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Published in Ivey Business Journal | January – February 2024
The literature on innovaon in business is
extensive—but not just because of its
importance. The signicant aenon innovaon
aracts stems partly from the fact that most
organizaons struggle to successfully do it. And
when it comes to oering aconable advice on
how to innovate eciently and consistently, the
exisng literature oen misses the mark, overly
focusing on high-prole successes and the
process of innovaon while emphasizing
transformaon via technology.
This is understandable, especially in the digital
age. But to improve how organizaons develop
and commercialize innovaon, our experience
has led us to conclude that much more
aenon needs to be paid to the primary role
played by human beings along with the
importance of applying general principles—such
as learning from failure and being open to
collaborang with competors.
Over the past several years, we have conducted
in-depth research on innovaon eecveness.
This work included primary research at 50
companies (in industries spanning consumer
products, energy, life sciences, high technology,
and nancial services) and extensive secondary
research and analysis on innovaon successes
and failures. It also included a survey of 758
execuves from more than 380 companies. And
according to our ndings, successfully and
Unlearning to Innovate
Why building an innovave corporate culture requires
focusing on people rather than technology
By Jonathan Hughes, Jessica Wadd, and Drew Roberts
Unlearning to Innovate
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Published in Ivey Business Journal | January – February 2024
consistently innovang requires unlearning a
number of common behaviours and ways of
thinking. Success also requires directly
confronng the costs and risks of innovaon,
and careful consideraon of when, and when
not, to apply dierent innovaon strategies.
By reframing a false dichotomy between open
and proprietary innovaon, and rebalancing
their focus on organizaonal culture and
people, companies not only increase innovaon
but, more importantly, also increase
compeve advantage and commercial benet
derived from innovaon.
Here are nine strategies to maximize revenue
returns on innovaon investment.
EMBRACE “SMART” FAILURES
The bromide that innovaon requires
embracing and celebrang failure is widespread
but honoured more in the breach than in
pracce—despite an extensive body of research
that supports the important role failure plays in
the innovaon process. For example, in their
2019 arcle “The Risk of De-Risking Innovaon,”
Donald Drakeman and Nektarios Oraiopoulos
make a compelling case that because “fast and
frequent failures are the precursors of novel
products, organizaons could benet by
creang mechanisms that encourage them.”
Indeed, in our research we found unanimous
and strong support from leaders at all levels for
the importance of failure in generang
innovaon. We also found at every company
that individuals at all levels felt that failures
were usually punished and hardly ever
celebrated or rewarded. What explains the
dissonance?
The reality is that many failures do not
contribute to innovaon, and rightly deserve
censure, not celebraon. Think of the
Challenger space shule disaster. No
organizaon, and no leader, can follow a general
precept of celebrang failures. Unless a clear
disncon is made between producve and
wasteful failures and is eecvely
communicated throughout an organizaon,
people will noce, and focus too much on,
apparent inconsistencies when failure is
punished. Carefully arculang what makes a
failure worthy of praise and reward, and what
constutes the kind of failure that will be
cricized and penalized, is an essenal task for
leaders in any organizaon that wants to
movate the kind of experimentaon and risk-
taking that innovaon requires (see Figure 1 for
examples of “good” versus “bad” failures).
FIGURE 1
“Bad” versus “good” failures.
Unlearning to Innovate
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Published in Ivey Business Journal | January – February 2024
FIGURE 2
Company culture related to risk-taking and “mistakes”
Our research indicates that companies where
leaders deliberately culvate a culture of “smart
risk-taking” achieved a 40 per cent increase in
revenue compared to companies with risk-
averse cultures.
RETHINK “SUCCESS”
A corollary to celebrang and rewarding
producve failures is reorienng noons of
success. Consider the high-risk/high-cost
domain of space exploraon. Eorts to develop
new, innovave rocket designs have tradionally
focused on ensuring “successful” launches.
Aer all, the cost of building an inial
prototype, coupled with the further cost of
delay if a test mission fails, is (pardon the pun)
astronomical. Hence, a rocket exploding is a
failure so costly that virtually any eort and
expense is jused to avoid it. Boeing has
connued this paradigm. SpaceX has followed a
completely dierent approach.
