Wharton on Innovation

WHARTON on.................. http://executiveeducation.wharton.upenn.edu Innovation http://knowledge.wharton.upenn.edu leading businesses have willingly shouldered the expense and the risk of innovating as the price of staying ahead of competitors. dominance in manufacturing. Figuring out needs. 15 Finding Money for Innovation: Develop Those People Skills Innovations typically involve trial.S. either. But innovating has become a lot tougher lately. according to a panel who recently spoke at the University of Pennsylvania’s EMTM program. Day. weeding out needless complexity and innovating with an eye on the bottom line are the keys to growth. 7 Philips Lighting CEO Rudy Provoost: Innovation Means Putting Consumers’ Needs First Philips. co-director of Wharton’s Mack Center for Technological Innovation. 12 Innovation ‘Out of Necessity’: Entrepreneurship during a Downturn Looking for ways to incentivize entrepreneurial activity and enhance corporate liquidity during a recession has become a strategic focal point for Spanish companies. energy. by the time of its initial public offering in 2004. and even finance. director of the IE Business School's Center for Entrepreneurial Management and president of the Global Entrepreneurship Monitor (GEM). Far too often firms find it difficult to sustain growth because they become risk averse and opt for incremental product and service improvements instead of major initiatives. one thing had long been presumed unassailable: good old American ingenuity. error and outright failure before turning into successful products or services. incremental product improvements instead of focusing on potentially more profitable—but riskier—breakthrough innovations. 3 Contents Sustaining Corporate Growth Requires ‘Big I’ and ‘small i’ Innovation All companies face a common challenge: how to grow their businesses so they can boost earnings and enhance the value of their shares.Innovation EVERYONE TALKS ABOUT THE IMPORTANCE OF INNOVATION. Now it appears that’s not safe. Amazon and Yahoo. the world's largest producer of industrial and consumer lighting products. but talking is not walking the walk. 2 Wharton on Innovation I ©2009 University of Pennsylvania . 17 Why an Economic Crisis Could Be the Right Time for Companies to Engage in ‘Disruptive Innovation’ While globalization has witnessed the decline of U. Google was already a formidable rival of Microsoft. Why didn’t they see the same opportunities? One crucial reason appears to be that industry giants—and large companies generally—concentrate too much on relatively safe. For instance. For decades. discusses the impact of economic crisis on innovation and entrepreneurship in Spain. has a big role to play in the ongoing transformation from incandescent to solid-state lighting using LED technology. Ignacio de la Vega. according to a study by George S. For one thing.” Day writes in the paper. says companies can avoid lackluster growth by better understanding the risks inherent in different levels of innovation and achieving a balance between—using two terms he has coined—BIG I innovation and small i innovation. Yet studies have shown that only 29% of managers of major corporations are highly confident they can reach their organic growth targets.Sustaining Corporate Growth Requires ‘Big I’ and ‘small i’ Innovation All companies. price competitive markets— pressured by customers who themselves are squeezed—and are forced to compete for incremental share gains with rivals who follow similar strategies. who also serves as co-director of Wharton’s Mack Center for Technological Innovation. a consultant to many Fortune 500 companies. A combination of factors can make organic growth hard to sustain. firms often find themselves in saturated. as a result. titled “Closing the Growth Gap: Balancing BIG I and small i Innovation. firms find it difficult to sustain growth because they become risk averse and. Day. Growth— particularly “organic” growth that comes from improving a company’s performance from within rather than relying on acquisitions—is so important that it is at the top of the agendas of some 80% of U. according to a study by a Wharton marketing professor. Day discusses how executives can properly assess risks and then seek creative ways to reduce risk exposure. says his research is the outgrowth of years of thinking about the problems that companies face in trying to set and achieve growth targets. opt for incremental product and service improvements instead of major initiatives. “These executives know that the expectation of superior organic growth is the most important driver of enterprise value in capital markets. face a common challenge: how to grow their businesses so they can boost earnings and enhance the value of their shares. George S. In his study. While this is an appealing Wharton Executive Education I Knowledge@Wharton 3 . according to Day. chief executive officers. however.” It is also a less expensive way to grow because a firm typically pays a premium to acquire another business. One answer to this challenge is to explore new “blue ocean” markets with new business models and offer a better customer experience. Day. from major multinationals to start-ups.S. Far too often. This approach also does not account for the consistent growth records of Wal-Mart. are applied to innovation processes. that is. companies may succumb to short-term thinking. risk-averse cultures and inferior innovation capabilities. For instance. Crippling Consequences There are any number of reasons why companies are placing a growing create breakthrough innovations that stretch capabilities. firms may opt for “exploitation” activities over “exploration” activities. This bias toward safer. longer-term investments in innovation may decrease when companies use up scarce development time and resources to react to urgent. “There is a well-known organizational trade-off between activities that exploit existing capabilities and those that explore new market spaces and incremental and more certain opportunities. the returns may not compensate for the higher risk and long delay before any returns are realized. Even the less ambitious development of products “new to the company” dropped by a third. incumbent firms may suffer from tunnel vision. Most financial yardsticks used to choose which development projects to fund are biased against the lengthy pay-offs and uncertainty of BIG I innovations. Why didn’t they see the same opportunity sooner? In other cases. the proportion of “new-to-theworld. Long established. according to a study cited in Day’s paper. When the mindset and methods of business process re-engineering. Finally. Day writes. which have been methodically leveraging their low-cost business models in closely adjacent markets. Google was already a formidable rival of Microsoft. Small i projects make up 85% to 90% of the average corporate development portfolio. “This uneasy trade-off is tilted toward exploitation by process management methods that emphasize the reduction of variance in organization processes.growth path. they miss early signals of market opportunities that offer openings for rivals. The combined effect of these external and internal impediments to growth is that incremental small i innovation displaces BIG I innovation growth initiatives. short-term requests from customers and salespeople. they tend to displace the inherently divergent and variance increasing activities needed for creative exploration. Between 1990 and 2004. By contrast. incremental line extensions and product improvements seems to be intensifying.” Day writes. back on discretionary spending designed to fuel growth if they were likely to miss their quarterly earnings target. In other cases. Amazon and Yahoo. Day says 80% of CFOs of major corporations would reportedly hold 61% of profits. 14% of a sample of business launches that were substantial innovations accounted for emphasis on small i innovations. demanding channel 4 Wharton on Innovation I ©2009 University of Pennsylvania . Slowly—and perhaps imperceptibly—the choices of research projects to select and products to develop are steered toward the 14% of a sample of business launches that were substantial innovations accounted for 61% of profits.5%. true innovations” in development portfolios dropped from 20% to 11. by the time of its initial public offering in 2004. These projects are necessary for continuous improvement but do not change the competitive balance or contribute much to profitability.” At other times. disappointing growth can stem from organizational impediments (such as short-term incentives that subvert long-term objectives). “These requests stem from fragmenting markets. Dell and IKEA. Six Sigma and ISO 9000. So the company broke down its Wharton Executive Education I Knowledge@Wharton 5 . “But this should not be an excuse for passivity. the matrix shows that it is far less risky for a business to launch a new product or technology into a familiar served market than to adapt the current product to a new end-use market. with small i initiatives gaining the upper hand. “The lead role for the ‘Imagination Breakthrough’ growth initiative within GE was given to the marketing team within each of the 11 business units. and pizzas couldn’t be served through the drive-in window. vulnerable to emerging technologies and lacking a compelling story about its future growth thrust. In 2003. there were no marketers among the senior ranks and no coherent approach to marketing beyond building communication programs and designing product launches. “If the market is entirely unfamiliar. the firm doesn’t even know what it doesn’t