INNOVATION
Innovation is the process of turning new ideas into value, in the form of products, services, business models, and other new ways of doing things. It is complex and goes beyond mere creativity and invention to include the practical steps necessary for facilitating adoption. New developments tend to build on earlier versions, in a way that fuels productivity and economic growth. It is now clear that truly innovative firms can have significant impacts on business and society as a whole while outperforming their peers in a number of ways.
According to The Future Of Growth Report 2024, Digitalization rates across advanced and developing economies are diverging rather than converging, leading to persistent economic divides and missed opportunities for innovation. In high-income economies, talent availability is an increasing bottleneck to further advance innovativeness, while opening an opportunity for trade in services from developing economies. Within the Innovativeness pillar’s global average of 45.2 are large differences across country income groups. High-income economies’ average score (59.4) is more than twice that of low-income economies (26.8), and about 50% higher than that of upper-middle income economies (39.3), revealing a correlation between the innovation-alignment of countries’ growth trajectories and their GDP per capita.
Open Innovation
Established companies innovating together with startups, often called “corporate venturing” or “CV,” is a fast-growing phenomenon that takes many forms. These include corporate venture capital, corporate accelerators, venture clients, venture builders, and joint proofs of concept, to name a few. Since 2016, corporate venture capital investment has increased four-fold globally; this is a part of open innovation, a growing paradigm that assumes firms can and should use external ideas and paths to market as they look to advance their technology. These external inputs may come from startups, governments, universities, venture capital investors, or accelerator programs. The South Korean multinational Samsung, for example, gained a foothold in next-generation quantum computers by directly investing in the startup IonQ, which later went public, and German athletic apparel company Adidas partnered with the California-based startup Carbon to develop a 3D-printed shoe.On average, nearly 69% of corporate-startup innovations fail, however, according to a report published in MIT Sloan Management Review. So, what is the remaining roughly 31% doing differently? What is the right structure, degree of autonomy, and sources of deal-flow for the teams running corporate venturing and startups, for example?
Some popular myths include the notion that corporate venturing is only for large corporations (many small- and medium-sized enterprises are pursuing it), and that it is just corporate venture capital (it encompasses other mechanisms such as the “venture client,” where the corporation is the first client of the startup). Some also mistakenly think CV is just about intuition; abundant data are available to drive it forward strategically. Looking ahead, there are two predominant trends.
The first is a growing number of corporations innovating with deep-tech startups, or those with emerging technologies based on scientific discoveries and offering a substantial advance over established technologies (illustrated by the expansion of the American chipmaker Intel’s deep-tech startup accelerator Ignite). The second is a growing number of corporations forming small groups to innovate with startups - so called “CV squads” - to share costs, anticipate opportunities, and strengthen value propositions. The carmaker Volvo, for example, did this by teaming up with telecommunications firm Ericsson and others. To capture the true value of corporate venturing, in terms of fielding innovative new products and services, chief innovation officers should make a point of reviewing their existing CV strategies.
Innovation Ecosystem
“Government” may not be the first thing that comes to mind when thinking about innovation. Yet, together with academia and industry, it is a key pillar of the innovation ecosystem necessary to foster economic and social development. Some of the greatest innovations - such as spaceflight and the internet - have been made possible through government support and resources including financing and the testing environments needed to scale up impactful ideas. Governments themselves are constantly in need of greater innovation, in areas like drones for delivering medical supplies, sustainable urban farming, and digital twins for smart-city infrastructure - and there is untapped potential in many regions. For example, Europe is home to a wealth of research done at universities and in companies and governments. Max Planck Gesellschaft, Centre national de la recherche scientifique, and the University of Oxford are just some of the global leaders in the region, yet more can be done in terms of commercializing their discoveries. It is worth noting that it has been estimated that nearly 95% of the existing patents in Europe are inactive.
Among the reasons for this: private investors tend to be unwilling to fund research projects, which are usually characterized by high risk and complexity, significant expenses, and long gestation periods.
As a result, researchers often lack the resources required to locate and validate the right market to commercialize their discoveries - an innovation gap sometimes referred to as Europe's “Valley of Death.” Keeping in mind that Europe's active patents, or just 5% of the total, contribute to more than 40% of the region's GDP (according to the European Patent Office), is there a way to improve the process of commercializing discoveries? According to a European Commission study, three lines of related work have been explored. The first is tailoring co-investment mechanisms for early-stage ventures (such as proof-of-concept projects), while grouping together corporations and private investors interested in science-based startups and bolstering philanthropic funds (including those focused on impact investing). The second is tailoring existing investment mechanisms for technology transfer, while validating related policies via small experiments (sandboxes). The third is better supporting technology-transfer while aligning regulatory frameworks to simplify nation-wide scaling for startups.
Business Model Innovation
The internet spawned Airbnb, Amazon, Netflix, Uber and many other companies that have used business model innovation to rewrite the rules of their industry. That means they managed to change accepted ways of doing business, challenged the status quo, and served new customer needs while meeting existing needs in new ways. In doing so, they created enormous wealth for shareholders while providing useful services for customers. They have also been sources of inspiration for more established firms like Bosch, IKEA, or Philips as they assess and update their own business models. To better understand business model innovation, it helps to define what a business model is. As noted in the 2021 book Business Model Innovation Strategy, these core elements characterize a business model: what, how, who and why.
