One of the most overused words in the business lexicon is often misunderstood: What is true innovation? Should it be a priority for all companies? And how can firms make it happen?

Author: Laurence Neville

Defining something as pivotal to modern life as innovation is surprisingly difficult. We can be certain that the groundbreaking mRNA technology that helped create a whole new class of vaccines, including ones that protect against Covid-19, is innovative. But what about a phone with a screen that folds but that otherwise works just like other phones? That gets called innovative too.

“A lot of the problem associated with innovation—within both society and companies—is the use of language,” says Andrew Russell, dean of the College of Arts and Sciences at SUNY Polytechnic Institute and co-author of The Innovation Delusion: How Our Obsession with the New Has Disrupted the Work That Matters Most. “Innovation is too blunt a word to describe what actually happens.”

Matt Ridley, author of How Innovation Works: And Why It Flourishes in Freedom, draws a distinction between invention (which he says involves new prototypes) and innovation (which consists of incremental improvements that make products or services more affordable, available or reliable). He offers a well-known example: lighting. Based on the average wage now, it takes a third of a second of work to pay for an hour of lighting, compared to eight seconds in 1950, 15 minutes in 1880 (for a kerosene lamp) and six hours in 1800 (for a tallow candle). “Now energy is a given, not a luxury,” says Ridley. “That’s as a result of innovation.”

Russell agrees that most innovation is not a spark of genius, but comes about through successive iterations. “In our own time, we think of the iPhone as a pivotal, even iconic innovation,” he notes. But it wasn’t invented from scratch. “Its success came because Apple recombined existing technology and packaged it with excellent marketing and a keen understanding of the sensibility of users,” he adds.

How Innovation Took Over the World

The fetishization of innovation started after World War II, when economists were trying to explain economic growth: A perception was formed that technological change—dubbed innovation—was associated with increased productivity. Given the era’s geopolitics, the arms race and the space race also came to be described in the same terms. “That language of innovation has altered our expectations of what change looks like,” says Russell. “As postwar consumer culture took hold, it hijacked the concept of innovation, which subsequently came to dominate business schools, consultancies and many businesses.”

In recent years—the dawn of the Digital Age—digital technology’s transformative power has turbocharged the cult of innovation. “There is disruption in almost every industry—and it’s not just from big tech companies like Amazon,” says Stephen Wunker, managing director at consultancy New Markets Advisors. He notes that even in seemingly staid industries like household durable goods manufacturing, new business models are emerging, new technologies are facilitating product substitution and regulations are changing how markets function. In the air conditioning business, for example, climate change regulations and the Internet of Things have significant implications.

In today’s world of accelerating disruption, innovation has come to be perceived as central to corporate survival and success. “Change doesn’t occur in just a linear way anymore but increasingly as a series of discontinuities,” says Wunker. “People realize that while they need to keep the lights on in the core business, they also have to innovate in fundamentally different ways.”

Companies’ recent experience of business disruption due to Covid-19 only increased expectations of innovation. “The pandemic caused a heightened sense of urgency for how companies innovate,” says Francesco Fazio, principal at Doblin, Deloitte’s innovation strategy unit. “That requires a much more agile and experimental approach.”

The Wrong Type of Innovation

Agile and experimental, yes, but too many corporates go about it in the wrong way.

With tech and software firms widely celebrated as exemplars of innovation, companies in other sectors have, predictably, tried to emulate them. But while software firms may live or die by the latest version of their product, which often accounts for most or all of their revenue, the majority of businesses don’t. “Most companies’ customers neither want nor need the product or service they buy to be transformed on a regular basis,” Russell explains. Software’s “move fast and break things” philosophy is not a good template for most other businesses.

In reality—as both lighting and iPhones show—business success most often comes from incremental improvements to existing lines rather than a single breakthrough new product. But today, our understanding of innovation as well as our expectations for returns have been skewed by tech companies that are capable of perpetually reinventing themselves in a way that regular companies cannot. Many corporates that try—such as GE, which sought to digitally transform itself into “a 124-year-old startup”—fail.

In their quest to match the success of the tech sector, some companies lacking innovation capacity have instead resorted to “innovation speak,” deploying the language of innovation without delivering real progress, explains Russell. Ridley agrees: Companies talk the talk of innovation, but don’t make the incremental improvements needed to stay the course.

