By understanding the phenomenon of innovation and conditions with which it emerges,  companies and governments can build policies and strategies to facilitate it.

By understanding the phenomenon of innovation and conditions with which it emerges,  companies and governments can build policies and strategies to facilitate it. Open innovation programs are now the norm in the private sector as firms seek to unlock greater opportunity and value by tapping into external knowledge, resources and ideas. Collaborations within ecosystems is now a fundamental part of private sector innovation strategies. Yet all successful Innovations takes place through complex ‘systems’. As such the role of government policy must be an innovation systems designer. Policy must focus on creating two ecosystems and ensuring the integration of these; Entrepreneurial ecosystem and a Technical ecosystem. The challenge of public policy is ensuring integration of these ecosystems.

Ecosystems for startup success

The strategic objectives of innovation policy are directly realised through the success of technology startup enterprises. Large companies do not create as much high impact innovation as startups, often troubled by the politics and culture which prevent adoption, implementation and route to market of breakthrough solutions.

As the success of innovation policy is so closely tied to the success of startups, assessing the conditions which create startup success is an essential part of the puzzle. MIT’s model emphasises two key ecosystems critical to startup success.

How the model works:

I-Cap: Innovation Capacity which includes the development of R&D but also the translation of R&D into products and services.
E-Cap: Enterprise Capacity which includes the business environment for forming new successful enterprises.

Both the innovation and enterprise capacities are built through focusing on the key production functions across both capacities. In practice these capacities materialise through two separate ecosystems. Governments have introduced policies to aid capacities in each I-Cap and E-Cap production function segment.

Examples: UK government:

The UK government has passed multiple policies to aid capacities:

• E-Cap Human Capital: Widening the availability of optional courses in entrepreneurship across undergraduate programs
• E-Cap Human Capital: Introduction of the entrepreneurship visa
• E-Cap Funding: Introducing the SEIS and EIS up to 30% tax relief for investors of early stage high risk startups
• I-CAP Funding: Innovate UK fund provides grants to high risk, high growth potential research & development

Challenge: Integrating the ecosystems

In practice, furthering the capacity of production function in I-Cap and E-Cap materialise through separate ecosystems. In 2017, London attracted 3.1% of the global venture capital market, 8^th highest in the world. Our analysis showed the majority of these rounds were smaller seed rounds and not larger growth rounds. Yet, these seed rounds did not flow to British university spinoffs. London has become a thriving tech hub attracting startups from across the globe, with world class research institutions producing both technical and commercial talent, yet there is a big issue with integrating the two ecosystems and capacities.

Government role is to be an innovation systems designer. Specific policies like the UK’s, help with enhancing individual capacities across I-Cap and E-Cap create two separate thriving ecosystems. However, successful policy must design not just linkages between I-Cap and E-Cap but an integration strategy between the two. The lines between each ecosystem must be blurred, both eco systems must merge and be agile. A individual commercialisation teams will not work in the I-Cap ecosystem. Technology and R&D specialists at the E-Cap ecosystem will not work. 

What integration looks like

In practice, this requires government to challenge age old traditions and practice. An integration of I-Cap and E-Cap will force universities will to evaluate Phd’s and research based on commercial potential; market size, competitive landscape, total venture funding etc. It will leverage E-Cap capabilities for essentials like coordinating industry proof of concepts and access to commercial talent. Research will focused on industry growth segments and emerging needs and researchers will be driven by an entrepreneurial culture.

Government as the orchestrator

Government must also play the part of an orchestrator who is responsible for ensuring the separate ecosystems merge and stay glued together. This glue must appeal to everyones self interest and be the reason why stakeholders chose to stay engaged in the ecosystems. The glue of the ecosystem must create an intrinsic value for stakeholders who are both apart of the ecosystem and external to it.

E.g

• A well recognised brand such as a government department can act as the glue
• Government support in exploiting opportunity not otherwise available
• Access to unique collaboration potentials to unlock strategic growth
• Quality of ecosystem relationships have an intrinsic value to themselves

Government initiatives tend to create separate ecosystems by focussing on enhancing individual capabilities within I-Cap and E-Cap. Quite simply, what matters most in creating and sustaining innovation is the strength of interdependency amongst ecosystem players. As an innovation systems designer, government policy must not just focus on the linkages between the two, but a complete merger and integration.

