Not All Innovations Are Equal

by Vijay Govindarajan and Chris Trimble

There is no shortage of published ideas on how best to manage innovation. Empower employees. Encourage initiative. Cultivate risk taking. Overcome mindlessness such as, "We do it this way because it has always been done this way." But managers need more than such generic advice because there are many different kinds of innovation, and each requires a profoundly different managerial approach.

This book focuses strictly on strategic innovation, which differs sharply from three other categories of innovation:1

• Continuous process improvement involves countless small investments in incremental process innovations. General Electric excelled at this pattern of innovation through its well-known Six Sigma program.
• Process revolutions also improve existing business processes, but in major leaps—say, a 30 percent increase in productivity—through the implementation of major new technologies. For example, Wal-Mart is investing heavily in "smart tags" (radio frequency identification, or RFID, tags), which identify what a product is, where it is, where it has been, how it has been handled, and so on. The technology may revolutionize processes for tracking consumer products from production to consumption and yield dramatic new supply chain efficiencies.
• Product or service innovations are creative new ideas that do not alter established business models. Consumer product companies such as toy and game manufacturers excel in this type of innovation and are constantly priming developers for the next Cabbage Patch doll, Tickle Me Elmo, or Razor scooter.
• Strategic innovations, such as OnStar, Tremor, and MovieBeam, are the subject of this book. They may include innovations in process or product but always involve unproven business models. Innovative strategies alone—without changes to either the underlying technologies or the products and services sold to customers—drive the success of many companies, such as IKEA and Southwest Airlines.

The four types of innovation require different managerial approaches, because they differ along three important dimensions: the expense of a single experiment, the time frame over which results become apparent, and the ambiguity of results.2 For example, a single process improvement is inexpensive, and its effects are quickly evident and measurable against past operational performance. Process revolutions cost more and take longer. Major product or service innovations, even those that retain the proven business model, generally involve more capital still—enough that a string of failures could sink a corporation—and results may remain uncertain for several quarters. Strategic innovations generally require the greatest investments over the longest time periods, and results can remain indecipherable for years.

These differences in expense, time frame, and uncertainty factor into such decisions as who should lead and participate in an innovation initiative, how resources should be allocated, how progress should be assessed, when the plug should be pulled, and so on.

By choosing to focus on strategic innovation, we are not implying that other forms of innovation must stop. Leaders cannot allow NewCo's youthful quest for an entirely new future to cast CoreCo as an aging dinosaur. NewCo's future is uncertain, and CoreCo is the foundation. CoreCo must always strive to reinvigorate itself through continuous process improvements, process revolutions, and new product and service launches. For example, the remarkable turnaround of McDonald's resulted from new CEO James Cantalupo's emphasis on refreshing its core business. By March 2004, the stock price had more than doubled from its nadir in March 2003, two months after Cantalupo's arrival.3

We choose to focus on strategic innovation because the long-term survival of a company depends on it more than ever before, and because it is perhaps the most devilishly difficult and most enigmatic management challenge.

The strategic innovation imperative
Given the list presented earlier of characteristics of strategic experiments, why would a company try something so risky, demanding, and complex?4 As a business ripens, growth inevitably becomes more difficult.5 The growth potential of any business model eventually decays.

Of course, Wall Street investors and analysts still demand double-digit growth rates from almost every company. Without growth, stocks perform dismally and CEOs lose their jobs. Without growth, employees stagnate and careers stall. Organizations themselves grow stale, and their competitiveness suffers.

What can managers do? They can buy their way to growth through bold acquisitions, but that strategy rarely benefits investors, customers, or employees in the long run.6 Generating growth from within—organic growth—is the more robust and more difficult strategy. As companies age and industries mature, growth within established markets comes only at the expense of other entrenched competitors, and it is never easy to buy market share. Therefore, strategic innovation soon becomes the most attractive option. Developing this competence is critical. Companies that successfully execute strategic innovation can deliver breakthrough growth and generate entirely new life-cycle curves.

Companies that develop their capability for strategic innovation early in life delight investors with sustained growth and surprise competitors by changing the rules of the game. Most companies, however, are satisfied with their existing business models until they hit the growth wall and performance begins to suffer noticeably. Eventually, strategic innovation becomes a matter of life and death. After all, the same forces that create opportunities for breakthrough growth—nonlinear change in the economic environment—can also shake the foundations of an industry. In such an unpredictable environment, all glory is fleeting.