know—and the knowledge is hard to acquire. The leaders of each GE business were required to submit at least three “Imagination Breakthrough” proposals per year promising at least $100 million in additional growth. This leaves firms with more projects than they can handle. These ranged from diversifying the top ranks with outsiders. They lacked credibility. It is not simply a lack of awareness. McDonald’s abortive effort to offer pizza in its restaurants was initially viewed as a “related product” for the current market. But this risk aversion imposes costs that need to be understood and contained. In essence. Many moves were made within GE to encourage fresh thinking. Preliminary projections were for an extra $33 billion to $35 billion of top-line growth from three to five years in the future.partners and new forms of competition that require a proliferation of product offerings and accelerated development cycles. and then tying more of their compensation to new ideas. Until recently. GE’s 35 best projects are subject to monthly CEO reviews. but still integrated within the existing senior management hierarchy. Conn. “This meant that service flow rates were disrupted. Yet the fledgling Big I initiatives may need to share resources. the other half required double-digit organic growth of $200 million per year.” For example. in a break from the company’s promote-from-within history. such as bio-detection of security threats and small super-efficient jet engines for the next generation of air taxis. according to Day. Day includes a “risk matrix” diagram that can help firms assess the probability of failure of different growth paths and calibrate the risks of unfamiliar markets and technologies. ranging from business-model innovations and new ways to segment and serve the global energy market. they tend to be confronted much later in the product development process. including competitors. they view the new entrant as risky and have to be given special inducements to try the new product. R&D budgets are being held constant or tightened to meet short-term earnings targets.” Companies that avoid BIG I initiatives also believe that the potential rewards will be received too far in the future at too high a risk. “No one could figure out how to serve a pizza in 30 seconds or less. Because the prospective buyers lack any experience. Day notes that such growth initiatives. An “ambidextrous” solution to the tension between small i and BIG I initiatives is to “house the initiative in a structurally independent unit with its own processes. the equity markets account for them in their expectations of earnings. But pizza was actually a “new-to-the-company” product because it didn’t fit the basic service delivery model. There will inevitably be conflicts over resource allocation.” according to Day. there were about 100 growth initiatives underway within GE. CEO Jeff Immelt boosted the organic growth goal from 5% to 8% per year. By early 2006. This is a startling departure for a company with a belief that superior products and technology are what really count. to products for new market spaces. and are harder to resolve. improved customer satisfaction and top-line growth. channels and consumers. “Market risks are much greater than product risks because there are more dimensions of uncertainty. Praxair set out to find $2 billion in revenue growth by 2008. If the firm is viewed as mired in slow-growth markets. McDonald’s vs.” Day writes. and pressing small i projects get priority. “Meanwhile. After he replaced Jack Welch. Indeed.” existing brand name has no meaning in a ‘new-to-the-company’ market. risk aversion may have even more crippling consequences.” writes Day. while the actual rewards may be realized far in the future. are awkward to manage within the constraints of the existing organization.” The “Imagination Breakthrough” effort aims to shift the balance toward BIG I growth initiatives by giving the organization permission to break away from the tyranny of past success and take calculated risks with departures from the way the business has been run. It’s healthier to properly assess the risks and then seek creative ways to reduce the risk exposure. oxygen and other gases. manufacturing expertise or market access. This procedure also encourages the sharing of best practices and the further search for cross-division business opportunities. This was far beyond the annual growth that could be realized from repackaging helium. its stock price will suffer. with the established units. hydrogen. Day says. “Certainly the probability of failure goes up sharply when the business ventures beyond incremental initiatives in familiar markets. which translates into finding an additional $3.” according to Day. For example. GE In his paper. a strong signal of commitment.4 billion in organic growth annually. structures and culture. The post-mortem of the failure revealed that the brand name didn’t give them permission to offer pizza. a Fortune 300 global producer of industrial gases based in Danbury. Market risks are not only less controllable than technology risks.” according to Day’s paper. which offer true breakthrough potential. while holding the business leaders accountable for results. to keeping executives in their positions longer so they become immersed in their industries. A further complication is that an The Praxair Case Another company with a noteworthy approach to organic growth is Praxair. such as brand presence.” Day says GE is an example of a firm that has struck the right balance in working to achieve organic growth by growing on a number of fronts. One half was to come from acquisitions. in fact. articulating and screening the opportunities. “The lead role in exploring the market. the CEO of Praxair spent one day per quarter reviewing the growth prospects for each business.” Day adds that the pay-off was immediate: The $200 million growth target was exceeded by $30 million in 2004. So the evidence was mounting that there was a trend working against Big I innovation. “If you have constrained budgets. It then occurred to me that maybe there was an increase in the tendency for companies to rely too heavily on what I call small i incremental innovations like product-line extensions.” writes Day. product upgrades and feature improvements. Then I read a great study by another researcher. McKinsey and the Marketing Science Institute. Day says that the ideas presented in his paper began to come together several years ago when he attended a CMO summit conference on innovation sponsored by Wharton. servicing the helium coolant used in magnets in magnetic resonance imaging machines and developing new reactor cooling and nitrogen injection cooling methods for the bioscience industry. the rest would come from new services. “There was a persistent theme to the conversation: Our companies have scarce resources and we’re always pressured to think about the short term. That’s when I asked. “At the same time.” Day notes. tend to cut down on a company’s willingness to take risks. who demonstrated persuasively that there was a relative shrinking of innovations in corporate development portfolios. real option analysis and partnering to contain but not avoid these risks. which are risky and long term— so long term. that senior managers may no longer be with the company once the project finally is completed. “These initiatives grew out of intimate knowledge of changing customer needs that could be met with Praxair’s existing capabilities.organic growth into actionable categories: The first 15% would come from incremental growth in the base business and new channels for serving current markets. I had been reading about how process management methods.” 6 Wharton on Innovation I ©2009 University of Pennsylvania . “is a disciplined process for realistically assessing the growth gap to be filled. with sustained top management support and oversight. ‘How can companies fight that tendency?’” The antidote described in the paper. such as nitrogen injection of oil and gas wells. As a clear signal of commitment. calibrating the risks and using the latest thinking on screening. Day says. expanding the search for opportunities. these incremental efforts tend to soak up a lot of that budget at the expense of BIG I projects. such as Six Sigma. and orchestrating the specific projects was assigned to marketing. Provoost. Could you tell us what the consequences of this big transformation are for Philips Lighting? And. Provoost: I recently became the CEO of Philips Lighting. An edited transcript of the conversation follows. has a big role to play in the ongoing transformation from incandescent to solid-state lighting using LED [light-emitting diode] technology. Day: Philips is the worldwide leader in lighting and has been for many. for three years. both in a new job and in an industry that is undergoing a transformation. It’s “Ful-Spectrum Innovation” week [at Wharton]. the CEO of [Philips] Consumer Electronics. academic director of Wharton Executive Education’s program Full-Spectrum Innovation: Driving Organic Growth.” Figuring out what those needs are. and that fits into my full immersion program. You’re coming into this business at a pivotal time. maybe talk a little bit about how you’re going to Wharton Executive Education I Knowledge@Wharton 7 . which I call the “University of Life. is the steady and perhaps accelerating transition into solid-state lighting. according to Rudy Provoost. weeding out needless complexity and innovating with an eye on the bottom line are the keys to growth. As such. at the same time. Philips. The pivotal time. and about the transformation that you are