Two days aer SpaceX’s SN1 prototype burst
apart during a pressure test on February 28,
2020, company CEO and chief engineer Elon
Musk posted a video of the explosion, then
tweeted, “It’s ne, we’ll just bu it out,”
followed by, “Where’s Flextape when you need
it?” This insouciance demonstrates a startling
comfort with (apparently) costly failures.
Coming from an outsized personality like Musk,
such comments garner a great deal of aenon.
But principal integraon engineer John
Insprucker’s comment, made during a company
webcast aer SN9 exploded upon impact at
landing, is even more revealing: “Again, we’ve
just got to work on that landing a lile bit. We
got a lot of good data, and the primary
objecve—to demonstrate control of the
vehicle in the subsonic re-entry—looked to be
very good, and we will take a lot out of that.”
This reconceptualizaon of “success” to be
about the value of learning, versus the
tradional view of end-to-end perfecon, is at
the heart of SpaceX’s approach to innovaon in
an industry that always thought the cost of
“failure” required a commitment to total
“success.”
PAY ATTENTION TO PEOPLE
Two-thirds of CEOs surveyed by the Korn Ferry
Instute in 2016 said they believed technology
will create greater value in the future than their
workforce will, and 44 per cent believed that
automaon, arcial intelligence, and robocs
will make people “largely irrelevant” in the
years to come. We believe this reects a
conaon of cause and eect (and perhaps an
infelicitous phrasing of the survey queson).
Unlearning to Innovate
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Published in Ivey Business Journal | January – February 2024
New technology connues to deliver enormous
benets to humanity as it has for thousands of
years. Someday, arcial intelligence may
indeed generate valuable innovaons on its
own. We are far from that day. Meanwhile,
human beings are the source of innovaon, and
technology is the fruit of human creavity.
Human beings are also essenal to the eecve
deployment and use of new technology.
The innovaon journey that led from the Sony
Walkman to the Zune to the iPod and to the
iPhone was one of human ingenuity. The iPod
did not create the iPhone. The iPhone resulted
from a long chain of innovaon involving myriad
human beings, and its success in the
marketplace required the collecve eorts of
thousands of individuals in roles spanning
nance, markeng, and supply chain
management. Harnessing the collecve
brainpower of the people in an organizaon
leads to faster innovaon, beer products and
services, and more prot. Rapidly evolving
technologies like AI and machine learning
should be viewed not as replacements for
human judgment and creavity, but as ways to
enhance human potenal.
A fascinang case study of human–machine
collaboraon occurred at a 2005 “freestyle”
chess tournament hosted by Playchess.com.
Compeng teams could include any
combinaon of human players and computers.
One might have expected the winning team to
comprise a Grandmaster paired with a state-of-
the-art supercomputer. Instead, two American
amateurs working with three computers came
out on top. Chess legend Gary Kasparov
interpreted the result in a 2021 Harvard
Business Review arcle as follows: “Weak
human + machine + beer process was superior
to a strong computer alone and, more
remarkably, superior to a strong human +
machine + inferior process.”
In 2020, re manufacturer Yokohama Rubber
announced its HAICoLab (which stands for
“Humans and AI Collaborate”) plaorm.
According to Masataka Koishi, head of the AI
Laboratory at Yokohama Rubber, “It’s a
framework that emphasizes collaboraon
between humans and AI. The ‘HAICoLab loop’
greatly improves the probability of radical
innovaon, as well as promong the growth of
our engineers.”
A misguided focus on technology as the primary
source of a company’s value inevitably leads to
an underappreciaon of, and underinvestment
in, human capital. The average individual
worker’s lifeme work today spans 40 to 50
years. According to Forbes, me-to-
obsolescence for web-enabled services was
three to ve years 15 years ago; today, it is just
14 to 18 months. If you do the math, that is 26
to 42 innovaon cycles the average worker will
go through in their lifeme.
