Shaping tomorrow: why innovation means breaking the rules

I did a speech about innovation recently. As usual, my opening question was: “Which is the most innovative company in the world?”. And, as usual, the answer shouted back from the crowd was: “Apple!”.

Apple. The firm everyone wants to be like because it is cool, successful, the world’s most valuable company by market capitalisation and because it is what we all want to be. But it wasn’t always this way. Some of us remember 1997, when the company was on its knees.

Back then, when asked what he would do with Apple, Michael Dell, founder of Dell, was famously quoted as saying that he would “shut it down and give the money back to the shareholders”. Instead, Steve Jobs came back from his forced exile and took the company into the stratosphere. The result is that $1000 invested in Apple in 1997 would be worth $58,000 today. Not a bad return on investment.

The not-too-easy answer

What did Jobs do? He made a simple statement and took a simple view: “The cure for Apple is not cost-cutting. The cure for Apple is to innovate its way out of its current predicament.” So easy to say, but so hard to do in reality.

But Jobs made it happen by redefining the competitive battleground. For example, many of us think Apple is a computing company, but Apple has nothing to do with computing. Apple is an entertainment-enabling company. Apple first of all allowed us to enjoy entertainment in a new form by creating the simplest music machine possible: the iPod. It then took the iPod and allowed us to use it with a touch-screen phone. Next, it integrated the phone more tightly with a website for entertainment that offered not just music, but books and films and more. And most recently, it gave us a bigger mobile device, the iPad, to watch our movies easily, as well as surf the Web.

These are continuous innovations on a theme of consuming visual and audio content. And that is what Apple does best. So the real innovation was to stop thinking about computing power and start thinking about entertainment hubs. This redefined Apple’s strategy, approach and vision, and is a core to its resurgence as it stopped competing with Microsoft and Dell and started competing with Sony and EMI.

Disruptive innovation

This redefinition of purpose is something that I often look for in disruptive innovation and is illustrated by this story from the 1950s. Olympic Tyres made high-strength aircraft rubber tyres – 'tires' for you American readers – and was the market leader during that decade, with twice the market share of its nearest rival. Olympic charged a premium price for what was perceived as a leading product, its strategic positioning summed up in the slogan: “Technically excellent rubber for aircraft tyres.” 

All proposals and discussions at Olympic were based around technical product excellence. For example, it would say things like: “Our tyres are twice the tensile strength of any other with the ability to take 100 kilograms of pressure per square millimetre.” Then, the Japanese entered the markets with cheaper tyres that were just as good. Within two years, market share was declining so rapidly that Olympic was going out of business.

So Olympic re-positioned and changed the ground rules. It redefined its business from 'technically excellent rubber for aircraft tyres' (product-based) to 'safe landings for aircraft' (customer-based). Its new advertising guaranteed so many thousands of safe take-offs and landings. It communicated this new positioning to employees and customers and it was so simple and memorable that Olympic managed to achieve a groundshift in market perception, re-secured its market-leading position and reported soaring revenues and profitability for many years after.

Sounds so simple doesn’t it? The real message is that an innovator changes the ground rules of the markets in which it competes and continually does so until it gains market leadership.

And which financial institution is doing this? Apple. I say this on the basis of the announcement this March of the Apple iWallet. The iWallet claims to be a digital platform that gives the user complete control over their subsidiary financial accounts directly through their iPhone and leverages near-field communication technology to complete credit card transactions on the phone as well. It includes a whole range of features and, like the Google Wallet and similar plans from Amazon and Facebook, highlights the need for banks to sit up and take notice.

As Steve Jobs said: “Innovation distinguishes between a leader and a follower.”

Chris Skinner is an independent financial commentator and chairman of London-based The Financial Services Club.