What’s All This Talk About Innovation?

What’s All This Talk About Innovation?

Beth Goldstein

I’m continually in planning mode for the various seminars and workshops that I teach, so it’s hard for me to ignore the theme that is most commonly requested (after increasing sales)— innovation.

Let’s face it; this isn’t a new topic, but with so many companies cautious about hiring after a long recession, growth has to come from somewhere. So, innovation is “hot” (once again). What does it mean to be innovative? Merriam Webster defines it as making a change, creating a change or making something new apply to your business in many different ways. You can innovate the way you run your business (i.e., change your business model) or you can innovate with whom you do business (your customers) or how you approach customers (your sales and marketing tactics). I’m confident you can think of other ways to innovate but those should get you started (the fact that you’re reading this article is a sign that you’re probably already innovating… or at least thinking about it).

Let’s start by discussing innovation in terms of your business model. A company’s business model basically is the way it creates, delivers and captures value for customers. Since value propositions (what customers care about) can be experienced in different ways, how you deliver your value (i.e., your business model) can be innovative, and can lead to true top- and bottom-line growth.

How do you determine what innovation would mean for your company? It’s not simply about the products and/or services that you deliver. If it were, then you’d run the risk of becoming a commodity, where price often becomes an overwhelming driver. Even if your product actually is differentiated at this moment, to remain a growing business you don’t want to be perceived as a pure “commodity player,” so you also should identify other unique value that you deliver to customers… also known as your competitive advantage. Perhaps customers want to do business with you because they like the experience or you offer additional benefits such as fast turnaround or amazing customer service. These are in addition to the actual product they are purchasing and help differentiate you from others who might offer a product that otherwise could be perceived as similar.

Let’s take an example within the restaurant industry. I recently heard the founder of Panera, Ron Shaich, speak at an event at the Harvard Business School and was intrigued to understand what made this restaurant chain so successful. What was his “secret sauce” (i.e., unique value)?

Here’s what I learned: From the start, they chose to offer value in several interesting and unique ways that were not being addressed in the market. They differentiated their business model by offering a more upscale dining experience relative to a typical fast-food restaurant. Combine the inviting atmosphere you experience there (unlike McDonalds, Burger King or other fast-food restaurants) with high-quality products such as artisan breads baked daily and you’ve got a terrific meal that doesn’t cost customers a lot more than eating at a typical fast-food place. They include in that experience free Wi-Fi for all of their customers (for years Starbucks charged a premium for this service), and now they’ve created loyal customers and differentiated their value.

By doing all of the above, they created an atmosphere that encouraged people to hang around. Panera didn’t try to be all things to all customers. The company also didn’t try to be just another bakery or fast-food restaurant. Management saw a unique gap in the product offerings in terms of customer needs, stayed with the bakery-café model and delivered a consistently excellent dining experience at a reasonable price point. I am especially appreciative of the model since the majority of my first book was written at Panera and my second one is on track to make the same claim.

Let’s look at another interesting business model and see how tapping into unmet customer needs can have a huge disruptive impact, not just on a business but on an industry. Groupon was first introduced in late 2008. Its business model is relatively simple. Groupon approaches a merchant to offer a deal (discount) on a product/service with the opportunity to tap into Groupon’s enormous database of millions of online subscribers. If the deal reaches a critical mass or a minimum purchase level, then it’s activated and these Groupon subscribers receive a coupon to redeem the offer at the merchant’s store.

What’s in it for coupon purchasers? Well, they save anywhere from 30-50 percent off the price of the item while the merchant (who already has discounted the value of the service) receives 50 percent of the offer price. That means the merchant may be getting as little as 25 percent of the list price of their product/service. So why would a merchant be interested in getting such a low margin—or risk losing money on every item purchased? The continual challenge for most small business merchants is to introduce new customers to his/her business… customers who ideally will continue to buy from the company/store once they’re acquainted with it. Therefore, Groupon basically is a new advertising model. Before the Internet, the Yellow Pages and newspapers were the medium of choice for small business owners to reach local consumers. Then, new business models sprouted such as group coupons and Google advertising. Who knows what the next new innovative force will be.

