with a particular process have identified the need to improve parts of it. That may be because they are cumbersome, wasteful, illogical, not routinely or any other reason. However, they are unable to define a solution to their problem, do not have an alternative and are stuck with the process as it is. They might have given up and have accepted that it is just part of their lives. The efforts to improve these “processes without progress” will eventually fade away. Where these incongruities or inconveniences occur, they might not only cause frustrations but also opportunities to solve an immediate problem. It forms an opportunity to successfully innovate by solving that specific problem. This opportunity is only visible to industry insiders. Process needs occur when there is a weak or missing link in a process that needs fixing. Solutions can be complicated or rel- 89 Chapter 4: Systematic Innovation atively easy, but in any case, the solution to the problem will be accepted instantly because it is “a better way”. Given that everyone in the company or industry experienced the same problems, a processbased innovation is likely to be accepted because it is so “obvious”, even though no one had thought of it before. An innovation that improves a process or a part of it soon becomes the standard and is typically successful. Once upon a time, during the late 90s of the previous decade, Steve Jobs envisioned a product that would change the music industry and Apple’s future forever. He wanted to attract new customers to the Mac “environment”. At the time, his hub strategy involved making the Mac computer central to everything media related, ranging from videos to photos to music. At the time, however, the music industry struggled a lot with illegal downloads as Napster became increasingly popular. He knew that the future of music was in MP3 downloads, rather than the physical album that customers would buy at record stores (of which few have survived). When looking at competition and every other portable media player (PMP), his team at Apple noticed a couple of missing links within the process of using them: • Transfer time from computer to PMP took too long for even an album’s word of songs (up to 10 minutes for around 12 songs). USB technology was too slow; • The storage space on smaller PMPs was far too low (typically only 1 album); • The size of players with hard drives was far too big to be convenient. All of these problems in the process of using an iPod were known to industry insiders, but it took ingenuity and a different approach to solve them all at once. The fact that Apple had a Toshiba 1.8” hard drive with 5 gigabytes of capacity laying around also helped them forward. Having identified the process needs for portable music players, his design team began to work on prototypes that would fix 90 Pastoors · Scholz · Becker · van Dun: Towards Sustainable Innovation them all. Within 6 months’ time, just prior to the Christmas shopping season in 2001, the first iPod were being shipped. Two years later, in 2003, Apple would launch iTunes to change the music industry forever. Although many Apple fans and pundits alike questioned the iPod during the product’s presentation, it was an instant hit among customers worldwide, changing the company’s future forever. Remember: the high-tech sector was still in shatters after the dot. com bubble burst leaving many technological companies severely wounded. Without the iPod, there possible wouldn’t have the iPhone and consequently no smartphone as we know it today. The iPod was, among other reasons, so successful as it fixed all the problems other PMPs had. For the interested reader, the iPod case can be found in the appendix of this chapter, illustrating the essence of systematic innovation, as well as entrepreneurship and fostering innovation. Nota bene: Obviously, market and industry changes (the next source), as well as new knowledge were instrumental to the creation of the iPod. Most successful innovations are based on opportunities arising from different sources, if not almost all of them. This notion will be discussed at the end of this chapter. Industry and Market changes Sometimes, industry and market leaders neglect newcomers that aim to do things differently, simply because they surely feel that “that’s not how it works around here”. A couple of years later, they find themselves fighting these newcomers that now pose a real threat to their profitability, which proves to be a lost fight should this newcomer have reacted on changes in the industry or markets. A company’s strategy is always contingent on the environment. The industry, in particular, provides the rules by which the game needs to be played. Compare this to a game of chess (or poker) where different players pursue different strategies based on their assumptions 91 Chapter 4: Systematic Innovation about how the others are going to play and what the rules are. When markets and industries change, and players are not able to change accordingly, they are playing chess on a checker board (which has 100 squares instead of the 64 in chess). Although the changes might even be visible to outsiders and seem obvious, incumbent companies often see them for threats, rather than opportunities. Rather than seeing what they can and need to change, they seek strategies that might protect them from having to change. A classic mistake, made by so many companies that lack entrepreneurial management or spirit. Change in industries or markets are major opportunities for innovation. It requires a new answer to the question “What is our business?” Essentially, companies need to change their business models in accordance to those changes, which essentially is business model innovation. Consider the differences between the consumer-packaged goods (CPGs) industry and retail of non-consumables (often referred to as durable goods). CPGs (or fast-moving consumer goods, both terms are used