The state of innovation at the end of 2018

Since everyone is compelled to write at least one backward looking story at the end of the year, I've chosen as my topic a review of innovation at the end of 2018.  This review isn't meant to be an attempt to grade innovation activities or suggest better or worse approaches, but to think about innovation holistically and consider the implications and ramifications of where we are, and where we who would like to think of ourselves as innovators will be moving in the future.

Let's look way back to establish a baseline.  All the way back to 1997.

1997 - a dividing line

I often speak at corporate events, universities and conferences, and one of my favorite parlor tricks is to ask people why 1997 is so significant in the annual of innovation.  To me, 1997 is so important we could create a BCE and ACE nomenclature around that year.  We could think of the days prior to 1997 as "before modern corporate innovation" and afterwards as during or after modern corporate innovation.  Why 1997?

Two significant occurrences happened in 1997:  Jobs returned to Apple and set it on a course that made it the company all innovators want to emulate, and Clayton Christensen published The Innovator's Dilemma.  A lot that we do today is built on the recognition and the shifts that occurred based on these two facts.

Jobs took a once interesting company that was nearly bankrupt and made it the model of innovation, especially business model innovation with a lot of design influence.Christensen, from his perch at Harvard basically introduced innovation as a management philosophy.   Change didn't happen overnight, but it did catch fire relatively quickly after 1997.

Prior to 1997

Before everyone gets up in arms about my selection of a crucial date in innovation history, I'll acknowledge there were other important innovation dates, start from Eurypides and his discovery of displacement (the infamous bath incident) and continuing on through a range of inventors (Edison springs to mind) and people who attempted to structure innovation (Osbourne and Parnes) as well as other inventors of innovation methods (Altshuller as an example).  But while all of these have influence on what we do as innovators today, none have the current impact on management thinking in the way that Jobs' Apple products (and margins) do.  It's pretty common to hear that someone wants their next product to be the "iPhone" of their industry.  When your product becomes the avatar for success in several industries, you've had an impact.

Christensen and Jobs also reinforced the idea that large companies can and should innovate.  Many earlier writers, inventors or consultants were individuals or very small teams, either by necessity or government dictate or other reason.  Christensen's work seems to make innovation safe for large corporations and to create a pseudo-scientific approach that provides some comfort to executives who were formed in the days of operational efficiency.

2018

The state of innovation in any year is less influenced by the calendar, post 1997, and more influenced by the state of the market, the profitability and competitive factors a company faces, its culture and its management team. Taking these in reverse order:

• Management teams - in 2018 in a large corporation most executive management is in their early 60s.  They've been successful and achieved a very senior role, starting their careers in the late 1970s or early 1980s.  Most have an MBA from an established graduate program, and because of the date of their matriculation into the work world, and their experience in graduate school, have little education about innovation and few if any have led innovation projects.  These folks for the most part were steeped in management traditions of efficiency, meeting quarterly objectives, gradually increasing sales volumes, reducing errors and inefficiency.  As senior leaders looking to retire in a few years, their primary goals are to stay the course, build a legacy and to avoid any costly mistakes.  All of this means that innovation will be a low priority for these individuals until or unless the company has a dramatic challenge - rapidly declining sales, a powerful or compelling new entrant, an exceptionally fast changing technology base or exceptionally fickle and rapidly evolving customers.  Of course many of these executives are facing these issues but were schooled in times prior to the Internet and NAFTA when change was slower and more predictable.  
• Profitability - most companies that have good access to the financial markets have been living large over the past few years due to exceptionally low interest rates used to prime the economic pump.  Cheap money and a strangely stagnant wage base have meant that companies are relatively profitable even in the face of growing competition.  The Trump administration's work on tariffs will create government sponsored winners and losers, accelerating profits for some industries and placing a pall over others.  As long as profits are relatively high, the demand for innovation is typically low.  We can see change on the horizon, however, if trade wars increase and the Fed and other financial markets signal the end of cheap money.  As Buffet likes to say, we'll see who has been swimming naked when the tide goes out.  In this context that means we'll see who has invested those profits from the good years in innovations that should be reaching market now, as competition rises and cheap money ends.
• The market - the market, both the stock market, which signals consumer expectations about the future, and the economy in general, feel exceptionally strange.  It seems we are coming off a sugar high in the US, fueled by low taxes and cheap money, yet many of the signals of the financial crisis are emerging again - high student debt, increasing personal debt, borrowing at every level in the economy, including at the federal level.  This is money that will need to be paid back, and when the money comes due consumers will be forced to cut back.  As consumer spending is 70% of our economy, the economy will likely slow down, and demand for new products and services is likely to slow.  Then, when funds are scarce, only really interesting or differentiated products will command a premium.  As consumers pull back to pay down debt, the federal government will only be able to do so much in a divided Congress.  Thus, companies that have been innovating in 2016-2018 will benefit, and those that haven't likely won't have the funds to do so, and will miss a market window.  History has demonstrated that a significant amount of innovation happens during a market tightening and as the market starts to rebound.  Since the average recession in the US is approximately 11 months, we could see companies that have innovative products start to recognize these benefits in about a year or so. The companies that have been practicing innovation theater, talking about innovation without doing anything, won't be able to release anything meaningful in this timeframe.

