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(originally published by Booz & Company)


Purpose and Innovation

How to optimize corporate R&D efforts.

An Innovation is any development that creates change. It could be as big as a jet engine or as small as a tiny improvement to production line processes. Or, as the economist of innovation Joseph Schumpeter put it, it can be a new kind of food: “It should be stressed at once that the ‘new thing’ need not be spectacular or of historic importance. It need not be Bessemer steel or the explosion motor. It can be the Deerfoot sausage.”1 I’m interested in innovation—in innovative strategy, technology, products and services. I’m especially interested in the two million suggestions made in a year at Toyota through the employee suggestion scheme—because 85 percent of them were adopted.2 That could not happen without a strong, consistent Purpose. Was it a Purpose of excellence, discovery, heroism or altruism? To answer that, one would have to know the nature of most of the suggestions.

Standard strategic analysis “explains” advantage, for both countries and companies, principally in terms of innovation. As Michael Porter puts it: “Innovation has become perhaps the most important source of competitive advantage in advanced economies.”3

Some companies can defend their existing strengths for a while without innovation, but as everyone knows, patents expire, consumer tastes change and competitors come up with new ideas. Innovation is not at the top of the agenda for all industries—many packaged grocery products, for example, are fantastically stable—but it is somewhere on the agenda for all industries. At the same time, this reliance on innovation has often led companies away from their Purpose, into a series of expensive blind allies. In 2005, Booz Allen Hamilton conducted a study of the one thousand biggest spenders on innovation—the companies with the largest research and development budgets around the world. They found no significant correlation with any measures of corporate success. None. Not profits, not revenues, not growth or shareholder returns.4 In other words, the simple decision to invest in innovation is not enough. How you invest, and especially how innovation serves a larger Purpose, determines the value of your investment.

It’s my view that Purpose helps innovators see beyond current convention—it improves the quality of innovation. And Purpose counters the natural risk aversion that large companies have to innovation. It thus increases the quantity of effective innovation, often without raising the price tag.

Purpose makes an innovator more aware, or sensitive, because it is itself a response to the environment, and one that engages the innovator strongly. We might even say that a Purposeful response, if genuinely felt, is an innately innovative response because it provides a context for paying attention to the needs in the world outside.

Think of innovation as taking place within a mental space. In a company without Purpose, this space has three dimensions—understanding of the technology, understanding of the customers, and understanding of the competition. In a company with Purpose, this three-dimensional space becomes four-dimensional, the additional dimension being understanding of the Purpose—discovery, excellence, altruism or heroism. The extra dimension makes it easier for the innovator to think outside existing conventions. In the absence of Purpose, “what the customer wants” can be interpreted in a very conservative way—extrapolating past purchasing patterns, listening to focus-groups and consulting qualitative research data.

The innovator has every reason to identify the essence of practices in other industries and repackage them for his own use—like Ford, who adapted meatpacking techniques, or like Aristotle Onassis, who pioneered cruise ships by borrowing from the hotel industry. The innovator may reconfigure components into new products, like the engineers at Sony who developed the Walkman. The innovator may glimpse potential benefits in new technologies, like the engineers at Seiko who developed the quartz watch or those at Apple who worked on the graphic user interface. He or she may simply see economic logic in a situation masked by current convention, like Siegmund Warburg helping Reynolds Metals take over British Aluminum. Or he or she may realize how the peculiarities of his or her organization can generate new customer benefits, like Nathan Rothschild in the 1820s, who used his international network to make local payments to international bond holders.

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PURPOSE: The Starting Point of Great Companies
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