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strategy and business
 / Summer 2004 / Issue 35(originally published by Booz & Company)


The Innovator's Prescription: Raising Your Return on Innovation Investment

Companies are both inspiring and responding to a shift in academic thinking about innovation. Harvard Business School professor Henry Chesbrough recently wrote Open Innovation: The New Imperative for Creating and Profiting from Technology (Harvard Business School Press, 2003) specifically to address the issue of technology innovation models. Although “closed innovation (inventing and exploiting technologies in-house) worked well for decades at industrial powerhouses such as GE, DuPont, and AT&T’s Bell Labs, Professor Chesbrough points to several economic and social trends that are prompting the shift toward open models, including the greater availability of venture capital and a more entrepreneurial mind-set among scientists and large firms. Professors Markides and Geroski have suggested that large firms can refashion themselves into networks of independent agencies ready to pounce on new markets and opportunities as they flash into being. “Established firms must create, sustain, and nurture a network of feeder firms — young, entrepreneurial companies that are busy colonizing new niches,” they have written in strategy+business.

Despite the academic fervor for outsourcing, though, companies need to think rigorously about what can be sent outside the four walls. Although, as a syndrome, “not invented here” is destructive, the impulse to keep control can be rational. Our experience with successful outsourcers persuades us that the innovation value chain presents natural opportunities for openness.

The first link in the chain, idea generation, is clearly ripe for outsourcing; a company should cast as wide a net as possible for ideas. By contrast, the second link, project selection, cannot be outsourced. This critical step speaks to the heart of a firm’s strategy and its vision for its business — its corporate soul, if you will. There are few conceivable means by which a company can outsource its selection of investment opportunities and still remain an entity in any but the vaguest sense of the word.

Link three, development, can certainly be outsourced. Taking an idea from concept to tangible product or service involves a multifunctional set of technical and managerial skills. Some companies, such as Johnson & Johnson’s McNeil Consumer & Specialty Pharmaceuticals division, excel at this; others do not. To the extent a firm can find a product developer outside its walls that can speed up its time-to-market and execute formulation and product creation, there is no reason this capability has to remain in-house. Moreover, with superior product management skills, portions of product development certainly can move outside.

The final link in the innovation value chain, commercialization, cannot really be outsourced. Commercialization is the execution of the strategic vision for the product, and as such is an expression of the firm’s strategy. Although portions of the commercialization process have been outsourced for decades (e.g., advertising campaigns, market research), key decisions about a product’s goals, placement, pricing, rollout, features, and so forth, are intimately linked to a company’s core identity and are too vital to surrender to outsiders.

The Payoff
Methodically improving capabilities may not sound sexy, but there are vivid examples of companies that have done it and reaped significant rewards. Take Apple Computer. During founder Steve Jobs’s hiatus in the early 1990s — when he was off leading the digital animation house Pixar — Apple pursued a new product strategy of launching nondescript versions of older models and me-too clones of IBM/Microsoft boxes. Gone was Apple’s original positioning as a cool-machine kind of place whose products appealed to college kids and graphic artists. After Mr. Jobs returned in 1997, he retooled the innovation engine, fired a number of engineers, and shook up the entire development process. He listened to the market, reorganized, and in short order launched a string of exciting, successful new products, including the iMac, the iBook, and the iPod digital music device. Mainly as a result of its strong new products, Apple’s revenues were up 36 percent in the fourth quarter of 2003. Mr. Jobs improved innovation effectiveness by focusing on capabilities, not spending.

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  1. Costas Markides and Paul Geroski, “Colonizers and Consolidators: The Two Cultures of Corporate Strategy,” s+b, Fall 2003; Click here.
  2. “Why the Pace Has to Pick Up: Special Report on Innovation,” Business Week, August 31, 1998
  3. Henry Chesbrough, Open Innovation: The New Imperative for Creating and Profiting from Technology (Harvard Business School Press, 2003)
  4. Clayton M. Christensen and Michael E. Raynor, The Innovator’s Solution: Creating and Sustaining Successful Growth (Harvard Business School Press, 2003)
  5. Charles I. Jones and John C. Williams, “Measuring the Social Return to R&D,” Stanford University Department of Economics Working Paper Number 97-002; Click here.
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