You'll notice that I haven't written anything yet about innovation tools, methods, approaches or best practices.  That's because of the wide distribution of capabilities and experiences across companies and industries.  Some of the companies that know innovation best seem to have neglected innovation recently (looking at you Apple), while there are hundreds of larger corporations that haven't really implemented the basics of innovation in their organizations at all.  Since the level of sophistication is so low, many companies are still at the nascent stages of operationalizing an innovation function.  Yes many companies have an innovation success story but it is from one division or team, not a corporate capability.  This means that while there are proven innovation tools and methods, few companies even 20 years after Jobs returned to Apple and Christensen wrote The Innovator's Dilemma are really deeply invested and broadly capable of sustained corporate innovation.

Not a bleak assessment

This isn't a bleak assessment.  It takes time for these kinds of changes to occur.  US corporations didn't get serious about quality until the Japanese car manufacturers starting winning based on quality, but that data was out there for close to 20 years before GM, Ford and Chrysler changed and before the Malcolm Baldridge award was created.  It took close to 40 years (1960 - 2000) for the hyper-efficient, low risk, short term economic model that the vast majority of companies follow to become fully ingrained. It will take 20-30 years for it to be unwound to an extent and for these organizations to relearn and for younger leaders more schooled in innovation, agility and change to take the reins.

When these factors happen we'll see more innovation, because the other factors that influence innovation - the accessibility of information, the ability to create products and services, access to venture capital or financial backing, access about customers and their needs - are only increasing and rapidly available on a global scale.  When AirBnB can scale from a few guys in an apartment in Brooklyn to the same valuation as several hotel chains in about a decade, anyone can quickly scale a company if they have the right idea.

Alert to the press: prototypes aren't finished products

I rise today to do something I find strange.  I'm actually going to defend Elon Musk.  Musk is receiving a significant amount of negative press after his unveiling of the Boring Company's (if you need to throw stones, do so at that name) pilot tunnel.

To the shock and dismay of many people, the prototype is only a mile long and uses Tesla cars rather than the futuristic car depicted in mockups.  People who were invited to take part in the drive felt the ride was a bit rough and the cars didn't travel as fast as promised.  These are the same people who will complain about wrinkled table cloths at a five star restaurant - completely missing the artistry in the food.

For heaven's sake, Musk just unveiled a prototype tunnel under Los Angeles, built in the last year or so at his own expense.  Could we stop for a moment and recognize the work involved to get planning approval and simply to build a mile long tunnel in a crowded metropolitan area like Los Angeles? 

Further, could we acknowledge for a second that it is a prototype, a very rough proof of concept - not meant to be a complete and final solution?  The problem with many consumers of new innovations is that they take a solution at face value and don't appreciate the potential for further refinements.  Who today using an Apple iPhone X would go back to the initial iPhone?  Over time Apple has improved and added features and benefits as it learned.  So to will Musk if he decides to move ahead with his plans.

But perhaps the biggest wow factor that the pundits miss is the cost.  Musk is interested in taking cost out of the digging of the tunnel and claims to have built the mile long tunnel for about $10M.  In contrast, the last time Los Angeles expanded its subway system it paid about $1B per mile for its tunnel.  Clearly we aren't comparing apples to apples - the subway tunnel was larger and more complex, but we can see that Musk may be able to take the cost of digging a tunnel down significantly.  Why isn't this - the most difficult and complex part of the whole project - the focus of the article, rather than how smooth the ride is?

I can't say I'm surprised. Almost any prototype and many 1.0 versions of products are very simple and basic, and consumers fail to understand how rapidly they can be improved as companies come up the learning curve.  We consumers often look at something like this prototype tunnel or a first version of a project and think that the solution in front of us is as good as it will get, while visionaries recognize how fast they will be able to improve the solution. 

