Strategy Innovation

Usually when we use the word innovation, it refers to improving products or services. Sometimes this is a gradual process, like adding functions to a software product or adding more customer service options (like self-service check-in for airlines). Sometimes innovation can be radical, such as the Nintendo Wii, which changed the game console market almost overnight, or flying cars that are currently being prototyped (a process that will take many years).

But innovation doesn’t always have to be products and services. Business models can be innovative as well. Look at the Apple iPod. Although the design and the user interface are very slick, the true innovation is not in the hardware, but in the integration with iTunes. Apple solved a fundamental dilemma in the music business. The existing business model in music--selling CDs--was declining in popularity. The alternative model, downloading music via peer to peer networks, had legal issues. Apply made downloading easy and integrated enough for people to actually prefer this over downloading music for free.

Another example of business model innovation is software-as-a-service (SaaS), or on demand. The true innovation is not in the license versus subscription structure (Capex vs Opex), but in opening up of new capabilities. Traditionally, only large companies can manage full-functionality software and deal with the global complexity. However, globalization and regulation do not differentiate between large and smaller organizations. The software that a smaller organization could manage would not provide enough functionality to handle their own complex globalization and regulatory issues. SaaS and related models allow smaller organizations to run fully functional software. The dilemma has been ‘broken.’

Business model innovation usually is about ‘breaking the code,’ where code would mean the way you usually do things--how you believe things work. Innovation is finding a way to eliminate those limiting beliefs.

This is the same way of thinking I’d like to apply to strategy, which is full of limiting beliefs as well. One of the most common misconceptions about strategy is that it's about making choices, about the either/or questions. As Porter says, either cost leadership or differentiation. Or, according to the value disciplines of Treacy and Wiersema, either customer intimacy, product innovation or operational excellence. Strategy innovation is about finding ways to do and/and, and eliminate those limiting beliefs.

I believe this is the true goal of operational excellence. The cost savings of heavy standardization will turn out to be not even the most important result, it will be something else: strategic agility, being able to adapt to changing market circumstances faster. Operational excellence, product innovation and customer intimacy, we can’t say one is more important than the other. They’re all equal parts in the mix. Strategy innovation in action.