Essays on Management: What environment is needed for innovation now and in the future?

Innovation requires both a supportive wider environment in which a business can operate, and an encouraging environment for innovators within a business.

Innovation can only flourish where there is a supportive legal, institutional, social and economic environment.  The laws and social mores must support business, uphold contracts, and there must be well-defined, exclusive, protected and tradeable property rights.

Within the wider business environment (national or international) is the local environment.  Globalisation has emphasised not eliminated local contextual and institutional differences.  The earth is not flat and personal interactions in local places still drive innovation.  Most people you regularly text or email live close by and are personally known to you.  Patent citations have a strong home bias.  Venture capitalists prefer to be no more than a twenty minute drive from their clients.

Proximity and interaction between bright people drives much innovation and suggests it will flourish in densely populated cities where people interact closely. Cities allow rich labour markets to emerge (though spatial mismatches can occur in a city between housing location, public transport availability, and where the jobs are).  Rich labour markets are specialised and enable more precise matching between people and jobs, and people and potential marriage partners.  They also make it possible for specialist professional couples to pursue their own careers while living in the same place.

Innovation feeds off the interaction between people, and one innovation can spark a seed that draws other people and their innovations.  Associated with this, innovation often involves clustering and “Matthew Effects” – “to he who has will be given even more”. This differs across fields.  Biotechnology, electronics and IT involves strong clustering effects while natural resource-based and some capital-intensive innovation and productivity less so.

Go ahead cities generate “Matthew Effects” and agglomeration and these depend on a city’s wealth-generating not its wealth-consuming capacity.  If you build a productive company “making things” then a Warehouse will follow, not the other way round.  Service businesses grow and in turn attract other service businesses drawn to where both customers and competition for them are.

Bright innovative people like to live in nice places with interesting people and creative offerings and so urban life quality matters.  In earlier times, less educated people moved to where the jobs were while the better educated had deeper roots and were less mobile.  Now it is better educated people who move and the poorly educated remain.  The more innovative, prosperous cities with good life quality will therefore attract the more motivated and able.

Vibrant cities generate positive externalities because one person’s productivity and innovation boosts others’.  In contrast to cities, unemployed people who stay in towns such as Tokoroa and Kawarau rather than go to where the jobs are create negative externalities because remaining in places with high unemployment reduces the job chances of other unemployed.

Innovation depends on human capital and therefore requires a strong education system.  No city can be a powerhouse of innovation unless it has a strong university and vocational training system.  Innovation can be fostered with “public space” discourse, where academics and others engage with the public and industry in an open, non-proprietary way, and share and seed ideas and learning from others.  Associated with this, teaching-linked research instils new knowledge in graduates who then apply that learning in the economy and society.

A supportive external business environment needs to be complemented by a fostering internal environment within a business.  A tight focus is needed not only on innovation but how it fits within an organisation’s overall strategy and product mix.  A business must ask whether its strategy supports innovation.  If so, it must systematically be seeking and resourcing opportunities, and must use a disciplined process for converting ideas into practical applications.

Innovation strategy needs to balance innovation versus continuity, and core capabilities versus new skills developed for tomorrow.  It needs to balance defining new fields versus playing in existing ones.  Important strategic questions to ask are:

  • is the organisation configured to systematically seek opportunities?
  • does it have in place a process for converting ideas into practical applications?
  • has it the financial, managerial and human resources needed for innovation?
  • is it prepared to make the structural changes often required for innovation?

A potential innovation can flow from an existing organisational strategy, structure and product mix and can also be a trigger for change.  It may motivate reductions in products offered and doing fewer things a lot better.   It can involve simplicity, with an in-depth understanding of what underlies product functionality and appeal and eliminating superfluities.  This will be influenced by the kinds of markets served.  Some companies can be configured to respond to demand, others to produce and to then try and sell.

Product-based companies often lack the ability to build capabilities and apply resources to processes.  Businesses may need to decide whether they are foxes that know a lot of things, or hedgehogs who know just one big thing.  Some businesses can focus on one tightly-defined sliver market and service it with multiple technologies.  Others may have one core technology they use to service multiple markets.  Often a technology-based business will create a platform technology, however sooner or later it will need to “chase the vertical”.

Important in innovation strategy is consolidation and follow-through, continuous improvement, exiting from static and declining markets and constantly striving to do better and create new markets.  Imitators often do better than the original innovators because they free-ride on those who came before and do better than them.

As businesses become larger they become inflexible and slower to grasp new opportunities.  It is important to address this within an organisation through spin-offs, “skunk works” or other structural arrangements.  For policy makers and regulators it is important to maintain a business environment that encourages the emergence of new players and fosters creative destruction.  This creates a virtuous circle where the wider business environment must support the emergence of new businesses, sustain their growth, and also allow new players to emerge who may replace incumbents.

What of the future environment needed for innovation?  This of course is difficult to answer without thinking through how innovation itself might change.  Innovation is an endless frontier, and leading parts of that frontier will be web-facilitated technology and trade.  Global access to information and therefore sources of innovation will increasingly be open sourced.  The web does overcome some of the tyranny of distance that New Zealand is subject to.  It allows you to sell to the whole world on day one, but the world has to notice.  It makes it easier to create a brand but difficult to monetise it.  It makes it possible to be a born global business, but only if you have something different to offer to the globe.

IT and the web are widening the “surface area” that businesses share with external customers, reducing transaction costs, and this is impacting on capital productivity.  On-line retailing such as Trade-me, a “sharing economy,” and customer to seller direct interactions can increase the utilisation rates and therefore the productivity of capital assets people own – from surfboards to houses.  On-line and sharing economy tools see people market on-line the use of such assets as homes, tools, sports equipment and thereby lift asset utilisation without middlemen and with minimum transaction costs.  These assets are under-used and if they are sitting in the garage gathering dust they are dead assets.  These dead assets become live assets only through low cost and person to person sale or rent mediated on line.

