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Best Business Books 2003: Innovation

The High Art of Business

Let me admit right up front that I am an innovation junkie. Coming from Silicon Valley, I consider innovation to be the high art of business. Sure, operating an efficient, productive, competitive widget maker is the Holy Grail for many professional managers, and I admire great operating prowess wherever I find it. But what use is it all if it isn’t creating something new? Innovative businesses are an engine for change. And change is exciting because it is ripe with opportunity and possibility.

One more thing before you read on: I am not a big fan of business books that purport to tell you how to succeed. When I am pleasantly surprised by a business book, it is because of the value of the insights that it provokes rather than the advice or examples that it gives.

I tend to think of innovations as breakthrough ideas or game-changing technologies — like the Internet or genetic sequencing. On the other hand, I know there are many hardworking, successful businesspeople who consider new packaging for a breakfast cereal to be innovative. Merriam-Webster OnLine defines innovation as “the introduction of something new; a new idea, method, or device: novelty.” In the thesaurus, the first word that comes up for innovation is change. The combination seems like a good working definition to me: A new idea that effects change. Bigness or smallness is not important. With this definition in mind, I set out to see what the current batch of writers had to teach us about innovation.

Three of the books chosen explore innovation from an analytical perspective; each holds the view that networks are critical to innovation. In How Breakthroughs Happen: The Surprising Truth About How Companies Innovate (Harvard Business School Press, 2003), Andrew Hargadon sees a series of “small worlds” — seemingly distant, disconnected, and disparate populations or actions — that need to be bridged by technology brokers. Henry Chesbrough, in Open Innovation: The New Imperative for Creating and Profiting from Technology (Harvard Business School Press, 2003), sees a diffusion of knowledge that needs to be knitted into innovative solutions, both inside and outside companies. In The Slow Pace of Fast Change: Bringing Innovations to Market in a Connected World (Harvard Business School Press, 2003), Bhaskar Chakravorti sees a network of constituencies that must coordinate if they wish to abandon the status quo they currently support and create a new environment where innovation may flourish.

Each writer brings something unique to the discussion. Hargadon emphasizes that the structure and culture of organizations determines their success with innovation. Chesbrough feels that business models are crucial to creating value from innovation, and that they can also help to organize internal research and development. Chakravorti believes that, with the help of game theory, a new market environment of supportive, benefiting parties can be successfully negotiated around disruptive innovations. Each book addresses the elephant of innovation from a different perspective, but all cogently describe the same beast.

Talented Synthesizers
Andrew Hargadon hails from Silicon Valley and Stanford. He has relevant experience at IDEO, one of the world’s most impressive product design firms, and Apple Computer, which is likewise distinguished by its innovative products. But Hargadon isn’t enamored with the notion of solitary, ingenious inventors. Instead, the premise of How Breakthroughs Happen is that innovation results from the hard work of talented synthesizers — people who bridge ideas from unrelated small worlds. These small worlds are often the detached domains of seemingly unrelated industries, like health care and running shoes. He calls these synthesizers technology brokers rather than inventors, not to diminish their importance but rather to illustrate how most innovation actually occurs.

Take the example of Design Continuum, a product-design firm located in Newton, Mass. Despite its resume of innovative products, Design Continuum “invents” remarkably little. Rather, it pulls together knowledge from its divergent experiences to form compelling new solutions to various problems. When Reebok retained the firm to design a new athletic shoe, Design Continuum drew upon its prior work with medical IV bags to develop an inflatable air bladder for ankle support and comfort. IV bags were certainly not new to the medical industry, but they were quite new to the shoe business. Design Continuum bridged the two worlds to create a novel solution.

Hargadon holds that it is not enough simply to apply disparate ideas to new solutions — it is then necessary to build communities of support around those solutions. This insight is important and arises again in other works. Inventing is only the first step in innovating. If innovation is to take root, many parties must embrace it along the way. People must be willing to let go of their current thinking and incorporate the new ideas into their own work. To effect changes, it is critical to build support among those constituencies necessary for the changes’ adoption and success. Consequently, organizational skills and structure are key assets in innovation.

These collectives and communities are directly affected by the organizations and cultures in which they arise. If you don’t have an organization and culture that encourage risk taking — and that accept the failures that frequently result — then you are likely to fall prey to the “safer” dominant logic. In order to innovate, according to Hargadon, it is best to start by opening up your company, and in particular your researchers and developers, to outside thinking. This stands in stark contrast to the classic monolithic research efforts like those of AT&T’s Bell Labs.

