We know that the innovation process is risky. Nothing can guarantee the success of something new and failure is probably a good sign of a healthy innovation system. Without failures, no innovations. Of course, failure for its own sake is a ‘career-limiting move’ but successful innovation managers take the view that trials and rapid prototyping enable organizations to cycle through ideas to find the ones that create value. If most ideas will fail then the best outcome is that they fail quickly. They are also sufficiently disciplined to stop funding ideas that do not make sufficient progress.

Firms must have an appetite for risk if they are to engage with innovation. More risk potentially means greater returns and managers need to understand what types of returns shareholders or stakeholders (in the not-for-profit or public sector context) expect. Risk management and innovation is a very under explored area of corporate governance and it also means that boards need to understand the innovation process from a risk management perspective. Managing the innovation portfolio across the 3 horizons and being able to evaluate an organization’s innovation process as a value chain are both examples of how boards can engage with management of innovation strategy and not interfere with the processes of management.

While the magnitude of the risk is one dimension of innovation risk management, the other critical issues is that of owning the right risks. In an article from the Harvard Business Review from 2008, Buehler, Freeman and Hulme talk about a different way of thinking about competitive advantage. They invert the question of ‘what are we better at compared to our competitors’ into ‘what risks are we better able to manage compared to the competition’. It’s a subtle change, but it makes a lot of sense. For example, one firm may be better equipped to manage the risks associated with exporting to a new market than others and this is an important component of their competitive advantage.

In the context of innovation, the idea of owning the right risk bypasses the usual discussions of trying to eliminate risk. For example, is the risk of prototype development the best for us and should we own the risks associated with scaling up the prototype? Does our expertise in this area of technology mean that we have a competitive advantage in managing risk in the development of certain products? As you can see, the notion of owning the right risks has the advantage of including both risk management and strategy in the same analysis.

As another example, think about Westfield’s initiative to develop an online shopping mall, as reported in the Australian a few weeks ago.

Sources close to the virtual shopping mall project say it is one of the biggest software development projects in the southern hemisphere and is straining the supply of developers familiar with the Ruby programming language. The Australian 20/7/2010

Now, is this the right risk to own? Experimentation in online shopping is probably mandatory for Westfield but this looks like a very big bet in an area that isn’t core to their business. While Westfield is still the largest shopping mall manager in the world, the capabilities surrounding internet retailing are very different from shopping mall management. As a Westfield shareholder, it just looks like a “bridge too far” to me.

Ryan Freitas recently wrote a post called 35 Lessons in 35 Years – there are some good tips here. One that particularly caught my eye is this one:

Debates over terminology and semantics are for archivists and academics. If you’re interested in the living heart of what you do, focus on building things rather than talking about them.

We often think that innovation is all about new stuff, but I think that Freitas’ advice is sound – our innovation will be more successful if we focus on building. That’s part of why we talk so much about the importance of having a bias towards action.

Personally, I’m trying to build a network of people that use innovation to make both work and the world a better place – my hope is that through my work I can contribute to that.

What are you building?

(the Watercube under construction – picture from flickr/xiaming under a Creative Commons License)

Three blog posts that caught my eye this week demonstrate three different ways that you can fail at innovation:

• Ignore the small innovations: James Todhunter wrote an excellent post yesterday defending thinking about improvements as innovation. You should read the whole post, but here is a highlight:
  

  Breakthrough innovation, incremental innovation, minor improvement—these are all points on a continuum of value creating solution generation. Incremental innovation is very beneficial to an organization trying to develop the core competence needed to support a high-performance innovation system. Specifically, incremental innovation delivers both short and long term benefits. In the short term, immediate business benefits can be realized—extended revenue life of a product, increased market share, better contribution to margin, etc. In the long term, incremental innovation provides a low risk platform to hone the basic innovation skills needed for successful, repeatable breakthrough innovation practice.

  I don’t have much to add to that – I think’s he’s right. Which leads to the second way we can fail at innovation:

• Ignore the big innovations: As Todhunter points out, innovations occur along a spectrum. If you focus too much on one end of it, your long-range prospects aren’t good. The problem is that the two ends of the spectrum require different management skills, and different ways of envisioning the future.

  Mike Masnick makes that point in an excellent post which discusses why Yahoo! missed the rise of Google:

  Whenever we talk about innovation and things like patents, one common refrain is that no innovation would occur without patents because big companies would immediately copy the technology and destroy any up-and-comer. We’ve pointed out plenty of times that this simply isn’t true. For a truly disruptive innovation, big companies often won’t even notice you until you’re way ahead of them — at which point copying is fruitless. Hell, for nearly the past decade now, Yahoo’s tried every which way to “copy” Google, and it got them nowhere in terms of actual market share (actually, it got them so little that they recently gave up and outsourced it all to Microsoft).

