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A discussion paper
APRIL 2008 MARIANNE DOCZI
WORK DIRECTIONS
DEPARTMENT OF LABOUR
Feedback is welcomed: marianne.doczi@dol...
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INNOVATION FROM E V ERYONE AND E V ERY WHERE
He aha te mea nui o te ao?
He tangata,
he tangata,
he tangata!
What is the ...
3
SUSTAINABLE INNOVATION APPROACHES FOR 21ST CENTURY NEW ZE AL AND
3
The purpose of this document
This document has been d...
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INNOVATION FROM E V ERYONE AND E V ERY WHERE
the changing nature of customer research, and the
opportunities and risks o...
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SUSTAINABLE INNOVATION APPROACHES FOR 21ST CENTURY NEW ZE AL AND
“Real innovation is trying to identify problems
other p...
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INNOVATION FROM E V ERYONE AND E V ERY WHERE
In this discussion paper we focus on the first of the
OECD’s key actions, h...
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SUSTAINABLE INNOVATION APPROACHES FOR 21ST CENTURY NEW ZE AL AND
ideas which improve the way processes are
undertaken, o...
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INNOVATION FROM E V ERYONE AND E V ERY WHERE
their employees so that firms have an incentive
to invest in training while...
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SUSTAINABLE INNOVATION APPROACHES FOR 21ST CENTURY NEW ZE AL AND
into our relationships and support systems so it’s
easi...
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INNOVATION FROM E V ERYONE AND E V ERY WHERE
Innovation is contextual, and a combination of
serendipity and purposefuln...
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SUSTAINABLE INNOVATION APPROACHES FOR 21ST CENTURY NEW ZE AL AND
innovation and how to support this
Understands the»» d...
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INNOVATION FROM E V ERYONE AND E V ERY WHERE
The distinguishing feature of this new
marketplace is that consumers becom...
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SUSTAINABLE INNOVATION APPROACHES FOR 21ST CENTURY NEW ZE AL AND
Companies, obviously, have to make the decision to
com...
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INNOVATION FROM E V ERYONE AND E V ERY WHERE
While every innovation can be traced
back to individuals, it is collaborat...
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SUSTAINABLE INNOVATION APPROACHES FOR 21ST CENTURY NEW ZE AL AND
R&D or C&D?
Internationally connect and develop, or C&...
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INNOVATION FROM E V ERYONE AND E V ERY WHERE
Networks fail for a variety of reasons – government»»
intervention can act...
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SUSTAINABLE INNOVATION APPROACHES FOR 21ST CENTURY NEW ZE AL AND
ICT – enterprise 2.0 –
and collaboration
The accelerat...
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INNOVATION FROM E V ERYONE AND E V ERY WHERE
had not integrated.60 61
However, many of the CEOs
did not know how to int...
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SUSTAINABLE INNOVATION APPROACHES FOR 21ST CENTURY NEW ZE AL AND
negotiation, analysis, appreciative inquiry, relations...
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INNOVATION FROM E V ERYONE AND E V ERY WHERE
Much innovation knowledge is embodied in
people and their skills, and appr...
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SUSTAINABLE INNOVATION APPROACHES FOR 21ST CENTURY NEW ZE AL AND
One of the challenges identified was the need to creat...
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INNOVATION FROM E V ERYONE AND E V ERY WHERE
A set of case studies produced by NESTA in its Hidden
Barriers report reve...
Innovation from Everyone and Everywhere (1)
Innovation from Everyone and Everywhere (1)
Innovation from Everyone and Everywhere (1)
Innovation from Everyone and Everywhere (1)
Innovation from Everyone and Everywhere (1)
Innovation from Everyone and Everywhere (1)
Innovation from Everyone and Everywhere (1)
Innovation from Everyone and Everywhere (1)
Innovation from Everyone and Everywhere (1)
Innovation from Everyone and Everywhere (1)
Innovation from Everyone and Everywhere (1)
Innovation from Everyone and Everywhere (1)
Innovation from Everyone and Everywhere (1)
Innovation from Everyone and Everywhere (1)
Innovation from Everyone and Everywhere (1)
Innovation from Everyone and Everywhere (1)
Innovation from Everyone and Everywhere (1)
Innovation from Everyone and Everywhere (1)
Innovation from Everyone and Everywhere (1)
Innovation from Everyone and Everywhere (1)
Innovation from Everyone and Everywhere (1)
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Innovation from Everyone and Everywhere (1)

  1. 1. A discussion paper APRIL 2008 MARIANNE DOCZI WORK DIRECTIONS DEPARTMENT OF LABOUR Feedback is welcomed: marianne.doczi@dol.govt.nz INNOVATION FROM EVERYONE AND EVERYWHERE DEVELOPING SUSTAINABLE INNOVATION CAPABILITY FOR 21ST CENTURY NEW ZEALAND
  2. 2. 2 INNOVATION FROM E V ERYONE AND E V ERY WHERE He aha te mea nui o te ao? He tangata, he tangata, he tangata! What is the most important thing in the world? It is people, people, people! “On the heels of a global transformation from a physical asset-dominated economy to a service- and information-driven economy in which intangibles drive the marketplace, it is proven over and over again that the greatest single asset of any organization is its human capital. In terms of gaining and sustaining a competitive advantage, the strategic use of human capital is as critical as or even more critical than a sustainable and additive business model, technology, a global presence, a strong balance sheet or physical assets. Ideas are relatively easy to find … The real competitive success comes from the ability to implement that idea, to get the team focused, to get the team working together. Competitive advantage comes not from ideas or concepts but from people, people who have the ability to actually implement ideas and concepts. Once you build a strong culture, it is very hard to duplicate because of the values and philosophy engrained in that culture. … soft skills are actually much harder than the hard skills, since they’re much harder to learn and much harder to duplicate […] The irony is that a lot of the things that people think are the hard skills are, in fact, easily learned and easily transferred and, therefore, cannot provide a sustainable competitive advantage.”1 1  Excerpts from the introduction and Jeffrey Pfeffer’s contribution to Leaders talk Leadership: Top executives talk their minds Meredith D Ashby and Stephen A Miles. Heidrick and Struggles International Ltd 2002. ISBN 978-0-478-28184-2
  3. 3. 3 SUSTAINABLE INNOVATION APPROACHES FOR 21ST CENTURY NEW ZE AL AND 3 The purpose of this document This document has been developed to help distil our thinking around the role of the workplace and the workforce, and the nature of skills, in regard to sustainable innovation. It draws on the insights, knowledge and experiences of many. We hope that it will be a catalyst for the creation of a virtual community of interest around the people practices essential for sustained innovation in organisations. After you have read it, we invite you to join this on-line community, contributing your ideas, knowledge, experience, and links to resources. The URL is http://dol-innovations.3months.com/ Our interest in innovation In the Department of Labour we have a dual interest in innovation. We focus on understanding how government and social partners: can support organisations and enterprises»» to improve the ability of their workforces to contribute to innovation through the creation of high performing workplaces;1 and encourage the development and use of the wide»» range of skills needed to enable the workplace to collaborate around innovation, internally and externally.2 3 Our approach Our approach to innovation and skills embodies our approach to the Skills Strategy in that it; uses the term ‘skills’ to include all the skills,»» competencies, capacities, capabilities, knowledge, attributes and experience that enable people to contribute to innovation in all its forms; recognises the importance of context, and»» therefore the workplace culture and practices needed to support the development and optimal use of these skills and approaches to innovation; recognises the importance of knowledge flows»» between and within workplaces, and how uncodified (tacit) knowledge is created and shared: the 1  The term ‘workplace’ encompasses enterprises, firms and organisations: for profit; public sector; not-for-profit. 2  The UK’s National Endowment for Science, Technology and the Arts (NESTA) report, The Innovation Gap: Why policy needs to reflect the reality of innovation in the UK, in advocating a broad view of innovation to exploit the full innovative potential of the vast majority of the UK economy, suggests a framework for skills that is more than the traditional science- and technology-intensive areas, which will provide the capacity to initiate, absorb, support, organise, manage and exploit innovation in its many forms. http://www.nesta.org.uk/informing/policy_and_ research/policy_briefings/innovation_gap.aspx 3  A discussion paper on the Skills Strategy was recently launched by government, in partnership with Business New Zealand, Council of Trade Unions, and Industry Training Federation, see www.skillsstrategy.govt.nz for further details. importance of the learning organisation; and the importance of leadership and management skills»» in creating the change management processes and work environment essential for contributions to innovation from everyone and everywhere. These aspects of innovation both complement and leverage work on the research, science and technology (RS&T) system, tertiary and on-the-job education, the digital strategy, venture capital initiatives, and support for entrepreneurship and management, which are being done as part of strengthening and broadening the national innovation system. In looking at the skills needed to support the innovation process, and new innovative practices more broadly, we advocate a layered approach that considers: The personal attributes needed for innovation,»» such as curiosity, risk taking, adaptability, empathy, respect, and persistence Foundation cognitive and functional skills, such»» as communication, problem solving, numeracy and literacy Foundation innovation support skills, such as»» idea generation and assessment, negotiation, relationship and engagement building Mid-range technical and associated skills, such»» as customer engagement, marketing, and project management High level technical, functional skills, such as»» analysing, synthesising and prototyping. 4 We are not addressing the technical and professional skills needed for specific sectors. The discussion We begin our discussion by looking at the many dimensions of innovation, and the imperative to take a broad view of what innovation is. In the next section we outline three principles: innovation from everyone and everywhere; customer-centricity; collaboration, which inform our approach. By taking an innovation from everyone and everywhere approach New Zealand will be better placed to harness the most competitive resource we have – our people. We explore a customer-centric approach, not only in relation to existing customers but also to potential customers, looking at the importance of lead users, 4  The Business Council of Australia notes, in its November 2006 New Pathways to Prosperity: A National Innovation Framework for Australia report, the importance not only of strong technical skills in the workforce but also those associated with communication, teamwork, problem solving, entrepreneurship and leadership. Skills are about capabilities and include attitudes, knowledge and behaviours. http://www.bca.com.au/Content.aspx?ContentID=100942
