Business innovation is all about the successful exploitation of new ideas. Often, the objective of dynamic, growing businesses is to innovate as well as to generate profits.

Overview

Innovation is about more than just bringing new and improved products and services to market. It can involve the exploitation of an idea by starting a new business or finding new ways to increase the efficiency of your business and, most importantly, improve its profitability. Sometimes, an idea may originate from within an existing organisation - eg a business or university. In these cases, the new business is called a 'spin-out'.

It is important for businesses to continue investing in innovation during difficult trading conditions, so that they are in a better position to compete when conditions improve.

This guide explains how you can make your business processes more innovative and outlines the different approaches you can take. It gives you advice on innovation start-ups, planning for innovation and creating the right business environment to develop your ideas. It also outlines the help and support available to innovative businesses and the risks and rewards associated with innovation.

The business case for innovation

There is an important difference between invention and innovation. Invention is coming up with a new idea. Innovation is the commercial application and successful exploitation of an idea.

Innovation means introducing something new into your business. This could be:

• successfully exploiting a new idea through an innovation start-up
• improving or replacing business processes to increase efficiency and productivity, or to enable the business to extend the range or quality of existing products and/or services
• developing entirely new and improved products and services - often to meet rapidly changing customer or consumer demands or needs
• adding value to existing products, services or markets to differentiate the business from its competitors and increase the perceived value to the customers and markets

Innovation can mean a single major breakthrough - eg a totally new product or service. However, it can also be a series of small, incremental changes.

Whatever form it takes, innovation is a creative process. The ideas may come from:

• inside the business - eg from employees, managers or in-house research and development work
• outside the business - eg suppliers, customers, media reports, market research published by another organisation, or universities and other sources of new technologies

You will need to filter those ideas, identify those that the business will focus on and apply resources to exploit them.

Introducing innovation can help you to:

• improve productivity
• reduce costs
• be more competitive
• build the value of your brand
• establish new partnerships and relationships
• increase turnover and improve profitability

Businesses that fail to innovate run the risk of:

• losing market share to competitors
• suffering from falling productivity and efficiency
• losing key staff
• experiencing steadily reducing margins and profit
• going out of business

Innovation can be risky but the benefits gained from it can be critical to the continuing success of your business.

Approaches to innovation

Your approach to innovation will depend on your business strategy, capability and market understanding, as well as how much finance you have available.

There are many approaches to innovation that you could focus on in your business, including:

• continuous product and process improvement
• improving your product design
• upgrading your business model - for example, by offering complementary services or products
• using new technologies to add value to an existing product or service
• exploiting a new technology to create a new product, service or business

Analyse the marketplace

Innovation is not something separate from everything else your business does. Instead, to move your business forward, study your marketplace and understand how innovation can add value to your customers.

Identify opportunities for innovation

You can identify opportunities for innovation by adapting your product or service to the way your marketplace is changing. For example, if you're a specialist hamburger manufacturer, you might consider lowering the fat content in your burgers to appeal to the health-conscious consumer.

You could also develop your business by identifying a completely new product. For example, you could start producing vegetarian as well as meat burgers.

You could innovate by introducing new technology, techniques or working practices - perhaps using better processes to give a more consistent quality of product.

Innovation Protection Support Scotland provides support for innovators.

If research shows people have less time to go to the shops, you could overhaul your distribution processes, offering customers a home delivery service, alongside online and telephone ordering.

If your main competitors' products have a reputation for being cheap and cheerful, rather than trying to undercut them on price you could innovate by revamping your marketing to emphasise the quality of your merchandise - and consider charging a premium for them.

Planning innovation

To encourage innovation in your business, you must develop and communicate a clear, simple vision, with a strategy to achieve it.

Good leadership is essential. You will need to manage people and resources, consider any risks to your business and market, and be prepared to be flexible to respond to them.

Some innovative ideas may just come out of the blue. However, when planning innovation you should ideally have:

• innovation as part of your business strategy
• astrategic visionof how you want your business to develop - if you dedicate your time to monitoring trends in your business sector, you can then focus your innovative efforts on the most important areas

Innovation will not only improve the chances of your business surviving, but also help it to thrive and drive increased profits. There are lots of practical ways of assessing whether your ideas have profit potential:

Assess the competition

Find out who your competitors are and where they operate. Use the internet and advertising sources such as the Yellow Pages to find out about their products, prices and operating culture. This can give you an overview of their selling points, as well as any areas you might be able to exploit.

For example, if the competition is focused on value for money, you might want to emphasise the quality of your product or service.

Study market or industry trends 

Awareness of the climate in which your business is operating will help you to plan.

You can find a lot of information about your industry on the internet. Business and trade magazines will also feature useful articles.

Build a relationship with your customers

It's not enough simply to know who your customer base is. You need to communicate effectively with them as well.

Effective communication involves not only listening to their needs but also actively observing their behaviour in relation to current products and services and generating ideas on how you can make improvements.

Involve your suppliers and other business partners

Pooling your resources with your suppliers or other business partners will help to produce and develop creative ideas. Potential partnerships can also be developed through business networking opportunities.

Next, consider what taking a particular innovative step could mean for your business. Ask yourself:

• what impact it will have on your business processes and practices
• what extra training your staff may require
• what extra resources you may need
• how you'll finance the work
• whether you'll be creating any intellectual property that will need protecting

Finally, you should include your vision in your business plan by:

• putting down your goals, both long and short term and detailing how you intend to achieve them
• linking goals to financial targets, such as achieving a specific turnover by a set date
• reviewing your plan regularly

Encourage innovation in your business

There are many sources you can use to help generate new ideas for the business.