undergoing. after having been. with a very interesting background. Provoost says.Philips Lighting CEO Rudy Provoost: Innovation Means Putting Consumers’ Needs First Approximately 19% of the world’s electricity bill comes from lighting. CEO of Philips Lighting. is no stranger to new technologies. I thought that it was the right way to start a new life by going through a full immersion to refresh everything that I’ve ever been exposed to when it comes to strategies and how to make growth happen and drive innovation. who until 2007 was CEO of Philips Consumer Electronics.” So. Day: Tell us a little bit about why you are here at Wharton. the world’s largest producer of industrial and consumer lighting products. which he says are “just a vehicle to respond to needs. of course. many years. and with Knowledge@Wharton. He recently spoke with Wharton marketing professor George Day. about the challenges of staying ahead in a rapidly changing industry. I’ve been working in different businesses: Procter & Gamble. where should we depend on others or partner with others. and Philips Lighting—the last seven years in Philips Also. And so.based. we have to be more specific in answering the question of what is required—and then bring the two together.” Rudy Provoost. yes. But. the whole ICT sector has gone through a dramatic transformation. you’ve got that kind of model. [Laughs] And so. but indeed lighting is at the crossroads—and I say that both from a marketing perspective and from a company perspective. This is like writing history. and lighting can contribute significantly. It’s a very exciting moment and I look forward to it. There is the whole energy efficiency “green wave” that really forces society to change. street lighting? On the technology side. Genlyte. it’s a daunting prospect. CEO.” That’s a place where all forces come together. consumer electronics. We acquired five companies: Color Kinetics. And I’m sure that Philips is fabulous at that sort of thing. many of them are U. 19% of the electricity bill in the world is lighting. in the TV business. GE. Now. There was a notion before that when we 8 Wharton on Innovation I ©2009 University of Pennsylvania . you’ve had some really exceptional experience that I think equips you for this particularly. Whirlpool. Philips Lighting much how good we are in the process industry. Technologies are just a vehicle they have asked me to do this job. yes.S. There are some very important real trends that change the dynamics of the business and even the business models that go with it. And there’s no escape: I will have to deal with it again in lighting. I think that we have all of the ingredients and we have the building blocks. And now it’s about a unique combination of hardware. and lighting can contribute significantly. who maybe will become part of the lighting game—which until now was very much an oligopolistic game. You know. and maybe you can reflect on your experience in consumer electronics and how that might help guide you through this transformation. Day: I have this vision of a lighting plant that I was in one time which was immense and automated. How are you going to transform and disrupt that? And. So. It is hopefully going to help me to be successful going forward. the emphasis was on the electronics. change means opportunity. On the marketing side.manage the decline of the traditional business while this is going on? Provoost: [Those are] many questions at the same time. And now the fact of the matter is that we need to put the pieces of the jigsaw puzzle together. we very much know what is possible. Day: Yes. many companies with new disruptive technologies that are coming in. what the requirements are for lighting solutions and experiences in various places and spaces: What does it mean in the office? What does it mean in the shop? What does it mean in terms of city beautification. It’s really about [looking] outside and understanding what the market needs are. where the giants like Matsushita. and so we have a contribution to make. or whether we should manufacture everything ourselves. talked about consumer electronics. Provoost: There must be a reason why Consumer Electronics. that culture and that system. and in that sense we have actually been anticipating what is happening. again. That is what I’m supposed to do. which I always call a “life-altering experience. there are the shifts from analog to digital. there are the shifts from CRT to LCD and plasma. and they could tell me the cost of everything down to a tenth of a pfennig. There’s the whole shift from incandescent lighting to new forms of lighting. They managed that all for efficiency. In the past two years. what the future applications are. I hope that I can use everything that I have learned in the past years and apply it again and add to the learning. The whole landscape is changing. on the hardware. we will not be a successful lighting company by excelling in manufacturing processes. solid-state lighting in particular. we did a $4 billion acquisition program. if you think about paradigm shifts and transformational change—that is what I have been dealing with for the past seven years. whoever that might be? In that sense. Obviously. OSRAM and Philips were fighting the war. software services and content. I think that we’ve found a successful formula to compete in a very global and dynamic market. what are the assets that you bring from that into the new game? Provoost: I think the issue is not so “The whole energy efficiency ‘green wave’ really forces society to change. there are many. I really believe that the issue is: Where do we have to be a vertically integrated business? And/or. take all of those ingredients and bring them together into a winning formula. That allows us to step up significantly. So. Canon. I mean. having gone through that “University of Life” and having been exposed to it. But. There is a lot of internal talent. It’s about. To win. my focus will [much more] be outside-in. through these acquisitions. in whatever shapes or forms—from joint ventures to alliances— you need to make sure that it’s a mutually rewarding partnership. As a matter of fact. just here. One is leadership and you are exercising that and you have a vision. but a lot of the IP can be bought.to respond to needs and come up with absolutely brilliant solutions and applications. And that is typically the case. through the What I learned here is that statement of Darwin’s—that it’s not about being the strongest. the team of today is not the team of the future and so we will have to strengthen it. If you have IP. which is the one that I want to turn to now. understanding what needs to be done and how I can connect the dots also between the capabilities and competencies we have now in the new lighting company. making sure that we have the culture right and that we use the DNA of success in the past. with lots and lots of partners. the informal network. is the motivation part of it. The second A is accountability. who has seen the need to bring in a lot of outsiders. But. it’s about an extended pool of resources. and so that’s where the challenge is. but blend it with new DNA. in the future. And there. we’ve made a very deliberate choice to actually go for the incentive scheme that stimulates the kind of “one lighting. For me it’s about accountability. the incentives and the metrics. But the answer is not only in our own talent pool. Now. [especially] around maintaining your leadership position? Provoost: I guess it’s a bit of a paradox. We have a consumer lifestyle business. he’s actually a partner.” joined forces. make sure that we have the willpower to stay the course. It’s also about connecting with the world and working with the right partners. a lot of fresh faces. within Philips. I guess in the way we structure Wharton Executive Education I Knowledge@Wharton . but you need all three— I call it the “Triple As. What will be the biggest barriers that you think you will have to overcome. Day: We did talk about one of your competitors. particularly in the context of Philips Lighting today. it is remarkable how you can blend everything together. we need to add brain power and horsepower. LEDs. one amplifier is the reward schemes that you use. you’ve got a number of partners out there. is who gets to keep the intellectual property and monetize that? Provoost: Well you know. both providing ideas and helping you to commercialize them. during this week. different mental models. In that sense. including all of the people. Now. rather than a pure technology view of it. So. it’s not only about your own talent pool. Do you see the need for new metrics and new kinds of incentives? Provoost: Yes. It’s really about accountability—make sure you have owners with a face and a name and then connect the right people together. in some aspects. There is a very intense exchange of talent between the different sectors. I don’t like the word “structure” too much. Right now. in the world of solidstate lighting. I mean. a healthcare business. I would say that we should be open to any business model and just pick the one that creates the most value. but the success of the past could be the biggest barrier for the future. The third. That is what it’s really all about. This lighting company has been extremely powerful and has invented the space and came up with particularly winning technologies and there were many control points. of course. I mean. Day: We’ve talked about two of what I think are the four main levers that you are working with. fine. all of the units. it will require different prioritization. then make sure that we are obsessed with end-userdriven innovation