In this context, the best response I can come up with to support Musk is:  pearls before swine.  Musk is showing the immense potential of a technology, and the pundits miss the incredible outcomes delivered to date to complain about how smooth the ride is, in a tunnel 30 feet under the surface of Los Angeles.  Probably the only privately funded tunnelbuilt in California outside of drug smugglers.  And yet we are still talking about how smooth the ride is in a prototype tunnel?

Prototypes aren't finished products and shouldn't be evaluated that way.  This isn't just a punditry failure; businesses do the same things to some of their best ideas.  They judge them too quickly and too harshly on metrics that only a completed product should be expected to meet.  I guess I expected a bit more wonder and amazement about the technology and the progress Musk has made.

Let's wait to judge the solution when it is a completed solution, and not apply rigid evaluation criteria suitable for a final product on a rough prototype.  Businesses can learn from this example.

The Six Million Dollar innovation fallacy

A few days ago I wrote a blog post about the relevance of the Six Million Dollar man to innovation, noting that the show was based around rebuilding Steve Austin, making him better, stronger and faster.  Many corporate innovation organizations need the Six Million Dollar man treatment.  Every firm needs to be innovating more effectively, faster, with better outcomes and increasingly with more partners.

Today I'd like to talk about the other side of the Six Million Dollar man innovation.  As a kid I was entranced by the fact that a regular guy could have his arm replaced with a bionic arm that allowed him to lift exceptionally heavy objects, until an older friend of mine pointed out that the arm might be able to lift heavy objects, but it was attached to a flesh and blood human, who was still subject to the weaknesses and frailties of being human.  This has a lot to say about corporations becoming more innovative - you can't simply bolt on an innovative process to a conservative "body" and expect the two to work together seamlessly.

Setting the context

If the first two paragraphs have you wondering, let's recap.  The Six Million Dollar man was a TV show in the 1970s about an astronaut who suffers a horrific accident, and parts of his body - an arm, two legs and an eye - are made "bionic".  The replacement limbs he receives are more powerful and more capable than the flesh and blood variety.  Steve Austin, the character in the show, goes on to do important work for the US government because he is an augmented human and capable of doing important work that a normal human might not be able to do.

There are some big gaps in the physics of the show, however.  A human simply cannot lift an exceptionally heavy weight just because their arm is bionic.  For many of the feats Austin undertakes, in reality the arm would separate from the body.  They never really dealt with these issues on the show, but in real life we have this challenge - can you bolt on a really powerful limb to a less powerful organism and expect them to work effectively?

How this relates to innovation

The big question then, from an innovation point of view, is can you bolt on a really interesting, powerful innovation capability to an organization that remains complacent and conservative, focused on efficiency and meeting the next quarter's numbers?  Does this powerful innovation capability, like Steve Austin's arm, attempt to do things that the corporate body simply isn't capable of doing or even understanding?  And when the innovation capability takes on more interesting and risky propositions than the rest of the company can bear, what happens?

Depending on the linkages between the innovation capacity and the rest of the organization, a couple of outcomes are possible:

• If the innovation capacity is loosely linked to the rest of the organization, the risky ideas are likely to be considered as wildly outside the scope of reality, and ignored or rejected.  No fatal dismemberment takes place but the innovation capacity faces a slow atrophy as its ideas are ignored.
• If the innovation capacity is tightly integrated to the rest of the organization, and the organization isn't attuned or aligned to new innovation activities and outcomes, chaos or disruption will ensue.  As the innovation team creates really disruptive ideas that the conservative operational team is called on to implement, the operational processes and people will either seek to simplify the idea, to fit into their traditional ways of thinking or working, or will try to force radically different ideas into a process not meant for them.

What this ultimately means

What this analysis suggests is that unlike Steve Austin, who is part human and part bionic, organizations need to be fully innovative or fully conservative.  Trying to be a "bit" innovative as a business is a lot like Steve's arm:  as long as the bionic arm is acting like a regular flesh and blood arm, doing the things that a normal arm would do, there's no problem.  Once the bionic arm tries to do things it is capable of, but the body isn't capable of, dramatic failures will increase.

Thus, it is risky to attempt to bolt on a powerful innovation process to an unwilling, conservative and efficiency-oriented business.  You'll need to encourage the business to become more innovative - more "bionic" if you'd like to think that way, or train the innovation capacity to work at the level, rate and risk tolerance of the rest of the organization - and what's the point in that?

This analysis leads to another insight:  you can either accelerate and improve your internal innovation capabilities across the organization, in all groups, functions or geographies, or you might want to consider simply acquiring horizon 2 and 3 innovations. Increasing innovation in large corporations may become less about building or bolting on powerful competencies and more about incubating great ideas in small companies and acquiring exciting new ideas as tested products and services.

