What do innovators do to succeed? A case study of Sage plc

What do innovators do in their efforts to succeed? Successful innovation is embedded and leveraged by the management strategy. Sage plc, the third largest management software company in the world, is analysed. Various factors are seen to foster an innovation culture at Sage: an open organizational culture, a responsive market orientation coupled with a proactive market orientation, an international expansion strategy according to a multi-domestic orientation, and a horizontal internal communication policy. Sage Portugal was visited and its CEO interviewed, several times, in-depth. Sage Portugal No2 was also interviewed. Company documents, reports, newsletters, Internet site and Intranet were also analysed. INTRODUCTION Innovativeness is an important path to performance Some academics refer that organizational structure, strategy, as well as innovativeness are linked with performance (Capon et al., 1992) and suggest that a company must innovate to gain a competitive advantage, whether it be to survive or grow (Deshpandé and Farley, 1999). “Because it is its purpose to create a customer, any business enterprise has two – and only these two – basic functions: marketing and innovation. They are the entrepreneurial functions.” (Drucker, 1954, p.37). Innovation is not confined to engineering, manufacturing or research but rather it extends across all parts of a business. Based on 4,938 innovations, Edwards and Gordon (1984) classified innovations according to levels of significance: 1) innovations that establish an entirely new category of product, 2) innovations that are the first of their type on the market in an already existing product category, 3) innovations that represent a big improvement in existing technology, and 4) innovations that are a modest improvement designed to update an existing product. According to Lambin (2000, p.458) “a true innovation is a product, a service, a concept, which introduces a new solution to the problem of the buyer”. Contradictory competing preceding solutions may be resolved but a new functionality is introduced, also. Thus Lambin (ibid.) puts forth four criteria to classify innovations: “1) the degree of novelty for the company; 2) the intrinsic nature of the innovation; 3) the origin of the innovation; 4) the degree of novelty of the concept.” “Surprisingly little has been established in the economics literature to identify those conditions and market environments that are conducive to innovation activity and those conditions that retard it.” (Acs and Audretsch, 1990, p.37). Innovative output may well be influenced by the amount of R&D expenditures and the extent to which appropriation of economic rents accruing from innovation can occur (Acs and Audretsch, 1990). Knowledge is possibly the most important input into the production of innovations (Winter, 1984). DISRUPTIVE INNOVATION Financial markets relentlessly pressure executives to grow ever faster – one may talk of a growth imperative. The problem for managers who seek growth, however, is that the sought after growth markets of tomorrow are still small today. Is innovation a predictable process that delivers continued and profitable growth? Christensen (1997) identified two distinct categories of innovation sustaining and disruptive based on the differing circumstances of innovation. In sustaining circumstances the innovator is occupied with the making of better products that can be sold for more money to attractive customers. In this case incumbents almost always win. In disruptive circumstances the challenge is to sell a simpler, more convenient product that sells for a cheaper price, thus appealing to a new or apparently unattractive customer segment. In this case the entrants are likely to beat the incumbents. Christensen (1997) goes on to say that the best way for upstarts to attack established competitors is through disruption. Successful new-growth builders should shape their strategies so that they enter a disruptive race they can win – disruptive strategies greatly increase the odds of success in the marketplace. All markets have a rate of improvement that customers can utilize. For example, automobiles have ever improved engines however we can’t utilize them fully due to excessive traffic on roads, imposed speed limits and safety concerns. Some customers may never be satisfied with the best that is available, other customer segments may be over satisfied with very little. Sustaining innovation targets demanding, high-end customers with better performance than what was previously available. Examples are incremental annual improvements in the software industry which most good software companies are capable of producing. Other sustaining innovations are real breakthroughs. Established competitors tend to win such sustaining technology battles as they are motivated to do so for their best customers. Disruptive innovations are quite different. They disrupt by introducing simpler, more convenient and cheaper products that have appeal for new or less-demanding customers. Disruptive products gain entry in new or low-end markets, where the improvement cycle begins (Christensen and Raynor, 2003). Note that a decade after the first publication appeared on disruptive innovation large and small companies alike are still struggling to put the ideas in practice to produce high-potential disruptive-growth businesses (Anthony and Christensen, 2005). Guidelines for disruption exist (INNOSIGHT, 2005): 1) Understand what jobs customers are trying to get done and make them simpler and easier. 