Why you should care about innovation
I care about innovation because I think that innovation is needed for a society to develop. I know people think that innovation is for companies only but in many cases, the benefactor of truly new ideas are the everyday people like you and me.
For me, this is a topic I love. I am always looking to improve my understanding of how best to bring new products and services to people. I have been very fortunate in my career to invent new software products and also worked for companies creating and running innovation programs. I have seen how this process drives positive results and have observed many different ways innovation can work.
I believe that if we can help more people be good at innovating it can have a great impact on our society. It is very hard to measure the social impact of innovation, we can all think of at least one idea that has significantly changed the world. Mobile phones are a very obvious example. These ubiquitous devices enable both communication and commerce over a wide distance which in turn has been an enabler for people providing security and new ways to work and play.
Some industries have a more direct link to social benefit such as medical science. Developments by pharmaceutical companies have a very clear relationship to the well being of a society, however, the measurement is still complex; How do you value of living longer or reducing illness, and at what cost?
Other inventions can have a large impact but are more often overlooked as the social benefit is less obvious. They tend to be everyday simple innovations that we might take for granted today. These inventions continue to have a significant benefit to society over many years for a very large population. A good example of this is the clothes washing machine. I was very lucky to meet Hans Rosling the Swedish physician, academic, statistician, and public speaker. He explained that the ability for families to get affordable washing machines is directly linked to the increased rate in education and earning power of women and the education of their children.
Washing Machines have meant that people–women especially–had more time to cultivate their minds and the minds of their children. – Hans Rosling 2010 TED
I truly believe that we can continue to improve the lives of the world with thoughtful and systematic innovation. However, I think there is a general belief that disruptive innovations can only come from small start-ups and the days of big companies creating something significantly new are dead. This option has increased as the barriers to creating something new lowering through new technology. The combination of the internet and software products have changed the creation process. Today there are so many more ways for people to get new ideas to end users especially since micro-funding models have removed the biggest barrier: Money!
As of January (2018), Kickstarter has raised $3.47 Billion for 138,000 funded projects. All of this money has come from over 14 million people, of which 4.5 million have supported more than one project. These are some very impressive statistics. This has changed company ownership by taking this approach a company does not require to give equity to investors. The traditional path of giving up ownership for investment taken by start-ups can lead to unhealthy outcomes for small companies. Most of which force them to drive the maximum revenue from the existing product sometimes at the expense of inventing a better or different product.
The idea that large companies can’t innovate has not been helped by a series of large company failures where they have not been able to keep up with market innovation. Kodak is an example I think everybody is aware of, the leader in photography who could not transition to digital technology. However many people might not realize that Steven Sasson who worked for Kodak had identified how Charged Coupled Devices (CCD) could be used to capture images back in 1973 (New York Times Report). The company was too invested in the production of film and the revenue that it generated to be able to change its business model. On this basis, it would seem the large companies are doomed, but that might not be the case.
Innovation and Company Size
If we gave up on the incredible potential that is within so many larger companies we loose one of the largest segments of innovation. This is not a new realization and over the past 10 years, there is an increased drive for recognizing and helping intrapreneurs . In doing this we can build on top of the traditional Research and Development (R&D) driven innovation approach and increase innovation further. As reported by the National Science Foundation (NSF) the Rates of Innovation in major U.S. companies have remained steady since 2012 (to 2014). According to the study 15% of the surveyed 1.3 million companies introduced product or process innovations. What was especially interesting was the rate of innovation by company size. Counter to popular expectations only 10,000 of the 1.3 million companies had more than 500 people working for them, and companies with more than 25,000 employees reported a product/service innovation rate of 37%; more than double the average. Therefore it would seem that startup is not the only place innovation can flourish. How much of that innovation was disruptive is different but we can not write off such a significant sector from the innovation process.
Companies with over 25,000 employees reported an overall product or process innovation rate of 37% (33% product innovations, and 32% process innovations). NSF Info Brief (August 2017)
Also within the report, it shows a direct relationship between companies that have formal R&D programs and the rate of innovation. The survey found that over 53,473 companies had R&D programs ranging in spend from under $10 million to over $100M per year. If we look at the rate of innovation across all of these companies the amount of spend does not seem to significantly impact the rate of innovation, with all companies averaging 69.5% as shown below.
Now there will be a difference in the value resulting from innovation based on R&D funding, but the fact that the rate of innovation is similar seems to show that having a focus on research and development is as important as the level of spend.
