The New Nature of Innovation Revealed

The paradigm of innovation as driven primarily by technology and science is passé. A new paradigm is emerging, with the publication of success stories of companies innovating through other ways. The Danish and Finnish governments jointly funded a study into the new nature of innovation, as a contribution to the OECD’s work on innovation strategy. Innovationmanagement.se asked the FORA team behind the report to present the highlights. FORA is a research and analysis division under the Danish Authority for Enterprise and Construction

The report speaks about a new nature of innovation. How would you describe the key differences with the past?

- In the past, technology and competition were the main drivers of company innovation. Companies had an “inside-out” way of thinking. They designed new products and services based on internal resources, and used their marketing skills to persuade consumers to purchase.

- Technology has always played an important role in driving innovation, and will continue to do so, but for many companies technology will move from being a driver of innovation to becoming an enabler of innovation. New drivers of innovation are emerging and gaining importance to become as important as technology once was.

The New Nature of Innovation provides helpful insights into how innovation has changed in recent years. It also provides helpful thinking on how governments should respond to these changes and strengthen innovation.

Pilat, Head, Structural Policy Division, Directorate for Science, Technology and Industry at the OECD.

- In the future, companies will need to become more open; i.e. to learn from their customers, collaborate with others and assume greater social responsibility. If they do not do this, they will not survive. While companies will still optimize their businesses, globalization and the digital technology are changing the rules of the game.

Four drivers transforming how companies innovate

The report mentions four new drivers of innovation. In what way are they new? Did they not exist as of innovation in the past?

- The new nature of emerging innovation has a number of critical characteristics which differentiate it innovation in the industrial era. There are four drivers that are transforming how companies innovate:

  • Co-creating value with customers and tapping into knowledge about users
  • Global knowledge sourcing and collaborative networks
  • Global challenges
  • Welfare challenges.

- These four drivers of innovation illustrate important new trends or areas where new things are emerging. Until recently, these trends have been developing on a small scale within particular companies or niche markets. What is new is that more and more companies are reacting to the changing conditions for business and are beginning to innovate in new ways. In other words, they are changing their strategies and business models.

- No single company will react to all of the trends described. However, we believe that if companies want to remain innovative and competitive, they will have to adapt to today’s business environment in one way or another.

Public-private innovation partnerships: a golden opportunity for companies

Which of the report’s results do you think will have the biggest impact on companies, and why?

- The notion of innovation is changing radically. Previously, R&D was about developing the best technology and pouring large amounts of resources into long term projects in company R&D departments. But innovation today is no longer only technology based. Realizing what is important now and for the future requires that company executives adopt a different mindset.

- Consumers are increasingly demanding products and services based on individual experience. Companies must think about new ways to deliver their products and services. By using tools for co-creation and taking advantage of existing as well as new technology, companies will be able to mass produce individual experiences for large numbers of users.

- Companies are recognizing realizing that global challenges, such as climate change, supply of clean water, epidemics, and social needs, constitute huge new markets. By creating new and more responsible and sustainable solutions, companies can cultivate new business opportunities. ‘Corporate social innovation’ may be an important new business area for private companies and a core driver of innovation.

- The demand for innovation in public services would seem obvious. However, the difficulties seem substantial. Citizens want more individualized and higher quality welfare services, but the amount of resources allocated to the welfare system are under pressure, and the system’s ability to innovate is questionable. These challenges provide huge opportunities for private companies if they can find ways to innovate with the owners of welfare institutions; however, the domain of public services is fraught with political obstacles.

No single company can innovate in a vacuum

How would you recommend a company executive should approach and take advantage of this new type of innovation?

- Company managers must learn to work in new ways to be able to develop innovations that will keep their companies competitive. This will require two things in particular: working in partnership with other companies and organizations and opening up their innovation processes –e.g. to users, partners, suppliers and so on – in order to get new ideas.

- Companies will have to form collaborative networks and engage in binding innovation partnerships. No companies – regardless of size – will possess all the knowledge and resources needed to innovate on their own. Therefore, companies will need to access and combine globally dispersed knowledge on ever larger scales.

It is as if innovation can act as a bridge influencing organisations — suppliers and customers, research institutions and companies, public and private, government and non- government – and bridging between countries. Innovation in the future will be about ‘us’ and ‘them’, constructing together the bits to build new futures.

José Santos, Professor of Practice in Global Management, INSEAD

Transnational companies have always sourced knowledge globally, but in the future even the smallest companies will find it necessary, will have the opportunity to source knowledge internationally, in order to respond to global competition.

