But… What about innovation as a concept? In these lines we will try to approach it on a more theoretical level, to get to know the vision of some authors who dedicated a good part of their lives to studying it, and we will answer some questions that you will find interesting and that will also help us to understand it a little better.
Which definition should I choose?
Before going on, we must be clear that there is no perfect or complete definition of innovation. As with so many other things, it will depend on the circumstances, the observer’s point of view or the context we are talking about. However, there is a term that is often related or compared to innovation, and that can help us to define it: R&D. And no, we are not talking about the same thing; R&D and innovation are two different things. But let’s bring two additional concepts into the equation: wealth and knowledge. Let’s forget about competitive advantages, products or services for now.
Simplifying as much as possible, if R&D is the process of transforming wealth (economic resources, human capital) into knowledge… we could say that innovation is precisely the inverse process: taking knowledge and transforming it into wealth. In five words: transforming knowledge into wealth.
But wealth that brings more than just financial resources, wealth in the sense of solving problems or improving our quality of life. That is the essence of all innovation. But not to be so minimalist, we could describe it as the process that goes beyond mere invention and focuses on the effective application of new ideas to generate added value for customers and gain a competitive advantage in the marketplace.
A scholarly touch
Joseph Schumpeter, the great economist and scholar of innovation, left numerous contributions to posterity. Perhaps the most important was his theory of ‘creative destruction’, which elevates innovation to the status of an engine of economic development. Just by reading the name by which his theory was known, one can intuit this dynamic whereby products, services, processes or even entire markets disappear as obsolete, to make way for new ones that improve on the previous ones in one or more ways.
Paul Romer’s model
Another leading economist in this field is Paul Romer. His theory breaks with the traditional growth model, which basically relates production (of goods/services) to labour force and capital stock.
Romer’s model introduces the generation of ideas (knowledge), a new variable which, together with the traditional variables (labour and capital), explains production, but with increasing returns as a result of this combination of labour and knowledge, an important nuance and the opposite of the classical model, which predicts decreasing returns. It earned him the Nobel Prize in Economics in 2018.
Beyond the brief definition we saw at the beginning, the thesis that knowledge is a fundamental input for innovation is very common among academics, especially the most current ones. It is a consensus that highlights a certain collective awareness – which has been growing – that the most important thing in a company, and by extension in an economy, are the people who are part of it, the ideas they have and what they are capable of doing with them, very much in line with Romer’s approach.
We could go on gathering more academic contributions, because there is a lot of literature on the subject. However, there is a fundamental question to be asked. If innovation is so important in companies, what requirements must it meet?
Conditions for innovation
While all innovation stems to a greater or lesser extent from prior knowledge, not all knowledge can lead to innovation. Theorems aside, there are three basic conditions that generally enable the innovation process:
- Utility: what good is it to the potential customer? The market must perceive value in terms of efficiency, quality, profitability or satisfaction. Without utility there is no innovation.
- Replicability: The idea or knowledge must be replicable, or can we talk about innovation if we can only manufacture one product unit, or sell the service once? It does not make sense. And if it does, we should call it something else.
- Novelty: You don’t need a disruptive idea. Just think for a moment and you will see that not all innovations have involved an outright disruptive change, but a new combination of several existing ideas, a different use of a product that is not new, or redirected consumer preferences. In any case, there is some novelty, yes, but not necessarily in the product or service itself.
- Peter F. Drucker, considered the father of business management, clarified that innovation is not only limited to creating new and revolutionary products, but also to finding new ways of doing things, improving processes and adapting or anticipating changes in the market and society. He established so-called ‘systematic innovation’ which, in a nutshell, is a deliberate and structured approach to identifying and seizing opportunities to innovate in the business context.
- These opportunities are like a drawer, the larger the size of the company, the bigger the drawer. If there are two of us in the business, innovation is a two-man business, but what if there are 20,000 of us? There is a lot to contribute, and perhaps in the most unexpected corners of the company. Innovation is everyone’s business.
Finally, there is another question that makes more sense at the end of the day. As Lord Kelvin said, ‘What is not defined cannot be measured. What is not measured, cannot be improved. What is not improved, always degrades‘’. So, to close the circle we need to ‘score ourselves’ in some way.
How can we measure innovation?
Measuring innovation is essential to assess its impact, to feed it back into the company’s strategy, and to contribute to its long-term sustainability. There are several indicators we can use to assess innovation performance. Let’s look at them:
- Number of new ideas proposed
- Percentage of ideas selected for implementation/implementation
- Number of unsuccessful projects (to identify areas for improvement and learning)
- Speed to Market or Time to Market
- Revenues generated by new ideas
- Percentage of sales of new products
Conclusions
And now that you have come this far, let’s realise that in the end ‘innovation’ is the term given to a concept that implies or encompasses much more than it seems to us at first glance. It is not a specific area of a company, nor even a global strategy or an economic-business paradigm, but rather the backdrop behind a large number of technological advances or changes of various kinds that have made society as a whole grow.