In the private sector, the closed innovation paradigm which dominated the 20^th century has been replaced with a new collaborative, partnership orientated approach, open innovation. This new approach stresses partnerships expand access to opportunity and provide the opportunity for greater value creation. Strategic partnerships are thus a source of competitive advantage. Yet innovation partnerships/programs consistently under deliver on expectations. By analysing the cause of failure in the private sector, we have found successful government innovation policy must prioritise building the right partnerships and consensus to succeed, both, internally within the existing public sector infrastructure and externally with industry stakeholders.

Why partnerships are important:

Pushing the frontiers of entire industries requires more than technology, business environments, ecosystems and smart public policies. Transformational change in major industries requires small and big companies to overcome their competitiveness concerns and utilise their complementary strengths. This is compounded in industries which have complicated value chains such as agriculture and manufacturing, which requires cooperation between multiple stakeholders. Utilising complementary strengths expand the opportunity for greater value creation. Collaboration with small companies provides incumbents with insights of emerging consumer needs and insights on underserved market segments. For small companies, partnerships are an invaluable source of distribution, manufacturing and leverage. Involving stakeholders from the value chains ensures a greater chance of adoption and implementation. Successful innovation partnerships occur when the value of mutual collaboration is bigger than the cost and risk.

The depth of intercompany collaborations continues to strengthen. Strategic partnerships are also manifesting themselves through corporate venture funds of which we have seen a 25% year on year compound growth rate to $25billion globally in 2017 since 2012.

Why open innovation fails in the private sector:

Yet a significant percentage of open innovation programs and innovation partnerships under deliver. A recent survey by Accenture found more than 50% surveyed said these partnerships did not yield as many new product and benefits they had hoped. The success of innovation programs are measured by impact, adoption and implementation yet internal political and cultural barriers are preventing the realisation of innovation programs. An open innovation plan that does not include methods for overcoming internal barriers to adoption are doomed to fail.

Without a multi-layered internal network of supporters, advocates and stakeholders, innovation programs risk silo thinking and will not take into the account the diverse thinking, expertise and ownership required. To ensure implementation, successful innovation programs ensure ownership from all stakeholders. The politics of ‘we did not invent it’, disruption of change and technical implementation challenges are preventing innovations efforts being realised.

What governments can learn:

Partnerships and consensus are a prerequisite for innovation policy success. Our experience dealing with government policy has identified internal and external multi-stakeholder networks, and relationships which must be incorporated into policy to maximise success.

The networks, partnerships and consensus building are split into three categories, Horizontal, Vertical and Intersectional. Networks are either internal where the capacity lies within the existing infrastructure or external where the capacity lies outside of the current domain.

Consensus:

Internal: Public sector

Policy must focus on building internal consensus within the existing public sector infrastructure. Different government departments, innovation initiatives and innovation assets must be aligned to utilise complementary strengths and resources.

• A break away from traditional research areas, and greater focus on high growth potential areas
• Consensus between government departments to utilise complementary strengths, avoid overlap
• Consensus between funding bodies and research base

External: Industry

Policy must also focus on creating external consensus within the industry to create a culture of mutual value creation between stakeholders. Deep industry partnerships will maximise the chances of adoption. In practice this may look like:

• Alliances with corporate venture funds
• Joint R&D
• Collaborations with industry supply chains

Multi-layered networks

Both internal and external networks and partnerships must involve multi-layered networks to avoid a top down approach to innovation. Partnerships must involve customers/researchers, field agents, management and executives. Multi-layered networks will foster equal ownership, provide a diverse set of insights and address adoption hurdles before they arise.

Transformational innovation and disruption across major industries, has very less to do with individuals and specific technological breakthroughs and everything to do with complex systems, partnerships and supply chains aligning together.

