CHAPTER
1
How We Got Here
Innovation matters—now more than ever. Few managers would argue with the assertion that innovation is a business imperative. CEOs, academics, and politicians can be heard waxing lyrical about the need for innovation in this or that company, industry, or even national economy. But why does innovation matter so much in today’s business world?
The answer is surprisingly simple. Innovation is where the worlds of business and creativity meet to create new value. It really is as simple as that.
The word innovate first appears in the mid-sixteenth century. It comes from the Latin innovatus, meaning “renewed, altered,” from the verb innovare, which comes from in (“into”) and novare (“make new”). In other words, innovation is all about finding new ways to change things. One useful definition of innovation is “the creation of new value.”
What makes this all the more relevant today is that we live in a world where we are constantly demanding new value from the products and services we consume. Think about it. When did you last buy a new phone that boasted “the same old tried and tested technology,” or a car that proclaimed itself “just as good as before”? Our ancestors might have been persuaded by claims of constancy and old-fashioned consistency, but today we demand more.
Blame it on fickle consumers, if you will. Or blame it on progress. But there is a continuous ramping up of our expectations, and this includes a heightening of our expectations of innovation. Companies are in the front line.
And it isn’t just that the competition might add a new feature or button to an existing product. Commercial life can be positively Hobbesian: nasty, brutish, and, increasingly, short. Entire product categories can disappear overnight. Remember the VHS player? Remember the cassette recorder? Remember buying film for your camera?
One of the biggest challenges in dealing with innovation is dealing with discontinuous innovation. When technologies shift, new markets emerge, the regulatory rules of the game change, or someone introduces a new business model, many formerly successful organizations suddenly become vulnerable, and some of them are soon consigned to history.
A key part of the problem is that dealing with discontinuity requires a very different set of capabilities from what we are used to. Organizing and managing discontinuous innovation requires searching in unlikely places, building links to new partners, allocating resources to high-risk ventures, and exploring new ways of looking at the business. These are very different from the conventional and traditional approach to innovation. Historically, a company simply hired some very smart people, put them in an R&D lab, and let them get on with it. That approach is no longer sufficient.
One of the great challenges facing managers today is: How does an organization start building the capability for discontinuous innovation?
That is one of the questions that this book seeks to help you address. But let us start at the beginning. Obviously, innovation is as old as human life. In fact, some people would argue that the ability to innovate is the distinguishing feature of humanity and that it is what has allowed us to dominate the world in recent millennia—for better and for worse. (Let us hope, too, that it is also the redeeming feature that allows us to learn the lessons needed if we are to sustain our planet in the future.)
Along the way, there have been several leaps of innovation. We can point to the innovations that enabled our ancestors to move from being hunter-gatherers to farmers, for example, and later to develop agrarian economies. We can point to rich periods of experimentation and innovation in art and science that produced the Enlightenment and the Renaissance. All these are a testament to human creativity and inventiveness. But it is innovations in the commercial and organizational realms that are our focus.
Innovation and Business
There is a paradox here. The fact is, business and creativity are uncomfortable bedfellows. Indeed, creative is often a pejorative term in business—think of “creative accounting” or the broad-brush distrust of “creatives” in many organizations. The stereotypical corporate world is full of buttoned-up suits and left-brained rational decision makers, whereas the world we associate with creative endeavors is populated with undisciplined, scruffily clad, right-brained mavericks. It is the seeming disconnect between creativity and business that makes innovation so difficult for companies (especially large companies) to understand and manage. Yet, manage it they must because the need for innovation is becoming more and more vital to the success of all organizations.
The reason is simple: the world is moving ever faster. One by-product of this is that competitive advantage is increasingly fleeting. In today’s turbulent and complex business environment, smart firms know that if they fail to innovate—both in terms of their products and services and in terms of their systems and processes—they will lose out to competitors. That’s why they invest time and effort in creating systems, structures, and processes to ensure a sustained flow of innovation.
At the same time, the way we think about, understand, and execute innovation is being shaped by new ideas and fresh points of view from leading researchers, practitioners, academics, and management thinkers. Together with new innovation practices, the latest ideas and thinking about innovation are dramatically changing the innovation landscape. It should come as no surprise that the way we understand innovation itself is continuously being innovated!
