S T R AT E G Y I N N O VAT I O N T R A N S F O R M AT I O N

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June 28th, 2010

Idris Mootee

An Innovation Primer

Innovation Is The New Industrial Religion

The Economist magazine called innovation the industrial religion of the 21st century. So what
exactly is the new thinking about innovation and why is it so important? Furthermore, why does it need
to be taken so seriously by business and government? Very simply, innovation is the core of economic
progress. Without it many of our firms will go out of business, and those that remain will become second-
rate and subservient to international leaders in decision-making and profit taking. Without innovation there
won’t be new businesses and jobs that are necessary to support economic growth.

But what is innovation? The first thing is that innovation is not invention. Invention is the creation
of a new idea and its reduction to practice. Innovation is the commercialization of ideas. Innovation is often
mistaken for research and development. R&D is an element of innovation, but is only that: one element.
Innovation is really about economically valuable novelty. It is about new products, processes and experiences
and all the scientific, technological, organizational and, financial activities that produce them. Innovation
is an emergent event; it happens when practitioners “on the ground” have worked on something enough to
discover a new approach in the messy variety of practitioner effort, tons of conflicting quantitative research
data and unfocused conversations. Innovation only happens when there is sufficient variety of thought
and action; it works more like natural selection, which requires lots of mutation. Innovation is, by its
nature, unorthodox. Dig deeper underneath the veneer of any innovation success story, there was trial and
error going on behind the scenes, and lots of variety happening before the (sometimes accidental) eureka
moment. And even after that eureka moment, the only reason we think of the outcome as an innovation is
because it found traction and really worked. Innovation often sprouts from the messy, trial-and-error efforts
of practitioners in the trenches, but there are ways to make it more manageable.

We Are Living In A World Of Discontinuities

Organizations that are totally occupied with reactionary strategies are missing the bigger picture. We no
longer have time to reflect on how the bigger picture is changing. We must find time to reflect on all the
big challenges. Innovation has a bigger mission than finding the next great product extension. The World’s
population is exploding and population growth drives deforestation, the expansion of agricultural land,
the pollution of air, water and soil, and suburban sprawl etc. Human activity, such as urbanization and
development, fragments wildlife habitat and drives many species to extinction. Changes to our landscape
are occurring faster and on a larger scale than ever before. Our population could pass 13 billion in fifty years
and never before have so many people shared our planet earth. At the same time we are persisting “labor
saving” technologies to automate everything. Technology is dragging us into unknown and dangerous

This teaching note was authored by Idris Mootee solely as the basis for executive education and class discussion. Teaching notes and cases are not
intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

Copyright © 2010 Idea Couture inc. Idea Couture is a global strategic innovation, customer insights and experience design firm that brings together
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territories by accelerating change. Business, societies, nature and legislations are struggling to keep up.
The reality is all innovations have unforeseen consequences - even when they are done for the very best
reasons. Organizations’ ability to learn is a critical success element of any innovation effort, and it is the fear
of failure that inhibits the very experiences we need to learn. Here’s a simple example: No one can learn to
ride a bicycle or to snowboard by watching a DVD or reading a book. You have to fall off-to know what the
union of human and machine or object will or will not do. The alternative is not to learn safely, is simply
not to learn at all.

The approaches to innovation are notably different between those for incremental changes and those for
radical ones. While a company depends on incremental innovations to survive in the short run, it really
needs to develop and manage discontinuous innovations in order to maintain its competitive advantage
in the future. Most companies prefer to concentrate on incremental changes, thereby being less effective
in managing discontinuous innovations. Organizational inertia, structured routines, and less absorptive
capacity are among other hindrances to the discontinuous innovation. Therefore, the company has to design
and implement different approaches, including strategic actions, industry context, organizational context,
technological context, and people context. In conclusion, the company has to promote discontinuous
innovations in this changing environment while maintaining the survival ability by managing incremental
innovations.

Global Challenges Are Becoming A Driver of Innovation

Companies will constantly search for new business opportunities and they will realize that global
challenges such as climate change, the supply of clean water, epidemics and social needs constitute a huge
new market. By creating new more responsible and sustainable solutions, companies can cultivate new
business opportunities. ‘Corporate social innovation’ may be an important new business area for private
companies and a core driver of innovation.

Global challenges such as climate change, access to clean water and various social needs have until now
been regarded as political challenges and not as business challenges, implying that the responsibility for
finding solutions rested with the political world. Companies responded to requests and demands put
forward by public sector institutions by providing the required service or product.
In the industrial age, companies focused on production and profit maximization within the existing
demarcation line between private and public. For the most part, companies did not innovate and create
new solutions to meet global challenges.

