• 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.

In some industries, cutbacks in R&D reflect changes in the way that new products travel down the “invention pipeline”. During the late 1990s, for example, Cisco Systems kept itself at the cutting edge of its fast-moving high-tech business (making internet routers) by buying a long string of creative start-ups financed originally by venture capital. The company’s R&D was, as it were, outsourced to California’s venture capitalists, who brought together the marketing savvy of a big corporation and the innovative flair of a small one — functions that were famously divorced at AT&T and Xerox.

These days there is less money going into venture capital, and a new method of outsourcing R&D is on the increase. More and more of it is being shifted to cheaper locations “offshore” — in India and Russia, for example. One Indian firm, Wipro, employs 6,500 people in and around Bangalore doing R&D for others — including nine out of ten of the world’s top telecom-equipment manufacturers.

Pharmaceutical giants continue to get their hands on new science by buying small innovative firms, particularly in biotech. Toby Stuart, a professor at the Columbia Business School in New York, thinks that this shows another change in the supply chain of invention. He says that many of the biotech firms are merely intermediating between the universities and “Big Pharma”, the distributors and marketers of the fruits of academia’s invention. Universities used to license their inventions to these firms direct, but small biotech companies make the process more efficient. They are well networked with the universities, in whose “business parks” they frequently locate their offices. They may not, of themselves, be very innovative.

Companies need to resist the feeling that it is not worth getting out of bed for anything other than a potential blockbuster. Product cycles are getting shorter and shorter across the board because innovations are more rapidly copied by competitors, pushing down margins and transforming today’s consumer sensation into tomorrow’s commonplace commodity. Firms have to innovate continuously and incrementally these days to lift products out of the slough of commoditisation. After it used innovation to create a commoditised market for fast food, McDonald’s struggled before recently managing to reinvigorate its flow of innovations.

Finding a Niche

Another factor to take into account is the fragmentation of markets. Once-uniform mass markets are breaking up into countless niches in which everything has to be customised for a small group of consumers. Looking for blockbusters in such a world is a daunting task. Vijay Vishwanath, a marketing specialist with Bain, a consulting firm, says that Gillette’s bouncy blade may yet end up as no more than a niche product — fine if it is profitable.

Mr Chakravorti believes that the problem lies with the marketing of new innovations. It has not, he says, caught up with the way that consumers behave today. “Executives need to rethink the way they bring innovations to market.” Too many are still stuck with the strategies used to sell Kodak’s first cameras almost 120 years ago, when the product was so revolutionary that the company could forget about competition for at least a decade. Today, no innovation is an island. Each needs to take account of the network of products into which it is launched.

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