Linking a green philosophy to IT suddenly creates potential for rich and highly specialised markets to emerge without alienation, abstraction, geographic or social distance.  On the face of it a “green” philosophy is naïve and parochial.  It erodes global specialisation of labour and our identity as one humanity where we all depend on each other regardless of our national or other identities.

However, a close-knit green mindset is built on known personal relationships between people and can create specialisation and therefore productivity gains within that community.  It favours small businesses which lack scale economies but may be tightly and productively specialised, each within geographically constrained relationship markets.

Web-facilitated labour market tools such as Freelancer can help thicken and enrich formerly thin and poor labour markets and accelerate matching between what is wanted and what can be offered. It makes possible engagement of people whose skills were unrecognised, hidden or discouraged and it makes those skills productive.

It makes it possible for geographically constrained markets to have greater internal diversity, richness and specialisation.  It may also transcend geographic constraints through relationship-based markets that connect strangers across continents and where the blogsphere, email romances and IT-trade interrelate.

For example, a business such as Riverstone Kitchen north of Oamaru is based on a network of specialised farm suppliers whose identity is reflected in a farm to plate way and whose specialised products can start to achieve some scale through this, while eliminating both some of the middlemen and some of the abstraction that otherwise occurs between consumers and suppliers.

Future technological innovators may make their mark through biotechnology, cloud computing, nanotechnology, energy storage to deal with intermittency constraints in renewable energy, 3D-facilitated manufacturing, mass adoption of electric vehicles or new materials such as graphene and in a host of unpredictable ways.

Some transformative technologies may concentrate wealth and power, others may diffuse or democratise it.   Technological advances may make distributed electricity generation more economic, while 3D-facilitated manufacturing (and globalisation more generally), rather than creating a flat world, has made niche local markets more possible and more innovative.  It has made artisanal production top end rather than quaint and hobby-like and may restore more economic power to smaller scale businesses.

Web-facilitated digital technology such as 3D printing reduce or eliminate scale economies.  It is capital light and makes different forms of small scale investment possible.  This also means local ownership can endure over time and this can decentralise business asset ownership.  Given a world price for internationally traded raw materials and minimal labour cost components it allows competition on creativity and on those factors such as environmental quality that can attract and retain innovative people.

A challenge for New Zealand innovators is that 3D printers are additive rather than subtractive and yet many of our industries take a raw material such as wood and take bits away, in the same way Michelangelo uncovered a statue within a block of marble.  Can New Zealand innovators rethink how 3D-facilitated manufacturing can be applied to core New Zealand industries?

However, it is impossible to forecast in detail the external and internal business environment needed for future innovation.  What is however certain is the need for a wider environment.  This environment needs to support innovation and the ever-emerging formal rules of the game and market and non-market institutions needed to favour new players over incumbents and help innovation continue as an endless frontier.

THE END

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About Peter Winsley

I’ve worked in policy and economics-related fields in New Zealand for many years. With qualifications and publications in economics, management and literature, I take a multidisciplinary perspective to how people’s lives can be enhanced. I love nature, literature, music, tramping, boating and my family.
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17 Responses to Essays on Management: What environment is needed for innovation now and in the future?

  1. JohnnyDeppStep says:

    “Innovation can only flourish where there is a supportive legal, institutional, social and economic environment. The laws and social mores must support business, uphold contracts, and there must be well-defined, exclusive, protected and tradeable property rights.”
    Peter, it’s my experience in business (as distinct to bureaucracy or academia) that Innovation is intimately linked to Collaboration.
    Collaboration may end with a contract, but it cannot start with one. The legal issue is in fact the first constraint to Innovation.
    Trust in cahoots with Little Bets or a Proof of Concept Department is all that is required.
    Trust is the cornerstone of Collaboration, which in turn is the key to Innovation. And of course the final test.
    Usefulness .

    • Peter Winsley says:

      Thanks so much. Very insightful comments. I agree that trust and collaboration are fundamental. I guess I should have put more emphasis on this and should not have taken it so much for granted.

  2. ashokbhatia says:

    A comprehensive post on the subject. I believe that the capacity to be able to identify a market gap and/or opportunity is one of the critical success factors. It opens up new vistas of our imagination. As Einstein once remarked, logic can take us from A to Z, imagination can take us anywhere!

  3. Dilip says:

    A very interesting essay on innovation. Yes the prerequisites highlighted by you are important yet for innovation to thrive yet a culture that encourages experimentation and does not look down upon failures helps.

    • Peter Winsley says:

      Thanks so much Dilip, I agree. In New Zealand we are not too bad at encouraging experimentation, however we could do better at letting people fail and loose money without being too judgemental about it.

  4. strategyaudit says:

    Great stuff Peter, Thoughtful, and original.
    Thanks

  5. Very interesting to cite the Matthew effect for city economies and the clustering of activities, thanks.

    • Peter Winsley says:

      Thanks so much Stefaan.

    • Peter Winsley says:

      I meant to also comment that Robert Lucas observed that human capital moves to places where it is plentiful not scarce – implying clustering overrides the tendency for scarcity to put prices up.

  6. Pingback: Essays on Management: What environment is needed for innovation now and in the future? | waltika

  7. Charlie says:

    A very rare and deep insights on innovation. Thanks for giving us a chance to think about the innovation in a systematic way. I like the concept of ‘public space’ for fostering the innovation. I agree to the idea that breaking down the barriers that are blocking the flow of information, asset, or any other resources is really important. Thanks for your essay. 🙂

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