Our aim is to concisely identify innovation in every sector.
This post explores our approach to this. We will cover what we mean by innovation; why innovation is important; how we identify...
...where innovation is needed.
What do we mean by ‘innovation’?
A common understanding of innovation is this: something which is fundamentally new or an order of magnitude improvement on something already existing.
At FRNTIER, we accept the latter part of this definition, but reject the former part. It seems clear that everything is, to a greater or lesser extent, derived from something (or a combination of things) already existing. As a result, there can be nothing which is fundamentally new.
An analogy to understand this is: innovation is pushing the envelope; not replacing it. Indeed, you could argue that the envelope needed to be invented. However, the history of envelopes shows how they derived from earlier, analogous things. You could further argue that email replaced the envelope (or, more specifically, replaced written mail). However, email is simply an order of magnitude improvement on something already existing (i.e. the envelope and written mail).
Understanding what we mean by an ‘order of magnitude’ improvement involves understanding what we call the ‘degree of improvement’. There are two types of degree of improvement: the degree of incrementation, and the degree of innovation. These exist on the same spectrum. The degree of incrementation denotes improvement which is between 0x and 10x (non-inclusive) better than something (or a combination of things) already existing. Such improvement is not innovation. In contrast, the degree of innovation is improvement which is 10x+ better than something (or a combination of things) already existing. Such improvement is innovation.
An analogy to understand the difference is this: innovation is leaping; not stepping.
We must further understand the ‘rate of innovation’. There are two dimensions of this: the interval-dimension and the breakthrough-dimension. The interval-dimension refers to the time taken between each instance of innovation. The greater the interval between each 10x+ improvement, the slower the rate of innovation. It seems that sectors cycle between periods of innovation and periods of non-innovation: innovation occurs (‘period of innovation’), then that innovation is horizontally integrated, adopted and/or scaled (‘period of non-innovation’). To be clear, new innovation can occur during the period of non-innovation. That is, while the market is adjusting to the first innovation, another innovation can occur. The market would consequently need to adopt that newer innovation. This state of affairs should be welcomed because it seems that more often is the case that a 10x+ improvement is followed by incremental improvements made on that 10x+ improvement, or no incremental improvements and the 10x+ improvement is simply horizontally integrated.
The breakthrough-dimension refers to the time taken between the first idea to the actual exploitation of the idea. The longer for the breakthrough to occur, the slower the rate of innovation. However, the greater the degree of innovation which occurs, the more justifiable it is for the breakthrough to take a long time.
On another note, it is important to consider the types of innovation. Hoffman and Yeh distinguish four types of innovation: technology innovation; strategy innovation; management innovation, and business model innovation. It is probable that most FRNTIER reports will focus on technology, strategy and business model innovation.