When we think about growth through innovation we want to think about two key factors. Once again, the innovative capability and then second, the ability to appropriate the gains from innovation. So let's take a few minutes here to talk about this idea of an innovative capability. Again, the firm's ability to develop new products and services and to manage the innovation process. Now, if you go to your local bookstore you can probably find numerous books that tell you the process by which to go about innovation. And many of those propose some type of linear process represented by these three different columns. These are three separate processes but they share a lot of similarities. Some idea of going out there and generating ideas, designing, developing those ideas and then eventually commercializing those in the market. In this type of rational plan model of innovation, you often have the following kind of analogy to a funnel. Where we start with lots of different concepts that feed into a funnel. We investigate those concepts, we do research on them, and then eventually we narrow the funnel into one idea, kind of gets developed and eventually comes out as a product on the back end. Here's what the actual development process typically looks like within an organization. You have ideas originated in different parts of the organization, maybe research, marketing, or top management team. This kinda get put together in this kind of hodgepodge of ideas that are circulated around, some are investigated, some are not. Maybe organizational politics plays a role. We have dice there to highlight that maybe there's some luck involved. And then some things start to pop out the other end. Some of which might turn out to be viable products, but others might go all the way through and then eventually are put in the garbage can or thrashed at the end of the day, there. So the actual development process is a much more chaotic, uncertain process than is often portrayed in some of these books and text. So, when we think about an organization's capability for innovating, we need to thing about a few kinda necessary conditions that need to be created. First, you need to create a climate to generate, and pursue novel ideas. Now, as I've mentioned before, a lot of work suggests that novel ideas often come between the bringing together of information from diverse sources. So the first thing you need to do is you need to encourage free flows of information within the organization. And that can be done through any number of different ways. But you want to be explicit about the mechanisms for that information exchange. This could be things like having a knowledge management system within the organization to make sure various functions and parts of the organization knows what the others are doing. This could be things like hosting a design gathering of your various employees and staff within the organization to talk through novel ideas. In addition of getting information exchanged and people talking to one another, you also have to think about what are the underlying incentives to innovate. All too many organizations incentivize it's staff, it's employees and the like to focus on the here and now and rarely give them the incentives to actually be bold and think about new ideas. Particularly problematic to a lot of organizations is the reluctance to fail. So when we talk at entrepreneurs these days, there's often a lot of discussion about the freedom to fail or the idea of failing fast. In fact in Silicon Valley in the lake, you often hear the idea that if you haven't two or three times, you're not a true entrepreneur. That same type of logic can apply within the organization. Is there a tolerance and other incentives to actually accept failure? If you do not have those types of freedom to fail, you can imagine what it does, then, to the incentives to try, and to experiment, and to try to innovate there. Beyond a climate, we also wanted to think about having effective development processes in place. This includes processes for selecting ideas for development, articulating these clear product ideas. We have to think about the organization of tasks, who does what and in what order. What's the composition of a team, a design team or an engineering team. How do we think about the tenure of people? Is it better to have teams that have been together for years or is it better to reconceive teams over time? Last but not least, we need to also think about how we coordinate with other partners outside our organization, alliances, suppliers and the like. And this is a critical point when we think about innovation in this day and age. We're in an era where we often talk about open innovation. And by this we mean innovation that arises through more of the ecosystem of the organization, than just purely within the organization. If we go back 40, 50 years, when we think about the prototypical successful innovators, we might look at something like Xerox Park or AT&T's Bell labs, where you take a bunch of smart people, you put them on a hill, and wonderful ideas spout out from these works. This day in age we think more and more about what's the network that you establish outside your organization. And there's a number of ways in which an organization can bring in ideas and work on new innovations with these various eco system partners. There's things like corporate venture capital. This is when established companies take equity stakes in new entrepreneurial ventures. Obviously various types of alliances, R&D and otherwise, that may bring two organizations together. There's acquisition strategies using either M&A where you actually go acquire a business, or through licensing technology from other players. And then of course there's the internal development processes of R&D and new product development that will also need to interface with these external players. Because of this importance of open innovation we also say that one of the necessary conditions for an organization's capability to innovate is to be able to assimilate knowledge outside the boundaries of the firm. This is sometimes referred to as absorptive capacity. The capacity of the organization to absorb knowledge outside its boundaries. It's recognizing that important knowledge might be distributed throughout the firm and the market. Basic research, for example, is often done in institutions such as universities or other types of think tanks. How can that be brought into your organization. I think it's a truism to say to understand these outside developments, to understand these other entities and what they're doing, you have to invest in the underlying science. To say in other words, in more technical words, to code the signal, one must build a receiver here. It's not sufficient just to go out there and look. You actually have to have the expertise yourself to be able to understand the innovations and the technology in others. And then be able to then have an ability to bring that back into your own organization.