and just take that to its full consequence. it’s all about mindset. for example. we made sure that we have a very good intellectual property platform [laughs]. a lighting business. we will be. It’s really about a more segmented end-user application solution approach to it. Do you see a substantial number of new employees. if you just let Lamps do what they think is the best for lamps. So. different ways of spending our money and allocating resources. or it can be a shared interest. if we need to be vertically integrated. Day: That’s definitely one way to do that. it’s always about the trade-off between incentive schemes that stimulate the feeling of belonging and the joining forces behavior versus the incentives that reward individual or team accomplishments. me. but if you really want to and have to partner. to put it in IT terminology. at the end of the day. or Lighting Electronics do what is best for lighting electronics or the Luminaires Group do just what is best 9 acquisitions that we made. allhands approach. [Laughs] Provoost: We have quite a lot of intellectual property there. so to speak—that is very critical. or it can simply be a control point. can act as. but the IP of course is an element. It’s not only about the IP. And so. talent. So. which is a mix of existing Philips businesses and acquired companies. everybody has access to the basic technologies. where you work with companies who. you need to make sure that all of the business groups. And. but it’s about being the most responsive and agile [when it comes to] change. everybody has access to LEDs. and then. One of the big challenges always in managing open innovation. GE. This will require people changing. value-added resellers or system integrators. the people are probably the most important limiting factors. This is because if you want to win in the future.” One. we. and it will require The third A for me is you need amplifiers. And so. It can be an enabler. the leader has to be an advocate—he has to be an activist almost for innovation. absolutely. all of the acquired companies as well as the existing teams—you need to make sure that these teams are working together. we had the chance to listen to the lighting science group and CEO—well. Day: So. It’s really more about the business model than about bits and pieces of processes—you cannot disconnect the two. if you want to be successful and in terms of business model control points. Day: It’s market-driven innovation at a scale beyond anything that you’ve ever had to manage—or at least Philips Lighting has ever had to manage. The second of course would be the structure that you put in place. then you have to make sure it’s a win/win. it’s not about org charts and re-drawing the reporting lines. or will the acquisitions that you have already made bring in enough fresh talent for you? Provoost: We have got all of the fresh partnerships. Again. And that is when you can pile on and gain share. CEO. I cannot answer for the the strongest. And it turned out that was when market shares shifted because there were some competitors who were forced. Now. But. This is so everybody can ask themselves. you can innovate everything. it’s a bit of a paradox. it’s about picking the right battles. which answers to that.. And so. For me. should be a very inclusive notion. Again. but in times of recession. we have had a robust economy. and leads by example. I don’t think the answer should be or could be to cut budgets. for me. I think the notion of innovation. I am very optimistic. So. but it’s about being the most responsive and agile when it comes to change.. the enthusiasm for it. Then. This is true flexible and responsive to change—and the one that speaks to the hearts and minds of the consumer. I think that it’s very important that the leader is the chief activist.” Rudy Provoost. cut back on innovation. that is the way we are going to deal with it. And so. And that is. And I think that in times of recession.. So. at a time of recession. which helps in time of recession to keep the costs down. in times of recession. Provoost: We referred to Darwin world or for other companies. consumers have to make choices too. This will make resource allocation. Europe and in Asia. Day: Some years ago. at the end of the day. actually. there was a very interesting study which looked at a couple of recessions and looked at the changes in industry structure. Philips Lighting in general. in every process. looking at your experience and thinking about your competitors and companies that you know. How do you manage the balance between creativity and organization in managing innovation? earlier and this is again Darwin at work. Now. the way that we will deal with it. Day: This goes hand in hand with a And. even in times of possible recession. that’s probably even truer. recession will probably force us to make choices. as consumers need to make choices. every morning: What can I do differently? And that goes from taking out unrewarded complexity in the spirit of Philips’ “Sense and Simplicity” to just challenging the status quo—and I think that that is everybody’s job. I am optimistic. One. the willingness to support it and make the long-term investments that are necessary? Provoost: Well. we have to maybe make choices. Innovation is at the top of most CEOs’ agendas as it is in yours. too. Whose job is it to innovate in your company? Provoost: There are probably two partnering orientation. Of course. if you really want to push the envelope. I hope that we can manage it in the proper way going forward. So. it is survival of the fittest. we should be the most attractive offer for that consumer. you will need to have the big boss to have skin in the game. For me innovation is a little bit like acupuncture: You need to put the needles where the energy points are. every day. So. Day: I have one final question. reprioritization or sharing of competencies and capabilities much easier. it’s about share of wallet and the choices they are going to make. that could be a real energy efficient lighting solution. notably in North America. In times of recession. the last thing you want to do is cut off the oxygen. not to mention executive education and all of those other things—and they invariably lost a lot of ground. At the end of the day. you need to work harder. or a share-to-gain mindset. and you do not want to limit yourself to the small “i’s” (incremental innovation) but you also want to hit the big “I’s” (breakthrough innovation). it’s not about doing less. Value becomes more valuable. if the value proposition is attractive enough—and it can only be attractive if there is a real innovative component to it. the innovation agenda is actually part of a larger growth agenda and I want to make sure that everybody feels part of that same growth objective and signs up for the same bottom line. in that sense. it is everybody’s job because innovation is not only about product innovation or service innovation. Provoost: Absolutely. “It’s not about being is really looking at innovation in large organizations. what do you think is going to happen in recession? What will happen to innovation. But certainly from a Philips Lighting perspective. Innovation is inherently a somewhat messy process. For the last five years. Knowledge@Wharton: I have a couple of questions. And so. or who chose to maximize current earnings—cut back on marketing. we are not going to cut the oxygen and we’re not going to cut the lifeline—because no lifeline means no survival. in my opinion. A recession can indeed trigger shake-outs and the one that prevails is the one that was the most 10 Wharton on Innovation I ©2009 University of Pennsylvania . Are they going to buy Philips Lighting or something else? Now.for luminaires—we will end up with a suboptimal situation. run faster and so you need a lot of oxygen and for me innovation is about oxygen. In essence. so to speak. Knowledge@Wharton: You referred to the sort of disruption that innovation causes. both before and after the recession. Wharton Executive Education I Knowledge@Wharton 11 . that should stimulate that culture of innovation. So. but within the boundaries. they allow a lot of creativity. diverging and converging solutions and elements of innovation—that could be a very creative process. in one way or another. there again. or the process itself. I’d rather have leading indicators like: What do we have in the pipeline? And.Provoost: I don’t think that the process should be messy. to some companies that are very well known for their success. the effectiveness of the innovation. You need that bottom line in order to continue to generate resources and to continue to invest in innovation. an internal rate of return. But. the best creative process is the one that is well structured at the end. Knowledge@Wharton: How do you measure the returns that you earn on your investment in innovation? Provoost: I think it is extremely important that with whatever point of measurement you take. I mean. The top line is interesting. And. their bandwidths. whether it’s what you put into the innovation process. I think that the process should be very structured and disciplined. Every innovation project should have a return on investment. that for me is a very important element—the most important element. like new products that were brought to the market in the last two years or three years. I believe in. That is for me a lagging indicator. I guess that is the way to handle it and to manage it. But what you put into the process—and what comes out of it—and the cycles of. or the output of it—that there is always the notion of profitability. things like R&D as a