3 misconceptions about Innovation

This is a first article in a series about innovation in Finance, starting with 3 misconceptions:

1) Innovation is not necessarily “disruptive”

Innovation comes from the Latin word innovatio meaning “renewal”. The change associated with innovation can have a limited impact (incremental change) or a very significant impact (transformational change).

“Disruption” is a concept that is often misused. It has a very specific meaning as popularized by C. Christensen: “process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors”.

I like the model defined by G. Pisano from HBS which proposes 4 categories of innovation including routine and disruptive innovations:

Source: https://hbr.org/2015/06/you-need-an-innovation-strategy

2) Innovation is not only about technology

The services offered by Airbnb and Uber are considered as major innovations. However, their technology is ordinary, essentially an internet website and mobile application with geo-localization. The actual innovation came from their business model: allowing demand to meet untapped sources of supply.

Indeed, there are multiple ways to innovate from a business perspective, as illustrated by this excellent framework from the Doblin firm “Ten Types of Innovation”:

Source: https://www.doblin.com/ten-types

By definition, “new” technologies carry the promise of change. From a business perspective, technology must be considered as an enabler to innovation.

3) Innovation is not [only] about creativity and idea generation

People often associate innovation with the notion of idea generation and creative brainstorming. This is necessary but not sufficient. To succeed, innovation should be considered as a global system, including the following components:

  • Strategy (goals, guiding principles, portfolio)
  • Operations (processes from supply to experimentation and production)
  • Organization & governance (decision process, metrics, RACI, …)
  • Sourcing & Culture (talents, incentives, partnerships, training, …)

I would like to emphasize the Culture component, because it is a key ingredient in the success recipe (also one of the major obstacles to successful acquisition of a startup by a large corporate). Peter Drucker said that “Culture eats strategy for breakfast”, I would also add that:

Culture eats Innovation for lunch

That being said, Financial Institutions don’t need to change the culture of the entire firm to develop successful innovation. The challenge is rather to manage two different cultures at the same time.

I will deep dive on some of these components in future posts. Stay tuned!

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