interchangeably) are those low-cost products that are sold/ bought quickly and frequently, examples include food, soft drinks, batteries, pens, cosmetics, shaving products, laundry products et cetera. Generally, the products that are sold in supermarkets. Durable goods are those that are not consumed and have a longer lifespan and higher costs, examples include consumer electronics, sports equipment, toys, home appliances et cetera. Looking at those industries, for a long time, there was little difference. Until rather recently, the markets for especially durable goods changed dramatically. For one, some physical products are not even physical anymore (think of books, magazines or music), but the places where they are sold are very different from before. All around the world, local stores are going bankrupt as they cannot compete with the newcomers any longer, for they have such an elaborate as- 92 Pastoors · Scholz · Becker · van Dun: Towards Sustainable Innovation sortment, have lower prices and consumers can find their way to their stores far easier. This goes for home appliances, garden equipment, toys, barbecues, televisions or laptops. Those newcomers in retail are Amazon and every other major online store that you can think of. They are the winners in these industries, where the traditional smaller or even very large stores are the clear losers. The ones that are able to survive are the niche players, the experts that have expertize and where it pays off to actually drive to the shop and get feedback, get advice. On the contrary, in the CPG industry, your local supermarket is still the same as ever and hardly anyone will buy his or her groceries online. Two seemingly similar industries, yet they have developed very differently over the last decade. Yet, the wary supermarket will now offer an online store where you can enlist the CPGs you need and will bring it to your home at a time convenient to you, because they too realize that online is increasingly important. If they don’t, someone else will. With many two income households where time, rather than money is scarce, this will be a “future” development. Newcomers like amazon, Alibaba and other major online retailers have changed business processes massively. Department stores and traditional stores have fought it all the way, coming up with different ways to attract customers to their stores. They saw the internet as a threat, rather than an opportunity and now have to pay for it. They should have brought the store to the customer, offering what they needed. Why is there such a difference between the industries? The answers are quite simple, yet fundamental to how those two industries work and differ: • Firstly, CPGs are by definition low cost, meaning there are only minor absolute differences in price, although they may be high in percentage. Whether an avocado costs 40 cents or 80 cents 93 Chapter 4: Systematic Innovation is a 100% difference, yet it only equals 40 cents. Not something the average customer is willing to investigate alternatives for. Economic theory teaches us that the percentage of the income spend on a good has a major effect on the price-elasticity on that good. In other words, customers do not really feel the difference if it is an avocado, whereas a 10% difference on a TV might actually be 100 Euro or Dollar. That’s a major difference, probably something the average customer might be willing to spend some time online for looking for the best bargain. • Secondly, CPGs are bought very frequently and do not get that much consideration. In addition to that, they have a relatively short shelf life and cannot be stored. • Thirdly, CPGs are more of a commodity than durable goods. How much difference is there between batteries of brand X and Y? Not that much. Hence, there is no need for a massive assortment of different products in different colours, different sizes, different varieties as with consumer electronics, clothes and everything else customers buy online. 4.4 external sources for Innovation In contrast to the internal sources for innovative opportunity, the external ones are not only visible to industry or company insiders, but to a broader public. We differentiate between changes in demographics, changes in behaviour and values and new knowledge and technology. Many of these, you will find in the standard PEST (or any of the closely-related variants of this) framework, as they do indeed constitute the external environment. These sources for innovation are indeed all based on changes in social (demographics), philosophical (values), political (behaviour) and intellectual (knowledge and technology) environment. An important notion is that the external environment cannot be influenced by the company itself, which means that they need to adapt to any changes that happen within it. 94 Pastoors · Scholz · Becker · van Dun: Towards Sustainable Innovation Changes in demographics The word demography stems from Greek, in which demos means people and thus is a picture of the people. That picture contains, among a great many factors the population’s size, age structure, composition, employment, education status and income. Demographic changes thus consist of at least one of these factors changing. In innovation, changes in such demographics make for very reliable, unambiguous opportunities to innovate. • One of the reasons that demographic changes are so clear is the fact that the lead times are very long. We have known for years that the baby boomers are currently all retiring, causing some major complications for healthcare and social security systems. It doesn’t take a rocket scientist to understand that someone who is born today, will turn 18 in exactly that same amount of years. Although this may feel slow, it is actually very rapid. From the one day to the next, the kid will age by 1 year. That is great information for universities, driving schools or any company targeting 18-or-so year olds. • A second reason for that reliability is the fact that it can already be studied what people of a certain age buy, how they behave or what they want. That means that when a large portion of the population is aging, they will most likely conduct themselves in the similar fashion. • Another reason is that the changes are very unambiguous in a sense that they either change or they don’t. Demography, which is the study of vital social statistics of a population will hence enable the innovator to know exactly by much it has changed (or will change for that matter) and when it is to be expected. Given the fact that lead times are often very long, demographics are easily studied and that the implications of the changes are already observable, it seems almost too obvious to be a source for innovative opportunity. Yet, it is often overlooked just for that simple reason. 