Innovation & Quality vs Cost
Innovation, the new face of quality
For almost 100 years of our quality journey, we increasingly pampered our customers by giving them what they wanted. Customers now assume that quality is a given. Further, in our present information age, customers are more aware of competitive suppliers, as well as suppliers with poor performance. Quality performance has peaked globally, and the faces of quality have moved from the line worker to the corporate executive. Activities that improve quality hardly yield significant benefits anymore. So what else can be done to improve business performance and delight customers?
In the interdependent and competitive global economy one must find true competitive advantages based on features and capability rather than quality alone. Delivering a solution that is unique to each customer is becoming more important than delivering a standard solution with virtually perfect quality. Instead of managing the cost of goods or services, businesses will need to manage growth by offering innovative solutions to customers. The quality of innovation becomes a differentiating factor. The quality of innovation implies how well each business is equipped to innovate and offer high-volume custom solutions. Thus the businesses will be moving from quality improvement to innovation improvement.
Interestingly, innovation has become a global issue and is being addressed by national governments. In the European Union, for example, each country must have a national policy on innovation, create an infrastructure for innovation, and establish measures of innovation to grow the economy and maintain and improve the standard of living. India formed the Knowledge Commission to establish its national innovation policy. China’s premier launched an initiative called Self Innovation to change its image from that of a low-cost manufacturer to an economically self-reliant nation offering new products and services for global consumption. The United States passed an Innovation Act in 2005 to promote innovation in manufacturing. In other words, we are in the innovation age, and this offers a great opportunity for quality professionals to migrate from improvement to innovation.
Innovation implies the use of intellectual resources--the people and their intellectual involvement, knowledge management, and new product innovations. Innovation offers a great opportunity for quality professionals to lead the organization in improving the quality of business by contributing to profitable growth. They have the inherent advantage of knowing the customer’s pulse and the organization’s capabilities. They only lack an innovation methodology to leverage existing resources to exploit the opportunities offered by the customers.
Having been a quality professional who successfully transitioned to an innovation professional, I see a striking commonality between quality improvement and innovation. Ultimately, innovation means change, and so does improvement. One way to understand the difference is that improvement may be a one-dimensional change, while innovation is a multidimensional change.
The three rules of creativity
We must learn about innovation as a process. It begins with a belief that one can be innovative. Innovation is for everyone, and can be applied in everything. It is no longer a debate between manufacturing and service. Many experts tell us that we must learn creativity, the assumption being that we are not already creative. I believe that we all are creative. The evidence of our creativity comes from our actions. We rarely do anything exactly the same way twice. After teaching business innovation classes at the Illinois Institute of Technology, I have come to the conclusion that the following three steps help everyone to become more creative. Applying these steps changed my class response from being 5-percent creative to 100-percent creative in 10 minutes. These rules for creativity are as follows:
- Rule 1: Decide to always be creative. Look for innovations everywhere, admire creativity, and research any topic that interests you. Learn as much as possible.
- Rule 2: Start combining two or more items or ideas in unique ways. Every innovation is a unique synthesis of many ideas. Analyze other innovations to see what is so different about them. Associating and combining is a natural activity for our brain.
- Rule 3: Continually practice to become fast at combining ideas. We must become fast thinkers by synthesizing all the information we have gathered and have fun doing it.
The five phases of the methodology
Once we learn the creative process, we must recognize that creativity and innovation are two different things. Creativity is just an idea, invention is a prototype, and innovation is production. Unless the idea becomes a reality and is used repeatedly in creating value--and people are willing to pay for it--it isn’t innovation. For example, suppose no one bought Apple’s iPod. Would it be called innovative? Absolutely not; it would simply be a creative product. Thus we must learn the entire cycle of innovation, from concept development to monetization.
- Target Oportunity
- Explore Idea
- Develop Alternatives
- Optimize Solution
- Comercialize Innovation
• Target. Studies suggest that research-and- development-driven innovations have only been about 4- or 5-percent successful. Reducing product life cycles requires faster innovation, leading to innovation on demand. Defining what to innovate to fulfill customer needs helps improve the success rate of new products.
• Explore. Today’s R&D represents a little research and a lot of development. I think this is backwards. Initial research is critical to maximize innovation. Good innovation depends on excellent exploration. In other words, before developing an innovative solution, we must extend and expand our thinking based on thorough research. In the absence of solid research, products coming out of R&D will be of marginal quality in terms of design, innovation, and meeting customer expectations.
• Develop. Once information about customers’ needs is gathered and sufficient research has been conducted, multiple innovative solutions can be quickly developed. The result is having many alternative innovative solutions to choose from rather than taking the conventional approach and developing the first (and probably only) solution.
• Optimize. Out of the multiple innovative solutions, the best and most economically feasible solution is selected and optimized for robust production and delivery. The solution must provide profit margins. Currently, new products often have early failures, and many businesses lose money during the introduction year. For example, any car in its introduction year is considered to be a risky purchase due to its higher-than-normal failure rate. A well-implemented optimization phase would minimize such risks.
• Commercialize.In transforming a creative solution to a successful innovation, excellence in marketing the solution to potential customers plays a significant role. No sales, no innovation--it’s that simple. We must not be satisfied with just developing a creative product, service, or business model. For any innovation to be successful, we must also be innovative in generating revenue growth.
The four types of innovations
One of the innovator’s dilemmas is how to manage innovation, i.e., delivering innovative solutions when needed, allocating the necessary resources, and defining the process of innovation. Most companies do allocate time and budget to new product development; however, they are unable to deliver on time, within the budget, and make money. Our analysis shows that, on average, return on innovations for most corporations are between 15 and 20 cents per dollar spent on development. This supports the hypothesis that the current innovation process is inefficient.
