The Link Between Innovation and 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’. 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 organizations have increasingly had to react to change more rapidly if they wish to succeed in the marketplace. Indeed, so important is the successful implementation of new ideas that Drucker famously reflected that: ‘Business has only two basic functions – marketing and innovation. In other words, a business organization 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 organization’. He then continues: ‘Competitive advantage may usefully be thought of as that which allows an organization 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’. It is an important issue for a business because a strategy which can enable a sustainable competitive advantage will allow an organization to generate super-normal returns, and will have a distinct impact on overall organizational performance: an effective strategy can add value.

Herein lies the essence of the role of innovation in strategy – it is often a key component of a sustainable competitive advantage. For instance, 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 article 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.

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. 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. 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. By having a strategy centered 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 organization much more profitable.

So where can business organization’s 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. 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. 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’. 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 organizations 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 organization’s. 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. 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?.

Moreover, at Apple, innovation is centered 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’. This results in an organization thoroughly committed to the successful commercial exploitation of new ideas at a strategic, operational and tactical level. Indeed 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’. Thus a commitment to a strategy of innovation should foster a culture which reflects this aim of management, as this can lead to the organization innovating more effectively.

Finally, it is important to note the impact of a strategy centered 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?’. 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. An expert 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.

Moreover, innovation is not the sole component of an effective strategy, and it never can be. Organizations must consider a range of other issues. For instance, business organizations 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 organization 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 organization 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 organizations. And if this is done effectively, innovation can play a key role in what every business organization seeks: a competitive strategy which adds real value.

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