Why do you need an External Innovation Unit?

“Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”

“Through the Looking Glass”(1871), Lewis Carroll.

A simple truth to start: The world goes faster every day.

We’ve made it smaller for goods and people to travel, we have reduced it to the size of a dot for ideas, concepts and information. We find ourselves in Alice’s Red Queen world and her advice was right.

Relative speed has become the key feature to manage in order to keep in the same place or reach another one. In nowadays businesses, the difference between how fast my company grows and how fast the aggregated market we are grows is all that matters:  we are in trouble if this difference is negative, around zero means we are in the comfort zone and when positive we expand. Be aware, that in all three scenarios our company can be growing if my market is growing. Growing maybe was enough, now we also should be stressed about how fast (regarding my market). Remember, relative speed is the key.

https://ourworldindata.org/economic-growth#globally-over-the-last-two-millennia-until-today

Let’s go back a bit in time, to get a picture of how economic growth has evolved during the last centuries and see how fast the change has been (its derivative).

The first tipping point is around 1800, the industrial revolution, Adam Smith and a new concept framework, Wealth vs Capital. Wealth is the abundance of valuable resources or valuable material possessions. Adam Smith, in his seminal work The Wealth of Nations, described wealth as “the annual produce of the land and labor of the society”. In economics, capital consists of an asset that can enhance one’s power to perform economically useful work.

In a competitive world, one can grow, basically, by two main means: by taking a bit from the piece cake of another’s or by making the cake bigger and taking the new piece. And this is what mainly changed two centuries ago with the concept of capital and how industrial revolution gave it back up: making the cake bigger is possible.

And here comes innovation. Innovation brings you new tools that give you an advantage in front other players, either to take an existing piece of the cake or to expand the cake and being the first to reclaim it. Taking a closer look to growth evolution from 1800 to today[1], we discover a second tipping point.

It was during the late 1900s, when we start to believe as a law of nature, not only that the cake can be made bigger, but it seems there is no limit to it.

Therefore, expectations shifted from growth to how fast you were going to grow, and so it did credit (or the availability of money from tomorrow) and stokes value, boosting the race.

And here comes innovation again, but not as an advantage anymore, but as a MUST to keep the pace.

But, what’s exactly innovation?

Innovation is production or adoption, assimilation, and exploitation of a value-added novelty in economic and social spheres; renewal and enlargement of products, services, and markets; development of new methods of production; and the establishment of new management systems. It is both a process and an outcome

(Organisation for Economic Co-operation and Development (OECD) manual’s definition).

For us, innovation is new ideas, either as methodologies, technologies, etc, made economically useful.

NOVELTY WITH IMPACT. THE EMBODIMENT OF AN  USEFUL IDEA IN THE MARKETPLACE.

In our growth race, one of the principle drivers, if not the most important is Productivity. Before 1800 the productivity ratio was almost constant to human labor and the growth was a flat line.

With the Industrial Revolution, human labor productivity (mainly physical-energy related) started increasing so the GDP line began to show slight positive slope.

Then information revolution increased human labor productivity (this time intellectual-cognitive related) again and again.  And the slope kept increasing. Till today, on the verge of a new revolution, the AI/robot revolution, that will increase productivity ratios again (either physical and cognitive related), in an unimaginable way, devising the growth curve as an exponential one.

Summing up, the speed of growth has been increasing in a faster way the closer to present time. And innovation is one of the main causes of this exponential economic growth: the more innovation, the higher productivity, the faster growth.

https://ourworldindata.org/economic-growth#productivity-is-the-driver-of-economic-growth

Business innovation NEED is bigger every day. Continuous incremental innovation seems not enough. Each time they are also more addicted to disruptive innovation to keep the pace. And disruptive innovation is not easy to get. If incremental innovation is about answers, improving them, disruptive innovation is about questions, new questions that bring good useful answers. And coming up with those new questions requires knowledge, creativity and a lot of effort.

Traditional internal innovation was bound to the size/talent/investment of the company. Mainly focused on incremental innovation, their speed in delivering worthy useful results was becoming short, moreover once keeping them secret become almost impossible.

In 2003, the concept OPEN INNOVATION[2] arised. If internal innovation was not enough, then let’s open the doors and let’s look out. It is defined as “a distributed innovation process based on purposively managed knowledge flows across organizational boundaries, using pecuniary and non-pecuniary mechanisms in line with the organization’s business model“[3].

In this sense, it is understood as the systematic encouragement and exploration of a wide range of internal and external sources for innovative opportunities, the integration of this exploration with firm capabilities and resources, and the exploitation of these opportunities through multiple channels.

The opening to external collaboration has mostly been focused on research centres, start-ups and lately challenge initiatives.

We advocate for opening also to external innovation units. Small external innovation units with a generalist, multidisciplinary profile. More than one. Scattered. Of course, with a gravitational pull to the central internal innovation department, but with quite independence and autonomy to develop their concepts and projects. We understand the gravitational pull as a goal-oriented force, measured by clear result-performance indicators (ROI2).

WHAT BENEFITS WILL BRING THESE UNITS?