  4. 4. 4 INNOVATION FROM E V ERYONE AND E V ERY WHERE the changing nature of customer research, and the opportunities and risks of co-creation. Collaboration is looked at both in relation to inside an organisation and across supply and value chains. The people and technology aspects are explored; how increased uptake of fast ICT and web 2.0 tools combine to increase opportunities for innovation from everyone and everywhere, and stimulate customer-centricity. The third section looks at the implications for organisations and firms, focusing on the role of leadership; the importance of managing risk to enable learning from mistakes; the need for an agile workforce; the importance of culture; the challenges of assessing and measuring innovation capability and outputs; the relationship between innovation capability and skills; and the role of and skills of leaders and managers. Continuing the discussions – creating the community We hope by the time you’ve read the document you will be clearer about how important it is that New Zealand embraces a broad view of innovation. That you will have ideas and practices about how we can collaborate to improve the attitudes, skills and practices that will enable innovation from everyone and everywhere. That you will be keen to participate in an on-line community, and contribute your ideas, knowledge and links to other resources. The heart of the challenge, however, is not so much how to innovate but rather how to build innovative organisations – organisations capable of generating a constant stream of innovations that will increase profitability and growth over time… How do the companies stand out from the rest? They force change even when circumstances don’t. They drive breakthrough innovation by setting and holding the organization to “impossible goals”. They are values- and vision-driven, and their leaders are remarkably open to challenge. They are also deeply committed to their employees as the source of their success. They work hard to hire and retain the people they need, and they go to great lengths to reward them. Gibson and Karim, The Conference Board of Canada
  5. 5. 5 SUSTAINABLE INNOVATION APPROACHES FOR 21ST CENTURY NEW ZE AL AND “Real innovation is trying to identify problems other people haven’t discovered. When you solve those ones you delight people. The power of observation, and the discovery of latent needs.” “We need to turn great ideas, which are world class, into something that can be made consistently, and sold internationally around a great brand.” “Innovation is ubiquitous; it applies to every part of the supply chain. The vast bulk of our innovation occurs in systems, processes and relationships […] We have to be less product-centric in seeing innovation potential […] Innovation is a jigsaw with discovery being only one part.” As you can see, from the above quotes by New Zealand entrepreneurs, innovation has multiple dimensions. But essentially, it is about people creating economic or social value by implementing new ideas. Innovation can be incremental or radical. It applies to all aspects of an organisation or business. It could be something new to the firm or organisation; it doesn’t have to be new to the world. It could be using new knowledge or recombining already existing knowledge, technology or practice to create something new. While operational innovation, that is, new ways of organising the flows of production, is an important source of innovation, management innovation – substantial changes in the way in which the work of management is carried out to advance organisational strategy and goals – is now being highlighted as a critical dimension of innovation.1 As this includes the capability to capture the wisdom of every employee, an approach that has taken Toyota to # 1 car manufacturer status, it is very germane when considering how to support innovation from everyone and everywhere. Why does it matter? Innovation is widely regarded as being at the heart of economic development. The development, diffusion 1  Gary Hamel with Bill Breen, The Future of Management. Harvard Business School Press 2007. http://discussionleader.hbsp.com/hamel/ http://www. managementinnovationlab.com/ For an interesting commentary on Hamel’s perspective see John Hagel’s blog http://edgeperspectives.typepad.com/edge_perspectives/2006/02/hamel_on_ manage.html and adoption of new and existing technologies, the recombination of existing knowledge and ways of doing things, the development of new business models, and new ways of interacting with customers are understood to be central to growth in economic output and productivity – helping firms be more competitive. “If you are a true innovator, it doesn’t matter what the exchange rate is doing. If you’ve got an innovative product people want, they will pay a premium. You can be a price maker rather than a price taker.” Food and hospitality entrepreneur Only by taking a broad view of innovation can we understand the nature and range of the attitudes, skills, knowledge and behaviours required to develop the innovative capability of New Zealand workplaces and their people, and create the policies, support services, and programmes needed to accelerate returns from innovation. Traditional innovation policy The national innovation system has traditionally been seen as comprising researchers (principally located in crown research institutes and universities), businesses which turn research results into commercialisable products and services, and investors who provide the capital investment and seek a return from it. Last year the OECD reviewed New Zealand’s innovation policy.2 The OECD report noted that while many of the fundamentals are in place, New Zealand’s per capita GDP lags most OECD countries and that New Zealand’s investment in R&D is one third of the OECD average. The report recommended that New Zealand should focus on doing four key things: Promote innovation in the business sector»» Improve the business environment for innovation»» Improve the effectiveness of competitive research»» funding Improve the governance of the innovation system.»» 2  Innovation policy has ‘only recently emerged as an amalgam of science and technology policy and industrial policy’. The Measurement of Scientific and Technological Activities, Oslo Manual, OECD, 2nd ed, 1997, p. 6. http://www.oecd. org/dataoecd/35/61/2367580.pdf Third edition 2005 http://www.oecd.org/docu ment/23/0,3343,en_2649_34451_35595607_1_1_1_1,00.html WHAT IS INNOVATION? 1
  6. 6. 6 INNOVATION FROM E V ERYONE AND E V ERY WHERE In this discussion paper we focus on the first of the OECD’s key actions, how to promote innovation in the business sector: this term encompasses organisations that are run in a business like way but do not return a private profit, and community and social sector innovators. We’re looking at how to develop sustainable innovation capability through people practices. Taking a broader view The size and scale of much NZ innovation suggests that while some innovative organisations have leaders with big aspirations, many New Zealanders lack both confidence and a willingness to be global in their aspirations, and prefer to focus on the domestic market; innovation is not central to their business strategy. Therefore we’re looking beyond the classic view of innovation, and the formal national innovation system, and encouraging a broader view – innovation from everyone and everywhere; customer-centricity, and wider and deeper collaboration. As a leading Australian innovation advocate put it: Is the people side of the equation the next focus for all innovation policy, not just the Knowledge Intensive Service Activities?3 More than novelty and invention Returning to what is innovation. While there are many definitions, to repeat, innovation is about people creating economic or social value by implementing new ideas. As Irving Wladawsky-Berger, the recently retired Chairman Emeritus, IBM Academy of Technology and visiting Professor of Engineering Systems at MIT, said in his blog: “Technology is necessary, but not sufficient. More than ever, it is simply an enabler for innovation – whether you’re designing a new kind of production system, making retail stores more responsive to customers… , or seeking to become a globally integrated enterprise.  The key to success, I heard over and over in just about every talk and panel, is people. The innovation isn’t in the tools, but in how they’re used. And that means that we need to surround ourselves with the best possible people – employees, partners, researchers, customers – so that together we can tackle these very attractive but complex 21st century challenges.4 3  Dr Robin Batterham, formerly Chief Scientist, Australia, and now Chief Technologist at Rio Tinto Ltd, was commenting at the launch of the OECD’s Knowledge Intensive Service Activities (KISA) report in Sydney, March 2006. http://www.innovation.gov.au/index.cfm?event=object. showContent&objectID=5DA6DEB4-B930-59CE-84B05CEA5A4EEF88 4  June 25, 2007 http://blog.irvingwb.com/blog/2007/06/the-2007-ibm-bu.html Innovation is not simply novelty or invention. While science and technology remain of fundamental importance, it is more than formal research and development (R&D) based on science and technology; more than patents. To turn an invention or a bright idea into an innovation, it must be able to be replicated and scaled up to create value, which someone is prepared to pay for, or invest in.5 Increasingly it is seen as providing solutions, not about the creation of a single product or service: hence our focus on customer-centricity and collaboration.6 The US Department of Commerce, in March 2007, sought public submissions on measuring innovation, and provided this broad definition: The design, invention, development and/or implementation of new or altered products, services, processes, systems, organizational structures, or business models for the purpose of creating new value for customers and financial returns for the firm.7 In Peter Senge’s words, The idea becomes an innovation only when it can be replicated reliably on a meaningful scale at a practical cost.8 Increasingly, innovation is being seen as broad-based: not simply the preserve of technology firms but something that all firms can aspire to. Something that all people in enterprises are party to creating or supporting: as the Australians note: 9 10 Innovation is about ideas, and the transformation of those ideas into value creating outcomes – into products, processes and services. Innovations include breakthrough ideas that lead to new products or services, and incremental 5  Noting that many not-for-profit and voluntary organisations innovate, and do not charge directly, or at all, for services or products. 6  Innovation is increasingly being achieved through what Tapscott refers to as b-webs (business webs), which rely on collaboration and self organization more than ownership of either resources or knowledge. This is discussed more extensively in the section on collaboration. 7  Measuring Innovation in the 21st Century Advisory Committee. US Department of Commerce http://www.innovationmetrics.gov/ At their September meeting the Committee discussed initiating a survey of innovation in services as comprehensive as that in manufacturing. http://www.innovationmetrics.gov/PublicMeetings/091207/transcript%20 9.12.07.pdf 8  Peter Senge, The Fifth Discipline – The Art and Practice of the Learning Organisation. Double Day Business 2006 9  http://www.innovation.gov.au/index.cfm?event=object. showContent&objectID=01456E8B-9AB0-5155-6268C8BB6F389053 10  Case studies on this site illustrate the blend of R&D, science, customer engagement, marketing, people management, and adopting best practice business processes that enable firms to innovate http://www.innovation.gov. au/index.cfm?event=object.showContent&objectID=CCEBF2BD-65BF-4956- B5DA8E561663A29F
