Innovation: Transforming the way business creates

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Innovation: Transforming the way business createsThe innovation imperativeWhy innovate? Innovation has become thedefining challenge for business everywhere.A decade ago, companies saw survival andgrowth in terms of restructuring, lowering costs andraising the quality of their goods and services. Sincethen, commoditisation, privatisation and deregulationhave swept the world—from the advanced economiesKEY POINTSof the United States, Japann Innovation is increasinglyand Europe to the rapidlyimportant for companies and emerging markets of the Asiagovernments.Pacific rim and Latin America.Thanks to the internet, airn The evidence of a link betweentravel and improved patentingprocedures, access to theinnovation and performance isstronger among firms and industriesthan among countries. latest technology has becomeBut even at the national level, universal. Today, few firms anywherecan feel secure behindinnovation may help to improveeconomic performance.their established brands, longstandingcustomer relationships,proprietary technology,n Innovation requires clear thinking,an ability to improvise anddogged determination.or tariff barriers. The competitivepressure on them is globaland immediate.Companies everywhere, especially those in advancednations with high labour costs, have becomepainfully aware that even in their new slimmeddown,outsourced, globalised guise, they cannotconduct business as before. No matter how goodtheir quality, standard products made in the standardway cannot sustain a firm’s competitive edge.Business leaders in companies big and small, inevery industry, have started to refocus on top- andbottom-line growth. And the general consensus isthat one of the best ways to achieve this is throughinnovation. The reaction of consumers to suchproducts as the iPod and the BlackBerry suggests thatcompanies can grow faster if they innovate. This givesthem a head start, if not an unassailable lead.A large number of studies have found a positiverelationship between research and development (R&D)and growth in output. Studies of the effectivenessof firm-level R&D use productivity to measure performancerather than profits. It has been difficult toestablish a direct link between innovation, or R&D, andprofits, in part because the variety of influences thataffect profits may be greater than for productivity.Other results that emerge from most of thesefirm-focussed studies include: process R&D is morebeneficial for companies than product R&D; basicR&D typically yields more than applied R&D; and R&Dreturns vary considerably between industries, withthe highest returns occurring in research-intensiveindustries. R&D should not be confused with innovation,however. A company may invest heavily inresearch and not come up with a single, good idea.Indeed, our survey suggests that more innovationscome from sales and marketing than from R&D (seepage 19). But even so, without a good R&D effort,it would be hard to translate most of the ideas intoinnovative products and services. Given that R&D israrely more than 5% of a company’s total revenue,increasing R&D activity would seem to be a winningcorporate strategy.It is argued that countries generating innovationcreate new technologies and encourage the adoptionof these new technologies. As a result, they growfaster than those that do not. The message that innovationis important is being heard by governmentsas well. The Organisation for Economic Co-operationand Development (OECD), a governmental groupingof 30 advanced economies, has been at the forefront © The Economist Intelligence Unit 2007
Innovation: Transforming the way business createsof those emphasising that long-run economic growthdepends on the creation and fostering of an environmentthat encourages innovation. Innovation is consideredan important driver of long-term productivityand economic growth. It is argued that countries thatgenerate innovation, create new technologies andencourage adoption of these new technologies growfaster than those that do not. However, the OECD’s empiricaltests of this proposition have been sparse, andthose that have been undertaken for a limited numberof OECD countries have yielded ambiguous results.The conventional wisdom is that innovation ismost likely to drive growth in the highly developedcountries, while poor and middle-income countriescan import technology from abroad and thereforeneed not bother to innovate domestically. However,our study indicates that for high-income countries,innovation yields a smaller impact on economicgrowth than for low- and middle-income countries.This is true for the top two countries in our innovationranking, Japan and Switzerland, (as well forsome innovative Euro-zone economies and Israel),whose economies have not grown rapidly for thepast decade.This finding also reflects the fact that for lowandmiddle-income countries, domestic innovationactivity tends to facilitate the more efficient andrapid absorption of imported technology. Thus, theybenefit from their internal innovativeness as well asfrom the spillover effect of foreign innovations. Thiswould tend to increase the catch-up prospects of themore innovative middle-income countries, such asChina and Mexico.Innovation defined Innovations have two maincharacteristics. First, innovations break the mouldby applying knowledge in some novel way. Second,innovations are the result of a chain of events thatstarts with an original idea, invention or discovery,and then proceeds (usually in a chaotic manner)Which of the following steps does your organisation generallytake in support of planned innovation initiatives?Select all that apply. (% of respondents)Create a dedicated team not distracted by current business operations41%Empower the internal venture to take appropriate risksProvide appropriate funding to the ventureProvide senior executive support to the ventureInsist on objective evaluation of progress by a senior executive team27%None of the above6%Don’t know3%37%39%50%through prototype construction, financing, customerdemonstration, field trials, engineering, production,marketing and finally sales. Only by successfullycompleting this obstacle course can an invention beconsidered an innovation. An invention that costsUS$1,000 to make can easily cost US$10m to turninto an innovation.Innovation, it has been said, is like climbing amountain. There has to be a plan of attack, a teamof talented mountaineers assembled, money for theventure secured, a full supply of provisions madeavailable, and all the appropriate equipment hauledto base camp. There are usually well-trodden paths upthrough the foothills, and numerous potential routesto the top—some riskier but quicker, others safer butslower, still others that have yet to be reconnoitred.There will be many disappointments, with successrarely coming quickly or even at the first attempt.Apart from skill and resources, the most importantrequirements are a clear head, an ability to improviseand dogged determination.Innovation is no less an ordeal. But, just as mountaineerswho have scaled the peaks successfully havebequeathed charts for subsequent climbers to retraceor amend, the pioneers of innovation have likewiseleft route maps for the rest of us to use. What theydemonstrate is that there is no one way to innovate.© The Economist Intelligence Unit 2007 7
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