  Copying ideas is simultaneously easier than we think and much harder than we expect – which is part of why the debates around copyright and patenting are so vociferous. But overall, I think he’s right. Executing ideas is often very hard, which in turn makes it difficult for other firms to steal your idea. As Masnick points out, they usually too busy ignoring your big innovation to actually try to do it themselves. This leads to the third way to fail at innovation:

• Focus only on idea generation not idea execution: The latest version of this comes from a Fast Company post discussing R&D expenditures and patent filing. It shows (with some really nicely constructed graphics) that the US is spending a lot on R&D relative to the rest of the world, but is not patenting at an equally high rate. Innovation is about more than R&D, and about more than patents. So when they conclude:
  

  It’s indeed troubling that we spend so much money on research that can’t readily be turned into world-beating products. So we should worry about the chart above–but just not for the obvious reasons.

  I’m not at all convinced that anything that they are measuring is actually innovation. R&D contributes to innovation, and patents, used wisely, can also contribute to innovation.

  But innovation is about successfully executing new ideas to create value, something that is captured by neither R&D spending nor patent filing.

  These three common problems are all pitfalls into which many organisations stumble. You need to avoid all of them if you are going to successfully innovate.

There’s a good post today by Michael Schrage concerning the recent article making the rounds claiming that America is suffering a creativity crisis. In short, he’s not buying that proposition. Here is one of the key quotes:

This point is vital: genuine creativity isn’t about ideas. It’s about translating ideas into ingenious products, services and solutions. Ideas are the seeds, not the substance, of creativity. Getting them to take root is easier than it’s ever been.

That’s why cover stories declaring creativity droughts in America feel so faux. Sure, they’re provocative. But the underlying science is psuedo; the overarching solutions are silly.

I agree with nearly all of the post, and it reinforces a couple of points that we have consistently tried to make here. The first is that any time we talk about ideas (and it doesn’t matter whether we frame the issue as “creativity” or “innovation”), we are better off thinking of it as a process rather than as an event. We must have great ideas, but more importantly, to be genuinely creative or innovative, we must execute great ideas.

As John Hagel perceptively pointed out in response to my post about using IP, this is a stock and flow problem. If we view idea generation as the critical creative function, then we will stockpile ideas. But in order to improve things, we don’t need stocks of ideas. We need well-executed ideas. The ideas must flow through some sort of selection and implementation process – and we better be good at both of these steps if we wish to succeed.

Finally, Schrage points out that the value of creative ideas (that have been executed!) is defined by whoever ends up using them. In other words, innovation is discovered in use. It is often very difficult to predict the best use for your idea in advance, and usually the best-laid plans are ruined at the first contact with the market. So one final skill that we need to build is flexibility – we need to be able to adapt our ideas as we’re executing them.

Generating creative ideas is a critical step in the innovation process. The problem is that too many people think of ideas as an end in themselves. If you do that, you end up stockpiling ideas, which doesn’t actually do you any good. Instead, think about managing ideas so that they get executed. To be creative, or innovative, you have to get the ideas to flow.

(the drought photo is from flickr/Mundoo under a Creative Commons License)

I had an interesting conversation with someone from the government sector whose job is to support innovation and increase the number of innovating firms in the economy. While I can see why governments want to foster innovation, I think that his job is extremely difficult because he is actually trying to affect the strategy of companies and how their boards and managers view innovation. Given that there are so many firms in the economy (about 80,000 in the Brisbane region alone), this is going to be a Herculean task. I don’t know how else to convince firms to innovate because in the end it is the people in the firms that decide to pursue innovation as a means to create value.

My own opinion is that what governments can actually do to promote innovation is somewhat limited. There is very little international evidence that R&D tax breaks can encourage innovation. There is a good deal of evidence that it results in more R&D spend but the relationship between this expenditure and innovation output is unclear. I recall getting a phone call from somebody asking me to provide evidence that tax breaks supported R&D. It turned out that he was from an accounting firm who had a specialist group of people working on maximizing the tax refunds for R&D. He wasn’t impressed when I showed him the studies that were unable to point to a clear link between tax breaks and innovation.

Another government tactic is what Professor Alan Hughes at Cambridge University calls the “cargo cult”. The original south pacific cargo cults were developed by islanders after the second world war. When the US brought wealth and materials to the islands through their military operations it was accompanied by airfields, planes and soldiers. After the war, some islanders tried to bring back the cargo by carrying out rituals with artifacts that looked like the planes and airfields.

Alan says that a lot of government innovation strategy isn’t very different from a cargo cult. If we can see a thriving and innovative region such as Silicon Valley, all we need to do is replicate the conditions and it will happen. While this doesn’t mean building planes out of sticks and leaves, it usually means spending money to create institutes and attracting companies from a particular sector (usually biotech or software) to create a cluster without really understanding what made the original cluster so successful in the first place.

The problem with cluster theory is that there is very little evidence that firms in clusters do any better than firms that aren’t part of clusters. We also know that innovation is widely spread throughout the economy and many “old” industries are just as innovative as the fashionable new ones.