  7. 7. 7 SUSTAINABLE INNOVATION APPROACHES FOR 21ST CENTURY NEW ZE AL AND ideas which improve the way processes are undertaken, or products are manufactured. According to the Sloan Management Review, although innovation is recognised as critical to firms’ continued success: Many companies have a mistakenly narrow view of it. They might see innovation as synonymous with new product development or traditional research and development. But such myopia can lead to the systematic erosion of competitive advantage. As a result, companies in a given industry can come to resemble one another over time. In actuality, business innovation is far broader in scope than product or technological innovation. In fact, a company can innovate along any of 12 different dimensions with respect to its (1) offerings, (2) platform, (3) solutions, (4) customers, (5) customer experience, (6) value capture, (7) processes, (8) organization, (9) supply chain, (10) presence, (11) networking, and (12) brand.11 This is illustrated by the approach of a leading NZ retailer: “We innovate to stay ahead of the competition, through a combination of things: products; in- store environment; the way we market; customer retailing; bringing new things to customers; where we source from; how we package […] We have to manage the risk that we have too much on the innovation plan. We do business cases – short and long – then post-implementation reviews.” The OECD review emphasised that innovation is not the preserve of large, R&D intensive technology companies, but can be applied to business practices in small firms: Innovation is not just about new science and technology; that changes in markets, business practices, activities and organisations play a vital role; that all small companies and not just fast growing high-technology SMEs need outside help with the adoption of new business practices.12 Again, reflected in the practices of small, service companies in NZ: “Innovation is ubiquitous; it applies to every part of the supply chain. The vast bulk of our innovation occurs in systems, processes and relationships […] We have to be less product-centric 11  http://sloanreview.mit.edu/smr/issue/2006/spring/14/ 12  OECD Reviews of Innovation Policy: New Zealand, OECD, 2007. http://213.253.134.43/oecd/pdfs/browseit/9207071E.PDF in seeing innovation potential […] Innovation is a jigsaw with discovery being only one part.” The implication of this broad view of innovation is that the knowledge and skills needed to innovate and to absorb innovation must be widely distributed, not sequestered within universities, crown research institutes, and technology firms. We should consider the drivers of this new and broader understanding of innovation, in particular, the skills that build our collective capacity to initiate, absorb, support, organise, manage and exploit innovation in its many forms. This would include developing an education system and curriculum that prioritises the foundation skills for innovation – analysis, problem-solving, creativity, imagination, resourcefulness and flexibility. 13 Harnessing hearts and minds – a ‘whole of nation’ approach Finland is recognised as a highly innovative country, ranked third in the European Innovation Scorecard. The Finns are evolving their view of innovation from the ‘waterfall model’, based on the notion that the amount of basic research affects the number of innovations and thus determines the growth rate of production and subsequently of employment, to a broader view. While science and technology frequently form the foundation of innovation, and enable innovations in services, what is necessary is an innovation culture that fosters innovative solutions and applications throughout the Finnish economy and society.14 The Finns recognise that small countries have special problems – and that to enhance their capability, the whole country must support the practice of innovation: A small country cannot manage unless it is able to utilise the talent of the entire population. The motivation of individuals to learn and to utilise their know-how creatively is the foundation of the innovativeness of society.15 The OECD review of New Zealand’s innovation policy recognised the critical role of skill development in building innovative firms. The report called for: a mutual commitment between firms and 13  NESTA, Policy Briefing on The Innovation Gap: why policy needs to reflect the reality of innovation in the UK, Research Report, October 2006. http://www.nesta. org.uk/informing/policy_and_research/policy_briefings/innovation_gap.aspx 14  Annual Innovation Policy Trends and Appraisal Report Finland 2006. European Commission Innovation/SME programmes http://www.proinno-europe.eu/docs/ reports/documents/Country_Report_Lithuania_2006.pdf 15  Making Finland a leading country in innovation. Final report of the Competitive Innovation Environment Development Programme 2005 Sitra. www.sitra.fi
  8. 8. 8 INNOVATION FROM E V ERYONE AND E V ERY WHERE their employees so that firms have an incentive to invest in training while employees have an incentive to acquire knowledge and skills specific to the firm in which they work.16 Finally, UK commentator Charles Leadbeater has proposed that innovation should be central to national identity – that innovation is not something that belongs in R&D departments or science organisations, but in the future should be the preserve of everyone, everywhere. He advocates that we; “position ourselves as a society of mass innovation, a place where creativity and innovation are everyday activities, practised in many settings, by many people. Innovation as not just something done for the masses but by the masses. Our future will turn on how we develop, attract, retain and mobilise creativity from all sources within our society and apply creativity systematically in all walks of life, from health and education, to arts and business, science and industry.”17 Our discussions with innovative New Zealand companies confirms this 21st century approach to innovation – that it requires bold ideas about products and services AND innovation applies to all aspects of an organisation. “We apply innovation to the tiniest detail which allows you to improve the product. It’s not just about the Big Idea.” Leading NZ manufacturer The leaders of the companies with whom we had discussions saw innovation as ranging from fixing what was wrong with what they already had to creating and implementing innovations in the way they did things, not just by launching new products and services – “it is a total way of business”. Innovation was seen as a critical way of staying ahead of the competition, and focusing on value rather than being fixated with the exchange rate. It needs, therefore, to be supported by a culture that encourages everyone to contribute ideas, and the sorts of workplace practices that enable everyone to turn ideas into tangible forms of value. 16  OECD Reviews of Innovation Policy: New Zealand http://213.253.134.43/oecd/ pdfs/browseit/9207071E.PDF 17  Charles Leadbeater ‘The Ten Habits of Mass Innovation’ Provocation 01 NESTA November 2006 http://www.nesta.org.uk/assets/pdf/ten_habits_of_mass_ innovation_provocation_NESTA.pdf Innovation in services18 Innovation has historically focused on products, and on manufacturing physical items. Given that the size of the services sector in developed economies is between 65 and 80 percent of tradable products; the way products are now being ‘suffused’ with services; and their contribution to employment growth, many countries are now paying special attention to services in their thinking about innovation.19 Concerns about the need to understand the dynamics of innovation in services have found substance in the last few years with significant symposiums and workshops being held, and research reports being published, in the UK, Finland, Japan, Australia, and Ireland. 20 21 The EU is also considering the innovation dynamics of services. Member states are addressing issues ranging from the need to adapt the existing or to develop new tools and instruments (policies); mobilising the expertise of practitioners; refining systems for measuring innovation in services; whether current policies are sufficient; and the additional knowledge or assistance that will enable firms and organisations to capitalise on the growth in services. Whether they make goods, such as cars or industrial equipment, or provide financial, retail, leisure, entertainment, or learning services, companies are increasingly offering a fusion of product and service in regard to what they’re selling, how it is produced, and how it is distributed or consumed. “While we provide a physical product, the value we provide is in the end-to-end service: speed and flexibility […] we need to know how the retail seller wants the product displayed, and what sort of staff training they provide […] There’s a high turnover in sports shops so we build innovation 18  A paper on innovation in the services is being prepared 19  For example, services account for 70% of US GDP and contributed 2% to aggregate employment growth between 1990-2002. 20  NESTA http://www.nesta.org.uk/hidden-innovation-research-reports/ ; TEKES report Finland www.tekes.fi/eng/publications/innovative_service.pdf ; Services Innovation in Ireland: Options for Innovation Policy http://www.forfas.ie/ publications/show/pub242.html http://www.wtoconsultation.ie/publications/ show/pub242.html : Japan, REITI forum on Productivity Growth in the Global Economy: Innovation in the Service Sector and the Role of Intangible Assets June 2007 http://www.rieti.go.jp/en/events/07062201/handout.html OECD CSTP meeting Sydney March 2006: Howells, University of Manchester Where to from here for services innovation paper presented at KISA conference Sydney March 2006. KIBS and their role in innovation Pim den Hertog; Services A sleeping giant? Dirk Pilat, OECD Science, Technology and Industry Directorate  April 2005; Kuusisto Jari. The Character of Service Innovation – Learning from the OECD KISA project Oslo, October 25-26 2005; Innovation in the Service Economy – a business perspective Vorster, Gerhard Managing Partner, Consulting Deloitte Australia & Asia Pacific Japan Region Presentation to OECD CSTP meeting Sydney March 2006. 21  Previously it may have been assumed that services were low-tech and therefore not innovative or not doing R&D, as it was defined in the NIS: rather users/adopters of others’ innovations and technology.
  9. 9. 9 SUSTAINABLE INNOVATION APPROACHES FOR 21ST CENTURY NEW ZE AL AND into our relationships and support systems so it’s easier for their retail staff to have the knowledge they need to sell the product effectively.” Globally focused science based personal products entrepreneur The fusion of products into services, or the wrapping of services into products, was signalled over a decade ago by researchers and writers such as Quinn and Schrage. While his coinings provices and serducts never caught on, Schrage was prescient in noting that “product companies want to become service companies and service companies want to become product companies. Each feels the other has the necessary ingredients for innovation, competitiveness, and growth. Each fears its own business is caught in the death spiral of declining margins and commoditized relationships.”22 In its 2006 report to the UK Government, the Council for Science and Technology (CST) reflected the concerns of business about the need for innovation policy to meet in a more systematic way the needs and opportunities for innovation in the services sector.23 In the UK the National Endowment for Science, Technology and the Arts (NESTA) has published two reports on the hidden dimensions of service innovation and the need to support it more effectively.24 In June 2007 the CST released an occasional paper, Innovation in Services.25 As the Chief Economic Advisor and Director General of Economics at DTI (now the Department of Business, Enterprise and Regulatory Reform), noted: “Research conducted for this report emphasises the importance of non-technological innovation in the economy. One of the findings is that the full utilisation of technology often requires firms to use it in an innovative way and this is often accompanied by changes in skill mixes and organisational changes. Knowledge of the customer, i.e. the ‘demand side’ of the equation, is particularly important as many services are simultaneously created and consumed at the same time. In some instances, co-ordination across several organisations is necessary to facilitate innovation, for example, in making better use of airport runway space. This project also highlights several well-known areas of importance for innovation policy such as the 22  Michael Schrage. http://www.fastcompany.com/online/04/fcke.html 23  Innovation in the Services Sector http://www.cst.gov.uk/cst/reports/files/ services_letter.doc 24  Op cit. 25  DTI Occasional Paper No. 9 Innovation in Services, June 2007. http://www.dti. gov.uk/about/economics-statistics/economics-directorate/page14639.html diffusion and adoption of technologies. The findings are relevant to thinking about innovation throughout the economy. Increasingly, firms do not consider themselves to be ‘services’ or ‘manufacturing’ but providing solutions for customers that involve a combination of products and services. Improving understanding of services innovation complements the better-established knowledge of manufacturing innovation.” Reflections and provocations How well is our innovation system configured to1. take advantage of these changes? What are the challenges of creating an2. approach to innovation based on ‘Innovation from everyone and everywhere’? What are the opportunities? How much shared understanding do we have3. among government agencies, and between government and social partners, of what innovation is; how it takes place; the changes in practices by players overseas and in New Zealand that reflect 21st century realities; and, more importantly, opportunities to stimulate more innovation? How well do our policies and services support4. the range of innovation activities – including innovation in services? What gaps are there?5. How should they be filled?6. What would it take to engage the ‘hearts and7. minds’ of more New Zealanders in innovation?
