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Innovation for beginners

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Accounting regulations limit some finance innovations, but there still is so much you can do. 

Financial innovations might include novel ways to close the books faster or new sources from which to raise capital. Professor Antonio Davila of the Instituto de Estudios Superiores de la Empresa at the University of Navarra in Spain, Professor Marc J. Epstein of Rice University in Houston and consultant Robert D. Shelton of Price Waterhouse Cooper’s Silicon Valley-based Global Innovation Practice take lessons from their book, Making Innovation Work: How to Manage It, Measure It and Profit from It (Pearson Prentice Hall, 2005), and apply them to accounting and finance.

In their book the authors identified six levers of innovation, including three business-model levers and three technology levers. Chief financial officers can use these to find surprising ways to improve both the efficiency and the effectiveness of their activities.

The three levers of business-model change are as follows:

Value proposition

The basic value proposition of any firm is what is sold and delivered to the market. Changes might include bundling products and services together or selling previously bundled products as stand-alone offerings. Another option for change is expanding the boundaries of the business.

Value network

How value is created and delivered relies on its network. Changes to the network might include reworking the supply chain, seeking out alliances with companies that offer complementary products and services, building and monetising social-media networks and modifying the revenue, cost or margin models.

For example, although most airlines derive the bulk of their revenue from ticket sales and pay airports to use their gates, Ryanair famously persuaded airports to pay them instead. In return, they committed to deliver a specified number of passengers to the airport and offered passengers cheap airfares to do it. The company also receives a portion of the sales generated by the airport’s retailers.

Target customer

Changes here might include looking for customers that competitors have missed. These could be unserved customers who have bought similar offerings from competitors or non-customers who have never bought your kind of product or service from anyone.

The Indian automaker Tata Motors did exactly this when it designed the Nano, a $2,500 car targeted at millions of people in India who previously couldn’t afford a car.

The three levers of technology change are as follows:

Product and service

offerings

Changes might include upgrades or introductions of entirely new products or services. This is the most easily recognised type of innovation, because consumers see the changes firsthand. This is not usually the CFO’s domain.

Process technologies

Although it is less visible to customers, technology also is used to improve the manufacturing process and/or service delivery. The result is better, faster and less-expensive products and services.

Supporting technologies

Rather than changing the functionality of a product or process, changes to supporting technologies help a company execute its strategy faster and leverage time as a source of competitive advantage.

For example, improvements in information technology can facilitate the exchange of information among various participants in the value chain.

Insight inspires and informs all six innovation levers. CFOs and other finance executives have their own insights into how a corporation works. They should apply these to bring about business-model and technology changes.

To make the best strategic decisions, it is necessary to understand the characteristics of three types of innovation and when it’s appropriate to use each.

Many companies thrive on incremental innovation, seeing it as a way of wringing out as much value as possible from existing products or services without the need for significant changes or major investments. This is the most prevalent form of innovation, and it’s seen as relatively safe.

Incremental innovation may work well for accounting and finance processes, which historically have been slow to change.

For example, the business-technology-consulting firm Infosys is able to close its books and report more quickly than its rivals, thanks to incremental improvements it made to its enterprise-resource-planning system.

Breakthrough innovation, on the other hand, involves substantial changes either to the business model or to the technology of an innovation, but not to both.

The third type is radical innovation. Although radical innovations can create tectonic shifts in an industry and put a company in the lead, astute CFOs should approach them with caution.

The authors conclude that CFOs can be fonts of innovation if they understand how innovation works and apply their insights to it. With innovation know-how, finance executives can make new contributions to drive positive change.

© 2014 Instituto de Estudios Superiores de la Empresa, IESE Universidad de Navarra

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