In Open Innovation, Henry Chesbrough carries this idea even further. He defines the old methods of research and innovation as “closed” and asserts that the future of innovation lies in being “open” to the diffusion of ideas and knowledge that lie outside your company.

Chesbrough offers a compelling set of reasons for the necessity of the move to open innovation. The closed paradigm of innovation reflected a very different business environment — one where the boundaries between industries seemed impermeable to outside ideas because there was little apparent overlap between the products and core competencies of each. What could research in the pharmaceutical industry have in common with research in the electronics industry? Large, vertically integrated companies were able to reap the value of their internal research within their siloed business models. They could hire the best talent in their industry, manage the speed and timing of their inventions, direct those innovations toward their customers’ stated needs, and realize the full value of those innovations through aggressive intellectual property protection and captive markets. Bell Labs is an excellent example of just such a closed innovation paradigm, one that worked successfully for decades.

Toward the Open Paradigm
But something happened in the last 20 years that undermines the closed innovation model for the majority of businesses, which no longer can rely on vertical integration and captive markets to harvest their internal breakthroughs. The conditions favoring closed innovation have been eroded by the increasing mobility of talent, the influx of venture capital, the abundance of entrepreneurial startups, and the increasing importance of university research. The resulting network of communications and talent has created strange bedfellows, like genetics and microelectronics, which have been melded in microchips designed for use in the diagnosis of cancers.

Chesbrough points out that this erosion calls into question the closed model of innovation. When the best minds in your company can easily leave to found a new business with venture capital, you quickly discover that your company no longer has a monopoly on the best ideas, no matter how much you spend on R&D. When you find that the newly minted Ph.D.s you were relying on to inject your company with state-of-the-art thinking are instead happier to pursue their university projects at upstart competitors, you become acutely aware that the fortress you have built to lock your innovations inside actually may be keeping the best ideas out. Sure, the threat from startups may be momentarily abated, but that is a consequence of the current business cycle — not the ultimate trend of the underlying market dynamics.

Chesbrough offers a framework for how businesses can move toward open innovation. He uses the example of IBM, once a pinnacle of closed innovation, which adopted an open approach after, as he puts it, “a near-death experience.” From 1945 to 1980, IBM dominated the computer business. It had the largest sales, largest research budget, and most patents of any company in the industry. In 1992, its business was facing powerful competition on every front from the likes of Microsoft, Compaq, Sun Microsystems, Hewlett-Packard, and DEC. At the end of that year, IBM recorded the largest quarterly and annual loss in U.S. corporate history. Something had to change.

Louis V. Gerstner Jr., an outsider, was brought in to lead the charge. His IBM shifted its focus from products to customers and soon realized that its research dollars were being squandered on lower tiers in the value chain. IBM needed to redirect its efforts toward the applications and solutions that its customers valued. So Gerstner hired research managers to broker technology between IBM’s labs and its business units, with special emphasis on those innovations that could directly influence sales. And IBM stopped using its intellectual property largely as a defensive measure to ensure itself the freedom to innovate products safe from litigation. Rather, it attached its intellectual property to processes and components that its fabrication and manufacturing supplied to other companies — including would-be competitors. In this way, IBM’s component customers pay for the otherwise contestable right to use a particular technology that IBM has developed, and IBM earns a return on its intellectual property apart from issuing naked licenses or selling finished goods.

What really caught my attention in Chesbrough’s book, however, was his discussion of the role of business models in innovation. The value of technology is not inherent; instead, it is derived from how the technology is ultimately deployed. A major challenge for large companies that innovate is not that they can’t invent technology, but rather that they are impaired in creating new business models to best exploit it. Startups have nothing invested in their business models; they are agnostic in their pursuit of the best way in which to capitalize on an innovation. Large companies, on the other hand, are constrained by the dominant logic that pervades their organization and culture. The result is the exodus of talent and ideas to startups.

Take Xerox, for example. In the 1980s, the corporation’s business model sprang from its legacy copier business. The company made a modest profit on equipment and relied heavily on the sale of supplies. The key to capturing value was that Xerox required customers to purchase things like paper, toner, and maintenance only from Xerox. When researchers at its famed Xerox PARC labs in Silicon Valley developed PostScript (page “layout” software that enabled Xerox workstations to communicate with Xerox printers), there did not seem to be a compelling business model for PostScript as a stand-alone product. Rather than remain captive to Xerox’s closed systems, PostScript’s inventors, John Warnock and Chuck Geschke, spun off and began selling libraries of fonts for desktop publishing based on PostScript. The company they formed was Adobe, and the rest is history. Xerox’s dominant, closed-technology business model could not accommodate the open-standard approach that underlies Adobe’s success.