  10. 10. 10 INNOVATION FROM E V ERYONE AND E V ERY WHERE Innovation is contextual, and a combination of serendipity and purposefulness: ‘under the radar’ and managed processes. While contextual, we think there are three principles that are at the heart of New Zealand being able to innovate more dynamically. These are: Innovation from everyone and everywhere1. A customer-centric approach – to existing and2. potential customers Collaboration – within and across organisations,3. with suppliers, customers and knowledge providers. i Innovation from everyone and everywhere We see the need for an approach to accelerating innovation in New Zealand that encourages innovation from everyone and everywhere. To promote innovation in business, encourage SMEs to generate new ideas and approaches, and develop the capability to implement innovations, will require a ‘whole of organisation’ and ‘whole of nation’ approach. Our learning, reinforced by innovative NZ business leaders we talked with, is that ideas and innovations are not confined to those formally involved in R&D; to lone geniuses or highly technically qualified individuals. Indeed, successful execution of ideas requires a whole of workplace involvement, customer-centricity and collaboration. “We’ve got thousands of people […] can’t drive innovation through one person, we need a shared sense of why innovation is important […] If someone has an idea, give them the freedom to do it. We’ve got a version of Dragon’s Den that provides the opportunity to get buy-in from management. It’s about not feeling everything needs to end up on the CEO’s desk for approval. Give people the autonomy to do things. If they have responsibility for profitability of a SBU, then they are responsible […] at work we have a built in defence system, we have a reflex action that says NO. We have to recondition that reflex, shut up and listen more.” Large service company “Give people permission to do anything … have an overlap of roles …push the ownership into the organisation …but only certain people take it […] we let everyone do it, we don’t single people out. When they come into the organisation it is important that they have a chance (to contribute) […] Only need so many crazy people, need balance from consistent people to make things happen.” Leading NZ manufacturer “We’ve got a nice balance in staffing … entrepreneurial flair and commercial acumen and then specialist people in other facets of the business – production managers, café manager, kitchen head chef – all […] we have innovation in products, menus, processes in the production area. We’re having to be more innovative in our sales and distribution, and rely on knowledgeable telephone staff.” Food and hospitality operator Innovation from everyone and everywhere is a radical idea, but we believe it is increasingly the practice of sustainably innovative organisations and, as we have seen, it is the way of the future for highly innovative countries such as Finland. Our #8 fencing wire culture and ‘give it a go’ approach, while sometimes criticised as not being appropriate for modern innovation are, in fact, valuable for harnessing the almost innate talent New Zealanders have for innovation. They are particularly powerful when combined with the recent focus on design and branding. How can we foster innovation from everyone, everywhere? We advocate an approach that: Understands the»» current and potential needs of customers, users, citizens (the demand side) and involves these people in developing innovations Provides support for the»» diversity of approaches to innovation – products, services, organisational processes, business models, customer experiences and interactions – from the radical to the incremental Understands the»» social and cooperative aspects of Three Key principles 2
  11. 11. 11 SUSTAINABLE INNOVATION APPROACHES FOR 21ST CENTURY NEW ZE AL AND innovation and how to support this Understands the»» diverse range of skills required and how to create such a skilled workforce Encourages innovation-responsive»» workplace cultures with supportive attitudes, practices and behaviours Recognises that firms have to»» manage continuity and change at the same time – exploit the familiar and explore the unknown Supports firms to»» collaborate more effectively with innovation partners – customers, suppliers, intermediaries, researchers – nationally and internationally Recognises the power of»» design, the arts and humanities as integral to innovation, alongside science and technology Exploits»» ICT platforms and social network technologies to support innovation in respect of processes, content, products and services. The leaders of the NZ companies we spoke with reinforced the need to liberate employees to put forward their ideas, to own their ideas, to let people question constructively. To give people the freedom to explore and be creative, to discover problems and craft solutions: to make mistakes and learn from them. They emphasised the need to be continually on the look out for good ideas, new ways of doing things, questioning the status quo. They relied on passionate and knowledgeable staff to maximise opportunities to suss out ways of improving and innovating. The power of employees to contribute is reinforced by the 2007 PricewaterhouseCoopers Clever Companies/EMA survey where over two-thirds of respondent organisations said they created new products with the primary source of ideas being their own staff (81%). The next largest source of ideas was consumers (77%).26 ii Customer-centricity Innovation is turning new ideas and knowledge into products, services and processes that create value for the user or consumer. Increasingly, successful innovators in New Zealand and overseas are involving their customers in the innovation process: co-creation and collaboration. In this section we consider the role of customers in the innovation process, explaining why innovation must be customer-centric. This means harnessing the 26  Behind the Walls & Inside the Minds of Kiwi Companies. PricewaterhouseCoopers Clever Companies/EMA Survey in conjunction with the University of Auckland Business School June 2007 http://www.pwc.com/extweb/ pwcpublications.nsf/docid/F494DCAA09FC1F98CA257361000A3B78 intelligence that can be gathered by employees who are in contact with customers, as well as delving deeply into customers’ needs through direct and indirect research. “The key focus for us is ‘what do customers want?’ and ‘what’s wrong with what’s on offer already?’ We actively seek advice from our customers, by email, phone and video, to get information about what they’re looking for […] Our customers are multiple: distributors, wholesalers and retailers, as well as our end users.” Internationally focused science based personal product entrepreneur “… giving people permission to enable them to have conversations about their ideas, bring out their ideas so they now know what is important to the business … we have given them a way to have a story with us, so we have said that it is really absolutely critical for us to put the customer at the centre of everything we do.” International financial services company operations manager Innovative companies use customers in new ways by harnessing lead users; adopting co-creation practices demonstrated by lead users and advocated by leading innovation theorists and researchers.27 Some commentators identify lead customers as critical. Others make a distinction between lead customers and lead users. Lead users, as von Hippel noted in Democratising Innovation, are already innovating, whether they be skate-boarders, medical professionals, software designers, or Lego users. They’ve adapted, customised or invented something that works for them. Understanding customers’ needs or opportunities is now a more sophisticated form of social science than the traditional marketing approaches of focus groups or questionnaires. Innovative companies are increasingly using ethnographic customer ‘immersion’ practices.28 Designers refer to this as diving deep into what people want to improve their situations or lives. Customers are fundamentally changing the dynamics of the marketplace. The market has become a forum in which consumers play an active role in creating and competing for value. 27  Eric Von Hippel, Democratising Innovation http://web.mit.edu/evhippel/www/ Under the creative commons license the book can be downloaded. 28  These involve ‘living in’ types of observation, or asking people to record in multiple media, their own experiences. Rae provides a metric on how customer- centric innovation impacts on profitability, and this site also has a videocast with Rae outlining her perspective. http://www.businessinnovationfactory.com/ weblog/archives/2007/07/the_financial_u_1.html
  12. 12. 12 INNOVATION FROM E V ERYONE AND E V ERY WHERE The distinguishing feature of this new marketplace is that consumers become a new source of competence for the corporation. The competence that customers bring is a function of the knowledge and skills they possess, their willingness to learn and experiment, and their ability to engage in an active dialogue…29 Some commentators, using the Henry Ford argument (“if I’d asked my customers what they wanted, they’d have said ‘faster horses’ ”) say that current customers only know what they know or have, so cannot be sources of innovation.30 Others make the point that it’s the customers that you don’t have, and the customers you could have, who are most important for innovation. Companies usually have tons of data on current customers who use their products and services, plus data about customer satisfaction, perceptions and preferences within the industry category. This type of data is mostly useful in learning how to do the same kinds of things a little better. However, it’s not very useful for learning what different things to do to serve current customers and rarely tells you anything about non-customers who avoid your brand or category completely.31 Yet the imperatives for taking a customer-centric approach to innovation are many: the growth of services as a proportion of GDP and of employment; the increasing demand for sophisticated and personalised/ customised products and services (experiences); the increasing availability of ICT and the Internet to provide an innovative range of services and delivery models, many involving co-creation by customers; lastly, the greater opportunities for SMEs to provide innovative service and product solutions. Collaborating with lead users/customers reduces the likelihood of failure. By working with lead users, soliciting ideas from customers, or enabling customers to collaborate in terms of design or features, firms reduce the likelihood of producing a product that misses the market. Some companies ask for a commitment from a customer to purchase the innovation before they begin production.32 29  C K Prahalad & Venkatram Ramaswamy, Co-opting Customer Competence. Harvard Business Review, Jan-Feb 2000. 30  Ironically, Henry Ford’s management innovation – the assembly line production – resulted in his company losing its capacity to innovate. Kathleen Franz, an American historian, in her work, Tinkering: Consumers reinvent the early automobile, reveals how passionate enthusiasts and amateurs drove many of the innovations around automobiles. http://www.upenn.edu/pennpress/book/14136.html 31  http://www.doblin.com/what/InnovDiscFS.htm Click on red dot “Few deep insights into unmet customer needs”. 32  Susumu Ogawa and Frank T Piller, Reducing the risks of new product development. MIT Sloan Management Review 47, no. 2 Winter 2006. The power of firm-customer relationships to drive innovation was reinforced by Forrester Research, where they identified five distinct customer experience strategies that companies use to disrupt an industry: ultra-simplification, online infusion, service infusion, service amplification, and value repositioning.33 While they note that these strategies may not make sense for all firms or all industries, they suggest that every company should expect at least one of these approaches to challenge the status quo in their industry. In other words, if you don’t innovate, someone else will! Forrester also note the importance of organisational culture and business processes, which we discuss later, in driving better customer experiences.34 Companies place a high priority on improving customer experience — and they cite a lack of organizational alignment as their top obstacle to making improvements. But our interviews with experts show that there is no single organizational structure that paves the way for delivering better customer experiences. Cultural factors and internal processes matter far more than organization. Specifically, firms must: 1) build a shared understanding of how to think about customer experience and 2) put the process and skills in place to make improvements. Further, they advocate that companies adopt formalised programmes in order to more deeply explore different sorts of customer insights – be able to truly hear the voice of the customer. Such moves have significant implications for the skills of not just traditional sales and marketing roles, but every employee who interacts with customers. This has implications for how R&D is defined and supported by the government’s national innovation system. Nakajima has identified a new way of collaboration with customers with the emergence of ubiquitous networks – web 2.0 – whereby consumers, irrespective of geography and demographics, can be invited to participate in decisions about design and production.35 Nakajima terms this ‘collaborative marketing’. A plethora of web sites enable consumers to give feedback on offerings; request personalised combinations of services or products; or offer ideas for new products and services. 33  http://www.forrester.com/Research/Document/Excerpt/0,7211,40813,00.html 34  http://www.forrester.com/Research/Document/ Excerpt/0,7211,38806,00.html March 2006 35  H Nakajima , Marketing Strategy in the Era of Ubiquitous Networks. Nomoura Research Institute No. 44 March 1 2002 www.nri.co.jp/english/opinion/papers/2002/pdf/np200244.pdf
