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Innovation is first and foremost about reducing costs

It is often assumed that innovation is about bringing new offerings or methods to the market. In business, there would be a noble side, that of innovation, and a less noble one, that of managing operations. Nothing could be further from the truth. One of the most fundamental aspects of the free market system lies in its ability to reduce costs, and therefore prices.

In his monumental piece "Capitalism, Socialism and Democracy", still an essential read sixty years later, Schumpeter explains that innovation is not the capitalist system's distinguishing feature: other civilizations or political systems have been innovative in sime areas as well (think of space technologies in the former USSR or Law in ancient Rome). The real distinguishing feature of the system is its inherent ability to democratize innovation by making available new products to the masses. This is achieved both through its ability to organize efficiently but also and more importantly through the ability to decrease costs. In other words, the symbol of capitalism and innovation is not so much the start-up as Wal-Mart, the low-cost supermarket that saves Americans' mostly low-income customers about $50 billion a year. For these customers who struggle to make ends meet, it's something.

Schumpeter thus summarized the argument:"The capitalist engine is first and last an engine of mass production which unavoidably also means production for the masses... It is the cheap cloth, the cheap cotton and rayon fabric, boots, motorcars and so on that are the typical achievements of capitalist production, and not as a rule improvements that would mean much to the rich man. Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort. . . . the capitalist process, not by coincidence but by virtue of its mechanism, progressively raises the standard of life of the masses." (source)

Unlike what The Economist explains in their must-read article "The Silence of the Mammon", I don't think defending this system in the name of this formidable wealth creation and affordability is defensive or smacks appeasement. On the contrary, it's a perfectly valid argument as it does not pretend to bestow other responsibilities to this system than it is supposed to have.

The Economist conference: Fresh thinking for the innovation economy

On March 23-24, The Economist is organizing a conference called "Fresh thinking for the innovation economy".

A multi-part, multimedia, multi-continent forum, this event will expand and possibly overturn established thinking about what innovation is, where it comes from, and how to make it work. Some of today’s top global innovators will examine and iterate on the genesis of good ideas, the great challenges of the twenty-first century, the question of whether we live in a flat world, the costs and benefits of crowdsourcing, the power of social entrepreneurship, the role of government in catalyzing innovation, leveraging failure, finding innovation in a crisis, organizing the teams of tomorrow, the phenomenon of reverse innovation, the future of open innovation, and how old economy actors are being disrupted in the new economy. Whether the impetus is to improve customer relationships, develop new products and services, explore untapped markets, or improve efficiency, companies today must implement more than just an R&D strategy to survive and thrive. Regardless of geography or industry, an organization lives or dies by how it innovates.

Featured speakers

• Amar Bhidé, Professor, Kennedy School of Government, Harvard University
• Tim Brown, CEO, IDEO
• Ed Catmull, President, Pixar and Disney Animation Studios
• Clayton Christensen, Professor, Harvard Business School
• Jared Diamond, Author, Guns, Germs, and Steel
• Judy Estrin, President, JLabs
• Kris Halvorsen, Chief Technology Officer, Intuit
• Jacqueline Novogratz, Founder, Acumen Fund
• Michael Porter, Professor, Harvard Business School
• Paul Saffo, Visiting Scholar, Stanford Media X

The conference will take place at the Haas School of Business, University of California at Berkeley, USA.

Call for Papers: Tilburg Conference on Innovation

 Call for Papers - The Tilburg Conference on Innovation: Innovation at the Intersection of Strategy, Organization and Learning. June 10-12, 2010, Center for Innovation Research (CIR), Tilburg University, The Netherlands

