Inside the Green Box

How does innovation within a company really work? That question has bedeviled researchers and practitioners alike ever since Schumpeter popularized the term “Creative Destruction” in 1942 and Christensen put forth the theory of “disruption from below” in 1997. There are many perspectives one can take when trying to answer this question, but one of the most interesting and relevant perspectives on innovation is the perspective of that complex, dynamic, system – namely the firm. It is also the one of the most difficult systems to understand.

A recent article from McKinsey researchers claims that companies who master eight ‘innovation essentials’ can achieve 2.4 times the economic returns over those who don’t. They do this by excelling with their innovation portfolio (the green box) and within this green box, with breakthrough innovation.

What do these eight innovation essentials look like in practice? How do they create increased value? What does a breakthrough innovation system look like?

Even though the system of innovation is complex, that should not stop one from trying to determine the underlying dynamics of the system in order to identify the critical components and dynamics. One of the ways to understand complex systems is to model them and one of the most useful tools to do this type of modeling are System Dynamics Models championed by Jay Forrester in the 1950’s. Since then, these types of models have found use in numerous political, economic, social, technological, environmental and business situations to understand the dynamics of systems that have complex and non-linear interactions and outcomes. Innovation is such a system.

A system dynamics model of innovation in a firm was constructed using Stella Architect. The model and the results of running some specific ‘experiments’ are described.