As companies and countries search for the next path to growth and development, their leaders cannot get away from the challenge of innovation.
Everyone is looking for the genius innovator, killer application or product that will rocket them to top of the growth league. If you find another Steve Jobs, your country’s wealth could increase by US$600 billion (the market capitalisation of Apple), or roughly the annual GDP of Switzerland or Saudi Arabia.
There are two mainstream views of innovation, both attributed to the Austrian economist Joseph Schumpeter. Drawing on his explanation of the Industrial Revolution, he argued that economic growth is driven by innovation created by entrepreneurs who combine technical or scientific knowledge with business models that propel growth in the economy.
Schumpeter’s view of innovation changed when he moved to Harvard in the 1930s. After witnessing the power of large corporations, he argued that only these institutions have the scale and resources to operate the large research laboratories and then take these ideas to the market place.
Based on the Schumpeterian linear model of innovation from laboratory to market, many countries began to develop science and innovation policies, spending on basic research, technology parks and, more recently, incorporating market needs as national strategies. South Korea has just launched its “Five-Year Green Growth Plan” to make the country the world’s 7th ranking green economy by 2020. The plan mobilises the whole country from citizen to business to deliver “Green Growth for Future Prosperity”.
In a recent important book, Innovation Re-Invented: Six Games that Drive Growth (University of Toronto Press) Canadian management consultants, Roger Miller and Marcel Cote argue that it is market conditions, not R&D, that shape innovations and drive innovators’ strategies. They examine in a novel way the factors that shape innovation in the economy, by classifying products and markets into six classes, each one calling for different innovation strategies.
The first group is the “Eureka! Game”, easily recognised as someone inventing a new product that catches the public imagination and is defended through patents and brands.
The second group is called the “Battles of Architecture”, evolving from network competition in the telecom business. Networks have a “winner-take-all” characteristic. Today’s Battle of Architecture is being fought in the smart-phone area – whoever wins with the hardware (like the iPhone) that allows the downloading of apps that catches the largest following is the biggest winner.
The third class is “System Breakthroughs”, where a demanding customer induces an expert firm to master a specific technology to meet customer needs. This typically comes from collaboration between two different producers, such as Toyota adopting aircraft design technology and skills from French aircraft manufacturer Dassault, or Microsoft collaborating on its software skills with IBM. System Breakthroughs are not always defended by patents, but via such superior service and quality that it is not easy for the customer to switch.
The fourth class is “New and Improved” games, usually undertaken by large firms with established products that they need to continually upgrade in order to differentiate their product and services. These are often in consumer products and intermediate goods, which are at risk of being commoditised when they lose profitability.
The fifth class is ”Mass Customisation”, a competitive game between giants that need to get the profit edge from brands, but if they are able to “personalise” products for the mass market, they win big. Mass Customisation is not a single product innovation, but a business model where there is continuous improvement over product and platform that delivers smart services to customers. It calls for smart use of technology that increasingly enters the mass-market through social media and new IT tools.
Last but not least, major players innovate through “Pushing the Envelope”, where they assemble the best experts, technology and platforms to change their competitive edge. This is where governments as major customers can play a driving role. For example, the US Defence Advanced Research Projects Agency (DARPA) evolved a multi-disciplinary approach to use basic research and innovative technologies to address defence needs in practical ways. Innovative firms are given research grants with time limits to develop new products for defence use. That methodology has been successfully replicated in various commercial applications.
How should governments think about promoting innovation in our economy and business? Miller and Cote suggest six broad public policy considerations. The first is to create new industries through new market games, by fostering a positive environment for local entrepreneurs to succeed in new market games, including supporting start-ups in budding markets; protecting intellectual property rights; and basically helping businesses transfer new ideas into commercial innovations.
The second is to develop a pool of technical and managerial talent that fast-growing firms can tap to plan new market games. We need better engagement and interaction between research-oriented universities and innovative firms. There are almost no walls between Stanford, CalTech and Silicon Valley. In simple ABC terms, academia must learn how to cooperate with business and the civil service towards supplying talent, ideas and generating applied innovation. Too often, they don’t talk with one another.
Thirdly, competition laws shape “Battles of Architecture”, because there are complex coalitions of concentrated market power that could turn oligopolistic rather than globally competitive.
Fourthly, government sponsorship of System Breakthrough projects works well when the research trigger games that generate significant commercial innovation.
Fifthly, because governments also invest in infrastructure, they can help firms “Push the Envelope”, sharing risks that would enable local firms to develop skills to compete at the global level.
Sixth and finally, public policies should aim to nuture a competitive business environment that values continuous innovation and competition as a way of life.
All this sounds familiar, but is very hard to achieve. Many technology parks often end up as property plays. Innovation guru John Seely Brown argues that innovation is often institutional, where bright individuals and organisations come together and collaborate in evolving networks of creation. They learn, copy, build and compete with each other until something new evolves. In short, they game each other.
How to foster creation nets in each social environment is clearly the game that is being played in many emerging markets today.
Andrew sheng is president of the Fung Global Institute. www.fungglobalinstitute.org.