Bushy mustache, denim dungarees and a bit on the short side - the Italian plumber better known as Mario, is not considered an icon of innovation. And to be honest, he shouldn’t be, even if he was the best plumber in the whole universe. However, the story of Nintendo – the company that created Mario - is a great example of what innovation really is, and how it can stimulate a company to phenomenal levels.
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The road to innovative enlightenment for Nintendo started in the 1950s. Back then, the company was selling playing cards for a popular Japanese game - “hanafuda” - and was led by Hiroshi Yamauchi. Throughout the 50s he repeatedly traveled to the US looking for new business opportunities for his company. What he learned was that the card game business on its own wouldn’t pay the bills. Without innovation, his organization was doomed to failure. This was the first call for change.
In the 60s Nintendo tried to diversify their core brand into different, sometimes pretty bizarre businesses, including a chain of so-called “love hotels” and a taxi company. In parallel, Nintendo kept working in entertainment, selling Disney-licensed playing cards and a wide range of toys.
The modern chapter of its history starts in 1977, when a young artist by the name of Shigeru Miyamoto joined the team as a game creator. At that time, the company leaders already knew that electronic entertainment devices were a real treasure trove and a market definitely worth exploring. The company focused on gaming console production and video game development. As a result, Miyamoto became a legend of the gaming world, creating titles like Mario, The Legend of Zelda and Donkey Kong.
Today, the company is also well known thanks to innovative products like Game Boy, Wii, and Nintendo Switch.
This Japanese enterprise is an amazing example of the fact that innovation is not a one time, singular explosion of creativity - the product life cycle indicates that after scaling and maturity comes inevitable decline. In order to limit the decline, companies must constantly innovate and improve their products, adapting to market needs and changing external factors.
Key takeaways from the Nintendo story on innovation
- It succeeded because it was constantly reinventing its own products and responding to the needs of their users.
- Nintendo successfully incorporated innovation into the brand’s DNA, despite making questionable decisions in the past (like a chain of love hotels).
- Sometimes, the urge to change has to come from outside of the organization. For Nintendo, the breakthrough moment was hiring Shigeru Miyamoto, who pushed development of new types of products: video games.
In the opposite corner, there’s a company that famously didn’t succeed with innovation, despite being at the very center of technological change. This company is Kodak.
This leading producer of affordable cameras and photographic supplies hit the first bump in the 1970s. The company actually did recognize the upcoming digital revolution and even released their own digital camera. Despite this, the company leaders decided to drop this project for fear of losing their share in the photographic film industry. In the long run, and from our perspective, their decision seems to be inexplicable. The slump continued.
In 2001, sales of film declined dramatically, which prompted changes in Kodak’s strategy. The company started selling digital cameras, but despite being number two when it came to sales, they were losing $60 for every single device sold (source). Kodak was losing against producers from Asia that were able to produce cameras of similar quality, but at lower prices.
In 2012, Kodak filed for bankruptcy in the US courts. As a result, the company sold many of their patents to companies that were more effective in their innovation efforts - Apple, Google, Facebook, Amazon and Microsoft (source). The 525$ million received from selling their technology helped Kodak survive. Yet today, the company is serving mostly as a packaging and printing provider. Not very impressive, taking into account their business potential and once-powerful brand. The glory faded away.
Key takeaways from the Kodak story:
- Company decision makers were blind to a great opportunity to innovate.
- Making a similar mistake in the 2000s, digital cameras became common, with many new companies entering the market. A lack of innovative thinking led to a lower ability to compete against numerous companies from Asia that were more agile and flexible in meeting the growing demand.
- By selling patents to stronger players, the company lost its recognition as a brand and solution provider.
Does this mean that jumping on the technology bandwagon is the ultimate way to innovate and succeed in business? Not at all.
Innovation - the Holy Grail of business development
Innovation might be a product or service, brought to the market by an organization in the search for a new source of revenue. This straightforward definition isn’t perfect, because, as with any theory, it doesn’t always track with reality. To understand it better, let’s look at types of innovation, and examples of thereof according to the Innovation Ambition Matrix (source).