This type of phenomenon leads Chesbrough to go beyond encouraging businesses to open up to outside ideas: He also recommends that they make their internal innovations available for others to exploit. Where structural impediments hinder the realization of an invention’s potential, an innovator can still reap its value by licensing it to others who are not so impeded; startups, spin-offs, and existing companies with compatible businesses. The innovator can still share in the rewards through equity investments or royalties. More important, the returns from investment in research will be greatly improved over those that result from simply shelving innovations that don’t fit the dominant model.

Coordinating Stakeholders
But what about realizing value from those innovations that businesses choose to pursue themselves? Bhaskar Chakravorti, in The Slow Pace of Fast Change, focuses on the challenges that arise after innovations go out the door. Chakravorti describes a complex network of interconnected parties that need to be coordinated for an innovation to succeed. These parties are stakeholders in the status quo. They have arrived at their positions by rational choices intended to maximize their self-interests. This ecosystem includes competitors and partners, customers and vendors. To introduce an innovation, one must coordinate a move away from the current market environment and then recoordinate the group in the creation of a new set of market relationships that reinforce the innovation’s success. This harks back to Hargadon’s lessons about collectives inventing and communities embracing.

Chakravorti’s book presents a cerebral approach to the topic. He employs game theory, explaining how companies can choose from among a set of strategies that move toward the end game with due consideration for the many independent choices that others will make in their own self-interest. This process is recursive, with each choice dynamically affecting every other.

Chakravorti argues that by concentrating on those end games that plausibly serve the common self-interests of the various constituencies, you can negotiate a path to success. Focus is critical, since resources are ultimately limited — especially for startups. Finding points of leverage to help move the various decision makers toward the desired new alignment of businesses and customers is also paramount. You won’t be able to convince everyone. Who is necessary to the result? And why would it be in their interest to go there?

The networks of ideas, talent, businesses, and stakeholders envisioned by these authors make up a whirlwind of opportunities for technology brokers and open innovators. Armed with these insights, among others, I was ready to delve into two new tales of remarkable creativity and invention that happen to reinforce the theories presented in the Chesbrough, Chakravorti, and Hargadon books.

I started with Code Name Ginger: The Story Behind Segway and Dean Kamen’s Quest to Invent a New World (Harvard Business School Press, 2003), by Steve Kemper.

Kemper follows the early days of the Segway, the self-balancing scooterlike device invented by Dean Kamen. Interestingly, much of the hype related to the Segway started with a leak about Kemper’s attempts to peddle this manuscript. (In the interests of full disclosure: Kemper even includes me in a cameo appearance because I informally advised on this project. Caveat emptor.)

To tell a good story, an author has to settle on a point of view. The reader should never expect the “whole” truth. Kemper favors the perspective of the inventor and his team. That is not to say that Kemper does not train his critical eye on Kamen from time to time. Indeed, for his indiscretions Kemper is eventually tossed out of Kamen’s paradise of innovation prior to the Segway’s launch. But before he is expelled, we are treated to a page-turner.

Kamen is revered in the press as a modern-day Edison. Hargadon points out that Edison was more of a synthesizer than a free-form inventor. Kemper paints Kamen in much the same way.

The Scooter as Metaphor
True to Hargadon’s and Chesbrough’s theses, the creation of the Segway borrows from what has come before and feeds off the small worlds that have already birthed efficient motors and gyros and batteries. The brilliance of the Segway is in Kamen’s searing vision and the development team’s tireless creativity. As if concurring, Kamen admits at one point, “I don’t have to invent anything. It’s out there somewhere if I can just find it and integrate it.”

There is a tug in the book between the mythical image of Kamen’s lone genius and the well-led, hardworking team of developers. Kamen, like many great visionaries, seeks to maintain control of the Segway and its commercialization even when the task exceeds the limits of his experience. He battles wills with the likes of Steve Jobs and the legendary venture capitalist John Doerr, and wins Pyrrhic victories that ultimately seem to handicap his success. Kamen’s struggle speaks to the passion that fuels creativity and the tenacity that is required to challenge the status quo. Greatness does not come easy, and it is not for the meek.