percentage of sales. because at the end of the day. And so. And. it’s about generating returns. if you think about outcomes. you need to hardwire it and keep yourself honest. of not just trying to be satisfied with simple measures that do not mean a lot. but the bottom line is what matters. You look to the benchmarks. they all have a very structured and disciplined way of dealing with innovation. like R&D resources. there are many lagging indicators. I would say. R&D in relation to EBITDA. a net present value. from the ideas of this world. I don’t believe in. And of course. If we think about what was happening at that time in the market. director of the IE Business School’s Center for Entrepreneurial Management and president of the Global Entrepreneurship Monitor (GEM).55% that year. spoke with Universia Knowledge@Wharton about the current economic crisis and its impact on entrepreneurship. and we see an extremely important turning point between 2000 and 2001. not a systemic crisis like today—and there were the attacks of September 11 … and finally. There were lots of opportunities to start companies and. looking for ways to incentivize entrepreneurial activity and enhance corporate liquidity has become a strategic focal point for Spanish companies.78%. which is an accurate reflection of the overall economic climate. we see that it was a period of boom. with a 24% drop in the rate of entrepreneurial activity. optimism declined along with the rate of entrepreneurial activity. Universia Knowledge@Wharton: What has been the impact of the global economic crisis on entrepreneurial activity in Spain? What differences are there compared with previous crises? In what ways will entrepreneurial activity evolve? Ignacio de la Vega: Starting from 2000. In 2002. when the rate climbed to 12 7. Then the Internet bubble burst. and there was a serious crisis in the technology sector—a sector crisis. which analyzes entrepreneurial conditions in 43 countries. when entrepreneurial activity did not bear fruit it was not because of a shortage of work opportunities but purely because of the particular opportunity. We began with an entrepreneurial activity rate of 4. Ever since then. The GEM 2008 Global Report is sponsored by the Ministry of Industry’s small and midsize business division and the Banesto Foundation for Society and Technology. Ignacio de la Vega. but at that time it was a crisis in financial markets that had yet to Wharton on Innovation I ©2009 University of Pennsylvania . Analysts began to notice the crisis in July 2007. we practically returned to the levels of 2000. we’ve been experiencing rising economic activity. but that reflects the growth of our economy since 2000. until this year with some isolated declines. we have measured the macroclimate and environment in Spain very carefully at our organization. when the Internet bubble in Spain was at its decisive moment. unlike the current situation.Innovation ‘Out of Necessity’: Entrepreneurship during a Downturn During a recession with fast-growing unemployment. The sort of innovation barriers at the moment. For example. at best.: There are three fundamental been a significant increase in the number of entrepreneurs who develop a business project and contribute 100% of the financing. you could jointly create a public bank to develop projects aimed at smaller companies. entrepreneurial projects are a very important source of development that takes place “out of necessity. the need [for income] will win out. It has tried to inject confidence in the market with its bank rescue plan. Nowadays. in an attempt to survive and grow. and it is very harmful. UK@W: Experts talk a lot about innovation and exports as two good tools for getting around the crisis. we have been living through a new era ever since 2000. and the psychological fear of failure and risk. Demand has shrunk a great deal. As long as we do not see the light [at the end of the tunnel]. Second. those people who are liquid expect to make money [on their investments]. and public support is not functioning at this time. and those who have already invested [their funds] don’t have any more cash to invest. which you get from financial institutions. scarcity of financing and so forth. there are lots of other measures: A fiscal agreement for the serious reduction of taxes so that small companies can delay some tax payments—so that they can spread out payments of VAT [Value Added Taxes]. and then even if they sell less and many of them don’t get paid when they do sell.D.V: The solutions involve laying out their [debt] obligations—not making nominal payments. although that is also difficult to communicate given today’s community norms. This will add some fuel to the system. but the catch is that this operates through financial institutions that have a maximum level of requirements when it comes to [providing] guarantees. On the other hand. In addition. starting a business appears to be very risky. In July 2008.” For the same reason. payments to suppliers. Obviously. but with complex criteria and in sectors of activity that are not subject to so much risk. and so forth. that includes making it a clear responsibility of financial institutions to get more involved in the system.spread into the real economy. That is just one sort of innovation that is possible for a very specific sort of company. Do you believe that the right policies for addressing those subjects are getting off the ground today? I. and for social security liquidations. it shows there has public policies that are more efficient than those we have today. UK@W: How are people dealing with those obstacles? What concrete measures are they implementing. The third barrier is real demand. something that they can do now but which will have an extremely high cost when there is a bank guarantee. and taking competitive positions in the marketplace that make it hard for someone who does not have these competitive advantages to enter the market. banks are not required to provide liquidity to the market. but it has had some mediocre results because many banks are not participating or are doing so only by dribs and drabs. and they turn off the flow of credit. That occasionally means lowering their prices. they wind up not being able to take care of Wharton Executive Education I Knowledge@Wharton 13 . entrepreneurial activity becomes paralyzed. and what’s your assessment of them? I.V: Innovation is not just about developing innovative R&D in technology. the criteria for solvency are especially high. Starting from there. especially in a country like ours. The solution definitely involves injecting liquidity and confidence into the system. at the time of our annual study. and really bring to the market some of the rescue measures for small companies that have already begun as commitments by the communications media to develop some optimism within the system. we won’t be spending. it’s not coming from informal investors. Companies leave the market. Some banks do that. small companies continue to lack access to that financing. where [entrepreneurial] activity has fallen by 13%. Nevertheless. As a result.5 million small companies.D. Financial aid is available through the ICO [the Ministry of Economics’ Official Credit Institute]. have a cash flow problem. including the climate of pessimism. UK@W: What barriers are today’s entrepreneurs facing? I. you create a rescue plan for small companies that basically consists of providing them with some 10 billion euros. but there is the problem of communication here. and in the current situation. We find ourselves in a tense position. The problem is if the small companies don’t get any liquidity. and an amazing drop-off in job opportunities—the unemployment rate is over 15%. Given the problems in the market. many companies are becoming more aggressive. Our 2008 report already reflects this situation. Given today’s challenging conditions. of which 80% have financing problems. its monetary policy is determined by the EU. Competition between companies is already well established and. There are 3. there are some things it can do. leaving out strong companies that could survive and that. Once that barrier has been overcome. especially when it comes to the smaller companies we’re talking about.D. The vicious circle tightens. To remedy this situation. the decline will not be as steep as in the 2000-2002 period because.V. a normative change is going to permit people to capitalize up to 60% of their unemployment subsidies and dedicate it to entrepreneurial activity. There is a need for more aggressive solutions such as if the government were to strongly guarantee help through the ICO for small companies that have a certain degree of insolvency. However. The Spanish government has limited resources. since there are fewer job opportunities today. Many small companies don’t fit in that category. which has a culture where there is a clear fear of failure and risk. many unemployed people will have to look for refuge in selfemployment. and it is very hard for others to enter it. that way. The figure of the “business angel” was already weak in Spain [before the crisis]. the second big barrier is [a shortage of] financial resources. halfway between the need to find means for income and professional activity. In my view. given the rate of unemployment. The first is psychological. Fewer financial resources are coming from the two principal sources for financing entrepreneurial activity: First. debt. the rate [of entrepreneurial activity] will continue to drop. either. When demand contracts in the ugly way it is contracting today. the financial crisis already had a very important