Explore Rice

8/15/2005 12:03:00 AM

Firms must choose: Process of innovation or process of elimination

Innovation need not spring from the mind of a single creative genius but can come from a process, say the co-authors of a new book that offers the first set of practical guidelines for creating value from investment in innovation.  And companies would be wise to look ahead, says the Rice University author, since the biggest threat to them are competitors that don't even exist yet -- think bookstores before Amazon.com.

-----------------

The biggest threat most companies face today is not from current competitors, but from those who don't even exist right now. A company's survival depends on how well it anticipates and responds to customers' future needs. That, according to Rice's Marc Epstein, is innovation.   The problem is that many companies get sidetracked or stalled in their quest for new technologies or business models.

"Ten years ago national book store chains didn't consider the notion of purchasing books over the Internet a competitive threat," says Epstein, the Distinguished Research Professor of Management at Rice's Jesse H. Jones Graduate School of Management. "But as we know, Amazon was a very successful industry changing innovation both from the standpoint of a business model and technology."

While some companies are spending $2 billion to $8 billion annually on research and development, they lack the systems, tools and, in some cases, the leadership to enable innovation to occur.

This dilemma forms the basis of a new book, Making Innovation Work: How to Manage It, Measure It, and Profit From It . In it Epstein and his co-authors Tony Davila from Stanford's Graduate School of Business and Robert Shelton, head of Navigant Consulting's innovation practice, show companies not just how to develop a strategy for innovation, but more important, how to implement and measure it.   In doing so, the authors debunk several myths about what it means for a company to be innovative.

"Some companies believe that a formal process stifles creativity, but research shows otherwise," Epstein says.   "Innovation isn't primarily about having a creative culture. It's about good business."

Like other key business functions, innovation relies on standard management tools - strategy, structure, leadership, management systems and people. In Making Innovation Work, Epstein and his colleagues provide senior managers with practical guidelines on how to make innovation happen within their companies using these formal processes and tools.   A key aspect of the book is its focus on the use of metrics and incentives that, according to the authors, can be used by companies of all sizes, complexities, and in all types of industries.

"Too often, incentive systems discourage innovation because they reward short-term achievement and punish people for risk taking," Epstein says. "In other instances, companies measure the wrong things."

As an example, Epstein points to the experience of a company that was unable to come up with any radical innovations or new ideas for changing their business and technology models. Part of the problem stemmed from the company's reward system that was based on the number of projects launched in the research and development unit.

"Instead of encouraging employees to take risks and work on new product ideas that would take more time and effort, the company was inadvertently encouraging their R&D employees to make a lot of incremental improvements by simply extending the product lines," Epstein explains.

"While innovations should match a company's opportunities and competencies, typically a mix of some radical and some incremental innovations is needed if a company is to grow and remain competitive."

The authors also stress the importance of a firm's leadership, particularly in clearly identifying the role of business model innovation and technology innovation for the company. Usually we think of innovation only in terms of technology, but business model innovations can be just as potent. As an example, Epstein points to the experience of HP versus Dell computers.

  "One focused only on technological innovations, while the other developed a new business innovation, selling its computers by phone and over the Internet," Epstein says.

"Since then Dell has been the leader in personal computer sales and has continued to grow and do very well."

In preparation for their book, the authors conducted extensive interviews and surveys on innovation with major corporations throughout Europe, Asia, South America, Canada and the U.S.  

Epstein, whose research centers on implementation, measurements and rewards, is the author of a dozen books that have won top academic, professional and business awards.

A graduate of the University of Oregon, where he earned his master's and Ph.D. degrees, Epstein was appointed Harvard's first Hansjoerg Wyss Visiting Scholar in Social Enterprise last fall.

Prior to joining Rice's Jones School in 1999, Epstein was a member of the faculty at Stanford Business School, Harvard Business School and the European Institute of Business Administration.

For more information on this research, contact Epstein at epstein@rice.edu or Debra Thomas in the Jones School at dthomas@rice.edu.