INNOVATION

INTRODUCTION

The term innovation means a new way of doing something. It may refer to incremental,
radical, and revolutionary changes in thinking, products, processes, or organizations. A
distinction is typically made between invention, an idea made manifest, and innovation,
ideas applied successfully. (Mckeown 2008) In many fields, something new must be
substantially different to be innovative, not an insignificant change, e.g., in the arts,
economics, business and government policy. In economics the change must increase
value, customer value, or producer value. The goal of innovation is positive change, to
make someone or something better. Innovation leading to increased productivity is the
fundamental source of increasing wealth in an economy.

Innovation is an important topic in the study of economics, business, design, technology,

sociology, and engineering. Colloquially, the word "innovation" is often synonymous
with the output of the process. However, economists tend to focus on the process itself,
from the origination of an idea to its transformation into something useful, to its
implementation; and on the system within which the process of innovation unfolds. Since
innovation is also considered a major driver of the economy, especially when it leads to
increasing productivity, the factors that lead to innovation are also considered to be
critical to policy makers.

Those who are directly responsible for application of the innovation are often called
pioneers in their field, whether they are individuals or organisations.

Innovation and market outcome

Market outcome from innovation can be studied from different lenses. The industrial
organizational approach of market characterization according to the degree of
competitive pressure and the consequent modelling of firm behavior often using
sophisticated game theoretic tools, while permitting mathematical modelling, has shifted
the ground away from an intuitive understanding of markets. The earlier visual
framework in economics, of market demand and supply along price and quantity
dimensions, has given way to powerful mathematical models which though intellectually
satisfying has led policy makers and managers groping for more intuitive and less
theoretical analyses to which they can relate to at a practical level. Non quantifiable
variables find little place in these models, and when they do, mathematical gymnastics
(such as the use of different demand elasticities for differentiated products) embrace
many of these qualitative variables, but in an intuitively unsatisfactory way.

In the management (strategy) literature on the other hand, there is a vast array of
relatively simple and intuitive models for both managers and consultants to choose from.
Most of these models provide insights to the manager which help in crafting a strategic
plan consistent with the desired aims. Indeed most strategy models are generally simple,
wherein lie their virtue. In the process however, these models often fail to offer insights
into situations beyond that for which they are designed, often due to the adoption of
frameworks seldom analytical, seldom rigorous. The situational analyses of these models
often tend to be descriptive and seldom robust and rarely present behavioral relationship
between variables under study.

From an academic point of view, there is often a divorce between industrial organisation
theory and strategic management models. While many economists view management
models as being too simplistic, strategic management consultants perceive academic
economists as being too theoretical, and the analytical tools that they devise as too
complex for managers to understand.

Innovation literature while rich in typologies and descriptions of innovation dynamics is

mostly technology focused. Most research on innovation has been devoted to the process
(technological) of innovation, or has otherwise taken a how to (innovate) approach. For
example the integrated innovation model of Soumodip Sarkar (Sarkar 2007). These
'integrated' approaches, draw on industrial organization, management and innovation
literature.
Sources of innovation

There are several sources of innovation. In the linear model of innovation the
traditionally recognized source is manufacturer innovation. This is where an agent
(person or business) innovates in order to sell the innovation. Another source of
innovation, only now becoming widely recognized, is end-user innovation. This is where
an agent (person or company) develops an innovation for their own (personal or in-
house) use because existing products do not meet their needs. Eric von Hippel has
identified end-user innovation as, by far, the most important and critical in his classic
book on the subject, Sources of Innovation.

Innovation by businesses is achieved in many ways, with much attention now given to
formal research and development for "breakthrough innovations." But innovations may
be developed by less formal on-the-job modifications of practice, through exchange and
combination of professional experience and by many other routes. The more radical and
revolutionary innovations tend to emerge from R&D, while more incremental
innovations may emerge from practice – but there are many exceptions to each of these
trends.

Regarding user innovation, a great deal of innovation is done by those actually

implementing and using technologies and products as part of their normal activities.
Sometimes user-innovators may become entrepreneurs, selling their product, they may
choose to trade their innovation in exchange for other innovations, or they may be
adopted by their suppliers. Nowadays, they may also choose to freely reveal their
innovations, using methods like open source. In such networks of innovation the users or
communities of users can further develop technologies and reinvent their social meaning.

