For most companies, the real challenge of innovation isn't the development of ideas, but successfully managing the process so it delivers a good ROI in money, time, and people. Most attempts fail to generate enough payback—especially in cash.
Recently, some leading CIOs have tried to address this problem, shifting their focus from cost-cutting and operational efficiency to revenue growth through innovative use of IT. While other executives may come up with new products or services, CIOs are in a unique position to help their business harness information about customers and trading partners to spot unmet needs or enable new ways of working with suppliers. For many companies, customer information is the key to innovation. It can create value through new products and services, better business processes, and improved business models.
Rather than resist innovation because it's often disruptive, successful CIOs proactively seek new ways of using the enterprise information assets they manage and maintain to grow the business. CIOs should think of innovation as a process that uses new knowledge to generate a payback as follows:
-- Process. Innovation isn't a singular event or random occurrence. Instead, it's a tightly managed but flexible process that drives a string of business results.
-- New knowledge. The innovation process uses new knowledge to generate more new knowledge, which in turn spurs even more innovation. The knowledge could be an idea, a chemical formula, or an insight into customer behavior. It might be new to the company or the world at large. All types of new knowledge have the potential to create immense value for an organization.
-- Payback. In business, there's no successful innovation independent of a financial return. The payback can come as a direct or indirect result. The most direct result is cash: bottom-line financial returns that are directly attributable to the innovation.
There are also four types of indirect payback that companies can obtain through innovation: New-knowledge generation, brand enhancement, a strengthened company ecosystem, and a revitalized organization. To be true benefits, however, these must generate financial returns and ultimately turn into cash.
Zara, a unit of Spain's Inditex SA, offers an excellent example of using information to create innovative processes that generate cash payback. Zara is a maker and retailer of fashionable, reasonably priced apparel. Fashion apparel is a notoriously fickle and risky industry—manufacturers and retailers essentially place big bets, months in advance, about what's likely to be hot, innovative, and in demand during the next season. As a result, many in the industry do all they can to hedge their bets, hand off the risk to another party, or try to improve their operations and reduce their time to market. Zara on the other hand, doesn't see the need to avoid the risk—in fact, the company embraces it. Zara has turned its control over garment factories into a competitive advantage, not only by selling clothes but also by designing and making them.
Zara has more than 760 stores in 55 countries. But because it does everything itself, the company can react swiftly to market trends and quickly distribute new products throughout its system. For others in the industry, it takes up to nine months to get new product lines into shops; Zara, by contrast, gets the job done in two to three weeks. Shop managers report back to designers on what has and hasn't sold; the information is used to decide which lines are kept or altered, and whether to create new lines.
In its factories, Zara doesn't focus solely on maximizing utilization to drive manufacturing efficiency. Rather, the company intentionally retains extra capacity so that it can quickly respond to changes in demand. Rather than seeking economies of scale, it manufactures and distributes products in small batches. Instead of relying on outside partners, it controls all design, warehousing, distribution, and logistics functions in-house.
Such integration carries risks: high exposure to market whims and the possibility of something going wrong in some part of the process. In Zara's case, however, the risks have been far outweighed by the cash rewards. The company collects 85 percent of the full ticket price on its retail clothing, compared with the industry average of 60 percent to 70 percent. It also has fewer out-of-stocks of popular items and less obsolete merchandise sitting on store shelves. As Zara hones its reputation for stocking styles that people actually want to buy, its brand grows stronger, generating even more cash payback.