  13. 13. 13 SUSTAINABLE INNOVATION APPROACHES FOR 21ST CENTURY NEW ZE AL AND Companies, obviously, have to make the decision to commercialise based on their strategy and their assessment of the cost-benefit ratio. However, given the evidence of most innovations having less than 5 per cent success rate, the new approach to customer collaboration should improve the chance of success.36 As Ogawa and Piller note, using web 2.0 technologies to explore the feasibility of ideas and the extent of early adoption can be cheaper and better than traditional methods of consumer research, and may enable firms to reduce the risks of new product development.37 38 A working example is cuusoo.com, which is a virtual market place launched in 1999 and, according to their web site, now holding 20,000 people’s wishes about their desired products. Of 120 customer-proposed designs, 20 received enough orders to be manufactured and are available for purchase. Another 7000 ideas have been posted and are waiting to be designed. While understanding customers’ current and future needs is considered to be critical to reducing the risks of new product development, alongside collaborating with them to develop new products and services, it is not risk-free in itself. Various risks have been identified within the business-to-business area, along with ways of mitigating them. The risks have implications for workplace practices and skills.39 The key risks identified by Enkel et al include: Loss of know-how if customers choose to use the»» company’s knowledge for their own purposes or link up with a competitor – a customer may claim joint or sole ownership of the ideas. Becoming dependent on the customer’s demands or»» personality; balancing having a ready buyer for the innovation with the opportunity to sell to anyone. Customers’ perspectives limiting the innovations»» to incremental ones. Both internally and externally, people who derive status and revenue from existing ways of doing things can stand in the way of disruptive innovations, especially if they stand to lose existing market share or their current product or service becomes obsolete. 36  http://www.boozallen.com/publications/article/981406 37  Op cit. 38  A recent development is the use of virtual reality environments for market research, particularly using avatars with teenage consumers. BusinessWeek article on the Sulake Corporation's surveying of the teenage community on their Habbo internet. community.http://www.businessweek.com/innovate/content/ aug2007/id20070813_140822.htm A growing number of companies are using Second Life to test drive or market research new products. 39  Enkel E., Kausch C., Gassmann O.,‘Managing the Risk of Customer Integration’, European Management Journal Vol. 23, No. 2, pp 203-213, April 2005. http:// www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6V9T-4FXWWWP-2&_ user=10&_coverDate=04%2F30%2F2005&_rdoc=1&_fmt=&_orig=search&_ sort=d&view=c&_acct=C000050221&_version=1&_urlVersion=0&_userid=10&md 5=08c5f798b6585d3e0ddae4f3cd78b2df Misunderstandings between customers and»» employees. Personalities and character can help or hinder the process. Losing the knowledge once it gets inside the»» organisation because of silo organisational structure, cultural practices and internal politics (not-invented-here syndrome). The extent of these risks is situation dependent. A key skill for innovating with customers is therefore assessing the balance of value from opening up the innovation process, then managing the negotiations and relationships involved, internal and external: having systems in place to derive full value from the collaboration. A related question is how much to protect the ideas and developments formally, given that the option of trade secrets has been traded off for customer intimacy. iii Collaboration Collaboration is the new foundation of competitiveness … the exchange of knowledge among people allows them to communicate complex ideas and to collaborate in creating value […] The focus is on how organizations can successfully engage and collaborate with self-organized communities inside and outside the firm to achieve competitive advantage.40 The principle of collaboration covers not only collaboration within and across functions within an enterprise but also collaborative activities that take place outside the boundaries of the firm or organisation. Of increasing significance is the use of networks and intermediaries, and collaborative innovation techniques such as distributed innovation, and connect and develop (C&D). This term was coined by Proctor and Gamble (P&G) to describe their approach to innovation when Andrew Lafley, the new CEO, decided to revolutionise the way P&G innovated by determining that 50 percent of innovation would be sourced externally.41 Having strong in-firm capability doesn’t prevent companies, such as the leading US furniture company Herman Miller, from seeking outside help for innovation. Horizontal linkages or collaborations, inside and outside of organisations, are increasingly being enabled through social network tools, such as shareware, wikis, virtual forums and blogs (known as web 2.0 and enterprise 2.0). We discuss these at the end of this section. 40  Don Tapscott, Winning with the Enterprise 2.0. http://204.15.36.164/media/ Winning_with_the_Enterprise_2.0.pdf 41  http://www.businessweek.com/magazine/content/04_41/b3903463.htm http://hbswk.hbs.edu/archive/5258.html In 2005 this included New Zealand http://www.uniservices.co.nz/pageloader.aspx?page=807d3d0d76
  14. 14. 14 INNOVATION FROM E V ERYONE AND E V ERY WHERE While every innovation can be traced back to individuals, it is collaboration among creators that brings disruptive innovations over the tipping point.42 Rarely the lone genius A key dimension of collaboration within the organisation is team work, which we discuss in the next section. But it’s appropriate to begin our discussion on collaboration by questioning the received wisdom that creativity and innovation is about the genius, the lone individual. 43 Increasingly researchers and ‘experts’ are suggesting that innovation is the result of group or team activity. In his recent book, Group Genius, the Creative Power of Collaboration, Keith Sawyer, a psychologist at Washington University, reinforces the importance of collaboration and the ingredients we’re suggesting are important for improving innovative capacity in the workplace: Diversity works. Increase the variety of people,»» and you increase the pool of potential ideas. Don’t worry about who gets credit.»» When everyone genuinely collaborates, everyone ends up being more creative. Build on past ideas, whether or not»» they’re yours. Stay on top of what everyone else is doing, and be open to inspiration from other people’s ideas. Clarity is not a virtue. If everything you»» say is detailed and explicit, you won’t give your collaborators room to run. Put ideas out there that are half-baked, ideas where you’re not even sure what it means yet. Create a large network of colleagues, and»» stay in touch constantly. Put yourself at the centre of a creativity web. Put yourself in an environment that rewards»» failure. Creativity is risky; successful creative people are also the ones who fail the most often. Creativity is inefficient. Don’t expect every»» idea and every project to pan out. Know when to cut your losses and move on.44 The importance of collaboration is further reinforced by Howard Gardner, a Harvard professor of cognition and education, with his discovery of five types of minds, one being the creating mind, which needs to work alongside 42  Tapscott Op cit. 43  While incremental innovation is deemed to result from individuals concentrating on solutions to ‘regular’ problems, the execution of solutions frequently benefits from shared knowledge. 44  http://www.artsci.wustl.edu/~ksawyer/groupgenius/advice.html the others – disciplined, synthesizing, respectful, ethical – to enable new knowledge to be generated and implemented.45 46 In the UK’s Confederation of British Industry QinetiQ report, the proportion of respondents involved in collaboration with external specialists to support their innovation work had risen from 75% in 2001 to 98% in 2004.47 The authors noted that companies particularly mentioned the need to innovate throughout the supply chain and to outsource innovation work to the most appropriate level. Companies were also increasing their collaboration with universities to access knowledge and specialist ideas and skills. Companies’ ambivalence around doing this was put down to cultural differences between companies and universities: a point reinforced in the Innovation Working Group workshop on the role of intermediaries.48 While many NZ companies understand the value of collaboration, there is not as much evidence in NZ that it is seen as an essential aspect of innovation, which is of concern given the small size of most of our firms (in global terms) and the need to scale up to be competitive internationally. Indeed, there seems to be a tension between our great potential to collaborate because we’re small and physically close to each other and our fear that by collaborating we might advance our domestic competitors.49 However the importance of setting strategy in collaboration with stakeholders was noted by a number of entrepreneurs and innovators we spoke to. As innovation is increasingly dependent on contributions from a diverse value creation network, people commented that it was essential to ensure that everyone benefited in ways that were meaningful to their organisations. 45  Howard Gardner, Five Minds for the Future. Harvard Business School Press, 2006. Gardner makes an interesting distinction between the creator and the expert, which is pertinent to knowledge intensive businesses, namely features of temperament, personality and stance. He notes that the creator is perennially dissatisfied with current work, standards, questions, and answers. She strikes out in unfamiliar directions and enjoys – or at least accepts – being different from the pack. When an anomaly arises, she does not shrink from that unexpected wrinkle: indeed, she wants to understand it and to determine whether it constitutes a trivial error, an unrepeatable fluke, or an important but hitherto unknown truth. She is tough skinned and robust. He goes on to note that “only a person who is willing to pick herself up and ‘try and try again’ is likely to forge creative achievements.” But as he goes on to note, quoting Amabile, most workplaces marginalise or fire deviants, reflecting the tensions identified by Hirshman in his work on Exit, Voice and Loyalty. hgasst@pz.harvard.edu 46  Video interview with Howard Gardner http://www.teachers.tv/video/5452 47  Investment in Innovation. An analysis of business investment in innovation and the implications for public policy. Confederation of British Industry QinetiQ Report. March 2007 www.cbi.org.uk 48  IWG Intermediaries workshop, 29 June 2007. Ministry of Research, Science and Technology 49  See sections on “How good are we at collaborating?” in ‘Science and Technology Adoption in the Vegetable and Savoury Foods Sub-Sector’ report for the Innovation and Skills Working Groups of the Food & Beverage Taskforce. Owen Harvey & Carmen Gray July 2006 www.nzte.govt.nz/common/files/fbtaskforce- scienceandtech.pdf