Whether innovation is mainly supply-pushed (based on new technological possibilities)

or demand-led (based on social needs and market requirements) has been a hotly debated
topic. Similarly, what exactly drives innovation in organizations and economies remains
an open question.
More recent theoretical work moves beyond this simple dualistic problem, and through
empirical work shows that innovation does not just happen within the industrial supply-
side, or as a result of the articulation of user demand, but through a complex set of
processes that links many different players together – not only developers and users, but a
wide variety of intermediary organisations such as consultancies, standards bodies etc.
Work on social networks suggests that much of the most successful innovation occurs at
the boundaries of organisations and industries where the problems and needs of users,
and the potential of technologies can be linked together in a creative process that
challenges both.

Diffusion of innovations

Once innovation occurs, innovations may be spread from the innovator to other
individuals and groups. This process has been proposed that the life cycle of innovations
can be described using the 's-curve' or diffusion curve. The s-curve maps growth of
revenue or productivity against time. In the early stage of a particular innovation, growth
is relatively slow as the new product establishes itself. At some point customers begin to
demand and the product growth increases more rapidly. New incremental innovations or
changes to the product allow growth to continue. Towards the end of its life cycle growth
slows and may even begin to decline. In the later stages, no amount of new investment in
that product will yield a normal rate of return.

The s-curve derives from an assumption that new products are likely to have "product
Life". i.e. a start-up phase, a rapid increase in revenue and eventual decline. In fact the
great majority of innovations never get off the bottom of the curve, and never produce
normal returns.

Innovative companies will typically be working on new innovations that will eventually
replace older ones. Successive s-curves will come along to replace older ones and
continue to drive growth upwards. In the figure above the first curve shows a current
technology. The second shows an emerging technology that current yields lower growth
but will eventually overtake current technology and lead to even greater levels of growth.
The length of life will depend on many factors.

Goals of innovation

Programs of organizational innovation are typically tightly linked to organizational goals

and objectives, to the business plan, and to market competitive positioning.

For example, one driver for innovation programs in corporations is to achieve growth
objectives. As Davila et al. (2006) note,

"Companies cannot grow through cost reduction and reengineering alone . . .

Innovation is the key element in providing aggressive top-line growth, and for
increasing bottom-line results" (p.6)

In general, business organisations spend a significant amount of their turnover on

innovation i.e. making changes to their established products, processes and services. The
amount of investment can vary from as low as a half a percent of turnover for
organisations with a low rate of change to anything over twenty percent of turnover for
organisations with a high rate of change.

The average investment across all types of organizations is four percent. For an
organisation with a turnover of say one billion currency units, this represents an
investment of forty million units. This budget will typically be spread across various
functions including marketing, product design, information systems, manufacturing
systems and quality assurance.
The investment may vary by industry and by market positioning.

One survey across a large number of manufacturing and services organisations found,
ranked in decreasing order of popularity, that systematic programs of organizational
innovation are most frequently driven by:

1. Improved quality
2. Creation of new markets
3. Extension of the product range
4. Reduced labour costs
5. Improved production processes
6. Reduced materials
7. Reduced environmental damage
8. Replacement of products/services
9. Reduced energy consumption
10. Conformance to regulations

These goals vary between improvements to products, processes and services and dispel a
popular myth that innovation deals mainly with new product development. Most of the
goals could apply to any organisation be it a manufacturing facility, marketing firm,
hospital or local government.

International Innovation Index

The International Innovation Index is a global index measuring the level of innovation
of a country, produced jointly by The Boston Consulting Group (BCG), the National
Association of Manufacturers (NAM), and The Manufacturing Institute (MI), the NAM's
nonpartisan research affiliate. NAM describes it as the "largest and most comprehensive
global index of its kind".

