The innovation ecosystem
Long-term value creation
It is undeniable that during the 21st century concerns about the environment will have a significant impact on business practice. There will be more and more focus on sustainable business models with long-term goals versus the short-term profit-making that has often tainted traditional capitalism.
At the heart of this paradigm shift is the understanding that sustainable business models tend to create more value for society over time. It is becoming clearer that there are costs involved with ignoring sustainable business practice. For example, while China has risen as an industrial power, the World Bank estimates that air and water pollution costs that country at least 6% of its GDP.
Sustainable innovation
In an ever-shifting environment, innovation is the best way to keep pace with change. But in order to innovate, companies need to understand what innovation really is. Innovation has often simply been defined as a novel creation that produces value. From my perspective, the concept of innovation is distinct from creativity. In my recent book, The Corporate Startup, I define innovation as the creation of new products or services that deliver value to customers in a manner that is supported by a sustainable and profitable business model.
This definition is intended to take the focus of innovation beyond creativity in order to measure its impact on society. The definition also goes beyond profits and focuses on the creation of sustainable business models. Sustainable business models are those that create value for customers and society in general. While it is possible to get rich while destroying value, this is not viewed as a sustainable way to do it.
So, innovation can be viewed as a three-step process:
- generate novel and creative ideas;
- ensure that those ideas create value for customers and society;
- find a profitable business model.
Innovation ecosystem
Most companies can launch new products that become one-off successes. However, the ability to build a repeatable innovation process lies at the heart of sustainable success. As such, rather than viewing their companies as monolithic institutions with a single business model, managers need to take an ecosystems approach. This takes us back to nature. An innovation ecosystem is as critical to innovators as the natural ecosystem is to bees.
Without building the right ecosystem, companies can kill the spirit of innovation and watch their best innovators ‘migrate’ to other companies. There is a tendency to underestimate the importance of ecosystems. However, W. Edwards Deming notes that “a bad system will beat a good person every time”. In our context, a bad ecosystem will kill innovation every time! Below are four key elements that make for a good innovation ecosystem.
Balanced portfolio
A lot of companies tend to focus on their core cash-cow products. In such an ecosystem, there is no room for innovation because everyone is focused on delivering profits and cutting costs. To survive long-term, a company has to have an ecosystem of products and services. In a balanced ecosystem, a company will have core product innovation (i.e. existing products for existing markets), adjacent innovation (adjacent product and adjacent markets) and transformational innovation (new products for new markets). Having a balanced portfolio is the only way to ensure that a company is being strategically managed with short-term, medium-term and long-term goals in mind.
Ideas, ideas, ideas
It will be difficult for a company to have products that represent adjacent and transformational innovation if it does not create an environment that is open to new ideas. As Linus Pauling notes, “the best way to have a good idea is to have many ideas”. As such, it is important that companies break down silos within their business and allow cross-functional collaboration. When individuals interact with people from other disciplines, they learn new things that later inform their ideation. Companies must create an environment that is rich with the cross-pollination of ideas and practice. Ideas can also be encouraged using tools such as brainstorming, idea jams, hackathons, idea competitions and incubators.
Experiment, experiment, experiment
There is nothing more discouraging to innovators than coming up with great ideas and watching them wither away because nobody in the company wants to invest in them. At the heart of innovation is a tolerance for failure. Most companies will only invest in ideas that have good business plans and revenue projections. Such data are hard to collate for transformational innovation. The best way to know if a transformational innovation will work is to experiment. As such, companies have to develop management processes that allow them to invest in experimentation. They also need to create a culture that is tolerant of failure, since a number of the ideas will fail during experimentation. This is only natural as, even in nature, not all species survive in all environments.
Business models matter
Ultimately, ideas are ‘a dime a dozen’. What matters is whether they are supported by a sustainable and profitable business model. This is what guarantees that our ideas will have a lasting impact on the world. As such, experiments should not only be R&D that is focused on product development. Business model innovation is also possible. Companies should be constantly searching for innovative new ways to create and deliver value. Experimenting with new business models is key to success.