Innovation, a Driver of Success?

Corporate innovation is widely praised as essential for success, yet it yields sustainable growth only when balanced within organisational, ethical, and cultural frameworks. Unrestrained focus on innovation can disrupt established values, risking both stability and purpose. Successful innovation respects tradition and considers long-term implications.

For most of my corporate career, innovation has been a central theme whenever an executive has got up on their hind legs and started talking about the company's future. Yet for all the talk about innovation, I seldom hear anyone discuss the degree to which innovation and inventiveness can be considered the primary determinants of success in organisations—we just take it for granted they are.

As 'an' historian I'm seldom keen on taking the philosophical underpinnings of our institutions or organisations for granted. Thus, I thought it time to make the case for innovation. Specifically, whether exhorting staff to "be more innovative in your roles" does much to move the needle on organisational success.

If we remain within the very narrow confines of a "bring positive vibes only" approach to management, which demands that only authorised thinking be a truth for everyone, then we can happily banish all competing forms of thought and accept innovation drives success. But that would only propagate one of the many insidious myths that abound in organisational life.

Instead, if we look beyond the trite assumptions of motivational posters and platitudes masquerading as strategy, we find that innovation is only a key driver of success IF it is integrated within the institutional, cultural, and ethical frameworks of an organisation. But, and this is the "gotcha" when it comes to innovation, there are major risks in leaders becoming enthralled to innovation and prioritising it over other key values, such as tradition and stability. When this happens, organisations are much more likely to fail fast and fail often than they are to become the next Apple (APPL).

The Foundations of Sustainable Innovation

The relationship between innovation and progress has long been a subject of debate in many philosophical traditions. Thinkers such as Edmund Burke (1729–1797) emphasised the need for gradual change and the maintenance of tradition. In Reflections on the Revolution in France (1790), Burke argued that while innovation is necessary, when people embark upon radical or revolutionary change they risk destabilising the social fabric of a nation. His critique exemplifies the argument that unbridled innovation which neglects the wisdom of inherited institutions is inherently dangerous. An argument that was picked up on by Michael Oakeshott (1901–1990) who warned against the uncritical embrace of innovation. In Rationalism in Politics, Oakeshott argued that the pursuit of technological progress without regard for traditional values and established institutions can lead to social instability.

Friedrich Hayek (1899–1992), while sharing Burke's respect for tradition, introduced a more dynamic understanding of innovation in The Constitution of Liberty (1960). Hayek argued, in his concept of 'spontaneous order', that innovation emerges naturally from the interactions of free individuals within a society, provided they operate within a framework of well-defined rules. Accordingly, innovation is not the result of deliberate planning but is the outcome of individuals seeking better ways to meet their needs. Hayek's argument aligns with the view that innovation is essential for economic progress, provided it respects a broader cultural and institutional context. Put less grandiloquently, 'using the results of the experiences of others':

Who will prove to possess the right combination of aptitudes and opportunities to find the better way is just as little predictable as by what manner or process different kinds of knowledge and skill will combine to bring about a solution of the problem. The successful combination of knowledge and aptitude is not selected by common deliberation, by people seeking a solution to their problems through a joint effort, it is the product of individuals imitating those who have been more successful and from their being guided by signs or symbols, such as prices offered for their products or expressions of moral or aesthetic esteem for their having observed standards of conduct—in short, of their using the results of the experiences of others

Hayek, 2011/1960.

Joseph Schumpeter's (1883–1950) theory of 'creative destruction' [schöpferische Zerstörung], a term coined by Werner Sombart (1863–1941), represents another influential philosophical perspective on the relationship between innovation and productivity. Schumpeter posited that capitalism's strength lies in its ability to continuously reform economic structures through innovation, replacing old industries with new ones, old businesses with new ones, old ways of working with new ones. This process of creative destruction is essential for economic development because it leads to technological advancement and productivity gains. However, Schumpeter also acknowledged the potential social costs of this process, including unemployment and the displacement of traditional industries, which must be managed carefully.