Core (or incremental) innovation is the type of development that optimizes existing products for existing customers. This kind of innovation might be perceived as quite conservative, but this connection is rather misleading. It tends to be low risk. Diet Coca Cola is a decent example of core innovation.
Adjacent innovation takes place when an existing business expands to include something “new to the company”, but builds on known assets. It means that the company is adding new products to its offer and serving new markets or customers. Your favorite vegetarian restaurant that recently started food delivery is a great example of adjacent innovation, albeit not a very fancy one.
Transformational or disruptive innovations are those breakthrough products or services that are created for completely new markets and new customers. It brings a lot of risk, but might be the most profitable. Windows OS or the first iPhone with its application-focused environment are perfect examples. Any other visualization of the “game changer” idiom will give you an idea.
What is NOT an innovation?
- Jumping onto the technology bandwagon just for sake of it.
- Innovation is NOT your company’s spending on its R&D department.
- Spending money in the search for mysterious “products” or “solutions”.
- Starting from scratch without any experience or adequate resources.
In search of a golden rule
How do different companies decide on their budget for innovation? It’s strictly related to their size and industry. Industrial companies tend to spend more money on core, “safe” innovations, and technology enterprises do the opposite. The latter are forced by the specific nature of their market to move forward quickly in the mainstream of technological progress.
According to the Innovation Leader 2018 report , most R&D departments of Fortune 1000 companies are slowly shifting their attention when it comes to spending resources on the above-mentioned types of innovation. Only a couple years ago, the golden ratio of investments in each type of innovation was 70-20-10, which translates as 70% of investment on core innovations, 20% for adjacent innovation and 10% for transformational. However, the report unveils that nowadays managers in charge prefer a different ratio: 50-30-20. Obviously, this is not a divine recipe for certain triumph. Especially given that the ratio varies depending on the industry companies are working in. The same goes for returns from investment.
In 2011, two-thirds of Xerox’s revenue came from products and services that had been introduced within the last two years (source).
Speaking of which, it’s generally accepted that the returns ratio is the inverse of the resources allocated. The most conservative approach invests little, and the most progressive invests the most. The transformational types of innovations are usually those which bring the biggest return of investments.
Other metrics, other than financial, to take in account when it comes to innovation results, are (source):
- Sales growth,
- Customer satisfaction ratings,
- Number of new ideas in the pipeline,
- Market share,
- Number of products in the pipeline,
- Net value of innovation portfolio,
- Time to market.
Innovation: a rough ride
Do you think your organization will be able to carry out transformational, or any other, innovation? The perspective is pretty grim. A study made by the Corporate Strategy Board shows that only 1% to 10% of mature companies are reaching their goals when entering new business. So maybe it’s not worth spending all those resources and risking total failure?
A conservative approach and a tendency to avoid innovation will most likely cause even more problems. According to an Innovation Matters report:
66% of senior executives around the globe agree that their organization will not survive without innovation.
Furthermore, only 24% of survey respondents were fully confident they have defined the skills and activities they need to be innovative. Human resources and the demand for talent are one of the biggest struggles when it comes to innovation:
- 21% of organizations are struggling to recruit the innovative people they need for success.
- 38% say that when they do manage to hire the right talent for innovation, they cannot keep them.
- 61% believe they are more likely to achieve success if they source innovation from outside the organization.
A lack of talented employees is not the only challenge that you most likely face. The Innovation Leaders survey results point out the biggest issues when taking on innovation.
One of the greatest problems that organizations are facing while struggling with innovation implementation is a lack of internal integrity. Politics, lack of communication and no alignment between departments and different levels of management are the main obstacles that companies are facing, according to 55% of managers.
Cultural issues, like a fossilized company structure or simply a fear of trying (and potentially failing) is problematic for 45% of respondents. Sometimes it’s just a matter of moving out of the notorious “comfort zone”, which is too much for too many people. Innovation, especially the transformational type, means changing politics and culture, quite often severely.
For 42% of managers, companies are failing to act on signals that may be crucial to the future of the business. This is the, “this looks like a great chance for us, but let’s wait and see…” kind of situation.
