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Innovation Doesn't Wait for Resources

Zappos is an online retailer, primarily of shoes. Its business model relies on customer service and fast, convenient delivery. Although offering a mature product (shoes), Zappos has steadily grown profitability the last decade by providing a unique shoe-buying experience. Zappos has been innovative in developing its business model, growing the company despite very modest financing for the first five years it used less than $10 million in investment. Zappos offers a good case study on innovation and how it can drive results.1

Peter Drucker asserted that innovation is an essential function of a business enterprise. He defined innovation as "the task of endowing human and material resources with new and greater wealth-producing capacity." Without innovation, a firm grows vulnerable to inevitable market changes and competitive challenges. Because it depends on what is already known, benchmarking is not a substitute for innovation. The business must improve its product or make it more economical. Interestingly, innovation has little to do with either technology or resources. In fact, those working under constrained resources, like the people at Zappos, are more inclined to innovate than those working for better financed firms.

Innovation can occur in three areas: 1) in the products or services themselves, 2) in the marketplace where customers are, or 3) in the methods of how things get done. Innovation should be purposeful, and effective managers create activities and allocate resources so those doing the work can improve current methods. But how do you innovate when resources are being cut or are considerably less than top competitors?

Consider Zappos. Like other online retailers it originally adopted a drop-ship method of distribution where shoes would ship directly from the shoe manufacturers and not from Zappos. Intuitively, this system made perfect sense to shorten the supply chain from producer to customer and save investment in expensive warehouses. This did not work, however, in a business that required accurate inventory recording, so Zappos tried to outsource fulfillment to UPS. Again, this made sense because UPS had sophisticated warehouse facilities that Zappos could not emulate. But UPS could not customize to meet the "highly SKU-intensive business that required virtually perfect inventory accuracy." So they were stuck with option 3: develop their own distribution center that incorporated a complex inventory management system something they had no expertise in doing.

Despite never having done something like this, having no existing models to copy, working with limited IT staff, and having insufficient funding to automate, Zappos personnel developed an inventory system that maximized the capacity of their space by innovating. For instance, they created a stocking system that randomly placed new inventory in static shelves, which actually optimized their warehouse capacity and made it easier to fill orders with nearly 100% accuracy.

Managers are the important conduit for innovation. Often managers blame lack of innovation on lack of resources, but rarely is innovation resource-dependent. Paradoxically, those with fewer resources are often able to become more efficient and/or effective than better financed rivals. For example, lean manufacturing was developed because Japanese firms did not have the ability to build and operate the large assembly line factories used in the United States.

Managers can foster innovation by helping people see opportunity, which usually occurs outside of standard analysis. A few guidelines for fostering innovation:

  • Routinely think about the question of what your business (or unit) should be. The status quo never works forever and the life of the status quo keeps decreasing. This thinking helps in finding new businesses or in improving what you do making it better or more efficient.

  • Push authority for decisions to the right place closest to the work or the customer. If authority is not in the right place, people can't take ownership for performance, which is how most process and product innovations occur. For example, most of the new products (e.g., fish sandwich) introduced at McDonalds were the result of single store experiments, rather than corporate design.

  • Allow those doing the work scheduled time to think about how things are being done and how they might be done better. The Japanese assembly line is the result of giving workers on the floor time to reflect on what they were doing, informed by frequent feedback on results (e.g., number of cars needing rework).
And don't wait for more resources. Neither the Japanese automobile executives, nor those as Zappos, accepted losing as a fait accompli just because of resource constraints.

1"Zappos.com: Developing a supply chain to deliver WOW!" By David Hoyt, Stanford Graduate School of Business, 2009.

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