1. No Idea Left in a Drawer

The first clear benefit for this kind of collaboration is be able to handle a higher number of tasks-projects without increasing structural fixed costs. Most exploration projects can be outsourced easily. At today’s pace, we can not afford not to consider any worth idea, therefore no idea can be left in the drawer for later.

2. Innovation Led by Un-biased Decissions

Potential solutions-projects assessment can also clearly benefit for this scheme. First of all, innovations in one area can have multiple non-evident consequences-effects in many other areas. External multidisciplinary evaluation will higher the odds to identify undesirable effects.

But, it will also, help to avoid biased decisions. As an external generalist unit, its assessment will not be biased by any specific solution or interest. Not even for any internal company force dynamics. [4]

The first bias to overcome is the EXPERT – TECHNOLOGY BIAS. Usually experts and technology departments focus their pros on the solutions they know most. Because in many cases they are not only looking for your benefit, but to continue the collaboration with you.

The second one, and the more harmful one, it is the ORGANIZATION INTERNAL DYNAMICS BIAS. When a potential idea can shake your organization, it will find resistance. The power shift it implies, we’ll bring a fight from some key departments, key staff, that will try to kill it before it is really born. We call it the NOKIA-KODAK effect.

When innovation it is not only internally driven, but you also rely on 4 of 5 external units, when they vouch for an innovative idea, that will back the internal innovation unit to face other departments in front of the CEO.  If 4 of 5 external units consider that the future of mobile phones is getting them smarter and therefore bigger (NOKIA had all the technology to develop smart phones in 2004 but dismissed the idea), or digital photography vs analog photography (KODAK invented the digital photography but also dismissed it to no damage their analog photography core business), in front of internal manufacturing and research departments that consider the future is getting them smaller, wouldn’t it not help to influence the future strategy definition? Of course, it is easy to see afterwards. But it really was so difficult to see it then or interests blinded their decisions?

3. More Innovation, More Disruptive Innovation

More innovation is a must, otherwise we close the external unit. Increase the probability to come up with disruptive solutions would be great. But how should this unit be to give the most of it? From here on, let us simplify assuming main innovation goal it is to maximize productivity. Understanding productivity in the most general way:  a completely new product will define a new productivity function, so directly we have increased the productivity value from zero to something as we create a new market.

Improve our productivity function is a complex problem, one that we can be reduced or considered as the kind mathematicians call NK-problem space. N input parameters, with K interdepences between them gives us an output landscape uncharted but for the input parameter combinations we know and have checked. How we get a higher position in our map? With an iteration process: changing one input at a time, see if we improve or not, and then change another one. Following a path of successful improvements.

When we create a network of different units trying to maximize our output the common sense says the more units working together the better the optimization process or innovation. But simulation experiments don’t agree completely. The structure of communication networks among actors can affect system-level performance.[5]

The main conclusions were that random networks highly connected-integrated can get a local optimal quite fast, mainly the closest to the starting point. But in order to get a global optimal, less connected network increased in a significant way their odds, requiring a bit more of time. We dare to say a highly connected network provides through incremental innovation quite fast improvement. But in order to get a real change, a global optimal, you need a jump, disruptive innovation, and that can be more easily attain by a more autonomous network and a bit more of time.

Tackling another aspect of the innovation unit, specialists vs generalist[6]: Everyone will say a multidisciplinary team will get better innovation results. Few years ago, a research team tried to get some insights from how research in mathematics work. Their results were that in a high-speed evolution field, specialized researchers were the ones providing innovation, mainly because they were the only ones capable of following and understanding the new advancements. But in other fields with no so fast evolution, generalist researchers were the main ones driving the innovation. So, depending on the speed of technology business area, the faster the more specialized teams you need. For all the other situations, a more generalist teams will bring better results.

[1] You can take a closer look to how economic growth and income per capita have evolved during the last 200 years in the gapminder organization web.
GDP/capita: https://www.gapminder.org/tools/#$chart-type=linechart
Income distribution: https://www.gapminder.org/tools/#$chart-type=mountain

[2] Chesbrough, Henry William (1 March 2003). Open Innovation: The new imperative for creating and profiting from technology. Boston: Harvard Business School Press. ISBN978-1578518371

[3] Chesbrough, H., & Bogers, M. 2014. Explicating open innovation: Clarifying an emerging paradigm for understanding innovation. In H. Chesbrough, W. Vanhaverbeke, & J. West (Eds.), New Frontiers in Open Innovation: 3-28. Oxford: Oxford University Press. Page 17.

[4] https://journals.sagepub.com/doi/abs/10.1177/0001839216647679

[5] David Lazer, Allan Friedman (2007). The Network Structure of Exploration and Exploitation.  Harvard University. ttps://ndg.asc.upenn.edu/wp-content/uploads/2016/04/Lazer-Friedman-2007-ASQ.pdf

[6] https://hbr.org/2018/07/when-generalists-are-better-than-specialists-and-vice-versa?fbclid=IwAR1-ubBIPKgvLnezRLjyqXxp89a0NONfpRpONifBrBCIdP7FQvy_hnrR_Io

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s