Innovation in strategy

This essay evaluates the role of innovation in strategy, and explores the ways management can promote it in organisations. It first looks at the nature of innovation, and examines its importance in current economic and social conditions. It then sets strategy in context, defining it primarily in terms of competitive advantage – that is, as a search for capabilities which allow allows an organisation to meet consumers’ needs better than its rivals. It then investigates why, exactly, innovation is often seen as a key component of strategy. It comes up with two key reasons: its capacity to generate a sustainable competitive advantage for business organisations; and its ability to aid organisations in preventing strategic drift. As a result of these benefits, strategies which are centred upon innovation can add real value to an organisation’s value proposition, and consequently can substantially improve business performance. The essay then turns to look at the ways that management can promote innovation in organisations. For this, it turns to the world’s most famous management thinker – Peter Drucker – and the world’s most innovative company – Apple Inc. – for guidance on theory and practice respectively. Having thus established the importance of the role of innovation for strategy, and the ways in which management can promote it in organisations, the essay then considers some limitations. In particular, it looks at the possible advantages of strategic drift; and also the other aspects of strategy beyond innovation which must be considered by an organisation. The essay thus concludes that innovation is a necessary component of a successful strategy – in that it is able to generate a sustainable competitive advantage for a business – but that it is not sufficient in and of itself: an organisation must consider more than innovation if it is to develop an effective strategy.

Innovation is usually defined as ‘the successful commercial exploitation of new ideas’ or simply as ‘the successful implementation of new ideas’. This encompasses ideas that are ‘new to the world’, ‘new to an industry’ or merely ‘new to a particular firm’ (Gabriel, 2008, p. 146). The prominence given to the role of innovation in strategy is to a large extent the result of the prevailing social and economic conditions. In what Peter Drucker – the most influential management thinker of the second-half of the twentieth century – termed the ‘knowledge economy’ that has emerged due to the rise of the service industry and decline of manufacturing since the end of the Second World War, business organisations have increasingly had to react to change more rapidly if they wish to succeed in the marketplace (Drucker, 1992, p. 263). Indeed, so important is the successful implementation of new ideas that Drucker famously reflected that: ‘Business has only two basic functions – marketing and innovation (Kotler & Armstrong, 2008, p. 40). In other words, a business organisation must first create a customer, but consequently that business must constantly adapt to provide the necessary goods and services to keep them making a profit: they must pursue innovation both to survive and to thrive.

Having explored the nature of innovation, it is useful now to define what is meant by ‘strategy’, and examine briefly why it matters. The nature of strategy has traditionally been a contentious issue. A helpful starting point for understanding the concept is found in Anthony Henry’s (2008) Understanding Strategic Management, where he provides a synopsis of forty years of heated debate on the issue. He first outlines that, ‘there is agreement that the role of strategy is to achieve competitive advantage for an organisation’. He then continues: ‘Competitive advantage may usefully be thought of as that which allows an organisation to meet consumers’ needs better than its rivals . . . [and] its source may derive from a number of factors including its products or services, its culture, its technological know-how, and its processes’ (Henry, 2008, p. 4). It is an important issue for a business because a strategy which can enable a sustainable competitive advantage will allow an organisation to generate super-normal returns, and will have a distinct impact on overall organisational performance: an effective strategy can add value (Kay, 1995).

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Herein lies the essence of the role of innovation in strategy – it is often a key component of a sustainable competitive advantage. For instance, Grant (2005, p. 513) has observed from empirical evidence based on such successful companies as 3M, Wal-Mart, and Toyota that, ‘ultimately, the only sustainable competitive advantage is the ability to create new sources of competitive advantage’. Firms with a fixed commitment to innovation seem to prosper in the modern ‘knowledge economy’. For instance, Apple – a company which this essay examines in more depth below – has become synonymous with strategic innovation. In Fortune’s America’s Most Admired Companies 2008, Apple topped the chart. A senior commentator reflected on this development with the following remark:

Apple not only takes the No. 1 slot on this year’s list of America’s Most Admired Companies but also tops the global survey – and wins the highest marks for innovation too. That’s probably no coincidence. In an industry that changes every nanosecond, the 32-year-old company has time and again innovated its way out of the doldrums. Rivals always seem to be playing catch-up. (Fisher, 2008)

