Firms must choose: process of innovation or process of elimination

Firms must choose: process of innovation or process of elimination

BY PAM SHERIDAN
Special to the Rice News

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. According to Marc Epstein, distinguished research professor of management at the Jesse H. Jones Graduate School of Management, that 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 bookstore chains didn’t consider the notion of purchasing books over the Internet a competitive threat,” Epstein said. “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 spend $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.” Epstein and his co-authors show companies not just how to develop a strategy for innovation, but 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 said. “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.

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 can be used by companies of all sizes and 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 said. “In other instances, companies measure the wrong things.”

As an example, Epstein pointed 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 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 [research-and-development] employees to make a lot of incremental improvements by simply extending the product lines,” Epstein said.

“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 stressed the importance of a firm’s leadership, particularly in clearly identifying the role of business-model innovation and technology innovation for the company. Usually innovation is thought of only in terms of technology, but business-model innovations can be just as potent.

Epstein said the experience of HP versus Dell computers is a prime example. “One focused only on technological innovations, while the other developed a new business innovation, selling its computers by phone and over the Internet,” Epstein said. “Since then Dell has been the leader in personal computer sales and has continued to grow and do very well.”