On innovation and why we need to risk it
Mark Dodgson
Technology and Innovation Management Centre, University of Queensland Business School, St Lucia QLD
PP: 34
Article Text
Last year The Economist magazine called innovation the industrial religion of the 21st century. What is the new thinking about innovation and why is it so important? Why does it need to be taken so seriously by business and government?
Very simply, innovation is what is going to enable APEC countries to pay their way in the world. 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 the new businesses and jobs that are necessary in a dynamic economy.
But what is innovation? Many managers and policy-makers have misconceptions about innovation that can lead to all kinds of mistakes being made. The first thing to say is that innovation is not invention. Invention is the creation of a new idea and its reduction to practice. Innovation is the commercialization of inventions. Innovation is, furthermore, 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 services and all the scientific, technological, organizational, financial and business activities that produce them.
Innovation is complex and risky. Huge amounts of money are invested in innovations, with companies like IBM, sometimes betting the company in their belief in new products. Investments like this are risky because innovations fail more often than not. Worldwide, only 1 in 10 new products succeed in the market.
Of the roughly 6000 new chemical substances currently on trial for their potential as new pharmaceuticals, perhaps only 1 will become a successful new drug. There is also a good deal of research that shows that billions of dollars are spent on new equipment like machine tools and robots and so on since the 1980s has been wasted.
Networks of suppliers and producers are growing to be so important that they are features of a new generation of innovation process.
Innovation is also risky because it is so unpredictable. Lord Kelvin, who was President of the prestigious Royal Society, once said that heavier-than-air flying machines were impossible, and the Chairman of the major computer company, DEC, said that no-one would want a computer in their home. Very knowledgeable people can get their predictions in this field hopelessly wrong.
Innovations often succeed in unpredictable ways. The computer and the Internet were developed as tools for scientific research with no idea of their mass market appeal. When the laser was developed it really had no commercial applications, and now it has a wide range of uses from surgery to CD players.
When 3M developed the Post-It Note, it pasted the clever invention - the non-sticky glue - on noticeboards to which ordinary pieces of paper could be attached. It took some time before it was realized that it would be much better if the glue was put on the, now ubiquitous, little notes.
The sheer speed of changes in technologies and markets adds to the risk of innovation. When Sony developed the camcorder it estimated that it would have a six-month lead before competitors produced a better product. Toshiba's factories produce a new version of its laptop computer every two weeks. It is very easy to be left behind when things are moving so fast.
Innovation is complex because different firms and different technologies often have to be combined. Technology-based innovations, be they planes, cares, buildings, home banking services or personal stereos, have various component systems. A lot of innovations take the form of complex control systems and networks and civil engineering projects that require inputs from many different firms.
What this means is that the expertise required for innovations can rarely be found in one organisation. Even the powerful Boeing Corporation probably cannot design and build a new aircraft by itself anymore. In the case of its 777 jet it relied on others to design the engines, and the fuselage was built in Japan and the rudder in Australia where the greater expertise resided.
When firms are dealing with such risk and complexity it makes sense to have a series of support systems with others. In the private-sector this entails close collaboration between producers and their suppliers and cooperation with all sorts of industrial or research associations. These kinds of networks are growing to be so important that I believe they are features of a new generation of innovation process.
Firms are only one part of larger support systems that are called national innovation systems. Other parts include educational institutions, which make important contribution through research and teaching.
The legal system protects intellectual property through patents and copyright. Financial institutions provide investment and venture capital. International research shows it is the strength of the relationships amongst the constituent parts that provides the greatest support to innovative firms in national innovation systems.
Technology itself is also more closely integrated in the new innovation process. This takes two forms. The first is technology fusion: closer lings between basic research and innovation, and new combinations of fields of technology such as photonics and biosensors. The second is the automation of the innovation process.
Boeing designed its 777 entirely by computer using a new electronic toolkit. This toolkit is very important in the design of large, complex systems such as aircraft, utilities and communications systems where it is not usually feasible to test full-scale prototypes. But its use is far more widespread, including drugs and cars. Just as automation revolutionized mass production in factories, the automation of innovation has the potential to revolutionize knowledge production.
Innovation is costly, risky, unpredictable and complex. So why is it so important, and why does so much depend upon it? There is plenty of research showing the importance of innovation for business success, job creation and higher standards of living.
Firms need continually to consider their organizational structures, making sure there are no barriers between staff and that the broad-based teams needed for successful and speedy innovation are supported.
For us to understand why this is so we have to understand the nature of leading-edge industry and services. We need to think about intense, international competition; rapidly changing markets; decentralized, network-based and highly flexible firms; and competitiveness derived not so much from tangible assets like capital investments, but from intangible assets like skills, creativity and the ability to learn. These are features of what has been called the 'knowledge economy'.
