Here is an excerpt from an article written by Gary P. Pisano for Harvard Business Review and the HBR Blog Network. To read the complete article, check out the wealth of free resources, obtain subscription information, and receive HBR email alerts, please click here.
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Despite 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 trade-off 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. Long-term 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.
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 hardware-software development, proprietary operating systems, and design makes total sense.
How will the company capture a share of the value its innovations generate?
Value-creating innovations attract imitators as quickly as they attract customers. Rarely is 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.
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A version of this article appeared in the June 2015 issue (pp.44–54) of Harvard Business Review.
Here is a direct link to the complete article.
Gary P. Pisano is the Harry E. Figgie Professor of Business Administration and a member of the U.S. Competitiveness Project at Harvard Business School.