• 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.

Companies that fail to come up with big new headline-hitting blockbusters should not despair. There are plenty of other, albeit less glamorous, areas where innovation can take place. Management thinkers have identified at least three. Erik Brynjolfsson of the MIT Sloan School of Management, says that the roots of America’s productivity surge lie in a “genuine revolution in how American companies are using information technology”. Good companies are using IT “to reinvent their business processes from top to bottom”.

Reinventing, or simply trying to improve, business processes can offer surprising benefits to firms that do it well. The software that runs many business processes has become an important competitive weapon. Some business processes have even been awarded patents. These are controversial and, because they may stifle rather than encourage the spread of new ideas, are probably not in the wider public interest. Yet Amazon obviously views its patent for one-click internet purchasing as valuable, and there are plenty of other examples, particularly in the financial-services industry.

Nevertheless, there is no doubt that, patented or not, what Mr Hammer calls “operational innovation” can add to shareholder value. In an article in the April issue of the Harvard Business Review, he asks why so few companies have followed the examples of Dell, Toyota and Wal-Mart, three of the greatest creators of value in recent times. None of them has come up with a string of revolutionary new products. Where they have been creative is in their business processes.

While superficially mundane, Wal-Mart’s pioneering system of “cross-docking” — shifting goods off trucks from suppliers and straight on to trucks heading for the company’s stores, without them ever hitting the ground at a distribution centre — has been fundamental to the company’s ability to offer lower prices, the platform for its outstanding success. Is it not over the top, though, to glorify such a common-sense change with the title “innovation”? For sure, it does not call for a higher degree in one of the obscurer corners of science. But Wal-Mart did something no competitor had ever dreamed was feasible and that was highly innovative.

Mr Hammer, who was once a professor of computer science at MIT, believes that the best qualification for innovation is a basic training in engineering. Crucially, he says, engineers are taught that design matters; that most things are part of a system in which everything interacts; that their job is to worry about trade-offs; and that they must continually be measuring the robustness of the systems they set up. Such a frame of mind, he believes, fosters innovation. It may be no coincidence that many of the greatest corporate leaders in America, Europe and Japan, past and present, trained first as engineers.

Companies are being encouraged to embrace other forms of innovation too. In a recent issue of the MIT Sloan Management Review, Christopher Trimble and Vijay Govindarajan, two academics from Dartmouth College’s Tuck School of Business, recommend that they try a little “strategic innovation”. The authors point to examples such as Southwest Airlines, a low-cost American regional carrier, and Tetra Pak, a Swedish company whose packaging products are handled at least once a day by most citizens of the western world. Such companies succeed, they say, “through innovative strategies alone, without much innovation in either the underlying technologies or the products and services sold to customers.”

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