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The importance of innovation

guest commentary by David Potts

Editor’s note: David Potts is a certified public accountant with more than 33 years experience. Although every effort is made to provide you accurate and timely tax information, it is general in nature and not specific to your facts and circumstances. Consult a qualified tax professional to discuss your particular case. Feel free to e-mail topic suggestions or questions to davidpotts@potts-cpa.com

Opinions, commentary and other essays posted in this space are wholly the view of the author(s). They may not represent the opinion of the owners of The City Wire.

Steve Jobs said innovation distinguishes between a leader and a follower. Michael Porter said innovation is the central issue in economic prosperity. Both ideas describe the importance of innovative thinking within your organization if you are to avoid mediocrity.

America’s greatness is a free market economy. At the heart of a free market economy is competition. Competition drives innovation and innovation is the DNA of the American Dream. Innovation is what defines the entrepreneur and it is the engine that creates value and drives success, success for both individuals and organizations. So why is it that innovation seems accidental in so many businesses and organizations?

When, like Ford, you have a better idea, you engage in innovation. It doesn’t mean you create something new that nobody has ever seen or heard about. For example, McDonald’s didn’t create the hamburger. Dick and Mac McDonald had a better idea and by changing the menu choices of traditional restaurants, they offered a limited menu allowing them to focus on an effective preparation process and the quality of their product. Add Ray Kroc to the mix with his ideas of standardization of the product and processes combined with the training of employees and you have a world that has eats billions of McDonald’s hamburgers every year. Innovative ideas can be simple ideas.

Innovative ideas, to be profitable, have to be accepted in the market place. This acceptance generally will be rewarded with high profit margins. Then the American Way kicks in. People learn how much money is being made by the company selling this new innovative product and the natural progression of a free market economy toward competition begins. The higher the profit margins the more intense competition.

Depending on the difficulty of copying the original concept and the difficulties of bringing a competitive version to market, prices eventually fall until margins are minimal and the supply of the once new product is plentiful. For the original company to move back toward high profit margins again, more innovation is required to create greater value for their customers.

New businesses start with an innovative idea that creates great value for their customers, then they become victims of their own success. Their business becomes profitable and they make a good living but they get too busy to continue to generate new ideas. The demands of their customers, the negotiations with vendors, and the difficulties of governmental compliance sap their energy and steal their day. There is no energy left and there is no time to think, to generate new ideas, to innovate. Business owners inadvertently become caretakers, not entrepreneurs. Soon their margins and sales growth fade and their enthusiasm fades.

What business owners need to understand that to achieve high profitability and maintain high levels of profitability through time, a business must “practice” innovation on a regular and sustained basis.

Time and energy aren’t the only obstacles to the practice of innovation. A business owner’s attitude can also be an issue. I own the book “Innovation and Entrepreneurship: Practice and Principals,” written by Peter F. Drucker. It has been in my library at least 25 years and I read it periodically. This book is divided into three parts with the first part titled “The Practice of Innovation.”

The introduction to Part I states: “Innovation is the specific tool of entrepreneurs, the means by which they exploit changes as an opportunity for a different business or a different service. It is capable as being presented as a discipline, capable of being learned, capable of being practiced. Entrepreneurs need to search purposely for the sources of innovation, the changes and their symptoms that indicate opportunities for successful innovation. And they need to know and to apply the principles of successful innovation.”

After observing businesses for the last 34 years, I believe the lack of systemic innovation or the lack of systemic generation of new ideas to create value for their customers has cost most businesses lots of money. Many people still believe they aren’t creative and therefore cannot be innovative. That’s a myth. Everybody has the ability to be innovative. The real obstacles to systemic innovative thinking for most business people is a belief they are not creative and they lack time and energy. At the end of the day, these are self-management issues.

The practice of innovation should be a core strategy for any organization. However it may be harder for some organizations to implement than others. Mr. Drucker made an interesting observation in his book Management. In the chapter “Entrepreneurship in the Public Service Organization,” he wrote, “… public-service institutions find it far more difficult to innovate than does even the most bureaucratic company. The existing seems to be even more of an obstacle for them.”

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In first sentence of the next paragraph Mr. Drucker wrote, “Most innovations in public-service institutions are imposed on them by outsiders or by catastrophe.” If Mr. Drucker is correct about public-service organizations, and I believe he is, what does this mean for the future of Fort Smith? Should we gather together in a prayer vigil asking God for a catastrophe?

Hmmm. Stay tuned.

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Comments

Hmmm indeed

I always thought Whirlpool's inevitable closing would be the catastrophic catalyst for innovation. It may yet be true, things just aren't changing as quickly as we'd all like.

From Whirlpool to Whirlwind

This town needs more tornados to boost the economy. The tornado is our regions greatest natural resource after gas & oil. By the way, can the toxic plume be removed by fracking ? I'm not an engineer, so I'm just asking.

Catastrophe

The most important happening in the development of downtown in recent years was the tornado of 1996. The riverfront, Pendergraft Park, the new library and the parking lot at westend would not be here but for that event. I have often thought we needed another, more directed, tornado to spur innovation and development. This is somewhat tongue in cheek as I certainly don't want anyone injured or killed. But,the clearing all the derelict buildings out Towson Ave. past Sparks Hospital would open the way for some innovation the same as it did for the west end of Garrison.

careful what you wish for

Downtown was already starting to come back to life when the tornado hit. As a matter of fact, as you know, the tornado took out a nicely renovated Reynolds-Davis building at South 2nd and Garrison. Not sure if a parking lot, small park and still undeveloped riverfront were worth what was lost or signify the kind of game-changing innovation we need. Had Beverly Enterprises built their corporate headquarters on Garrison as was briefly the plan, then we probably would have seen some lasting innovation. As it was, the storm certainly didn't lead to much of anything in the neighborhood of northwest Fort Smith, the part of town most affected by the tornado.

Da plant! Da plant!

Is Tesla innovative enough? Well they're looking for a place somewhere in the SW to build the largest lithium battery manufacturing plant in the world! Hey see ya later bye Whirlpool! We would really be rolling again with that and the medical wouldn't we? Rode in one last year..it was a very nice car! I'm going to go out and get a whole bucket of paint.