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Faced with slow growth, commoditization and global competition, many CEOs view innovation as critical to corporate success. William Ford Jr., chairman and CEO of Ford Motor Co., recently announced that, “[f]rom this point onward, innovation will be the compass by which the company sets its direction” and that Ford “will adopt innovation as its core business strategy going forward.”1 Echoing those comments, Jeffrey Immelt, chairman and CEO of General Electric Co., has talked about the “Innovation Imperative,” a belief that innovation is central to the success of a company and the only reason to invest in its future.2 Thus GE is pursuing around 100 “imagination breakthrough” projects to drive growth though innovation. And Steve Ballmer, Microsoft Corp.’s CEO, stated recently that “innovation is the only way that Microsoft can keep customers happy and competitors at bay.”3
But what exactly is innovation? Although the subject has risen to the top of the CEO agenda, many companies have a mistakenly narrow view of it. They might see innovation only as synonymous with new product development or traditional research and development. But such myopia can lead to the systematic erosion of competitive advantage, resulting in firms within an industry looking more similar to each other over time.4 Best practices get copied, encouraged by benchmarking. Consequently, companies within an industry tend to pursue the same customers with similar offerings, using undifferentiated capabilities and processes. And they tend to innovate along the same dimensions. In technology-based industries, for example, most firms focus on product R&D. In the chemical or oil and gas industries, the emphasis is on process innovations. And consumer packaged-goods manufacturers tend to concentrate on branding and distribution. But if all firms in an industry are seeking opportunities in the same places, they tend to come up with the same innovations. Thus, viewing innovation too narrowly blinds companies to opportunities and leaves them vulnerable to competitors with broader perspectives.
In actuality, “business innovation’’ is far broader in scope than product or technological innovation, as evidenced by some of the most successful companies in a wide range of industries. Starbucks Corp.,
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1. “Bill Ford: Innovation Key to Ford’s Future; Commitment to Hybrids to Grow,” Sept. 21, 2005, http://media.ford.com.
2. J. Immelt, “The Innovation Imperative” (2004 Robert S. Hatfield Fellow in Economic Education lecture at Cornell University, Ithaca, New York, April 15, 2004).
3. C. Nobel, “Ballmer: Microsoft’s Priority Is Innovation,” Oct. 19, 2005, www.eweek.com.
4. Organization-theory researchers have shown that firms competing in the same markets begin to look increasingly similar through a process referred to as “isomorphism.” See, for instance, M.T. Hannan and J. Freemen, “Organizational Ecology” (Cambridge, Mass.: Harvard University Press, 1989).
5. Joseph Schumpeter’s seminal work in this area identifies “new combinations” of existing things as fundamental to the definition and accomplishment of innovation. See J. Schumpeter, “The Theory of Economic Development” (Cambridge, Mass.: Harvard University Press, 1934).
6. B. Nussbaum, “The Power of Design,” Business Week, May 17, 2004, 86.
7. The challenge is figuring out which of the radar dimensions might mean the most to customers and why. Customer value is often not apparent when a company is attempting to innovate in areas traditionally neglected by an industry. There might be few precedents to validate the firm’s beliefs and assumptions, and customers are often unable to provide helpful feedback regarding a new direction. However, it is this uncertainty that provides significant opportunity. Researchers have discovered numerous practical insights regarding conquering the inherent risk involved in innovation. See, in particular, R.G. McGrath and I. MacMillan, “The Entrepreneurial Mindset: Strategies for Continuously Creating Opportunity in an Age of Uncertainty” (Boston: Harvard Business School Press, 2000); and S.H. Thomke, “Experimentation Matters: Unlocking the Potential of New Technologies for Innovation” (Boston: Harvard Business School Press, 2003).
i. G.A. Churchill, “A Paradigm for Developing Better Measures of Marketing Constructs,” Journal of Marketing Research 16 (February 1979): 64–73.
ii. C.B. Jarvis, S.B. MacKenzie and P.M. Podsakoff, “A Critical Review of Construct Indicators and Measurement Model Misspecification in Marketing and Consumer Research,” Journal of Consumer Research 30 (September 2003): 199–218.