Dr. Eliyahu M. Goldratt in his famous book The Goal states “The goal of any organization is to make money now and in the future.” Making money constantly (basically shareholder value) requires constant innovation. Let me explain “why innovation” taking an example.
I have explained the need for innovation to many people in different forums and in many different ways. After a number of approaches, this one was the easiest to follow for the participants. Read this small and quick explanation of why you need to innovate constantly?
When the Indian IT industry has been finding itself in great turmoil, I wrote on Twitter. Inefficiencies were fine until we’d cost advantage. Now Indian IT industry needs to improve operations and innovate without fail. Because the cost advantage as a competitive strategy would not work.
Dr. Eliyahu M. Goldratt in his famous novel The Goal says – “the goal of any organization is to make money now and in the future.” Let me take this forward with a question how can an organization be consistent with making money NOW and in the FUTURE?
The reason for constantly investing in Innovation can be explained very easily with the help of an income statement below.
Why do organizations need constant Innovation?
Simply put, profit for the shareholders is The Revenue Minus the Cost of the company. Everyone sees the income statement to check profits. The goal of a company is to increase profits for the shareholders. So how can a company make more money?
Profit = Revenue – Cost
A company can improve profits by either increasing revenue or by reducing costs. However, here there is a catch, reducing cost has a limit, one cannot go below a certain level in reducing the cost. So, the other option is increasing revenue. Let me explain my assertion of “reducing cost has a limit” with an example of a product company.
Revenue for this company is the number of units sold multiplied by the price per unit. If the company wants to increase revenue it can either increase the number of units sold or increase the per-unit price. Agreed?
However, the market is governed by the economics of demand and supply. Increasing prices beyond a certain level would not increase revenue because customers will stop buying.
Practically speaking, cost reduction has a lower threshold. Similarly, the number of units and price also follow an equilibrium. What options do you have to increase the Profits of a company? You have to innovate, create more value for the customers, solve more of their problems and remain the darling of your customers Now and in the Future.
Effectively, an organization needs to innovate constantly not only to improve profits but also to remain competitive, survive and grow. Is not it a very interesting explanation for why innovation?
Innovation is easier said than done. Because, mostly the approach for innovation is random trials or one time genius thought to action. I train on proven innovation tools such as TRIZ, and different types of innovations (beyond products). The approach I have defined for innovation helps organizations innovate effortlessly. Reach out to me to know more.
Note – I have been using this explanation since 2011. I have published variations of this article in multiple presentations and articles online – e.g. medium, LinkedIn.