2) Start simple with easy to satisfy customers. Improve incrementally. 3) Take a market perspective and consider existing competitors’ perspectives. Is our approach really disruptive? 4) Test and adapt. Test key assumptions and adapt the strategy accordingly. We believe Sage plc to be such a company, which is now moving towards more demanding customers, other than SMEs (small and medium enterprises), their traditional market, which they conquered as an entrant. THE SAGE GROUP PLC The text in this part of the article was based on interviews gathered during visits to Sage Portugal. Sage Portugal CEO, Jorge Santos Carneiro, was interviewed several times, the last of which in the presence of Sage Portugal No2, Maria Antonia Costa (financial director and director of control and management – encompassing human resource management, logistics, administrative aspects, and internal systems), who also contributed with information. Company documentation provided was also analyzed, as was the company web site, Intranet and company e-newsletters. Sage main principles are: Simplicity, Agility, Integrity, Trust, and Innovation. A PRESENTATION OF SAGE Sage is the third largest software company in the World, after SAP and Oracle. 15% of their sales are re-invested in innovation every year; 7% of their sales are reinvested in marketing every year. In 2006 Sage invested 1,000 million Euros in acquisitions, its chosen strategic path of growth. Sage is the only information technology company in the FTSE 100 stock market (the 100 largest companies listed on the London Stock Exchange). Sage is a leading supplier of business management software and services to 5.2 million customers worldwide. From small start-ups to larger organizations, they make it easier for companies to manage their business processes. Their purpose is to help their customers run their businesses more effectively, helping them to gain greater insight into their business activities and providing them with lasting benefits by automating their business processes. The Sage Group plc comprises market-leading businesses throughout the World (UK and Republic of Ireland, mainland Europe, Africa, Australia, Asia, the Middle East, and North America) supplying business management software and related products and services to the small and medium sized business community. Financial insight: Sage annual earnings per share for 2006 were 20%, which is very good, up from 11%, in 2002, and with a continuous increase over the last 5 years to this figure. The Sage earnings per share evolution has been very consistent, going up steadily since June 1996 – very different from another listed IT competitor MISYS, for example, or from Logica CMG, or iSOFT, which have had many ups and downs. INTERNAL COMMUNICATION POLICY Sage plc has two electronic newsletters – one called View and another called Open. Both are periodic worldwide publications for Sage employees. The Sage group has a powerful Intranet platform called eTeam that assures knowledge sharing within the company. Everything of interest is published on eTeam. For example, within eTeam there are thousands of projects. Information is segmented by country: mainland Europe, North America, Australia, South Africa, UK, Ireland. Numerous presentations that occurred worldwide are stored on this platform, for those who were not present to read. The Group CEO authored a financial review available for employees to see. These tools mentioned above are very important to Sage. SAGE PORTUGAL Sage Portugal, with whom we had contact, has 120 people of whom 30 are devoted to innovation. There are a further 10 people in marketing. With a wide offer of solutions for accounting, payroll & HR, CRM, Web, Sage Portugal (Sage has now been in Portugal for the last seven years) is the leading supplier of business software solutions in the Portuguese market with over 80.000 enterprise customers. Major brands are SP for the entry-level market, Infologia 50, Next, Line 100 and Gestexper for the SME segment and Adonix for the mid market. Sage Construcao is the solution for the construction market. GESPOS is the product for the point of sales market. Sage Portugal has a strong presence among the accountants community. REGIONAL EMPOWERMENT Regional heads are given total authority to deal with employees and customers. If there is a Portuguese customer complaint that is sent to England, to the head