Successful innovation is fundamentally about the discovery, use and commercialization of new products, processes and services. Organizations engage in innovation in order to enhance their performance; those that fail to innovate run the risk of losing out to those that do. But innovation as such does not guarantee competitive success, as the degree to which firms are able to benefit from their innovative efforts varies widely. This conference aims to explore the drivers and consequences of this heterogeneity. Innovation strategy involves a number of decisions regarding the nature and type of innovations to engage in, as well as the speed, openness, and flexibility with which the organizations respond to challenges.
Additionally, organizations experience a tension between routine and innovation, which implies that they need to balance the resources dedicated to explorative and to exploitative projects. In many respects, issues related to innovation strategy are inseparable from those related to the organization of innovation activities. 
To begin with, organizations face issues regarding the governance of innovation activities: whether to develop know-how in-house, in collaboration with other organizations, or to outsource it. Additionally, how organizations manage their portfolio of innovation activities and organize the innovation process is critical for success. The timeliness and successful commercialization of innovations are especially important. In
this sense, insight into organizational learning processes in innovative projects and organizations is also crucial to understanding their innovative
performance.   
Hence, the central theme of this conference will deal with innovation at the intersection of strategy, organization and learning. The Tilburg Conference on Innovation, hosted by the Center for Innovation Research at Tilburg University, is a forum in which scholars from intersecting research streams will come together to debate current research and gain insights into future trends. This will be a small conference with a maximum of 45 papers so that participants have the opportunity to receive quality feedback. Our aim is to
include participants from all over the world and to give equal opportunity to younger as well as established scholars, with quality of research being the predominant goal.  
We invite both theoretical and empirical papers that predominantly, though not exclusively, reflect some of the following issues:
*       What organizational capabilities are needed to deploy and govern
innovative activities effectively, especially in fast-changing environments
and across great distances?
*       How does organizational structure affect the learning inputs and
outcomes involved in innovation?
*       In what ways do networks of organizations contribute to the
development of innovations?
*       How do institutional forces affect the innovative performance of
organizations?
       
Any other contributions pertaining to innovation strategy, organization of innovation and organizational learning for innovation are also welcome.
There is no registration fee, and presenting authors will have their accommodation covered during their stay. An added attraction of the conference is the opportunity to visit the southern Netherlands in spring and sample the best local beers Belgium and the Netherlands have to offer.

Confirmed speakers/special guests include:
       
Bart Nooteboom   Will Mitchell    Andrew van de Ven      
Daniel Brass     Terry Amburgey  Maurizio Zollo  
Deborah Dougherty        Joe Lampel       Lee Fleming     
Arjen van Witteloostuijn        Keld Laursen    Gino Cattani    
Anna Grandori                  

Submission process:     
Please submit a full paper to [email protected] by February 15, 2010. Submission
guidelines can be found here.
Authors of accepted papers will be notified by March 15, 2010. 

The distinction between Radical and Incremental innovation is not relevant

The opposition between radical and incremental innovation is one of the enduring themes of the innovation literature, both academic and managerial. While incremental innovation consists in improving existing products, radical innovation is about inventing completely new product, or more precisely new product categories. They are new to the market, but also to the firm that creates them.

Clayton Christensen's seminal book, the "Innovator's dilemma" shows how incumbent companies take advantage of incremental innovation, which play on their strengths, but are disrupted by radical innovation. Names such as Kodak, NCR, Digital Equipement, for instance, come to mind when evoking the innovator's dilemma syndrome.

Initially, Christensen framed the discussion in terms of technologies, building on the S-curve framework, (introduced by Foster) which describes the non-linear progression of a technology in terms of performance. In the beginning, the new technology - say the automobile - is less performing than the old one - say the horse - on the key dimensions (reliability, speed, simplicity for instance). But it gradually improves, slowly at first, then more quickly until the time it becomes more performing than the old one. At this stage, the new curve breaks past the old one and the old technology is abandoned. However, several counter examples showed that there were incumbent companies able to withstand a disruption by a radical innovation, and sometimes even thrive on it. IBM is a good example, having gone through at least five major radical changes in its environment (mainframes, minis, PCs, product to service, open source). The distinction between radical and incremental is therefore not a relevant categorization to explain why in some cases, incumbents fail and in others incumbents survive and thrive.

Later on, Christensen refined the theory and defined the issue in terms of sustaining versus disruptive innovation. By that he meant that what matters in a disruption is whether the incumbent's business model can leverage the disruption or not. For instance, mobile telephony is really a radical innovation, a completely new category both to the users and to the operators. However, many competencies required to manage a mobile business are very close to those required to manage a fixed line network. In that sense, mobile telephony is not disruptive to the fixed telcos, but sustaining. This is why in most countries, the incumbent mobile operators are also the incumbent fixed line operators.