This book captures some of the most significant ideas and perspectives that have transformed the innovation landscape in recent years, as well as those that will shape it in the coming years. As a result, it offers a lens through which we can understand an emerging set of ideas that will have—and are already having—a profound impact on the future of business.
Creative Destruction
So why is the impact of innovation so profound? To answer that question, you have to take a hard look at the capitalist system.
The Austrian American economist Joseph Schumpeter (1883–1950) coined the phrase “creative destruction.” Today, it is almost as familiar as Adam Smith’s “invisible hand” as an explanation of how capitalism works. And yet, how many times have you heard the phrase without considering the role of innovation in the capitalist mantra?
Innovation can be seen as the driving force behind Schumpeter’s gale (as the forces of creative destruction are sometimes known). Taken as a whole, innovation is the animating wind of progress. If we break it down into the smaller storms of progress, then each new innovation can be seen as a small tornado.
There is nothing new in this. Far from the sun-kissed streets of California’s entrepreneurial powerhouse in Silicon Valley, there was an earlier whirlwind that is much less appreciated today. The origins of the first explosion of commercial and industrial innovation occurred in Britain in the eighteenth and nineteenth centuries, during the Industrial Revolution. The winds of change it gave rise to blew around the world, having more influence in creating the British Empire than Britain’s military might.
The Industrial Revolution was an outpouring of new ways of thinking and working as much as it was of sweat and blood. Indeed, our modern sense of creativity, with its connotations of newness, originality, invention, and progress, was forged in the fire of commerce. (Ironically, during the Industrial Revolution, artists, rather than inventors, explorers, entrepreneurs, or industrialists, became the role models for creativity. But the industrialists kept the patent on innovation.)
Those same winds of creative destruction are still at work, constantly rampaging through the world economy. “Creativity and doing things differently are, if not identical, then nearly synonymous,” says Jonothan Neelands, professor of creative education at the United Kingdom’s Warwick Business School. “Doing things differently suggests a more creative approach to the world of business, but it is also a recognition that we cannot in any sphere of our lives continue as if we are not facing political, economic, social, and environmental crises that may engulf us. We are being battered by Schumpeter’s now constant gale.”
Time and time again, innovation unlocks the social and economic building blocks and reconfigures them for a new era. Throughout history, periods of social turmoil and change have been preceded by—or have given rise to—explosive bursts of innovation. Think of the Renaissance of the fourteenth century, the Age of Enlightenment in the eighteenth century, and the Industrial Revolution—or the current digital revolution, for that matter.
So, what do we know about innovation? Given that it is integral to the human condition, the answer is, surprisingly little. But there have been a handful of individuals whose track record suggests that they are worth listening to and learning from. One man with a genius for innovation was the American inventor and entrepreneur Thomas Alva Edison (1847–1931).
Sweat and Toil
“Genius is one percent inspiration and ninety-nine percent perspiration,” Edison famously observed. This remains one of the most quoted—and insightful—observations ever made on the subject. It is testimony to his special place in the pantheon of innovation, too, that the lightbulb that he invented has become synonymous with new ideas and innovation. No examination of innovation could be complete without mentioning his precocious talent and his voracious appetite for fresh thinking.
To understand innovation, Edison’s own life is instructive. His observation about the effort required to turn ideas into innovations was also the maxim by which he lived. By the end of his extraordinary career, Edison had accumulated 1,093 U.S. and 1,300 foreign patents. The inventor of the phonograph and the incandescent lightbulb also found time to start up or control 13 major companies. His endeavors directly or indirectly led to the creation of several well-known corporations, including General Electric and RCA. Consolidated Edison is still listed on the New York Stock Exchange.
Telegraphy was the catalyst for Edison’s greatness. Edison was a natural with the Morse key, one of the fastest transcribers of his day. As a night-duty telegrapher, Edison was required to key the number six every hour to confirm that he was still manning the wire. Instead, he invented a machine that keyed the number for him automatically and spent his nights indulging himself at the local hostelries. Fired from a succession of jobs, he crossed the United States, working as a freelance telegrapher. Louisville, Memphis, Nashville, and Boston—Edison passed through them all before finally coming to rest in New York. He had by this time filed for his first patent—an automatic vote recorder for the Massachusetts Legislature.
