Innovation Is Not An Option

Bauhaus art school building in Dessau, Germany. The Bauhaus principles of simplicity, functionality, and innovation underpin the minimalist design behind the iconic Apple aesthetic.

Executive summary

Why innovation is not an option?

There is a tendency to think innovation only takes place in the Silicon Valley and technology clusters across the world. In fact, innovation is everywhere. It is the engine of every lasting business. Whether the organization is a commercial company, a non-profit foundation, a university, a city, a museum, or even a country, it has no choice but to innovate. Otherwise, another organization will.

The typical example of innovation is a new technology that better solves a problem that was out of reach with existing technology. Under the pressure of competition, we observe all the companies of an industry that relied on the existing technology moving to the new technology when they realize or expect it has given satisfactory results. During years or decades, both technologies will coexist but sooner or later, the new technology will take over until it becomes the standard and the existing one obsolete. Note also that the new technology does not have to automatically start from scratch. In many cases, it is a combination of existing technologies. Indeed, the majority of innovations are no more than the rediscovery of a past technology that couldn’t be used in practice when it appeared for the first time. For instance, machine learning couldn’t be put in action when it first appeared in the 50’s because we didn’t have the volume of data and the power of computing we have now.

There is not one but multiple innovations

  • Top-down innovation
  • Bottom-up innovation
  • R&D innovation
  • Creative-destructive innovation
  • Fortuitous innovation
  • Copycat innovation

Top-down innovation

In the top-down innovation, the decision of change comes from the top and spreads to the bottom of the organization. Typical examples include the deployment of a new CRM system, the digitalization of a business model, or the development of a data marketplace. Often, it is a decision that the executive management takes as a result of a large business expansion, a recent strategic acquisition, or a major organizational change. The common process of top-down innovation consists in four stages:

  • First, the problem-statement stage in which the CEO writes or assigns a steering committee to write a vision in terms of the current business situation, the reasons to change, the objectives, the expected benefits, and a timeline.
  • Second, the project-structuring stage in which the project lead and project team conduct a more detailed assessment of the current situation and develop a strategy to move forward.
  • Third, the solution-implementation stage in which the project lead and team use one or a combination of multiple technical, organizational, and management methods and tools to solve the problem at hand.
  • Fourth, the change-selling stage in which the project lead and team promote the project, explain its benefits, and train the users to get endorsement and support.

A top-down innovation is often well managed. Deviations happen in budget or time but the innovation is rarely stopped from going up to completion (footnote 1).

Top-down innovations are purportedly “sold” but they are in reality “told” to the rest of the organization.

Bottom-up innovation

Bottom-up innovations are common in established organizations but do not have the same visibility as the planned top-down innovations. They started by a person, not automatically a manager or an executive, who notices that they can enhance their work by just tweaking an existing process or tool. You might have heard about large side projects at big tech companies but smaller side projects are common in almost all the organizations. One of the side projects of IT people is to create scripts to automate the repetitive work. Another example is the use of Post-it notes with different colors to classify work. Such innovations get unnoticed but they contribute to the global innovation of the organization.

In contrast to top-down innovations, bottom-up innovations are always “sold” in the same way as a new technology gets introduced to an existing market. A new innovation is not the single initiative looking for attention. The innovator has to “market” it to the target users who may be dissatisfied with the current solution, provide a compelling reason to switch, and tailor the new innovation as needed (2). The burgeoning of bottom-up innovations is a continuous process akin to a complex adaptive system (3) in which new innovations appear, others disappear, and others combine into new innovations.

R&D innovation

R&D innovations are very similar to investing and indeed in some cases to gambling — betting on future rewards to materialize based on today’s information. Except for companies with deep pockets such as big tech, big pharma, and big investment companies, the majority of advanced R&D innovations are in academic organizations with funding from governments and foundations.

The process is planned and managed but at higher grain-coarse detail compared to top-down innovations. Even if the majority of research & development projects do not result in commercial products, they are key to further innovation, growth, and employment.

R&D innovations do not always translate into a growing business. The reason is not the lack of financial resources — government agencies and private investments usually pour a lot of money into high-tech, fintech, and clean-tech start-ups. The reason is that R&D innovation is embedded with uncertainty.

Creative-destructive innovation

Creative-destructive innovation rarely sparks from incumbents because of the following reasons:

  • Incumbents continue to defend their legacy solution because every part of the organization perfectly fits that solution. They became so excellent at it that they view every problem and opportunity through the lenses of this solution. For instance, the telecommunications operators and manufacturers were the front-runners of innovation when telephony was king, but they totally ignored the potential of data — They considered the packet-based Internet as a cheap low-quality alternative to circuit-based telephone.
  • They do not jump in any new disruptive innovation because an existing business has to take into account the legacy and can therefore only embark on incremental innovations. This explains why brick-and-mortar businesses lagged behind digital native counterparts in e-commerce.
  • Incumbents may seem uncomfortable with disruptive innovation because of the high costs, risks, and volatility to (re-)enter the market now that it has shifted and the newcomers have become the leaders. Digital advertising is a typical example where almost all the small agencies had only three choices: grow through merger and acquisition, change the business model to become a partner to Google and Facebook, or vanish.