If, however, the disruption is incompatible with the business model, then the incumbent is in trouble. This is the case, for instance, with SAP. SAP's is in the business of selling very complex IT systems able to manage the complete business of large, global companies in an integrated way. A typical price tag runs in the millions of US dollars. SAP's business model is a combination of license fee for the software and service fees (development, maintenance, training, etc.) In addition, an army of consulting firms live off this business by selling their own services. A few years ago, a disruption started to develop in the form of Web-based IT solutions, a typical leader being Salesfore. Because it is a pure Web solution, Salesforce is sold as a service (subscription) for a few dollars per month. Salesforce is certainly not as sophisticated as SAP, but for small and medium business it is good enough, especially because you can sign up and start using it in less than five minutes, and one doesn't need any infrastructure or service provider. The real problem for SAP is that its market is saturated and it needs to grow, so the untapped market of small to medium business is appealing. So SAP wants to go downmarket. But Salesforce, being established in the low end of the market, also needs to grow, and by tapping the upper side of its existing market, it can get higher margins. So Salesforce improves its product. Hence the collision course between SAP, going down, and Salesforce, going up.

The real problem, as Christensen remarks, is that it's always easy to go up (same cost base, increased margins therefore very beneficial, and shareholders are happy) but very difficult to go down (same cost base, lower margins, reluctant sales people and partners, unhappy shareholders). SAP's way to address the lower end market is to create a cut-down version of its product, but the motivation to sell it is not there. SAP could also create a clone of Salesforce (they actually have a Web version); the problem is not a lack of competencies. But the result would be the same. Put otherwise, SAP's business model is not compatible with a lower end segment: customers are different, its sales force is not adapted to small sales, the distribution network is different, etc.

As a result, SAP is locked into its existing business model, and cruises in a frenetic inertia mode, while Salesforce grows and grows, moving up in terms of segments. It's unlikely that Salesforce will ever target very large, global companies, but it certainly will be very happy with the rest of the market, which probably represents 90% of the total. SAP will have been reduced to a high-end, highly profitable small niche, just like Apple was in the PC sector. Not a bad place to be, but certainly a missed opportunity to reach mass market.

Getting to plan B

Getting to plan B, by John Mullins and Randy Komisar, is an important book. In short, the thesis of the book is that successful startups very often had to change their initial business plan. To quote Mullins and Komisar: "If the founders of Google, Paypal or Starbucks had stuck to their original business plans, we'd likely never had heard of them." The startup process, largely driven by poorly conceived business plans based on untested assumptions, is seriously flawed. And the authors to give a few interesting examples of business plans changes that were successful. If only for this, the book is important because, despite many criticisms, business planning remains the cornerstone of entrepreneurship courses at business school, and well honed business plans are a must-have to pitch venture capital. The fact that no business plan survives the first encounter with reality seems to bother no one in industry. Importantly, the flaw does not lie in some limitations of the planners. In other words, it is not because of poor planners that business plans are useless, or even harmful. It is the very process of planning that is problematic. Behind the notion of planning lie the idea that to control the future, we need to predict it. However, recent research on entrepreneurship by Sarasvathy (see the concept of effectuation) showed that in uncertain environments, it is simply not possible to predict the future. Hence prediction is really a gamble.

Continue reading "Getting to plan B"

Workshop on Innovative business models in the digital economy

On December 18th, the Innovation and regulation in digital services Chair created by Orange, Ecole Polytechnique, and Télécom Paris Tech organizes a workshop on innovative business models in the digital economy: Chinese and European Ways.

The digital economy is now in search of new business models. More and more frequently, new services are offered even if the sustainability of their operation is not ensured: innovators are seeking formulas that will put in front of the production costs of these services, revenue that the market will accept to generate.
Moreover, on activities in increasing numbers, different business models are often tested. We see competition arising between business models: the competition has shifted from services to business models that can make consumers solvent. The innovation concerns now the business models as well as the products themselves. Product innovation, process organization and market design must from now on combine in innovative business models.
This workshop has two aims: firstly, to address innovation in terms of business models, analyze this emerging market of business models, and attempt to characterize the business models involved in the digital economy, and secondly, produce this analysis from two types of markets responding to different logics, the European market and the Chinese market.
This cultural comparison around the business models should provide an interesting field not only for studying the innovation processes at work on business models, but also to better identify structures that could allow their classification.