Liberal thinkers, such as John Stuart Mill (1806–1873), argued that individual freedom is essential for societal progress. In On Liberty (1859) Mill advocated for the freedom of individuals to experiment with new ideas and innovations, as this is the primary means by which society can improve. Mill's utilitarian approach suggests that innovation should be encouraged if it maximises societal happiness. An approach to innovation which ushered in the notion of the moral imperative of progress.

The Relationship Between Innovation and Productivity

The basis for an empirical relationship between innovation and productivity can be found in the Solow-Swan growth model, which emphasises technological change as a primary driver of long-term economic growth. Research by Robert Solow (1924–2023) demonstrated that technological improvements, rather than capital accumulation alone, were responsible for the majority of economic growth in the post-WWII period. Solow's model laid the groundwork for subsequent research that highlights the role of innovation in improving labour productivity and overall economic output.

A more recent meta-analysis conducted in The Journal of Economic Literature supports the finding that investment in research and development (R&D) is directly correlated with productivity growth across industries. The study revealed that countries and sectors with higher levels of R&D expenditure typically experience greater productivity gains, as innovation leads to more efficient production processes and the development of new products.

To understand the value of R&D to companies who single-mindedly pursue innovation, Apple has allocated a substantial $30 billion to research and development (R&D) for the twelve months ending 30 June 2024. A marked increase from prior years, representing over 7% of its annual revenue. This funding is directed at projects aimed at future-proofing its product lineup, with a primary focus on artificial intelligence (AI), machine learning, and proprietary silicon development. Apple's strategic R&D focus includes flagship initiatives such as Vision Pro and generative AI technologies. This investment reflects Apple's commitment to advancing innovative technology and enhancing control over critical components within its ecosystem.

Of course, unlike John Stuart Mills' utilitarian approach to innovation, corporate investment is not merely an altruistic attempt to maximise societal happiness. As studies have shown, an organisation's incentives to innovate are driven by the potential for profits.

In The Second Machine Age, by Erik Brynjolfsson and Andrew McAfee, the potential for technological unemployment, as automation and artificial intelligence replace jobs traditionally performed by humans is writ large. Concerns which are also echoed in a study by Carl Benedikt Frey and Michael Osborne, The Future of Employment: How Susceptible Are Jobs to Computerisation?, that estimates nearly 47% of jobs in the United States are at risk of being automated in the coming decades.

Implications for Governance

Given the symbiotic relationship between innovation, productivity, and social impact, leaders must strike a balance between encouraging inventiveness and mitigating its potential for social, ethical, or even organisational harm. Managers can play an active role in steering innovation towards desirable outcomes through four key factors:

Innovation does not occur in isolation: anyone attempting to lead their organisation on the path of innovation needs to be aware of the history of their organisation, place within society more broadly, and the long term effects of policies. Something might seem a 'hot topic' today, but if it stores up long term systemic risks it is best to weigh the consequences carefully rather than diving in unthinkingly for fear of being left behind.
Educational systems: leaders needed to foster critical thinking and the capabilities necessary for innovation. As Eric Hanushek and Ludger Woessmann noted in The Knowledge Capital of Nations, societies with higher levels of cognitive skills tend to experience greater economic growth due to their capacity to innovate. The same principle governs organisational innovation.
Psychological safety: managers who build safety in teams, which can unlock low uncertainty avoidance and high individualism, are more likely to foster organisations that embrace innovation and entrepreneurial risk-taking. In contrast, emphasis on conformity and risk aversion fosters teams who are generally slower to adopt new technologies. A cycle which either enhances or limits productivity and growth.
Organisational culture: because tone is set from the top, ensuring appropriate policies, processes, procedures, and funding for R&D is a crucial determinant of sustainable innovation.

In the final analysis, the degree of inventiveness and innovation in an organisation can be a major driver of productivity. However, innovation will only be a force for good if pursued within a framework that considers the organisational, ethical, and social implications of change—change of changes sake is not progress, much less is it innovation. By fostering a psychologically safe environment that also respects societal values and traditions, leaders can ensure that innovation contributes to both economic growth and organisational well-being. Making it a driver of success in word and deed.

Good night, and good luck.