Schumpeter On ‘Creative Destruction’

Decades ago Schumpeter identified five different types of innovation, which in modern terms are product,
process, market, input and organizational innovations. His descriptions of the nature of the innovation
cases could be modified and supplemented, taking into account new phenomena. In input innovations,
knowledge sources today are more important than the sources of raw materials mentioned by Schumpeter.
In market innovations, an interesting new phenomenon is the transfer of the value offering point. The
Internet’s very design is a neutral platform upon which even the wildest ideas can come to life - it is
a wonderland for social creativity and inspires an unprecedented breadth of innovation. Old ideas, old
products, and old companies are constantly displaced by new ones, which led him to describe capitalism
as a process of “creative destruction,” a continual and massive churning of the market that brings new
companies to the forefront as it pushes others aside. One very interesting comment from Schumpeter is

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that people act as entrepreneurs only when they carry out new combinations, and they lose the character
of entrepreneurs as soon as they have built up their business and when other people start running it for
them. All this explains the reason of challenges established businesses are facing with today. Management
training downplays the idea of innovation and entrepreneurship which is very difficult to measure, and
virtually impossible to express mathematically. It therefore does not easily fit into formal management
models. The organization management model is built on the assumption of continuity; their focus is on
operations. Capital markets are built on the assumption of discontinuity; their focus is on creation and
destruction. Unless organizations constantly renew their mental models, relax conventional notions of
control, and embrace new thinking, their performances will be drawn into an entropic slide to mediocrity.

Every Business Success Is Quietly Seeding Its Own Destruction.

When your business is featured on the cover of a business magazine, that’s when you need to start thinking.
When you hear managers saying “Our firm is doing great... but I know we really need to change some
things. How can I get our managers to even think about more change when we are doing so well?” When
we are under the gun and things are falling apart around us, we can usually find enough compelling reasons
to change what we are doing. After all, it doesn’t take a rocket scientist to figure out that if something
isn’t working, you ought to try something else! But when business is great and profits are healthy, what
incentive is there to risk making an innovation? History tells us that the firms who are doing well are
pushing more innovation, more in scale, and more in numbers. Innovation, in today’s chaotic business
environment has emerged as the primal strategy for driving faster growth, increasing revenue share and
even survival! It is increasingly becoming a fundamental factor helping companies cope with disruptive
technologies, changing customer behavior, short product lifetimes, super low cost competition, the need
to replace products sooner and the ammunition to face new competition.  Innovation doesn’t have to
invent new products, it unlocks hidden value in existing ones – thereby reinvigorating a business without
completely reinventing it. It is a disciplined process by which an idea is generated that results in significant
economic value creation and improved customer experience. Many of today’s ideas on innovation are
about coping with unpredictability rather than understanding the key forces that create it, and there are
“predictable elements or pathologies”. Once you know what those pathologies are, the process of creating
profitable innovations is not as inherently unpredictable as once thought. Because of today’s exaggerated
sense of uncertainty and foreboding about the future, foresights are in great demand. The future is much
more important than the new, the hip and the cool and we need to develop a deeper understanding of
change. Strategy must be created from the future backwards, not the present forwards. This also underlines
the short-termism of much of today’s innovation activity which places too much emphasis on what your
market research reported this month. The future is often a mix of revolutionary change and evolutionary
continuity, if we try hard enough we can see it.

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Beware Of The Convex Cost Curve

Every organization that produces goods in a high cost country has the same problem that keeps them up
at night. The wave of low cost competitors in all industries (with the exception of commodity and energy)
are creating serious threats. The emerging of China, India and Mexico are driving a new wave of cheap by
way of developing their own brands. Suddenly low price doesn’t mean low quality anymore, and it could
mean a challenge to both middle and high-end products depending on categories. Soon Chinese companies
can design innovative products, raise quality without raising costs. The result is what Kouvelis refers to as
a “convex cost curve,” which rises slowly across the quality spectrum and then rises sharply in cost once
quality reaches the very high end. The more opportunities for a low cost firm to narrow the quality gap and
strengthen its value-cost proposition, the more a high quality firm faces a competitive disadvantage.

It is dangerous for organizations to put all their stakes and their profitability in the quality game. When
new entrants have the resources, technology and the willingness to produce higher and higher quality
goods with low variable costs, everyone jumps on the quality game. When everyone engages in price
competition, industry profitability drops. Innovation becomes a survival play.

