On average, investments in information technology are associated with greater productivity for companies — but why do some companies get greater productivity benefits from IT than others? That was one of the questions MIT Sloan Professor Erik Brynjolfsson addressed at a presentation at the MIT Center for Digital Business today. (Brynjolfsson and Wharton’s Adam Saunders have a new book out, Wired for Innovation, that addresses this topic and others related to IT, innovation and productivity.)
Erik Brynjolfsson
As part of his presentation today, Brynjolfsson discussed findings from research that involved studying 1167 large firms over 10 years — and that concluded that business performance depends on both IT and organizational capital. The researchers found that there is a very measurably different set of management practices that are much more common in IT-intensive companies than in others. What’s more, these practices — which Brynolfsson calls practices of “the digital organization” — are correlated with generally higher productivity and higher market value in the companies that implement them.
The downside? It’s possible to “spend a lot on IT without getting much of a return,” if you invest in IT without adopting digital organization practices, Brynjolfsson commented. A similar problem, he noted, can occur if you change a company’s work practices to adopt digital organization practices — but don’t make the corresponding IT investments.
What are the practices that characterize the “digital organization”? In Wired for Innovation, Brynjolfsson and Saunders write that digital organizations:
move from analog to digital processes
open information access
empower the employees
use performance-based incentives
invest in corporate culture
recruit the right people
invest in human capital.
IT-intensive firms, Brynjolfsson observed in his presentation today, tended to put more effort into hiring and, once they hired, into training.
If one innovation approach is helpful, you might think using more than one approach to innovation would be even better. Not necessarily, write Frank T. Rothaermel and Andrew M. Hess in an article on innovation strategy in the new issue of Business Insight, MIT Sloan Management Review’s collaboration with The Wall Street Journal.
In a five-year study of strategies among pharmaceutical companies pursuing innovation in biotechnology, Rothaermel and Hess found that not all innovation strategies are equally complementary — and that companies can risk wasting resources if they pursue certain combinations of strategies at the same time. For example, the authors note, companies that invest simultaneously in cultivating internal human capital and in external alliances may not get the best return on the combined investment — since the two strategies offer similar benefits.
The best single innovation strategy over all, according to this research? Investing in people. ”The most effective way to achieve continuous innovation over the long term is to hire and cultivate talented people,” Rothaermel and Hess write. “Companies that innovate through hiring will have stronger control over their intellectual property and often a steadier pipeline of future inventions because they aren’t relying on outside partners for any part of the innovation process.”
Here’s a sign of the times: McKinsey & Company’s ‘What Matters” site hosted an online debate about innovation — except both of the expert authors, Iqbal Z. Quadir and Robert Atkinson, agreed on the central topic of the debate: that Asia could become the world’s innovation center in the 21st century. (Quadir, who directs the Legatum Center at MIT and founded GrameenPhone, focused more on Asia’s strengths, Atkinson more on shortcomings in U.S. industrial policy.)
Meanwhile, Aneesh Chopra, the Obama administration’s chief technology officer, said in an interview this week with the San Jose Mercury News that he is concerned about the U.S.’s competitive position in technology innovation. Asked in the interview if he was worried about U.S. competitiveness in business and technology, Chopra responded: “Absolutely.”
Anthony reports that, according to some new research by Jeffrey Dyer, Hal Gregersen and Clayton Christensen, most successful innovators tend to be very good at seeing connections between seemingly disparate ideas, a trait the researchers call “associational thinking.”
The good news? Anthony argues that would-be innovators can strengthen their innovation skills. One way is by improving the skills that drive associational thinking, such as questioning and experimenting.
Another option Anthony suggests: Try to place yourself in “innovation schools” — in other words, real-life settings that will give you experiences that could relate to new challenges you may face in the future. Such activities might range from volunteering for an international project at work to using free time on nights and weekends to help a relative launch a start-up.
One of Tian and Wang’s interesting findings: Venture-backed companies that eventually conducted IPOs (initial public offerings) and were backed by more failure-tolerant venture capitalists were significantly more innovative than other venture-backed IPO companies.
What’s more, the researchers’ analysis suggests that what particularly matters is investment at an early stage by a failure-tolerant investor. Venture capitalists, Tian and Wang conclude, appear to influence the culture of the early-stage start-ups they invest in — and failure-tolerant early investors result in IPO companies that are more innovative.
Tian and Wang measured VCs’ failure tolerance by looking at how long the VCs continued to invest in prior companies that they eventually wrote off. The authors’ measured innovativeness by looking at a company’s patents and the impact of those patents.
