• Strategy
  • The Economist

Don’t Laugh at Gilded Butterflies

Rather than chasing wonder new products, big companies should focus on making lots of small improvements.

It is not just markets that resist innovation. Michael Hammer, co-author of another important business book (“Re-engineering the Corporation”, HarperCollins) quotes the example of a PC-maker that set out to imitate Dell’s famous “Build-to-Order” system of computer assembly. The company found that its attempts were frustrated not just by its head of manufacturing (who feared it would lead to most of his demesne, including his job, being outsourced), but also by the head of marketing, who did not want to upset his existing retail outlets. So the innovative proposal got nowhere. Dell continued to dominate the business.

Mr Christensen described how “disruptive innovation” — simpler, cheaper and more convenient products that seriously upset the status quo — can herald the rapid downfall of well-established and successful businesses. This, he argues, is because most organisations are designed to grow through “sustaining innovations” — the sort, like Gillette’s vibrating razor, that do no more than improve on existing products for existing markets.

When they are hit by a disruptive innovation — as IBM was by the invention of the personal computer and as numerous national airlines have been by low-cost carriers — they are in danger of being blasted out of their market. This message found a ready audience, coming as it did just as giant businesses from banking to retailing, and from insurance to auction houses, were being told that some as-yet-unformed dotcom was about to knock them off their pedestal.

Innovative Lessons

William Baumol, a professor at New York University, argues that big companies have been learning important lessons from the history of innovation. Consider, for example, that in general they have both cut back and re-directed their R&D spending in recent years. Gone are the droves of white-coated scientists surrounded by managers in suits anxiously awaiting the next cry of “eureka”. Microsoft is a rare exception, one of the few big companies still spending big bucks on employing top scientists in the way pioneered by firms such as AT&T (with its Bell Laboratories) and Xerox (with its Palo Alto Research Centre, the legendary PARC).

This will prove to be a wise investment by Microsoft only if its scientists’ output can be turned into profitable products or services. AT&T and Xerox, when in their heyday, managed to invent the transistor and the computer mouse (respectively); but they never made a penny out of them. Indeed, says Mr Baumol, the record shows that small companies have dominated the introduction of new inventions and radical innovations — independent inventors come up with most of tomorrow’s clever gizmos, often creating their own commercial ventures in the process (see table).

But big companies have shifted their efforts. Mr Baumol reckons they have been forced by competition to focus on innovation as part of normal corporate activity. Rather than trying to make money from science, companies have turned R&D into an “internal, bureaucratically driven process”. Innovation by big companies has become a matter of incremental improvements within the processes that constitute daily operations.

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