Six Fundamental Truths About Innovation

The term “innovation” gets bandied about a lot these days. For organizations to truly benefit from their innovation initiatives, they first must understand what exactly it is—and what it is not.

It has been my humble pleasure to work with a number of outstanding luminaries in judging the MIX’s most recent challenge, the Innovating Innovation Challenge (the first leg of this year’s Harvard Business Review/McKinsey M-Prize for Management Innovation). This challenge asked for real-world case studies and bold new ideas that make progress in making innovation a deep-rooted, systematic competence in all types of organizations. Innovators submitted entries in which new strategies helped organizations to harness the innovativeness of the people within, and to better the world around them. The main question was, “How do we make innovation more of a natural act and less of a ‘happy accident?’”

In pursuit of that goal, the MIX received more than 140 entries from a diverse group of thinkers, practitioners and experimenters. I’ve distilled six principles, or truths, about innovation from my time spent judging the challenge. Here they are.

1. Innovation is a concrete thing

Many of the case studies in the challenge spent considerable time defining the term “innovation,” and getting to a common understanding. In truth, few people really understand what innovation is. It’s not an ethereal, mystical or nebulous thing. It has concrete attributes.

In many ways, we are approaching what the economists call a perfect economy, wherein supply and demand curves are in equilibrium. Technology has been a huge enabler of this state in a few ways. For instance, it has eliminated the information differential between buyer and seller—nobody walks into a car dealership without first visiting the Internet and researching the options. Technology has also driven efficiency in value chains—today, I can have a new idea, sketch it out using world-class design software via the cloud, find and route it to the best possible prototype manufacturer anywhere in the world who produces it using 3D printers, and have it delivered to my door the next day via FedEx. If it turns out the idea has legs, I can do everything from crowdsource business plans to turn my customers into a superior support organization through companies with self-service web sites, from the comfort of my desk and with my personal credit card. All of the companies enabling these capabilities, such as InnoCentive, Tongal, 99designs, TopCoder and Kickstarter, are being used by organizations large and small. This is great for the consumers of world: Any need or demand can and will be met faster than ever.

The downplayed downside of this convenience is that there is usually no profit from such ventures. If there is profit, a new supplier with a slightly more efficient way to meet the demand will quickly enter the space. There is one form of profit left, however: monopoly profits. Those moments in time when you have an offering that no one else has—a unique value proposition. Such propositions come from innovation. This is why innovation is so important and takes up so much room in press and annual reports. And no wonder, it’s fast becoming the only way to truly turn a profit from a new idea.

2. Innovation involves risk

This point seems obvious. However, it’s an idea that organizations must truly understand and be prepared to systematize. The past 100 years of management principles were all about getting rid of risk and creating stable processes that could be repeated without variance. Innovation, however, is inherently dangerous. It can’t be created with a five-year business plan. Executives usually think that if an idea hasn’t been implemented, there is a reason. To foster innovation, they have to change their risk profile.

3. Innovation is a team effort

There is a general misconception that great innovation is usually carried out by individuals: think of the attention lavished on Steve Jobs, Bill Gates, Henry Ford. As well-deserved as the attention on these inventors is, the truth is that most innovation comes from team efforts. However, the people in organizations who are the most responsible for innovation frequently work alone, isolated from others. Such teams should actually be involved across the organization, collaborating and whiteboarding with various teams that can provide perspective on whether an idea is awesome or simply crazy.

4. Innovation is hard to measure

To understand how much risk an organization can tolerate, executives can develop a set of standards and practices that provide a set of metrics. The challenge is that when organizations come up with a measurement system, there is a tendency for management to turn it into a target. Employees will then spend all their time trying to drive up the “score” rather than trying to improve the business.

Organizations need to understand the metrics to innovation, versus a sustaining business or invention, and how to use them without the risk of Goodhart’s law, which says that when a measure becomes a target, it ceases to be a good measure. The point of a measure is to determine whether you are doing the right thing and how well you are doing it. When the measure starts becoming the goal, whether what you are doing is right or not becomes irrelevant as long as you are “improving” the measure. Consequentially, paradigm shifts, new opportunities, course corrections and innovations are never searched for or seen if they appear.

5. Innovation is not incremental

As Henry Ford reportedly said, “If I had asked customers what they wanted they would have said a faster horse.” People tend to see innovation as a better, faster, cheaper way of doing what they are currently doing. John Seely Brown explained this idea of “conceptual rut” with the clipper ship industry of the 19^th century. Improvements in speed and deficiency were achieved by adding more masts to carry more sail, with seriously decreasing marginal utility. It took inventors from outside the industry to break the paradigm with steam engines. Today’s companies are practicing innovation in management in a similar fashion. Incremental changes to well-established practices will not foster innovation. What’s needed is a radical rethinking of organizational management.

6. Innovation is open—with an asterisk

Innovation takes place in the open and with transparency. In 2000, Goldcorp Corporation put proprietary information online and offered a monetary reward to people who could help find the location of gold deposits. Outsiders eventually helped the company identify 110 sites, 50 percent of these previously unknown to the company. Of these new targets, more than 80 per cent yielded significant gold reserves. If you give information to large numbers of people, you can achieve incredible increases in productivity. This truth has been exemplified throughout history.

The key challenge to open innovation, or the asterisk, is the issue of intellectual property. How does an organization balance the needs of “protecting” its property so it can achieve a return on the investment in developing the intellectual property, yet not risk being outrun by organizations practicing open innovation? The Darwinian crucible of the economic system will eventually correct for this. The question is whether it does so in a positive or negative manner.

We already see company secrets being breached every day by state, corporate and individual espionage. With tremendous variation and application, having a patent is effectively meaningless in some areas of the world, and in a global economy that eventually means it becomes meaningless everywhere. Much patent activity has moved from affirmative creation of value to defensive (or even retributive) barriers to creating new value—so much so that we now have M&A activity primarily based on patent portfolios (e.g. Google’s acquisition of Motorola Mobility) and even an entire industry driven by them (i.e. patent trolls). Only if enlightened organizations can figure out how to share their IP yet retain their ability to generate value, and enable the economic systems to expand that value tremendously, can we avoid these negative consequences.

Stay tuned to future blog posts in which I will explore some of my favorites among the finalists of the Innovating Innovation Challenge, and lessons that can be taken away.