With innovaon cycles shortening, so too are
the life cycles of companies. Corporaons in the
S&P 500 Index in 1965 stayed in the index for an
average of 33 years. By 1990, the average
tenure in the S&P 500 had narrowed to 20 years
and it is now forecast to shrink to 14 years by
2026. Meanwhile, human lifespans connue to
increase. The average number of jobs in a
lifeme is about 12, according to a 2019 United
States Bureau of Labor Stascs (BLS) survey of
baby boomers. In its 2020 Employee Tenure
Summary, the BLS reported that the median
employee tenure was 4.3 years for men and 3.9
years for women. The success of an organizaon
is more dependent than ever on its people, and
on movang and enabling them to contribute
to connuous innovaon.
SOURCE IDEAS, NOT JUST “STUFF”
The discipline of strategic sourcing, by now
pracsed in some variaon by almost every
company, is predicated on an exchange-based
model where customers dene their needs and
pay suppliers to fulll them. A “best” pracce is
to dene very detailed and ghtly dened
specicaons for those needs, then invite
suppliers to provide price quotes and submit
proposals explaining their qualicaons to
deliver on required specicaons. There is
Unlearning to Innovate
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nothing wrong with this model, and there are
indeed many benets to being clear, internally
and with potenal suppliers, about exactly what
is needed.
The problem is that the standard customer–
supplier paradigm ses rather than catalyzes
innovaon. Even very small companies oen
have dozens if not hundreds of suppliers; large
companies have thousands. The combined R&D
expenditures, patent porolios, knowledge of
marketplace trends, and individual technical
experse across those suppliers dwarf the
knowledge assets and innovaon capabilies of
any single organizaon. Tapping into the
innovaon of a company’s supply chain requires
a dierent mindset and dierent pracces. A
paradigm shi toward sourcing innovaon is
required. This shi requires rethinking the
tradional relaonship between a company and
its suppliers (see Figure 3).
Leveraging tradional pracces for sourcing and
purchasing external goods and services, and a
focus on reducing costs, will always be
important. But they must be augmented by new
approaches to deepen engagement with select
suppliers, create space for them to share
creave ideas, and reward them for delivering
unique soluons. Even in highly cost-
compeve industries, success increasingly
comes not from extracng lower prices from
suppliers than competors pay, but by ensuring
that a company gets a disproporonate share of
suppliers’ best talent, ideas, and investments.
Consider an industrial company we worked
with, where regular maintenance of chemical
manufacturing and storage tanks constuted a
major expenditure with suppliers. Historically,
the company sourced carefully specied
services, including the seng up of scaolding
for maintenance workers, cleaning and
maintenance acvies, and the breakdown and
removal of scaolding once complete. What
happened when they began to source
innovaon? They engaged suppliers without
providing detailed requirements. Instead, they
shared—under condenality agreements—
dierent informaon with potenal suppliers
than they had ever shared before: about their
business model, manufacturing processes, and
producon schedules and bolenecks. They
then asked their suppliers for new and beer
ways to maximize producon up-me and
reduce operang costs.
Most suppliers oered proposals and bids
similar to those they had provided in the past.
But one supplier noted that it was prototyping a
new portable elevator system and oered that
this might eliminate the need for scaolding set-
FIGURE 3
Two views of sourcing
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Published in Ivey Business Journal | January – February 2024
up and breakdown. The supplier’s bid was more
expensive—but it reduced maintenance me
(and thus lost producon me) from weeks to
days. The increase in revenue made up for the
increased cost many mes over.
SHARE, DON’T HOARD
Winning the innovaon game requires more
than developing innovave oerings for the
marketplace, it also requires determining how
to maximize the revenue and prot from such
innovaon. This in turn requires rethinking the
costs and benets of dierent strategies for
“protecng” intellectual property, trade secrets,
and other forms of innovaon. The exclusive
ability to produce and sell innovave products
or services is valuable; it creates pricing power
and delays commodicaon. But no innovaon
is valuable forever. Innovaons age out, as new
innovaons render prior ones obsolete.
Focusing on this reality is the rst step in
assessing how to maximize the value realized
from innovaon.
