Innovation

What is innovation and why does it matter?

An article defining what innovation is and why it is important for organisations to invest in to succeed long-term.
New definition of innovation vs existing definition of innovation

Innovation is a nebulous buzzword which tends to be thrown around a lot in the corporate world. When I say the word innovation, what comes to mind? Technology, something new?

A common definition of innovation is: "the practical implementation of ideas that result in the introduction of new goods or services or improvement in offering goods or services". The ISO standard for innovation defines it as "a new or changed entity realising or redistributing value".

Our definition: innovation is the ability to create and deliver novel solutions that better solve a problem.

An innovation (the noun) is a novel solution that better solves a problem.

There are three important components to this:

When we think of innovation in this way, we begin to see it is really infrastructure. It is the infrastructure that enables us to deliver solutions to meaningful problems that ultimately drives long-term business growth, great customer experiences, operational efficiency and more.

Why the old thinking on innovation is wrong

The current definition of innovation is bad in several ways. In the first, 'goods and services' only represent product innovation, but what about business model, operations, marketing & sales, distribution, customer support, culture, strategy...

Furthermore, it in my view overcomplicates what innovation fundamentally is, generally for the sake of trying to sound smart rather than seeking common understanding and simplicity. Making something sound complicated doesn't make it good, in fact it does the exact opposite - it makes it unusable and hence worthless. Proof is in the pudding, 94% of innovation initiatives fail.

A short story of real-world innovation - American Airlines

To illustrate my point, I'll use a real story of a very successful innovation by American Airlines during the 1970's that has no relevance to product.

In 1978 the U.S congress announced the deregulation of the airline industry. Up until this point, regulators determined where airlines flew to, what prices they charged and how much they paid employees. This deregulation would contribute to 170 airlines going out of business over the next few decades, including the largest airline on the planet at the time, Pan Am.

Why the deregulation was so devastating to the industry is because airlines ran on long-term employee contracts with fixed wages. The deregulation enabled new entrants to pay employees far less and translate this reduced cost into cheaper prices stealing market share from existing airlines.

In response to this change, American Airlines introduced the two-tier pay system. An A-scale for employees hired before 1978, and a B-scale for new hires where they would pay new market rates.

They then rapidly expanded their operations, increasing the number of jobs and flights offered to decrease their average labour costs to a profitable point, negating the fixed overheads of existing contracts from pre-1978.

This was an operations innovation which meant that as they scaled their operations, average expenditure would decrease enabling them to not only survive the period while the fixed contracts at above market rates were in play but become the most successful airline in the world.

This was not an innovation unique to American Airlines, but it is an example of a non-product-related novel solution to a meaningful problem which ultimately led to the company surviving when many of their competitors did not.

It is worth noting, this is an example of a one-off innovation. The real power of innovation investment is creating the capability to continuously develop novel solutions to a meaningful problem.

Benefits of investing in innovation

We won't go through an exhaustive list of benefits from investing into innovation capability, but the most obvious one is it helps you grow your business value long-term.

Some of the key reasons why organisations invest in this capability are:

Why we are excited about innovation

At Alto, we see innovation as core infrastructure that enables an organisation to develop world-class products and services, brands and achieve operational excellence.

We view investment into innovation like a compounding interest rate. If you get 1% better each day at how you create novel solutions to better solve problems, you will be 37x better within 1 year of the initial investment.

Now think what that means if you truly invest into innovation capability long-term, you won't be a little bit better than your competitors at developing better products, marketing and operations, it won't even be a competition.

Cue the likes of Amazon who do invest in this kind of continuous improvement to their ability to innovate which over a relatively short life for an organisation has led them to being leaps ahead of any organisation in their rate of improvement and ability to enter multiple markets and win.

The five components of innovation capability

We like to simplify our definition of innovation into five tangible sub-capabilities that makes investing in your innovation infrastructure more palatable. These are - your ability to identify opportunities; validate & select the most meaningful opportunity to pursue; the ability to create high-quality solutions; the ability to validate & select the best solution; the ability to execute a solution.

What drives our ability to innovate

With these sub-capabilities defined, we can now begin to analyse what are the different factors that drive our ability to innovate. For example, what drives your ability to identify opportunities?

Here is a non-exhaustive list of factors that drive your innovation capability.

Process

The step-by-step and automated processes your team uses to identify and solve problems.

Skills of your people

The skill level of your people to apply contemporary techniques and rate of learning across the team.

Data collection & analytics

The quality of your data collection and analytics to identify, prioritise and select problems and ideas.

Facilities & tools

The physical spaces and tools you have available for your people to use to conduct innovation activities.

Strategy

The quality of your strategy – whether the team is focused, know what success looks like and how the team will achieve the desired outcomes.

Incentives

What behaviours you incentivise and whether they are the behaviours of an innovation culture.

Organisational Structure

How teams and assets are arranged and if they are designed to maximise learning, expertise and asset velocity.

Network

How you engage with other organisations and customers to increase your collective intelligence.

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A picture of Scott Thomson, Google Head of Innovation, Customer Engineering, and adviser to Alto

Google's Scott Thomson

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