Kemper spends a good deal of time whittling Kamen down to size, but he nevertheless shows appreciation for Kamen’s achievements. In addition to his many inventions, Kamen created FIRST, a philanthropic mission to elevate scientists and engineers as role models for young people through staged robotic competitions between teams of students and their corporate sponsors. FIRST has been a tremendous success, attracting more than 600 teams and 20,000 kids in 17 regional championships in 2002. Genius, promoter, or otherwise, Kamen is using his celebrity and vast energies to foster visionaries and innovators among future generations.

Although it was a fun read, I did not find Code Name Ginger very insightful for a business reader because Kemper spills his first-hand observations onto the page without much attention to the nuances of the various parties and interests. As a result of his slant, we see only two-dimensional characterizations of almost everyone except Kamen and key members of the development team. The businesspeople and the business issues are given short shrift.

In contrast, Jeffrey Zygmont, in Microchip: An Idea, Its Genesis, and the Revolution It Created (Perseus Publishing, 2003), calls upon a rich and textured history in revealing the lessons from the innovation of the chip.

I was more than pleasantly surprised by Zygmont’s book. I thought I knew most of the microchip’s lineage, but Zygmont weaves a fascinating set of stories together to illuminate one of the last century’s most amazing feats of innovation. Of course it discusses Bill Shockley’s seminal work at Bell Labs coinventing the transistor in the 1950s and Jack Kilby’s creation of the integrated circuit at Texas Instruments, grouping transistors with other components to create smaller circuits. The pace of innovation quickens when Shockley packs up for California to found Shockley Semiconductor Laboratory. Here is Shockley’s greatest piece of brilliance: He hires Gordon Moore, Robert Noyce, and a group of other ingenious engineers and scientists. There is a mass diffusion of knowledge when the “traitorous eight” leave Shockley to form Fairchild Camera, and I couldn’t help but reflect on Chesbrough’s comments about the mobility of talent eroding the conditions that once supported closed innovation. These stars and their protégés move on to startups like Intel, Advanced Micro Devices, National Semiconductor, and Mostek, and eventually give rise to a new capital, Silicon Valley.

Zygmont sees the competitive market as the master of innovation. In his model, we are empowered, not the innovators who slave endlessly to win our acceptance. In Chakravorti’s terms, we are key stakeholders in the new market equilibrium that spells success for any innovation.

The microchip saga is an embarrassment of riches for its wealth of material: There are geniuses like James Siepmann, a tenacious physician who fights off depression by developing the Light Clock, and Jean Hoerni, who broke through from the “vertically” layered transistors to the “horizontally” connected wafers that predominate today. There are formidable engineers like Ted Hoff, the man who designed the microprocessor because he was appalled at the convoluted layouts of one of his clients, and misanthropes like Harold Koplow of Wang, who formulated the model for word processing as he was biding his time waiting to be fired. One never senses Zygmont judging, but rather illuminating the whole primordial soup. Itinerant talent and garrulous customers and suppliers broker the technologies that drive development to the relentless clock of Moore’s Law: Every 18 months the capacity of chips doubles while their prices drop by half.

The key insights of Hargadon, Chesbrough, and Chakravorti are substantiated by this engaging story about the big bang of innovation that was unleashed by the microchip — cell phones, personal computers, microwave ovens, antilock brakes, etc., etc. I could not put this book down without a sense of awe for what the likes of Shockley and Kilby wrought.

In early 2003, Larry Ellison of Oracle pronounced the decline of technology innovation. Where is the invention that can spawn a bounty of innovations the way the microchip did? Ellison should read these books. Opening up the walls of captive research to the wealth of outside knowledge offers the opportunity for accelerating innovation. Technology brokers have access to an abundance of ideas generated in these networks of innovation, which they in turn can cross-pollinate into brilliant new products and services. The methods may be changing, but unchanging is the fact that invention and change themselves are inextricable parts of being human. Innovation is far from dead; in fact, it is an unstoppable force of nature.

Author Profiles:


Randy Komisar (editors@strategy-business.com) has been a founder, executive, or director of more than a dozen companies, including Claris, LucasArts, and TiVo. He teaches entrepreneurship at Stanford University, and he is the author of The Monk and the Riddle: The Education of a Silicon Valley Entrepreneur (Harvard Business School Press, 2000).

 

 
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