Consider a well-known nancial services
company that had developed a highly
dierenated vericaon soluon based on a
unique data asset. The president of the business
unit that had developed this soluon believed
that oering it to competors to resell was the
best way to maximize the speed and breadth of
marketplace adopon, and thus maximize
nancial returns for the company and its
shareholders. Most other senior execuves
were aghast. “We can’t possibly share our most
innovave product with our competors. We
will enable their success by cannibalizing our
own sales! We need to fully leverage the power
we have from this soluon to drive sales of our
other, less dierenated oerings.” The small
conngent in favour of a relavely open
distribuon model pointed out that holding
their unique vericaon soluon hostage, as a
way to movate customers to buy other
soluons from the company versus its
competors, smacked of extoron. “We might
gain some addional sales by forcing some
customers to buy X from us when they would
rather buy X from a competor, because only
we can sell them Y, but that will certainly
generate resentment and ill will. Customers will
look for every opportunity in the future to move
away from us.”
Extensive debate and analysis led the company
to ip the compeve paradigm on its head. By
giving competors access to resell its
vericaon soluon, the company confronted
them with a choice: invest heavily to develop a
compeve soluon (with high uncertainty
about success) or generate substanal
immediate prot at zero risk by acng as sales
channel partners. At the same me, the
company could leverage the sales forces and
market penetraon of competors in order to
deliver its innovaon to more customers, faster,
and maximize market penetraon. Meanwhile,
compeon would connue unabated in the
marketplace for many other soluons. But at
least for a me, an innovave vericaon tool
would be broadly distributed by competors,
beneng the company, its competors, and all
their customers.
By creang a reseller pricing structure that
opmized benet for the company while
creang sucient value for competors, the
company was able to maximize the value of its
innovaon. In the ve years following the
company’s shi in strategy, revenue from the
soluon increased 149 per cent, versus a 46 per
cent increase in revenue during the preceding
ve-year period, during which the company did
not enable third-party sales and distribuon.
This situaon highlights another innovaon
paradox we have observed in numerous
situaons. On the one hand it is natural, and not
altogether wrong, to try to protect innovaons.
Companies that invest in innovaon need to
earn an aracve return on those eorts. If a
company represents the only route to access
the innovaon, then it not only reaps all
returns, it also limits price compeon and
reduces the risk of rapid commodicaon. But
in most situaons, enabling (some) other
companies to market and distribute an
Unlearning to Innovate
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Published in Ivey Business Journal | January – February 2024
innovaon not only is a faster path to market
adopon—it also means broader penetraon of
the market than a single company can ever
achieve on its own.
But surely it’s self-defeang to share innovaon
with direct competors—despite the benets of
distribung innovaons through channel
partners, resellers, or perhaps embedding
innovave technology or features as part of
another company’s products?
In their 2019 arcle “Managing Knowledge
Sharing-Protecng Tensions,” Audrey Rouyre
and Anne-Sophie Fernandez argue that sharing
knowledge with your competors “[exposes a
company] to high risks of knowledge leakage,
opportunism, and unwanted spillovers. The
knowledge shared within a common project can
be used by one competor against another and
can damage rm compeveness.” Too oen,
this is the mindset that wins out as execuves
debate strategies for monezing innovaon, as
in the vericaon soluon example recounted
above. Usually overlooked is the fact that
enabling competors to benet by selling or
otherwise distribung that innovaon greatly
reduces their incenve to invest in further
compeve innovaon.
In other words, by sharing innovaons with
competors, companies are likely to extend the
eecve lifeme of the innovaons they
develop, and thus their total prots.
COLLABORATE WITH COMPETITORS
The noon of coopeon—collaborang with
competors—was popularized by a 1996 book
by Yale School of Management Professor Barry
Nalebu and NYU Stern School of Business
Professor Adam Brandenburger. Twenty-ve
years later, this pracce remains relavely rare.
“It is sll oen seen as a last resort,”
Brandenberger noted recently. This is consistent
with our research and experience. The refrain
“We can’t possibly do that—we’d be enabling a
competor!” is pervasive, and substanally
limits collaborave innovaon with compeve
companies.
