Most reports about the dynamics of technological innovation pay more attention to new consumer-oriented sectors like social media, biotech and IT. Sectors considered to be mature are seen as generating little innovation.
The real challenge is growth: Most companies have ambitious growth goals. The trouble is there are only so many sources of market growth. Markets in many countries and industries are flat and increasingly commoditized; achieving growth in market share is expensive; and acquisitions often do not work. And so product and service innovation becomes the logical source of this growth.
The wide variety of opportunities and challenges requires strategic direction to navigate with a clear focus. In this regard, there is potential for improvement in nearly all firms.
To further strengthen a company’s innovation capacity, innovation must be promoted from the top of the organization. Thus, the top executives need to use budgets to actively shape the focus and content of these programs. In light of digitization and related trends, there are severe risks for the medium- to long-term competitiveness of established corporations. Many of these companies have no option other than to remain innovative because competing purely on price against firms with superior digital solutions is usually not an option in the long run.
“Mature companies have to strive to achieve an ever closer relationship with their clients, and with their clients’ clients. This means knowing how they use their products and knowing the business of the chain that they are part of.”
Thus, innovation should not be considered a means to immediately improve the bottom line by a few extra points. Instead, it should be regarded as a means to shape a firm’s future core business, which often depends heavily on innovation. This is one of the biggest quandaries facing mature businesses today: how, or how far, they can adopt disruptive practices without harming their organization.
Companies that are getting it right
There are numerous examples of this kind of innovation, which may not get the headlines that companies like Apple do, but are certainly no less “bold” if done right. A good example is P&G’s Olay skin-care business: Once almost given up on by P&G, the business was rejuvenated based on the “one big concept”—preventing the signs of aging on womens’ faces. The company searched for and found the needed technology (outside P&G) and relaunched the business with multiple new products: Regenerist, Definity, Professional, and others. Olay now does over $2 billion in sales annually.
Another example is Denmark’s Grundfos, a manufacturer of industrial pumps. Pumps do not have the same cachet as an iPhone, but Grundfos found ways to be innovative in a mature, competitive market. Its Bio-Booster, for example, proved to offer a big solution that solved a major problem, namely how to secure fresh water at a remote industrial site, and handle waste water. The simple solution was a “water factory” shipped in container modules that, once assembled, recycle the water, much like on board the space station.
Green Mountain Coffee Roasters is a company that began humbly as a small café in rural Vermont in 1981 and soon was doing its own coffee roasting and selling to local hotels and restaurants. Management saw a unique consumer need and developed an inexpensive and convenient single-serving coffee-maker for households. Green Mountain created the K-Cup and Keurig system and signed up well-known coffee makers. The company has been enormously successful, achieving 2011 sales of $2 billion, and has been able to win against corporate giants like Kraft and Nestle.
There is a pattern here: bold, breakaway product and service innovations—often systems solutions, sometimes new business models—but solutions that nonetheless tackle major problems that customers are having. This is the type of innovation that even mature firms can create that will generate the growth desired by so many firms.
A good example of this is Winchester, VA-based Trex, a single product line $500 million company that sells decking through DIY retailers such as Lowes and Home Depot. Wood and pressure-treated wood for decking have been around almost forever. Trex introduced a wood alternative decking product made almost entirely from recycled materials such as garbage bags and household plastics. In the 1990s, wood-alternatives barely represented 1% of the market. Considering that wood and pressure treated wood runs about $0.55 a linear foot and wood-alternative lumber costs over $2 a linear foot, it’s not hard to see why. But Trex stressed the performance factor of its product.
Decks made with traditional wood materials have to be maintained, and sanded down occasionally to eliminate splinters and decks made from wood need to be replaced at least every seven to 10 years. Decks made with the firm’s proprietary process alternative do not require much maintenance apart from cleaning with soapy water and they last for 25 years. A premium market developed when more people decided they didn’t want to be bothered repairing and maintaining decks made with wood.
Decks made with wood-alternatives now enjoy 15% of the market with Trex leading its competitive sector with 45% of this market. It turns out that selling a performance product in a market dominated by a commodity material had its advantages. Not that everything went smoothly for the company. Fifteen years ago the first generation wood-alternative product had severe teething problems when some decks were plagued by mold and discoloration. Trex came up with a coating for its boards that was also made from recycled materials. The wood alternative boards that were encased with the second generation material not only eliminated the problem, but improved scratch resistance which became a major selling point.
Company margins have moved up to 39%, where margins for its competitors remain in the mid-20s. Trex CEO Jim Cline observes, “You can see the results of this innovation this past year, where we expanded our gross margin by about 400 basis points. It had been a long time since the company had seen that kind of improvement, and I’d say that pivot was probably the most meaningful change we made.”
Mature companies have to strive to achieve an ever closer relationship with their clients, and even with their clients’ clients. This means knowing how they use their products and knowing the business of the chain that they are part of. This is a dimension that receives little attention in the existing definitions of product innovation.
When a product is developed and put on the market, it is sometimes only successful when it is applied in an unexpected way. A good example is Orion Engineered Carbons, a Luxembourg and Houston,TX-based company known chiefly for advanced polymers, printing inks and specialty materials for electronics using carbon black. Spun-off from a German chemicals giant, Orion is a B2B company that prides itself as being a technology company driven by its innovation by partnering with their customers on R&D initiatives. They have a state-of-the-art innovation center in Cologne, Germany to develop new innovative carbon black production processes and products. (Carbon black is generally used as a paint additive and coating material for electrical wires.)
The use of carbon black in the manufacturing of lithium ion batteries, and in the development of advanced lead-acid batteries to extend battery life is a potential market disruptor. (Tesla, for example, is experimenting with various materials to achieve a longer-life battery.)
On the rubber side of its business, Orion is disrupting the truck tire market by developing a carbon black material that is sold to truck tire makers permitting the manufacture of superior tires that optimize fuel economy, mileage and wet grip for trucks. Tires infused with carbon black technology can boost road life by 12% to 15%, which in the transportation industry with thin margins can be significant. Michelin, Firestone, Continental and Bridgestone among others are adopting this technology in their tire manufacture. A few years ago, Orion was a smaller player in the specialty carbon black segment. Today, the company is a market leader with 25% share, primarily as a result of their R&D focus. (Carbon black is even used in the production of Under Armour t-shirts. Everything black, from car finishes to cables, is usually Carbon Black.)
The critical importance of innovation is generally acknowledged by most firms today—even in mature industries. However, the full impact of innovation on all business activities, value chain and ecosystems has usually not been understood in detail. Moreover, many companies are characterized by a ‘wait and see’ attitude. But this is no longer an option. Taking action is a requirement because transformational trends—such as digitization and automation—are here to stay. Thus, CEOs need to start innovation programs now to protect their firms’ business from competitors that are doing a better job at transformation and to benefit from the opportunities associated with digital transformation and related trends.
However, many large organizations have settled in their comfort zones. To change something, they have to leave those comfort zones, and this requires developing an entrepreneurial mindset within one’s culture. To really change something, companies need to create a sense of opportunity. This is what P&G did when it declared that it would henceforth be open to external knowledge and ideas. Not everything needs to be invented from within. This ability—as well as the courage to radically change one’s perspective—are the keys to setting trends of one’s own, especially in light of digital transformation.