Learning to Innovate

Turning technical innovations into great products for an existing customer base should be a valuable skill that a company can apply to multiple technologies and market segments. However, new research suggests that successfully developing new technologies and entering new markets also requires an entirely different skill: the ability to learn.

Erwin Danneels, associate professor in Worcester Polytechnic Institute’s Department of Management, has written two papers that describe his research on a company’s ability to learn how to serve new markets with new technologies. Danneels surveyed top managers from 145 publicly traded manufacturing companies in 2000, tracked their profitability over three years and resurveyed 77 of those companies in 2004. The sample was restricted to companies that manufactured their own products and that did most of their business in a single business segment.

A November 2007 paper, Second-Order Competences and Schumpeterian Rents, describes two types of competences: customer competence, which is “the ability of the firm to serve a particular group of customers,” and technological competence, or “the ability to use a particular technology to produce output.” These “first-order competences,” as Danneels calls them, are needed to keep a company’s current business humming.

Danneels posits, however, that there are also what he calls “second-order competences” in both technology and marketing. These second-order competences consist, in effect, of the abilities to add new technological or customer competences. Thus, second-order competences affect the company’s ability to renew itself beyond its current business. “A company may be good at serving a particular market, but that doesn’t make it skilled at learning how to serve new markets,” says Danneels. “Similarly, it may know a technology really well, but that does not make it skilled at learning and using new technologies.” So the success of Apple Inc.’s iPod music-player franchise might be seen as an outgrowth not only of the first-order consumer electronics design skills that have refreshed Apple’s Macintosh computers over the years, but also of the company’s second-order ability to learn about a different set of customer needs and build the technologies to serve them.

Second-order competences are a valuable corporate capability. Danneels found in his research that companies with a second-order marketing competence experienced a short-term boost to profits, as measured by return on assets, especially when competitive conditions were volatile.