Don’t Knock ‘Innovation’—Create a Framework for It

In the movie Apollo 13, the crew must deal with rising carbon-dioxide levels. To fix the problem, they need to install square canisters in—you guessed it—round holes. “I suggest you gentlemen invent a way to put a square peg in a round hole. Rapidly,” urged flight director Eugene Kranz, played by Ed Harris, to the engineers back on Earth.

Companies today depend on innovation to survive, a characteristic displayed by the engineers on that fateful mission. But outside of the space program, the term is applied to some far less momentous moments. In earnings calls, Kellogg CEO John Bryant has referred to new Kellogg products, including its peanut-butter-flavored Pop-Tarts—“Gone Nutty!”—as innovations. As the Wall Street Journal quickly pointed out, S&P 500 CEOs had also applied “innovation” to perfume, potash, and higher-alcohol beer. Is the term being misused?

It may be useful to step back and think about the tasks that are fulfilled by innovations. At a very basic level, the role of innovation in business is to create, sustain, and enhance the success of a company, product, or product line in the market. This can be done in a variety of ways that are new to the company in question. If Kellogg’s wanted to increase its overall sales of the Pop-Tarts line and prevent customers from defecting to rivals or to other breakfast and snack alternatives, and if the new product achieved that objective, the outcome was consistent with what the firm set off to accomplish with the “innovation.”

However, innovations need not be restricted to the physical product. They could, for example, involve a change in how a firm prices its products. Think about the 99¢-per-track download on iTunes. Or think about Broadway’s move to dynamic pricing, which involves increasing or decreasing prices for certain seats based on week-to-week, or even day-to-day sales trends. Again, if the objective is to increase demand, or to better capitalize on differences in consumers’ willingness to pay, then it makes sense to categorize these tactics as innovative.

A second task fulfilled by innovation is to enhance the brand. By brand I mean more than the physical product or the service. I mean the host of associations that consumers conjure up in their minds when faced with the name of a company or its products.

Consider the Chevy Volt, GM’s plug-in electric car. In the first 10 months of 2013, 18,782 Volts were delivered. That was 2.7 percent less than 19,309 delivered in the first 10 months of 2012.

Has the Chevy Volt generated large sales and profits for GM and Chevrolet? No. But has the Volt, along with the other new product introductions, improved the GM brand in general and the Chevrolet brand specifically? The answer appears to be yes. For example, Chevrolet entered Interbrand’s 14th-annual ranking of the best global brands at No. 89 last year.

A third task fulfilled by innovation is to create a new category. Defining a category can be tricky, so I choose to define it broadly as well as loosely. Consider, for example, Procter & Gamble’s Febreze. Prior to its introduction, eliminating odors from furniture was not a need that was easily fulfilled. And although the ultimately successful positioning of Febreze was not based on this specific benefit, consumers could meet the need with this product. The product is now used in diverse applications—for example, to deodorize the helmets of motorcyclists in Vietnam. When it was first introduced, P&G had to advertise where in the store one could find the product: “Now available in the detergent aisle.”

Apple’s iPod also comes to mind. Was it the first product to meet the need of music portability? Of course not! Was it even the first hard drive–based music player? No, again. But it was the first product to tightly integrate the hardware and software experience that allowed consumers to easily and conveniently access a large selection of music while on the move. The benefit of a new category is that it can create its own product lines, spin-offs, and other enhancements. Witness the variations on Febreze now available at your local supermarket or the “i” line spawned by the iPod.

There is a fourth task that innovations are sometimes called upon to fulfill—one that is beneficial for society at large. While not always central to a firm’s innovation machine, new products, services, packaging, and pricing have been created to meet the needs of “bottom of the pyramid” consumers. Examples of this include Dannon’s various projects around the world, including providing drinkable yogurt in Senegal (Dolima) and cheap yogurt in Bangladesh (Shokti Doi); Adidas’s attempt at providing €1 shoes to Bangladeshis; and Unilever’s low-cost water filtration system in India (Pureit). The success of these projects tends to be measured by different metrics than when a firm is looking to increase demand for their products in the short run.

Note that the various objectives of innovation are not mutually exclusive, along the lines of the roles of marketing articulated by Northwestern University’s Mohanbir Sawhney. Febreze was, and is, a very successful product line in the market and has a strong brand name. The iPod brought back to life a rather moribund Apple—and was successful both in the marketplace and as a brand builder. What is different across the various types of innovation above is sustainability with the passage of time. Specifically, the question is whether the introduction of Pop-Tarts with peanut butter will help sustain the sales of the product line in the same way as, say, the creation of a new category, as in the case of Febreze. This is where most of the disagreement about what innovation means seems to stem from. If one views innovation as always being of the more sustainable variety—enhancing brands and creating new categories—then applying the nomenclature to a flavor variation is not likely to be satisfactory.

Yet one can argue that a firm requires innovation to fulfill a variety of the above objectives. Are “incremental” innovations required? Absolutely. Even the iPod became available as the Classic, the Nano, and the Touch in different colors, shapes, and sizes. But would it have been sufficient—for investors and consumers—for Apple to have stopped after creating those multiple versions? Perhaps not. Without evolving from the iPod to the iPhone to the iPad, Apple may not have been able to sustain its heady growth.

This is where innovation has to move from being merely tactical to residing in the strategic realm of a firm. Organizations need to think of a portfolio of innovations—some incremental, some brand enhancing, some category creating or redefining, and perhaps even some societal-welfare enhancing. In the movie Moneyball, Brad Pitt’s Billy Beane exhorts his staff and players, “It’s a process. It’s a process. IT’S A PROCESS.”

It is critical to establish the right culture, environment, and rewards system within an organization to help it deliver the innovations needed for success. Ultimately it does not matter how companies use the term, or how often. It is what they set out to accomplish and manage to deliver that is most relevant.

This piece is adapted from the Kilts Center Faculty Blog.