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Innovation

Pillars of Innovation

At both a national and corporate level, innovations don’t just happen by chance. Here are the 10 factors that matter most.

by Rob Preston

November 2016

Paying lip service to the concept of innovation has become a panacea for the competitively challenged. Is your country or company losing ground to rivals? More investment in innovation is the answer! Having trouble attracting highly skilled, motivated workers? Create a culture of innovation! Are digital disruptors threatening the commercial cosmos as you know it? Innovate your way to a stellar future!

Back in the real world, however, the economists, business leaders, and change agents who study (and actually live) innovation at a national and firm level know that within those broad strokes, there’s a science to out-innovating the competition—and measurable results to be gained from the effort. Innovation, broadly defined as a new product or method that produces a substantial commercial or societal improvement, doesn’t just happen organically.

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“Innovation is the product of intentional human action,” says Stephen Ezell, vice president of global innovation policy at the Information Technology & Innovation Foundation (ITIF), a Washington DC–based think tank. “That requires effective policy at a national and international level to create the conditions in which innovation can flourish among individuals and enterprises. And it takes a business and political culture that embraces risk, experimentation, and new technologies, and creates the opportunity space where innovation can flourish.”

Profit looked at demonstrably innovative economies and companies worldwide to get a better understanding of what makes them so successful. What follows are ten key factors that drive innovation at both the macro and micro levels.

Macro-Level Innovation

A number of reputable reports regularly compare and rank countries’ innovation levels and capacities. Among them are a biannual ranking from the ITIF; the World Economic Forum’s Global Competitiveness Report; the Bloomberg Innovation Index; and the Global Innovation Index copublished by Cornell University, INSEAD, and the World Intellectual Property Organization.

So which innovation competencies and attributes matter most in the grand scheme of things? These five rise to the top:

1. A deep talent pool and first-class education system. One ranking of the world’s top education systems puts the UK, Canada, the US, and Germany at the top. Another ranks South Korea, Japan, Singapore, and Hong Kong as the world’s top educators.

Among the factors weighted differently in those and other rankings: spending on education per student; percentage of STEM (science, technology, engineering, and math) graduates; average class sizes in primary and secondary schools; number of top-ranked universities (which also contribute to a country’s R&D capacity—see factor #2); number of researchers per capita (ditto); and the overall “quality” of education (which itself factors in many variables).

Regardless of the measurement criteria, the value of a good education is clear: countries that do the best job of preparing their citizens for the innovation-oriented jobs of the future—especially those countries that provide a strong STEM grounding as every business becomes a digital business—are those that will spawn the new companies, industries, and job creators of tomorrow.

But a deep talent pool isn’t just a function of the strength of a country’s education system. It’s also about a country’s ability to attract, nurture, and support people with the right skills and abilities. Most of the top-ranked countries have flexible labor markets, ones in which talented people are relatively free to move from job to job or start their own businesses—though most European countries make it difficult for employers to dispense with underperformers.

Likewise, countries that import some of their talent via open immigration and/or work visa policies (Canada, Australia, Germany, Singapore) have a leg up on countries that are more closed. Consider the number of innovative US companies that were cofounded by immigrants, including eBay, Goldman Sachs, Nordstrom, DuPont, and Pfizer.

2. A vibrant R&D environment. Given the private sector’s tendency to underinvest in innovation—especially in high-risk, early-stage research—public R&D funding is essential to producing “the breakthrough innovations that generate large benefits for the domestic economy and the world in the long run,” according to the ITIF’s January 2016 innovation report.

South Korea, Israel, and Japan spend the most on R&D as a percentage of their GDPs. The challenge is to ensure that spending is making its way out of the labs and into real-world innovations. One productive model is the US National Science Foundation, which makes more than 90 percent of its grants to companies or university research labs that commercialize their R&D.

It’s no coincidence that Silicon Valley, the world’s preeminent tech innovation hub, is home to several world-class research universities as well as five national laboratories, notes the ITIF’s Ezell. As such, the Valley’s roots are in national defense and other government-supported research programs, spawning the microchip, the internet, Wi-Fi, GPS, and myriad other tech innovations. Worldwide, the ITIF report notes, significant investments in basic research are still needed before the commercialization of nanotechnology will be possible, so governments now fund the vast majority of that research.

You have to bring everyone on the journey. If you have a digital business unit and they’re the cool kids, all you do is you have people pressing their faces up to the window thinking, ‘Why wasn’t I chosen to be part of that journey?’”–Neil Sholay, Vice President of Digital, Europe, Middle East, and Africa Operations, Oracle

Another role model is Finland’s Funding Agency for Technology and Innovation (Tekes), which funds R&D in a number of areas besides technology, including natural resources, health, and the environment. About 60 percent of its activities are directed to small and midsize companies, according to the ITIF, which estimates that Tekes has supported about a third of Finland’s high-growth companies, playing a key role in developing its forest, IT, and services industries and in establishing its biomaterials industry.

