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.