Can you acquire innovation?

There are opportunities and risks involved even in new idea acquisition, however.  Compelling new ideas and products may have different business models or reach customers through different channels than your existing products do, forcing your team to broaden its reach substantially or make choices between new, exciting but disruptive products or the tried and true products that align to existing capabilities. 

In the end you are left with the conclusion that whether you plan to create your own disruptive ideas through a bionic capability or you plan to acquire new products and services, you must rethink your internal organization, operating models and culture.  Just as Steve Austin and his bionic capabilities required people to think differently about augmented humans, real innovators, whether they build or buy compelling new ideas, must rethink their strategies, operations and capabilities.

Six million dollar innovation

Since I write about innovation regularly, I often receive questions about "the future" of innovation.  Who really knows anything about the future of innovation, when many of us don't fully comprehend all of the tools and activities for innovation that are available to us now.

My standard response is in the title of the post.  In the future, we'll do innovation work much more quickly than we do today, we'll be smarter about our approach and increasingly we'll never do it alone.  But it's especially appropriate given the return of the Six Million Dollar man that we can talk about making things:

• Better
• Faster
• Stronger

The return of the Six Million Dollar Man

For those of you who came of age in the 1970s, few television shows had more impact on your imagination than the Six Million Dollar man.  After all, that was a time when astronauts still had glamour, when the concept of a half-human, half-cyborg was fantasy and the Terminator was well off in the future.  For those not raised on the Six Million Dollar man, he has returned as an action figure in Christmas oriented Honda commercials.  Which says something about Honda and its marketing targets, but I digress.

Steve Austin, the Six Million Dollar man, was in a horrific test flight accident, and government scientists rebuilt him with bionic legs and a bionic arm and eye, which made him far more powerful than other normal humans.  Even the amount - Six Million Dollars - seemed astronomical at the time.  However, in Steve's story - rebuilding a broken human, making him better, faster and stronger - is a story that is powerful for today's business executives and their challenge to improve innovation.

Today, we need to make our innovation efforts, our entire businesses, more effective at innovation (better), more facile and speedier at innovation (faster) and more daring in their attempts.  We will also have to teach these organizations that they can't go it alone.

Faster

We'll do innovation faster than we do today because 1) we'll know more about innovation and how it works 2) we'll have more information about needs and emerging technologies and capabilities but 3) most importantly customer demands and emerging competitors will be coming for your customers and markets faster than ever.  I don't think any company will have a choice.  As markets, technologies and competitors accelerate, as customers increase their demands, you'll be faced with either speed up the innovation process and generate more new products and services at greater speed or you will be the dinosaur.  This isn't hyperbole.  This is a fact.  Slow and steady may have won the old races but that model won't win in the future.

Better/Smarter

As Artificial Intelligence, machine learning, big data, predictive analytics, IoT and a host of other technologies emerge, we'll capitalize on the data that is generated and managed by increasing our insights and beginning to spot trends as they emerge.  Even if our innovation processes don't improve - which one hopes they will - the preponderance of the data will help make decisions less risky, and thus make the innovation process more intelligent.

In addition, a newer cohort of employees who are less wedded to old corporate models and decision making and more attuned to technology adoption and social media, and the concept of an MVP, will be more likely to engage innovation at a more strategic level.

With partners

Every company, every innovation process is currently surrounded by an ecosystem of partners, customers, channels, competitors, funders and other institutions that are potential partners who can provide ideas, technologies, market access or insight, funding and other important ingredients to the success of a new product or service.  The days of going it alone are ending rapidly as organizations of all shapes and sizes are discovering that the ecosystem can help them get to market faster, with less risk.  Today, when you do innovation on your own you are a hero.  In the future, trying to do innovation on your own, ignoring the potential partners in your ecosystem will seem unthinkable.

Even Six Million Dollars rings a bell

So, we need to be better, faster, smarter and work with partners if we are to succeed in the future.  Steve Austin and the Six Million Dollar man were more prescient than people could know.  Even the figure, a huge figure by 1970s standards, now seems rather small to most corporations.  But I'm willing to bet that most firms don't spend even six million dollars a year on innovation  (taking the R&D budget out of the equation).  What would it look like if we rebuilt our innovation capacity and funded innovation at even a modest $6 million dollars?  Would we, too, have a bionic innovation capability?  Or like Austin Powers, raised after decades of sleep, would we demand $1 million dollars not realizing just how small a demand that is?