Although Innovation holds the key in opening an endless frontier of growth, high-level uncertainty in systematically ferreting out value from the market is a challenge. Hence, we need to focus on reducing uncertainty in innovation. To do so, we need a disciplined systematic approach, as opposed to random extermination of hype fuelled ideas.
Why is innovation a magical act? Why are we failing in reducing uncertainty in innovation? Innovation is too important to be left to a random process. Uncertainty in innovation is leading to growing wasteful investment. On the other hand, its unpredictable nature is causing a painful change in society. Furthermore, due to uncertainty, innovation has been the underlying cause of growing inequality between individuals, firms, and countries.
Human beings have three primary means for creating Wealth: natural resources, labor, and idea. Among these three, the idea offers a highly scalable path. In fact, the idea is our only option of creating increasing wealth from depleting resources. Idea offers an endless frontier of growth. However, in a competitive market, wealth creation out of ideas is highly uncertain. It appears to be a random process. Data indicate that more than 80 percent of newly introduced products retire before producing a profit. On the other hand, the startup mortality rate is extremely high. However, some firms have been consistently profiting from ideas. Therefore, we need to figure out underlying causes and devise means for reducing uncertainty in innovation.
Reducing uncertainty in innovation demands clarity about underlying causes
The basic ingredient of innovation is the idea. It’s an abundant resource. Idea generation is a human being’s inherent capability. Human beings are in a relentless race to generate ideas and use them in redesigning means for serving their purposes. But why is there uncertainty? Of course, the creative spark cannot be made fully predictable. However, competitive market dynamics are the major cause of uncertainty. Due to competition, good ideas fail to succeed due to the emergence of better ideas. Consequentially, the investment made for pursuing good ideas ends up at a loss. It’s like a race; only one wins.
The suggestion could be to reduce competition force through different means—including patents. However, even great ideas do not grow as useful means to improve our living standards in the absence of competition. A relentless journey of Incremental innovation is at the core of turning great ideas into increasingly useful means. Competition appears to be the most powerful means to fuel a much-needed race of incremental innovation.
For example, the Transistor—powering the information technology revolution—emerged in a very primitive form. In the early days of its life cycle, the transistor was of no use in innovating any practical solution. Its mighty force powering innovations kept emerging through profit-making competition. Similarly, the Wright Brothers’ airplane, mobile phone, or electronic image sensor emerged in a very primitive form. Profit-making competition has been at the core of keep improving them through incremental innovations. In the absence of competition, all these great ideas could have of no or very little use in uplifting our quality of living standards. However, this much-needed competition is also the major barrier to reducing uncertainty in innovation.
Theorizing innovation dynamics in a competitive market
Innovations are evolving. Every great idea has been progressing through incremental advancement. Innovators are in a race to evolve their products by adding new features or improving existing ones. This evolution race is vital for sustaining innovations in the competitive market. In this mission, they have to exploit technological advancements. However, technological advancement is not fully predictable. Hence, it adds uncertainty in the evolution of goods and services.
Innovators are also updating their innovations to meet customers’ purposes increasingly better. However, customer preferences have been changing. Such a change is also adding uncertainty in innovation successes. The same customer who used to be happy with certain product features no longer preferring them to serve their purposes.
Externality effects in the form of information & experience gap, availability of 3rd party complimentary goods and services, infrastructure, and industry standards—affecting the compatibility—also affect the success or failure of innovations. Hence, the externality factors should be taken into consideration in reducing uncertainty in innovation.
Competition response–offering alternatives–is the most powerful factor in creating uncertainty in the innovation space. Irrespective of the intellectual property barrier and greatness of ideas, competitors respond with replication, imitation, innovation, and also substitution. Particularly, the offering of alternatives by changing the technology core creates serious uncertainty. Even highly innovative dominant incumbents fail to respond appropriately—resulting in experiencing disruptive consequences.
In recent times, predatory pricing has become a major source of uncertainty. The thesis of VC managers of washing out competitors has been a new source of uncertainty. New generation Startups are emerging with a very weak proprietary intellectual asset base. Many of these ideas are around software and connectivity. Hence, there has been a very high scale advantage due to zero cost of copying of software and exponential effect of network externality effects.
Focus areas for reducing uncertainty in innovation
As opposed to randomly experimenting with ideas, innovators should focus on articulating innovation dynamics as repeatable patterns. Fortunately, such patterns exist. Instead of getting confused, they should focus on unified Theory of Innovation for getting guidance from related theories and terminologies. Such an understanding will lead to systematic idea generation instead of pursuing brainstorming like random idea creation practices.
As it has been explained, technology introduces high-level uncertainty in the innovation space. For example, the uncertainty of the growth of image sensors and transistors baffled Kodak and RCA, consequentially making them bankrupt. Even today, whether Tesla will succeed or not in its EV race depends on the progression of the battery and fuel cell technologies. Systematic monitoring of technologies and the dynamics of underlying science also help in reducing uncertainty in innovation.
To deal with uncertainty pertaining to consumer preferences, the focus should be empathy, Passion for Perfection, and deep design thinking. Instead of following the flow, depending on the user level survey, or relying on the innovators’ emotional urge, innovators should put themselves in the shoes of target users in offering means in getting their target jobs done better at less cost.
The Externality Effect has become a major source of blessing and also uncertainty. To leverage it in a predictable manner, innovators should focus on offering a system solution. As opposed to being the sole provider of a single solution, the focus should be on developing an ecosystem for offering system solutions to customers.
To deal with the uncertainty created by the competition response, innovators should focus on having a sustaining innovation strategy—through a series of incremental innovations. The sustaining innovation strategy will also help to counter predatory pricing. Focus on developing intellectual assets to exploit the scale advantage could be a useful strategy to counter predatory pricing.
Smart insights are vital for reducing uncertainty in innovation
Despite the immense importance of innovation in creating new wealth for society, a high level of uncertainty is limiting our ability to exploit innovation opportunities. It appears that due to our limited understanding, innovation is appearing to us as a random act of creative genius. In fact, the world will be so much better off when we all understand that innovation is a skill and follows a reasonable process. On the other hand, the predatory pricing practice of VC fund managers is also adding a twist.
Hence, for reducing uncertainty in innovation, we should focus on developing an understanding of the innovation process as a repeatable pattern. Furthermore, instead of randomly generating ideas, we should focus on systematic idea generation for ferreting out value from the market. Moreover, regulatory measures should also be put in place to discourage predatory pricing, as it often creates a barrier to grow of ideas in creating beneficial effects for society.