How innovation will transform our future

Some of the best performing stocks in the history of the stock market are also known as some of the most innovative companies in the world. They change the way we live, make our economy more productive, and provide a return to investors along the way. Ford (NYSE: F) developed a method for mass-producing cars; 3M (NYSE: MMM) invented the Post-It Note, Scotch Tape, and — by mistake — developed Scotchguard; and Intel (Nasdaq: INTC) turned little pieces of silicon into chips that have changed the world.

Today, Apple (Nasdaq: AAPL) is known for innovating products that have people clamoring just to hear what's next, Amazon.com is changing the way we shop, Tesla Motors (Nasdaq: TSLA) is changing the way we see personal transportation, and Life Technologies is making amazing advancements in genetic sequencing. The history of innovation in America is strong, and all of these companies are making some sort of leap in the way we view the world, turning conventional wisdom on its head through their innovations.

But what is this thing we call innovation, and how do we spot it in our investments?

What is innovation?
The technical definition of innovation is the introduction of something new or a new idea, method, or device. That sounds very official and may be true, but "something new" is vague and not useful for investors.

When I cut my teeth as an engineer, inventor, and innovator at 3M — a company known for its innovations — I remember one quote about the difference between innovation and invention that stands out as my personal definition for innovation:

Invention is the process of turning money into ideas; innovation is turning ideas into money.

That rang true for me. All of the ideas in the world are useless without a way to turn them into money, and the most innovative companies in the world are known for making money.

When you look an innovative company like Apple, it didn't invent many of the things it now makes, but it figured out a way to turn other people's ideas into money. Whether it was the mouse from Xerox labs, the music player formerly dominated by Sony, or the smartphone, Apple didn't invent these things, but it has a knack for turning ideas into money.

How do you breed innovation?
Creating innovation is more than just talking about it; it has to be woven into the fabric of an organisation. It has to be part of the culture from the top of a company all the way to the bottom, and that's the challenge for companies today.

A few of the best insights into creating an innovative culture come straight from some of the most influential people in U.S. business history. Here are a few quotes that I find telling from the man who made 3M an innovation machine, the father of Apple, and the two men who created Google.

"Hire good people and leave them alone." –William McKnight

"You can't ask people what they want if it's around the next corner." –Steve Jobs

"We just want to have great people working for us." –Sergey Brin

"We're trying hard to find user needs that aren't being met at all." –Larry Page

The common thread here is people. Employees are important, customers are important — and if you get the right group of people making products that please customers, then revenue, profits, and stock performance will fall into place.

The actual mechanism that a company chooses to create an innovative environment doesn't seem to matter much, as long as innovation is part of the culture. 3M does it with the (largely symbolic) "15% time" initiative, and Google does something similar by allowing workers to pursue ideas beyond their job descriptions. Both companies are also open about sharing ideas and testing them on the world. Apple, on the other hand, centres its innovation at the top of the organisation, keeping a shroud of secrecy that keeps its own engineers in the dark.

Many methods of creating innovation are effective, but it's clear that it starts with an appreciation of the people doing the work and the people using the products — not on the financial statements. As investors, this is what's important to watch for, and it can be spotted in press releases, conference calls, and interviews with company management.

Innovation can fade as fast as it began
I've given a peek into what to look for to find innovation, but even the most innovative cultures don't last forever. In my experience, I saw a lot of changes to innovation at 3M under Jim McNerney's tenure as CEO. The rise of the six-sigma management strategy put shackles on the creative process and killed ideas before they could really develop. Under McNerney's 3M, the Post-It Note would never have been created, because the organisation became more rigid.

Hewlett-Packard used to be a boon of innovation, and we know what's happened there. Innovation just doesn't last forever, and even Apple will eventually lose some of its lustre. Steve Jobs played a larger role in Apple's products than most CEOs do and therefore had an oversized effect on innovation.