The International Innovation Index is part of a large research study that looked at both the
business outcomes of innovation and government's ability to encourage and support
innovation through public policy. The study comprised a survey of more than 1,000
senior executives from NAM member companies across all industries; in-depth
interviews with 30 of the executives; and a comparison of the "innovation friendliness" of
110 countries and all 50 U.S. states. The findings are published in the report, "The
Innovation Imperative in Manufacturing: How the United States Can Restore Its Edge."

The report discusses not only country performance but also what companies are doing
and should be doing to spur innovation. It looks at new policy indicators for innovation,
including tax incentives and policies for immigration, education and intellectual property.

The latest index was published in March 2009. To rank the countries, the study measured
both innovation inputs and outputs. Innovation inputs included government and fiscal
policy, education policy and the innovation environment. Outputs included patents,
technology transfer, and other R&D results; business performance, such as labor
productivity and total shareholder returns; and the impact of innovation on business
migration and economic growth. The following is a list of the twenty largest countries (as
measured by GDP) by the International Innovation Index:

Innovation Innovation
Rank Country Overall
Inputs Performance
1 South Korea 2.26 1.75 2.55
2 United States 1.80 1.28 2.16
3 Japan 1.79 1.16 2.25
4 Sweden 1.64 1.25 1.88
5 Netherlands 1.55 1.40 1.55
6 Canada 1.42 1.39 1.32
United
7 1.42 1.33 1.37
Kingdom
8 Germany 1.12 1.05 1.09
9 France 1.12 1.17 0.96
10 Australia 1.02 0.89 1.05
11 Spain 0.93 0.83 0.95
12 Belgium 0.86 0.85 0.79
13 China 0.73 0.07 1.32
14 Italy 0.21 0.16 0.24
15 India 0.06 0.14 -0.02
16 Russia -0.09 -0.02 -0.16
 17 Mexico -0.16 0.11 -0.42
18 Turkey -0.21 0.15 -0.55
19 Indonesia -0.57 -0.63 -0.46
20 Brazil -0.59 -0.62 -0.51

TRENDS IN INNOVATION

Science and technology grew exponentially during the 20th century. But will the
conditions necessary for creating the kinds of innovations that shape our lives be
sustained in the future?

By definition, the word innovate means to bring in something new, to make changes in
something established. Clearly, there is a continuum of innovation that ranges from
breakthroughs that change the underpinnings of our society to new methods or tools to
solve particular problems. The major innovations of the future, those that will shape
society, will require a foundation of strong basic research. Innovation is the key to the
future, but basic research is the key to future innovation. And today, the future of basic
research appears vulnerable.

Although applied research and invention play important roles in innovation, they do not
generally produce the major conceptual breakthroughs necessary for creating radically
new technologies. The limitation of focused or problem-oriented research becomes
apparent in the following observation: If you know what you are looking for, you are
limited by what you know. As inventive as Thomas Edison was, he could not have
created the transistor—perhaps the most important invention of the 20th century. To
elucidate this point, it is useful to trace the transistor’s development.

• In the latter 19th century, scientists studied the atomic spectra of various elements.

• In 1885, Johann Balmer discovered his formula for the spectral lines of the hydrogen
atom; the Lyman, Pfund, Brackett, and Paschen spectral series followed.
• In 1900, Max Planck proposed the concept of the quantum in the emission of energy; and
in 1905, Albert Einstein developed the idea of the quantum of energy in the radiation
field (the photon).

• In 1911, Ernest Rutherford discovered the atomic nucleus in alpha-particle scattering

experiments and confirmed the “planetary model” of the atom.

• Two years later, Niels Bohr developed a semiclassical model of the hydrogen atom based
on a quantization of the electron orbit; it accounted for the observed discrete spectra of
hydrogen and established a new model for the atom’s stability.

• In 1925 and 1926, Werner Heisenberg and Erwin Schrödinger developed quantum
mechanics.

• In 1928, Felix Bloch applied the full machinery of quantum mechanics to the problem of
conduction in solids, spearheading the development of the modern theory of solids.

• In 1929, Walter Schottky and others found electron “holes” in the valenceband structure
of semiconductors, uncovering the mechanism of semiconductor behavior.

• In 1933, solid-state diodes were used as receiving rectifiers.

• In the late 1930s and early 1940s, investigators began doping silicon and germanium to
create new semiconductors.

