Question: What defines innovation, and what can I do to promote a culture of innovative thinking in my business?

Answer (Part 1 of 2): The Business Week article “Hot Growth Companies” (June 7, 2004) stated that “Building a sustainable enterprise requires speed, flexibility, innovation, and at least a little luck to thrive in the face of relentless competition.” The dictionary definition of innovation is the process of making changes — a new method, custom or device. However, all innovation is not the same. Fortune magazine, in advertising the Fortune Innovation Forum in November, says that “innovation is ideas in action. It’s the origin of competitive advantage, the engine of economic growth, and the indispensable strategy for increasing market share and productivity.”

Donna Prestwood and Paul Schumann, in “Applications of the InnoVantage Grid” (www.glocalvantage.com) describe nine different types of innovation and display them on a grid, with the Nature (focus) of the Innovation along one axis and the Class of Innovation (how great the change is from current production) on the other axis.

The Nature of Innovation falls into one of the following three categories:

Product innovations: involve the way things interact with things — the function provided to customers or the form that function takes. Examples include improvement in industrial machinery, consumer goods, software and component parts.
Process innovations: involve the interaction of people with things — the way a product is developed, produced and provided. Examples include improvements in manufacturing, distribution and development systems.
Procedure innovations: involve the way people interact with people — the way in which products and processes are integrated into the operations of the enterprise. Examples include improvements in marketing methods, administrative methods, sales terms and conditions, and requirements generation.

The Class of Innovation falls into one of these three categories:

Incremental innovations: those that reflect a relatively small improvement over present products, processes, and procedures — advances that are a little better, a little faster or a little cheaper.
Distinctive innovations: those that provide significant advances or improvements, though not ones based on fundamentally new technologies or approaches.
Breakthrough innovations: those that are based on fundamentally different technologies and approaches, and which allow the performance of functions that were previously not possible, or the performance of presently possible functions in a manner that is strikingly superior to the old. Prestwood and Schumann go on to say that “breakthrough innovation results in the creation of a new industry or class of technologies,” which “result in a significant number of distinctive innovations, and, these, in turn, result in a flood of incremental innovations.”

Source: OrlandoSentinel, here. (free registration required)

If you believe the hype, start-ups are an innovative breed that go against the grain of conventional business. But are they?
 
A new study says the vast majority are not, leading one to wonder whether innovation is what it takes to start companies, or if they’re really fueled by something else. The findings, released this week in the Global Entrepreneurship Monitor, are part of an annual assessment of entrepreneurship as it relates to economic growth in more than 40 countries. Developed by Babson College, the London Business School and the Ewing Marion Kauffman Foundation of Kansas City, the survey contains lots of interesting facts — Who knew Uganda ranked No. 1 in entrepreneurship? — but those on innovation stand out.
 
The largest number of start-ups pursued less-than-innovative ideas in highly competitive industries. In the highly competitive U.S. market, 27 percent were pursuing an idea that was “not new to any customer.” Start-ups considered most innovative — pursuing an idea “new to all” in a market with “no competitors” — amounted to only 4 percent of the total. Bill Bygrave, co-author of the study and a professor of entrepreneurship at Babson College, Wellesley, Massachusetts, called those innovators “superstars” but added that they were the rare exception.

“The grass-roots entrepreneurs are companies that take something someone has done before and do it better, or cheaper, or offer better service,” he said. “That’s the core of the economy.” It’s also because the landscape of entrepreneurship includes everyone from a fast-food franchise owner to a high-tech innovator. The advantage of the former — no new product, many competitors — is that the ubiquity of the idea shows it can work. The company will not face the task of having to convince customers to buy it. The downside, of course, is that the customer may not choose to buy it from this particular company, since so many others offer a similar product or service. One solution — innovation — is risky and costly, but small, incremental innovations can be highly profitable.
 
In line with these findings, venture capital tends to be a poor marker for start-up activity, because so much of the money backing new companies goes to less than earth-shattering ideas. Venture capitalists avoid early stage companies. The total amount invested by venture capitalists to seed new companies in 2002 was $304 million, the lowest since 1980.
 
Given this reality, Bygrave tells students to just do it — get started in business, rather than spend a lot of time creating the ultimate concept that will very likely fail to win the attention of venture capitalists. All of which points to the conclusion one might glean from this study: Highly innovative ideas are rare, whereas modest ideas backed by friendly capital might very well be the root of a successful business, if not the economy.

Source: Reuters, here.

This Innovation Mindset Model is from the Innovation.Net Blog by Mike Docherty. I discovered the blog recently on BlogShares.

“At the beginning of any strategic innovation initiative, everyone’s excited and optimistic, we’ve got a great idea and we’re going to rule the world (Dreaming). Then $%^& happens as it always does and we face failure (Doubting). It’s never as easy as we thought it would be. Failure is a natural and useful element of innovation… it’s how we learn and adapt our solutions. Or determine it’s time to try another challenge. As we develop innovative concepts into real-world practical solutions, we’re learning more, the problem isn’t as simple and we begin to truly understand the complexity of the challenge. It’s this 3rd stage (Quitting or Perservering) that truly separates innovators from dreamers… those that perservere and don’t quit often experience a transformational experience of having worked through the challenges and acquire a new confidence built upon deep knowledge and experience. “

The contemporary manager has a problem. It is no longer possible to touch or see the things that matter to business performance. A long-term shift from tangibles to intangibles is occurring in many industries. The focus is no longer mainly on cash, inventory, plant and equipment or land, which typically accounts for only about one-fifth of a firm’s value.