Other signposts suggest innovation has lost steam. He notes that the turnover of companies—how quickly they die and are replaced by new entrants—has slowed down, entrepreneurs’ average age is increasing and nondigital industries such as manufacturing or transport lack dynamism. “We’ve been fooled by the huge rate of innovation in the software industry into thinking that we are in an era of incessant advances,” says Ridley. “In reality, we are suffering a drought of innovation.”

How to Deliver Real Innovation

Creating appropriate structures for innovation to flourish is fiendishly difficult. The high-level goal should be to encourage trial and error, says Ridley. That means allowing for error. “More experimentation inevitably means more chances for failure, yet incumbent organizations are not built to reward risk-taking,” says Patrick Kuehnle, senior manager at US grocery delivery firm DoorDash, noting that big companies in particular struggle with new ideas. “What they don’t realize is that the risk of not experimenting can easily outweigh the risk of doing so.”

While copying big tech verbatim doesn’t make sense, Ridley identifies a number of potential innovation models that large incumbent companies might consider. One strategy is to give up trying to invent in-house, and instead commission research globally, he says. P&G moved to an open innovation model, giving up their own R&D; and it worked well for them. The strategy makes it easier for a company to cut its losses when things don’t work out, overcoming a common problem for internally developed projects.

A second approach—Amazon’s method—is to treat a big company as a series of city states, where people are empowered to try different things. “At Amazon, even a junior employee’s idea—provided it is championed by someone else—cannot be vetoed by the majority and must be presented to a senior management committee,” Ridley says. “That means Jeff Bezos continues to hear about radical ideas, as does his successor [Andrew Jassy, set to take the CEO seat in Q3 2021], and they are not shut down by the natural conservatism of company bureaucracy.”

A third option, designed to escape that natural conservatism, is to build an isolated facility for blue-sky thinking. The Lockheed Martin Skunk Works model, also pursued by X Development (formerly Google X), gives researchers complete freedom to consider “mad” ideas, explains Ridley. Innovators need to be protected, argues Damon Centola, professor in the Annenberg School for Communication at the University of Pennsylvania, and author of Change: How to Make Big Things Happen, against influences from elsewhere in the organization that nudge them toward strategies that resonate or mesh with the status quo. Separation enables innovators to “develop new ideas without being pressured to conform,” he says.

Getting the Details Right

The nascent scientific discipline of social networks is bringing new understanding of innovation’s two components—fostering new ideas and diffusing them—according to Centola. He says the field’s key insight is that networks behave counterintuitively.

“We might assume that networks with access to more information are better for innovation,” he explains. “But if people constantly have high levels of information, it’s easy for them to default back to everyone else’s ideas.”

Centola ran eight competition experiments, giving one problem-solving team “fireworks” networks, in which they can easily access broad but limited information regarding the activities of others. The second team, on the other hand, worked with “fishing net” networks, which offered more-limited access to the same information.

“The fishing net teams always found the best solution,” Centola says.

Once an innovation is conceived, the next step—getting it to take hold within an organization or to change—also happens through a social network; and some ideas are more “contagious” than others. A “simple” contagion is just a new way of doing the same old thing, Centola explains; while a “complex” contagion challenges basic assumptions about what good solutions look like or how a business operates. “This may entail significant risk,” he says, “because the real value of innovation is often unknown at first.”

For the latter, the solution lies in what Centola calls “wide-bridge” communication, which runs through multiple overlapping social connections rather than narrow, liaison-driven collaboration that relies on broker relationships. Centola cites the Human Genome Project: Each of more than a dozen labs had its own established norms and practices; but via multiple overlapping information- and discovery-sharing practices, each retained freedom to adapt its problem-solving approaches as deemed fit without ideas being funneled through a centralized authority or a handful of key brokers.

Centola’s findings emphasize the importance of clearly delineated strategies when it comes to innovation, not only on the front end of creation but also on the back end of implementation.

There appears to be a financial incentive. Consultancy Stryber recently analyzed 1,838 listed US and European companies from 2010-2019. The analysis indicates that 68% were not major innovators and also did not deliver big shareholder gains. Stryber also found that the firms that most diversified their revenue segments—which Stryber believes is a reasonable proxy for innovation—delivered shareholder returns 54% higher than those that didn’t diversify at all.

There’s more than one way to innovate; but regardless of the model, companies must trust their innovation teams enough to free them from conventional thinking and recognize that for new thinking to take hold requires every employee to be an innovator.

“More than ever now, the innovation engine needs to produce results in weeks or months,” says Deloitte’s Fazio. “Gone are the days or months, or years, to develop, validate and launch new concepts.”