impact on the real economy and we were expecting successive declines in the rate of economic activity in coming years. and it is very hard to find [business] opportunities in many sectors. And we all need to play with the same rules. Today’s entrepreneur also invests more [in his or her business]. In addition. and the average cost of an initial investment in a project has gone up. we also observe that over the past twelve months. but the interesting thing is the change that has occurred in the last two or three years. If we begin to invest seriously now and. Spaniards invest in the service sector because it is more welcoming. In addition. rather than the speculator. it was used for buying new machinery and other initiatives that are not really R&D. but this is a little like R&D in that it is a long-term process. For example. the ratio between male and female entrepreneurs evens out. The reality is that the government’s R&D funding has been squandered. UK@W: The database for your report includes 50 countries. In order to export. it is a problem of competitiveness.: For some years. In addition. at times. The profile of the entrepreneur is becoming more uniform. absenteeism is practically zero there. Nowadays. and it is approaching forty [years of age]. a neighborhood supermarket faces a very trying situation such as declining revenues. that is an oxymoron. few Spanish college students want to become entrepreneurs.D. create a Ministry of Innovation. provide them with resources so that they can be more competitive. but higher than in the countries surrounding us.D.V. etc. The average age has gone up by almost four years. in traditionally masculine business sectors. the government. perhaps we can diversify the business model of the country in ten years. Things that we do not require of companies of [nonEuropean] origin [such as China] are requirements for our companies [in the EU]. We need a profound change that begins with training. As for exports. construction and automobiles “Small and midsize companies generate more than 80% of all new jobs. the universities and so forth. higher costs for all sorts of things including logistics.: Our rate of entrepreneurial activity is a bit lower than in English-speaking countries.” Ignacio de la Vega. and so forth. In families where there are not workers. For this sort of entrepreneur. These days. You have to start from the root of the problem: We need to educate our companies. However.V. an entrepreneur coming into the market needs more professional baggage—more knowledge of the sector and so forth. and in this country we have a very troubling situation in that regard. at times. you need to be competitive. So long as the communications media do not recognize the entrepreneur. Center for Entrepreneurial Management. At times. Director. you’ve already been seeing a certain change. and it obscures a reality of our environment. we start with an unfavorable scenario in many low-cost markets in that salaries in those countries are up to eight or 10 times lower than in Spain. the business schools. but people need to know this is about long-term investment. since competing simply on the basis of price has become so difficult. IE Business School You have to invest in R&D and have a public policy [to support that]. a contradiction in terms. This can even happen. This is related to the concept of becoming an entrepreneur “out of necessity”—starting at that age because your professional career in Spain has come to an end even though that shouldn’t be the case. the government is very interested because small and midsize companies generate more than 80% of all new jobs. a change in values and society. It doesn’t make sense to say that [R&D] is a [short-term] solution to the crisis. and education now provides an additional competitive advantage. why? How does it differ from that of neighboring countries? I. we have trouble exporting because we have exhausted our options for exporting in many sectors. there has been a significant increase in the industrial sector of renewable energy. and it has minimal risk. In times of crisis. it involves an innovative business model. Declining activity in sectors such as real estate. Now we are moving in the right direction. as the person who generates value. Ultimately. diversified companies are more sustainable. What kind of country do we want to be in the future? 14 Wharton on Innovation I ©2009 University of Pennsylvania . This is very common among entrepreneurs older than fifty. which means that there are fewer and fewer [external] sources of funding.within reach of small companies often involves some technology but. today’s entrepreneur has a higher level of training. for example. This change was beginning to occur before the crisis. very lax. the origins of that problem are in public policy. Traditionally. quality control requirements are of the typical Spanish entrepreneur? Has it changed a great deal in recent times? If so. according to the textbooks. innovation could mean trying to generate additional value for customers with classic solutions such as discounting. UK@W: Do you believe that the crisis will change business habits in Spain? I. building on the boom. This is something positive. especially. the woman often develops her entrepreneurial project on her own. the typical entrepreneur is maturing and aging. The entrepreneur contributes part of the means that male entrepreneurs are disappearing and female entrepreneurs are being created in the service sector. on occasion. or it could mean looking for more innovative products. The responsibility belongs to all of us—the people. with no controls. What is the profile funding from his own pocket. and this makes our competitiveness deficit even a bit deeper. But we are talking about small companies exporting and. things will go poorly for us. which was titled “Street-Smart Innovation to Align Emerging Technology and Business. Evans. according to a panel of technology experts who recently spoke at the University of Pennsylvania’s Executive Master’s in Technology Management program. conducted approximately 10. vice president of the innovation division at Unisys. suggested several members of the panel. With R&D budgets shrinking and markets retrenching in a worldwide economic crisis. researchers and program managers should focus on aligning innovative projects with company goals. error and outright failure before turning into successful products or services. all but gutted much of the non-commercial “basic research” performed by the lab. technologists will need more than lab expertise to convince their employers to keep the research funding spigots open. based in northern New Jersey. But innovating has become a lot tougher lately. Thomas Edison. struggling AlcatelLucent sought to align Bell Labs’ operations more closely with the parent’s Wharton Executive Education I Knowledge@Wharton 15 .Finding Money for Innovation: Develop Those People Skills Innovations typically involve trial. Alcatel-Lucent. the ability to communicate well and other “soft skills” are just as important as technological expertise when it comes to selling new ideas to investors or senior management.” In addition. As panelist Nicholas D. Indeed. owner of Bell Labs. it’s much easier to justify budgets for speculative projects that show an obvious commercial benefit to the parent company. future scientists. leading businesses have willingly shouldered the expense and the risk of innovating as the price of staying ahead of competitors. pointed out.000 failed experiments before perfecting the incandescent light bulb. The product of a rocky 2006 merger. That lesson became painfully obvious this past summer to employees of the storied Bell Labs research group. For decades. the panelists noted. for example. “The C-suite recognizes that business is about taking risks and that not everything can be analytically proved or supported when venturing into the unknown.” His advice: “Use the bad times to conduct a deep self-audit. “The ills of Western banks mean. Day. They need to like your idea. which had been gaining steam in 2008.” said Green. All too often.” Panelist Eric F. a difficult economic climate is an ideal time to diagnose defects that may have gone unnoticed when the economy was stronger. Some products have already come to market. companies focus on incremental innovation—since it is more predictable and less disruptive. “Since true innovation entails uncertainty. President Barack Obama has pledged to devote much of his economic stimulus plan to investments in green technologies. Several of the panelists suggested that while technical people are generally not known for soft skills. These companies are not cutting back on innovation. Too often. Schoemaker. a laser surgeon. which involves engineering at the atomic level.” From Nanotech to Alternative Energy The panelists agreed that amid the ruins of the current economy lie vast opportunities. Bioethicists have noted that nanotech presents a host of as-yet unanswered questions. H. We’re not just talking about products and services. “Executive sponsorship is very powerful. “There are some companies that see beyond that and continuously invest in innovation and growth. said he frequently sees entrepreneurs stumble because they lack such skills. Innovation department heads must become adept at “making the case for maximizing productivity and reducing waste. including the fine art of schmoozing. biofuel plants and the like will be less plentiful. a selfdescribed “veteran of the biotech wars.” he said. When conditions are tough. a research firm that covers the deal-making environment for renewable energy projects. as