Category: innovation

The fact is, innovation is (relatively) easy to define, but it is notoriously difficult to achieve, as Dave Richards finds out

The concept of ‘value’ embraces commercialisation, commercial success, wealth, utility, adoption and wellbeing, but in a way that doesn’t unduly limit our definition or thinking about what constitutes innovation.

‘Value’ is a more comprehensive psychological construct than utility. Humans can value, appreciate and love things that aren’t useful.

Another key reason to place the concept of value at the heart of innovation is to consider your why, what and wow. Why does your organisation exist? What does it deliver in the world? What’s your ‘wow factor’ that makes your brand or offering stand head and shoulders above others? Would anyone care if your organisation tipped over its collective shoelaces and died?

The essence of any organisation is its business model. At the core of any business model is a product – whatever good or service the enterprise produces that is intended to be of value to someone, usually thought of as the ‘customer’. The rest of the business model is simply whatever the enterprise does to produce the product, and whatever it does to get the product into the hot little hands of the intended customers. In its simplest form, a business model is simply about manifesting value in customer experience.

Of course, in reality, most organisations deliver a complex product portfolio, but we can nonetheless think of whatever is produced as the ‘product’. Further, there might be incredibly complex international supply chains, distribution channels, sales and marketing, and much more involved, but at its essence, a business model consists of these three simple elements. We can also use the term ‘value delivery model’, especially when considering public or social enterprises that might not like to think of themselves as businesses.

The concept of ‘customer’ is also somewhat complex. Whether this customer is a paying consumer or the recipient of charity or public services, they are nonetheless a ‘customer’. And sure, there is some psychological complexity here, in that some customers might be users, while others might be choosers (or buyers), influencers, all three, or any combination. Further, there is typically an incredible level of diversity of customer experience resulting from even the simplest of products, let alone complex product portfolios delivered in a wide variety of ways. Life is complex.

Given the above – that any enterprise should exist to create and deliver value to customers – the best definitions of innovation are ‘fresh thinking that creates value’ or ‘people creating value through the implementation of ideas’ or ‘something new that delivers value to the world’ – recognizing that the concept of ‘value’ must therefore also be clearly and unequivocally defined to fully understand what we mean by ‘innovation’. So, what is value?

Value is a psychological experience, or perception. Value is not absolute, and it’s not equivalent to money. Money, after all, is a human construct designed to enable commerce, trade and wealth. But if you think about it, even when money was made with precious metals, there was nothing inherently valuable about it, other than the value people placed in it based on their expectations for how they might use it. Value is more about love than money. Sure, people pay for love (some more than others), and will pay much more for something they truly love than something that is merely useful. Even the concept of money is psychological, and the value humans place on various forms of currency is also based on their perceptions, expectations, hopes and fears – all psychological phenomena.

Based on all of the above, I offer this definition:

Innovation is the realisation of net new value as experienced by people, resulting from the implementation of ideas (by the same or other people) for value creation.

The degree of innovation success at any given point in time is measurable return on investment (ROI) – the value created relative to the value (time, money, effort or other resources) invested to create it. ROI is usually expressed as a ratio, or percentage:

Innovation ROI = (Value Created – Value Invested) / Value Invested

Whether or not, or to what extent innovation is considered ‘successful’ is therefore a relative judgment. The level of ROI considered ‘acceptable’ by any given organisation, board, or investor will depend on other investment options, and perhaps other strategic considerations.

Being able to agree upon measures of value is critically important both for conversations about innovation, the development and implementation of innovation strategies, and of course the assessment of innovation results.

Money (commercial success, costs, budgets, profits) is of course a common and relatively easy way to measure perceived value – as it’s constantly tied and correlated to value experience in real time, in various local and global markets. But as alluded to above, if we focus only on money as our measure of psychological value, we might miss very important nuances. Leading organisations have learned that measures of customer experience, loyalty (e.g., net promoter scores) and love (of brands, products, etc.) can be vital for predicting and measuring success or failure. Four key concepts to bear in mind: (1) garbage in, garbage out; (2) not all that can be measured is important; (3) not all that’s important can be measured; and (4) the devil is in the detail.

Let’s end this series by defining another term – ‘unnovation’ – to refer to cases where the ROI is negative, negligible or simply disappointingly low. The fact is, innovation is (relatively) easy to define, but it is notoriously difficult to achieve, as witnessed by the fact that innovation success rates are very low (less than 10%) across all types of enterprises and industries globally (Dobin Group, 2012; Richards, 2014; VIIMA, 2018).

Dave Richards is Co-Founder of the MIT Innovation Lab, and a highly acclaimed author, speaker and consultant on strategic innovation leadership. He is the author of The Seven Sins of Innovation: A Strategic Model for Entrepreneurship  and holds a PhD in mathematical psychology and neuroscience from the University of Toronto.

We need to think beyond commercialisation and wealth creation to embrace concepts such as utility and wellbeing. But do we require so much complexity to define innovation? Dave Richards Investigates

Many organisations are talking about innovation, without any real clarity or common definition, leading some people to conclude that innovation is just a buzzword that we should stop trying to have serious conversations about.