Suppliers, business partners and business network contacts can all make valuable contributions to the creative process, as well as providing support and encouragement. Your employees are also a vital asset in generating innovative ideas.

To get the most from them, you need to create an innovative environment and encourage creative thinking.

Steps to promote innovation

• Make sure you have processes and events to capture ideas. For example, you could set up suggestion boxes around the workplace or hold regular workshops or occasional company away days to brainstorm ideas.
• Create a supportive atmosphere in which people feel free to express their ideas without the risk of criticism or ridicule.
• Encourage risk taking and experimentation - don't penalise people who try new ideas that fail.
• Promote openness between individuals and teams. Good ideas and knowledge in one part of your business should be shared with others. Teamwork, newsletters and intranets can all help your people share information and encourage innovation.
• Stress that people at all levels of the business share responsibility for innovation, so everybody feels involved in taking the business forward. The fewer the layers of management or decision making in your organisation, the more people feel their ideas matter.
• Reward innovation and celebrate success. Appropriate incentives can play a significant role in encouraging staff to think creatively.
• Look for imagination and creativity when recruiting new employees. Remember that innovative thinkers aren't always those with the most impressive list of qualifications.

How a designer can help you innovate

Design tools and processes can generate innovative new ideas, improve business performance and help growth. Businesses do not always require a creative element to be successful. However, while your business runs as normal, a designer can explore new and different ways of turning your ideas into real products or services.

Innovation can be described as developing and implementing new ideas, concepts, products and processes, either through incremental changes or with radical new concepts. This involves exploring and experimenting, embracing change, taking risks and thinking laterally. Designers can help you create and manage a strategic innovation project for your business that may:

• add value to your products and services
• stimulate sales growth
• exploit new markets

Design is about more than creating the look and feel of a final product. Designers can offer a wider variety of insights which can help your business become more innovative. Their methods and processes include:

• research - which focuses on what your customers need and want, and on revealing unarticulated opportunities
• brainstorming - which creates lots of ideas quickly
• prototyping - which allows you to test quick and dirty models of your ideas early in the innovation process to see whether they are viable

These design techniques can be incorporated into the existing research and development functions of businesses of any size.

To achieve good results, it is important to involve a designer from the beginning of the project.

Funding innovation

Securing the right kind of finance is key to delivering high growth and innovation. There are a number of ways you can fund your innovation start-up or growth through innovation, either by using your own funds or tapping into external funding such as loans or equity finance.

For an innovation start-up, you may even need several rounds of investment while you are developing your idea until your business starts generating more cash than you are spending.

Any route to external funding will need a high-quality business plan that describes your business and sets out detailed forecasts of where it is going.

Businesses often turn to their banks for overdrafts or loans for additional finance, depending on their borrowing needs. But banks are often reluctant to lend money to innovation start-up businesses - especially if you have no significant tangible assets such as premises and equipment

If you're willing to relinquish some control of your business to external investors, you could consider using equity finance. The two main routes for this are investment from business angels and venture capital (VC) firms:

• Business angels are wealthy individuals or syndicates who invest in private companies, typically from £10,000 up to £2 million.
• VC firms provide higher levels of investment in return for shares in the business. Companies looking for VC for the first time can raise up to £5 million, although some smaller regional VC firms or VC Trusts will make investments from £50,000.

Investors in start-up ventures will usually expect a return on their investment after between five to seven years after investment. This is usually achieved by selling either the entire business or just the investors' shares in it so that they can realise the value of their investment.

You may also consider seed corn venture funds - locally based funds, often linked with regional strategies - or unsecured loans, for example from family or friends.

Grants to support innovation

You may also wish to consider applying for a grant. This will usually only cover part of your project, but you will retain control of the shares in your business and, providing you do not break any of the conditions, you will not have to repay the sum awarded.

There is a wide range of grants available, backed by a variety of sources, including the government, the European Union and local authorities.

There are a variety of innovation funding options for Scottish businesses. Scottish Enterprise offers innovation grants and Highlands and Islands Enterprise (HIE) offers research and development loans. You can also find out about European innovation funding from Enterprise Europe Scotland.

Other sources of help

Small and medium-sized businesses can claim tax relief and credits on appropriate research and development spending.

The risks and rewards of innovation

Innovation is a complex process with many stages. It will often require investment of time and money before positive effects can be seen. If you're thinking about innovation in your business, you need to be sure that it will be of benefit.

For example, will it add value to your business? 'Value added' is a good measure of how well a business is doing financially, and is worked out by subtracting the cost of bought-in goods and services from your sales.

In order to compete in a rapidly changing marketplace, and increase the value of your business, you should focus on improving the efficiency of your business model, by increasing your value added.

As part of any innovation process, you need to understand, evaluate and manage risk. Risks can include:

• operational - for example failing to meet your quality, cost or scheduling requirements
• commercial - for example failing to attract enough customers
• financial - for example investing in unsuccessful innovation projects

There are various steps you can take to reduce these risks:

• Seek professional advice - professional consultants and others in your industry can provide valuable insight into your related markets. A business network could provide you with useful contacts.
• Joint ventures - sharing the development process with a business partner spreads the risk, and means you can benefit from their expertise and resources.
• Licensing - allowing somebody else to bear the risks of developing your idea in return for a fee and royalties.
• Grants - these could help to spread financial risk and allow you to develop you system to a higher quality, reducing operational risk.
• Incremental innovations - you should be constantly looking for ways to enhance your existing offering. New ideas for low-cost opportunities may come from customer feedback, employees, or networking with other businesses.
• Ongoing research - keep up to date with market research and technological developments that may influence your business.