Moreover, innovation can be key to preventing ‘strategic drift’. Strategic drift is the tendency for strategies to develop incrementally on the basis of historical and cultural influences but to fail to keep pace with a changing environment (Johnson, Scholes, & Whittington, 2008, p. 179). This is what happened to Sainsbury’s – who were one of the most successful food retailers in the world until the early 1990s, using a tried-and-tested formula of selling high quality food at reasonable prices. Its strategy consisted of gradually extending its product lines, enlarging its stores, and expanding its geographical coverage; but under no circumstances would it deviate from its traditional ways of doing business (Johnson, Scholes, & Whittington, 2008, p. 179). However, during Sainsbury’s period of strategic drift, its rival Tesco followed a policy of ruthless innovation – developing Club-Card marketing, building a successful on-line retailing capability, and implementing new ideas to radically reduce its distribution costs (IMD, 2008). By having a strategy centred on innovation, therefore, Tesco was able to both establish a competitive advantage and avoid strategic drift. It was, in short, able to develop a strategy which added value, and which made the business organisation much more profitable.

So where can business organisations look for innovation – how can they promote it more effectively? Peter Drucker has suggested that there are seven areas where companies should look for such opportunities. These have been expertly surmised by Hindle (2008, p. 105), as being: ‘the unexpected success that is rarely dissected to see how it has occurred; any incongruity between what actually happens and what was expected to happen; any inadequacy in a business process that is taken for granted; a change in industry or market structure that takes everyone by surprise; demographic changes caused by things like wars, migrations or medical developments (such as the birth-control pill); changes in perception and fashion brought about by changes in the economy; and changes in awareness caused by new knowledge’. Moreover, although it is often the case that ‘innovation has been used interchangeably with the term “creativity”’ (Forrester 1993, p. 3; cited in Thompson & McHugh, 2002, p. 255), Drucker insists that this ought never to limit a business, claiming that: ‘There are more ideas in any organization, including businesses, than can possibly be put to use’ (Drucker, 1964, p. 188). Across the literature on innovation, there seems to be a general agreement with this approach set out above: that the opportunities for innovation are multitudinous, and that by paying attention to such factors organisations can develop strategies which can lead to a sustainable competitive advantage and prevent strategic drift.

A brief case-study of Apple will help demonstrate how this theory outlined above works in practice, and help us to better understand the ways management can promote innovation in organisations. First, Apple appreciates that innovation is an inexact science: as the CEO and cofounder of Apple, Steve Jobs, puts it: ‘You can’t ask people what they want if it’s around the next corner’ – rather you have to simply provide what you think they might want (Morris, 2008). To guide them, Apple looks to the areas mentioned by Drucker above to gain insights into such potential needs and wants. Apple employees in particular focus on the inadequacies in every-day technology processes that are currently taken for granted, and innovate in these areas. New-product development, according to Apple sources, occurs as a result of conversations such as: ‘What do we hate? (Our cellphones.) What do we have the technology to make? (A cellphone with a Mac inside.) What would we like to own? (You guessed it, an iPhone)’ (Morris, 2008).

Moreover, at Apple, innovation is centred on producing technology the employees really want: as Jobs says, ‘One of the keys to [innovation at] Apple is that we build products that really turn us on’ (Morris, 2008). This results in an organisation thoroughly committed to the successful commercial exploitation of new ideas at a strategic, operational and tactical level. Indeed Morris (2008), observing the culture of innovation at Apple, has pointed out that: ‘You won’t find that word on a placard or a piece of propaganda at One Infinite Loop, Apple’s headquarters . . . there innovation is a way of life’. It is this culture that ‘provides the push to overcome design and engineering obstacles, [and] to bring projects in on time’ (Morris, 2008). Thus a commitment to a strategy of innovation should foster a culture which reflects this aim of management, as this can lead to the organisation innovating more effectively.

Finally, it is important to note the impact of a strategy centred on innovation upon the performance of Apple. It has astounded commentators – with one perplexed writer asking: ‘who knew [Apple] could build a . . . [successful] company on the strength of a portable jukebox and a computer with a single-digit market share?’ (Elmer-DeWitt, 2008). Indeed, the company has been monetarily hugely successful as a result of the innovation it has pioneered. In the 5 years ending in March 2008, sales of Apple wares tripled to $24 billion; and profits rose to $3.5 billion, from a mere $42 million only five years before. Morris (2008) sums up the position of Apple thus:

[It] set the gold standard for corporate America with an entirely new business model: creating a brand, morphing it, and reincarnating it to thrive in a disruptive age. . . Apple has demonstrated how to create real, breathtaking growth by dreaming up products so new and ingenious that they have upended one industry after another: consumer electronics, the record industry, the movie industry, video and music production.

