SOLUTION: ENT 3613 University of South Florida Creativity Innovation Multiple Choice Questions

INNOVATION
You Need an Innovation
Strategy
by Gary P. Pisano
FROM THE JUNE 2015 ISSUE
D
espite massive investments of management time and money, innovation remains
a frustrating pursuit in many companies. Innovation initiatives frequently fail, and
successful innovators have a hard time sustaining their performance—as Polaroid,
Nokia, Sun Microsystems, Yahoo, Hewlett-Packard, and countless others have found. Why is
it so hard to build and maintain the capacity to innovate? The reasons go much deeper than
the commonly cited cause: a failure to execute. The problem with innovation improvement
efforts is rooted in the lack of an innovation strategy.
A strategy is nothing more than a commitment to a set of coherent, mutually reinforcing
policies or behaviors aimed at achieving a specific competitive goal. Good strategies promote
alignment among diverse groups within an organization, clarify objectives and priorities, and
help focus efforts around them. Companies regularly define their overall business strategy
(their scope and positioning) and specify how various functions—such as marketing,
operations, finance, and R&D—will support it. But during my more than two decades studying
and consulting for companies in a broad range of industries, I have found that firms rarely
articulate strategies to align their innovation efforts with their business strategies.
Without an innovation strategy, innovation improvement efforts can easily become a grab
bag of much-touted best practices: dividing R&D into decentralized autonomous teams,
spawning internal entrepreneurial ventures, setting up corporate venture-capital arms,
pursuing external alliances, embracing open innovation and crowdsourcing, collaborating
with customers, and implementing rapid prototyping, to name just a few. There is nothing
wrong with any of those practices per se. The problem is that an organization’s capacity for
innovation stems from an innovation system: a coherent set of interdependent processes and
structures that dictates how the company searches for novel problems and solutions,
synthesizes ideas into a business concept and product designs, and selects which projects get
funded. Individual best practices involve trade-offs. And adopting a specific practice
generally requires a host of complementary changes to the rest of the organization’s
innovation system. A company without an innovation strategy won’t be able to make tradeoff decisions and choose all the elements of the innovation system.
Aping someone else’s system is not the
answer. There is no one system that fits all
companies equally well or works under all
circumstances. There is nothing wrong, of
course, with learning from others, but it is a
mistake to believe that what works for, say,
Apple (today’s favorite innovator) is going to
work for your organization. An explicit
innovation strategy helps you design a system to match your specific competitive needs.
Finally, without an innovation strategy, different parts of an organization can easily wind up
pursuing conflicting priorities—even if there’s a clear business strategy. Sales representatives
hear daily about the pressing needs of the biggest customers. Marketing may see
opportunities to leverage the brand through complementary products or to expand market
share through new distribution channels. Business unit heads are focused on their target
markets and their particular P&L pressures. R&D scientists and engineers tend to see
opportunities in new technologies. Diverse perspectives are critical to successful innovation.
But without a strategy to integrate and align those perspectives around common priorities,
the power of diversity is blunted or, worse, becomes self-defeating.
A good example of how a tight connection between business strategy and innovation can
drive long-term innovation leadership is found in Corning, a leading manufacturer of
specialty components used in electronic displays, telecommunications systems,
environmental products, and life sciences instruments. (Disclosure: I have consulted for
Corning, but the information in this article comes from the 2008 HBS case study “Corning:
156 Years of Innovation,” by H. Kent Bowen and Courtney Purrington.) Over its more than
160 years Corning has repeatedly transformed its business and grown new markets through
breakthrough innovations. When judged against current best practices, Corning’s approach
seems out of date. The company is one of the few with a centralized R&D laboratory (Sullivan
Park, in rural upstate New York). It invests a lot in basic research, a practice that many
companies gave up long ago. And it invests heavily in manufacturing technology and plants
and continues to maintain a significant manufacturing footprint in the United States, bucking
the trend of wholesale outsourcing and offshoring of production.
