Exploring Innovation

What is the difference between innovation and invention? And how does invention become a success?

At the CFO Alliance Roundtable breakfast held at the Carmel Country Club on Jan. 26, Ram Baliga explored these questions with finance and accounting executives from the Charlotte region and surrounding areas in a discussion called “Game Changers: How to Make Innovations that Matter.”

Baliga, John B. McKinnon Professor of Management at Wake Forest University Schools of Business, said that many people think that invention and innovation are the same, but that in reality only successful commercialization of an invention or discovery should be considered innovation. He went on to point out that appropriate business models were essential to translate invention/discovery into innovation.

He used several examples of companies who generated inventions but failed to turn them into innovations. An example of a costly failure to innovate was that of AT&T, who was the first to deploy mobile telephony in a test market but failed to develop it further assuming that there was only a limited market. By not persisting it ceded its lead in mobile telephony to Ericsson and the Finnish newcomer Nokia.

Baliga used other examples of companies such as Kodak (in digital imaging), Barnes and Noble (on line retailing) and Kmart (small town discount retailing) who had the means to be innovative but lost to Sony, Amazon.com and Walmart respectively. He explained that the fundamental objective of innovation was “to stay strategically, competitively, and financially fit,” and creating new business models were critical to success.

He said that a good business model must do three things: it must create value for the customer, and the customer’s customer; capture the bulk of the value created, and enable the firm and to take advantage of growth opportunities with minimal modifications.

Baliga then explored the many elements of the business model, including: the value proposition based on the customer’s willingness to pay; the specification of the revenue architecture, cost structure and target margins, and the strategy by which a company will gain and sustain a competitive advantage. He then talked about focusing on changing the various elements of the business model creatively to gain competitive advantage. One example was to reconceptualize the customer’s value. “Rather than an insurance company saying ‘I won’t insure a risky driver,’ they must instead ask themselves, ‘at what price can I make a profit on risky drivers?

Baliga then went on to assert that creative business models had the potential to transforming industries and that companies that generated such business models were ideally positioned to sustain competitive advantage.

Following his presentation, the audience broke into smaller groups to examine how innovation was being dealt with in their own companies. He also challenged the group to think differently about their customer’s key metrics, in their value capture – where he used the example of Google’s advertising based model as a way to monetize search and Apple’s iPod-iTunes model which minimizes value capture in selling music in order to maximize value capture through sales of iPod.

Baliga concluded by saying that innovation needs to be managed, and that companies should have a growth budget set aside to explore innovations.

The CFO Alliance was founded in 2007 and provides CFOs with an exclusive live events network and a knowledge-based online community where members can collaborate, discuss critical issues, and share knowledge among peers. Wake Forest became an academic partner of The CFO Alliance in 2009.