To be sure, nonlinear change affects each industry differently. Jukka Harmala, CEO of Stora Enso, an international paper corporation, told us, "People have been predicting the end of the paper industry for decades. You've heard of the ‘paperless office,' but have you seen one?" Fair enough. But the chief executive who dismisses the threat of a revolution walks a perilous path. Even two years after the dot-com bubble burst, Kodak announced what it termed a "historic shift" in strategy that boosted investment in internal ventures in digital photography while increasing the rate at which it phased out its traditional film business. A faster-than-anticipated acceleration in consumers' transition from film to digital photographs motivated this decision.7 Sun Microsystems, once a high-flying technology company with a well-performing high-end hardware business, now looks nervously in several directions, particularly software, for its next source of high growth.

Through cycles of boom and bust, a fundamental truth endures: Change is constant and often nonlinear. Financial markets are misleading, because change does not alternate between periods of hyperactivity and inertness. Through strategic innovation, corporations can not only stay ahead of change, they can create change. They can pile new successes on existing ones. They can consistently create, grow, and profit from new business models.

A new frontier in the science of management
As essential as it is to the long-term health of organizations, knowledge about best practices for managing strategic innovation is scarce. For every strategic experiment studied, we observed a unique approach to management. There is no commonly accepted principle or standard.

Management theory has evolved rapidly over the past few decades. For example, the once-popular notion that the essence of strategy is to maintain stability has given way to acceptance that stability is illusory. Modern strategists do not seek to build and defend a competitive advantage from change by, say, erecting barriers to entry. Instead, they recognize that to stay ahead, corporations must always look for new markets and new sources of competitive advantage.8

This shift in emphasis in strategy formulation demands a similar shift in the field of strategy execution, but the latter field lags. Although the what of strategy now focuses on innovation and change, knowledge of the how is still nascent.9

In part, the reason for the slow accumulation of knowledge in this area is that it requires difficult and expensive research. Study of which strategies to choose can proceed with largely quantitative and statistical techniques, but the utility of using such methods to approach the how of strategy is limited. The management of innovation is a rich and complex problem. Statistical studies can point in only a few broad directions. They can tell us something about which management decisions correlate with success, but little about why.

Truly understanding what works and why requires multi-year, qualitative, interpretive study. The study of strategic innovation resembles history or psychology more than finance or economics. Furthermore, the little existing research-based knowledge emphasizes the very early stages of managing strategic innovation, particularly the generation of and evaluation of creative ideas. That leaves much terrain uncharted.

If research-based knowledge about managing strategic innovation is limited, then how much can actual managers know? Practitioners will always have better understanding of certain areas of human endeavor than researchers will, especially when practitioners develop a deep, intuitive understanding through repetition. What scientist understands how to hit a baseball better than Alex Rodriguez?

But the practitioners of strategic innovation have few opportunities for repetition because each attempt takes at least a few years. Only a handful of people in our study had participated in a strategic experiment even once before, in part because many corporations bet on them only sporadically. Early in life, many companies conclude that all their resources must support the growth and expansion of the existing business. Senior executives defer strategic experiments until growth declines. When times are better than expected, executives ask, "Why take the risk?" When times are tough, they say, "We must focus all our energies on restoring our core business to good performance." With such inconsistent investment, deep knowledge about the management of strategic innovation cannot accumulate in any one organization.

Further, rarely do managers of strategic experiments return for an encore. Those who succeed ascend internally to bigger responsibilities (as measured by current revenues or employees under supervision), and those who fail often leave for opportunities elsewhere. Corporations large enough to fund entire divisions dedicated to supporting multiple strategic experiments would seem to be likely centers for the accumulation of experience on this topic, but these divisions are highly vulnerable to funding cuts during recessions.

If you are preparing to initiate, lead, or support a strategic experiment, consider the following:

• You may face this particular challenge only once in your career.
• Limits to innovation have less to do with technology or creativity than with management skill.
• Few people, if any, within your organization can guide you from their direct experience.

You can, however, learn from the wrenching experiences of many others in various organizations and industries.

Excerpted by permission of Harvard Business School Press from 10 Rules for Strategic Innovators: From Idea to Execution. Copyright 2005 Vijay Govindarajan and Chris Trimble; all rights reserved.

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Vijay Govindarajan is the Earl C. Daum 1924 Professor of International Business at the Tuck School of Business at Dartmouth.

Chris Trimble is an adjunct associate professor at Tuck and a senior fellow at Katzenbach Partners, LLC.