Instead, more slippery considerations such as vision, motivation, various types of explicit and implicit knowledge, customer and employee loyalty, and brands are the key determinants of an enterprise’s performance. In 1982, 60% of the value of the United States S&P 500 companies was accounted for by tangibles. By 1999, it had fallen to 16% (the figure remains below 20%). According to the consultancy firms Accenture and AssetEconomics, by mid-2003, $US7.6 trillion, or 58% of the value of the US stockmarket, was a valuation of the future potential of intangibles.

A 2003 survey by Accenture, AssetEconomics and the Economist Intelligence Unit of American companies found that half the executives listed the management of intangibles as one of their top three priorities. Yet only 5% said they had a robust system of measurement. One- third had no measurement in place, and 61% had measures that were either informal or unorganised. John Barton, principal of John Barton Associates, says companies have trouble developing the new ways of thinking required to understand and assess intangible assets. “What you see in company after company is that knowledge management is pushed back into IT.”

What is required is not a modification of the methods used to value tangibles but a radical departure. Intangible assets are considered to be elements such as innovation, knowledge (explicit and tacit), governance, organisational design, reputation, customer and employee loyalty, capabilities and brand strength. The way in which these are bought, sold and created, is different from tangible assets. For one thing, intangibles have a more uncertain value than is usually the case with tangible assets. Investing in knowledge generation, for instance, can lead nowhere or it can lead to high- value returns. The result of an investment in plant and equipment, by contrast, is comparatively predictable.

Some intangibles have completely different characteristics from tangibles. Knowledge, for instance, is usually not scarce in the way tangible assets are (because it is not lost to the owner when sold). Possessing knowledge is to some extent inevitable in a business, whereas owning a tangible asset is not. It is hard to imagine a business without knowledge, at least if it is to have any hope of staying in existence. Businesses cannot “own” knowledge, except to the extent that they can legally protect its fruits through patents and brand names. The push from the accountancy community to take a pessimistic view of intangibles on the balance sheet is at least half right.

The “snapshot” approach to valuation (the balance sheet is a snapshot of a business’s value at a moment in time) is not ideally suited to getting a grip on intangibles. What really matters is what income they will create, not what their resale value is (which means taking a close look at what customers will pay for in the future). For example, important staff members may create great value for an organisation, but they cannot be bought and sold in the way that, say, land can. Resale value is largely a meaningless measure for “human capital”.

The greatest challenge is in human-resources management. The term itself inspires little confidence (humans are in no meaningful sense “resources”). Yet if intangibles are to be managed well, much depends on the way people are managed. All intangibles gain value only because of what people do. Peter Aughton, chief executive of the consultancy Amerin and director of the Fred Emery Institute, says human-resource managers might do well to drop the title. “Human-resource managers often come through a background of the humanities, but somehow they lose their roots and try to run things as a machine. They get lost in bureaucracies and … the reward structure.” Barton says what is required is “360-degree stakeholder management” – not just training workers to be multi-skilled, but also to involve them in management. Without this, the necessary innovation and flexibility will not materialise.
 
One way to derive an assessment of intangibles is to use “future value analysis”. According to an article by John J. Ballow, Robert J. Thomas and Goran Roos in the Journal of Applied Corporate Finance, this is the difference between a company’s market capitalisation (the total value of its shares) and the “current value of daily operations”. The general rule of thumb, they say, is that capitalised current operating value equals 10 times the current earnings.
 
Future value is only a tentative indication of a company’s need to manage intangibles but, in combination with net tangible assets as a proportion of the share price, it does give an idea of a company’s position. Ballow, Thomas and Roos write that no US companies include accounting for intangibles in their annual reports. Only in Europe have there been serious attempts to improve the accounting for intangibles.

Source: BRW Magazine, by David James

“We need to change the culture of this organisation!” Whenever I hear this war cry, I cringe. Culture cannot be imposed; it must be discovered. What is frequently overlooked is the fact that the culture of an organisation is contained in the hearts and minds of the people it employs. It is already there, waiting to be expressed. To the extent that we allow that culture to be expressed, a range of benefits will emerge. If we don’t allow that culture to be expressed, an organisation will always fall far short of its potential.

I often ask employees to tell me what they expect of their employer. It is amazing how consistent the response is irrespective of the industry, from specialist medical practices to manufacturing. The first expectation is to be ethical. This is, of course, a term that has many shades, but in essence, what employees want is to be able to look customers in the eye and feel that they have done them a good service and that they give value for money. They don’t want to cheat or do something that is shady or questionable. They want to be perceived as honest.
In a workshop that I conducted with a group of rookie executives at the University of California, Riverside, which consisted of people from Japan, South Korea, Denmark and Argentina, I received the same response. These people also said that what they expected in their work was:

• Open communication.
• Positive feedback.
• Management that would listen to them and respond to their input.
• Clear goals and an ability to verify them.
• To have fun.

Across Australia and worldwide, employees consistently tell me the same thing. What better culture can you have than people who want to be ethical, have input into how the business is operating, get positive feedback from management, be able to set goals and achieve them, and have fun while they are doing it?

The overwhelming desire of most people in the workplace is to do good, to have fun and be proud of where they work. The challenge to management is to give free rein to these aspirations and let loose the culture that is bursting to be expressed. Unfortunately, a competing challenge is to report good quarterly figures. Letting the culture become established might not do too much in the first few quarters of the regime but the long-term sustainability of the organisation will be more secure and many more people will be happier going to work each day.

Source: BRW Magazine, by Louis Coutts

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