Everyone agrees that innovation is important. A survey by Boston Consulting Group found that executives across all industries rate innovation as one of their company’s top three strategic priorities for 2005. Another survey, conducted by consultancy Deloitte, found that manufacturing executives rate innovation as their top growth catalyst.

But what exactly is innovation?

‘Creativity is thinking up new things; innovation is doing new things,’ says Theodore Levitt, former editor of the Harvard Business Review.

An interesting definition, but it leaves managers with a lot of scope to claim they are innovating when what they are actually doing is tinkering. Of course, making tiny adjustments to products, business processes and underlying technology can lead to moderate improvements in efficiency, but they are not going to significantly change the fortunes of a company. A systems upgrade is not an innovation.

For Julian Birkinshaw, professor of strategic and international management

at London Business School (LBS), innovation has to be a ‘significantly new way of doing something’.

Tim Jones, a principal at strategy consultancy Innovaro, estimates that 30 per cent of companies’ resources are focused on significant innovation. ‘Business innovation in terms of radical change is often linked to disruption, where benefits can come from technology, business model or consumer sides,’ he says.

But why is innovation suddenly top of every executive’s priority list?

‘Innovation is a major driver of organic growth,’ says Jones. ‘Other than mergers and acquisitions, and shifting existing products into new markets, innovation is increasingly seen as the only way to grow a business.

‘Ten years ago, the only people who focused on innovation were research and development and marketing, and each had a different take. Now innovation is a chief executive issue.’

In a service-based economy, innovation is especially important for survival. Services are easy to copy and margins can be poor. You have to innovate to differentiate.

Some people believe the relentless drive toward ‘best practice’ is part of the reason why innovation has been pushed to the top of many chief executives’ agendas.

‘Although best practice has yielded some benefits, it has also had the effect of shortening strategy lifecycles,’ says Jim Scholes, managing director of consultancy Strategos Europe.

Companies tend to use the same data, the same analysis and the same advisers so, not surprisingly, they come up with extremely similar strategies. The result is a market full of products and services which, from a customer’s perspective, are more or less the same.

‘This causes an intensifying of price competition and a vicious cycle that we know as commoditisation,’ says Scholes. ‘More companies in the same industry are looking the same. As a result, companies are always looking for new ways to differentiate and find value. It is a tough challenge for chief executives. Innovation is one way to bridge the gap.’

But if it is true what people say about the British being innately wary of taking risks, will innovation be a difficult trick to pull off in the UK?

‘There is nothing inherently risk-averse or un-entrepreneurial about British people,’ says Birkinshaw. ‘In fact, if you look at the data, Britain is in the top third of countries when it comes to entrepreneurial spirit. There is some pretty good data to support that.’

And the UK still has a significant impact on world trade.

‘If you look at the history of Britain, we have been established in world trade for centuries. You can’t do that by being risk- averse,’ says Scholes.

But in terms of innovation, we lag behind countries such as the US, Japan, Switzerland, and the Nordic countries – (see below).

Most people see innovation and risk as going hand in hand, but this does not have to be the case.

‘I like to think of innovation as de-riskable,’ says Birkinshaw. ‘Most innovation can be de-risked by running a number of small-scale experiments to check whether it works or not.’

Once you have established that an idea works, you can invest more in it. The initial investment should be about thinking and understanding what works and what does not – see Shell case study, below.

‘Innovation = expensive’ is another myth that needs to be dispelled. ‘High spend does not imply high innovation, nor does low spend imply no innovation – it is about focus, ideas and leverage,’ says Jones.

Or as the father of lateral thinking, Edward de Bono, put it: ‘The winner is the chef who takes the same ingredients as everyone else and produces the best results.’

The challenge of innovation is to help people to think laterally.

‘It is difficult for traditional IT people, who like order, to get their arms around the chaos of innovation,’ says Simon Fox, IT director at Virgin Atlantic.

Not everyone has a creative bent, but with the right tools and processes, companies can increase the innovative capability of their employees.

‘What you often require is a maverick or challenging persona in the mix,’ says Jones.

Transforming a large, staid company into a dynamic one can be tough going, as organisations such as BT and Siemens have discovered, but change is not impossible.

Even a huge firm such as BP has managed to make the shift to an innovation culture. The oil company now files more patents than any of its rivals – three times as many as its closest competitor – including many for alternative energy sources such as solar power.

BP is now the world’s largest manufacturer of solar technology. And its investment in innovation has paid off: last year it showed a 26 per cent growth in profits over the previous year.

Small companies are generally quite flexible and have more capacity to innovate but, as Jones points out, they often lack sufficient insight or resources to deliver innovation.

The difficulty for smaller organisations is they often have less access to the same professional processes and skills as their larger competitors.

‘Sometimes you will find that small companies have difficulty scaling up a good initial idea,’ says Scholes. ‘They can take it so far, but they cannot ramp it up geographically or in terms of volume.

‘It is not uncommon in those circumstances for smaller companies to be acquired by larger companies that could not come up with the idea.’

Large companies sometimes face the opposite problem. They have the necessary market reach and production capacity but they cannot find new ideas, or when they do come up with a fresh idea, they find that some small company already owns the intellectual property rights.

This is where innovation networks come into play. Analyst Forrester Research calls innovation networks a ‘new market ecosystem’.