Thus innovation can play a key role in an organisation’s strategy, and it can often be effectively promoted by following the theory of Drucker and the practices of Apple. Nevertheless, it is important to note that there are limitations on the role of innovation in strategy. First, ‘strategic drift’ may not be such a bad thing after all. This is a view outlined by John Kay (2009) in his article History vindicates the science of muddling through. He contrasts the views of the American political scientist Charles Lindblom (published in 1959) with those of Dr H. Igor Ansoff. Lindblom supported a view of incremental adaptation by organisations to changes in their environment; Ansoff proposed a design-orientated, purposive approach to strategy. However, Kay then points that in terms of the organisational case-studies used to support each view – Saint-Gobain for Lindbolm; the US conglomerates TRW and Litton for Ansoff – the clear winner emerges as Saint-Gobain, a company which adopted a quasi-strategic drift approach to their strategy, which is still going strong while the other companies have suffered catastrophic failure. Thus, it seems that sometimes simply ‘muddling through’ can constitute an effective strategy – perhaps a firm commitment to innovation is not necessary after all.

Moreover, innovation is not the sole component of an effective strategy, and it never can be. Organisations must consider a range of other issues. For instance, business organisations ought to consider issues highlighted by Michael Porter’s ‘Five Forces’ model. This shows how the strategic situation of a company can be established by investigating the power of suppliers, the power of buyers, the threat of substitution, the threat of new entrants, as well as the degree of competitive rivalry between the industry’s firms. An organisation must consider innovation if it is to ensure that it continues to have an effective strategy in the medium to long term, but it must also pay attention to these other aspects of strategy – innovation is necessary, but it is not sufficient.

Thus innovation is a necessary component of a successful strategy – in that it is able to generate a sustainable competitive advantage for a business. However, it is not sufficient: an organisation must consider other issues as well as innovation if it is to develop an effective strategy. Nevertheless, by following the theory of Drucker and learning from the practices of Apple, management can promote innovation in organisations. And if this is done effectively, innovation can play a key role in what every business organisation seeks: a competitive strategy which adds real value.

References:

Drucker, P. (1964). Managing for results: economic tasks and risk-taking decisions. California: Harper & Row.

Drucker, P. (1992). The age of discontinuity: guidelines to our changing society. 2nd ed. New Jersey: Transaction Publishers.

Elmer-DeWitt, P. (2008, March 3). America’s Most Admired Companies 2008. Retrieved November 24, 2009, from Fortune Web site: http://money.cnn.com/galleries/2008/fortune/0802/gallery.mostadmired_top20.fortune/index.html

Fisher, A. (2008, March 3 ). Innovation Rules. Retrieved November 24, 2009, from Fortune Web site: http://money.cnn.com/2008/02/29/news/companies/fisher_amac.fortune/index.htm 2008

Gabriel, Y. (2008). Organizing Words: A Critical Thesaurus for Social and Organization Studies. Oxford: Oxford University Press.

Grant, R. M. (2005). Contemporary strategy analysis. 5th ed. London: Wiley-Blackwell.

Henry, A. (2008). Understanding Strategic Management. Oxford: Oxford University Press.

Hindle, T. (2008). Guide to Management Ideas and Gurus. London: Profile Books.

IMD. (2008). Tesco: Keeping the Hard Discounters at Bay? Switzerland: IMD International.

Johnson, G., Scholes, K., & Whittington, R. (2008). Exploring corporate strategy: text & cases. 8th ed. Harlow: Pearson Education.

Kay, J. (1995). Foundations of corporate success: how business strategies add value. Oxford: Oxford University Press.

Kay, J. (2009, March 15). History vindicates the science of muddling through. Retrieved December 13, 2009, from John Kay Web sit: http://www.johnkay.com/in_action/604

Kotler, P., & Armstrong, G. (2008). Principles of Marketing. 13th ed. London: Pearson Education Ltd.

Morris, B. (2008, March 17). What makes Apple Golden? Retrieved October 27, 2009, from Fortune Web site: http://money.cnn.com/2008/02/29/news/companies/amac_apple.fortune/index.htm?postversion=2008030309

Thompson, P., & McHugh, D. (2002). Work Organisations. 3rd ed. London: Palgrave.