But that naïve conclusion misses a vital truth. Deeply understanding what innovation is all about enables global industry leaders to establish and maintain superior performance, competitive advantage, and winning strategies for long-term value creation.

Members of the MIT Innovation Lab (which I cofounded in 1993 and codirected until 1996) clearly demonstrate this understanding in everything they do.

3M is a great example – a company with a mission of innovation, an unparalleled infrastructure of technology platforms upon which to build new solutions, and a consistent track record of delivering superior customer value, which of course translates into value for other stakeholders. Some people might choose to ignore conversations about innovation – and do so at their peril. Phrases such as ‘innovate or die’ come to mind.

Do you know the ‘official’ definition of innovation, mainly used (not very well) by governments to measure and monitor national and regional levels of innovation?

The Organisation for Economic Cooperation and Development wined and dined hundreds of academics and civil servants in one of the world’s most expensive cities, Oslo, for weeks to come up with it. The resulting ‘Oslo Manual’ definition of innovation is ‘a firm connecting something new to a marketplace’. This definition is fatally flawed for three reasons:

1 Only ‘firms’ can innovate, such that innovation within public or ‘third’ (charitable) sectors is (by definition) impossible – which hopefully we all agree would be a bad thing.

2 Anything ‘new’ to a marketplace is viewed as innovative. But should we really accept that anything ‘new’ is ‘innovation’? What about a new strain of flu, accidentally unleashed by a company trying to create a vaccine? What about the Edsel – a very new car design introduced by Ford in 1958 – a spectacular market flop? And what about RentMyChest.com, or InmatesForYou.com? Come on now!

3 Again, because only ‘firms’ can be the authors of innovation, users are precluded from driving or contributing to innovation, even though a considerable body of research (see von Hippel, at MIT) shows that users are often the first to come up with ideas for innovation, and that they frequently modify the products provided by firms to make them more useful and fit for purpose (e.g., surgeons modifying surgical instruments).

Luckily for us, there are many far cleverer definitions of innovation offered by various experts, none of which resulted from expensive boondoggles at taxpayer expense:

• ‘Innovation is the specific instrument of entrepreneurship. It is the act that endows resources with a new capacity to create wealth’ (Drucker, 1985).
• ‘Innovation = Invention + Exploitation’ (Roberts, 1987).
• ‘The starting point for innovation is the generation of creative ideas. Innovation is the process of taking those ideas to market or to usefulness’ (Ijuri and Kuhn, 1988).
• ‘New ideas – plus action and implementation – which result in an improvement, a gain or a profit’ (3M’s definition, according to Kelley and Littman, 2006).
• ‘People creating value through the implementation of ideas’ (attributed to the Innovation Network, by Kelley and Littman, 2006).
• ‘New products, business processes, and organic changes that create wealth or social welfare’ (attributed to the OECD, by Vaitheeswaran, 2007).
• ‘Fresh thinking that creates value’ (Lyons, of Goldman Sachs, attributed by Vaitheeswaran, 2007).
• ‘Innovation is new stuff that is made useful’ (McKeown, 2008).
• ‘Innovation is the conversion of knowledge and ideas into a benefit, which may be for commercial use or for the public good; the benefit may be new or improved products, processes or services’ (attributed to Smallwood by Waschke, 2011).
• ‘Note the difference between invention and innovation: invention is the creation of a new idea or concept – innovation is taking that idea, reducing it to practice, and making it a commercial success’ (THECIS, 2014).
• ‘Executing an idea which addresses a specific challenge and achieves value for both the company and customer’ (Skillicorn, 2016).
• ‘Something new or different that delivers value to the world, with the key criteria that I’m not innovating if I’m not bettering people’s lives’ (Barba, 2019).

Is innovation the successful commercialisation of ideas?

That’s a measure of innovation success for commercial enterprises. But again, what about non-commercial enterprises, and what about users adapting products to better meet their needs, perhaps without commercial motivations?

Clearly, we need to think beyond commercialisation and wealth creation to embrace concepts such as utility and wellbeing. But do we require so much complexity to define innovation?

Isn’t there a single concept that embraces commercialisation, commercial success, wealth, utility, adoption and wellbeing?

Look out for part two of this series, next week, to find out.

Dave Richards is Co-Founder of the MIT Innovation Lab, and a highly acclaimed author, speaker and consultant on strategic innovation leadership. He is the author of The Seven Sins of Innovation: A Strategic Model for Entrepreneurship  and holds a PhD in mathematical psychology and neuroscience from the University of Toronto.

Using lessons from Tesla’s Elon Musk and biopharmaceutical firm, Regneron, this excerpt from Innovation Capital looks at how you can use first-principles thinking to question assumptions and create new solutions using a blank-slate approach

Elon Musk has been instrumental in building three revolutionary, multibillion-dollar companies in completely different fields. His ability to solve seemingly unsolvable problems is essential to his success and he attributes his problem-solving success to first-principles thinking.

‘I operate on the physics approach of analysis by first principles,’ Musk told us. ‘The first principles approach to thinking is where you boil things down to the most fundamental truths in a particular area and then you reason up from there.’