• In 1947, John Bardeen and Walter Brattain took out a patent for the transistor, and
William Schockley applied for a patent for the transistor effect and a transistor amplifier.

• In 1951, semiconductors entered the world market. Four years later, transistors had
replaced nearly all tubes.

• In 1959, Robert Noyce and Jack Kilby invented the integrated circuit.

This example demonstrates how basic research established the foundations of the
technological revolution created by the invention of the transistor. Brattain said it clearly:
“The transistor came about because fundamental knowledge had developed to a stage
where human minds could understand phenomena that had been observed for a long time.
In the case of a device with such important consequences to technology, it is noteworthy
that a breakthrough came from work dedicated to the understanding of fundamental
physical phenomena, rather than the cut-and-try method of producing a useful device.”
Ironically, quantum mechanics—an abstruse conceptual framework in physics that was
developed to explain the structure of the atom—came to underlie some of our most
important technologies. It has contributed to the development of the Internet, computers,
lasers, consumer electronics, atomic clocks, and superconductors, to mention a few.

Symbiotic research:

In addition to basic research, applied research and product development played crucial
roles in the transistor’s development. New technologies clearly cannot be created without
a synthesis of all three. And often the boundaries between these types of research get
blurred. Sometimes applied research leads to important basic knowledge, and
technologies developed for basic research lead to broader applications. Accelerators, for
example, were invented to study the interactions of subatomic particles; and now various
types are used for such diverse applications as cancer therapy, studying the structure of
viruses, designing new drugs, and the fabrication of semiconductors and microchips.

Other examples include the Global Positioning System, nuclear medicine, and diagnostic
tools such as magnetic resonance imaging. The World Wide Web provides an especially
interesting example. Based on the concept of the Internet, it was developed at CERN (the
European Organization for Nuclear Research) to enable high-energy physicists
worldwide to exchange data and programs and to work together more effectively. The
rapidly developing Web is changing the way we communicate, teach, and do business and
is promoting economic growth in many parts of the world.

It is also accelerating advances in scientific knowledge and innovation, and it has

dramatically changed the scientific landscape. The Web spreads scientific information
much faster than printed scientific journals do, and this speeds the flow of work. For
example, the human genome is available online to any molecular biologist with a
computer connected to the Internet. The Web is also having an effect on economic growth
through its impact on scientific research and innovation. This raises the question of the
relationship between research and the gross domestic product.

Economists have studied the impact of research on various measures of wealth or well
being, which reflect the economic impact of the innovations derived from research. They
have estimated that one-half to two-thirds of the economic growth of developed nations is
knowledge-based. Recent studies have estimated that the average annual rate of return on
R&D investment ranges from 28% to 50%, depending on the assumptions used. Although
there is uncertainty in these numbers, there is general agreement that the impact is huge
and that past investment in research has paid for itself many times over.

In the United States and in other countries, university research has generated technology-
based industries and a large number of jobs. A 1997 study found that Massachusetts
Institute of Technology alumni, faculty, and staff have founded more than 4,000
companies during the last four decades, which employ more than 1.1 million people and
have annual world sales of $232 billion. Most of these companies are knowledge based.
This emphasizes the necessity of keeping research universities strong to maintain a high
level of innovation. They provide the scientific workforce of the future; they are the
source of most of the research that drives major innovation; and young people with new
ideas start many new companies after leaving the university.

Protecting innovation:

Creativity is the basis of all innovation, and although it is doubtful that it can be taught,
creativity should be nurtured in those who have it. Innovation ultimately depends on a
scientifically and technologically creative workforce. Thus, in addition to strong research
universities, there should be pre-university schools of excellence that bring together the
best young minds to introduce them early to science and give them opportunities for
creative work. Corporations and government research agencies should support special
 educational projects, such as science fairs for young students. Many outstanding young
scientists participated in science fairs as high school students.

Here are some other suggestions for enhancing innovation:

• Young people should be given good support and freedom in their research. They are the
greatest source of scientific creativity because they are not as committed to existing
scientific orthodoxy, and they have the energy and enthusiasm to push new ideas. As the
zoologist Konrad Lorenz once said, “The best morning exercise for a researcher is to cast
off one favorite hypothesis ever y day before breakfast.” The young do this better than
anyone else.