Manufacturers of televisions such Sony, Panasonic and LG have invested billions of dollars in R&D for HD TVs, ready for mass market adoption since the 1990’s. Yet the category has been a huge failure retrospectively. Similar trends such as 3D TV’s, smart TV’s have also failed. The reason was little to do with the added consumer value and technological breakthroughs. Instead, critical complements such as studio production equipment, signal compression technologies and broadcasting standards were not developed in time, key complementary technology was not adopted and there was a huge issue with industry alignment. Offering the world a rolex when society has not learned to read the time is a recipe for innovation disaster.

Ecosystem strategies are being deployed in the private sector and government policy has focused on recreating the silicon valley ‘system’ in other parts of the world. When they work, innovation ecosystems power growth and innovation. However, there are multiple risk factors to take into account in order to maximise the chances of success. The three types of risk include; initiative risk, interdependence risk and adoption risk.

Initiative risk:

Initiative risk entails evaluating the feasibility of the idea, the potential value creation, the readiness of supply chains and the quality of the project team. Initiative risk is the process of examining which ideas have the greatest chance of success and why. From our experience, there are three types of initiative aspirations; core, adjacent and transformational.

Core initiative:            Those which offer incremental value creation to existing solutions.

Adjacent initiatives:   Apply proven and tested capabilities in new areas.  

Transformational:      Initiatives which are viewed as breakthroughs and create the possibility of entirely new paradigms.

Core initiatives have much higher chances of success than transformational initiatives which require multi-stakeholder collaborations and the cooperation of supply chains

Risk initiative management requires defining your innovation aspirations like an asset portfolio. Stakeholders must decide on their appetite for risk and evaluate their aspirations accordingly. To reduce this risk, entrepreneurs must conduct a process of prospection, the process of information gather, analysis and scenario planning to inform ideation. Prospection should examine everything from assessing adoption rates, competitive intensity, market sizing, supply chain analysis. Deep scenario planning will prepare entrepreneurs for variables which could derail or open up greater opportunity, such as future changes in market structures, emerging technology adoption and regulation.

Collaboration and partnerships with industry stakeholders will be an essential asset for reducing initiative risk. Industry stakeholders will provide insights and analysis beyond the graphs and charts. They will open networks, and provide real time market insights.

Interdependence risk:

If an innovation initiative is a component of a larger solution, the success is dependent on the development and deployment of the other components by collaboration partners. This will often be the case for transformational initiatives in major industries. Thus a level of interdependence on other parties ability to satisfy their commitments within the required time frame exists. The greater the interdependence the less control the initiative has over its own success. Harvard Business School identified calculating interdependence risk by multiplying the probability of completion by estimated delays of required partners.

Example

If 4 technology partners agree to collaborate on a solution and each of the 4 believe they have a 80% probability of meeting the requirements in the time frame agreed, this would work our as followed.

0.8 x 0.8 x 0.8 x 0.8 = 41%

Thus the probably of all partners delivering their requirements for success of the initiative is only 66%. Basic probability also tells us, should one partner believe they have a lower chances of meeting the deadline, this derails the project significantly.

0.8 x 0.8 x 0.8 x 0.2 = 10%

A thorough interdependency risk assessment will inform expectations to investors and managers. This will also be essential in creating project timelines and anticipating delays.

Adoption risk:

Adoption risk is therefore the probability solutions will be integrated across appropriate supply chains and stakeholders. Transformational initiatives in major industries usually have multiple intermediaries positioned between the innovation and the intended impact. The higher the number of intermediaries, the higher uncertainty. Adoption risk must factor in the costs and benefits of adoption for each intermediaries along the value chain. Adoption does not always mean the specific solution being developed by how the required changes across value chains to integrate the initiative successfully. Adoption risk must also factor in sales cycles; the time for adopters at every point along the value chain to become aware of the product, agree to test it, accept the results of the trial and then scale up orders. It will also include integration delays due to technical challenges, transaction costs and change over costs.

 Time of adoption X number of intermediaries

Type of Risk                                        Risk Management

Initiative Risk                                      Prospection + External Industry Stakeholders

Interdependence Risk                         Probability X Estimate Delays

Adoption Risk                                     Adoption Cycles + Number of intermediaries