More specifically, what activities does a business model encompass; how are these activities linked (for example, in terms of sequencing or exchange mechanisms), who performs the activities (which are performed by the focal firm versus those performed by partners, suppliers, or customers), and lastly why does the business model create value and enhance value appropriation for the focal firm?
Firms can innovate the "what" by adding or eliminating activities (for example, when Apple began selling and distributing content for electronic devices in addition to designing and manufacturing those devices). They can innovate the "how" by linking activities in new ways (Netflix first competed against video-rental stores through postal distribution, then via online streaming).
Firms can also innovate the "who" by changing who performs certain activities (Tesla performs the sales function in-house instead of outsourcing it to dealers). Lastly, firms can innovate the "why" by adopting new revenue models and value logic (for example, Dropbox makes basic file storage free but charges for additional capacity). Much business model innovation has been driven by advanced information and communication technologies that enable new ways of doing business, though it is distinct from technology and product innovation. Business model innovation often flows from a unique take on customer needs and the best ways to satisfy them. The idea of software-as-a-service, for example, represented by firms like Salesforce, was driven by a realization that customers do not necessarily care about owning software outright. Such business model innovation can be a powerful source of competitive advantage, though it requires astute implementation and simultaneous change in multiple parts of the organization.
Technology Innovation
Emerging technologies like quantum computing, augmented reality, and gene editing tools present many opportunities. At the same time, they are the cause of immense uncertainty. Some particular sources of that uncertainty include the market applications a new technology will serve, the users who will adopt it, the related activities that will support its expansion; and the business models that will be deployed to commercialize it. A holistic approach can help managers unbundle specific sources of uncertainty and the potential interaction among them, according to an article published in Strategy Science in 2021. For example, quantum computing has made several exciting technological advances, yet it can still be difficult to predict how it will evolve and create genuine value. Several questions remain regarding the technology, including at what point it can consistently and reliably outperform existing high-performance computing solutions.
While some early-stage approaches have utilized “quantum annealing” technology - which is an alternative method of quantum computing that is already becoming commercially available - the next generation of the technology, dubbed universal gate-based quantum computing, is not expected to become widely-scaled-up for several years.
In terms of specific applications, quantum computing can serve many industries. Possible use cases include finance (for trading and risk management) and logistics (scheduling and planning), and eventually pharmaceuticals (drug development), security (encryption), and more.
Still, there may be uncertainty about how various actors will contribute to the technology’s value proposition; quantum computing does not necessarily hold utility when used simply to solve current problems faster than existing solutions, so to realize its full potential reformulating old questions or raising new ones is needed (companies such as 1Qbit, which specializes in “recasting” questions and problems related to quantum computing, have grown in value). Cloud-based ventures, including those focused on data storage, will also be important for bringing quantum technology to commercial fruition. Ultimately, it will require a business model - though that is difficult to design when the technology is still rapidly evolving, and use cases are still not fully defined. It will likely be several years before its true potential becomes clear. Meanwhile governments via initiatives like the Barcelona Supercomputing Center (and its spin-off Qilimanjaro) and companies like IBM have been shouldering substantial related upfront investments.
Social Innovation
Examples of social innovation are all around us; they include everything from kindergartens and hospices to Wikipedia, Kahn Academy, and microfinance (small loans made to entrepreneurs in the developing world who do not have access to traditional financing). Social innovation is often defined as innovation that aims to tackle both social problems and the means used to address those problems. This can take the form of new products, services, initiatives, business models, or simply novel approaches to accessing public goods - often achieved by creatively re-combining already-existing elements. The field has developed rapidly in recent years, according to a 2022 report published by the Academy of Management, as new sources of funding, public policies, academic research, and networks emerge.
The everyday work of social innovation typically happens within social enterprises (organizations working to solve social problems using market-based approaches), charities, non-governmental organizations, social movements, or patient groups. Universities, large companies, and governments also play roles, particularly in terms of validating ideas; results have included the construction of public playgrounds and the commercialization of community-developed, open-source software.
One notable development in the realm of social innovation is the deployment of pay-as-you-go (PAYG) technology.
This enables companies to cater to people living in relative poverty, by accepting small individual payments for key services. As with prepaid phone services, customers can buy small and therefore more affordable amounts of credit.
Solar energy companies like Angaza and affordable water organizations like eWater Services use PAYG technology to reach customers that might otherwise be denied such services. However, a lack of immediate commercial incentives can make it difficult to raise the capital needed to support such social innovation. As a result, organizations continue to experiment with frugal innovation - to make potentially scarce resources stretch further. One example of this is the M-Pesa mobile phone-based payment and micro-financing service, which has been deployed in countries in Africa, Asia, and Europe to facilitate banking services without requiring access to an actual bank. Due to their limited funding, social enterprises often adopt hybrid for-profit and non-profit legal structures - enabling organizations like Sanergy in Africa to supplement revenue with philanthropic donations.