Walters - The power of soft innovation

Kath Walters explains the role of incremental innovation in encouraging and harnessing revenue growth and profits in 2017.

With so much talk of disruption and paradigm shifts in business and technology, it is easy to forget the power of the “tweak”. Uncertainty is not ideal for business, but it’s becoming the norm. US President-elect Donald Trump, for example, is an unknown quantity in an already uncertain world.

Treasury forecasts that the Australian economy will grow by three per cent in 2017–18 as we see an increase in mining investment, and an incremental improvement from the past two years of 2.5 per cent growth. In such circumstances, businesses are wise to reduce risk, but not to stop taking risks altogether. In 2017, the smartest leaders will focus on the potential of soft innovation – “the tweak” – meaning incremental change and continuous improvement. Small changes are easier to make than big ones, but can have a dramatic impact.

Just ask the “Nudge Unit”, a British semi-government initiative, officially known as the Behavioural Insights Team. On behalf of the British Government, the Nudge Unit increased payment of taxes by 15 per cent simply by adding the words “most people pay their tax on time” on the top of tax reminder notices.

Why does “nudge theory” work? You probably already use it yourself. How many of us set our watches ahead by five minutes to stop ourselves from running late? We know instinctively that our brains are complicated; the idea of the nudge is to use what we know about behavioral science to prod us to behave in our own best interests.

Nudge theory is a great example of how a small tweak – an incremental innovation – can have a big impact. By 2020, US$5 trillion (AUD$6.6 trillion) of global gross domestic product (GDP) will come from soft innovation, according to management consultants, Bain & Company. Under the heading, Everything the same, but nicer, a report by Bain & Company identifies a macro trend towards “soft innovations” that will “change our basic habits, from the way we drink coffee to the way we buy clothes. Innovators will create businesses based on these insights.”

The big disruptors like Apple and Facebook get a lot of media attention. But companies like the US Whole Foods Market and Swedish clothing company, H&M, are making a fortune by tweaking the tried-and-true categories of food and clothing respectively. Whole Foods Market, a supermarket that sells health food, grew revenue to US$15.7 billion (AUD$20.75 billion) in the year to September 2016. Sales of H&M’s quality mass clothing rose 19 per cent to 290 billion SEK (AUD$30.25 billion) in the year to November 2016. There is money to be made in soft innovation.

The secret to success in soft innovation is to increase total consumption in a category through customer insights or simply through business process improvements. Low-technology products lend themselves to soft innovation: clothes, leisure, entertainment, food and healthcare.

Coffee is an oft-quoted example in the US, although in Australia it has been a long time since we saw lattes as a premium product – who drinks percolated coffee here? Soy lattes, Keep Cups, hybrid-bike-and-coffee shops, cat and dog cafes, and hole-in-the-wall coffee shops are all examples of tweaks to the coffee category that deliver growth in revenue and profits on the old favourite.

Incremental innovation is also taking hold in the field of technology. It is the key idea behind the trend towards “agile” technology projects. In the past, technology teams would try to scope entire projects sequentially before starting (known as waterfall development). Today, technology departments build a prototype, test it, and make iterative changes until they get it right.

Flat-pack housing is an incremental innovation, posing perhaps as a disruptive one. It’s a shift from the established model of the kit home, first developed in the early 1900s and used extensively in both Melbourne and Sydney. A disruptive innovation in housing, on the other hand, is the idea of printing bespoke housing designs using 3D printing technology.

Disruptive innovation, while exciting, is high risk. Failure to innovate, however, is even riskier. Wise leaders will search for incremental innovation in every aspect of business to deliver growth in revenue and profits in 2017.