BACKGROUND COMMENTS ON INNOVATION

Innovation is mutual act of creativity

between technology, process, markets and people

In the past, many organisations recognized the importance of innovation but treated it as a phenomenon that ‘just happened’, classically being relegated at arm’s length to a "R&D department".  There was a view that innovation was not something that needed direct engagement or scrutiny at CEO/Board level, and that it was not amenable to being managed.

Dislocation of innovation projects from business strategy and operational management led to misdirection of resources and missed opportunities. Where innovation happened it could be

• incoherent with business strategy and other company assets,
• have faulty analysis of end-market value,
• and require considerable investment before early adopters could be found.

As a result some organisations realised that the hit rate from dedicated R&D departments was too low, and looked to different models to get more value relevance from innovation investment. Examples include Philips and their Innovation Campus concept, Procter & Gambol directly engaging end-users, Lego and their approach to open innovation.

Another misconception was seeing innovation as being exclusively discovery driven, rather than a mutual act of creativity between technology, process, markets and people. Undoubtedly, discovery-driven innovation is important, especially so in markets like pharma where the relationship between the discovery (a new agent) and the market (health industry) is straightforward. But in most markets value is created by a combination of advances in different technologies coupled with deep engagement to a problem domain and its end-users, and can involve many intermediate steps, including shaping the intended market.

Put in another way, the potential value of an invention is very difficult to assess unless it fits easily into an existing product base; potential value can only be estimated once a tangible innovation takes place (ie a real problem or opportunity is in sight).

The classic examples of problem-driven innovation are the rapid advances made through innovation in times of war, where national imperatives drive creative relationships between innovators and early adopters. Other notable examples include the Internet (driven by the need for survivable communications in a crisis) and separately the development of the World Wide Web (sharing scientific knowledge within an open community). Mobile telephony depended upon advances in many different technologies plus innovation in standards and business models. The largely incremental developments in automotive technology responded to competitive and regulatory impetus.  Similarly, creation of completely new business models in the case of Dell, Amazon or in a somewhat different way Google, Facebook and YouTube all show that whilst discovery-based insights are important (Google did have a better search algorithm, etc), it is the linking of multiple inventions with a rich understanding of the market that more fully explains these successes.

In a globalised world , the need to maintain some distinguishing edge is all the more essential, not only to grow or protect market share, but also to provide anchors to defend appropriation of value by adjacent players in the supply chain.

This perspective of Innovation Governance assumes that innovation is essential in any activity, and that the future winners (businesses, regions, nations) will be the ones that master innovation most effectively, as discussed in Why Innovation Matters. It is worth recalling that the almost universal acknowledgement of the role of innovation was not always so - it is a relatively recent addition to accepted wisdom in wider business comment since, let's say, 2005. So while there is an extensive and long-standing academic literature on innovation, the embodiment of innovation in wider thinking amongst the political and business classes is still often at a much earlier stage.

Research in Australia found that many members of major company Boards did not feel innovation was something they needed to engage in. Likewise, the business and organisational fabric that promotes innovation is often undeveloped, with consequences that hold back the ability of businesses to create wealth in the globalized world, and ability of the public sector to respond to new policy imperatives.

The observation that kicked off research into Innovation Governance was a review of the committee structure of the Boards of Directors of major companies and public sector bodies. While almost all had major functions of governance covered by a formal committee, including audit, risk, human resources, corporate social responsibility, very few indeed had anything that looked like an innovation committee addressing the governance aspects of ensuring the organisation was tackling innovation in the most effective way. This was despite the role innovation played in the future success of these businesses, and the fact that many of their medium term risks were related to innovation related outcomes.

This leads to the question: "How do the Boards of these organisations satisfy themselves, their shareholders and other stakeholders that the processes, priorities and behaviours that drive successful innovation are sound?" Do market analysts have access to the information they need to assess how well a business is preparing its future competitive strengths? Clearly some of these aspects will be kept from the public domain - companies with a good architecture for innovating will not want that shared - but that is no different from other market-sensitive aspects that are made available in a controlled way.

So the idea behind Innovation Governance does not refer directly to the tools and techniques that practitioners of innovation and their managers must use to achieve innovation and outcomes (Innovation Management), but about establishing the "regime" within which innovation practice is optimised, evolved and scrutinized as an integral part of the wider governance of any organisation. This distinction is equivalent, in the financial management context, to the difference between what managers and their business units do in meeting financial targets, compared with the construction of the reporting and audit regime that feeds internal and Board level review. Clearly governance and management are closely related, but the distinction between how top-down leadership and scrutiny has effect, versus the techniques needed to deliver, is a clear one.

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