By: Adil Buhariwalla, FCA, CIA, CFE, CRMA, CI31000, CT31000, Managing Partner – MASC International

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Innovation is a key to a company’s success. It is one of the essential means that organizations can use to thrive and differentiate their business or products from the competition.

To a greater extent in the business world, and to some extent at the individual level, there is a constant push to think of ways to bring about innovation.

Being an Internal Audit professional, I have considered how innovation can be applied in the auditing sphere, and how internal auditors can become effective drivers of business innovation. This led me to further explore the topic. And in keeping with the ethos of my profession, “Progress Through Sharing”, I will provide a summary of what I have learnt, which will give you additional insights on the subject.

Let us start by looking at certain facts about innovation:

  • Over 40% of Fortune 500 companies who were on the 2000 list, were not on the 2010 list. One of the reasons attributed to this, was the lack of innovation. [1]
  • Both, in the public and private sectors, there are significant obstacles in the path of innovation implementation. [2]
  • By 2025, and due to continuous innovation it is estimated that solar power will become the largest source of electricity in the world, there will be no more food shortages and food price fluctuations as genetically modified crops will be grown rapidly indoors, petroleum-based packaging will be replaced by fully biodegradable cellulose, and Quantum Teleportation, will be tested. [3]

 

Moreover, history is witness to a large number of organizations that “stagnated and terminated” because they did not innovate. To name a few:

[1] Innovation Excellence: 99 Facts on the Future of Innovation for 2014 http://innovationexcellence.com/blog/2014/01/01/99-facts-on-the-future-of-innovation/

[2]Brookings: A Dozen Economic Facts About Innovation https://www.brookings.edu/research/a-dozen-economic-facts-about-innovation/

[3]International Business Times: 10 Innovations Analysts Predict Will Change The World By 2025 http://www.ibtimes.com/10-innovations-analysts-predict-will-change-world-2025-1614130

 

  • Blockbuster video rental company was not able to keep up with changes in the entertainment industry and how it affected consumer behavior such as: the ability to download videos from the Internet and video-on-demand by cable companies. The company eventually filed for bankruptcy in 2010.
  • Kodak, did not foresee the innovations brought by the digital age, and continued to rely on conventional technology in the production of cameras. In 2012, Kodak filed for bankruptcy.
  • Motorola failed to focus on the new trend in the phone industry with the introduction of smartphones that have multifunction and provide users with online access. The company lost its market share to newcomers like Research in Motion, Apple, LG, and Samsung.

 

Having obtained some background about innovation, let us now look at defining innovation?

But before we do that, let us first test our knowledge about this topic.

Answer True or False to the following 10 questions[1]. Then compare your answers with those shown on page 18

[1]Test Your Innovation IQ – Forbeshttp://www.forbes.com/sites/work-in-progress/2011/12/06/test-your-innovation-iq/#2f61e6b63364

  1. Innovation is the act of coming up with new and creative ideas
  2. Innovation is a random process
  3. Innovation is exclusively for a few naturally talented people
  4. The biggest obstacle to innovation is a lack of organizational resources and know-how
  5. The most important type of innovation is bringing new products and services to market
  6. Teaching employees to think creatively will guarantee innovation
  7. The most powerful way to trigger your brain is to simply ask it a question
  8. Most companies pursue known rather than radical innovation
  9. Most companies are not structured to innovate
  10. Listening to your customers is a great way to innovate

As you may have seen, innovation is not quite as simple as many of us think.

Innovation takes place when an improvement or a significant contribution is made to an existing product or service.

It is about creating new value and/or capturing value in a new way. As such, Value is the key driver for any innovation.

In the business sense, innovation is an organization’s process for introducing new ideas, workflows, methodologies, services, products, business concepts, which would enable the achievement of goals across the entire organization, and drive the overall growth agenda.

To further elaborate on the concept, it is worth noting that there are two types of innovation. The Evolutionary or Incremental type, and the Revolutionary or Disruptive/Radical type.

Evolutionary or Incremental innovation involves enhancing competence to build upon an existing concept (knowledge and resources), often resulting in relatively small changes in performance and usefulness of the existing product or service. It is the more common form of business innovation, which is generally aimed at existing customers, carries a low risk, and is adopted with less resistance. Examples of this are the multi-blade versus the single blade razor, or the smart versus the earlier mobile phones.

