Visionaries

I recently read a provocative article, Money Isn't Everything (free access, registration required), in Strategy + Business, a magazine published by Booz Allen Hamilton, the consulting firm. The authors studied the top 1,000 publicly held companies that spent the most in R&D in 2004 and concluded, "There is no relationship between R&D spending and the primary measures of economic or corporate success, such as growth, enterprise profitability, and shareholder return." Instead, they suggest, "Superior results, in most cases, seem to be a function of the quality of an organization's innovation process—the bets it makes and how it pursues them—rather than the magnitude of its innovation spending."

The article goes on to explain the results of their study. To summarize, in the authors' own words:

"The myth that higher R&D spend translates into competitive advantage has been around for decades, but it appears to be particularly strong now. [...] Perhaps this belief is a holdover from the past. When products were simpler, industrial processes less mature, and competition less fierce, companies could make new products and be reasonably certain that their customers would buy them. The R&D, manufacturing, marketing, and sales silos could do their jobs independently with little imperative to manage across departmental boundaries."

"We no longer live in that world. Shorter product life cycles have led to an ever-faster flow of new offerings. Customer demands for special features have generated enormous complexity. In turn, these factors have increased the competitive value of a fast and effective innovation engine. Yet of all the core functions of most companies, innovation may be managed with the least consistency and discipline."

For the major part of my career, I have been involved in technology transfer programs to get innovations from the labs to the marketplace. Let me offer some observations based on my personal experience over the years.

I totally agree with the authors that inventions, patents and R&D spending are not by themselves sufficient for a business or a nation to be an innovation leader and achieve competitive advantage in the marketplace. They never have been. Examples abound of companies that failed to commercialize the inventions produced in their labs, most notably Xerox PARC. In the 1980s, IBM was often cited for the major inventions from our research labs that were first brought to market by competitors, who proceeded to build successful businesses around them—such as RISC microprocessors, relational data bases, and high-speed Internet routers. In that same period, people kept wondering how the US could boast the world's best research universities and laboratories and receive the lion's share of Nobel Prizes, while Japan was reaping the economic benefits of all that U.S.-sponsored research.

But while not sufficient by themselves, inventions, patents, and strong R&D support do provide, I believe, a necessary base for marketplace innovation and economic development. For example, there is considerable evidence that, at a national level, investment in R&D pays off. As is well known, the U.S. government's investments in the Internet over the years since the 1960s started to pay economic dividends when the Internet became a commercial success in the 1990s (dotcom bubble notwithstanding), and will continue to do so for many years to come. Recent studies on the subject, such as those from the National Academies and the National Innovation Initiative have strongly recommended that the U.S. Federal government should increase its support of long-term basic research, to insure that there is a strong foundation for innovation well into the future.

As we have learned over the years and as the "Money Isn't Everything" study confirms, basic research is not enough and must be complemented by strong programs to advance education (especially for science and engineering careers) and to create an innovation infrastructure and climate that support commercializing the results of the research. This kind of balance is very much the intent of the National Innovation Act of 2005, legislation recently introduced in the U.S. Senate by Joe Lieberman of Connecticut and John Ensign of Nevada.

But even for individual companies, I can personally attest to the fact that a strong foundation in R&D—including a deep roster of the technical talent involved in such work—can not only help a company succeed in times of rapid technological change but, perhaps even more importantly, can enable it to survive.

In the late 1970s, in IBM's research labs, we started to investigate the future of large systems as part of a new thrust to establish technology transfer programs between our Research Division and our product units. Years later, in the early 1990s, there was a major transition in the technologies and architecture of large systems, as CMOS microprocessors became powerful enough to use in mainframes and supercomputers at a much lower price than the previous bipolar technologies. The transition almost killed IBM's mainframe business and IBM itself. However, as a result of the R&D that had been going on in our labs, our technical community had anticipated this transition and had been designing and prototyping the architectures for future mainframes. While the transition was still very painful, we survived it while many of our competitors have not survived similar technology transitions. Not only do we still have a healthy mainframe business, but we have also emerged as the leader in supercomputing.

What is clear is that the nature of innovation in the 21st century is changing. Innovation needs to be much more open and collaborative, involving not only all the units in the organization, from sales to marketing to R&D, but the world at large. No company, regardless of its success or wealth, can do the bulk of its own R&D and ignore the powerful forces at work out there in the larger community.

Moreover, as technologies have become increasingly powerful, standardized and affordable, we are able to tackle new kinds of problems found outside the labs, in the "real world," in the marketplace. Thus, we are seeing innovation "going up the stack", becoming much more market-facing and multi-disciplinary than in previous times, and increasingly focused on services, which abounds in opportunities for breakthrough ideas given the dominant role of services in the global economy.

