Innovation only makes a difference if it satisfies a customer

The question of how to shape strongly performing Innovation and Entrepreneurial Ecosystems is a very hot topic at the moment, and there are a growing number of programs and events that are addressing the practice. Two years ago MIT started the first cohort of countries of their 2 year Regional Entrepreneurship Accelerator Program, and I was lucky enough to be part of the New Zealand team. I was in Boston with the New Zealand team earlier this month for the last workshop of the program, together with teams from Scotland, Finland, Mexico (Veracruz), China (Hangzhou), Spain (Andalucía) and Turkey. The week before that in San Francisco was the Global Innovation Summit which strives to answer the question “How do we design entire ecosystems to drive entrepreneurship, technology, and economic impact?”. I also recently came across Ed Morrison from Purdue University’s Purdue Center for Regional Development, and he has some great resources on building innovation ecosystems at his website.

The term “innovation” is a problematic one as it can mean everything, and nothing. That’s the first problem. This makes it more difficult to have useful conversations around the subject because people often have quite different understandings of what the word means.

The second problem with the term is that innovation is often cited as a universal panacea for accelerating economic development, but because of that breadth of meaning, the results of the prescription of innovation are not as effective as a more nuanced understanding of the term might achieve.

An obvious place to look for a better understanding of innovation are those regions which have a proven track record in translating innovation into economic prosperity. The “Mecca” of these in the tech space is Silicon Valley. So I was interested to read more when, via Ed Morrison’s Twitter feed, I came across this article Why Silicon Valley’s Success Is So Hard to Replicate.

The article starts off by saying

"After decades of bafflement and frustration, the world is still struggling to guess the secret of Silicon Valley’s success".

It goes on to talk about all the usual suspects that anyone who has studied innovation ecosystems will tell you. The ingredients are usually a combination of these elements;

Friendly government and regulatory infrastructure
Access to risk capital
Access to talented and educated people
Presence of Universities and Research institutes
Entrepreneur-friendly culture
Well connected ecosystem
Accessible markets

Silicon Valley has all of these, but of course so do many other regions. What then accounts for Silicon Valley’s extraordinary success? The article identifies 2 key distinctions that it thinks makes the critical difference.

The integration of their innovation strategies with their business strategies
Innovation that is market driven, rather than technology driven

Innovation is an integral part of overall Business Strategy
What we found was a special trait that distinguishes Silicon Valley’s firms from ordinary companies: the ability to integrate their innovation strategies with their business strategies. Our survey reported that Silicon Valley firms are almost four times as likely as the average U.S. company on Strategy&’s annual Global Innovation 1000 study to have a tight alignment of their overall corporate strategy with their innovation strategy. Coordination like that can pay big dividends. According to the Global Innovation 1000 study, companies that successfully mesh their innovation strategies with their corporate aims grow far more vigorously than those that don’t, both in profitability and in net worth.

Innovation is driven by fastidious attention to understanding customer’s needs
Our ongoing research has identified three basic innovation strategies: Silicon Valley is dominated by what we call the “need seekers,” companies that focus on discerning their users’ actual needs, both spoken and unspoken; figuring out how to meet those needs; and then getting the necessary product or service to market as fast as possible. The other two categories are the “technology drivers” who take their direction from their engineering departments, rather than from their customers, and the “market readers” who rely on an incremental, fast-follower development approach. According to our research, the need-seekers consistently outgrow the other two over a five-year span, both in gross profits and in company value. Need-seekers, our research also shows, tend to formulate their innovation strategy decisions at the company’s highest levels. Then they make sure to communicate that strategy throughout the organization, and they manage their R&D project portfolios rigorously and ruthlessly. Need-seekers in general—and Silicon Valley companies in particular—foster a culture of strong identification with the customer and sincere passion for the company’s products and services. At the same time, there tends to be less “not invented here” prejudice, consequently making the company more open to good ideas, no matter the source.

In my opinion, innovation is a “servant” to entrepreneurship, and by this I mean that “innovation only makes a difference if it satisfies a customer”. Perhaps I might expand this, outside of a strictly commercial orientation, by reframing it as “innovation only makes a difference if it satisfies an unmet need”. It reminds me of the famous philosophical thought experiment

If an innovation falls in a forest and no one is around to buy it, does it make a sound?

And to quote one of my colleagues on the MIT REAP program – Innovation without commercialisation is just art :-)

This distinction around the 3 different innovation strategies cannot be overstated in its significance. It is obvious from this report that the economic benefits that we seek from innovation can be more highly leveraged by fostering more of the “need seeking” strategy, and reducing undifferentiated support, and support of “technology driver” innovation. The problem with investing significant resources in innovation that is not informed or influenced by market forces, is that its value sits unrealised without attractive market opportunities to fuel the will to commercialise it. This naturally raises the question of where and how can we minimise risk, and maximise returns, on our investments in innovation, and I plan to write on this in an upcoming post.

The article “Why Silicon Valley’s Success Is So Hard to Replicate” is based on is a 2012 joint study by the Bay Area Council Economic Institute and Strategy& (who incidentally have some great resources on their website). You can read the full 36 page report “The Culture of Innovation: What Makes San Francisco Bay Area Companies Different?” here.