Many of those problems are embedded in the companies that are seeking to innovate. This means that you can’t simply flick a switch to make a change. Some organizations will never have either the proper attitude, nor the ability to kick-off innovation of any kind. For most of them, the only rescue is to reach for external guidance and help.
The sin of omission
Innovation is a high-stakes endeavor. So what will happen if your organization loses ‘innovation momentum’?
The worst case scenario is obviously bankruptcy. But there’s also the Kodak scenario, with a great firm being forced to sell their most valuable assets and finally losing its importance. This is long and complicated process, but you can see some sign in advance:
- If an organization lacks integral agility and it’s focused on a limited number of services or products, because “it’s good at it”.
- When it’s unable to predict upcoming changes or evaluate their importance – the Kodak scenario.
- When it can’t recruit or keep innovative talent.
- If there’s always something more important than a new product, new service or any other innovation.
- Short-sighted planning - “the future is distant, but next quarter is close” way of thinking.
- Finally, the whole organization is archaic in its management methodology and processes, for example, using waterfall workflows instead of agile.
Having your own internal R&D department is surely a great move. It’s recognition of the inevitability of innovation. Nonetheless it’s not a guarantee for success in itself.
No innovation, no glory
Unfortunately, there’s no easy way to implement innovative solutions in your organization. The “blood, sweat and tears” perspective is only slightly exaggerated. Especially if you’re a first-timer, your environment is likely to lack the necessary assets or innovative culture.
Nevertheless we are far from saying that you shouldn’t try. Here are some examples of supportive action you can take in order to help with innovation.
Make sure you have the best team possible and take care of your talent. We keep saying this, but people are your most precious assets for working on new solutions. However, keep in mind that it’s not enough to simply have a couple of creative workers to do the job. To make a real change in the innovation process, they need to think as innovators. Samsung, a company whose innovative efforts are well known and widely praised, has an interesting approach to this matter. In the past, the Korean company was very keen to invite top scientists from former Soviet Republics. They brought to the company a new and refreshing approach, and numerous systematic innovation methods (source). Samsung goes even further, suggesting that transformational innovation carries the most benefits if the involved teams are somehow separated from the core business, financially, organizationally and even physically (source).
Double check that everyone involved is on the same page when it comes to innovation definition. While we can agree on some fundamentals, innovation means something different for small and medium-sized enterprises to giants like Walmart and Apple. You also need to be aware that not every single innovation is a game-changer, that will shape the way the market is developing. Everyone has to agree on some common sense to avoid unnecessary discussions.
Learn how to react to signals of upcoming change. As mentioned above, 42% of managers see that organizations have problems with acting on signals crucial to the future of the business. When change is on the horizon, some organizations are unable to react in an appropriate way and sometimes it’s obviously due to a lack of properly created policies. The problem is that it’s hard to expect that those kinds of policies will come from inside of an organization that has problems with execution.
While “thinking out of the box” is probably one of the most cliché statements in the history of business, it’s also very … practical. Especially if you’re thinking of implementing transformational innovation in your company. You have to be sure that your organization’s environment and culture is innovation-friendly. Your R&D department needs to be sure that the ideas they come up with will not be nipped in the bud, just because someone feels that creating a new product or service will affect the core business. New ideas and solutions can be disruptive. And this may be very unwelcome for some people.
Last but not least - prepare a reliable and applicable system to measure innovation efforts. Here’s a shortlist of KPIs that can be helpful (source):
- Inputs that are devoted to new products or services - mainly expenses and time.
- Throughput: number of ideas that entered the pipeline, the time it takes to move from concept to working prototype, etc.
- Outputs - number of innovations that reach the market in a given timeframe, revenue obtained thanks to new solutions.
This example is just a peek into complex territory. Once again, there’s no one golden rule about what exactly to measure and when - you should create your own metrics, based on your needs and pace of work.
Hit the road!
For many organizations, maybe even including yours, innovation is actually a “to be or not to be” situation. The markets are extremely competitive, technology is moving forward with great speed and talent acquisition has never been harder. To succeed with innovation you have to be creative, systematic and extremely agile, just like Nintendo is. The final question is:
Are you sure that your organization has all the skills and assets to go through innovation alone and achieve results?
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