Of all the innovations, creative-destructive innovation is the hardest to foresee, plan, or manage — no market research can tell you in advance what the market wants. As of today, in the midst of the Covid-19 pandemic, there is a lot of speculation about which technologies (biotech?), business models (all-digital?), companies (Zoom?), and industries (big pharma?) will thrive but there is no evidence that corroborates these speculations.

Fortuitous innovation

We tend to forget but history has plenty of innovations that were not in the mind of the people when they started and long before they became stars in their fields. E-commerce was not in the mind of Tim Berners-Lee, Robert Cailliau, nor others when, in 1989, they designed and implemented a computer network protocol for researchers at CERN to store and share data of research on particle physics. Cloud computing was not in the mind of Benjamin Black and Chris Pinkham when, in 2003, they wrote a short paper describing a vision for Amazon IT infrastructure to efficiently manage Amazon’s diverse computing resources. Facebook as a worldwide media and a digital advertising giant was not in the mind of Mark Zuckerberg and his friends when, in 2004, they launched the social network at Harvard.

Fortuitous disruptive innovations start with a simple idea, an urgency or a desire to solve a problem. There is no parent garage, no business plan, no marketing strategy, no financial forecast. We know more about the effects that innovation has generated than the conditions that triggered it. All of this structuring material comes after, but the story always starts with one or a few individuals who sensed the opportunity to do something about a situation they were not comfortable with or thought they could change.

Copycat innovation

Yes, copycat without violating intellectual property is also an innovation. China has mastered it to catch-up the USA in e-commerce (Alibaba), social networking (Xiaonei, now Renren), e-coupons (Meituan), and much more. Benefiting from the openness of the western culture and economy, China has even taken a lead in telecom (Huawei), fintech (Ants Financial), cashless life (WeChat), and the list goes on (4).

Copycat innovation does not only take in the same industry. The concept of the two-side platforms initiated by Amazon for retail has already copycats in other areas such as car hiring, feed delivery, freelancing, expert networks… Without copycat innovation, a lot of these innovations would not have existed. Copycat innovation does not have to be underestimated or despised. It requires creativity, effort, and money to bring it to life through a localization process to fit the local market. Also copycat innovation can be a first step for a far-reaching breakthrough innovation (e.g., Huawei in 5G technology).

Ingredients for innovation to succeed

  • Large public and private funding: Entrepreneurship is necessary but not sufficient. Any innovation needs funding to flourish and become a reality outside the brain of entrepreneurs, then to cross the chasm between the early adopters and the mass market. The USA and China are the places where cash flow in start-ups, now by billions of dollars. Europe, even if it has some of the top-level business- and engineering-schools in the world, is still lagging far behind when it comes to fund fast-growing start-ups.
  • A large and unified market: There is also the reality of geography, size, and governance. Creative-destructive and fortuitous disruptive innovations tend to favor large unified markets with minimal regulations for business to develop quickly. The USA and China are each a unified and gigantic market. Comparatively, Europe is a large but fragmented market.
  • Business-friendly regulation and taxation systems: Last but not least, the regulation and taxation systems play a very important role in high-risk innovations. Creative-destructive and fortuitous innovations easily take birth in countries with low taxes and low regulations. This explains the drain in Europe of some of the best-in-class entrepreneurs and high-potential start-ups toward the USA.
  • Marketing from the first days: It is not because the CEO has decided to launch a digital transformation that all the employees are happy with it. It is not because you love your blog that everyone in your organization will take a look at it. It is not because your breakthrough innovation has outstanding features that the world will adopt it. Like any product or service, a new innovation faces competition from other new and existing innovations. The individual or organization at the origin of the innovation has to market it outside the early adopters.

Takeaway

Footnotes

(2) For those interested in how to market a new innovation, I recommend the book “Diffusion of Innovations” by Everett M. Rogers.

(3) Part 1 of Murray Gell-Mann’s book “The Quark and The Jaguar, Adventures in The Simple and The Complex” is one of the best introductions to the field of complex adaptive systems.

(4) For a detailed description of how China innovates compared to the USA and Europe, I recommend the book “AI Superpowers” by Kai-Fu Lee.

(5) You can find other ingredients for innovation in Edmund Phelps’ book “Mass Flourishing”.

Disclaimer

Data strategy consultant, now leading marketing for Sparkling Logic, Inc.