In the popular imagination, innovation is often associated with creative inspiration that can neither be predicted nor planned. So what happens when two professors of operations and information management (who have also developed products and launched companies) tackle the topic of innovation?
In particular, Terwiesch and Ulrich focus on “innovation tournaments” as a tool that companies can use to identify promising ideas for innovation, which they term “opportunities.” Much as the American Idol television show is able to use a tournamentlike approach to identify a small number of promising performers from thousands of would-be contestants, companies can use tournaments, Terwiesch and Ulrich argue, to identify new opportunities for their businesses. Ideas may be sought from employees, from people outside the organization, or from a combination of internal and external sources.
Erik Simanis and Stuart Hart offer an interesting perspective on innovation in an article in the the new Summer 2009 issue of MIT Sloan Management Review. In particular, they offer a vision of a world in which businesses and communities are more closely intertwined.
The authors contrast “structural innovation” that companies have traditionally practiced — a transaction-oriented model where companies try to create better products to satisfy markets’ unmet needs – with a model they refer to in terms of ”business model intimacy” and “embedded innovation.” In this model, a business innovates by working closely with a community to improve people’s lives. An example is Grameen Bank, with its microlending program in Bangladesh that grew out of founder Muhammad Yunus’ personal experience with Bangladeshi villagers.
Write Simanis and Hart:
At its foundation, business model intimacy is a kind of relationship in which the identity of a community is fused with that of a company. The glue that binds this shared identity is a jointly constructed vision of a better life and community — a strategic community intent — anchored around a new business.
To generate innovative ideas, companies need to look in areas beyond the familiar — and often slightly beyond their core, day-to-day businesses. That’s one of the messages of “In Search of Innovation,” an article that is part of this week’s edition of Business Insight. which is produced in a collaboration between MIT Sloan Management Review and The Wall Street Journal.
How should companies think about innovation during a downturn like this one? Vijay Govindarajan, an expert on innovation and strategy from the Tuck School of Business at Dartmouth, thinks that businesses should be careful not to abandon innovation in their quest for efficiency and cost control during a recession — but they may need to reduce their focus on risky breakthrough innovation plans.
How should a company strike that balance? In an interview published today as part of Business Insight, MIT Sloan Management Review’s collaboration with The Wall Street Journal, here’s what Govindarajan suggested:
“I distinguish between two types of innovation: adjacency innovation, which is a little less risky because you are innovating in a business area adjacent to your existing core business, and breakout innovation, where you are going multiple steps outside of your core business. In a normal time, I would say spend about 50% of company resources on the core business and about 50% on adjacency and breakout innovation—perhaps 35% on adjacency innovation and maybe 15% on breakout innovation.
But during times like this, the percentages shift. I would shift to spending more like 70% on the core business and perhaps 25% on adjacency innovations—and maybe 5% on really breakout innovation. The investment in innovation in adjacency areas probably doesn’t change much, but you shrink some of the spending on real breakout innovation. The reason is: Breakout innovations are high-risk and high-payoff. And one thing you cannot afford during this economic crisis is to make a serious mistake.”
Should established companies even try to launch new ventures regularly? That question was the subject of an interesting discussion between Julian Birkinshaw of London Business School and Andrew Campbell of Ashridge Strategic Management Centre; their discussion was contained in a recent newsletter from MLab, in an article called “Debating Innovation.”
Campbell,in particular, urged established companies to be very conservative in their approach to innovation and pursuing new ventures. He wrote:
Don’t be blindly enthusiastic about doing new things: the cost can easily exceed the benefit. Innovate in a focused pragmatic way in areas where the gains are likely to be bigger than the costs…Don’t set up venturing units or venturing processes unless the opportunities you face are so exciting that you expect to have a continuous stream of new projects that will require processing.
Interestingly, both Birkinshaw and Campbell were coauthors of a 2003 MIT Sloan Management Review article called “The Future of Corporate Venturing.“
BusinessWeek chiefeconomist Michael Mandel makes a case in the current issue of BusinessWeek that the U.S. economy has experienced an “innovation shortfall”in the last decade — with successful commercialization of technological innovations slower to materialize than expected. The result, he suggests is an American economy that was weaker than it appeared. Writes Mandel:
“If the reality of innovation was less than the perception, that helps explain why America’s apparent boom was built on borrowing. ”
1) There’s an interesting new article at the strategy+business website about “in-market innovation.” What’s that? The article’s authors (Alexander Kandybin, Surbhee Grover and Nami Soejima, all of Booz & Company) define “in-market innovation” as the practice of doing ”mini-launches” of a number of products, with more limited prior market research — and seeing which succeed. Companies that they cite as trying some aspect of this strategy include Procter & Gamble, Target and Tiffany & Co.
