How to Target Innovation

November 24, 2007  

When I conduct executive training, one of my favorite activities requires participants to consider a typical set of processes common in the insurance industry: Develop Products and Services, Customer Service, Manage Revenues, Manage Distribution Channels, Market Products and Services, Underwriting, Claims Fulfillment, Manage Provider Network, and Plan and Manage the Enterprise.

I ask the group to tell me which process is most important to an insurance company. Quite often, the first answer will be Claims Fulfillment. “Why?” I ask, and they will say, “Because this is why customers get insurance in the first place.” I usually respond that Claims Fulfillment is a very important process, but I want to know which is the most important process. Someone will then suggest Manage Revenues because it is how the company makes money. Again, I commend them for their answer, but I still want to know the most important process. This goes on for a while, until nearly every process has been suggested. Eventually I stop the group and say, “Okay, I am going to give you the answer to this one: ‘It depends.’”

I then tell them about the strategies of four insurance companies serving relatively similar markets.

Unum Insurance. Unum is the market leader in disability insurance, a firm that differentiates itself by its skill in assessing and pricing risk. Unum claims, for example, to have such finely tuned data that it can distinguish the difference in risk between left-handed and right-handed doctors who drive Volvos and live in New Jersey.

Progressive Insurance. This company has achieved a remarkable level of excellence in claims processing and, as a result, has become one of the most profitable firms in the industry. Progressive’s loss adjusters operate from vans with cellular communication links and computer workstations. Driving around their assigned territories, they are often at the scene of an accident before the police. In many cases, claims are processed on the spot, and it has been known for a check to be handed over by the company’s loss adjusters at the site of an accident.

State Farm. Competitive positioning for State Farm depends on its exclusive (and extensive) network of agents and offices. Its wide geographic coverage is reinforced by the company’s motto: “Like a Good Neighbor, State Farm Is There.” The firm differentiates itself from the rest of the pack by this type of branding.

USAA. The customers of USAA are primarily in the transient, mobile military services. Because its customer base is so mobile, USAA tries to be as helpful as possible to its customers. At one time, USAA was the world’s largest user of toll-free numbers, which it uses as the main means to communicate with customers. These investments have paid off. In 2007, USAA was rated the #1 Business Week customer service company.

What is the most important process to Unum? It is Underwriting. For Progressive its source of differentiation is Claims Fulfillment. For State Farm, its Distribution Network is critical because the large volume it generates spreads its risk across a broad swath of the population. And USAA is focused on Customer Service. Capabilities that are strategic for one organization may well be less critical for another in the same industry. All four of these companies are essentially in the same business, but each concentrates on a different process to achieve its competitive advantage and its differentiation in the marketplace.

What is YOUR most important process? When I ask this question of CEOs, top executives, and employees, there is typically a very long, uncomfortable silence. Most people do not think of their business in these terms.

Although the question is simple, the answer requires significant reflection and alignment. And answering this question is important for determining your innovation strategy. In particular, how to focus your innovation investments. Companies have limited resources that must be invested in the processes that will have the greatest impact on the bottom line.

Here is a framework I use to help organizations prioritize their innovation investments.

Consider that your processes fall into three levels of strategic importance: “differentiating,” “core,” and “support.”

Differentiating processes (or I prefer the word capabilities) are those that set you apart from your competition. These are your most important capabilities. Ideally you only have one or two of these capabilities. At USAA, for example, this is Customer Service.

Core capabilities are critical to your business, but are not your source of competitive advantage. These create direct value for the customer. For a manufacturing company, core capabilities might include order fulfillment, order acquisition, and product support.

Support capabilities are necessary for running the business, yet are not considered core. Quite often, these are thought of as HR, IT, or finance.

Categorize all of your capabilities and then consider different strategies based on their position:

  • Support work should be minimized, and ideally, outsourced as much as possible. Cost containment is the main strategy while still assuring high quality.
  • Core work should be simplified and automated whenever possible. The objective is to turn these capabilities into well-oiled machines. Efficiency is the main strategy.
  • Differentiating work is typically knowledge work and is where you want to make the greatest investments in innovation. Ideally, you want to empower knowledge workers to deliver non-cookie-cutter results that will continually set you apart from your competitors.

There are several important points to note with this model:

1. Because innovation seems glamorous, companies often try to focus on differentiators before they have a good foundation. This is a mistake. You must have your “core” capabilities working well (efficient, low error rates, high service levels) before you can start worrying about your differentiators.

2. The most valuable use of this model is not at the enterprise level, but rather when used within each capability. Even support capabilities have components that help differentiate the company. For example, a major consulting firm was re-evaluating its corporate training curriculum and used this model to assist. They first determined which classes provided capabilities necessary to beat the competition – that is, their “differentiators.” For these, in house custom courses were developed. For “core” consultant skills, they partnered with world-class training organizations to provide tailored versions of existing training. And for less important, support skills, they used off-the-shelf training modules (outsourced training).

3. Sometimes, your differentiating capability can be one that ensures that the work of others is repeatable and predictable. Wal-Mart invests heavily in the ability to connect stores, warehouses, and vendors through leading-edge technology. The employees who develop these computer systems are Wal-Mart’s most valuable knowledge workers. McDonald’s innovation labs help ensure that every customer gets the same quality hamburger.

4. If you are #2, #3 (or worse) in your industry, your differentiating capability should ideally be different than that of your leading competitors. When you are playing catch-up, changing the rules of the game is critical. It is hard to beat someone at their game.

5. Your differentiating capability should be something that is difficult for your competition to replicate. One service company I worked with claimed its “offerings” were its competitive differentiator. I asked the group, “How long after introducing a new offering does your competitor offer the same deal?” The answer was, “In as little as two weeks.” Unless you want to reinvent yourself on a weekly basis, you should find a differentiator that is difficult to replicate and is uniquely yours.

This is an extremely powerful framework, and its uses are unlimited.

What is YOUR most important process?

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4 Responses to “How to Target Innovation”

  1. Susan Plunkett on November 25th, 2007 6:17 am

    I found this analysis enlightening, extremely useful and the examples really illustrated the salient points so well. Thank you. One of my research activities is to consult on drawing insights from blog and forum activity however I often find companies have not thought through exactly “why” they wanted a forum before commencing one and their process is floundering. There must be a core raison d’etre.

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