The Innovation Frontier
Where can investors find opportunity? Conceptually, opportunity lies on the boundary of progress, on what we describe as the innovation frontier (see diagram below). The innovation frontier defines the current optimized technology, technique, and best practice in a given industry or field, as applied knowledge embodied in leading product and service offerings. This can be thought of as the current state of evolution. Beyond this frontier is the knowledge frontier, which always advances ahead of innovation. This region represents how our body of knowledge in current and new fields is developing new ideas, insights, and principles. The gap between these two frontiers – between the innovation frontier and the knowledge frontier – is where applied research, development, and new innovation happens. Historians of technology call this place the adjacent possible, as it defines what is potentially possible in the near future with a given state of technology. This defines the future potential path of evolution, or technological trajectory, and is where future opportunity is to be found.
The knowledge frontier continually feeds the innovation frontier with new building blocks, such as new principles of knowledge, enabling technology, and new concepts and ideas. These can be combined with existing generations of product and service offerings to create next-generation offerings, or even new paradigms, which then push the innovation frontier forward. This is the fundamental basis for technological and economic progress and growth.
Growth Opportunities Are Found on the Innovation Frontier
Searching for Investable Innovation on the Innovation Frontier
Despite continual progress across the innovation frontier, not all new innovations are investable or profitable, as some innovations never develop into mainstream offerings or competitors imitate the innovation, and thus no one firm is able to earn sustainable above-average profits or returns. As a result of this dynamic, it is important to search for what we call investable innovations, where imitation is difficult and a standout industry leader can potentially capture the long-term revenue growth and profit potential as the industry grows over time.
Investable innovations are those innovations that we believe are ready for mainstream adoption, provide important value and impact to users, cannot be easily replicated or imitated by competitors, and where the value being created can be captured by the lead innovator. Types of innovations that we believe contribute to sustainable growth, often developed in combination, include technological innovation, product innovation, service or experience innovation, process or cost innovation, brand or marketing innovation, organizational innovation, and/or business model innovation. In addition, it is important for companies developing innovations to create barriers to competition. Therefore, we look for leaders building what we call innovation moats, such as brands, patents, network effects, switching costs, and scale.