Process Innovation and the Oslo Manual

Whenever the word ‘innovation’ comes to mind, there are different views on the types of innovation. I refer to the Oslo Manual developed jointly by EuroStat and OECD that suggests four variants – product innovation, process innovation, marketing innovation and organisational innovation. (Note: product means goods or services in the context of this entire article). Their definitions in the manual are as below:

  • Product innovation
    A good or service that is new or significantly improved. This includes significant improvements in technical specifications, components and materials, software in the product, user friendliness or other functional characteristics.
  • Process innovation
    A new or significantly improved production or delivery method. This includes significant changes in techniques, equipment and/or software.
  • Marketing innovation
    A new marketing method involving significant changes in product design or packaging, product placement, product promotion or pricing.
  • Organisational innovation
    A new organisational method in business practices, workplace organisation or external relations.

I do not dispute the classification of the innovation types in the manual as experts would have reviewed and recommended them. But there are others who could argue about classifying innovation by other types as well. Irrespective of how we classify the innovation types, my view is that process innovation cannot be a separate innovation type. Process is an inherent part of the other innovation types. The way Oslo Manual has treated process innovation as distinct is by restricting the scope of process to production or delivery methods. Since we know that processes exist in strategy, operations and support functions of any organization, then every innovation in those involve process innovation. Using this logic, the resulting innovation types would be:

  • Product (Process) innovation
  • Marketing (Process) innovation
  • Organisational (Process) innovation

Let me delve more into each scenario.

  1. Product (Process) innovation

    Whenever a new product (or improvement or feature) is considered, it is not enough to have just an idea or identify a need to launch it. If that was the case, the success rate of startups would have been 100% and not between 10 & 50% as industry analysts say. Businesses need to think radically even for identifying / creating the need, cost benefit analysis of product creation, taking it to market (in usual way), etc. In other words, innovative processes are necessary to even consider a potential product. When it comes to implementation, process becomes even more important. Businesses cannot afford to launch a product inefficiently. Take the example of GPS in smart watches as a product innovation. While it takes a lot to build the technology in the watch to pin-point the wearer’s location, it depends a lot on the process of how that technology is used. Innovation of the trilateration process is key to the success of a product using this technology.There are very good me-too companies in all industries, who are on the watch for innovators with poor implementation strategy. They are process specialists – they do not spend on idea generation, but they do so heavily to identify new ways of delivering the product cheaper, faster, better. Often the characteristics of the product such as shape and external design itself must be changed to synchronize with the delivery approach. Here the delivery process itself is an input for the product design. One could argue that this is process innovation, but it is the product that is being delivered to the customer in a better form and by a better method and therefore the whole package is innovated rather than just the process.
  1. Marketing (Process) innovationThe innovation in marketing is more relevant when any factor other than the product itself is changed drastically to influence or cause it to be purchased. Often, these are the product owner’s assurance of some kind that will result in the product’s value being perceived as higher than what it actually is. Let us take the example of a once-upon-a-time marketing innovation that has now become a retail standard. What we all know as ‘the return policy’. This simple act of stating that gave confidence to customers that the product is of high quality, and the product owners were guaranteeing their money back if something was wrong with the product. However, innovative processes had to be in place to implement and manage the returns, whenever that happened. Definition of time limits, return handling mechanisms, what products are to be exempted from the policy, etc. must be top-notch to enable such a strategy. Business delivery model innovation can also be a type of marketing innovation. For example, the process by which Netflix tagged all its streaming videos and shows and used the data analytics to market shows targeted at specific audience segments is highly innovative. A good example of process innovation in business model innovation for marketing innovation?
  1. Organisational (Process) innovationAn organization in its truest sense is a representative unit of humanity, an idealistic ecosystem in which all human beings coexist. So, an innovation at this level means taking another step to creating a culture that makes people flock to associate with such organizations for any kind of relationship, viz. as employees, customers, suppliers, partners, investors, etc. I believe this to be the holy grail of all innovations. If this is achieved, other innovations become a habit. But again, all the parts of an organization perform activities throughout its life cycle. Therefore, the organization becomes a collection of processes at various levels. How it innovates processes consistently becomes its culture.I loved reading about the family work culture in South West Airlines that resulted in astonishingly simple but highly impactful practices in many areas, but notably in hiring, pricing, scheduling and materials procurement. The hiring process was always painstakingly thorough to help find the right people that met the organization’s desired culture. And once they hired, the management stood by their employees even if it meant helping them out in difficult service situations. SWA’s service pricing was one of the lowest in the industry, but they still won coveted service related awards years in a row beating other expensive players. The scheduling of direct flights from uncongested airports instead of a hub-spoke model enabled them to save on food and luggage handling costs. A beautiful example of a strategic procurement culture that automatically enabled streamlining of various functions was the decision to purchase only Boeing 737 planes for their operations. This meant standard flight operating manuals, maintenance processes, training and people management.
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