There are broadly two types of innovation. Product innovation refers to work done to improve the product. Some product innovations are truly radical, such as the Sony Walkman. Others are incremental, such as adding new features to a colour television set. Process innovations aim to make the manufacturing process
more efficient through automation, simplification, better process control and lower energy consumption. Normally, product and process innovations are interdependent. In the early stages of the product life cycle, product innovations tend to be rapid. As the rate of product innovation decreases, it is common to observe a faster rate of process innovation. But the relative importance of product and process innovation depends on the nature of the industry. What can organizations do to encourage and nurture an innovation driven environment? In his 1985 book “Innovation and Entrepreneurship,” Peter Drucker has listed seven sources of opportunity for innovative organizations. In order of increasing difficulty and uncertainty, they are:
• The unexpected success that makes a company happy, but is rarely dissected to see why it occurred.
• The incongruity between what actually happens and what was supposed to happen.
• The inadequacy in an underlying process that is taken for granted.
• The changes in industry or market structure that catch everyone by surprise.
• The demographic changes caused by wars, medical improvements and even superstition.
• The changes in perception, mood and fashion due to the ups and downs of the economy.
• The changes in awareness caused by new knowledge.
In his interesting article, “Bringing Silicon Valley Inside,” Gary Hamel has drawn various insights from the success of Silicon Valley and explained how innovations can be encouraged. Hamel draws a distinction between stewardship, (safeguarding existing skills and assets) and entrepreneurship, (creating something new). He feels that for innovations to take place, the emphasis must shift from resource allocation to resource attraction. What Hamel emphasizes is that good ideas should be encouraged with support in the form of capital and human resources. Like Christensen, he explains how traditional capital allocation processes are unsuited for radically new businesses: “Resource allocation is well suited to investments in existing businesses. If the goal is to create new wealth, something much more spontaneous and less circumscribed is required – something much more like resource attraction… Resource allocation is about managing the downside. Resource attraction is about creating the upside.”
Hamel feels that ideas flourish in Silicon Valley for three reasons. People are clear that only innovations can create new wealth, and not improvements in existing processes. In the Valley, a budding entrepreneur can try his luck with several VCs and tie up the funding. Lastly, there is no prejudice about who can or cannot
succeed. So, even brash upstarts with good ideas are well received by VCs. Hamel agrees with Christensen that innovative ideas and technologies/business models cannot be filtered through traditional financial screens. In his article, Hamel quotes Steve Jurvetson, one of the leading VCs in the valley: “The business plan is not a
contract in the way a budget is. It’s a story. It’s a story about an opportunity, about the migration path and how you are going to create and capture value. I never use Excel at work. I never run the numbers or build financial models. I know the forecast is a delusional view of reality. I basically ignore this. Typically, there are no IRR forecasts or EVA calculations. But I spend a lot of time thinking about how big the thing could be.” Hamel adds: “In most companies, the goal of capital budgeting is to make sure the firm never ever makes a bet-the-business investment that fails to deliver an acceptable return. But in attempting to guarantee that there’s never an unexpected downside, the typical capital budgeting process places an absolute ceiling on the upside. Dollars lost are highly visible but dollars forgone are totally invisible.”
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