  15. 15. 15 SUSTAINABLE INNOVATION APPROACHES FOR 21ST CENTURY NEW ZE AL AND R&D or C&D? Internationally connect and develop, or C&D, is becoming increasingly significant in innovation. Open market or distributed innovation is being taken up by companies who are purposefully seeking outside sources in order to: share the costs and risks of innovation, particularly»» where it involves expertise outside of the firm gain new knowledge, or existing knowledge, faster»» and cheaper undertake research and development»» create complementary technology partnerships»» leverage knowledge into non-traditional business»» areas create virtual global partnerships»» integrate suppliers into the development process»» integrate lead users/customers into the»» development process trade patents and knowledge on the open market»» work with previous or existing competitors»» reduce development and implementation time»» achieve scale.»» While an open-market approach will not suit all industries or firms, new product and service innovation is increasingly being seen as a distributed activity that relies on international, multi-disciplinary collaboration. The benefits of this approach to innovation are obvious in respect to large organisations. It helps them avoid become moribund with their internal view of what could be a ‘best seller’; access global talent pools; monetise theirs and others IP more effectively; and benefit from the nimbleness of smaller entrepreneurs. The locus for innovation is no longer considered to be the individual or the firm but increasingly the network in which the firm is embedded. 50 51 Firms use networks that incorporate a range of external parties: suppliers; customers; lead users; trade allies; knowledge sources; and competitors. Such collaboration occurs locally, nationally and internationally, across disciplines and functions. It is increasingly central to innovation. Through 50  The power of networks, based on Metcalf’s Law, which says that the value of a network is the square of the sum of its nodes, means that firms who can access networks to assist with innovation are able to get an exponential return on the investment they make in innovating. ICT increasingly enables companies to tune into other networks to ‘develop and test drive’ their ideas and prototypes, and increase the speed with which they can develop realistically implementable innovations. 51  Networking and Innovation in the UK: A Systematic Review of the Literature. AIM Research February 2004 http://www.insme.org/documenti/networking.pdf Also look at http://www.aimresearch.org/publications/creating.pdf borderless collaboration, firms can source the range of competencies and partners they need in order to innovate. The linkages firms make are contextual. They vary depending on the nature of the firm and its markets, whether an innovation is incremental or radical, based on technology, production, or organisational factors. These factors affect how knowledge is sourced and deployed. As knowledge management experts emphasise, effective collaboration, which is a form of knowledge management, depends on people interacting with each other in ways that demonstrate high human values of trust and engagement.52 Hence, how work is organised becomes central to a firm’s innovation capability; how people are empowered to connect horizontally, rather than being directed through a vertical hierarchy of command and control; how people within an enterprise are able to link with parties outside. While noting the need for more research into networks and innovation, the findings of the UK Advanced Institute for Management’s systematic literature review on networks identified the valuable role of networks: Firms’ informal and formal relationships with»» multiple diverse organisations have a positive impact on innovation and performance. The integration of suppliers, co-suppliers and»» distributors in innovation projects has a positive impact on the productivity of individual firms, and the likelihood that the innovation will succeed. Third parties, science partners and institutional»» mechanisms (e.g. incubators) play an important role by creating a network infrastructure and can act as neutral network brokers between firms. Effective venture finance networks can enable»» better opportunities for commercial success when firms innovate. Firms need to actively manage network»» relationships, and what they gain from such relationships depends on their prior experience and network management competencies. There are many different forms of network»» configuration and these differ depending on the form of innovation, industry and the purpose of the network. Some networks can prevent innovation and be anti-competitive. 52  Points highlighted in a videoconference between Larry Prusak and Work Directions, Department of Labour March 2007. Larry Prusak has run workshops in NZ on knowledge management. He currently co-directs “Working Knowledge,” a knowledge research program at Babson College, where he is a Distinguished Scholar in Residence. http://www.laurenceprusak.com/
  16. 16. 16 INNOVATION FROM E V ERYONE AND E V ERY WHERE Networks fail for a variety of reasons – government»» intervention can act as both a positive and negative force affecting the sustainability of particular networks and network infrastructures. Personal and informal relations often drive the»» effectiveness of networking between firms. High trust is a critical ingredient In his work on social capital and networks Ronald Burt (a sociologist and business strategist) describes an inherent tension in networking between the diversity of reach achieved by brokerage across networks with weak ties and the importance of closure, which is achieved by tighter, more homogenous networks.53 Brokerage exposes people to variations in practices and perspectives, thus supporting greater knowledge trading and more innovative solutions, but this depends on establishing trust across distance. As many people are unable to broker beyond existing connections, or are not skilled at it (noting that Burt’s experiments show it can be taught: how to upskill people in building trust is another matter), the availability of skilled, professional network brokers or intermediaries becomes crucial in a distributed, open-market, global innovation system. An emerging service of intermediaries and brokers As innovation becomes a more complex and distributed activity, it needs more sophisticated and formal techniques of co-ordination. Overseas a range of companies are emerging to provide services as intermediaries and brokers. A selection is sketched below: there are increasing numbers coming into what is being termed the ‘innovation bazaar’. InnoCentive»» – a US web based brokerage and prize offering company where businesses list the R&D issues for which they are seeking solutions and scientists can register as solvers and provide initial solutions on-line. http://www.innocentive.com/ NineSigma»» – a US company with an international network of R&D expertise that helps client companies develop RFPs and source solution providers from across the globe. http://www.ninesigma.com/innovation-seekers YourEncore»» – businesses wanting solutions to innovation issues are linked to a network of retired scientists and product developers. http://www.yourencore.com/jsp/how.html 53  Ronald S Burt, Network Duality of Social Capital [June 2007]; Teaching Executives to see Social Capital: Results from a Field Experiment (August 2006); Brokerage and Closure: An Introduction to Social Capital (Autumn 2004). University of Chicago Graduate School of Business. ron.burt@chicagoGBS.edu IXC»» – An Australian (and now in the UK) commercially neutral and private not-for-profit, global knowledge network that deploys PhD qualified, creative and technically skilled intermediaries into clients’ organisations on a part-time basis. The role of the intermediary is to understand the organisation’s capabilities and needs and connect them with external opportunities and resources. http://www.ixc.com.au Innovation Design Bank IP Portal»» – A UK based IP trading portal for the design community that enables ‘safe’ collaboration between designers, originators; commercial and social entrepreneurs; academia; industry and dealmakers. http://www.britishdesigninnovation.org/ ?page=newlook/innobank Science-Business Network»» – A news network to encourage enterprise in science. It comprises alumni, staff and students of leading universities; leaders in corporate R&D management; and experts in intellectual property law, technology investing and business development. Its mission is to connect buyers and sellers of emerging technologies across institutions, across borders, across disciplines. http://www.sciencebusiness.net/info/about_us.php The above organisations: Provide a brokering service for matching solution»» seekers to solution providers Spot opportunities between companies and»» research organisations, and companies and companies, to collaborate on joint ventures where a scientific discovery can be used in a ‘non-traditional’ market opportunity Provide a neutral space to explore IP trading»» opportunities. New Zealand has a range of intermediaries and ways of linking knowledge generators (researchers) and firms, which, it would be fair to say, has developed in an ad hoc way. They include Regional Economic Development Agencies (EDAs), university commercialisation offices and also various central government schemes such as MED’s Biz and FRST’s Technology New Zealand schemes, especially the Global Technology Partnership, a subsidised knowledge brokering service. The Innovation Working Group, led by the Ministry of Research, Science and Technology, is exploring how to create a more systematic way of supporting intermediaries.54 54  For unpublished report on Intermediaries Workshop contact the Ministry of Research Science and Technology http://www.morst.govt.nz/about/contact/
  17. 17. 17 SUSTAINABLE INNOVATION APPROACHES FOR 21ST CENTURY NEW ZE AL AND ICT – enterprise 2.0 – and collaboration The accelerating use of social network software on the internet has provided organisations with new means to collaborate, internally and externally. Business and governments are starting to appreciate the impact on innovation, and the potential of hybrid social-economic production business models. This fusion of social and economic production was signalled by Yochai Benklar in his work on the wealth of networks.55 An early observer of the potential of ICT for innovation was Don Tapscott – a keynote speaker at the Government’s 2001 e-Commerce Summit – with his work on the digital economy and digital capital and, more recently, wikinomics.56 In his work on enterprise 2.0 Tapscott provides a useful way of understanding the ways in which interactive (collaborative) network technologies assist the enterprise to innovate – create b-webs (business collaborations). These enable firms to harness the skills and knowledge of people, which lie outside of their formal boundaries.57 In the diagram 55  http://www.benkler.org/ 56  Wikinomics: How Mass Collaboration Changes Everything. 2006 Series of articles on mass customisation in BusinessWeek http://www.businessweek.com/ innovate/di_special/wikinomics.htm Enterprise 2.0 reports http://204.15.36.164/default.asp?action=article&ID=32& Detail=pr 57  Don Tapscott and Anthony Williams. Realizing the Power of Innovation Webs, Optimizemag.com December 2005. www.newparadigm.com/media/Optimize_ InnovationWebs.pdf above he outlines the multiple ways in which ICT enables innovation.58 A point well made by Tapscott and others is that for an enterprise to capture the benefits of ICT for innovation it has to have an integrated strategy and business model that aligns organisational culture, work processes and employee skills. A business approach that enables it to capture opportunities provided by the Internet for more open and collaborative forms of business – collaboration that occurs between ‘things, people and firms’: collaboration is the new foundation of competitiveness. John Chambers, CEO of Cisco Systems, noted in an interview in CIO magazine on web 2.0 that as networks became the new platform for collaboration, including high definition video conferencing, time and distance will become less important issues in respect to collaboration.59 This is of critical importance for New Zealand given our location and increasing concern about the environmental impact of jet travel. CEOs in the IBM Expanding Global Horizons Innovation report who had implemented extensive business and technology integrations reported greater customer satisfaction, speed and flexibility than their peers who 58  http://www.newparadigm.com/media/Rethinking_Information_Technology_ and_Competitive_Advantage_Part%20II_-_Strategy_in_the_Age_of_ Collaboration.pdf 59  Cisco CEO John Chambers on Web 2.0, Collaboration, Avatars and Mashups www.cio.com/article/print/123655 July 13, 2007. Figure 1: Cascading Collaboration for Competitive Advantage