opposed to quantifiable risk. “nanobots” are developed to attack disease and enhance performance. but they also need to like you. Anthony P. added Sanjoy Ray. a speechwriter for Unisys who was the panel moderator. American Express. entrepreneurs come across as rude. pointed out that budget handlers are also more inclined to favor innovation if it can be shown to cut costs. The question is: Where? Bernstein. director of global application engineering for pharmaceutical giant Merck. Medicine is a final frontier for information technology as paper records contribute to the escalating costs and delays of healthcare. as predicted. the better for the innovator. “Just think of a sport like golf or tennis. “The best known ones are Samsung. the weaknesses in your game will show more clearly. who is also an adjunct professor of marketing at Wharton. there will always be an element of vision. dismissive and disrespectful to audiences of potential investors. So. company and leadership team. solar parks. But in times like these. On the other hand. networking and computer science. including the issue of what it will mean to be human if. Senior recounted the story of one researcher who was asked why he stayed at a large bureaucratic company.” Taylor said. he said.” money that is reserved for financing employee ideas to improve the business long-term.” said Day. a vice president with first-round funding group Ben Franklin Technology Partners. is there any money for enterprising business people with superb ideas in these fields? Are angels and venture capitalists still in the game? Green conceded that “it’s brutal” for those seeking early-stage. Green. in the months ahead than it has been in the last two years. inevitably. the panelists said. dermatologist and technology entrepreneur.” For example. it will make a big difference.” Alternative energy. portfolio director of corporate operations for Unisys. Many brilliant and highly marketable technologists will remain in an otherwise unremarkable place if the company has the financial muscle to invest capital in labs and equipment.” said Schoemaker. said a huge opportunity exists in digitizing and networking medical information.” notes a recent report by New Energy Finance. It provides ‘air cover. those individuals who desire funding to continue their work would do well to acquire them. “Tough times present an opportunity to assess systemic weakness in one’s industry. co-director of Wharton’s Mack Center for Technological Innovation. The problem surfacing right now is that full-blown venture capital groups want to deal only with requests in the $6 million to $8 million range. “Not everybody needs or wants that” amount to get a business to the next stage. interested in retaining top talent. This requires excellent communication skills. who is involved as an investor in four companies. many wellknown companies remain committed to innovation in spite of downturns and earnings myopia. “No one is funding at the $1 million level.’” in nanotechnology. how do organizational entrepreneurs keep innovation alive in companies looking to slash costs? And how do startups and growth companies attract investors when the rest of the economy is melting? That’s another place where those soft skills come in handy. non-seed funding. Bernstein.commercial interests in wireless. echoed that point.” According to Wharton marketing professor George S. Nokia. she added. That makes alternative energy projects tougher to justify to jittery lenders. and more expensive.” noted Mack Center research director Paul J. but the technology has yet to reach its commercial promise. thereby “infuriating the investment community. that the supply of debt finance for wind farms.” What’s more. “Business is all about relationships. “If [nanotechnology] is really as disruptive as biotech was. but about customer experience. noted that cost-conscious executives might want to carefully consider any cuts they make to innovation departments if they are 16 Wharton on Innovation I ©2009 University of Pennsylvania . optics. has been undermined as an investment because the global slowdown has resulted in lower prices for traditional fossil fuels. Schoemaker said. American Express last year invested $50 million in its “Chairman’s Innovation Fund. His response: “Because you have all the toys. Green also sees possibilities Where the Toys Are Jim Senior. who bank on the projects being cost competitive with fuels such as oil and natural gas.” Suzanne Taylor. entrepreneurship and faith involved. And the higher up the case is made. Then.” The wild card these days is what will happen to innovation—the advance of progressive ideas in science. So has Singapore. But if the patient is bleeding you need to stop that first. technology and business—now that the world economy is in a tailspin.Why an Economic Crisis Could Be the Right Time for Companies to Engage in ‘Disruptive Innovation’ While globalization has witnessed the decline of U.” Schoemaker says. for some companies. either. Council members of the National Academy of Sciences and the National Academy of Engineering have “expressed concern that a weakening of science and technology in the United States would inevitably degrade its social and economic conditions and in particular erode the ability of its citizens to compete for high-quality jobs.S. “The crisis has multiple impacts. has established a multi-year framework to become more innovative and. government and academia will be less willing to embrace the risk-taking and short-term costs that come with the territory of innovating. in turn. energy and even finance. dominance in manufacturing. Yet Paul J. Now it appears that’s not safe. can lead to restructuring and reinvention.” He also cautions against too much caution—over-reliance on incremental innovation versus transformative. whose industries have been envied in the West more for their tenacity than their ingenuity. the two have come to be differentiated as “small i” and “Big I” Wharton Executive Education I Knowledge@Wharton 17 . competitive.” according to a 600page report from the National Academies published in 2007 and titled “Rising Above the Gathering Storm. the economic crisis can actually provide an innovation platform. one thing had long been presumed unassailable: good old American ingenuity. suggests that. which is not good for innovation. Finland is merging its top business school. China.” innovation. therefore. design school and technology school to create a multi-disciplinary “university of innovation”. a phase starts where leaders ask which parts of their business model are weak (and perhaps unsustainable) and that. The conventional wisdom might suggest that business. H. “Loss of revenue and profit will at first instill a cost-cutting mentality. or “disruptive. research director for the Mack Center for Technological Innovation. In innovation circles. Schoemaker. however. Rather. “But A prime example she has found in her own research. It matches corporate “seekers” who have science.) “The investment approach. is company-wide recognition that disruptive innovation is actually important. usurped by a competitor: “Disruptive innovation is not sufficient. previous success can present a huge roadblock to 18 Wharton on Innovation I ©2009 University of Pennsylvania . companies can reap greater benefits. The “solvers” then compete—for bragging rights and often token rewards—to provide the best answers to the corporate problems. however. the giant telecommunications firm. companies are smart to develop an array of possible situations and contingencies. Stock analysts questioned Verizon’s large capital outlays on FiOS.” That point gives rise to the question: What is the best business model for fostering innovation? As it turns out. Among the most critical assets one can possess.” Wharton management professor Mary Benner sees the “stick to our knitting” syndrome as impinging on large companies’ ability to react to competitive threats. The archetype of that model is Waltham. a high-volume fiber-optic network intended to counter a “tripleplay” threat to its business posed by Comcast’s cable television. rather than pin all their hopes on one plan. particularly those expected to have stable. president of Bell Labs at Alcatel-Lucent and a successful tech entrepreneur. “Disruptive research is absolutely critical. “You can [cite] numerous examples of companies that came up with [new] technology but eventually were displaced by somebody else. “You like to be the first to develop technologies.” In the innovator’s lingo. not a rifle. they want a relatively quick fix for a specific piece of a larger puzzle. So just how does an entrepreneur or business go about being “disruptive”? How does one convince investors or top brass of a radical idea’s worth? One person who knows something about bringing disruptive innovations to market is Jeong Kim.–based InnoCentive.” according to Wharton marketing professor George S. high-speed Internet and voice-over-Internet phone service. and this innovation may instead take place in venture capital—funded start-ups. it is not enough to simply have brilliant engineers. and instead may be punished by reductions in stock price and market value.” That points to a “big trend” emerging in product development. “The largest gains in business come from more daring innovations that challenge the paradigm and the organization. exploring adjacencies and venturing more into blue oceans. outsourcing of innovation itself could turn out to be the wave of the notso-distant future. is Verizon Communications. predictable earnings and dividend payments—i. codirector of the Mack Center for Technological Innovation and co-author of Wharton on Managing Emerging Technologies.” The Business of Being Disruptive While “disruptive innovation” has enjoyed office buzz-phrase status for only about a decade. he says. Without competent management on the business side. when it comes to innovating.innovation. the most elegant technology can wind up on the scrap heap of business history. Mass. co-author of a book titled Wharton on Managing Emerging Technologies.” Benner says. But Schoemaker and other innovation gurus advocate looking at areas adjacent to one’s main business as fertile soil for innovative breakthroughs. also known as “crowdsourcing. “Sticking to our knitting” might appear to be a sound business cliché—it worked for a lot of companies that survived the dot.’ The result is that large firms. uncertain innovation or technological change. “What this means for large. the idea is quite old: Austrian economist Joseph Schumpeter had it in mind when he borrowed the phrase “creative destruction” to describe his theories of how entrepreneurs sustain the capitalist system. says Schoemaker.” Furthermore. there has been a focus on how firms acquire innovation that has been undertaken by small. Old-fashioned. has to emphasize more of an options and portfolio strategy rather than static NPV [Net Present Value valuation method]. He offered some suggestions in a recent presentation titled “Paving the Way for Disruptive Innovation” that was part of the Executive Master’s in Technology Management program’s ongoing lecture series: Aligning Emerging Technology and Business. or even worse. (“Blue ocean” is innovator-speak for unrealized. engineering and business problems with amateur “solvers” worldwide.e. developing scenarios. “Most companies are not looking for a big innovation they can knock out of the ballpark. publicly traded firms is that they may face a disadvantage in engaging in radical innovation. the more innovative in terms of business model that the company is. markets. the longer you can maintain advantage.” Benner says.” Schoemaker says. For firms that want the “secret sauce” to always come from in-house. “It may be that the locus of much really radical innovation is shifting outside of the large organizations to small start-ups.” Schoemaker says.” says Kim. Given the high failure rate of innovative projects. Investors and analysts often prefer that firms maximize shareholder value by ‘sticking to their knitting..” entails collaborating with partners to solve business problems.” Kim says. linear approaches that rely on standard measurement schemes are often outdated if relied upon solely.” Day says. “By examining a company’s growth gap. numerous decision-making tools exist to help firms systematically manage an innovation program.” Indeed. especially in the technology space. and therefore uncontested.com era. “I find that firms’ innovation into radically new technologies or new markets can seem to shareholders and securities analysts like too great a departure from their expectations for these firms. Day. According to Schoemaker. “income stocks”—are not likely to be rewarded by the stock market for entering new technologies or undertaking radical innovation. Open Innovation. “Particularly in the pharmaceutical area. privately funded firms such as biotech start-ups. In a company that’s already successful—or one with layers of bureaucracy that hinder new ideas—this can prove difficult. The firm also must commit itself to research. she noted. so-called “Open Innovation. these “somebody elses” are known as “fast followers”—that is. the analogy is to firing a shotgun. companies with better funding or sharper management who were able to exploit a technology more quickly and effectively in the marketplace than the original creator. the more flexible. “Recent research suggests the stock market is not good at valuing intangibles. But some people processed it. research needs to keep addressing the needs of the mother company. because they were not looking for it. An incredible opportunity to innovate disruptively lies in the problem of information overload. The Innovator’s Dilemma. then $730 million. in science fiction movies. Not even storied Bell Labs.?’ After a while. they were tired. Another is “experience pairing. but a fresh perspective on how to solve problems. Researchers at northern New Jersey– based Bell Labs have won six Nobel Prizes and take credit for an inventory of innovations: The photovoltaic cell.” says Kim. Alcatel-Lucent all but shuttered its funding for the Labs’ basic physics research. “I was really convinced that the reason I was put in there was that nobody else would do it. It’s just not very cost effective. a paradigm of “How to Do Things. as Alcatel-Lucent spokesman Peter Benedict told Wired Magazine in August. people let their “atwork” guardedness down and spent time learning about one another. according to Kim. intended to foster teamwork and cooperation. optics. The flip side is that we constantly filter out vast stores of data because we are bombarded with information as never before in history. The Mack Center for Technological Innovation. The Wharton School time—on how to inject a spirit of disruptive innovation into an existing and stagnant culture. human knowledge and networking. “You have to make an investment in capital.” Cross-discipline teaming “is one way of breaking the Curse of Knowledge.. H. some people missed it. “After six or seven hours of whitewater rafting like this. including commercial aviation. Or. Wharton Executive Education I Knowledge@Wharton 19 .” But the exercise-psychology experiment wasn’t over at the end of the rafting run. ‘Why are we doing this . Two teams. “You have seen. To prove his point. then $970 million. $560 million the next quarter. the managers began splashing one another with their oars.” Paul J. it seems. one dressed in white. The division was moribund: Financial results were disappointing and morale was low. “In the new innovation model. Kim shook up the management team and took the survivors to an off-site retreat that featured whitewater rafting. Audience members were told to count the number of passes made by the black-shirted players.innovation. dribbled basketballs and passed them back and forth. It can be done using these technologies today. he adds. says Kim. he says. The problem is that success creates a virtual construct. statistical process control.” The exercise. Lucent’s optical networking division was severely underperforming. is that “teamwork is so critical for the success of a company. The next day included all the off-site strategizing and white board sessions one might expect. the group posted revenues of $510 million. Kim showed audience members a movie clip that repeated an old psychology experiment. the GPS system and lasers. the silicon-based transistor. “That’s the way to get ahead.” That evening over dinner. In the first quarter following that meeting. But in practice. The point. the C programming language. and the company fired the unit’s top managers. Company officials said the move was done to align the Labs more closely with the parent company’s commercial pursuits in wireless. networking and computer science. You were looking for a particular thing. “I can assure you that all of you saw the gorilla. Bell Labs researchers are working on similarly ground-breaking technologies. the UNIX operating system.” Kim offered a case study from AlcatelLucent—Lucent Technologies at the Instead of cooperating.” or matching a senior employee with an individual who has considerably less experience. Kim calls it “The Curse of Knowledge. In a shock to the science world. 3-D holographic movie images? It can be done.” says Kim. was designed with the help of a psychologist. though it can seem exceedingly rare when many companies still think quarterto-quarter and employees take a similarly short-ranged view. is immune from the pressure to produce quickly exploitable technology. it has laid the groundwork for most of the modern technological conveniences we enjoy today.” “The largest gains in business come from more daring innovations that challenge the paradigm and the organization. a grouping of nearstrangers. Schoemaker. “disruptive” innovations since its creation in 1925 as a joint venture of AT&T and Western Electric. Kim said. they get really bored. stored it. A few of the students missed the person in the gorilla suit who nonchalantly walked through the middle of the scene. Seven Hours of Whitewater Rafting The term “disruptive technology” went viral in the late 1990s after the release of Harvard Business School professor Clayton Christensen’s book. for instance. “First thing they do is say.” he says.” Kim’s advice for jumpstarting disruptive innovation is not exactly revolutionary. Bell Laboratories has served as an incubator of paradigm-shifting. Research Director. but Kim says the interaction was more genuine and productive than if they had met as they were previously. a liquid sensor that can be transformed to any shape by applying voltage—Kim envisions it being used as a zoomable lens. Knowledge is being created at a far faster rate than any one human can ever hope to assimilate. and they needed somebody to blame. The division is also using nanotechnology to create 3-D images. the other in black..” Today. digital cell phone technology and wireless local area networks are just a few of the better-recognized innovations that have taken shape there. “like little kids.” inside of which new thinking cannot flourish. At the same time.” Basic research investigates the most fundamental of scientific questions and has no direct commercial application. They are developing.