China has established a multi-year innovation framework and so has Singapore. Finland is merging its
top business school, design school and technology school to create a multi-disciplinary “university
of innovation”. Council members of the National Academy of Sciences and the National Academy of
Engineering in the US have “expressed concern that a weakening of science and technology in the United
States would inevitably degrade its social and economic conditions and in particular erode the ability of
its citizens to compete for high-quality jobs. ”According to a 600-page report from the National Academies
published in 2007 and titled, “Rising Above the Gathering Storm.” Companies and countries must act
quickly before it is too late.

Harness The Power of Open Innovation

For most companies, innovation is a proprietary activity conducted largely inside the organization in a series
of closely managed steps. Over the last decade, however, a few consumer products, consumer electronics,
and technology businesses have been opening up the product-development process to new ideas hatched
outside their walls—from suppliers, independent inventors, and university labs. Organizations are now
considering the next step in this trend toward more open innovation. They are looking at ways to delegate
more of the management of innovation to networks of suppliers and independent specialists that interact
with each other to co-create products and services. They also hope to get their customers into the act. If a
company could use technology to link these outsiders into its development projects, could it come up with
better ideas for new products and develop those ideas more quickly and cheaply than it can today? Suppose
that a wireless carrier were to orchestrate the design of a new generation of mobile devices through an open
network of interested customers, software engineers, and component suppliers, all working interactively
with one another. The Internet is making it possible to amplify and aggregate human imagination and
capabilities in ways never before possible.

Summary

Rethink, Reimagaine and Reset - We need to think and act differently. Innovation is not only doing the same
thing differently, but also doing different things. We need to rethink and reimagine everything. Best practices
are obsolete at birth. It’s time to press the restart button. There are many things broken in today’s world,
corporations, consumers and governments are part of the problems. How many cell phones, batteries and
laptops we are discarding every 12 months? Every business and product needs to manage its ecological

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footprints. We need software that enable businesses to model and optimize their ecological impact before
making the decisions. It should cover the whole product lifecycles from material use, energy consumed
to distribution, marketing and recycle economics. A lot of innovation is needed to totally rethink how
we do things today. Imagine consumer products made from healthy and safe materials that, at the end of
their life, are taken apart and either turned into raw materials for new products or returned to the earth as
compost. These products are manufactured using renewable energy and marketed with socially responsible
strategies. In that world, we can flush the dirty diapers down the toilet, spray household cleaners without
fear of poisoning our houseplants and wax our surfboard without feeling guilty about the fish. Designers
and engineers have more influence over slowing environmental degradation than economists, politicians
and environmentalist and their power is catalytic.

The innovation economy encourages diversity, collaboration and creativity. The investment community
must redefine risk to in order to accurately appraise the path breaking innovative projects. Innovators must
redefine customer value to produce exciting new products. Public decision makers who focus on regulating
businesses producing more of the same need to refocus on how to reap greater benefits by letting the new
continuously replace the old. It is all about looking at the next big thing instead of focusing on more of
the same. Improving innovation is about increasing our collective creativity and intelligence to create new
value. It is a grand opportunity for all decision makers, be they corporate leaders running global enterprises
or political leaders running countries.

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Other published teaching notes and cases from the same series that are complimentary to this one:

5-027-5001 An Innovation Primer

5-027-5007 Strategic Innovation and Competitive Strategy
5-027-5008 Strategic Foresights and Innovation
5-027-5012 Managing the Adoption of Innovative Products
5-207-5013 Social Technologies and Open Innovation
5-027-5015 Strategic Innovation And The Fuzzy Front End
5-027-5016 Mastering the Innovation Process
5-027-5018 Strategic Creativity and Innovation
5-027-5019 Organizing for Innovation
5-027-5022 The Seven Roles of an Innovation Team
5-027-5023 Business Models Innovation Vs. Business Strategy
5-027-5031 Lead-User Driven Innovation
5-027-5038 Social Innovation and Social Enterprise
5-027-5039 Building an Innovation Culture
5-027-5042 Opportunity Mapping in Innovation
5-027-5043 How to Look for Breakthrough Ideas
5-027-5047 Research Design to Support Innovation
5-027-5048 Building an Innovation Business Case
5-027-5050 Design Thinking and Innovation
5-027-5056 Assessing Your Organization’s Innovation Capability
5-027-5058 Strategic Framing
5-027-5062 Rapid Prototyping and Innovation
5-027-5063 Social Responsibility and Innovation
5-027-5067 Service Design and Innovation
5-027-5068 Developing An Innovation Roadmap
5-027-5073 Managing Strategic Creativity
5-027-5075 Innovation for the Bottom of the Pyramid
5-027-5076 Lessons from the World’s Best Innovators
5-027-5080 Innovation and Value Creation