Innovate or evaporate. The message has gone out and is now accepted and clearly understood by Australian companies. Indeed, the message has probably been embraced more wholeheartedly by Australian companies than has previously been recognised.

The perception that success comes simply from competing on cost, price, or quality no longer holds sway. Innovation is the vital link.

But CIOs and other technologists should take a back step: technology does not rate as highly as a driver of innovation as many CIOs may like, and there are clear indicators that innovation should not be equated with invention, R&D, or science.

Companies involved in the study clearly believe that innovation will energise business growth and, when implemented well, will be a powerful driving force for profit and sustained value

Nonetheless, alongside the cautions on technology, there was a heap of good news about the quest for innovation contained in "The Reality of Innovation Unzipped", a study of innovation in Australia's middle market companies. Released at the end of 2006, the study was conducted jointly by the Australian Business Foundation (a think tank set up by Australian Business Limited), and Deloitte

The middle market chosen for the study is one of the most diverse of all sectors, and can include professional partnerships, publicly-listed corporations, private companies, family-run operations, and new high-growth businesses. The common factor is that they form a fast-growing group looking for ways to accelerate and then sustain growth. And they value innovation highly, broadly agreeing that innovation can be defined as the clever use of new ideas and ways of doing things in order to add business value and deliver hard targets and specific outcomes.

"Innovation is more pervasive in Australia than we think," explains Narelle Kennedy, chief executive of the Australian Business Foundation.

Kennedy says that the supply of creative and innovative ideas is not in question, especially as Australia has something of a reputation as a nation of early adopters and technology integrators.

"The companies involved in this qualitative study agreed that innovation is not something you do only if you are an enlightened firm; it is something you do because you have to," Kennedy says.

"Australian businesses understand that their competitive advantage comes not from cost-cutting but from competing on the basis of innovation, distinctive know-how, and collaborative business relationships."

Further, companies involved in the study clearly believe that innovation will energise business growth and, when implemented well, will be a powerful driving force for profit and sustained value. But there is a need for a clear view of what innovation is and what it is not.

The report finds that innovation is not just creativity, individual inspiration, and bright ideas. "It goes way beyond that. It even goes beyond the commercialisation of novel ideas, technologies, or products."

Innovation doesn't just happen. Study participants agreed that innovation must be seen as a core component of an organisation's growth strategy and must be managed like any other process within the organisation. That means targets must be set, funding and resources must be allocated, and skills must be available to convert innovative ideas into business and speed up the return on investment.

"The investigation showed that truly innovative companies have dedicated systems and tools to support the innovation process," says Julia Bickerstaff, Deloitte Growth Solutions partner.

For innovation to be successful in a middle market company that company needs to build imaginative business models, creative ways of organising, and a culture that sanctions experimentation, learning, and managed risk.

Overwhelmingly, however, innovation is driven by market pressures and customer demands, with study participants agreeing that innovation is about smarter and faster ways of solving problems for customers and meeting market needs more imaginatively.

"The participating companies and case examples in 'The Reality of Innovation Unzipped' found that many of their best innovations come from interactions with their customers and analysing their customers' behaviour," Bickerstaff says.

Because of that it is important that companies do not equate innovation solely with technology, which is only a part of a much bigger picture. Likewise, investment in innovation is not restricted to research and development, but extends to training and skills development, market research, design, use of advanced machinery and equipment, engineering development, and knowledge drawn from licences and patents, the study found.