The workshop takes place in Paris. Registration is free here.

Effectuation workshop at Vlerick School

On 7 and 8 December 2009, IMD and Vlerick Leuven Gent Management School invite scholars and instructors from across Europe to come to Ghent, Belgium to share their experience, learn from colleagues and co-create the future delivery of effectuation for aspiring entrepreneurs.

Effectuation is a logic of entrepreneurial expertise, developed from a cognitive science based study of 27 founders of companies ranging in size from $200 million to $6.5 billion. Effectuation articulates a dynamic and interactive process of creating new artifacts in the world.  Effectual reasoning is a type of human problem solving that takes the future as fundamentally unpredictable, yet controllable through human action; the environment as constructible through choice; and goals as negotiated residuals of stakeholder commitments rather than as pre-existent preference orderings (Source: www.effectuation.org).

The workshop is run by Stuart Read, from IMD, and Miguel Meuleman and Jan Lepoutre, from Vlerick.

The workshop is organized with the support of Flanders DC.

Adademic Enterprise Award

The Academic Enterprise Awards (ACES) will take place on December 10th in Paris. ACES is the only pan-European programme to recognize entrepreneurship at academic institutions. ACES is a mixture of keynote speeches, roundtable discussions, and networking opportunities.

Speakers inlcude:

• Jean-Philippe Courtois, President, Microsoft International, Senior Vice President, Microsoft Corp.
• Bart Gordon, United States Congressman, Chairman of the Committee on Science and Technology in the U.S. House of Representatives
• David Eyton, Group Vice President, Research and Technology, BP
• Cyrille van Effenterre, President of ParisTech.

In addition, ACES organizes awards. The awards gives public recognition to those researchers, engineers, professors, students and government officials in Europe who have done the most in 2009 to foster a culture of enterprise on campus. This can be through taking the risk of launching a spinout company, developing a discovery into a marketable innovation (at the risk of the tenure-track publication record), or promoting policies that create a receptive environment for entrepreneurship on campus.

For more information: ACES.

New book: Getting to Plan B: Breaking Through to a Better Business Model

If the founders of Google, PayPal, or Starbucks had stuck to their original business plans, we’d likely never have heard of them. Instead, they made radical changes to their initial models, became household names, and delivered huge returns for investors. How did they get from their Plan A to a business model that worked?  Why did they succeed when most new ventures crash and burn?

John Mullins and Randy Komisar argue that the startup process, largely driven by poorly conceived business plans based on untested assumptions, is seriously flawed. But there is a better way to launch new ideas—without wasting years of your time and loads of investors’ money.

In Getting to Plan B, Mullins and Komisar present a field-tested process for rigorously stress-testing your initial business idea, and using the evidence you uncover to make swift corrections that tip the business equation in your favor. Focusing on five elements that determine any business model’s economic viability— its revenue, gross margin, operating, working capital, and investment models—the authors’ approach significantly reduces your risk of failure by:

• Comparing your idea with existing models to steal what works, avoid what doesn’t, and add improvements
• Identifying “leaps of faith”: the as-yet-untested questions you are banking your business on
• Conducting fast, inexpensive, data-driven experiments to support or refute those questions
• Using this data to make smart strategic changes and course correct before it’s too late  

Through examples from their first hand experience and research in businesses around the world, Mullins and Komisar reveal how companies have used such systematic experimentation to transform their current business into a viable Plan B. Whether launching a new venture in the marketplace or inside your company, Getting to Plan B will help you replace assumptions with evidence—and vastly improve your odds of success.

John Mullins is the author of the business best-seller, The New Business Road Test, and an Associate Professor of Management Practice at London Business School
Randy Komisar is the author of the critically acclaimed best-seller, The Monk and the Riddle, a partner at Kleiner Perkins Caufield & Byers, and a lecturer on Entrepreneurship at Stanford University

Find the Amazon reference here.