Here is a brief excerpt from an article co-authored by Mohanbir Sawhney, Robert C. Wolcott, and Inigo Arroniz for MIT SLoan Management Review. To read the complete article, check out others, and obtain subscription information, please click here.

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Companies with a restricted view of innovation can miss opportunities. A new framework called the “innovation radar” helps avoid that.

Faced with slow growth, commoditization and global competition, many CEOs view innovation as critical to corporate success. William Ford Jr., chairman and CEO of Ford Motor Co., recently announced that, “[f]rom this point onward, innovation will be the compass by which the company sets its direction” and that Ford “will adopt innovation as its core business strategy going forward.” Echoing those comments, Jeffrey Immelt, chairman and CEO of General Electric Co., has talked about the “Innovation Imperative,” a belief that innovation is central to the success of a company and the only reason to invest in its future. Thus GE is pursuing around 100 “imagination breakthrough” projects to drive growth though innovation. And Steve Ballmer, Microsoft Corp.’s CEO, stated recently that “innovation is the only way that Microsoft can keep customers happy and competitors at bay.”

But what exactly is innovation? Although the subject has risen to the top of the CEO agenda, many companies have a mistakenly narrow view of it. They might see innovation only as synonymous with new product development or traditional research and development. But such myopia can lead to the systematic erosion of competitive advantage, resulting in firms within an industry looking more similar to each other over time.4Best practices get copied, encouraged by benchmarking. Consequently, companies within an industry tend to pursue the same customers with similar offerings, using undifferentiated capabilities and processes. And they tend to innovate along the same dimensions. In technology-based industries, for example, most firms focus on product R&D. In the chemical or oil and gas industries, the emphasis is on process innovations. And consumer packaged-goods manufacturers tend to concentrate on branding and distribution. But if all firms in an industry are seeking opportunities in the same places, they tend to come up with the same innovations. Thus, viewing innovation too narrowly blinds companies to opportunities and leaves them vulnerable to competitors with broader perspectives.

In actuality, “business innovation’’ is far broader in scope than product or technological innovation, as evidenced by some of the most successful companies in a wide range of industries. Starbucks Corp., for example, got consumers to pay $4 for a cup of latte, not because of better-tasting coffee but because the company was able to create a customer experience referred to as “the third place” — a communal meeting space between home and work where people can unwind, chat and connect with each other. Dell Inc. has become the world’s most successful personal computer manufacturer, not through R&D investments but by making PCs easier to use, bringing products to market more quickly and innovating on processes like supply-chain management, manufacturing and direct selling. And Google has become a multibillion-dollar goliath not because it has the best search engine, but because it pioneered “paid search” — the powerful concept that vendors would be willing to pay Google to match consumers with relevant offerings as a byproduct of free searches the consumers conduct.

Conversely, technological innovation in the laboratory does not necessarily translate into customer value. For instance, high-definition television is a radically new innovation from a technological perspective, requiring new recording, transmission and receiving equipment, communication frequencies and programming. But the result — an incremental improvement in picture sharpness — is of limited value to the general consumer. One of the most technologically advanced computers ever created was the NeXT Cube, developed by Steve Jobs’ company NeXT Computer, Inc. The product featured a host of technological advances, including clickable embedded graphics and audio within e-mail, object-oriented programming, magneto-optical storage and an innovative operating system. But the NeXT Cube was a commercial flop. Few compatible software applications were available, and consumers balked at the prospect of switching to a radically new system.

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Here is a direct link to the complete article.

Mohanbir Sawhney is the McCormick Tribune Professor of Technology and the Director of the Center for Research in Technology & Innovation at Northwestern University’s Kellogg School of Management in Evanston, Illinois. Robert C. Wolcott is a fellow and adjunct professor and Inigo Arronizis a postdoctoral fellow at the Center for Research in Technology & Innovation.They can be reached at mohans@kellogg.northwestern.edu, r-wolcott@kellogg.northwestern.eduand i-arroniz@kellogg.northwestern.edu.