- Companies will have to open their innovation processes. They will have to listen to customers, and address needs on the customer’s rather than the company’s terms. Information and communication technology (ICT) will be a key enabler in co-creating unique value with individual customers and enhancing the consumer’s experience. ICT will enable companies to co-create with many customers simultaneously. Companies will involve users in the early stages of their innovation processes by tapping their tacit or hidden knowledge, and finding inspiration in new solutions to problems.

Public-private innovation partnerships: governments must assume new roles

What results in the report would you say will have the biggest impact on policymakers, and why?

- Governments will be required to play new roles in the future. They must be responsive and able to engage in interdependent relationships with private sector companies and organizations. Governments must provide solutions to societal challenges by involving the private sector and relying heavily on innovation.

- New partnerships will emerge and will be crucial for future innovation. Government and public institution participation in collaborative networks will be vital. Symbiotic relationships will be challenging for public sector institutions and will call for new mindsets and new competencies. Trusting partnerships between regulators and private companies could presuppose a new culture and new competencies in the public sector.

- Public institutions must adapt to the conditions of the new nature of innovation. They will be interdependent of other actors and must be ready to move away from control-based policy formulation towards influence-based policy. This will require a deep understanding of innovation and company behaviour and strong government leadership.

Innovating at the intersection of innovation and regulation

How would you recommend that policy makers facilitate the new nature of innovation?

- Governments could encourage innovation by investing heavily in new knowledge and competencies that promote its new nature. In the new nature of innovation, businesses will need to access knowledge beyond science and technology. They will require explorative knowledge about user needs and behaviour on a global scale. They will need the competencies required to design new concepts and platforms for co-creation and the competencies to tap tacit knowledge from users. They will need access to a wide range of disciplines such as social science, human science and the arts, enabling, e.g. designers and architects with business understanding, to work in multidisciplinary teams with natural scientists and engineers.

- To meet this demand from companies will require cooperation from universities and research and education institutions, and heavy investment by governments. Governments should focus on formulating smart regulation. Global challenges, such as climate change, clean water, epidemics and social needs, can only be addressed by a combination of innovation and regulation.

- To find the right balance between regulation and innovation will require smart public sector policies. Governments must set new and demanding standards, but their timing must coincide with technological possibilities. If the regulatory authorities do not have the knowledge required to formulate smart regulation, collaboration with research institutions and private companies will be needed to help with its design and implementation.

- Government must learn to exploit public demands more intelligently. The public sector – and especially the welfare system – are under pressure. There are severe budgetary constraints and a lack of innovation capacity in the public sector. Governments could open the public sector to private innovators. Public procurement could be designed more intelligently to enhance private innovation, and public institutions and private companies could form innovation partnerships and create new welfare services.

Tanja Bisgaard, Chief Analyst at FORAThese responses are from Tanja Bisgaard, Chief Analyst at FORA, and responsible for the team that produced the report.

By Frode Lundsten, MBA, Guest editor for Denmark

C.K. Prahalad about the report

C.K. Prahalad, Ross School of Business

“This report to the OECD on the new nature of innovation is an important milestone. It represents four significant philosophical departures. First, from a traditional ‘firm centric view’ of innovation, this study moves us to a ‘personalized, cocreated view’ of innovation, from the centrality of the firm to the centrality of the individual. Second, it demonstrates the institutional interdependencies in the innovation process where specialized skills are sourced from around the world. Third, innovation is seen not as episodic but as interactive, iterative and continuous. Fourth, it is a call for the democratization of innovation. Consumers not just institutions will have a voice in the innovation process. The entire ecosystem – of suppliers, nodal firms and consumers, will be involved in the creation of value. Collaborative capacity will be critical for innovation. This is a bold and timely departure from the traditional view. I recommend this report to policy makers, managers and students of management.”

C.K. Prahalad, Paul and Ruth McCracken Distinguished University Professor, Ross School of Business, The University of Michigan
For more information on the study please see www.newnatureofinnovation.org

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  • http://uk.linkedin.com/in/zulfiqardeo Zulfiqar deo

    I agree with the need for innovation to be seen as more than commercialising technical developments. I spent most of my MBA working on innovating Strategic Thought in collaboration with industry, http://www.box.net/shared/1cgxb3z718 , has my article on the need to separate Strategy Implementation from Strategy Execution. Hope it helps to show how industry and universities can work together in ways that allow all sides to benefit outside the sphere of commercialising technology.

    Look forward to any comments.

  • http://www.lundsten.net Frode Lundsten

    Zulfiqar,
    Thanks for your comment. Interesting article and well-written argumentation for the separation of strategy implementation and execution. I agree that industry and universities in a triple helix context can benefit from working together and collaborate to a higher extend than today, but legislation in several EU countries does not permit universities to assume business risks thus difficult to enter into equal partnerships in hybrid research consortiums.

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