What is innovation?
Innovation is about introducing products that are better than what's already there. What's better and what's not is determined by the user.
The tech industry is obsessed with innovation. Mostly disruptive innovation. We've written about disruptive and sustainable innovation before, but failed to include a proper definition of innovation itself. How dare we! So, what is innovation?
Interestingly enough, there are myriads of definitions out there. It doesn't seem to be easy to agree on a single one, besides basic platitudes, acknowledging the fact that innovation has something to do with the new – new technologies, for example. But that's already in the semantics of the word: the introduction of something new.
Value is determined by the user
In the business context, innovation is always about creating new value. And in the digital world, value is always determined by the user (who is also a co-creator of value). Only what the user deems valuable can be used to capture value for other stakeholders as well, including shareholders. Timm Richter goes as far as generalising this for all kinds of companies:
The main aim of any company is to offer a product or service such that it generates user value. It is the job of any employee, in particular management, to create user value. This is the way a company does its service to society. If there is indeed user value, then it can be monetized to a certain extent. This is the oxygen a company needs in order to survive.
From this definition, it follows that new value needs to be greater than what the user currently has and values. Thus, innovation is about introducing products that are better than what's already there. What's better and what's not is, again, determined by the user. Is slightly better enough? That depends on the market. In some saturated, low-innovation markets you might get away with incremental innovation only.
And it's also important to quickly and incrementally iterate on highly innovative products. But precisely saturated, low-innovation markets are often markets that are ripe for disruption, especially if some new technology comes along that only waits to be applied to a customer's need, pain point, or desire. To really move the needle, more is needed. Thus, there is a school of thought that refers to the 10x value idea.
In 1997, management consultants Charles E. Lucier, Leslie H. Moeller and Raymond Held published a paper, 10x Value: The Engine Powering Long-Term Shareholder Returns, arguing that the only way to create lasting shareholder value was by improving customer value by a factor of 10. Innovation, they believed, was the key to reaching tenfold improvement, which could be achieved either through strategy, products or services. A single “big idea” wouldn’t be enough; you needed a whole slew of innovations.
This kind of thinking is deeply entrenched in the Silicon Valley way of doing business. From there, it has now spread all over the world and to all kinds of industries. Digital technologies, for a variety of reasons, provide a significant lever to achieve 10x value, but innovation of course isn't limited to digital.
Remember, value is what the user values. Not the shareholder. In this day and age, user value has superseded shareholder value. Only if and when the user gets value, the shareholder can capture value as well. In some respect, that's the antithesis to Milton Friedman's concept of shareholder value that ruled our Western economies for some decades.
Another innovation cycle
This turn reflects the shift of power from the corporation to the consumer, thanks to the internet. But now, with tech companies being at the top of the economy, power falls back to a new generation of titanic corporations. The consumer has no choice but to succumb to the likes of Google, Amazon, Facebook, and Apple. The big crunch of the digital universe stifles innovation.
On the other hand, this may ripen the Big Four for a new round of disruptive innovation. And so, another innovation cycle starts. There is still a lot that can be redesigned with the user experience as a starting point.
You've got to start with the customer experience and work backwards to the technology. You can't start with the technology and try to figure out where can I sell it.