Yet when viewed through a strategic lens, Corning’s approach to innovation makes perfect
sense. The company’s business strategy focuses on selling “keystone components” that
significantly improve the performance of customers’ complex system products. Executing
this strategy requires Corning to be at the leading edge of glass and materials science so that it
can solve exceptionally challenging problems for customers and discover new applications for
its technologies. That requires heavy
investments in long-term research. By
centralizing R&D, Corning ensures that
researchers from the diverse disciplinary
backgrounds underlying its core technologies
can collaborate. Sullivan Park has become a
repository of accumulated expertise in the
application of materials science to industrial
problems. Because novel materials often
require complementary process innovations,
heavy investments in manufacturing and
technology are a must. And by keeping a
domestic manufacturing footprint, the
company is able to smooth the transfer of new
technologies from R&D to manufacturing and
scale up production.
Corning’s strategy is not for everyone. Longterm investments in research are risky: The
telecommunications bust in the late 1990s
devastated Corning’s optical fiber business.
But Corning shows the importance of a clearly
articulated innovation strategy—one that’s
closely linked to a company’s business
strategy and core value proposition. Without
such a strategy, most initiatives aimed at
boosting a firm’s capacity to innovate are
doomed to fail.
Find this and other HBR graphics in our VISUAL LIBRARY 
Connecting Innovation to Strategy
About 10 years ago Bristol-Myers Squibb (BMS), as part of a broad strategic repositioning,
decided to emphasize cancer as a key part of its pharmaceutical business. Recognizing that
biotechnology-derived drugs such as monoclonal antibodies were likely to be a fruitful
approach to combating cancer, BMS decided to shift its repertoire of technological capabilities
from its traditional organic-chemistry base toward biotechnology. The new business strategy
(emphasizing the cancer market) required a new innovation strategy (shifting technological
capabilities toward biologics). (I have consulted for BMS, but the information in this example
comes from public sources.)
Like the creation of any good strategy, the process of developing an innovation strategy
should start with a clear understanding and articulation of specific objectives related to
helping the company achieve a sustainable competitive advantage. This requires going
beyond all-too-common generalities, such as “We must innovate to grow,” “We innovate to
create value,” or “We need to innovate to stay ahead of competitors.” Those are not
strategies. They provide no sense of the types of innovation that might matter (and those that
won’t). Rather, a robust innovation strategy should answer the following questions:
How will innovation create value for potential customers?
Unless innovation induces potential customers to pay more, saves them money, or provides
some larger societal benefit like improved health or cleaner water, it is not creating value. Of
course, innovation can create value in many ways. It might make a product perform better or
make it easier or more convenient to use, more reliable, more durable, cheaper, and so on.
Choosing what kind of value your innovation will create and then sticking to that is critical,
because the capabilities required for each are quite different and take time to accumulate. For
instance, Bell Labs created many diverse breakthrough innovations over a half century: the
telephone exchange switcher, the photovoltaic cell, the transistor, satellite communications,
the laser, mobile telephony, and the operating system Unix, to name just a few. But research
at Bell Labs was guided by the strategy of improving and developing the capabilities and
reliability of the phone network. The solid-state research program—which ultimately led to
the invention of the transistor—was motivated by the need to lay the scientific foundation for
developing newer, more reliable components for the communications system. Research on
satellite communications was motivated in part by the limited bandwidth and the reliability
risks of undersea cables. Apple consistently focuses its innovation efforts on making its
products easier to use than competitors’ and providing a seamless experience across its
expanding family of devices and services. Hence its emphasis on integrated hardwaresoftware development, proprietary operating systems, and design makes total sense.