Whatever your opinion of General Motors and its management decisions over the last few decades, it was sad to read today about GM’s Chapter 11 bankruptcy filing — and about the fact that an estimated 20,000 GM employees will lose their jobs between now and the end of 2011.
On a more upbeat note, Boston Globe columnist Scott Kirsner has declared June “Innovaton Month” in New England, the region of the U.S. where MIT is located. With the understanding that we’ll need innovationto get the economy out the recession, Kirsner’s theory apparently is that we might as well all start focusing on fostering it — particularly by connecting with one another. “My idea behind designating June as Innovation Month is to get everyone talking and making new connections in a focused way over the next 30 days,” Kirsner wrote in The Boston Globe. You can find out more details at the New England Innovation Month website.
In an article in Sunday’s Boston Globe, Kirsner noted that people in the New England region of the U.S. have a long history of innovating their way out of economic funks. For example, after the American Revolution disrupted the region’s then-dominant trade pattterns in the late eighteenth century, Boston experienced an economic depression — but within ten years, innovative businesspeople had developed new trading opportunities.
Good point – but New Englanders aren’t the only ones needing to get in touch with their innovative spirit these days. Maybe we need national — or international –Innovation Months to jumpstart the global economy.
Ran across an intriguing article in Sunday’s New York Times. The author, Steve Lohr, raised the question of whether current trends may create a shift in advantage in innovation– from entrepreneurial companies to large ones. The argument is that many of today’s biggest problems are in complex fields such as energy and the environment — and that solutions will need to be multidisciplinary rather than the work of entrepreneurial inventors. “The pendulum of thinking on innovation does seem to be swinging toward the big guys,” Lohr wrote.
The article brought to mind for me an interview I conducted with Harvard Business School’s Clayton M. Christensen last fall. An edited version of the interview with Clay Christensen appeared in the Spring 2009 issue of MIT Sloan Management Review – but one point that didn’t make it into the published version (due to space constraints) was a brief observation Christensen made about established companies and disruptive innovation. Christensen noted that he had become ”a lot more optmistic” in the last five years about leading companies’ ability to successfully innovate disruptively, if the management team understands the principles of disruptive innovation.
Executives wax and wane in their enthusiasm for launching new ventures outside an organization’s core business. In their more enthusiastic moments, leaders often see corporate venturing initiatives as sources of organic growth and vitally important engines of renewal. However, in their more disenchanted periods executives may see new ventures as high-risk, foolhardy distractions from effectively running the core business. What’s more, such pessimism isn’t wrong. Corporate ventures are risky and they usually do not produce hoped-for results.
What do you think? Are the dynamics of innovation changing in ways that favor larger companies? And are large companies getting significantly better at managing innovation — or not?
One conundrum for scholars of innovation has been what to make of the role of financial innovation in precipitating the financial crisis. In a new BusinessWeek.com column, Vijay Govindarajan and Chris Trimble, both of the Tuck School of Business at Dartmouth, argue that while financial “innovation gone awry….nearly blew up the global economy,” it’s time to recognize that the problems in risk management can be fixed — and business leaders should regain optimismand move forward.
How might the problems in risk management be addressed? Julian Birkinshaw and Huw Jenkins, both of London Business School, suggested in an article on The Financial Times website that companies need to incorporate greater personalization of risk management — with risk decisions being made at the right level in an organization, where people have both adequate insight and personal accountability. And economist Andrew W. Lo of MIT’s Sloan School of Management, in an interview in MIT Sloan Management Review, discussed the need for a new branch of accounting that measures risk.
This week was a big one for innovation here at MIT — in that the winner of the 20th annual MIT $100K Entrepreneurship Competition was announced Wednesday. Ksplice, the winning company from a record 260 entries, has developed technology that enables users to install software updates without rebooting their computers. The start-up was founded by five MIT engineers.
From an innovation point of view, the story of Ksplice’s founding illustrates an important theme: an idea born from a frustration with the status quo. According to an article by Ksplice COO Waseem Daher, Jeff Arnold, one of the company’s founders, was managing servers at MIT. A security update arrived in the middle of the week. Arnold decided not to install it until a more quiet weekend period – only to see the system compromised before then, so that all the software had to be reinstalled.