In lay terms, first-principles thinking – which was first articulated and named by Aristotle – is the practice of identifying what you think is true and then actively questioning every assumption you have about a given problem or scenario.

Challenge everything

First-principles thinking helped Regeneron, the New York–based biopharmaceutical company, revolutionise how it develops new therapies. Whereas it costs, on average, $4.3 billion USD for the average company to develop an approved therapy, Regeneron has been estimated to develop therapies for less than $1 billion USD per approved therapy, which is 20% of the cost of its competitors.

How? ‘We challenge everything,’ says Regeneron CoFounder, President, and Chief Scientist, George Yancopoulos. ‘Every concept. Every scientific principle. Nothing is unchallengeable, and you don’t take anything for granted. Most of what we believe are facts are not.’

The next step is to identify the constraints to achieving what you want to achieve and then start with a blank slate and create solutions that might solve those constraints. ‘We always try to figure out what’s limiting in a field. What’s the bottleneck?’ Yancopoulos says. ‘Then you look for a game-breaking idea that addresses the limiting factor.’

Tesla’s approach to expensive batteries

To illustrate how to apply a first-principles process, consider Musk’s description of how automotive and energy company, Tesla, approached the problem of the high cost of battery packs for automobiles.

Some people say: ‘Battery packs are really expensive and that’s just the way they will always be. . . Historically, it has cost $600 USD per kilowatt hour. It’s not going to be much better than that in the future.’ With first principles, you say, ‘what are the material constituents of the batteries? What is the spot market value of the material constituents?’ It’s got cobalt, nickel, aluminium, carbon, some polymers for separation, and a seal can. Break that down on a material basis, and say, ‘if we bought that on the London Metal Exchange, what would each of those things cost?’ It’s, like, $80 USD per kilowatt hour. So, clearly, you just need to think of clever ways to take those materials and combine them into the shape of a battery cell, and you can have batteries that are much, much cheaper than anyone realises.

Of course, it isn’t that easy to ‘think of clever ways’ to combine the materials into a battery cell, but first-principles thinking starts with a blank slate, questions every assumption, and considers a wide variety of options. Here is a three-step process for first-principles problem solving:

1. Identify the problem you want to solve

In the case of Tesla, the key problems the company needed to solve were reducing the cost of the battery pack (to make it affordable) and increasing the range a car could go on a single charge (to reduce range anxiety).

At Regeneron, two big delays in the creation of successful new medicines were the time required to create and breed accurate animal models, a necessary step in ensuring safety before clinical-stage testing in humans, and the time required to develop ‘fully human’ antibody drug candidates that would be accepted in a human immune system.

2. Break down the problem into its fundamental principles, and list major constraints to solving it

The main constraint to an affordable battery pack might have been the cost of one or more of the materials. So then you would ask, ‘how could we possibly reduce the cost of that key material?’ For Tesla, the challenge of creating a lower-cost battery pack had less to do with materials and more to do with the process of combining them into a battery cell at enough scale to reduce the cost (hence the need for the Gigafactory, Tesla’s facility to design and build lower-cost lithium batteries at scale). A major constraint to increasing the range of a Tesla from a single electric charge was the weight of the car body. Thus, Tesla became the first automaker to use a lightweight, all-aluminium body.

At Regeneron, the limiting factor to rapid, successful drug testing was the time required to carefully test, select, and breed for certain genetic qualities in mice to ensure the closest parallels to future human patients. So Regeneron sped up the process by developing a precision technology capable of directly inserting human immune-system genes in mice, eliminating the need for many generations of breeding to accurately model human diseases and produce antibodies that could be safely introduced into humans. These ‘fully human’ mice have allowed Regeneron to more quickly and accurately identify medicines that will work on humans, thereby reducing the cost of each potential new drug. This breakthrough has contributed to a tenfold increase in the company’s stock price in the 10 years since 2010.

3. Create new solutions using a blank-slate approach

Ask yourself: ‘If I could create any solution I desired, what would that solution be?’ The point here is to imagine the perfect solution and then consider a wide variety of approaches that might eliminate the greatest bottleneck.

At Regeneron, the blank-slate solution was having an animal model respond exactly like a human during early-stage drug testing. Of course, Regeneron needed to figure out how to make this solution a reality, or at least closer to reality.

During this phase, you need to engage four behaviours actively – questioning, observing, networking, and experimenting. Creative problem solvers excel at questioning, constantly challenging the status quo with ‘why not’ questions to turn things upside down. They also frequently ask ‘what if’ questions to envision a different future. They are also intense observers, carefully watching the world around them – especially customers, products, services, and processes— with a beginner’s mindset. Creative problem solvers also stand out at networking, talking with diverse people to spark a new way to solve perplexing problems. Finally, they search for new solutions by constantly experimenting.

First-principles thinking is a helpful approach to attacking problems creatively. And if you want to become an innovative leader, you will need to be as creative as you can in navigating around the obstacles that get in your way.

This is an edited excerpt from Innovation Capital: How to Compete – and Win – Like the World’s Most Innovative Leaders (2019) by Jeff Dyer, Nathan Furr and Curtis Lefrandt, courtesy of Harvard Business Review Press.

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