FURTHER READING
Beyond World-Class: The New
Manufacturing Strategy
COMPETITION MAGAZINE ARTICLE by Robert H. Hayes
and Gary P. Pisano
How will the company capture a share
of the value its innovations generate?
and Gary P. Pisano
Value-creating innovations attract imitators as
Companies need strategies for building critical
capabilities to achieve competitive advantage.
quickly as they attract customers. Rarely is
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intellectual property alone sufficient to block
these rivals. Consider how many tablet
computers appeared after the success of
Apple’s iPad. As imitators enter the market,
they create price pressures that can reduce the value that the original innovator captures.
Moreover, if the suppliers, distributors, and other companies required to deliver an
innovation are dominant enough, they may have sufficient bargaining power to capture most
of the value from an innovation. Think about how most personal computer manufacturers
were largely at the mercy of Intel and Microsoft.
Companies must think through what complementary assets, capabilities, products, or
services could prevent customers from defecting to rivals and keep their own position in the
ecosystem strong. Apple designs complementarities between its devices and services so that
an iPhone owner finds it attractive to use an iPad rather than a rival’s tablet. And by
controlling the operating system, Apple makes itself an indispensable player in the digital
ecosystem. Corning’s customer-partnering strategy helps defend the company’s innovations
against imitators: Once the keystone components are designed into a customer’s system, the
customer will incur switching costs if it defects to another supplier.
One of the best ways to preserve bargaining power in an ecosystem and blunt imitators is to
continue to invest in innovation. I recently visited a furniture company in northern Italy that
supplies several of the largest retailers in the world from its factories in its home region.
Depending on a few global retailers for distribution is risky from a value-capture perspective.
Because these megaretailers have access to dozens of other suppliers around the world, many
of them in low-cost countries, and because furniture designs are not easily protected through
patents, there is no guarantee of continued business. The company has managed to thrive,
however, by investing both in new designs, which help it win business early in the product
life cycle, and in sophisticated process technologies, which allow it to defend against rivals
from low-cost countries as products mature.
What types of innovations will allow the company to create and capture value,
and what resources should each type receive?
Certainly, technological innovation is a huge creator of economic value and a driver of
competitive advantage. But some important innovations may have little to do with new
technology. In the past couple of decades, we have seen a plethora of companies (Netflix,
Amazon, LinkedIn, Uber) master the art of business model innovation. Thus, in thinking
about innovation opportunities, companies have a choice about how much of their efforts to
focus on technological innovation and how much to invest in business model innovation.
Routine innovation is often called myopic or
suicidal. That thinking is simplistic.
A helpful way to think about this is depicted in the exhibit “The Innovation Landscape Map.”
The map, based on my research and that of scholars such as William Abernathy, Kim Clark,
Clayton Christensen, Rebecca Henderson, and Michael Tushman, characterizes innovation
along two dimensions: the degree to which it involves a change in technology and the degree
to which it involves a change in business model. Although each dimension exists on a
continuum, together they suggest four quadrants, or categories, of innovation.
Routine innovation builds on a company’s existing technological competences and fits with its
existing business model—and hence its customer base. An example is Intel’s launching evermore-powerful microprocessors, which has allowed the company to maintain high margins
and has fueled growth for decades. Other examples include new versions of Microsoft
Windows and the Apple iPhone.
FURTHER READING
Which Kind of Collaboration Is Right for
You?
Disruptive innovation, a category named by my
Harvard Business School colleague Clay
Christensen, requires a new business model
NETWORKING MAGAZINE ARTICLE by Gary P. Pisano and
Roberto Verganti
but not necessarily a technological
The new leaders in innovation will be those who
figure out the best way to leverage a network of
challenges, or disrupts, the business models of
breakthrough. For that reason, it also
outsiders.
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other companies. For example, Google’s
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Android operating system for mobile devices
potentially disrupts companies like Apple and
Microsoft, not because of any large technical
difference but because of its business model: Android is given away free; the operating
systems of Apple and Microsoft are not.
