Thursday, October 20, 2011

Lifestyle enhancers

Apple, 3M, GE, Sony, Toyota, Procter & Gamble, Samsung, etc. are among some of the well known companies that have been consistently voted into the list of the most innovative companies in the world for many years at a stretch. This begs the question – how do they do it? How do these companies make the list of most innovative companies in the world with such alarming regularity? What is it that they are doing right about innovation that their competition isn’t? After all, isn’t innovation fraught with risk? Before you try and correlate the innovation success of these companies with the quantum of their R&D spend, let me dispel that notion right away. Booz and Company recently published their Global Innovation 1000 study during which they found that seven of the top 10 innovative companies were not even among the top 10 spenders on R&D. On the contrary, the R&D spend of the most innovative companies as a percentage of their annual sales was typically less than 5%, compared to more than 10% for some of the heavy hitters. This study therefore confirms the fact that you cannot throw money at innovation and expect it to happen. The reverse, however, is very true. The same study showed that the most innovative companies were able to generate a higher EBITDA as a percentage of revenue compared to the ones who were not innovating so much! So whereas money cannot generate more innovation, innovation definitely generates more money. And that is the reason why we need to understand what the highly innovative companies do right.

I had to give it considerable thought, but in the end I came to the conclusion that the most successful innovative companies produce an innovation or a series of innovations that enhances our lifestyles by a couple of notches every time. The widespread acceptance and adoption of these innovations move our entire civilization forward a notch, in much the same way that homo-sapiens has progressed through the ages - from hunters to growing their own food as farmers, then to leverage machines to do his work faster during the industrial age and finally to use knowledge to become more efficient at his work during the information age. Let me cite just two examples to make my point.

Sony invented the Walkman portable music player in the late seventies, allowing humankind for the first time to carry their music along with them. Listening to music is a basic human need, since music is the food that feeds our souls. Understanding this need, Sony’s engineers gave vent to their creative genius and designed a compact portable music player. It was a mega hit with the masses for the next two decades and many imitations followed. But if you want to buy one today, you will be hard pressed to find one. Why? Because, although the Walkman made your music portable, its magnetic audio tape based storage technology had limitations of capacity and sequential seek Another enterprising company, by the name of Apple, recognized these shortcomings at the start of the century and their design engineers put their creative minds to work to innovate a portable music player called the Ipod. They introduced digital storage technology along with massive capacity into a device that is probably a tenth of the size of the Walkman. Ipods are such a rage with the masses today that the Walkman has become obsolete as quickly as it became famous. Such is the popularity of the Ipod today that any true music lover will not be caught without one today or at least an imitation of it. However, the larger point I want to make is that in creating the Walkman and the Ipod, both Sony and Apple enabled civilization at large to progress a notch by liberating it from the clutches of unportable music players.

Let us take another example. We all know the tremendous benefits humankind has derived from the invention of the modern motor car. Transportation has become much faster due to the motor car enabling us to be more productive in our day compared to the worker of the nineteenth century. However, after a century of guzzling gas the world over, car makers realized that the motor car could not be sustained to run on gasoline forever, since the world’s oil reserves were depleting at an alarming rate. This is when car makers got into a frantic race to develop cars that could run on alternative energy sources such as electricity, solar energy, etc. Many even developed commercial variants of their alternate energy cars. However, the company that achieved the most amount of commercial success in this regard was Toyota with its Prius car. Unlike other manufacturers, Toyota did not seek to develop a purely alternate energy car. Instead they developed a hybrid, a car that can run on gas as well as electricity. Their engineers installed an electric motor alongside the petrol engine and innovated to develop a Hybrid system that makes the electric motor act as a high-output generator to produce regenerative braking during deceleration. Simply put, it means that the car is storing the braking energy as electric energy to be used later for cruising without petrol. Ingenious! In one stroke, Toyota solved multiple problems – their hybrid approach doubled the mileage of the Prius compared to other petrol only cars, their regenerative hybrid system overcame the problem of the limited battery capacity of pure electric cars and at the same time their hybrid approach ensured that the performance of the car was not compromised in any way. The Prius was first introduced in the late nineties. Since then many other manufacturers have introduced commercial hybrid cars of their own and I believe that this trend is only going to increase in the years ahead. The larger point in this example is that with the hybrid Prius, Toyota enabled its Customers to address the issues of dwindling oil reserves and pollution without compromising in any way on everything they had come to expect from a transportation vehicle such as a car. Once again, Toyota managed to push the envelope and move civilization forward by a notch with its hybrid car innovation.

The ability to innovate and introduce commercially successful products and services is to me yet another pattern of Intellectual Capital – I have coined the name ‘Lifestyle Enhancers’ for this pattern. Make no doubt, innovative ability is a rare ability and one fraught with risk. Yet it is a type of Intellectual Capital that many large companies mentioned at the start of this article have harnessed and molded into commercial success. All of these companies are household names today - some of them have come into existence only in the last decade but have made their mark very quickly with their ability to innovate at every step of their existence. Such is the power of innovation, which is only a subset of Intellectual Capital. What would it be like if a company could harness all aspects of its Intellectual Capital? Your guess is probably better than mine.

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