Understanding the types of innovations and their characteristics will help prepare for innovation. I have come up with the following four types of innovations:
• Fundamental innovations. These are the rare ones that represent a major discovery. These innovations include development of the transistor, the theory of relativity, the photocopying process, or mobile phones. These innovations usually occur in large laboratories dedicated to new thinking or discoveries.
• Platform innovations. These are the base products of corporations. These innovations take fundamental innovations and launch a new industry or a new market. Most large businesses start with a platform product and grow with its success. These innovations include Microsoft’s operating system, Oracle’s database, Motorola’s Razor cell phone, IBM’s computer, Service Master’s services, Caterpillar or John Deere’s farming products, Southwest Airlines’ low-cost flights, and Apple’s iPod. Some small companies also have platform products and grow into a larger company. The platform innovations align with the long-term strategy of corporations.
• Derivative innovations. These are a variation of the platform innovation. They are byproducts of platform products. Apple’s iPod had the Nano and Shuffle; Motorola’s Razor had Crazor, Pebble, and Rocker; and Microsoft Office had PowerPoint, Excel, Access, and Word. Once successful, companies capitalize on their successful platform innovation by developing derivative innovations. The derivative innovations take much less time to develop than the platform innovations.
• Variation innovations. These are the customized applications of various platform or derivative innovations through options, services, and integration. These innovations can be developed by the user or the supplier to personalize or customize the product. For example, iPod has a service for imprinting the customer’s name, and cell phones can be personalized with color covers and unique ringtones. The variation innovations also could be keenly focused implementations of other innovations for a specific use. The variation innovations can be developed in real time responding to a customer’s need.
What to innovate
One of the commonly asked questions about innovation is what to innovate. We must always think innovatively, i.e., identifying the market or value potential of creative ideas continually. Be an opportunist and look out for employee dissatisfaction, low-yield processes, management issues, contradictions, or conflicts. In other words, look for pain points and decide to create an innovative solution. Have faith that if a problem exists and can be vocalized, then there must be a solution. That is the opportunity for innovation. As quality professionals, we should grab such opportunities to create value innovatively. The opportunity for innovation could be procedural or technical. The opportunity could be short term or long term. The short-term opportunity corresponds to variation and derivative innovations, and the long-term opportunities relate to platform and fundamental innovations.
The quality profession has evolved from 100-percent inspection to sampling plans to Six Sigma. We must maintain our intent to help our organizations improve their financial performance. Innovation provides quality professionals with a great opportunity to contribute to corporate performance more visibly. Understanding a holistic framework will help us start our innovation journey.
Several factors explain the competitiveness gap between developed countries
The most common causes cited in the literature :
- Unsuccessful sector specialisation (Cheptea et al., 2014) and unfavorable geographical location (Felettigh et ali., 2006)
- Resources misallocation (Bas et ali, 2015)
- Price competitiveness (labor, capital, intermediate consumption, mark-up, etc.) (Le Moigne et Ragot, 2015)
- Non-price competitiveness (Khandelwal, 2010)
The determinants of the non-price competitiveness (quality, innovation, design, brand image, distribution networks, customer service, etc.) also contribute toexplain the export performances.
Price competitiveness VS non-price competitiveness
European Commission (2010) shows that the price-competitiveness explains less than 40% of the change in export performances of the Euro zone countries.
Similarly, INSEE (2013), indicates that most of the export change of the European economies is explained by non-price competitiveness
- Most of the studies focus on one of these two types of competitiveness
- The non-price competitiveness is not easily measurable concept
- Revealed preference theory (Aiginger, 1997) ⇒ Drawback : limited on countries pair flows.
- Export price indices as quality indices (Hallak, 2006) ⇒ Drawback : reflect production costs, amongst other things
- Residual approach : Quality is the idiosyncratic term of the import demand function (Khandelwal, 2010) ⇒ Drawback : Prices reflect also quality
Innovation as a measure of quality
- Innovation is one of the three subindexes used to calculate the Global Competitiveness Index of the annual Global competitiveness Report.
- Chen (2013) shows that innovation (proxy of product quality) increases exporters’ intensive and extensive margins.
- Hall, Lotti & Mairesse (2009) show that the most innovative Italian SMEs have the highest turnover of new products introduced on the national market over the 1995-2003 period
- Different measures of innovation (R&D, Patents, etc.) have similar effects on trade (Wakelin, 1998 ; Anderton, 1999)
- Similar effects of quality image and innovation image (Crozet and Erkel-Rousse, 2004)
Issues and methodology
- Analyse the effects of the cost competitiveness and quality competitiveness linked to innovation (R&D) on trade of the OECD countries over the 1998-2012 period.
- Quality is present both in prices and quantities
- What is the the share of quality in export price for the OECD countries-sectors ?
- What are the cost (quality-adjusted price) and quality elasticities of import demand within the OECD countries ?
Methodology : 2 stages
- Determine the export price adjusted for quality linked to innovation (ISIC rév4 - 2Digit R&D expenditures)
- Estimate the influence of quality linked to innovation and the cost competitiveness on bilateral trade.
The share of quality in prices
- The share of the quality in prices is about 40%, on average
- The share of the quality in prices is significative in 14 sectors out of 20
- Namely, in 8 out of 13 sectors of low and medium technology and 6 out of 7 sectors of high and medium-high technology
- On average, the share is less important in low and medium technology sectors (24%) than in high and medium-high technology sectors (51%)
- In average, quality linked to innovation explains 40% of prices
- Price and quality effects are non linear :
- Cumulative positive effect for quality - Opposite effect for quality-adjusted price