!DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Strict//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-strict.dtd"> Streamline Training & Documentation: What drives radical innovation?

Thursday, July 19, 2007

What drives radical innovation?

Prompted by a one-page write-up in the Summer 2007 issue of the MIT Sloan Management Review, I've had a look at an intriguing working paper by Gerard J. Tellis, Jaideep C. Prabhu, and Rajesh K. Chandy (TPC), "Innovation in Firms across Nations: New Metrics and Drivers of Radical Innovation" (pdf).1

I was most interested in what TPC had to say about the role of company culture in promoting radical innovation, which they define as
the commercialization of new products that are based on substantially different technology and provide substantially higher customer benefits relative to existing products in the market.
As examples, TPC cite the microwave oven and the compact disc. Radical innovation is important for its impact on consumer welfare and on growth, both at the firm level and at the national economic level.

TPC define culture as
the set of values, aspirations, traditions, and protocols of a group of people which regulate their interpersonal relations and their attitude to their environments.
They look at two aspects of firm culture:
  • Attitudes — measured in terms of willingness to cannibalize current assets (reduce past investments' value), future market orientation (extent of emphasis on customers and competitors who are not currently in the markets the firm serves), and tolerance for risk.


  • Practices — measured in terms of incentives (monetary and non-monetary rewards for innovation), support for product champions (employees who aggressively pursue new product ideas), and internal markets (level of internal autonomy and internal competition among the firm's business units).
TPC's analysis of survey and archival data2 leads them to conclude that the internal culture of a firm is the strongest driver of radical innovations. More precisely,
the effects of future market orientation, willingness to cannibalize, and tolerance for risk are particularly strong. While the effects of incentives and product champions are relatively weaker, they are still significantly larger than zero.
Only the internal markets variable did not pan out as a significant driver of radical innovation.

The other finding TPC emphasize is the importance of measuring innovation in terms of final outputs, such as radical innovation, not in terms of intermediate outputs, such as patents, nor in terms inputs, such as R&D.

From their research, TPC conclude, "Commercialization of radical innovations has an important impact on a firm's financial performance and as such is a more valid measure of innovation than patents." However, TPC also find that "R&D has a strong and significant effect on market-to-book ratio [their measure of a firm's financial performance], even after controlling for radical innovations. This effect reflects markets' expectation of the future returns to current expenditures on R&D." TPC acknowledge that their results make it clear that firms must deploy R&D resources in order to achieve radical innovation.

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1 Gerard J. Tellis is Director of the Center for Global Innovation, Neely Chair in American Enterprise and Professor of Marketing, Marshall School of Business, University of Southern California, Los Angeles. Jaideep C. Prabhu is Professor and Chair of Marketing, Tanaka Business School, Imperial College, London. Rajesh K.Chandy is Carlson School Professor of Marketing, Carlson School of Management, University of Minnesota, Minneapolis.

2 The companies studied were in 17 large and/or populous economies: the US, Canada, UK, Germany, France, Italy, Switzerland, Netherlands, Sweden, Australia, Japan, China, Taiwan, Hong Kong, India, Korea, and Singapore. The data covered only manufacturing companies; TPC intend to do similar research on service companies. They also intend to refine their metric for innovation by moving away from a survey-based measure to a broader measure that draws on news reports and public databases.

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