• We should willingly take risks in supporting new projects. The tendency is to play it safe
when funding is low, but we need to remember that the greatest risks have the greatest
payoffs. In addition, individuals or small groups should be given sufficient latitude to
develop new ideas, which take time and are often only accepted with difficulty by others.

• People who innovate should get recognition and appropriate compensation for what they
do, especially young people.

• We should not allow institutional boundaries to impede interdisciplinary research. Some

of the most important innovations of the future can be expected from such collaborations.
Excessive bureaucracy is distracting, time-consuming, and destructive to creativity.

The scientific and technology communities must also address another set of issues. As
science and technology advance, we see a growing public concern about their social and
cultural consequences. There are fears about whether future developments in robotics,
genetic engineering, and nanotechnology, for example, will enhance the welfare of
humankind or prove to be a Faustian bargain. Such fears are causing a technological
backlash, especially in developed nations. The science and technology communities must
engage in these discussions, be completely open to listening to such concerns, and assess
and address them. If we do not listen and respond, we will lose the public as partners.

Basic vulnerability:
All of these recommendations for protecting and enhancing future innovation assume an
appropriately funded research environment. But who will support basic research in the
future? Industry, which previously supported a significant amount, no longer does so
because global competition has put an enormous amount of economic pressure on
corporations.

Private industry makes R&D investments that are expected to pay off in 5 to 7 years. but
it won’t make the 20- to 30-year investments necessary to create entirely new industries.
Such long-term investments in R&D have been cut as firms have merged and downsized.
Companies that once did long-term R&D, such as AT&T and IBM, have seen their
industries become highly competitive. To compete, they have largely withdrawn from
supporting basic research.

Patents are a strong indicator of innovation. A 1997 study funded by the National Science
Foundation found strong evidence that publicly financed scientific research plays a large
role in the breakthroughs of industrial innovation in the United States. It reported that
73% of the main science papers cited by American industrial patents in two prior years
involved domestic and foreign research financed by government or nonprofit agencies.
Such publicly financed science, the study concluded, has turned into a fundamental pillar
of industrial advance. This shows the close connection between national science budgets
and the economy, and points to the importance of establishing good bridges between
universities, government, and industrial laboratories.

In addition, there are often long delays in the applications that arise from basic research,
such as occurred in the invention of the transistor. Because of these factors, the public
and many political leaders do not fully understand the importance of basic research. With
the exception of biomedical research, basic research generally does not rank high among
a nation's priorities. The public and political leaders seem to recognize that it is important
to understand how nature works in all domains and at all levels. But given the needs of
society, this argument is not sufficiently persuasive to convince political leaders to make
the needed investment in basic research. They want to hear about applications, economic
growth, and competitiveness.
 We can make such arguments; but if they want examples, we can only talk about the past
because we cannot make specific promises about the future. We can tell them, however,
that throughout history, advances in scientific knowledge have resulted in revolutions in
technology that have improved the standard of living and changed our way of life.
Although direct benefits from basic research generally require several decades, they do
come. Electricity and magnetism were laboratory curiosities in the early 1800s and did
not become a factor in people's lives until more than half a century later. And there are
many other examples.

The challenges faced by science and technology today are crucial for the future of
humankind. They include:

• Improving the general health of the world population.

• Understanding ecological and environmental issues and providing guidance to policy

makers.

• Providing sufficient food for the world's rapidly growing population.

• Developing alternative sources of energy and substitutes for increasingly scarce natural
resources.

• Providing new technologies to enhance the quality of life of our citizens while extending
those benefits to regions and groups that have not yet shared in them.

To achieve these goals, we must provide sufficient support for continued progress in
basic science, applied science, and engineering. We have to expand our base of
knowledge and provide our young people with an education that will enable them to
utilize and further expand this knowledge and produce the innovations we need for the
future.
 CASE STUDIES IN INNOVATION

Do privately held companies have an edge when it comes to long-term innovation? At

least some of them seem to. Recently, Al Gore—former Vice-President and Senator and
now Nobel Prize-winning environmental evangelist—declared S.C. Johnson & Son one
of the most sustainable companies in the world.

