Innovation
Global Investor Focus, 02/2007 Credit Suisse
Global Investor Focus, 02/2007
Credit Suisse
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GLOBAL INVESTOR FOCUS <strong>Innovation</strong> — 31<br />
But can’t “how”-based innovations also be<br />
copied or become out of date?<br />
Niraj Dawar: It’s a concern to the<br />
extent that firms need to find other areas<br />
in which they can build a competitive<br />
advantage that is sustainable. Firms make<br />
a lot of investment in new product development,<br />
in creating value for customers,<br />
and they want to be able to achieve returns<br />
on that investment – returns that will<br />
impress their shareholders more than the<br />
shareholders of other companies. To do<br />
that, they have to have some degree of exclusivity<br />
around what they are offering –<br />
what Warren Buffet calls the “moat.” You<br />
have to have a moat around your castle, as<br />
without that your competitors will breach<br />
the fortress very easily and you will be<br />
unable to earn superior returns on your investment.<br />
So from a competitive perspective<br />
it is absolutely necessary to have<br />
that competitive advantage. Increasingly,<br />
products are no longer the areas where<br />
that competitive advantage is achieved or<br />
attained.<br />
What influence does digitalization have on<br />
innovation trends?<br />
Niraj Dawar: It does present tremendous<br />
opportunities. Communities already<br />
talk to each other, and are able to wrest<br />
control of the rules of the market from<br />
companies doing the selling, broadcasting<br />
and marketing. But at same time, digitalization<br />
also represents opportunity in terms<br />
of customization and in terms of understanding<br />
the needs and benefits of individual<br />
consumers and being able to deliver<br />
product information that is customized to<br />
the needs of the customer. So when we<br />
think of how the product is delivered, when<br />
we think of how we are selling it can<br />
change quite radically.<br />
For example, companies that sell food<br />
could limit themselves to selling packaged<br />
food via supermarkets. But they are<br />
going way beyond that today in terms of<br />
“Bringing in ‘how’-based innovation requires<br />
internal systems. It also requires changes in<br />
the culture of the organization.”<br />
the relationship with the customer. In<br />
terms of the “how,” for example, they are<br />
setting up databases where they encourage<br />
customers to log on to websites,<br />
call them, e-mail them, and thereby set up<br />
interactive communication with millions<br />
of customers simultaneously. Interactive<br />
communications are remarkable in<br />
that every time the customer contacts the<br />
company, the company recognizes this<br />
customer, knows who they are and<br />
remembers all the past interactions they<br />
have had with this customer, so they<br />
never have to ask the same customer a<br />
question twice.<br />
They can personalize the offer to the<br />
customer. If selling food, they can<br />
provide recipes that are customized to the<br />
family and stage of life of that customer.<br />
They will understand what that customer<br />
will want and when. Often they will predict<br />
what the customer wants before the<br />
customers even knows it themselves.<br />
Are product innovations in all sectors less<br />
sustainable than innovations in the area of<br />
interaction between seller and buyer?<br />
Niraj Dawar: The answer is that “how”-<br />
based innovations require internal systems.<br />
They require different parts of the organization<br />
to work together, they require<br />
a certain type of organizational structure<br />
to be put in place.<br />
Because of all that, they also require<br />
changes in the culture of the organization<br />
in which the “how” becomes visible rather<br />
than invisible. The company must systematically<br />
go out looking for ways to innovate<br />
in the “how.” It takes a long time for that to<br />
happen, but if it takes a long time in the<br />
innovating company, then it will take<br />
at least as long in the competitor company.<br />
I would say the opportunities for<br />
innovating in the “how” have tremendous<br />
potential, in so far that there is a lot of<br />
opportunity still unexploited. “How”-based<br />
innovation is just starting down the road –<br />
there’s so much to be done.<br />
Does this also apply to all markets – both<br />
emerging markets and markets in developed,<br />
industrialized nations?<br />
Niraj Dawar: The distinction isn’t<br />
relevant – I would argue that the “what” and<br />
“how” apply equally across all markets.<br />
In today’s world, product parity is product<br />
parity everywhere. We’re operating in a<br />
global marketplace.