95 Chapter 4: Systematic Innovation Demographic changes are believed to be slow, even though something might change from one day to the next. The fact that people see it coming for so long, and do have time to react well in advance, does not mean that it is slow. It is just predictable. Despite the relatively recent focus on Millennials, Baby Boomer households in the US (born between 1946 and 1964) represent both the largest portion of the nation’s household population (37.5%) and investable assets (45.5%). In total, they hold $14.5 trillion(!) in investable assets. Can you imagine the opportunities that this generation has on innovation? Combine that information with the fact that 42% of all baby boomers in the U.S. want to retire and live in the South Atlantic region (Florida) as well as the Mountain region (Rocky Mountains). That information is readily available but gets neglected too much. This creates a market for up-scale housing, golfing, cruise tours, toy stores for grant children, and medical centres in all of those areas. In conclusion, for those genuinely willing to go out into the field, to look and to listen, changing demographics is both a highly productive and a highly dependable innovative opportunity. Changes in Values and Behaviour The meaning and the consequences of the following two statements are totally different. Either “the glass is half full” or “the glass is half empty”. When these perceptions change, great opportunities arise. The facts do not change, just the meaning we give to it. The perception of health care for example, which in the past was an area of little importance and now is considered to be one of the most important personal needs. The baby boomers mentioned before and even more so the generation before them had to be beaten into the hospital with a stick should their health be at stake. Nowadays, emer- 96 Pastoors · Scholz · Becker · van Dun: Towards Sustainable Innovation gency rooms are occupied with people having nosebleeds, splinters, headaches or anything of the sort. That is nor healthy, nor financially maintainable. We have started valuing health far more than previous generations and that creates tremendous opportunities for innovators in the health care and food and beverage industries. The superfoods of today sell for three times the price as a couple of years ago when they weren’t considered superfoods, but just beans and berries. All of these examples show how over time perceptions, values and behaviour change. Why they change is irrelevant for entrepreneurs and innovators. All that matters for them is that something has changed, creating vast opportunities to innovate. The meaning of sustainability has changed a lot over time and with it our societal values and behaviour. We buy products which we believe to be sustainable, we try saving energy and waste and consciously consider our ecological footprints. We value sustainability and behave accordingly, creating opportunities for sustainable innovations that could possibly be sold for a premium. Let’s combine changes in demographics and changes in values and behaviour and stick to baby boomers. The first baby boomers have now retired and started living in place like Florida and Colorado, where they spent their times strolling the beach, playing golf, walking through the mountains and enjoying the slow lives in those specific regions. Thus, they already worry about their health, they want to prevent any disease as much as they can. Health care used to be hospital care for the ill, nowadays it is shifting towards decentralized health centres, home care and so on. This creates opportunities to innovate in home care products and services. This gave rise to new innovations such as Intel’s Health Guide. Microchip producer Intel created this device that is able to measure health indicators and communicate with a doctor directly. There are many examples of remote health monitoring, where elderly people have “devices” that they can use to monitor their health. Such innovations are based 97 Chapter 4: Systematic Innovation on changes in demographics, values and behaviour, new technology and changing market structures all at the same time. Figure 4.1: The Intel Health Guide New Knowledge New knowledge and technology, out of all the seven sources for innovative opportunity, is often believed to be the most important source for innovation. Although it is hot and generates a lot of attention, this is not per se the case. And even where that to be true, those innovations are just a relative small fraction of attempt to innovate in this area, as it is so risky. Much riskier than all the other sources due to some of the characteristics of knowledge and technology. Especially knowledge-based or technology-driven innovators need to make sure that their intended innovations are based on more than just this very source or they will fail. Rather than focusing on their idea or product, they need to gather as much valuable feedback as possible. They wouldn’t be the first to overzealously focus on per- 98 Pastoors · Scholz · Becker · van Dun: Towards