3. An entrepreneurial, risk-taking culture that’s (relatively) unrestrained by onerous regulations. It’s the most abstract and subjective factor of innovation, but one of the most important. Ultimately, countries need people willing to put their money and reputations on the line to build and sell a better mousetrap.

You can’t teach risk-taking, but you can create an environment in which risk takers can thrive. Consider Sweden, one of the world’s most innovative countries (birthplace of the likes of Skype, Spotify, Klarna, and SoundCloud), thanks in part to its highly educated workforce and considerable investments in R&D and infrastructure. Benefiting from a vibrant VC community and tax incentives for investing in startups, Sweden’s capital city, Stockholm, is now considered among the most prolific tech hubs in the world.

Especially in this digital age, however, innovation can be disruptive and messy. For example, Uber’s innovative application-based taxi service has proved wildly successful in the US and a handful of other countries, but it faces a gauntlet of legal and regulatory obstacles in Germany, France, and elsewhere. Would Uber, now valued at more than US$50 billion, have ever gotten off the ground in those heavy-handed countries?

4. Diverse, fluid ecosystems of innovation professionals. Related to factor #1—the need for a deep talent pool—is the need to connect highly skilled, specialized people as part of dynamic, mostly organic innovation ecosystems. Think Silicon Valley, Tel Aviv’s Startup City, New York’s Silicon Alley, and Berlin’s Innovation Cluster.

It’s where you’ll find collaborative cultures that encourage fresh ideas and talented people to move about freely. And it’s where the major players—venture capitalists, researchers, engineers, designers, consultants, investment bankers, lawyers, regulators, headhunters—can pull together (and disband) expertise as needed.

“The ecosystems mature in different ways across the world,” notes Alex Scandurra, CEO and cofounder of Stone and Chalk, a Sydney, Australia–based fintech accelerator that has designs on becoming an innovation gateway to the rest of the Asia-Pacific region. “I think you’ll see a lot more of an appreciation for paying it forward or making introductions for collaboration, because people will get that success isn’t, ‘I had the new idea first.’ Success is, ‘I have the network around me that helped me succeed and I’m eternally grateful.’”

5. A highly competitive, open, stable domestic economy. While innovation is cumulative and collaborative, it is also competitive. Nothing spawns innovation quite like intense competition. Consider the converse: How much true innovation comes out of protected, hidebound economies? Not much.

Of the 10 most innovative countries in the world—South Korea, Finland, Switzerland, the US, Sweden, Singapore, the UK, Japan, Germany, and Israel, based on a synopsis of the four leading reports mentioned earlier—only Japan can be considered to have protectionist tendencies. And even its markets are opening as the country seeks to revive its economy.

The ITIF takes the novel tack that the countries contributing the most to global innovation are those whose economic and trade policies do the most to support innovation while doing the least to detract from it. The ITIF groups the positive and negative policies into three categories each: tax incentives, vibrant human capital, and thriving R&D/technology on the positive front; and balkanized production markets (export subsidies, nontariff trade barriers, currency manipulation, and so on), insufficient intellectual property protection, and balkanized consumer markets (tariffs, service-trade restrictions) on the negative front. The ITIF report ranks Singapore, South Korea, and Finland as the countries with the most positive innovation policies, while it posits that Finland, the Netherlands, Belgium, Ireland, and Sweden field policies that do the least to detract from global innovation.

Micro-Level Innovation

It’s a given that every company’s ability to innovate benefits from all of the above macro attributes, but there’s more to innovation at the firm level. So which competencies matter most? These five stand out:

1. A structured (though not overly structured) plan of attack. Most company employees still don’t carve out enough time to focus on innovation because they’re overwhelmed with their day-to-day work. The challenge is to move all or select employees out of their routines and comfort zones by setting up structured, ongoing processes for hatching, vetting, prototyping, and testing new ideas. And it needs to be done without creating ivory towers—elite, head-in-the-clouds innovation teams that engender resentment.

“You have to bring everyone on the journey,” says Neil Sholay, vice president of digital for Oracle’s EMEA operations. “If you have a digital business unit and they’re the cool kids, all you do is you have people pressing their faces up to the window thinking, ‘Why wasn’t I chosen to be part of that journey?’”