Is this a good business model? Well, it certainly seems to be for Groupon, since Google recently offered to buy them for $6 billion, which is no paltry sum (note: a deal was never reached). However, their model is reliant upon a team of thousands of locally based salespeople and with no barriers to entry for competitors and no switching costs for merchants and customers… rivals easily are able to enter the market. If these competitors capture large market share (or capitalize upon a strong existing network) this could be a problem for Groupon. Facebook is looking into a way to leverage its enormous network by offering similar merchant discounts and other companies, such as Living Social, are aggressively acting in the same space.

We’ve looked at both a traditional brick-and-mortar business model and a mixed Internet-local service delivery company, but alternative business models can work for any organization in any industry… if they address a need or gap in the market.

Finally, let’s examine a manufacturer that fared well when it made a change to its existing business model based on an expressed customer need for more vertically integrated services. This company is a mold manufacturer that made a change in its business model, catapulting it from a million-dollar firm to one with revenues nearly five times that level.
Wondering what it did to achieve that type of growth? Instead of simply creating molds for clients, the company’s management chose to tool and produce the final products (offer a complete soup-to-nuts package) for its customer base. Naturally this required new capital equipment, and a different operating model—but that investment proved to be a powerful move that created a significant new line of business—directly tied to its core competency. By offering a more complete solution to meet customer needs, the firm was able to expand into new industries and with moresophisticated customers.

What Does This Mean For Your Business?

First, you must make sure you understand which part of the value chain you satisfy and what distinctive value you provide to your customers or prospects. This is the critical knowledge that is needed to determine which business model makes the most sense for your company. It might be the current model that you’re using or something completely different.

You can identify that by asking yourself some of the questions below to define opportunities that you might be able to leverage to grow your business.

•Are you encountering a lot of resistance from the market?

o Spend time with your key customers (and those individuals whose business you lost or can’t obtain) and ask them about some of the challenges they’re facing.

o See if their feedback suggests that they want to work in a different way.

o Conduct a careful analysis todetermine if you can change the way you conduct business to address customer interests and whether those changes would create a new revenue stream for your company.

•Determine whether you have an opportunity to vertically integrate and provide the “next step” for customers.

o This can be a product or a service. For example, if you produce equipment used for a service, maybe you can offer the service as well.

•If you can’t vertically integrate but have identified a strong demand for more comprehensive services, you might consider outsourcing these or partnering with another organization to provide a complete solution.

o This can benefit you in two ways. First, you will increase your value to your customers by providing a more seamless solution. Second, if you have the right partner, he or she should be able to generate more customers for you so that 1+1 = 3. If 1+1 is simply 2, then it’s usually not worth the investment in time and resources to work with a partner firm.

Changing a business model can provide a powerful form of innovation that gives you a new source of competitive advantage but you need to be careful. Some changes require investments and can lead to a loss of focus, and they may not provide the innovative benefits you seek. But, as is the case with all major decisions, you need to do some objective analysis before making a significant change.

However, I caution you against jumping quickly to conclusions about what customers want or need based on gut instinct or a few, limited conversations. It’s critical to conduct extensive customer and industry research either through a survey or in-depth interviews with current, past and prospective customers to obtain the knowledge you need before making any disruptive changes to your business model. I also advocate that you have this research conducted by an objective, third-party expert to guard against subjectivity or emotion creeping into important changes to your business that could have negative, long-term ramifications.

Consultant, nationally recognized speaker, author of “The Ultimate Small Business Marketing Toolkit,” and educator at Boston University, Beth Goldstein helps manufacturers grow their firms through increased profit and improved customer satisfaction and loyalty. Beth can be reached [email protected].