Successful startups excel in one thing in particular: the art of discovery. But when a startup model evolves to a mature operation, efficiency becomes the name of the game. And, as leaders become obsessed with generating profits, their exploratory tendencies sometimes bite the dust.
What’s worse, efficient processes that spell lower costs and higher profits tend to clash with innovative processes that transform thinking and products. A steel-eyed focus on efficiency and profits is a problem because it’s through innovation and exploration that mature companies can achieve strategic renewal, grow markets and increase revenue.
To identify innovative ideas with true market potential and convert the ideas to a form that’s marketable requires four things, including the creation of autonomous business units to pursue new endeavors and the appropriate management of internal transfer pricing to confirm an idea can lead to a viable business model.
Create Autonomous Business Units to Pursue Innovation
The goals that support the continued success of a business, such as cost control, can be at odds with innovation initiatives. For this reason, to pursue disruptive innovation, it’s often best to create an autonomous business unit for that very purpose.
By operating autonomously, the activities of an innovation project can avoid being governed by the same objectives that control a corporation’s processes…namely operational efficiency and cost containment.
Also, forming an autonomous business best ensures the pursuit of innovative ideas doesn’t fall victim to attempts to identify products that align with existing product lines. It also ensures that the chase for innovation isn’t overly influenced by prevailing product development thinking. McDonald’s fell prey to these mistakes when the company introduced the Arch Deluxe to attract adults “with a refined palate.” It was only after committing funds to the project, including about $100 million in advertising, that McDonald’s became aware that adding a round piece of bacon to an existing product doesn’t create an innovative product that will appeal to a new demographic.
Manage Internal Transfer Pricing to Support Viable Business Models
Every company has assets it must put to best use to maximize its profits. A business must commit some of these assets to an innovation project in anticipation of value creation.
A company can support its innovation projects through a variety of means, such as granting the project access to an existing technical infrastructure. But it’s important that a company commit to those projects that will be self-supporting. In part, a company accomplishes this goal by setting appropriate transfer pricing – the prices for goods and services sold between related company entities. Only then will innovation project leaders accurately estimate the profit potential of their product or do what’s necessary to make sure a viable business model evolves from their work. After all, an innovative product must be self-sustainable, meaning it must be successful in both an operational and financial sense.
Systematically Test Business Model against Assumptions
It’s likely that a company’s founders recognize the importance of validating a company’s revenue model. They respect the need to identify a consumer’s problem that a proposed product will solve, understand the consumer’s buying process and the company processes that must support this process, such as marketing communications and the product distribution structure.
For an innovation project to be successful, it’s important to consistently test the business model against specific assumptions. For example, the innovation team must ask questions, such as “Can a new product be the solution to this particular customer problem?” and “Can we produce the proposed product and earn a profit?” Doing so helps to ensure a viable and profitable product is brought to market with the fewest dollars and in the shortest time possible.
Recognize ROI Is Not the Single Measure of an Innovation Project’s Value
Leaders will always feel pressured to ensure operations are profitable and efficient, and that the company achieves a good return on its investments. Successful leaders must recognize when marketing expenses generate an appropriate gross profit and when a product generates sufficient income to warrant the resources a company deploys to make and sell the company’s products.
But to transform a company or develop an innovative product with the potential to earn a company the top spot within its industry, the company must periodically invest in innovative efforts that might not seem justified if looking at financial calculations alone.
When a startup evolves to a mature operation, efficiency in the name of profits may become the top priority. But efficient processes are rarely a formula for success when it comes to the development of innovative products that lead to market growth and increased revenue. For this reason, it’s a good idea to do four things, including create an autonomous business unit whose focus is innovation, rather than profit or efficiency.