Sustainable Innovation fecting a prototype or product for five years before they even dare to show it to someone else who can’t even begin to understand what the product is or what it does. That entrepreneur might than realize that what he has been working on for the last couple of years does not provide any value for anyone else and that he needs to get back to the drawing table to begin from scratch, but now incorporating the feedback that he received. Existing high-tech companies sometimes have made the same mistake far too often, they tend to push a technology on the market which no one cares for, simply because they believe it to be superior to the previous generation of technology. Or they focus on what they believe quality entails; a product that is so sophisticated and has so many features that it can only be successful. So, ask your customers what quality is in their opinion. Bose and JBL make some of the best music speakers currently on the market. They are sleek, have good sound and – very importantly – are completely fool-proof having only a couple of buttons on them. In the 1990s however, every single manufacturer of stereo systems went over-the-top with regards to buttons, features, size, options, and equalizer. All for too complicated for the quintessential user that just wanted to play a CD. That happened because they were innovating upward on a more=more curve which entailed outcompeting on another on the number of buttons per square centimetre. I question whether customers already back then believed that to be quality. An important characteristic of new knowledge is the fact that lead times are very long, even today where product life cycles are getting increasingly short. The term lead time describes the period between the emerging of knowledge, via its transformation in a workable technology till this technology is used in products for a reasonable price. That lead time may still be up to 25 years. Even some of the greatest innovations of recent times, the smartphone or Tesla’s electric car, are mostly based on relatively old knowledge such as computer, touch-screen technology, and battery technology. It took so 99 Chapter 4: Systematic Innovation long for all of those different technologies to be mature enough to actually create a smartphone or electric car to sell them successfully. The fact that that a wide range of multiple technologies is used in high-tech products is another characteristic, which is referred to as the convergence of knowledge. A product such as the smartphone or electric car can only be produced when all sorts of different technologies have converted and are mature or developed enough to work. The first modern-era electric car was produced by General Motors and even though they leased out some of them, it still had limited range and came at a high price. And even Tesla Motors found it hard in the beginning to make it work. Elon Musk, CEO of the car manufacturer always made it his mission to produce a reasonably priced car. But to achieve that, he had to introduce the Roadster and Model S first to work on this technology a bit more and to reduce costs enough to finally produce his magnum opus which is the Model 3 that was unveiled March 31, 2016 and only distributed in 2018. High-tech and knowledge-based innovators need to consider their business models extremely carefully as it is so turbulent and hard to grasp. They might need to develop a complete system that creates the infrastructure and environment to use that new knowledge. An example of this is Thomas Edison. He invented the light bulb in 1879, but was unable to sell it as there was no mass-electricity. After all, why would people want electricity when there was no use for it at all? There was no infrastructure whatsoever. So, Edison went ahead to innovate in the mass distribution of electricity, which was the necessary infrastructure for him to sell his light bulbs. In 1880 he succeeded spreading electric light, beginning in New York City, after which the rest of the world followed rapidly. 100 Pastoors · Scholz · Becker · van Dun: Towards Sustainable Innovation Training questions: 1. Explain, in your own words, why companies should seek innovative opportunities within their internal and external environment. 2. What is the difference between process needs and customer needs? 3. Why are changes in demographics such a reliable, unambiguous and transparent source for innovation? 4. Explain in your own words the unique risks of high-tech and knowledge-based innovations. 5. Explain what sources of innovative opportunity are exploited by Apple in the iPod case study. Recommended literature: Schumpeter, Joseph A (1976). Capitalism, Socialism and Democracy, New York. Drucker, Peter (1985). Innovation and Entrepreneurship: Practice and Principles, New York. Christensen, Clayton M. (2003). The innovator’s solution: creating and sustaining successful growth, Harvard.

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With sustainability having gained a lot of momentum over the last years and companies implementing strategies to create corporate sustainability, there are lots of opportunities for innovation. Thus, the two concepts of sustainability and innovation should not be considered separately – they are closely interlinked with one another. The main goal of sustainable innovation is to develop new products and technologies that have a positive impact on the company’s triple-bottom-line. To meet this aim, they have to be ecologically and economically beneficial as well as socially balanced.

In order to help companies to improve their sustainable innovation process practically, this book is structured into five possible phases of a sustainable innovation process:

Awareness of a sustainability problem

Identification & Definition of the problem

Ideation & Evaluation of the solutions

Testing & Enrichment of the solutions

Implementation of the solutions & Green Marketing