ADP, a provider of human resources management software and services, has the right idea. The company created three innovation centers, some of whose agile developers, system architects, designers, researchers, scientists, and customer liaisons rotate in and out in regular cycles, so that the labs aren’t an exclusive club. Their mission: build consumer-grade applications that enhance, but are outside the mainstream of, the company’s payroll and talent management businesses. The company’s ADP Marketplace app store, built outside of business hours during a 30-day hackathon, lets customers or third-party developers write apps that use ADP data and leverage ADP products.

Jeremy Ashley, group vice president of Oracle’s applications user experience team, thinks the best way to structure innovation isn’t to create a single group, but to create “catalyst teams” that facilitate innovation across the company. One such structure is the aforementioned hackathon, bringing together people from different departments with different perspectives and backgrounds to solve a problem or advance a breakthrough idea.

“The real barrier to innovation is the intransigence of any particular organization—‘We’ve always done things this way, and if we carry on doing this it’s safe, and we’re not being asked for anything different,’” Ashley says.

2. A tolerance for failure. It’s said that in the early days of MTV, Steve Ross would fire employees who didn’t fail enough. The innovation team that Caesars Entertainment assembled years ago used to plan for a 50 percent failure rate, figuring that if its ideas weren’t falling flat that often, it wasn’t pushing the envelope hard enough.

But too many big, lumbering companies treat failure as a scarlet F. Stanford University marketing professor Baba Shiv calls it the Type 1 mindset: a fear of making mistakes. He says organizations need to cultivate a Type 2 mindset: a fear of missing out on opportunities—the innovator’s mindset.

No one likes to fail. It’s frustrating, and at shortsighted companies it can be a career killer. But the idea is to do so as quickly, cheaply, and painlessly as possible and learn from your mistakes.

3. A diversity of skills and talents. In a TED Talk titled “When Ideas Have Sex,” zoologist and science writer Matt Ridley compares biological evolution to economic progress. “What sex does is enable the individual to draw upon the genetic innovations of the whole species,” Ridley says. Same goes for the exchange of ideas: the more that different people from different cultures and backgrounds with different ideas come together, the greater the innovations they will produce and spread. Collective smarts trump the sum of individual smarts.

The same logic applies to driving innovation at companies, where flatter hierarchies, more collaboration across departments, and new external partnership models are becoming state of the art.

The user experience team Ashley has assembled at Oracle represents 18 different cultures from around the world. He values people whose wide interests go well beyond their work for the software company. “Many innovations come about when somebody gets an idea from somewhere else—from a different business, from something they read or saw in a movie or on TV, or whatever, and they say, ‘Wow, that can apply to what we do,’” he says.

90

Percentage of US national science foundation grants that go to companies or university research labs that commercialize their R&D. (Source: National Science Foundation)


More

Innovation at Procter & Gamble used to rely mostly on its 8,000 R&D employees and a relatively small coterie of trusted suppliers and partners. Now the consumer products maker is throwing open its innovation process under a program it calls Connect + Develop.

The idea is for P&G’s dedicated Global Business Development team to tap potentially millions of third-party consumer goods experts worldwide to augment the company’s internal innovation work. That “co-creation,” which leverages a crowd-sourcing platform, encompasses everything from technology to packaging to marketing models to engineering to business services to design.

4. An iterative mentality. The old expression that “the perfect is the enemy of the good” applies as much to innovation (especially the digital variety) as any other business endeavor.

“One of the skills that innovators have to have is the ability to trade off,” Ashley says. “You may not be completely satisfied with what you’ve developed so far, but the point is to understand when something satisfies the core issues of what you’re trying to create or solve and is ready to be exposed to customers.”

Too many innovators get enamored of an idea, and they lose focus as they become too ambitious, Ashley says. That overreaching is rooted in a culture that believes the more complex a product or the larger the release, the better. But oftentimes simpler is better.

Take the iPhone, all of whose core technologies were widely available before Apple assembled them into the world’s first mainstream handheld computer. The breakthrough quality of the iPhone wasn’t its myriad features; it was its facile touchscreen interface, its ease of use, and its departure from the standard menus and windows construct.

5. A healthy sense of paranoia. In his 1996 bestseller Only the Paranoid Survive, former Intel CEO Andy Grove wrote about the importance for company leaders to anticipate and adapt to “strategic inflection points”—those times when new innovations, new competitors, big regulatory changes, and other major disruptions force a company to rethink its products and strategy.

Unfortunately, when times are tough, many companies have a tendency to go heads down to ride out the storm. And when times are good, their tendency is to not want to screw things up.

Companies must always apply innovation pressure on themselves. Adam Grant, a professor at the University of Pennsylvania’s Wharton School and a best-selling author, challenges CEOs to lead a “kill the company” exercise, whereby executives must figure out ways to defend against mortal threats to the business and ultimately seize new opportunities. “People are much more creative on offense than on defense,” Grant says.

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