I caught up with H. Fisk Johnson III, chairman and chief executive of the Racine (Wis.)-
based company behind brands such as Ziplock, Pledge, Windex, and Glade, after Gore
spoke at the Cornell Global Forum on Sustainable Enterprise in New York on June 3, to
hear what makes his company such a standout. Full disclosure: The event was sponsored
by the Johnson School of Management at Cornell University, which was named in 1984
after its Johnson family benefactors. Fisk Johnson is also an alum, with five degrees
including a 1986 PhD in physics.

Continue reading "Why Private Companies Are More Innovative"

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The Doctor's Office -- Obsolete?

Certainly not yet, but today online healthcare reached a milestone with the announcement
that American Well -- a start-up whose technology allows patients and doctors to connect
live in realtime via two-way Web video, chat or telephone -- is partnering with
OptumHealth, a subsidiary of UnitedHealth Group that serves 60 million customers
across the US.

Regional Blue Cross Blue Shield companies in Hawaii and Minnesotta already offer their
customers online care using American Well's technology, but the OptumHealth
partnership marks the first nationwide online service.

A recent Gartner Predicts report estimated that "by 2013, 25 percent of patient encounters
in North America, Western Europe, and Asia/Pacific that could be conducted virtually,
will be." The response of OptumHealth's consumers to the online offering will be an
interesting reality check to that prediciton.

Will patients feel comfortable meeting with their doctor via Web video? Are they happy
to trade the intimacy of the exam room for the convenience of a virtual visit? And how
will the technology-mediated interaction change the patient/doctor relationship? We'll
soon find out.

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McKinsey on Public-sector Innovation: Forthcoming Report

When researching a recent story on government innovation (here's a link), I spoke with
Stephen Corbett, a McKinsey partner in the consulting firm's Toronto office who heads
their Operations Practice for the Americas. Corbett spoke about recent trends, and also
tipped me off to a forthcoming publication called McKinsey on Government, a report on
on productivity and operations in the public sector. It will be available later this month.

Corbett previewed some research from the report. I asked him about success stories of
government innovation and he mentioned Sweden, which shaved 11% of of its budgets
after a major governmental budget crisis in the mid-90s. They did this by re-thinking
"overall structuring and management," Corbett says. He also points to the U.K., which he
says saved more than 26 billion British pounds annually after re-evaluating its operational
costs in 2004. The Canadian goverment merged over 70 different services, from different
agencies. "The streamlining of that flow saved 400 million Canadian dollars annually,"
Corbett says.

He says countries are using the concept of lean operations, borrowed from Toyota, and
applying it to defense logistics, taxes, immigration, and security clearances. The use of a
new process adapted from industry certainly is innovation.
But he cautions that it isn't easy to translate other nations' inventive processes to the U.S.
or even across European or North American boundaries. Still, there could be some
lessons learned.

For more, keep your eye out for McKinsey on Government.

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Knoll's New "Generation" Chair: Stylish Engineering and Comfort

The Generation by Knoll chair, which will debut at the NeoCon World’s Trade Fair in
Chicago in mid-June, is as comfortable an office seat as it is eye-catching. I’ve been
trying it out for a couple of weeks. Duing those weeks, though, I went away on business.
When I was away, some of my colleagues came by my office and tried it out. This was
evidenced by the different height of the chair when I returned. And they confessed.

As you can see from the picture,

the chair probably doesn’t look a
lot like many of the furnishings
you might have in your workspace
today. The back looks more like a
plastic web or netting, reminiscent
of the mesh found in hip sneakers
than the rigid, screen-like back of
the iconic Aeron chair (which I
normally sit in). And the webby
back conforms and moves with
your body. Unlike many previous
office chairs designed before the
mid-2000s, which were made for one type of work only—sitting straight and forward,
looking at a computer screen and typing or talking on the phone—this chair allows you to
lean toward a collaborator to listen more easily to what she has to say, or to sit sideways
to engage with, say, someone you’re mentoring.