In a survey of over 6,000 American manufacturing and service sector firms conducted in 2014, 49% responded that their most valuable product innovations originated from outside sources. Many reported customers and suppliers as the primary source of these external sources. 14% said startups were the origins of the innovations within their organizations. While many of these relationships are through formal market channels such as joint ventures and cooperative R&D, 37% reported innovation originating from informal communications channels. Another 20% stated service contracts or consulting as another source. The report estimated if these external sources were cut off from these companies, it would reduce the number of innovative firms by up to 43%.
This suggests the importance of communication channels within a city is a critical component of most firm's innovation strategies. A single firm cannot store all knowledge. As Bill Joy, co-founder of Sun Microsystems, famously said, "no matter who you are, most of the smart people work for someone else." Cesar Hidalgo, a faculty member of MIT's Media Lab, explains this as once the amount of knowledge exceeds a single person (personbyte) one must begin to form firms (firmbyte) comprised of multiple people working together to accomplish complex tasks. Once the cost of obtaining this knowledge and know-how is less expensive outside the firm, companies begin looking beyond the organization to assimilate new knowledge and capabilities. As we will examine in future posts, distance, quality of communication channels, the levels of trust, and advances in technology can significantly reduce these cost and encourage interfirm cooperation.
These external influences urge companies to recognize they are working in a broader context of an innovation ecosystem and establish connections outside their organizations. Developing these channels is not always easy for many companies that view it as a risk. The reality is without these channels they risk more by not having access to the best information and skills to bear on a given problem or foresight into new markets for their internal knowledge assets. Understanding the nature of their innovation strategy and how external sources contribute is a key to maximizing their value. Even when an organization understands they need to connect beyond the firm, they find it difficult to find suitable external partners.
A mix of firm size is vital to meeting the strategic external needs of each actor in the ecosystem. Smaller and medium-size companies often need access to industry knowledge, the markets, and scale of larger firms. Larger organizations tend to find it challenging to innovate internally due to their own rigid and risk-adverse cultures. These smaller companies are often more agile and can bring innovation to market faster. Through partnerships and acquisitions, large and small businesses can help each other prosper. In a survey conducted by Accenture Research in 2015, 78% of large corporations responded that collaborating with start-ups and entrepreneurs is important to driving innovation within their companies. 67% of start-ups responded that large companies were important to their innovation efforts.
A healthy innovation ecosystem facilitates the ease of connection between entities.