It was in New York that Edison formed his first partnership with Frank L. Pope, a noted telegraphic engineer, to exploit their inventions. The partnership was subsequently absorbed by Gold & Stock, a company controlled by Marshall Lefferts, former president of the American Telegraph Company, who paid $20,000 to the two partners for the privilege. Recognizing Edison’s ingenuity, Lefferts conducted a side deal with him, securing Edison’s independent patents for the then princely sum of $30,000.
In 1870, with the benefit of some financial security, Edison hired Charles Batchelor, an English mathematician, and the Swiss machinist John Kruesi. He signed patent agreements with Gold & Stock and Western Union; took on a business partner, William Unger; moved into a four-story building on Ward Street in Newark, New Jersey; and started inventing on a grand scale. The fertile mix of minds at Ward Street quickly produced a stock printer, quadruplex telegraphy, and a machine to enable the rapid decoding of Morse.
The 1870s were the most creative period of Edison’s life. Needing to expand his operation, he moved into buildings in Menlo Park, a town 24 miles from New York on the New York and Philadelphia Railroad. The name Menlo Park has become synonymous with innovation. It was there that Edison and his team perfected the phonograph. The patents were filed in December 1877, but Edison barely paused to draw breath; he began to experiment with incandescent filaments and glass bulbs. While he was still some way off from developing what would become the lightbulb, Edison managed to persuade a consortium that he could produce a commercially viable lighting system based on such a product. As a result, he signed a rights and remuneration agreement that laid the foundation for the Edison Electric Light Company.
In reality, Edison was far from developing such a product. Time passed, with Edison continuing to make favorable noises about progress, although he was actually making little headway in the lab. Feeling the pressure, at one point he retired to an under-stairs cupboard, took a dose of morphine, and slept for 36 hours.
It was on Wednesday, November 12, 1879, that Edison finally produced a bulb that remained lighted long enough to be considered of commercial value. It lasted for 40 hours and 20 minutes, and within two months, he had extended its longevity to 600 hours. Visitors trekked to Menlo Park to gaze in wonder at the lights that lit the roadway. Sadly, what followed for Edison was not the triumph of his invention but a period of protracted patent litigation that lasted more than 10 years.
The invention of the lightbulb and the formation of the Edison Electric Light Company marked the pinnacle of Edison’s achievements. However, he did continue to invent. In the years that followed, a succession of new innovations emerged: DC generators, the first electric lighting system, electrical metering systems, alkaline storage batteries, cement manufacturing equipment, synchronized sound and moving pictures, and submarine detection by sound. His labs also threw off a slew of great minds, most notably Nikola Tesla, who was famed for his work on the Tesla coil and AC induction motors. The Wizard of Menlo Park, however, never quite recaptured the brilliance of his earlier years. Edison died on Sunday, October 18, 1931, working to the last.
Lessons in Innovating
So what are we to take from this remarkable innovator’s life? Perhaps the greatest lesson of all about innovation: that a great idea leads to a genuine innovation only if it can be commercialized. Undoubtedly, a large part of Edison’s genius lay in his realization that innovation alone was insufficient for commercial success. Edison focused on creating commercially viable products. To do so, he assembled a team of brilliant minds at Menlo Park. In effect, he created the first product research lab—a forerunner of facilities such as the celebrated Xerox PARC at Palo Alto, California. It was a practical and commercial approach to invention that proved to be immensely successful.
While it seems obvious that innovation without commercialization is a rather empty experience, it is worth noting that there are many, many innovations that fail to be commercialized or that are commercialized, but not by their creator. In their book Fast Second, Constantinos Markides and Paul Geroski developed this theme, pointing out that the originators of innovations as diverse as the jet engine, the typewriter, the pneumatic tire, and the magnetic tape recorder were not the people who eventually led these creations to mass commercialization. “The individuals or companies that create radically new markets are not necessarily the ones that scale them up into big mass markets,” observed Markides and Geroski. “Indeed, the evidence shows that in the majority of cases, the early pioneers of radically new markets are almost never the ones that scale up and conquer those markets.”1
Even with the caveat that innovation does not always lead to commercialization, innovation the Edison way provided the blueprint for the twentieth-century corporation. Innovation was neatly corralled under the umbrella of R&D. Groups of R&D technicians and scientists—geeks, we would call them today—worked on innovation and then passed the fruits of their labors on to the rest of the organization.