It is innovation that transforms these intangible skills into economically valuable activity. As knowledge becomes the basis for economic competition, innovation becomes important for all firms, large and small. Even the smallest firm can be innovative, and traditional industries can transform themselves through innovation. The mining industry in Australia, for example, is seeing remarkable innovations emerging from small firms in areas like exploration and environmental management.
There is a simple consequence for firms not coming to terms with the need for innovation: they go bust. History is lettered with firms that failed in innovate. However, the effects can be much more devastating. Lack of innovation nearly wiped out the once mighty Swiss watch industry and killed the British motor-bike industry. The contrast is profound, in social and economic terms, when compared with the extraordinary vigour and wealth of the innovation industries found in the areas around Silicon Valley and Boston.
So innovation is difficult, but it is essential. What can firms do to improve their innovation performance? Very simply they must become cleverer. They need to understand their markets and technologies better. Their managers need to become more sophisticated and urbane in their appreciation of the importance of innovation, its nature and what drives it. As well as greater investment in innovation, a more strategic approach is required that makes it a core component of corporate strategies. Greater skills in managing networks and in the use of the new electronic toolkit are required.
Firms need to invest in R&D - not only for the potential technical outcomes, but also for the ways it helps them analyze trends, creates networks with researchers, gives them future options through new knowledge and skills, and attracts bright people into the firm. They need continually to consider their organizational structures, making sure there are no barriers between staff in different areas, and that the broad-based teams needed for successful and speedy innovation are supported. And they need to invest in the creativity and ideas of all their staff.
When Ford had developed its Taurus car it brought together 120 assembly workers from the shopfloor to see how the design could be improved to assist its manufacture. They came up with no less than 700 design improvements. Returning to the story of the 3M Post-It Note: the company's marketing department saw no potential for the product, but the secretaries in the company who had been using them saw their value and persuaded the company to proceed with their commercialization.
How can governments encourage innovation? The first thing I believe they need to do is to provide good data on scientific and technological trends, and networking, both nationally and internationally. Government also needs to encourage firms to improve their information on market developments and the innovation strategies of major players. Overall, there needs to be much more research into innovation. It is only on the basis of diverse and rich information that firms can try and overcome some of the problems of the unpredictability of innovation discussed earlier. Although there can be no certainties, as Pasteur put it 'fortune favors the prepared mind'.
Firms need to invest in R&D, not only for the potential technical outcomes, but also to help them analyze trends, create networks with researchers, give them future options through new knowledge and skills, and attract bright people into the firm.
Second, government policies have to reflect the realities of the new innovation process. It is a networked process, and the priorities of government policies, with limited exceptions, need to be directed away from the support of individual firms towards the creation and maintenance of networks of firms and their links with research organizations. It needs a national innovation systems approach, thinking about filling gaps and how the constituent elements could fit together better.
Third - and how many times does this have to be said - the government has to increase its investment in universities and technical education. You cannot have an innovative, knowledge economy without knowledgeable, creative people. Universities are the wellsprings of knowledge.
For their part, Universities, and research organizations need to explain their contributions to government and business more clearly. Along with government they need to take a broad national systems approach, identifying various roles to be filled: some on industrially-relevant research and training.
Universities also have to support research and teaching in innovation. Entrepreneurship and technology management needs to be taught on all science and engineering undergraduate courses, and at a postgraduate level. Business Schools need to make innovation management core elements of MBAs. Students need to be made aware of the social and economic importance of innovation and entrepreneurship.
Fourth - the government has itself to be innovative. Its policies, regulations and laws need continually to be examined form the perspective of whether they support or constrain innovation. This can sometimes lead to some difficult decisions. Innovations are more attractive to firms if they have a monopoly, which is conferred by a patent. Areas like competition law need to recognize sometimes that monopoly can be valuable. And sometimes the best contract for the country is not necessarily the cheapest - it is the most innovative. The quality of the partnerships between government and business is one of the most important aspects of the national innovation system: both need to work together more effectively.
And what about us, as individuals? How do we fit into this world of innovation? We have to accept that we exist in a world of uncertainty. Our capacity to contribute depends on our knowledge and our ability to network and work across boundaries. Our knowledge requires continuing refreshment, and reinvestment in education and training.
The final question is how are we doing in innovation? One answer is provided in a report written by Professor Jane Marceau and colleagues for the Australian Business Foundation. It asks: are we heading along the high road of innovation, productivity and high-quality jobs, or low road of industrial decline and low-quality jobs? Sadly, we appear to be heading the wrong way in many important areas like innovation rates, R&D personnel and expenditure, and management skills.
Yet we have most of the ingredients of an innovative society. In the APEC region, we're creative, optimistic, and wonderfully diverse. The importance of innovation is recognized by business and government, as evidenced by many new policies and government-sponsored events. The challenge is to transform this awareness into effective innovation using some new thinking in areas like national innovation systems and the new generation innovation process. Not to do so will be fateful.
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