Introduction

It has become obvious, in retrospect, that organisations with superb knowledge economy credentials – com­panies such as Microsoft and General Motors, for example – weathered the global economic crisis little better than companies based on the industrial age economics they superseded.

Industrial age economics revolve around the premise that organisations win if they have control of financial and physical assets. They are manufacturers, banks, and mining organisations. They are farmers and primary producers. They are the companies which, historically, have made nations great.

Knowledge economy companies are quite different. They recog­nise there is inherent value in know-how and intangible assets such as brand and goodwill. They prize patents and other intellectual property, and their value is based not on control of physical assets, but the quality of the talent they’re able to hire and retain.

So why was it, then, these knowledge economy companies weren’t better insulated from the downturn despite all their talent, knowledge, and intellectual assets?

Knowledge economy companies must be missing something.

Some analysts – myself included – have concluded the missing thing is Innovation Capital. Innovation capital accrues from the set of procedures, people, and infrastructures an organisation creates to translate knowledge into value.

Innovation capital is gener­ated whenever organisations make investments which allow them to do things which aren’t business-as-usual. As a result, they are very good at handling situations which are unexpected.

This is an explanation for the observation that many knowledge economy companies failed to do terribly well during the global economic crisis. Faced with unprecedented circumstances, they simply weren’t prepared when their business-as-usual operations were subject to dramatic changes.

Apart from poor performance during the downturn, what is driving modern companies to shift to innovation economics?

Most economies are about consumption. Companies are measured on their success as a function of growth. Growth is dependent on selling increasing volumes of product and service, ultimately with the goal of controlling particular markets.

This works when there is relative scarcity of the goods and services needed to make life worthwhile. But indi­viduals (in developed nations at least), increasingly have all the physical goods and services they need to live happy lives.

In other words, there is an upper limit beyond which consumption is no longer able to fuel corporate growth at the rates historically demanded by markets. Even population growth, which is slowing anyway, is no antidote.

The implication of this is simple. Corporate growth cannot be expected to continue indefinitely by encouraging consumers to do more of the same. A satisfied customer who has everything they need does not translate into sales.

Innovation economics are different, because fortunes are made by encouraging customers to embrace diversity, to do things in completely new ways. The basis of competition shifts from quality, brand and price, to discontinuities that capture the imagination.

It is to creating these discontinuities the innovation economy organisation dedicates itself.  For evidence this works, one need not go much further than the queues which form whenever Apple, the mobile computer company, releases a new product.

But why do knowledge economy companies still exist at all, if consumption is no longer the driver it once was?

It has traditionally been thought that some kinds of products or services can be provided only by very large organisations with control over industrial age resources.

Bankers are bankers because they have millions to invest. Drug makers succeed because they have huge research and development facilities. Fast moving consumer goods companies win because they have supply chain capabilities that connect products to supermarket shelves.

These historical barriers to entry provide large organisations with the illusion that they’re safe from the upstarts who are encroaching on their established operations. Because of the titanic investments they needed to enter markets in the past, they imagine that any entrant will need to make them also.

But the Internet and other technologies have changed that. Now, anyone can produce and distribute anything, without the scale investments needed previously.

Software can be produced in days. Companies started in minutes. Call centre operations leased on demand. There are even cheap three dimensional printing machines capable of producing industrial age products with little or no invest­ment at all. Even shipping can be outsourced at any level of scale with reasonable economics.

In short, few traditional barriers to entry exist for either industrial or knowledge economy businesses any more. Anyone can compete with any­one, as long as they are creative, have a good idea, and the will to execute.

Those with less access to industrial and knowledge assets, however, are forced to compete immediately on the innovation front, and invariably proceed to do so without very many constraints.

Most large organisations have people who know this, and are quite aware of the threat posed by these nimble, small entrants. They know they have to do something, but their challenge is finding a critical mass of supporters inside their organisations who agree the threat is real.

Invariably, many companies find themselves being disrupted by the upstarts they thought were no threat to them. This happens insidiously. By the time enough people realise what has happened, it is often too late.

How do you prevent this occurring? One answer is instituting a systematic approach to value that searches out innovation from employees, customers and suppliers. Such an approach seeks to make it possible for creativity to flourish and to convert it into useful products and services. Generally, the latter part is the hardest.

This book contains 10 rules you can follow to create a value-enhancing innovation method of your own.

In Rule One we discuss the need for an innovation strategy. You’d be surprised how few new innovators recognise the need to have the end-goal in mind before they start. But if you don’t know the destination, how can you design the journey?

Rules Two and Three are concerned with the nature of innovation and the roles you might expect innovators to take on. Both are important: the former, because knowing what innovation actually means in an organisational context makes it simpler to succeed, and the latter, because not everyone will agree at the beginning what those charged with finding innovation should actually be doing. Agreeing both up front is a shortcut to faster results.

Rule Four is about the money you need to invest. You’d be surprised how many organisations decide they want more innovation, but think of the money as afterthought. This is the section you should read to discover how much money you need, and how much money is too much.

In Rule Five, we’ll examine three big myths about innovation. Most people think innovation is about finding big hits. They imagine that if you have more ideas, you’ll also have more innovation. And, most especially, they believe that innovation is an inherently risky investment. This is the section that explains why these commonly held beliefs are wrong.

Rule Six examines the way your technology people respond to innovative propositions. It also provides some thoughts on how to manage technologists when they say “no!”. This will likely be often if your organisation is structured around cost avoidance and stability of delivery, as most are.

Moving onto the processes you can use to drive more innovation out the door, Rule Seven explains the questions an innovation project should be able to answer before it starts, while Rule Eight is about the diagnostics you should apply to ensure you stop innovating in directions which won’t create value.

Rules 9 and Ten are mainly about people, and about innovation people specifically. It is tempting to imagine that these highly prized, extremely creative individuals should be locked behind closed doors, the better to protect the competitive advantages they’re building. This is wrong, and usually results in much less innovation getting done. It is also attractive to think if you hire only really creative, right-brain type people, you’ll get great innovation outcomes. This is also incorrect. These last two chapters will explain why.

Some readers, no doubt, will now be asking whether it is possible to build a decent innovation programme with only these 10 rules. If it were so simple, they’ll be wondering, why don’t all companies excel at innovation economics?

The answer, of course, is innovators will never learn all they need by reading books alone. Each innovation team grows its capabilities in a specific way, for a specific organisation. This happens organically as they try things to see what works and what doesn’t. The failures are as much a part of the learning as the successes.

Getting started is what counts, and where many companies find the greatest challenge. These 10 rules are signposts that get the innovation journey started.

For me, this book has also been a journey. Last year, I wrote a big, thick book on innovation programmes for the banking industry. People seemed to like the book, but they felt at almost 350 pages with tiny writing, there was way too much detail for those in a rush to start.

The Little Innovation Book, a much shorter volume, is my answer. The format is abbreviated, a suitable chapter-at-a-time read for the morning commute.  I hope you find something valuable here.

So, let us get started. Turn the page and begin your own journey by deciding the innovation strategy your organisation will follow to leverage innovation economics.