  18. 18. 18 INNOVATION FROM E V ERYONE AND E V ERY WHERE had not integrated.60 61 However, many of the CEOs did not know how to integrate technology into their organisations, or found the task “too complicated” or too big a gap from where the business currently was. There are, naturally, opposing views on the enabling or otherwise nature of web 2.0 and enterprise 2.0, reflected in the debate between Andrew McAfee 62 from Harvard (an evangelist) and Tom Davenport from Babson 63 (a sceptic). For McAfee’s views, read his June 8th 2007 Blog (http://blog.hbs.edu/faculty/amcafee/) and for Davenport’s, his HBS March posting in response, an excerpt of which is below: 64 Enterprise 2.0 software and the Internet won't make organizational hierarchy and politics go away. They won't make the ideas of the front-line worker in corporations as influential as those of the CEO. Most of the barriers that prevent knowledge from flowing freely in organizations – power differentials, lack of trust, missing incentives, unsupportive cultures, and the general busyness of employees today – won't be addressed or substantially changed by technology alone. For a set of technologies to bring about such changes, they would have to be truly magical, and Enterprise 2.0 tools fall short of magic. I freely admit, however, to one key uncertainty. It's going to be very interesting to see what happens when the young bucks and buckettes of today's wired world hit the adult work force. Will they freely submit to such structured information environments as those provided by SAP and Oracle, content and knowledge management systems, and communication by email? Or will they overthrow the computational and communicational status quo with MySpace, MyBlog, and MyWiki? 60  The Innovation Horizon: the 2006 IBM Global CEO Study p33. http://www-03.ibm.com/services/ca/en/cio-implications.html#-2 61  The Quarterly European Venture Capital Report from Dow Jones VentureOne and Ernst & Young reports that while VC per se had flattened from the previous year, investment in ICT was higher both in terms of percentage of deal flows and funds invested. This was attributed to increasing interest in web 2.0. technologies. In response to this, IBM is opening an innovation centre for small- medium sized companies http://www.cio.com/article/123551/IBM_Expands_ Innovation_Network http://www.ey.com/global/content.nsf/International/ Media_-_Press_Release_-_Venture_Capital_Q1_2007 62  Andrew McAfee is Associate Professor of Business Administration at Harvard Business School. His research focuses on how enterprises use web 2.0 technology, and the likely impact. When IT leads to increased use of market mechanisms for coordination activity, and when it creates more hierarchies, and the impact over time of IT on the structure of US industries. 63  Tom Davenport holds the President’s Chair in Information Technology and Management at Babson College, where he also leads the Process Management and Working Knowledge Research Centers. 64  http://discussionleader.hbsp.com/davenport/2007/03/why_enterprise_20_ wont_transfo.html In their March 2007 report on the use of web 2.0 by firms, McKinsey’s note that more than half of the executives were pleased with the results of their investments and nearly three-quarters were planning to maintain or increase their investments.65 Views of respondents (nearly 2500 globally located CEOs) varied as to what long term competitive advantage web 2.0 technologies offered but adopters saw them as offering diverse benefits, including the ability to: communicate more effectively with customers and»» business partners encourage collaboration inside the company»» achieve tighter collaboration with suppliers»» manage knowledge internally and enable more»» knowledge to be contributed (collective intelligence) design and develop new products/gather ideas»» automate processes.»» The firms are very pleased with the way technologies such as blogs and wikis are fostering more dynamic communication and collaboration, across employees and with customers. And the potential for new products and services. They are finding that a grass-roots, bottom-up approach, whereby enthusiasts introduce and adopt the social network technologies, is often more effective than a top-down approach: senior management supports and ‘gets out of the way’. In terms of measuring results, executives report a variety of approaches; demanding normal rates of return; feeling it’s too soon to tell; being pleased with the improvements in customer engagement, internal collaboration, and reputation management. In terms of the holy grail of ‘best practice’, caution is suggested. “There is perhaps, at best, sound practice. Approaches are so dependent on context for success that slavishly following models used elsewhere will almost certainly restrict creativity.” While technical knowledge, or access to expertise to assess technologies, is important, the key skills to optimise the potential of ICT for collaborative innovation are those which enable knowledge to be co- created; to flow unimpeded within and between firms; between enterprises and partners; to enable work to be peer-organised around physical and virtual teams. Taking technical knowledge for granted (accepting that sourcing skilled people will remain a challenge) the non- technical skills are as if not more vital: communication, 65  How Businesses are Using Web 2.0: A McKinsey Global Survey March 2007. http://www.mckinseyquarterly.com/article_print.aspx?L2+16&L3+16&ar+1913
  19. 19. 19 SUSTAINABLE INNOVATION APPROACHES FOR 21ST CENTURY NEW ZE AL AND negotiation, analysis, appreciative inquiry, relationship management, prioritising. But, again, if the firm doesn’t have a reinforcing culture, and if management is not supportive of collaboration, no manner of technical or functional skills is going to overcome barriers to effective collaboration, and therefore opportunities to innovate.66 This is of concern given that the best insurance against having an enterprise’s business model overtaken by competitors who copycat the innovation is the culture and practice that enables the development of tacit knowledge. Stimulating co-creation and production Web 2.0 reflects a movement towards what is essentially co-production between firms and customers, which was signalled by Prahalad and Ramaswamy, in their article in HBS 2000, ‘Co-opting Customer Competence’, and their subsequent MIT Sloan Management Review article, ‘The New Frontier of Experience Innovation’. The Copenhagen Institute for Future Studies, in their 2004 book, Creative Man, highlighted the changing relationship between production and consumption: the move to co-creation and the rise of the pro-sumer.67 Building strong relationships with lead users, as von Hipple notes in Democratising Innovation, increases the likelihood of successful manufacture and implementation, which web 2.0 behaviours encourage and enable. John Seely Brown and John Hagel III also detail this trend in The Only Sustainable Edge,68 as does Tapscott in Wikinomics; how the internet is democratising the creation of value.69 They identify the increasing use of networks of collaborators for design, development and production. The internet reduces dramatically not only the costs of transactions but more importantly the costs of interactions, and increases a firm’s ability to harness global networks of new knowledge to drive innovation. Moving from bits and bytes to atoms – 3D rapid prototyping Until recently digital products were the focus of co- creation, or peer-to-peer production: music, photos, on-line games, movies, animation, writing. Moores Law has reduced significantly the price of 3D fabrication equipment while upping functionality.70 This has 66  Larry Prusak in conversation. 67  http://www.cifs.dk/en/boeger.asp 68  http://www.edgeperspectives.com/ http://www.johnseelybrown.com/ http://www.johnseelybrown.com/pushmepullyou4.72.pdf 69  http://newparadigm.com/default.asp?action=category&ID=87 http://www. wikinomics.com/ 70  Links to articles on rapid 3D prototyping http://people.bath.ac.uk/ en0frb/3dp/Assignment1.htm http://www.deskeng.com/articles/aaaewk.htm increased dramatically the opportunities for pro-ams (amateur designers) and professional designers alike to reach global audiences without having to develop expertise in manufacturing or logistics, or having to fund large quantities of raw materials or inventory. In the company Ponoko, NZ has a global leader in 3D fabrication, which enables innovation from everyone and everywhere, is customer-centric, and powered by collaboration.71 Ponoko enables designers to have physical products rendered from computerised designs and sold globally.72 It has made the pages of Wired magazine and The New York Times.73 This convergence between digital and atom based production, the interactive web, and the move to self-actualise around creativity has enormous power to take the NZ ‘shed’ to a globally competitive trading space. As a result, some of our tertiary institutions are developing courses and investing in 3D rapid prototyping technology.74 http://www.nytimes.com/2007/04/05/business/05scan.html?pagewanted=2&_ r=2&adxnnlx=1175789243-zIIv7j2XhBAuO5pchli9Sg http://www.fabathome.org/ wiki/index.php?title=Main_Page 71  http://www.ponoko.com/about/thebigidea 72  http://www.ponoko.com/ See also Protobuild, a company building 3D models http://www.protobuild.co.nz/ 73  http://www.wired.com/techbiz/it/magazine/16-04/bz_instapreneur http:// www.nytimes.com/2007/11/15/technology/personaltech/15basics.html?8dpc http://www.technologyreview.com/Biztech/19678/page1/ See also Jim Donavon’s blog http://jimdonovan.net.nz/ 74  http://www.cit.ac.nz/smartproduct/ http://www.elec.canterbury.ac.nz/ projects/postgradprojects.shtml
