11/03/2009 - 22:00

Framework facilitates innovation growth

11/03/2009 - 22:00


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True business innovation relies more on hard work than a flash of genius (part one of a two-part feature).

AS the great management guru Peter Drucker pointed out, innovation is "organised, systematic, rational work". It generally relies much less on a flash of genius and much more on the ability to deliver new sources of value to end customers by changing the wealth-producing potential of already existing resources.

The key to innovation lies in thinking creatively about how to serve customers better. It involves the ability to convert creative ideas into new, highly competitive sources of customer value. Innovation based directly on the commercialisation of an invention is relatively rare.

Some of the most successful innovations apply or combine existing elements in different ways to produce unique customer benefits. Examples include Apple iPod, YouTube, Star Alliance and Starbucks. Once the focus of innovation is on the end customer, every element in the design and delivery of the added value chain becomes a potential opportunity for innovation. Ironically, service and experience innovation - easily the biggest generators of wealth-producing added value - are the areas most neglected by R&D communities and the innovation industry.

The 'integrated innovation framework' is a seven-step innovation process embedded within high-performing teams. Without a pre-existing commitment to high-performance team leadership, it is naïve for organisations to even consider building an innovation culture.

The '7Es' process begins with the exploration phase and culminates with the execution of the implementation strategy.

Of course, it is never a neat, sequential process. For example, it may be the case that, soon after a successful launch, the search for even more effective solutions is maintained. However, each of the 7Es steps is an essential ingredient in a systematic well-managed, low-risk innovation.

- Explore by generating and vetting ideas from a wide variety of internal and external sources.

- Evaluate by assessing and prioritising options, making a selection and giving feedback.

- Extend by involving and co-opting partners and opinion leaders and progressively demonstrating small wins.

- Experiment by designing, testing, demonstrating and reviewing a prototype or pilot study.

- Engage by winning the management support for a proposed business model.

- Evangelise by publicising, showcasing, celebrating and involving all stakeholders.

- Execute by implementing the business model including launch and marketing strategies.

Australian company Cochlear is a classic case study that offers an instructive demonstration of how this framework works in practice.

Cochlear is a medical technology business with a long-standing mission to help the hearing impaired.

Despite humble beginnings, today it produces the world's most successful hearing implant. Based in Sydney, the company has a presence in more than 100 countries and has approximately 2,000 employees around the world. As global leader in its field, its market share is around 70 per cent.

The inspiration for Cochlear goes back to the 1960s and lies in the passion and pioneering research of Graeme Clark. As a young ear, nose and throat specialist in Melbourne, the deafness of Professor Clark's father drove him to explore ways of overcoming hearing impairment. Despite resistance from his peers, he persevered.

Perhaps because of the need to win over his opponents, Professor Clark was extremely careful to evaluate his experiments with the utmost rigour.

The idea of a bionic ear evolved progressively through the integration of research from numerous disciplines. Apart from audiology and surgery, these included biology, psychophysics, speech science, and electro-chemistry. Professor Clark consolidated and extended his research while undertaking a doctorate after becoming chair of a new department at the University of Melbourne. This included partnering with a leading expert in sound quality and a small local company conducting pioneering research on heart pacemakers.

The major experimental phase began in the 1970s but the first prototype Cochlear implant only took place in Melbourne in August 1978. The lengthy delay was due largely to the indifference of the medical community and the lack of financial support. Fund-raising continued to be a major obstacle and the leading Australian research bodies repeatedly rejected his applications for research grants.

Professor Clark was eventually forced to operate outside the normal research channels and adopt a direct almost crusading approach.

After more than seven years work, the first major breakthrough came in 1974 when Professor Clark persuaded the proprietor of a new television channel to conduct a fund-raising 'Telethon', which provided the finance to produce a prototype. After that money ran out he went straight to the prime minister.

A year later Professor Clark began partnering with a group of medical equipment manufacturers who had offered to commercially develop the bionic ear. However, it was not until 1982 that Cochlear was floated on the stock exchange and became a public company. In many ways this was the take-off point for Cochlear and the beginning of the systematic execution of Professor Clark's vision.

He then became involved in the serious development process by engaging the support and endorsement of the medical establishment and key government agencies. Initial clinical studies required by the US Food and Drug Administration were held in the early 1980s. Final FDA approval for adults was granted in 1985. Subsequently, the trial phase was extended to other centres and eventually worldwide approval was obtained to fit the device to children aged two and above.

Getting the endorsement of regulatory authorities and engaging the support of surgeons and hearing aid professionals around the world has been a formidable challenge. Because of the unique controls and sensitivities associated with medical technology, and despite the enormous credibility Cochlear has earned, there will be no respite for top management. They will always be evangelists and increasingly educators.

Thus, in recent years, 13 new territory outreach specialists were added to the US field force to help educate hearing aid professionals, a training and education centre was established in Beijing and a Cochlear awareness network was created so that volunteers could be enlisted to provide information and encouragement to potential implant recipients.

Most of Cochlear's growth has taken place in the last five years or so. This period has been marked by consistent annual increases in sales, revenue and net profits, while gross margin has increased to 72 per cent. Whereas in April 2002 there were 35,000 Cochlear implant users worldwide, by 2008 this figure had more than tripled. In addition, more than 40,000 implants have been installed for related hearing conditions. Currently the company reinvests 12-13 per cent of revenue annually into continuing research and development activities and works in partnership with over 80 universities and other organisations worldwide.

A remarkable feature of the Cochlear story is that, even as a relatively small SME, it pursued a global strategy based on organic growth. Notwithstanding the universal preference for growth by merger and acquisition (M&A) during the past few decades, there is now mounting evidence that the so-called 'organic growth all-stars' have significantly outperformed the stock market index in many countries. As Ed Hess, a leading expert on corporate growth has stated: "These companies have shown they can grow in good times and bad. It's not about the economic cycle. It's about the business model".

The synergistic relationship between innovation, growth and competitiveness is long established. Organisations and indeed countries achieve growth in the performance indicators that determine competitiveness and through their ability to innovate and create value. As economists from the time of Schumpeter have consistently argued, innovation is the critical independent variable.

n John Milton-Smith is emeritus professor at Curtin University's School of Management.


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