Innovation as a System: Seeing the Linkage between Business Innovation and Revenue Growth as a Generic, Closed Loop System Highlights the Importance and Purpose of Innovation Investments and the Role of Executive Leaders

By Patterson, Marvin L. | Research-Technology Management, September-October 2009 | Go to article overview

Innovation as a System: Seeing the Linkage between Business Innovation and Revenue Growth as a Generic, Closed Loop System Highlights the Importance and Purpose of Innovation Investments and the Role of Executive Leaders


Patterson, Marvin L., Research-Technology Management


Innovation has been defined as implementing ideas to create value (1). Business firms invest in innovation; that is, they spend money on it with the expectation of making a profit. In fact, a primary goal of starting and maintaining a business is to create a proprietary undertaking involving innovation that generates rates of return far greater than those that can be obtained through other, more commonly available, investment opportunities. In the context of this discussion, innovation is viewed more broadly, encompassing business aspects beyond the more traditional product development realm.

At the heart of every innovative business there must be a system focused on creating value. The nature and efficacy of this system is often hidden, sometimes obscure. Nonetheless, it is a crucial component of the firm's worth to shareholders (2,3). The value that this system creates, above all, must be for customers in the form of products or services that they are willing to vote for--to hire, to own--with their dollars. Their willingness to pay for this value, in turn, rewards the business with value in another form: revenue and profits. The goals of this article are to 1) broaden the perspective on innovation as a business system, and 2) outline key principles and relationships that govern system performance. The result is a new perspective on how innovation drives financial growth, and on how innovation can be more effectively managed and improved.

The Investment-to-Income System

A broadly applicable schematic for this investment-to-income system is depicted in Figure 1. Moving from left to right in the diagram, the primary system elements include an innovation engine that takes in invested funds and various kinds of information and puts out specific forms of value-added information. The nature of the activity within this element, and of the specific form of the output, varies widely from one enterprise to another. One firm may accomplish all innovation in-house, while another might use some of the innovation investment to fund external research, or to engage development partners. Nonetheless, the effectiveness of this component can be described concisely in terms of the value of its inputs, and of the value-added information that it delivers.

The output of the innovation engine enables operations-defined here to include business functions such as manufacturing, sales and field support--to implement these goods and services, deliver them to the customer and then support them as needed. Measures of success for this part of the system consider how effectively and efficiently innovative ideas are transformed into value that customers want and need. Further, they assess how completely this value is known and accepted in the marketplace. Finally, they evaluate the level of satisfaction that customers experience in doing business with the firm. If the system in Figure 1 is viewed as a racing machine, the innovation engine produces the power needed for acceleration (growth), while operations serves as the drivetrain that transforms and delivers this power efficiently to the point where the rubber meets the road--the marketplace. This metaphor is used later in the article to further elaborate key points.

At the top of the diagram, a stream of cash flow, also part of the system, flows from right to left and represents graphically the firm's income statement. This flow of currency originates with the customer and is put to various uses within the firm. First, funding for operations is extracted to cover the cost of products and services delivered as well as the cost of sales. Cash needed to cover expense items such as administration or taxes is represented as upward-pointing arrows and hence is not considered part of the investment-to-income system.

[FIGURE 1 OMITTED]

Funds required to support all innovation activity are pulled out last and directed to the innovation engine. …

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