Innovation

Organizations can teach themselves to grow.

Innovation in developing markets has less to do with finding new customers than addressing issues of product acceptability, affordability, availability and awareness.

IBM discovered decades ago that adding programmers to a software project that was late did not help. Indeed, progress slowed even more. The "resource-driven mindset," sometimes known as "throw more money at the problem," is limited, the authors argue. Yet this mindset has so dominated the research agenda that it has clouded our consideration of many situations in which scarce resources (precisely because they are scarce) are desirable, potentially leading to breakthrough performance. Resource constraints fuel innovation in two ways: through entrepreneurial, social-network approaches to securing the missing funds or the required personnel, and because teams often produce better results as a direct result of the constraints. The human mind is most productive when restricted, the authors maintain. Limited -- or better focused -- by specific rules and constraints, we are more likely to recognize an unexpected idea. Witness the outcome of a Cold War-era race between General Electric and BMW teams to design adequately cooled jet engines. The U.S. team had a virtual blank check, used the most advanced materials and spent nearly twice as much as the Manhattan Project did. The German team, which had significantly less funding at its disposal, came up with a simple yet elegant design principle that remains in use to this day.

Conventional wisdom has it that most innovations eventually become commodities, bought on the basis of price and nothing else. Citing a quotation by a Columbia Business School professor that epitomizes that point of view -- "In the long run, everything is a toaster" -- the author uses the technological history of toast to persuasively undermine that notion. Drawing on the wisdom of economists Ronald Coase, Paul Samuelson, John Maynard Keynes and Adam Smith, he makes a historical case that commodity is not destiny, and uses brands such as Starbucks, Evian, Dasani, Scott Paper, Yahoo and Google, Hoover and Dyson to illustrate the point. The danger, he says, is that executives, entrepreneurs and investors may buy into the commodity designation far more often than they should, making the commodity ideology a self-fulfilling prophecy. Businesses that believe that today's breakthrough is tomorrow's toaster understandably fear rapidly diminishing returns from their innovation investments, and the economics of "good enough" innovation become good enough. The potential of ideas is inherently undervalued. Sustainable innovation opportunities are either missed or dismissed. Intense price competition, the author argues, may not signal the prolific presence of substitutable commodities but rather an arid absence of innovation. That signal, he says, should give a clear and present incentive for executives and entrepreneurs to innovate in order to differentiate; to identify hidden or untapped potential for new value creation.

A company's market value actually increases when its known rivals innovate.

Launching new ventures outside a corporation's core business is risky and failure-prone -- yet often perceived as vital to innovation and organic growth. Can investing in new ventures add value to a company despite the risks? To explore that question, the authors conducted an in-depth study of corporate venturing at Nokia Corp. between 1998 and 2002; the study included two years of dissertation research by one of the authors. The research yielded a number of lessons about corporate venturing. For example, Nokia discovered that looking at the success or failure of an individual project as a business was the wrong way to evaluate the effectiveness of the venturing program. Whether or not they succeeded as businesses, Nokia's corporate ventures often added important capabilities to the core business, such as familiarity with a new customer segment for the company. In fact, seemingly unrelated investments sometimes led to technologies that later benefited the company's core business. The authors conclude that, to extract value from corporate ventures, companies must use different management practices than in their established businesses, structure new ventures so that they don't face pressure to deliver immediate results, and emphasize learning. Although 70% of Nokia's corporate venturing investments during the period studied were either discontinued or completely divested, the capabilities and technologies developed nonetheless played an important role in helping the company's core businesses respond to change.

Innovation is typically a group effort, but how exactly do researchers collaborate with one another to innovate? To answer this question, the authors compiled a dataset identifying all co-authorship relationships of U.S. patent inventors from 1975 through 1999. That dataset revealed that the social network of innovators is a "small world," with various clusters of people interconnected by different "gatekeepers," individuals who bridge one group with another. Historically, engineers and scientists tended to work within local clusters of collaboration that were isolated within a company. Recently, though, people have become increasingly mobile, changing jobs with greater frequency, and these formerly isolated clusters have begun to interconnect into larger networks through which information flows more freely between companies. Such environments provide both strategic opportunity and potential threat: They can increase creativity within a company, but they also aid in the diffusion of creative knowledge to other firms through personnel and knowledge transfer. The trick, then, is to manage innovation in ways that exploit the opportunities while minimizing the risks.

The history of the Swedish retailer IKEA illustrates the role that adaptation and experimentation play in the development of an innovative strategy.

Despite the importance of management innovation, it is poorly understood and usually not systematically fostered. To research the process, the authors first conducted an historical analysis of more than 100 management innovations that took place over 130 years. Then they studied 11 recent cases of management innovation, in most cases interviewing one or more of the key innovators. The research revealed that, compared with the process of technological innovation, management innovation tends to be more diffuse and gradual. It typically follows four stages. The first stage is some type of dissatisfaction with the status quo, such as a crisis or strategic threat. That stage is followed by inspiration from other sources. The third stage is the invention of the management innovation itself. While most innovators identified a precipitating event that preceded the innovation, such as a challenge from a boss or a new assignment, few recalled a distinct "eureka moment"when the innovation occurred. The fourth stage is validation, both internally and through external sources such as academics, consultants, media organizations or industry associations.

Research and development projects fail more often than they succeed. In fact, out of every 10 R&;D projects, five are flops, three are abandoned and only two ultimately become commercially successful. A principal problem is that many companies don't know how best to organize their labs to conduct R&;D work. A classic hierarchical structure, for instance, tends to impede the rapid spread of knowledge. Matrix organizations, on the other hand, can lead to information logjams, confusion and conflict among employees. To investigate how companies can best manage their efforts to innovate, the author conducted an in-depth study of six R&;D projects at the laboratory of a Fortune 500 corporation. She found that highly successful R&;D projects have four crucial factors that reinforce each other. The first is strong and sustained corporate support. The second is the presence of open communication patterns and a low degree of formal reporting. Beyond this, R&;D teams must be organized in specific ways so that informal social networks are reinforced -- not thwarted -- by the formal organizational structures. This leads to other crucial factors: third, R&;D projects must include a person who is central to the "technical-advice network" (a "technical star"); and fourth, they must include someone key to the "organizational-advice network" (a "managerial star"). An understanding of the interplay between informal social networks and formal organizational structures can help companies design and maintain learning organizations in which employees exchange pertinent knowledge efficiently and willingly, leading to more successful R&;D efforts.