  20. 20. 20 INNOVATION FROM E V ERYONE AND E V ERY WHERE Much innovation knowledge is embodied in people and their skills, and appropriate skills are needed to make intelligent use of external sources or codified knowledge. The role of human capital in innovation is important at both the firm and the aggregate level. Some issues of interest here are the quality of the education system and how well it matches the needs of innovative firms and other organisations; what efforts firms make to invest in the human capital of their employees; whether innovation activity is hampered by shortages of qualified personnel; whether there are sufficient opportunities for worker training; and how adaptive the workforce is in terms of the structure of the labour market and mobility across regions and sectors.75 In this section we consider the implications for firms and organisations of taking an approach to innovation that is based on contributions from everyone and from everywhere, customer-centricity and collaboration. To create and sustain innovation capability, businesses and organisations need to learn how to manage the various dimensions of the innovation process, as it relates to the business they’re in, or want to be in. While any innovation capability is context dependent, it will require the capacity to make strategic decisions about how and where to create value through innovation, manage the innovation process, manage risk, recruit and develop talent, and balance change with continuity – a capability termed ambidexterity.76 These involve being able to: make strategic choices»» become ambidextrous»» manage the people part of the innovation process»» manage risk»» become a learning and knowledge-centric firm»» 75  The Measurement of Scientific and Technological Activities Oslo Manual Guidelines for Collecting and Interpreting Innovation Data, 3rd Edition, OECD and Eurostat, 2005. 76  Tushman, Smith, Wood, Westerman and O’Reilly. Innovation Streams and Ambidextrous Organization Design. Harvard Business School Press, December 15 2004. http://www.london.edu/assets/documents/PDF/Tushman_Smith_et_al_ Org_Sci_Dec_2004.pdf Organisational Design and Innovation Streams http:// hbswk.hbs.edu/item/5691.html develop an agile workforce»» understand the importance of workplace culture»» meet the challenges of assessing and measuring»» both innovation capability and outputs recruit for and develop innovation capability skills in»» employees understand the role and skills of leaders and»» managers. In other words, developing a systematic approach to designing innovation capability. Making innovation part of organisational DNA. Making strategic choices Many firms don’t incorporate innovation within their core strategy. An innovation strategy is crucial because it charts the course for the organisation’s entire innovation effort, and enables employees to be clear about how they can contribute to innovation. The most successful and innovative organisations have a core purpose (reason for being) or vision that inspires and engages people and incorporate their innovation effort within the organisation’s overall strategy. The role of leadership in innovation is diverse, and ultimately of great significance as to how much and how well an organisation can innovate. A key aspect of leadership is being able to see the big picture and create a vision of where the company is going and a plan for getting there: make the strategic choices. The quality of leadership appears to be a significant, possibly the most significant, contributing factor for sustainable workplace innovation capability. New Zealand innovation leaders we spoke with commented that to be truly innovative requires a degree of leadership to go places that haven’t been gone before, and that when they looked back they saw it came down to the quality of leaders. Interestingly, some also observed that while we’re good at knocking leaders (fortunately the Tall Poppy syndrome is diminishing) many New Zealand companies didn’t realise how good they are. The importance, yet challenge, of leaders thinking outside of the day-to-day and the near term, is emphasised by NZ leaders: the dangers of being complacent about market leadership or positioning. Implications for firms 3
  21. 21. 21 SUSTAINABLE INNOVATION APPROACHES FOR 21ST CENTURY NEW ZE AL AND One of the challenges identified was the need to create discomfort with the current state because it wasn’t going to meet future customers’ needs. First innovation must be lead, then managed. Leaders, in setting their vision, have to follow through with ensuring that the vision is translated into practices and systems, into behaviours; set the tone for the culture and attitudes; the allocation of resources: innovation must be systematised. Governance, the role of boards of directors, is also seen as significant because directors are in a position to allocate or deny funds for innovations, to support or constrain risk taking. As the co-founder of a design driven exporting company, based on innovation, noted: “To be innovative requires leaders with drive and determination […] to go places we haven’t gone before […] leadership needs to look for challenging, stretching goals […] hard to get good innovation in a bureaucratic organisation. We’re getting a new breed of entrepreneurs, with know-how around management and leadership, with high aspirations, wanting to be distinguished from the masses … Real leadership is trying to identify problems other people haven’t discovered. When you solve those ones you delight people.” This reflects what has been termed Blue Ocean Strategy where, rather than focusing on the competition or existing product and service ranges or features, leaders make the competition irrelevant by opening up new and uncontested market places – blue oceans – rather than stay in the red (bloodied) waters of existing markets.77 Whether a firm chooses or feels it has choices about how to innovate are issues both of leadership and its place in a supply or value chain, and at what stage of the product life cycle it is – nationally and internationally. “We know of companies whose order books are full, whose profits are good. The owners don’t want to innovate dramatically because they’re planning to sell or hand over to family in five years. They could be leveraging their knowledge or the firm’s intellectual property to grow the company but there’s little or no interest.” CEO, economic development agency 77  W Chan Kim and Renee Mauborgne, Blue Ocean Strategy – How to Create Uncontested Market Space and Make the Competition Irrelevant. Harvard Business School Press, 2005. http://www.blueoceanstrategy.com/ Other factors include: The nature of a firm’s technology platforms, and the»» opportunities to leverage platforms or patents into new industries The size, age, and ownership of the firm»» The attitude of its owners and managers to risk and»» return Where it is located, and how well it is connected»» nationally and internationally How vulnerable its industry is to disintermediation»» or disruption by radical technologies or radical uses of platform technologies The profitability of its current products and»» services, and their potential profitability Its capacity to do R&D in-house, and its access to»» external R&D. In determining their strategy, some firms will make deep use of new science and technology, others will be followers. Many firms will innovate on the basis of existing or mainstream technologies, effectively recombining existing knowledge: extremely effectively as in the case of the iPod. Some firms are low tech but nonetheless highly innovative in how they organise themselves, the business models they develop, or how they provide customer experiences.78 Whether explicitly or not, firms have to make decisions about the kinds of markets they serve, or seek to create, and the kind of innovation they will attempt there. In looking to support firms become more innovative, it’s important to take into account where a firm is in respect of its product and industry cycle and market. Is it: A steady performer in a stable market with solid»» products A struggler trying to maintain its position in a»» shrinking market An innovator starting out in a market dominated by»» big players, or An innovator trying to create a market with a»» radical new product? Each case implies a very different risk profile, and a different set of skills will be needed by owners and managers to innovate successfully. 78  The value of recombining technologies has both advocates and critics but there is evidence that what are often seen as innovations by the market, such as iPod, are actually a recombination of existing technologies. For a historical view of American recombinant innovations ranging from Edison’s labs to early automobiles and modern computing and software, see Andrew Hargadon, ‘Brokers of Innovation, Lessons from the Past’ in Focus, Vol viii/1, 2004 http://andrewhargadon.com/writing.html
  22. 22. 22 INNOVATION FROM E V ERYONE AND E V ERY WHERE A set of case studies produced by NESTA in its Hidden Barriers report reveal the importance of the sector context, as the examples illustrate how barriers to innovation differ between sectors.79 Reinforcing this need for innovation policy to reflect a deeper understanding of context are the points made by Georghiou in relation to the power of market demand and regulation on encouraging and enabling sectors to innovate.80 Innovation involves doing something new, but how much innovation is appropriate? Will the changes be cumulative and evolutionary, or radical, disintermediating and revolutionary? All are legitimate expressions of innovation but the capability needed to be successful in each approach is different. Most firms will embrace only one approach: larger ones may adopt a variety of approaches across their practices and portfolio of products or services. Yet, whatever the approach taken, the point of difference conferred by innovation may only be transitory.81 A competitor may soon emerge with an offering that will directly attack the incumbent, or undermine a firm’s business model. Globalisation and the Internet mean there is nowhere to run to, nowhere to hide in terms of your competitors finding out what you are up to. To flourish over the long run, most companies need to maintain a variety of innovation efforts. They must constantly pursue incremental innovations, small improvements in their existing products and operations that let them operate more efficiently and deliver ever greater value to customers. An automaker, for example, may frequently tweak a basic engine design to increase horsepower, enhance fuel efficiency, or improve reliability. Companies also have to make architectural innovations, applying technological or process advances to fundamentally change some component or element of their business. Capitalizing on the data communication capabilities of the Internet, for instance, a bank can perhaps shift its customer-service call center to a low-labor-cost country like India. Finally, businesses need to come up with discontinuous innovations—radical advances like 79  Hidden Innovation – How innovation happens in six ‘low innovation’ sectors. National Endowment for Science and the Arts (NESTA). UK June 2007. http:// www.nesta.org.uk/informing/policy_and_research/highlights/hidden_innovation. aspx 80  Luke Georghiou. Demanding Innovation: Lead markets, public procurement and innovation Provocation 02: February 2007. NESTA. 81  Michael Cusumano and Costa Markides, Strategic Thinking for the Next Economy. 2001 digital photography that profoundly alter the basis for competition in an industry, often rendering old products or ways of working obsolete. All these types of innovation can have different targets. Some may be aimed at a firm’s current customers. Others may be delivered to an existing market that lies beyond a company’s current customer base—a car insurer may create a new kind of policy for boat owners, for instance. Still others may be focused on serving an entirely new market that has yet to be clearly defined—people who download online music, for example.82 Recognising the value from business model innovation Business model innovation provides important benefits in relation to a number of factors; cost reduction, strategic flexibility, focus and specialisation, and rapidly exploiting new markets and product opportunities. This is an under-recognised form of innovation despite the advent of mainstream technologies (like computing and the Internet), and the changing nature of how customers see themselves, enabling an increasing amount of business model innovation. Consider how the following companies have created innovative business models, harnessing ideas from employees and customers, and new and existing technologies, to develop innovations in customer experiences that increase productivity and profitability, plus employee engagement: Barnes & Noble booksellers – read while you eat/»» drink/think Amazon – customer reviews, personalised»» suggestions for further purchases Starbucks – marketing cultural products (music»» and books) and using Wi-Fi to become the office for mobile workers – creating the ‘third space’ 83 Southwest airlines – everyday prices with»» loving service – by changing routes, pricing models, seat assignment, workplace practices Adobe software – give away products to make money»» Apple – iPod; iTunes; your music library»» 82  http://harvardbusinessonline.hbsp.harvard.edu/hbsp/hbr/articles/article. jsp;jsessionid=AHC0UFKE0Q40AAKRGWCB5VQBKE0YOISW?ml_action=get- article&articleID=R0404D&ml_page=1&ml_subscriber=true 83  For a warning about how fast an innovation can be copied by competitors, McDonalds and other rivals are now imitating the great coffee lounge style of Starbucks. It remains to be seen whether McDonalds will also follow Starbucks’ latest innovation, of selling cultural products (music and books) as well as coffee. http://www.businessweek.com/bwdaily/dnflash/content/jul2007/ db20070717_188896.htm?chan=rss_topStories_ssi_5 For an interesting critique of Starbuck’s move into the cultural products space, read http://brandautopsy. typepad.com/brandautopsy/2004/06/music_margins_m.html

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