Arnold’s response, according to Daher? After expressing frustration, Arnold went on to write “an award-winning master’s thesis” addressing ways to update software without system reboots. And that’s the technology behind KSplice.
Ready for an unsettling interpretation of the financial crisis? MIT Sloan School professor Simon Johnson’s new article in the The Atlantic is titled “The Quiet Coup.”His argument? As a former chief economist for the International Monetary Fund, Johnson observes striking similarities between the current financial crisis in the U.S. and earlier crises that affected emerging markets. One common factor, he indicates, is a too-cozy relationship between a country’s government and its business elites. Writes Johnson:
Elite business interests — financiers, in the case of the U.S. — played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive.
The Role of Financial Innovation
According to Johnson, one of a number of symptoms of the financial sector’s political influence over the last decade was “an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.” In a speech last week, Federal Reserve Chairman Ben Bernanke addressed the relationship between financial innovation and consumer protection.
In his speech, Bernanke acknowledged that the last two years have shown that financial ”innovation that is inappropriately implemented can be positively harmful.” He later added that “the difficulty of managing financial innovation in the period leading up to the crisis was underestimated.”
Bernanke concluded that, rather than prevent innovation, regulators should allow “responsible innovation” that increases consumer welfare. How to do that? Bernanke suggested that regulators, in effect, weed out harmful financial innovation before it is implemented — by asking more questions upfront. (One example: ”How will the innovative product or practice perform under stressed financial conditions?” )
Reflecting on Bernanke’s speech, James Kwak, who blogs with Simon Johnson at The Baseline Scenario website, draws a distinction between two different types of financial innovations: those that make consumers’ lives easier — such as ATMs — and those that increase access to credit — which may or may not be beneficial, depending on the circumstances.
On the other hand, Kwak notes, many innovations — not just financial ones — have a “double-edged” quality – in that they offer both benefits and drawbacks. For example, he points out that the development of plastics has had great benefits — but has also led to problems such as “ an enormous amount of garbage that is now collecting in giant pools in the middle of our oceans.” (For more on that topic, see MIT Sloan Management Review‘s sustainability blog.)
Here’s an interesting new video clip showing innovation expert Vijay Govindarajan discussing the importance of innovation in a downturn. A few highlights of Govindarajan’s comments:
In the last 12 months, “innovation has become more important, not less.”
If you take a look at recessions in the last century, after a recession, “the competitive landscape changes; there are new winners and new losers. And the new winners are always ones who have focused on innovation.”
But you have to pursue innovation differently in an environment where cost control is a priority. Govindarajan’s advice? “Look at your innovation portfolio and pick fewer projects. Do them well.”
You can watch the video quickly; it’s a little over three minutes long. (Note: The video appears to have been informally produced, and you’ll hear some background noise.)
How is innovation faring during the economic downturn? The answer depends on whom you ask. Recently, we have seen interesting, but somewhat conflicting, reports on the state of innovation in the U.S. economy.
First, The Wall Street Journal reported some surprising good news last week: Despite the economy, large U.S. companies spent almost as much on R&D in the fourth quarter of 2008as they did a year prior. Write Justin Scheck and Paul Glader of The Wall Street Journal: “Big R&D spenders say they’ve learned from past downturns that they must invest through tough times if they hope to compete when the economy improves.”
The idea of mass customization — cost-effectively manufacturing products that nonetheless have enough variety that customers can get products tailored to their needs — may sound like an ideal only a few companies, such as Dell, have obtained. But a new article in MIT Sloan Management Review argues that, in fact, mass customization could make sense for most businesses.
Fabrizio Salvador, Pablo Martin de Holan and Frank Piller report that their research suggests that “mass customization is not some exotic approach with limited application. Instead, it is a strategic mechanism that is applicable to most businesses, provided that it is appropriately understood and deployed.” One key: Seeing mass customization as a process rather than as some “ideal state” that sounds impossible to obtain.
In their article in the Spring 2009 issue of MIT Sloan Management Review, the authors discuss the capabilities needed to make mass customization work –and they describe a variety of tactics that can be used to make mass customization practical. For example , in some cases “innovation tool kits” can allow customers to use a software design tool to express their product preferences.
Transparency, accidental innovation, trust, collaboration — as sustainability affects how the world works, so will it affect how business works in the world.