Tim Brown of the design company IDEO offers this take on Edison’s contribution to our approach to innovation: “Edison wasn’t a narrowly specialized scientist but a broad generalist with a shrewd business sense. In his Menlo Park, New Jersey, laboratory he surrounded himself with gifted tinkerers, improvisers, and experimenters. Indeed, he broke the mold of the ‘lone genius inventor’ by creating a team-based approach to innovation.”2
Armed with the bright ideas that came out of the R&D lab, the company’s job was then to commercialize the innovations on as large a scale as possible. At the time, this worked. Once a company had created an innovative product or service, it could build a large-scale operation to commercialize it. And it could build on a large scale, knowing that its advantage would last. For a large part of the twentieth century, a company that had a superior product or service could expect its advantage to last for years, even decades. Indeed, the primary purpose and rationale for large companies was to capitalize on their competitive advantage by leveraging economies of scale to drive costs down, and to defend their competitive advantage so that they could maintain a high price premium. The success of these large organizations was predicated not on their ability to innovate, but on their ability to earn higher profits through the efficiencies that flowed from economies of scale.
Mass production democratized many of the innovations that were being introduced, but it also had one unfortunate side effect: it made innovation more difficult. With scale came efficiency, but it also made it harder for companies to experiment and innovate.
Accelerating Change
As the twentieth century drew to a close, it was clear that the world was changing. As company after company in sector after sector has discovered, no competitive advantage is sustainable in the long run. If you have any doubt about this, ask the people who used to work at Kodak. A company that once enjoyed a seemingly unassailable position in the photography market was forced to file for bankruptcy in 2012 because it had failed to respond quickly enough to, and was eventually rendered redundant by, innovations in digital photography.
At its height in the 1980s, Kodak employed more than 60,000 people in Rochester, New York, alone. By the time it filed for bankruptcy in 2012, it employed fewer than 7,000 in the town, and it had closed 13 filmmaking factories and 130 photo labs around the world.
The collapse of the company’s fortunes was dramatic. In the mid-1970s, it dominated the photographic market, accounting for 90 percent of all sales of film and 85 percent of the market for cameras. In the 1990s, new competition from the Japanese company Fuji Photo, which attacked Kodak from below with lower prices, ate into its market share. But it was the advent of digital photography that was its undoing. While Fuji and other rivals embraced the innovation, Kodak failed to respond quickly enough and found itself marginalized. By the time the company did react, it was too little too late. A similar story has been repeated in companies around the world.
The phenomenon of innovation as a commercial whirlwind that redraws entire industries is not new. What has changed is the speed with which new innovations routinely sweep away competitive advantage and reconfigure entire industries.
Witness what is happening in the global pharmaceuticals industry. In pharma, the traditional R&D model is firmly entrenched. Scientists innovate new combinations of molecules in their labs. These are turned into products and marketed. Now, however, competing companies have become more adept and much faster at developing and launching their own competing drugs. Indian companies such as Cipla, Dr. Reddy’s Laboratories, Glenmark Generics, and Sun Pharmaceutical Industries have come from nowhere to become significant players in the global pharma industry.
The same thing is happening in other industries. In cell phones, Motorola first led the way; it was then displaced by Nokia, which had successfully reinvented itself; then came the BlackBerry, followed by the iPhone; and now Samsung is changing the marketplace once again.
In fashion, the Spanish company Zara has created its own brand of “fast fashion.” It has the capacity to produce the latest fashions quickly at competitive prices. Its innovation lies in its process rather than its original designs.
As the face of innovation has changed, so, too, has the way we understand it and think about it. Today, experts talk about several different types of innovation:
• Sustaining innovation. A brand of innovation that occurs within an existing market, offering better value and allowing a company to compete with its rivals.
• Efficiency innovation. A type of innovation that reduces costs or increases productivity. Efficiency innovation was the driving force for much of the twentieth century.
• Disruptive innovation. A type of discontinuous innovation that has the power to disrupt existing markets and create new ones. Typically, disruptive innovation results from a new technology that replaces the incumbent technology.
Increasingly, innovation is being applied to processes and services as well as products. Today, innovations extend to everything from the use of biometric scanning to shorten the queues at airports to offering touchless credit cards to speed up financial transactions.
