Excess Profits Only Come from Innovation, and There Are Only Five Basic Patterns

Earlier this year, I co-participated in the China Restaurant Industry Innovation Conference organized by Restaurant Boss Insider with Mr. Hua Shan, a strategic marketing expert. When we met again later, Mr. Hua said to me, 'Xiao Ma Song, you are an internet celebrity with great influence (here I should modestly say I am not), and I hope you can appeal that in the future, when any industry holds an innovation conference, they should not organize it casually but arrange the agenda according to Schumpeter's innovation theory.'

The Schumpeterian innovation theory Mr. Hua referred to was proposed by Schumpeter in his 1912 book 'The Theory of Economic Development' and was gradually refined to become the foundational framework of innovation theory.

Schumpeter said that innovation is not exactly the same as invention or creation. Invention is the discovery of a new tool or method, while innovation is the application of a new tool or method.

If you are running a business, according to Schumpeter's innovation methodology, you can find innovative ideas by exploring the following five directions.

Schumpeter summarized five modes of innovation. Of course, when these five modes were proposed, enterprises were mainly manufacturing companies, but we can analogize them to internet and service industries. The five modes are listed below.

Schumpeter also said that innovation is a 'recombination of production factors,' which we can appreciate.

(1) Introduce a new product or a new product feature.

The iPhone is this type of innovation; it provides consumers with a new product. Tesla is also a new product innovation for the automotive industry.

Lè Kǎi Sà durian pizza is a product innovation because it offers a new flavor of pizza. In the milk tea industry, cheese cap tea, compared to the previous pearl milk tea, is a product innovation.

Xiaomi MIX pioneered the full-screen design, and iPhone X introduced facial recognition, both of which are new product features.

Yī Sī Dé cardboard boxes offer a new form of cardboard box. Xiǎo Guàn Chá provides a packaging format with one can per serving and nitrogen sealing. The DEDAO app offers a new knowledge content product between book publishing and training education. All these are product innovations.

Toothbrushes from DuPont bristles (hard) to Toray bristles (tapered soft) are product innovations. The bristle surface changing from flat to mountain-shaped is a product feature innovation. Dr. Bei's bus-shaped toothbrush with double-helix bristles in a mountain shape is also a product innovation.

From carbonated drinks (cola) to non-carbonated drinks (Fresh Orange), fruit juices (Huiyuan), tea drinks (Ice Black Tea), functional drinks (Red Bull, Mizone), sugar-free drinks (Coke Zero), meal replacement drinks, fresh juices, and freshly brewed tea, a series of innovations have been driven by entrepreneurs.

(2) Adopt a new production method.

Traditional Shanxi knife-cut noodles are hand-cut by chefs, but using robots to cut noodles is a new production method (note: innovation is relative to the enterprise; some innovations are not perceived by consumers, but they improve production efficiency and profits). If you want to experience robot-cut noodles, you can visit the Liuyue Liù Dàtóng knife-cut noodle shop near Wangjing and Jiuxianqiao in Beijing.

To reduce moldy and spoiled seeds, Sān Pàng Dàn original-flavor sunflower seeds adopted a method of cutting sunflower heads at an angle and reinserting them at a 45-degree angle onto the stalk for drying, reducing bad seeds (the previous method was to cut and pile the heads, which easily accumulated water and caused mold). This is also a new production method.

The natural-colored toilet paper that has become popular in recent years is actually unbleached paper. This is also a new production method (or a revived one), which not only sells at a higher price but also saves bleaching costs (though the paper yield is slightly lower).

Elon Musk's reusable rocket launches, Jeff Bezos's exploration of drone delivery, and IBM's attempts at Watson robot diagnosis are all attempts at new production methods.

Henry Ford, founder of Ford Motor Company, changed traditional manual production to assembly line operations, reducing the time to assemble a car chassis from 12 hours 28 minutes to 1 hour 33 minutes—a revolutionary production method innovation.

From this, it is clearer that innovation is the main source of profit for enterprises. Schumpeter even believed that excess profits can only come from innovation.

