We're In For Innovation

There isn’t a single problem in the world today that can’t be solved through technology, innovation or economics. It’s a policy choice not to do so. A punchy statement, but history shows us that since the Industrial Revolution, technological and human capability has increased beyond comprehension. At the heart of this increase in capability has been an innovative economy and innovative companies.

Innovation isn’t just technology. Business model (distribution, supply chain) innovation has been key, too. Identifying the ground zero of the innovation is challenging, as it is often not the same company that diffuses the innovation far and wide. The GUI was created at Xerox PARC, but they didn’t spot the commercial potential; Steve Jobs did, and the rest is history. Who is the greater innovator in this situation? The creator, or the man who spotted the potential and then made it the worldwide standard in computing? 

Amazon is a highly regarded innovative company that helped pioneer an entirely new industry in cloud computing. However, much of its operational and robotics innovation came from acquiring Kiva Systems in March 2012. 

Speak of innovation, and you must speak of the military. The military has innovated remarkably over the last century. The list of innovations that can be traced back to the military in some way is impressive: the Internet, which came from ARPANET, GPS, jet engines, drones and radar. The British military at Bletchley Park brought the world the electronic computer. The Manhattan Project brought us nuclear weapons, and without money from military purchases, the semiconductor industry may never have got going. After languishing for a while, defence industry innovation is back.

There’s considerable recency bias when evaluating any innovation. What was once a revolutionary product soon becomes the norm, and this is reflected in the industry's standing. 

Take electricity and Thomas Edison, undoubtedly one of the most influential people ever. His company, the Edison Illuminating Company, pioneered the commercial production and distribution of electricity. At that time, it was a revolutionary and leading industry. The same cannot be said of utility companies now. Or take the man who worked at the Edison Illuminating Company, Henry Ford, who improved and popularised the production line. The car industry still innovates but on an incremental basis. That’s changed a bit recently: EVs and self-driving cars, pioneered by Tesla and Chinese manufacturers, have led a particular corner of the car industry to become highly innovative. 

The descent of innovation in an industry is most starkly observed through the history of Bell Labs, a research laboratory which changed the world. At the time, I wrote:

But ultimately, Bell Labs was consigned to an insignificant place within the corporate structures of Alcatel-Lucent and then Nokia.

A really bad way to measure innovation success is through the number of patents issued (the same is true for the number of academic papers published). On this metric, IBM would be the world’s most innovative company for decades, and clearly that is not true. Although IBM Research has a long history of technology innovations, they’ve struggled to commercialise them. Of all IBM innovations, the most remarkable is that IBM, along with the World Bank, took part in the first financial swap in 1981. IBM’s technological innovations include the floppy disk, the Fortran programming language, and dynamic random-access memory. 

But when talking about innovation, especially corporate innovation, it would be amiss not to speak about Google.

Google has had roughly three phases of innovation. The first phase began in 1998 with the PageRank algorithm, when Google focused on “searching and organizing all the world’s information.” This continued through the 2000s as Google embarked upon product expansion. The first phase was exceptionally successful. The second phase began in January 2010 with the creation of Google X, the home of “moonshot” technologies in areas unrelated to the core of Google’s business, such as self-driving cars. Whilst noble in ambition, Google X never really worked. It was a start-up lab but without the pressures of a start-up that make start-ups work. And it wasn’t a corporate research lab comparative to Bell Labs either. The third phase of Google's innovation is artificial intelligence. This started around 2014 with the acquisition of DeepMind. This third phase has been successful. DeepMind has brought about breakthroughs in artificial intelligence with programs such as AlphaGo and AlphaFold. Google developed the Tensor Processing Unit (TPU), an integrated circuit for machine learning; and the Transformer architecture, which powers current LLMs, was developed within Google, but crucially, others commercialised it first whilst Google let it languish.

I strongly believe it doesn’t matter where innovation comes from as long as we continue to accelerate.

Both the invention and commercialisation are equally important. If no one uses the invention, it cannot contribute to progress. But it’s not simple to create and diffuse innovation successfully over time. 

Let’s compare Google and Apple: both companies are considered not as innovative as they once were, but both continue to bring in billions in profit each year. They have two very different approaches to innovation: Google looked for big ideas in areas that weren’t similar to each other or necessarily core to an existing business (like Gmail and Google Maps). On the other hand, Apple, under Steve Jobs and still (though not to the same extent) under Tim Cook, deliberately focuses on innovations within a core area. 

There’s another key similarity, and that’s technology innovation supported by business model innovation. Neither pioneered the switch to a subscription based business model, but both thoroughly adopted it. In the development of its ad auction, Google innovated technologically and on ad business models. Both created sticky products and achieved customer loyalty through ecosystem lock-in. Whilst it is the technology breakthroughs which get you the initial edge, it’s business model innovation that sustains it.

What are the important aspects of creating an innovative environment? You need an incentive to innovate, and the best one is usually competition. This can either be the competitive market or, in the case of the military, competition with other militaries and nations. Monopolies are where competition and innovation die.

You need large amounts of capital from an organisation willing to take risks; the government and venture capital can take this role. You need a healthy mix of corporate behemoths, research labs, entrepreneurs, and start-ups, all providing competitive pressure. Some companies will focus on incremental, sustaining innovations, and others on disruptive, industry-changing innovations. You need supporting infrastructure, physical and digital.

However, before all of that, you need an educated labour force. The most innovative and economically complex countries are the world’s best educated. It’s never been more true.