Don't Go It Alone; Why Companies Are Broadening Their Innovation Channels
Today’s progressive companies are realizing that innovation is about generating new value for the organization. In doing so, they are redefining what innovation is and the process of how they go about achieving it.
An innovation channel is the path that you take in the pursuit of exploring and realizing an idea or concept. Companies are seeing that in order to fully realize this potential, they need to start to look beyond current stereotypes of innovation to a much broader set of options on how they can pursue this new value creation.
What’s driving this change is a clearer understanding of what corporate innovation is. In the modern corporate world, innovation is about VALUE creation. Innovation includes every activity that is looking to create additional value through new or improved processes, technologies and methods. This concept of value is not how innovation has traditionally been positioned and viewed within organizations. It has been viewed from a technology or process lens, and we too often talk about the tools rather than what we are looking to achieve. In doing so we make it difficult for organizations to make the connection between innovation and how it impacts the organization’s long term success.
To better explain the concepts of value creation and the connection to innovation, let’s start by looking at one area of value creation which is productivity improvement. Going back to Economics 101, we have all probably come across the Cobb-Douglas function at some stage of our life.
Total Production (Y) is a function of capital and labor, and how well these inputs are leveraged as Total Factor Productivity (TFP). Once you remove any unused labor or capital from the equation, a further reduction in either will result in a loss of production. For companies that want to reduce costs while increasing or maintaining output, productivity improvements through innovation then become necessary. Through innovation, if we can improve total factor productivity, all else being held constant (capital and labor), we can increase the total output and production.
Looking at innovation from the perspective of longer term impact on company and shareholder value, we can use the Gordon Growth Model shows the relationship between stock value and long-term dividend growth.
A higher expected growth rate increases the value of a company’s stock and market capitalization. The value of stock is a function of dividend (D), divided by the investors required rate of return (r) minus expected growth rate (g). What we see is that the stock price is very sensitive to long-term growth expectations. If we look at the purpose of innovation as creating new value, then innovation becomes core to driving long term shareholder value.
Applying this broader value-based definition of innovation to a few examples:
Is an acquisition innovation?
If the deal is accretive, then yes it can be considered innovative as it is finding channels to create new value for the organization.
What if we were to make a purchase that is not initially accretive, but we think there is potential for significant upside value? Once again, if these acquisitions are done with the expectation of potential upside value, then yes.
Is a new partnership innovation?
If through the partnership net new value is created, then yes, the forming of the partnership and the synergistic value that is created is innovative.
Is installing the new IT system innovation?
If the system creates value over its life in excess of its total cost, then yes it can be considered innovative.
For many innovation practitioners, this concept of value remains foreign, but it is the companies that can change their perspective that will really benefit from promoting and leveraging this broader concept of innovation. Over recent years, we have seen the broadening of corporate innovation channels both internally and externally to include channels such as incubators, accelerators, research labs/centres, cross functional and cross company teams, partnerships and joint ventures, as well as direct investment/company venture capital funds as examples. The golden rule of determining the best innovation channels is what is the best path to pursue or what additional capacity and capabilities do we need to maximise our chance of success. Companies are now realizing that by broadening innovation channels, they can broaden their thinking, accelerate their innovation, and improve the chance of a successful and positive outcome.
As the next frontier, companies are now pursuing the goal of engaging every employee as new value creators. How do we get every employee to think about what they could start doing or do differently to create incremental value for the organization? This is where the real potential of corporate innovation lies, when companies can harness every employee to help drive innovation and for this innovation culture and mindset to be part of the employee’s everyday work life and culture.