(3) Open up a new market.

For a company, its new market might be someone else's old market, so we discuss innovation from the perspective of a specific company. Of course, there are also entirely new markets.

Sunflower Pharmaceutical developed children's-specific medicines, which not only introduced a new product but also opened a new market.

Huā Diǎn Shí Jiān left the traditional gift flower market and opened a new market for daily-use flowers. The 8848 phone opened a market for security and luxury phones from functional phones. Xǐ Jiā Xī Bǐng grew in the birthday cake market and then expanded to the afternoon tea market. Yíng Dǐng Education left the college entrance exam tutoring market and opened a new market for college application counseling. Hùndùn Entrepreneurship Camp moved away from traditional MBA education and opened a market for CEO cognitive system upgrading.

Opening a new market sometimes involves launching a new product to create a new market, and sometimes it involves entering a new market with an old product. In 2012, when we launched the Ninth Class, we offered an advertising copywriting training course, which was both a new product and a new market. Nongfu Spring's advertisement suggesting cooking rice with Nongfu Spring water is an example of an old product entering a new market.

There are currently companies in the US dedicated to space mining, but their first goal is to mine water from the ice cores of asteroids, because water is scarce on the International Space Station and the cost of transporting water from Earth is extremely high. So the first market for space mining companies might be supplying water to the ISS.

The restaurant industry, which originally focused on banquets and gatherings, has gradually developed new markets such as group meals, casual dining, daily meals, breakfast, lunch, afternoon tea, dinner, late-night snacks, and company cafeterias.

(4) Adopt a new raw material.

This includes semi-finished materials, which may already exist or be created for the first time.

Some innovations in raw materials may bring significant performance changes to products, while others may have little effect on product performance but bring substantial cost savings to the enterprise.

In the swimming events at the Sydney Olympics, Australian swimmer Ian Thorpe wore a black one-piece tight swimsuit and won three gold medals. The sharkskin swimsuit he wore was made of a new polyurethane fiber material that increases buoyancy.

Boeing aircraft wings and fuselage are already 50% made of carbon fiber reinforced composite (CFRP) instead of aluminum alloy, and Japan is developing aircraft engines made of carbon fiber materials, which would greatly reduce fuel costs.

Even non-high-tech companies can innovate by adopting new materials.

The reciprocating razor head of the Xiaomi ecosystem company Smile Shaver uses Anlai steel, a material traditionally used to make Japanese swords.

In the restaurant industry, the current consumption upgrade includes not only upgrades in environment and service but also in ingredients, which is a form of new material. Xǐ Jiā Dé dumpling fillings and flour, Lè Kǎi Sà's Musang King durian, rice-shaped pasta, and eel, and Xī Bèi's Zhang Yeye hollow noodles are essentially innovations and upgrades in materials, bringing improvements in taste and quality.

(5) Adopt a new business model.

In recent years, the internet has been the core area for business model innovation. Shared bikes, known as one of the 'new four great inventions,' are a business model originally created in China.

Internet giants often grow through new business models. Google, Amazon, Tencent, Alibaba, etc., have all been built on new business models.

The iPhone is an innovative business model because it makes money not only from hardware but also through the App Store.

360 is an innovative business model: it acquires customers through free antivirus software and then profits from traffic business.

Business model innovation can also be approached from the transactional and relational connections between enterprises, between departments, between enterprises and customers, and between enterprises and channels.

For example, WeChat business (micro-commerce) is an innovation in the transactional and relational connections between enterprises and channels. Alipay is an innovation in the transactional and relational connections between enterprises and customers. VIPKID is an innovation in the relationships among the enterprise, teachers, and customers.

Finally, let's summarize several viewpoints on enterprise innovation:

1. Innovation is the driving force for enterprises to obtain excess profits.

2. Innovation may be unrelated to customer value or experience, but it must improve the enterprise's profitability.

3. There are only five modes of innovation to follow.

4. Schumpeter's innovation refers to enterprise innovation, not other fields.