As we keep saying on this blog, innovation is risky and hard work. Having an idea is easy but selecting the best idea and turning it into something of value is where most failure occurs. Given these challenges, it might be tempting to let others do the innovation. Clearly if someone else is going to make the mistakes then we can benefit by replicating their successes, without the risk and sweat.

While being a ‘fast follower’ can be a viable business strategy, there is a problem in assuming that imitating means that we don’t need to innovate. One reason is that some firms are careful to protect their innovations with formal IP protection such as patents or informal IP protection such as secrecy agreements. However, the protection of IP is not the most significant reason why imitation will struggle to substitute for innovation.

One of the most heavily cited academic studies of innovation, published in 1990 by Cohen and Levinthal, introduced the concept of absorptive capacity. The core of their argument was that a similar level of internal knowledge is required to assimilate innovations from others. In other words, firms that weren’t innovating will struggle to absorb new innovations from outside the business. Even fast followers needed to invest in innovation to understand the advances that were going on at the cutting edge of the industry.

I’ve written before about the difficulties of valuing innovation but the absorptive capacity principle makes valuation even more complicated and more likely to underestimate the return on investment for innovation. It’s possible that an innovation program might not produce any successful new products or services, yet still generate a positive return on investment by creating a sufficient level of knowledge to take in leading technologies and processes developed by others.

The key message is that innovation can do more than create new products, processes and services. It also builds knowledge and agility. This might not show up on the balance sheet but in a contest between a company with knowledge and agility versus another with a new product, I know who I’d be putting my money on to win the contest in the long run.