With this in mind it would seem that having a focus on innovation with structured programs and a repeatable approach would also yield similar increased benefits. Now the report does not look to classify how R&D spend is divided but I would be very interested in understanding the split between innovation programs and pure research and development activities. I am always surprised when I talk to people responsible for innovation management within large companies. Most of these managers state that they have strong R&D programs however their innovation program funding is less secure. It would seem that the MBA programs all promote the value of innovation but do not differentiate between research and development and cross company innovation programs. This, therefore, raises the question: How should innovation be funded?
Innovation Program Funding
In a very interesting article on RocketSpace the complexity and range in setting budgets for innovation are highlighted very well (How Should You Budget for Corporate Innovation?). In this post, Suman Sarkar proposes that CEO’s need to take a top down growth potential view in defining the level of change expected and the funding needed.
I think this is typically what people expect. One challenge I have seen with this approach is that it directly leads to an expectation of the level of return that will be achieved is linked to the amount of investment in innovation programs. However, in most cases, the expected duration for that return to be delivered by the CEO is the same. If significant benefits are not seen within 2 or 3 years the innovation program is either stopped or funding is significantly modified. In most cases, I have seen the funding get redistributed across the companies existing product near innovation programs on the idea that they can better drive a return. Something needs to change if Innovation Programs are to be more than a pet project for the current CEO.
In a resent review of 50 Research methods by Jan Spruit a Dutch Academic with significant experience in this area, he looked at the various levels of funding at the different stages of the innovation process. Although hard to see in the graphic below the majority of investment is needed in the Experiment phase. This is significantly higher than the other areas. This makes sense as the undertaking of tests and experiments with potential customers to both test and validate new innovations takes a lot of time.
I have seen that the Experimental phase is generally under significant pressure to perform faster and accelerate the start of new product revenue. The challenge is rushing this stage has a negative effect on revenue. Typically shortening the experiment phase leads to failed new products that are not ready to go to market. Typically a single innovation idea will be allowed 2 maybe 3 iterations before it is declared not worth continuing. However, as shown when trying to solve very complex puzzles the probability of success increases with more iterations. Alexander Bogomolny has illustrated this point by looking at how puzzles are best solved. He uses mathematics to help quantify this issue, in doing so comes to an equation that helps people understand that the probability of success increases significantly with greater attempts.
Let V be event that occurs in a trial with probability p. Mathematical expectation E of the number of trials to first occurrence of V in a sequence of trials is E=1/p. (Alexander Bogomolny, Number of Trials to First Success from Interactive Mathematics Miscellany and Puzzles, Accessed 11 September 2017)
So what does this mean for the larger companies that have such a large possible ability to drive innovation? In short, we need to help change how risk for innovation programs is managed and controlled. This requires different models for innovation risk than the business as usual risk management. This could also lead to alternative models for funding innovation through the complex Experimental phases. I would like to see how a “Kickstarter like” approach could be applied inside large companies, allowing both external funding and crowd refinement of innovative ideas.
Crowd involvement in innovation is not new, and it does come with its challenges but with careful control, it can help make better decisions. This is because the experts on a topic and decision makers are very rarely the same person in a company. By using a large population of employees to not only gather ideas but more importantly refine them (sometimes called Open Innovation) you will more likely get better outcomes. There is increasing evidence showing a greater probability of generating successful new products when you can use a crowd of experts in the experimental phase. This is similar to the existing processes of using a broad set of Beta users to help identify issues in products faster. If we consider the Open Source Software approach to iterations where money is less of a focus and the sequence of new features is driven by the participation of the various interested parties there could be some very different ways to manage the Experimental phase of innovation.
In doing this we will fully unleash the level of innovation within all companies whatever the size and drive us up from 15% to 37% or 69% innovation rate. This will benefit not only the companies but ultimately the society they operate within.
I truly believe in the importance of innovation both for companies and for society in general. I think there is a bias that only small companies are able to bring the bigger disruptive innovations forward. It is true that larger companies have significant challenges when managing innovation, however, with a systemic focus and new approaches to funding innovation the potential for improvement could be much more than we can ever imagine.
If you work for a large company I would be interested in your view of how innovation is funded by providing your feedback to the following poll. I will update this post with the findings when I have collected a reasonable sample size.
I hope this has provided you with some ideas that might help you increase innovation within your life or company. If you liked the post please share using one of the methods below, and sign up for my blog email list so you don’t miss the follow-up articles.