These and other changes are altering the innovation landscape.
Henry Chesbrough from the Haas School of Business at the University of California, Berkeley, and one of the world’s leading innovation thinkers, puts this change into perspective:
Vertical integration was the dominant business logic of the last century. Explained by Alfred Chandler and practised by General Motors, Standard Oil, DuPont and many others, it emphasized corporate centralization and integration. Underlying the logic was the belief that valuable knowledge was fundamentally scarce. As a result, companies sought to develop a knowledge advantage that others could not match.3
Chesbrough goes on to identify a number of working assumptions that accompanied this worldview:
• The company that gets an innovation to market first will win.
• If you create the most and the best ideas in the industry, you will win.
• The smartest people in our field work for us. Companies competed for the best and the brightest graduates and offered these recruits the best salaries and equipment.
• If we discover it ourselves, we will get it to market first. Internal R&D was seen as a barrier against smaller competitors.
• To profit from R&D, we must discover it, develop it, and ship it ourselves. The rise of companies like DuPont, General Electric, General Motors, IBM, Xerox, Merck, and Procter & Gamble was fueled by sustained investment in internal R&D. A by-product of this emphasis was the “Not Invented Here” syndrome, where companies rejected any technology that had come from outside.
• We should control our intellectual property, so that our competitors don’t profit from our ideas.
The New Innovation Reality
We are now in a new environment where those assumptions no longer hold. The first characteristic of this new environment is the increasing emphasis on disruptive innovation (see Chapter 2). Every so often a whirlwind blows through an industry—usually caused by a new technology that is so radically different that it alters the shape of the industry completely and, in doing so, puts many existing, successful companies out of business.
For an organization to be truly successful and sustain that success over many years, it needs to be good at both types of steady-state innovation (sustaining and efficiency), and also to be able to sense when a disruptive innovation is on the horizon. This, though, is a notoriously hard juggling act and gives rise to what Harvard’s Clay Christensen calls the innovator’s dilemma.
The challenge for companies is that initially (when they first come to market), disruptive innovations are not attractive to an existing company’s best customers, as they prefer the reliability and refinement of the existing technology. This causes a dilemma: should the company stick with its existing (often higher-margin) products, which its best customers want, or should it invest in a new technology that offers lower margins and will ultimately destroy its existing markets? For most companies, the answer is to stay with the existing technology. Unfortunately, this often means that the company is left behind and loses out when the new technology matures and replaces the incumbent technology. Hence, Kodak did not invest in digital photography until it was too late.
Being ready for discontinuous innovation requires a specific set of organizational skills, not least the ability to search for signs of a potential whirlwind that may sweep through an industry, or, as with the Internet, across entire business sectors around the world.
The second characteristic of the new innovation arena is co-creation (see Chapter 3). An idea championed by C. K. Prahalad, co-creation represents a profound shift in how new value is created, recognizing the increasingly symbiotic relationship between the firm and the consumer.
Related to co-creation, but spreading the innovation net still further, is open innovation (see Chapter 4). The phrase, coined by Henry Chesbrough, describes a radical new approach to innovation, exemplified by the open source movement that developed the Linux operating system. In recent years, open innovation has been embraced by some of the world’s leading companies, including Procter & Gamble’s Connect + Develop initiative.
The fourth emerging theme is reverse innovation (see Chapter 5). In the past, companies in the industrialized, predominantly Western, world came up with innovations and then exported them to the underdeveloped world. Reverse innovation turns this on its head, with products being developed in some of the world’s poorest nations and then being exported to more industrialized nations.
The next major theme is management innovation (see Chapter 6). Gary Hamel and Julian Birkinshaw of London Business School are among those arguing most powerfully that how companies are managed offers the greatest potential for innovation of all. Indeed, Hamel believes that an entirely new take on management is required, what he labels Management 2.0.
A final and perennial issue is that of leading innovation (see Chapter 7). How best can a company’s innovators be led and inspired?
These are the big ideas, but increasingly the battlefield has expanded. Some of the most interesting thinking and practice occur where innovation meets strategy (Chapter 8) and where innovation meets society (Chapter 9). The world is the stage for innovation, and now it is charged with tackling some of the world’s most apparently intractable problems.