Rethinking Innovation

Although 84% of executives agree that innovation is a key business driver, only 6% are satisfied with their innovation performance. The mismatch is unlikely to disappear soon as most of them have no idea why they fail, according to consultancy McKinsey & Company. Part of the reason behind such poor performance is a lack of understanding of what exactly innovation is. For example, Peter Drucker, a management consultant and writer whose work gave the foundation for modern business management, considered innovation as a core business function which reinforces marketing efforts to generate profit. As he put it: “Marketing and innovation produce results; all the rest are costs.” This remark suggests rethinking the concept of innovation to get a broader economic perspective and, at a more practical level, get a point of reference in pursuit of better innovation management.

“Innovation won’t overcome stagnation”

Despite having significant benefits, today’s innovations do not have as much transformative potential as the inventions of the Second Industrial Revolution such as electricity, internal-combustion engines or communication technologies like the telegraph, telephone and radio. In fact, many tech firms focus too much on consumption rather than innovation. More specifically, they are improving marketing and distribution channels of existing products and services rather than developing new ones as well as enhancing efficiency rather than transforming the work itself, argues Satyajit Das, a former banker, ranked one of the world’s 50 most influential financial figures in 2014 by Bloomberg.

Moreover, he observes the destructive impact of new technologies on the growth and productivity of existing industries:

“Smartphones and tablets cannibalized computers, mobile phones, portable music players such as the Walkman and digital assistants like the once-ubiquitous Palm Pilot. They replaced low-end cameras and watches. They incorporated GPS and other standalone technologies. Alphabet Inc. and Facebook Inc. divert advertising revenue from newspapers and magazines. Inc. and other online sellers have taken market share from existing retailers. Netflix Inc. has cannibalized television, video stores and cinemas.”

The tech disruption often does not result in new streams of income but income redistribution instead. For instance, the revenue gain from smartphones brings the revenue loss from all the replaced products. In addition, the reduction of operational costs often comes at the expense of product quality and employee training. In many cases, revenue is extracted from personal assets. This is how access (‘sharing’) economy businesses like Uber or Airbnb operate, Das explains.

See also The Sharing Economy: Beyond the Hype and Assumptions.

Paradoxically, the tech disruption can boost and harm the economy at the same time: On one hand, lower-cost products and services leave more disposable income for consumers. On the other hand, the decreased cost often means lower income for employees and reduced employment options. This can have a direct negative impact on total economic activity driven by consumption. “Innovation won’t overcome stagnation,” Das concludes.

Open innovation as the new normal

According to Jacob Morgan, an author and futurist who specializes in the future of work and employee experience, open innovation has vast transformative potential, which can already be traced across industries: companies have started teaming up with outsiders and exploring new cooperation formats to develop innovative solutions. It is an alternative approach to the traditional concept of workplace innovation, where organizations are trying to innovate using their own resources. This work format, however, does not work if a company has limited resources at its disposal, and faces major workforce changes. Open innovation addresses this drawback by giving the opportunity to combine the core competencies of each team and to utilize the best available resources.

“At its core, open innovation is going outside your own company walls to co-innovate with another organization, team, or individual,” Morgan explains. This can take different forms. For example, teams can “scan for opportunities”, especially if it concerns technology, business acquisition and information exchange. They can also share a vision for the future and turn it into concrete product improvements.

Companies which opt for open innovation face various challenges which can compromise cooperation, including a willingness to take the same investment risk or mutual trust to share work-related information. In Morgan’s opinion, most of the challenges can be overcome with good communication.

“To start with open innovation, consider how it could be used in your organization, and then get out there and talk to people that could be a good fit to collaborate. As technology and the future change, being able to innovate, collaborate, and adapt will be more important than ever before. Open innovation gives companies and individuals the tools to lead the way,” says Morgan.

“Stronger” patents = more innovation?

Vera Ranieri, Staff Attorney at the Electronic Frontier Foundation (EFF), working on a patent reform, is critical of “stronger” patent laws that are being lobbied in the US. In this context, stronger means “easier to get and / or harder to invalidate”.

In her opinion, the lobby’s argument that “stronger” patents will lead to better funding for research and development (R&D) and, eventually, more innovation is too simplistic. She agrees with the conclusion of a recent National Bureau of Economic Research (NBER) paper that there is “[…] essentially no credible empirical evidence on the seemingly simple question of whether stronger patent rights – either longer patent terms or broader patent rights – encourage research investments into developing new technologies.”

Ranieri believes that the actual motive behind lobbying for “stronger” patents is to make them more enforceable. This would especially benefit law firms as they could file more patent applications and patent infringement lawsuits.

Although patents might provide some incentive to innovate, their potential impact is offset by the barriers they create to boost innovation. “Patents work to prevent the development of follow-on innovation until that patent expires, delaying innovation that would have occurred, but is prevented by the grant of an artificial, government-backed monopoly,” claims Ranieri.        

In her final comment, she warns that lobbying for “stronger” patent law without having solid evidence of its value might actually cause severe damage to the innovation economy if enacted.

References: | Satyajit Das, Bloomberg | Jacob Morgan, Inc. | Vera Ranieri, | Heidi Williams, National Bureau of Economic Research (NBER), How Do Patents Affect Research Investments?