Revolutionary or Disruptive/Radical innovation is directed at future customers, and requires delving into new concepts and knowledge. The performance of innovation may initially be poor as compared to existing innovation, may not evoke interest of existing users, and is therefore fraught with risk. Examples include the desktop PC versus the mainframe, or e-learning versus classroom training.

Traditionally, most internal auditors talk about innovation that they have brought about in their daily operations, specifically to Planning, Fieldwork, Reporting and Audit Administration areas. This, they believe helps to enhance the quality of the assurance and consulting services that they provide to their internal or external clients. But most of these improvements are of the evolutionary kind.

As an Internal Auditor, how can you use this knowledge to “Enhance and Protect Organizational Value” of your company?

Internal Auditors need to explore ways to apply Revolutionary or Disruptive innovations to their operations.  This can be done through focusing on the organization’s “Innovation Governance”.

Innovation Governance [1] is the organization’s mechanism to achieve the following:

  • Align goals – innovation goals with business growth,
  • Allocate resources – build qualified teams, and
  • Assign decision-making authority for innovation.

At a more detailed level, Innovation Governance covers an organization’s systems and processes that:

  • Define innovation commitments
  • Define key responsibilities of the main players
  • Establish the set of values for all innovation efforts
  • Define innovation expectations
  • Define how to measure innovation
  • Make decisions on innovation budgets
  • Balance and prioritize innovation activities across divisions
  • Establish management routines regarding communications and decisions

The following are the areas that Internal Auditors should look at as part of their review of whether an organization has a comprehensive innovation governance system in place:

Why is the Company innovating? – Do all stakeholders know the importance of innovation, and share the reasons why the company needs to innovate, and how this relates to the corporate vision and objectives?

[1]Innovation Management .se: What is Innovation Governance? Definition and Scopehttp://www.innovationmanagement.se/2013/05/03/what-is-innovation-governance-definition-and-scope/

  1. What are the Company’s innovation priorities? – Where will the company focus its innovation efforts?
  2. What level of innovation does the Company want? – Is the Company looking for breakthroughs, and willing to embrace uncertainty, or favoring a more prudent approach through incremental innovation and lower level of funding?
  3. How can the Company innovate more effectively? –
    • What process will take most time, and be cost-effective, from new market needs and ideas, to successful market introduction?
    • What organizational effort is required?
    • What tools will be/are used for implementation?
    • What measures will be/are tracked?
    • How is a climate of creativity and discipline being developed?
    • Do they encourage sensible risk-taking?
    • Do they have a compensation system that encourages entrepreneurship and teamwork?
    • Have they created an environment that facilitates networking and communication in all directions?
  4. With whom is the Company innovating? – Concept of “open-source innovation” – building on ideas and technologies from third parties.
  5. Who will be/is responsible for what, regarding innovation? – Specific innovation management responsibilities at all levels, owners of all key innovation processes.

In conclusion, when Internal Auditors plays a role in reviewing innovation governance, they would be helping in the identification of major risks in the process. This would help the organization in better understanding the challenges associated with the various innovation initiatives it is undertaking, and therefore allow it to grow and ensure its continuity in the market/industry.

 

  1. False: In business, innovation is the act of applying knowledge, new or old, to actually creating something different that has value
  2. False: Innovation is a discipline that can (and should) be planned, measured, and managed.
  3. False: Everyone has the power to innovate by letting their brain wander, explore, connect, and see the world differently
  4. False: In most organizations, the biggest obstacle to innovation is what people already know to be true about their customers, markets, and business
  5. False: It is important to bring new products and services to market. But the most important form of innovation, and the #1 challenge, is reinventing the way we manage ourselves and our companies
  6. False: New ideas are a dime a dozen. The hard part is turning those ideas into new products and services that customers value and are willing to pay for
  7. True: The key to innovation is to ask questions that open people to possibilities, new ways of looking at the same data, and new interpretations of the same old thing
  8. True: Most companies focus on using internally generated ideas based on known facts to produce slightly better products
  9. True: Most organizations are physically set-up with little interactions between functions, except where needed for work. People often withhold information, believing that it puts them in a position of power

True and False: The answer is “it depends.” Research shows that customers can be a good source of ideas for improving existing products and services. For new unknown products and services, customer research is not sufficient