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Perspectives

Innovation vs. Efficiency: Which Lever Should Business Pull First?

2015-04-23


Balancing business efficiency with innovation can be overwhelming but to thrive in today's global marketplace, companies must simultaneously do both to stay relevant and competitive.

Balancing business efficiency with innovation can be overwhelming but to thrive in today's global marketplace, companies must simultaneously do both to stay relevant and competitive.


In today’s resource constrained times, companies often face an either-or conundrum. To balance their books, meet market expectations and retain investor confidence, many companies  must prioritize one over the other (e.g. operational efficiencies first, innovation later) before moving to the next, all while navigating increasingly complex and competitive landscapes. In other words, focus or fail. 

So which should companies focus on? The short answer: good companies do both. But great ones understand the timing of each and prioritize accordingly, industry experts say.

 “Some of my clients appreciate the difference between efficiency and innovation and are reaping the benefits,” says Bruce Rogow, who interviews over a hundred chief executives each year as principal of IT Odyssey in Marblehead, MA. “But others haven’t or are just starting to.”

The reason? Consensus thinking combines the two. “While conventional economics has a lot to teach us about efficiency,” writes Matthew Yglesias for Slate, “I don't think economists really know much about innovation and they [often] confuse the two, which is a fundamental error of growth.”

For those who make the distinction, many don’t know where to start. A logical first step involves getting your own house in order before attempting to master more complex innovations such as Code Halo thinking. Whereas efficiency is concerned with waste reduction and affordability, innovation is all about disruptive business models and product revolutions, which are more difficult to accomplish. 

For some, turning a big ship is harder than launching a nimble one in a new direction. “Entrenched or otherwise stagnant cultures can make running better more difficult to achieve,” explains Rob Asen, who heads strategic consulting in North America for Cognizant Business Consulting. “In those cases, it might make sense to start with run different innovations in search of new opportunity.”

Case in point: Walmart. Before modernizing its “Supercenters,” the world’s largest retailer recently started nesting grocer-sized stores within neighborhood communities to meet changing consumer tastes. 

An innovate-first approach doesn’t always work, though, especially where infrastructure has largely eroded. For instance, a large engineering-driven company recently built its most innovative consumer product to date, Asen recounts. “Meanwhile, they left their order and customer management infrastructure to rot instead of investing the millions required to fix the underlying problems and customer experience errors,” he says. “At some point you gotta lay down new bricks to improve.”

While the mandate’s starting point varies by company, it also varies by external factors such as competitive environment. “Before knowing where to start, you must identify a company’s competitive threats and opportunities,” says Ted Shelton, Vice President of Customer Solutions within Cognizant Business Consulting’s Enterprise Applications Practice. “If you’re Blockbuster, how far will run better take you against Netflix?” he poignantly asks. “Blockbuster failed because they didn’t run differently.”

Conversely, since struggling airlines aren’t facing external market pressures—at least not in the form of alternative air travel (Hyperloop, anyone?)—they should focus on run better—or efficiency—strategies, Shelton advises. “That’s not to say the only reason to run differently (embracing new and more innovative business capabilities) is because of a competitive threat,” he adds, pointing to still dominant GE, which historically spins off stale businesses to invest in new segments. “The point is that competitive threats or lack thereof, are important factors to consider before choosing to invest in running better or running differently.” 

Knowing where to start also depends on your balance sheet, Asen says. “When growth has slowed or margins are squeezed, running better can lead to faster short-term gains, which can buy more time to innovate.”  For instance, applying immediate efficiency savings towards upcoming innovation initiatives. 

In that sense, running better can often fuel the added time needed to innovate. “It can create more breathing room for reinvestment into more cycles, new products and fresh resources,” Asen says. “Amazon is a great example of this. They’re widely known for their warehouse efficiencies, which allowed them to eventually create the most innovative recommendation engine retail has ever seen.” 

Where established companies and industries often struggle is with unique missions. Healthcare is one, because risk-averse medicine often plays the “Saving lives!” card anytime someone tries to reduce costs or innovate patient care. Print journalism is another, because they view themselves as high standard, traditional and romantic watchdogs of the truth. “On the whole, they don’t like sourcing efficiencies and the affordability innovation of free online news gives them little, if anything, to work with when it comes to investing in new products or sustaining large newsrooms.”

Those are dramatic portraits of establishment struggles with simultaneous innovation and efficiency. For others, notably digital native companies with shorter memories, juggling both mandates is more easily achieved because said companies aren’t required to balance old models, legacy systems and ancient processes in order to operate. They just adopt the more flexible and virtual models of the day. 

Innovation vs. Efficiency: Which Lever Should Business Pull First?

For the remainder, adoption is the larger issue. “In order to run better and differently, you have to change your values,” says Shelton. “Nokia, for instance, said the iPhone wouldn’t sell because phone research at the time indicated people wanted smaller, tougher devices, not larger, delicate ones. But Nokia’s fatal mistake was viewing the iPhone as a phone and not the pioneering, mobile internet device it went onto become.” 

Of course, you also need buy-in, Asen reminds us. “Run better programs fail more often than they succeed because of a lack of adoption. You may build or acquire a really useful tool, but it won’t change anything if workers refuse or don’t know how to use it.”

In other words, your own people are sometimes capable of hindering your efforts, either because they’re poorly motivated, they eat their own dog food by company policy instead of market demand or because they’re out of their comfort zones.

“Companies are reflections of individuals and as individuals we rationalize,” explains Shelton. “We want to feel good about what we do, have done or will do. So we commit groupthink instead of listening to market demand.”

We do this because admitting when you’re wrong is hard to do, Shelton says. “And because it’s hard to know which changes to pay attention to and which to ignore.”

When tackling either run better or run differently, the good news is you can stand on the shoulders of giants, Asen asserts. “Do you want to learn lessons on your own nickel or someone else’s? If you’re insular or overconfident (i.e., ‘We know how to run our business!’) you run the risk of thinking small.”

Ultimately, knowing when to innovate or economize is a judgment call. “It can start either way,” Asen concludes. “There’s a tightrope to walk. For many, this is a big, if not aspirational theme.” But knowing which questions to ask is a great place to start. After all, a thousand mile journey always begins with a single step. 

For more information, visit Cognizant Consulting, Business and IT Strategy

Innovation vs. Efficiency: Which Lever Should Business Pull First?