Deep Change: How Operational Innovation Can Transform Your Company

by Michael Hammer

Breakthrough innovations in operations—not just steady improvement—can destroy competitors and shake up industries. Such advances don’t have to be as rare as they are.

HBR.org > April 2004

We spend a lot of time in our work on driving organic growth on innovation. What does that mean? The formal definition of innovation is “the act or process of inventing or introducing something new” which is normally applied to new products or services. This article offers tremendous insight into how operational innovation can lead to substantial growth. The key is creating competitive separation, i.e., creating separation between you and your competitors in the eyes of your customers. Anecdotally, one could argue that is may be more difficult for your customers to match gains from operational innovation since it usually involves a whole system than innovating in products or services.

"In 1991, Progressive Insurance, an automobile insurer based in Mayfield Village, Ohio, had approximately $1.3 billion in sales. By 2002, that figure had grown to $9.5 billion. What fashionable strategies did Progressive employ to achieve sevenfold growth in just over a decade? Was it positioned in a high-growth industry? Hardly. Auto insurance is a mature, 100-year-old industry that grows with GDP. Did it diversify into new businesses? No, Progressive’s business was and is overwhelmingly concentrated in consumer auto insurance. Did it go global? Again, no. Progressive operates only in the United States.....

....The secret of Progressive’s success is maddeningly simple: It outoperated its competitors. By offering lower prices and better service than its rivals, it simply took their customers away. And what enabled Progressive to have better prices and service was operational innovation, the invention and deployment of new ways of doing work.

Operational innovation should not be confused with operational improvement or operational excellence. Those terms refer to achieving high performance via existing modes of operation: ensuring that work is done as it ought to be to reduce errors, costs, and delays but without fundamentally changing how that work gets accomplished. Operational innovation means coming up with entirely new ways of filling orders, developing products, providing customer service, or doing any other activity that an enterprise performs."