Radical innovation is the polar opposite of disruptive innovation. The challenge here is purely
technological. The emergence of genetic engineering and biotechnology in the 1970s and
1980s as an approach to drug discovery is an example. Established pharmaceutical companies
with decades of experience in chemically synthesized drugs faced a major hurdle in building
competences in molecular biology. But drugs derived from biotechnology were a good fit with
the companies’ business models, which called for heavy investment in R&D, funded by a few
high-margin products.
Architectural innovation combines technological and business model disruptions. An example
is digital photography. For companies such as Kodak and Polaroid, entering the digital world
meant mastering completely new competences in solid-state electronics, camera design,
software, and display technology. It also meant finding a way to earn profits from cameras
rather than from “disposables” (film, paper, processing chemicals, and services). As one
might imagine, architectural innovations are the most challenging for incumbents to pursue.
A company’s innovation strategy should specify how the different types of innovation fit into
the business strategy and the resources that should be allocated to each. In much of the
writing on innovation today, radical, disruptive, and architectural innovations are viewed as
the keys to growth, and routine innovation is denigrated as myopic at best and suicidal at
worst. That line of thinking is simplistic.
In fact, the vast majority of profits are created through routine innovation. Since Intel
launched its last major disruptive innovation (the i386 chip), in 1985, it has earned more than
$200 billion in operating income, most of which has come from next-generation
microprocessors. Microsoft is often criticized for milking its existing technologies rather than
introducing true disruptions. But this strategy has generated $303 billion in operating income
since the introduction of Windows NT, in 1993 (and $258 billion since the introduction of the
Xbox, in 2001). Apple’s last major breakthrough (as of this writing), the iPad, was launched in
2010. Since then Apple has launched a steady stream of upgrades to its core platforms (Mac,
iPhone, and iPad), generating an eye-popping $190 billion in operating income.
The point here is not that companies should focus solely on routine innovation. Rather, it is
that there is not one preferred type. In fact, as the examples above suggest, different kinds of
innovation can become complements, rather than substitutes, over time. Intel, Microsoft, and
Apple would not have had the opportunity to garner massive profits from routine innovations
had they not laid the foundations with various breakthroughs. Conversely, a company that
introduces a disruptive innovation and cannot follow up with a stream of improvements will
not hold new entrants at bay for long.
Executives often ask me, “What proportion of resources should be directed to each type of
innovation?” Unfortunately, there is no magic formula. As with any strategic question, the
answer will be company specific and contingent on factors such as the rate of technological
change, the magnitude of the technological opportunity, the intensity of competition, the
rate of growth in core markets, the degree to which customer needs are being met, and the
company’s strengths. Businesses in markets where the core technology is evolving rapidly
(like pharmaceuticals, media, and communications) will have to be much more keenly
oriented toward radical technological innovation—both its opportunities and its threats. A
company whose core business is maturing may have to seek opportunities through business
model innovations and radical technological breakthroughs. But a company whose platforms
are growing rapidly would certainly want to focus most of its resources on building and
extending them.
In thinking strategically about the four types of innovation, then, the question is one of
balance and mix. Google is certainly experiencing rapid growth through routine innovations
in its advertising business, but it is also exploring opportunities for radical and architectural
innovations, such as a driverless car, at its
Google X facility. Apple is not resting on its
iPhone laurels as it explores wearable devices
and payment systems. And while incumbent
automobile companies still make the vast
majority of their revenue and profits from
traditional fuel-powered vehicles, most have
introduced alternative-energy vehicles (hybrid
and all-electric) and have serious R&D efforts
in advanced alternatives like hydrogen-fuelcell motors.
Overcoming the Prevailing Winds
I liken routine innovation to a sports team’s home-field advantage: It’s where companies play
to their strengths. Without an explicit strategy indicating otherwise, a number of
organizational forces will tend to drive innovation toward the home field.
Some years ago I worked with a contact lens company whose leaders decided that it needed
to focus less on routine innovations, such as adding color tints and modifying lens design,
and be more aggressive in pursuing new materials that could dramatically improve visual
acuity and comfort. After a few years, however, little progress had been …
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