‘No company, no matter how large, can do all of its own innovation any more,’ says Forrester research director Laurie Orlov. ‘The fixed costs are too great, and the possibilities from small firms or individual inventories are too powerful to ignore.’

Procter & Gamble (P&G), for example, has sourced a network of a million scientists to help find sources of ideas to incorporate into new products.

‘Every company needs an innovation network, whether it is as formal as P &G’s Connect and Develop programme, or informal relationships through industry consortia, partnership with venture capitalists, or universities,’ says Orlov.

An example of a global innovation network launched in the UK is Chancellor of the Exchequer Gordon Brown’s Malaria Initiative. The Bill & Melinda Gates Foundation finances the inventions of GlaxoSmithKline and biotechnology firms, which are then brought to market by non-governmental organisations such as charities in developing nations. In this innovation network, the UK acts as a broker, linking the various specialists, such as inventors and financiers, in the Anti-Malaria Research Innovation Network.

‘When people are innovating in terms of business models, the core competence or skills are not possessed by any one company,’ says Scholes.

‘To find complementary capabilities is a powerful way to move forward. One aspect is getting access to markets we can’t reach and one is capabilities we don’t have.’

So the future of innovation lies in collaboration.

The state of innovation in the UK: how do we compare with the rest of the world?

One way to compare innovation in different countries is through the results of the Global Entrepreneurship Monitor (GEM) survey.

The GEM consortium, founded by London Business School and Babson College, conducts questionnaire-based research in 34 countries. The survey asks thousands of people in each country if they have started a business, or know anyone who has.

‘Looking at the number of start-up companies is a useful measure, but what is even more useful is not to look at how many companies are started but how many grow to a decent size,’ says London Business School strategy expert Julian Birkinshaw.

‘Certain developing countries have very high levels of entrepreneurship. People need to start businesses because they cannot make a living any other way.’

Another measure of innovation is the number of patents filed.

‘We like patents because we can measure them, but they obscure more than they can reveal,’ says Birkinshaw. ‘I tend to look at output measures and the organic growth of companies.’

The most comprehensive comparison is conducted by the Geneva-based World Economic Forum (WEF), whose Competitiveness Index is drawn from a poll of nearly 11,000 business leaders worldwide. Innovation is one of the sub-indexes in the report, including company spending on research and development, research collaboration between universities

and industry, intellectual property protection, and capacity for innovation. This year, the UK was ranked 13th for innovation out of the 117 countries surveyed. The US was ranked as the most innovative country, followed by Japan and Switzerland. Last year the US topped the list, followed by Japan and Finland. The UK was placed 10th.

Out of 117 countries, 13th place doesn’t sound so bad.

‘It’s OK, but not brilliant,’ says Tim Jones, a principal at consultancy firm, Innovaro. ‘The main problem is that regions compete with each other. Regional development agencies (RDAs) all want to be a global centre for biotechnology, creative industries and so on. You end up with a lot of second-division clusters and no international focus. What is needed is more central government direction of the priorities in each area.

‘For example, the East of England RDA could get biotech funding for Cambridge, while North West gets aerospace funding, South West and South East receive IT funding and so on. The country would stand a better chance of creating sufficient centres of gravity on a global scale to compete.

‘The DTI, RDAs and key companies need to better understand global opportunities and future innovation areas, and focus on taking a lead in the ones that fit capability, market and competitive positioning.’

Case study: Shell - the oil giant fast-tracks employees’ bright ideas

When you work for a company with more than 100,000 employees, getting your bright idea recognised, funded and transformed into an innovation can be an onerous task.

Not at Shell. The Anglo-Dutch oil giant has implemented a team called GameChanger to fast-track bright ideas. ‘A significant amount of Shell’s exploration and production (EP) research and development has been initiated through GameChanger,’ says Jack Hirsch, global EP GameChanger leader.

GameChanger mimics the way venture capital works. Employees submit a proposal via email to a team of mid-level managers. The proposal is more anecdotal than quantitative; at this stage it is just a high-level idea.

GameChanger teams meet weekly to discuss the ideas. The proposals are pre-screened to see if they fit the following set of criteria:

* Novelty – Is the idea truly and fundamentally new and different?

* Value – Could the idea create substantial new value if it works?

* Why Shell? – Does Shell enable the idea to become bigger, and do we care if it does?

* Credible plan – Is there a plan to manage primary risks prudently by qualified people?

If the proposal passes pre-screening, it is allocated a sponsor whose role is to find a qualified Shell employee to champion the idea. Once a champion has been found, a brief screening panel is convened, comprising the person who submitted the proposal, the champion, and representatives of the GameChanger team. A decision is made at the meeting as to whether the idea should be converted into a formal proposal. If it receives the green light, the formal project proposal will be presented to an extended panel and a decision will be made within two working days.

The process usually takes between five days and two months. The seed funding, which can be in the region of £50,000 upwards, is used to develop a full business plan.

GameChanger is a bottom-up approach to encouraging innovation. Many of the ideas that have come out of the scheme – such as new ways to detect oil reserves, or smooth sleeves

to reduce drag on underwater structures – have saved or made Shell millions of pounds. By putting the seed funding in the hands of mid-level managers, the organisation sends a message to its employees that everyone’s ideas are important.