Dr Sorin Cohn, strategic development executive

On business innovation culture —
beyond risk taking and ambition

By Dr Sorin Cohn

Business innovation is a much used and abused term. To avoid it becoming a convenient buzzword one must understand its nature and acknowledge that it must be managed comprehensively, competitively and methodically — based on appropriate innovation metrics and measurements.

Business innovation is about growing value and enhancing competitive position in the market — the only place where it can be properly valued. Growth and competitiveness is achieved by attracting customers with good and affordable products and services and by surprising the competition with more effective and efficient strategies, capabilities and processes.

When I joined the Conference Board of Canada two years ago, we proceeded to change the definition of business innovation for comprehensively covering "the generation of ideas and their transformation into economic and social values through the development and commercialization of new or improved business models, strategies, capabilities, products, services and processes". We then proceeded to undertake a number of in-depth studies inside firms across Canada and across all economic sectors covering the complete spectrum of business innovation.

As for culture — another soft and abused term — I will use the anthropological definition, as expressed by legal anthropologist Dr E Adamson Hoebel. He described culture as an integrated system of learned behaviour patterns which are characteristic of the members of a society and which are not a result of biological inheritance.

Business innovation much more than S&T

The first issue with the culture of business innovation in Canada concerns the myth that science and technology research is the basis of innovation. No. Research, at its most abstract, is the transformation of money into knowledge.

From a business perspective, research may, and should, address three areas of interest: Market research – user needs and market requirements, conditions and regulations; Business research – management know-how and process research, including people management; and, S&T research.

Business innovation is the transformation of ideas and knowledge into higher values where it matters — in the market and in society at large. In addition to research there are two major phases in the Process of Business Innovation:

* The implementation phase: concerns the transformation of knowledge into solutions, be they new or improved strategies, capabilities, products, services or process. But possessing these solutions does not give a company extra value and enhanced competitiveness. For that, the next phase of the business innovation process is needed:

"About 50% of Canadian firms of all sizes and sectors we surveyed in 2012 did not have a formal innovation management process and some 80% did not structure innovation activities into proper projects. Not surprising as the average performance of such companies is 40-50% below that of companies that do manage and structure their firm-level innovations"

* The commercialization phase: Only through successful commercialization can companies and countries achieve tangible economic and social benefits.

As a scientist with a record of scientific research and academic expertise, I feel emboldened to state that business success depends on many other factors than just S&T. Some of the most successful companies today have become leaders not through traditional science attributes but through business model innovations and astute commercialization. Think of Amazon, Dell, Coca Cola, Apple, Google or Wal-Mart. Their initial success or subsequent market leadership did not have much to do with science.

In response to the well-intentioned but rather confusing Paradox Lost report from the Council of Canadian Academies, innovation is not, as the myth goes, about having ideas. Innovation is about transforming ideas through hard structured work to success in the market, where it can be valued and accounted for.

Another myth, which persists in Canada concerns the low investments Canadian industry makes in innovation. This myth is largely based on the assumption that R&D expenditures are a good measure of innovation investments. This may be partially true for some technology-intensive sectors like life sciences, clean tech, information technology and software. But it is incorrect when applied to resource-oriented industries, or to service-intensive industries like utilities, wholesale and retail trade, transportation or financial services industries, or even manufacturing. A much better measure of innovation investments is the percentage of corporate time dedicated to business innovation. Time is money in business, and using such a measure for innovation investments allowed the Conference Board to show that Canadian industry isn't such a laggard in matters of business innovation investments.

The final myth of business innovation is that results are proportional to investments. There may be a correlation between investments and results but only if innovation is properly managed. This includes the selection of innovation targets and resource allocation to the actual management of innovation activities, their commercialization and the timely evaluation and adjustments of the firm-level innovation portfolio.

Astoundingly, about 50% of Canadian firms of all sizes and sectors we surveyed in 2012 did not have a formal innovation management process and some 80% did not structure innovation activities into proper projects. Not surprisingly, the average performance of such companies is 40-50% below that of companies that do manage and structure their firm-level innovations.

Suite of appropriate metrics is key

In the same vein, about 45% of Canadian companies surveyed do not use innovation metrics, and less than 8% of companies use between six to 10 metrics of innovation at the firm level, which appears to be the optimum size of an innovation metric portfolio. The difference in average performance between these two groups is over 50%. Think of how much better Canadian industry would perform if we could train industry management to use six to 10 metrics and manage them adequately.

Productivity — a black box measure

And let's stop considering productivity gains as a good measure of innovation. Productivity gains are mostly used as an innovation metric by companies in decline. Productivity is a black box measure assessing the ratio of output vs. labour or capital input. It does not say anything about what goes on inside the box — all the links within the firm's value chain, from top management to production and commercialization.

Understanding this, should we blame the workers and demand for more worker training and more investments in machinery when the real cause for poor overall productivity may be management making lousy decisions, or the research that missed the mark, or the design that was faulty, or the development team which was late or the supply that got inferior materials? Or perhaps the marketing that was inefficient or the sales channels that were weak?

Indeed, should Nortel or Blackberry workers be blamed for the problems of their companies? Was it their production or design machinery and tools that were not sufficiently productive?

Data from 2012 show that 13% of companies surveyed with low time-investments in innovation (<2%) exhibited poor performance as a group, while the companies with moderate investments (2-7%) had a better performance than the average. And, companies with high time-investments in innovation showed a performance not much better than the average.

This group represents over 60% of the companies surveyed, and when we split it by companies that do manage formally their innovation versus those that do not, we found that companies who spend high time on innovation and manage it formally perform 44% better on average than those that do not invest in innovation. Alternately, companies that invest a lot in innovation but do not manage it formally have terrible performance — even worse than that of companies that do not invest much in innovation.

This isn't as surprising as it first appears. Not managing innovation investments properly wastes both time and money. Managing it effectively is the key to success.

Dr Sorin Cohn is a strategic development executive with extensive experience in international management, business and technology.