The proper management of innovation in our times is one of the most important tasks facing every business. As the "Money Isn't Everything" study properly concludes, "There is no easy way to achieve sustained innovation success—you can't spend your way to prosperity. If you're a corporate leader, it's time to roll up your sleeves, open the innovation black box, and start retooling the works. The future viability of your enterprise depends on it."

It seems that wherever you turn these days, you hear about innovation. Nations and regions all over the world have innovation initiatives such as the NII in the U.S., which is run by the Council on Competitiveness and the European initiative on innovation being led by CORDIS. Many businesses have integrated innovation into their overall strategies and marketing campaigns, such as the Innovation that Matters initiative we at IBM launched earlier this month in conjunction with an advertising campaign around the theme of What Makes You Special?.

For a while now I've been intrigued by innovation’s emergence as such a hot subject. One conclusion I have come to is that the major reasons for all the activity around innovation are all the changes taking place around technology, business and society, which I believe are historic in nature and which may have the kind of impact on us in the 21st century that the Industrial Revolution had on previous generations.

But, while viewing innovation in historical terms is a useful way to get a grasp on the "big picture" of what is going on, that is certainly not what drives a business competing in the marketplace day in, day out. So, there have to be more "down to earth" considerations. Last week I heard a couple of talks—by Burt Rutan and Geoffrey Moore-that complemented my view of innovation from interesting and different angles—at the PartnerWorld 2006 Conference, IBM's major worldwide conference for our business partners.

Burt Rutan is an American aerospace engineer who is most famous for his design of Voyager, the first plane to fly around the world without stopping or refueling, and SpaceShipOne, the first privately funded suborbital rocket plane. He is not only a world-class engineer but an inspiring leader and entrepreneur who clearly knows a thing or two about innovation. He made two points about innovation that particularly resonated with me. The first is that if you want teams of people to perform at an extraordinary level, you need to challenge them with problems that really inspire them. People love to work on and solve problems that seem impossible to everyone else, and if you can tap into that emotional energy, you have a really charged-up, motivated team. But his second point was that people will rarely perform at such levels when they are relaxed and happy. In order to reach inside yourself and find that something extra needed for true innovation, you have to feel the stress that comes when you know that it is absolutely crucial to come up with a solution to the problem.

This felt so true to me, because I am convinced that the combination of "seemingly unlimited possibilities" and "necessity as the mother of innovation" is responsible for the current interest in—and importance of—innovation.

Let me explain. With all the advances in information technology, standards and the Internet in particular, we can now tackle problems in all kinds of areas that would have been considered impossible just a few short years ago. These areas include information-based medicine, the use of RFID in supply chains, highly visual simulations in engineering design and advanced supercomputing applications in the finance industry. There is something very romantic about "reaching for the stars," solving problems no one has ever solved before and building something qualitatively different from anything that existed in the past which is driving innovation in field after field and industry after industry.

On the other hand, the challenge of survival in our increasingly competitive business climate is anything but romantic. This is a point that was very nicely addressed by Geoffrey Moore at the PartnerWorld Conference. Moore is a best selling author and venture capital partner in Silicon Valley. He is particularly known as the author of Crossing the Chasm, which explores the various stages of adoption of high technology innovations. His new book, Dealing with Darwin, focuses on how companies can leverage innovation to differentiate themselves to compete—and survive—in our increasingly global, commoditized and deregulated marketplace.

Moore makes the point that when market environments change, as is certainly the case today, previously successful business strategies will no longer work, no matter how much you try to fix them. Companies that are unable or unwilling to adapt to the changes in such a "Darwinian" climate—due usually to the inertia that makes them want to continue doing what made them successful in the past—will become marginalized or extinct. The only answer is innovation that can significantly differentiate the business from its competitors and lead to customer preference. However, in our highly competitive global economy, what differentiates you today will be quickly emulated by others around the world, so the bar for innovation and differentiation keeps getting higher and higher.

The challenge for any business is, in part, to find the resources to invest in today's faster innovation cycles, and those resources can only come from constantly optimizing and achieving productivity in their legacy businesses and processes. This is much easier said than done, but it is absolutely critical to a successful innovation management strategy.

Consequently, a business or institution of any kind—whether in government, healthcare, academia or any other area of human endeavor—needs to think about innovation as a principle, a pervasive set of behaviors and skills that underlies every aspect of its operations, its strategy and its relationships. In historically dynamic times like these—the inflection points of really big shifts from one era to another—simply innovating aspects of an organization in one or two areas will not be sufficient. The winners—not just of the current competitive battles, but those who aspire to shape the future of commerce and society—need to reimagine and reinvent a lot more than products, services or even processes. They need to rethink basic business models, management systems, organizational relationships and broader policies.

Most leaders in business today recognize these complementary drivers of innovation—new possibilities as well as sheer necessity. We have never had more powerful capabilities at our disposal and more exciting opportunities to use them—but so does every business all around the world, from mature ones struggling to survive to the many startups fighting to take their place. No wonder innovation is such a hot topic today.