Well… enough criticism… so what actually works? In a comparative study of the UK and US economies, Professors Alan Hughes and Andy Cosh (MIT) found that the US government’s procurement program was successfully acting like a venture capital fund. Governments face a range of significant long term challenges in critical areas such as health, education, power, and water. Identifying areas for breakthrough technology and challenging innovative firms helped to support these firms and at the same time create valuable innovations. This is quite different from a development grant. Firms usually say that these are too small and too slow with costs incurred in putting the grant together. Far better to challenge a firm with a real project.

While this works in the US, I also know that Brisbane City Council have a similar program (albeit on a smaller scale) and it is paying off for the council and for the firms that are involved in the procurement program. This morning the Lord Mayor, Campbell Newman, announced that council would fund its own renewable energy project to meet its strategic targets. He also said that this was part of kick-starting the industry in South East Queensland.

Firms don’t need innovation welfare. They need sophisticated partners and customers.

Hutch Carpenter just wrote a nice post outlining 25 different definitions of innovation. This is an interesting exercise. He breaks the definitions down into five sub-categories, which all reflect slightly different takes on the nature of innovation.

I find this interesting because I frequently hear people discount the importance of innovation by saying that it is just a buzzword. As evidence, they talk about how it means something different to every person that uses it. In this short video, I get some help from my new kitten Schumpeter in trying to explain why this is so, and why this does not actually reduce the importance of innovation:

Definition of Innovation from Tim Kastelle on Vimeo.

There are a couple of key points here:

• I define innovation as: executing new ideas to create value. All three parts are important – to innovate you have to do something new, you have to actually execute the idea, and doing so must create value.
• Innovation is a top-level definition – which means that it has multiple sub-categories. The analogy that I use in the video is that “innovation” is equivalent to “birds”. The category of “birds” includes a range of animals from penguins to peregrine falcons. In the case of those two types of birds, they are extremely dissimilar, yet we still call them both birds. This is because they share a number of traits which tell biologists that they belong in the same order.
• People often say “innovation” when they actually mean one of the sub-categories. When one person means “radical technological innovation” while another means “incremental process innovation”, it is confusing. This is why some people think that “innovation” doesn’t have a real meaning, because it is actually used to mean many different things.

If there is a gap between where you currently are and where you want to be, the only way to bridge it is by doing something new. Innovating. That’s why innovation is important, and why it’s more than just a buzzword.

I guess one other lesson from all of this is that squirmy kittens make poor co-stars….

I wrote a post last week about why experts will often overlook disruptive innovations. Today I’m going to extend this argument by saying that crowds and markets are just as good at missing these step changes, but first I’ll talk about the inspiration for the post.

Last night was the Australian federal election and I think it was probably the most gripping and wackiest night in Australian politics that I’ve ever seen. Late last year it seemed impossible that the conservative coalition parties would be able to win government and the current conservative leader almost got the job by accident. Several weeks ago the Prime Minister, Kevin Rudd, was dumped by his party after being one of the most popular Australian PMs in history only 12 months ago. With the new PM, Julia Gillard in place (the first woman to be an Australian PM), the government called a snap election and the book-makers had the government on short odds (about 1.3:1) to retain power, while the opposition were out at about 2.5:1.

The betting was interesting to follow because it has previously been one of the most accurate predictors of the election outcome. With lots of people placing bets, and those with inside information on poll trends placing big bets, it usually becomes a very accurate market for information. In the previous election it had been more accurate than any of the research polls. A week before the election the odds on a conservative victory had blown out to 3:1 and a victory by the incumbent government looked inevitable, even though the polls were saying that the election result would be very close.

All the usual signs pointed to a government win. Very few Australian governments are given just one term in office, the economy is doing very well and unemployment is low and the two seats that had gone with the winning party in every election looked safe for the government. What happened last night was a night of many political firsts, in addition to all of the political chaos leading up to the election.

By early in the evening it was clear that some sort of swing to the coalition was going to threaten the government. In an electorate north of Brisbane, a 20 year old was elected to become the youngest ever parliamentarian. Later in the evening the Green party claimed their first ever seat in the house of representatives and then a former secret service officer, running as an independent, won a seat that used to be assumed to be rusted-on to the governing party. By the end of the night it was apparent that the most likely outcome would be the first hung parliament since the second world war. A bizarre night for sure, but why had the betting market gotten it so wrong?

I think that the market for information in the election failed for the same reason that experts miss disruptive innovation. When we are faced with radical changes in the environment where the conventional operating rules are being broken, the usual informational cues can’t help us. SInce the majority of us are using the same cues we collectively miss what is really going on. There is a much better discussion of the psychology surrounding this issue written by Nasim Tayeb in his book, Black Swans. Markets probably work well in stable environments when we know what information we should be paying attention to in order to make decisions about what price to pay for a bet, a stock, or an innovation. After last night I’m a lot more skeptical about the ability of crowds and markets to make better decisions than individual experts when confronted with radical change.