Innovaon ROI equaon (Vc) × (Nc) × (Trv)
The value realized in the marketplace from an
innovaon is the revenue/prot captured from
each customer, mulplied by the number of
customers from which that value is captured,
mulplied by the me for repeated value
capture from the same customers (through
repeat purchases, subscripon pricing, etc.). To
maximize innovaon using this basic equaon,
companies must analyze each of these three
variables in depth under dierent scenarios. For
example:
▪ How much less value will the company
capture when a customer purchases its
innovaon from a third party, versus
when it sells and delivers that
innovaon directly to a customer?
▪ How many sales—which the company
otherwise would have made—will be
lost to cannibalizaon by third pares?
▪ How many more customers would pay
for the innovaon, over any dened
me frame, if it were available from
third pares instead of only from the
company that developed it?
▪ How quickly and by how much will the
value of the innovaon diminish if
competors are not enabled to gain
value from it through reselling or
distribuon partnerships—and thus
they opt to invest (more, and sooner) in
developing compeng innovaons?
Part of the problem is that compeon
between companies is too oen viewed as zero-
sum. If we assume anything that benets a
competor will harm us, and allow fear or
frustraon to shape our thinking, we blind
ourselves to a wide array of scenarios where
collaboraon with competors can deliver
mutual benet. Alternavely, if we embrace
constant and ever-shiing currents of
compeon as a catalyst to improve and
innovate, we expand our strategic opons and
agility.
Unlearning to Innovate
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Another challenge is that managing coopeon
is just plain hard. Only 28 per cent of
parcipants in our research rated their company
as highly eecve at managing coopeon.
Even among those that expect collaboraon
with external partners to drive more than 75
per cent of their future growth, 69 per cent of
respondents sll rated their company as only
somewhat eecve or not eecve at managing
coopeon—even though they expected
signicant compeon with many partners. The
expectaon of heavy reliance on external
partnerships, including with competors, and
thus presumably a signicant movaon to
gure out how to do it well, is not sucient to
ensure eecve management of coopeon.
Yet some companies do report being highly
eecve at managing coopeon, and their
nancial performance indicates they are onto
something. Companies that reported the most
extensive use of partnerships with competors
to address compeve threats saw the value of
their stock increase by 24 per cent during the
prior four years (more than twice the average of
all companies in our study). Respondents
reporng that their companies are “very
eecve” at managing coopeon (at
collaborang with other companies while also
compeng with them) saw twice the revenue
growth compared to those who rated their
companies as “not eecve.”
Successful companies employ dierent models
and pracces for managing coopeon-based
partnerships, but they are united by similar
organizaonal mindsets—as, conversely, are
those companies that struggle with coopeon.
To a large extent, the dierence comes down to
those companies that partner with competors
as an absolute last resort, and those that view
coopeon as a pervasive feature of business
relaonships and a challenge to be managed,
but not an existenal threat to be avoided at all
costs.
Our data indicate that the “coopeon-
comfortable” companies consistently achieve
beer results from partnerships with
competors than do “coopeon-averse”
companies. In part, this is due to a form of
selecon bias, but a self-fullling one. At
companies where coopeon is viewed as
highly risky and undesirable, partnerships with
competors are entered into under precisely
the condions where they are least likely to
succeed. Extreme pressures have made the
near-unthinkable unavoidable. Companies that
FIGURE 4
Eecveness managing coopeon has a direct impact on revenue growth
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Published in Ivey Business Journal | January – February 2024
feel themselves forced into such arrangements
are almost always in a severely weakened
condion relave not only to the marketplace,
but also to their (compeve) partner.
By contrast, coopeon-comfortable companies
regularly enter into coopeon-based
partnerships not out of desperaon, or a
posion of weakness, but from a posion of
strength. The marketplace and structural factors
surrounding many of these partnerships are
more conducive to success from the outset. In
the accompanying table (Figure 5), we
summarize atudes about, and approaches to,
coopeon that arise from two very dierent
organizaonal mindsets.
LOOK OUTSIDE YOUR COMPANY AND YOUR
INDUSTRY
Henry Ford got the idea for his revoluonary
assembly line aer touring a Chicago
slaughterhouse. “The fastest way for
organizaons to make sense of the challenges
they are seeing for the rst me is to survey
unrelated elds for ideas that have been
working for a long me,” noted Fast
Company magazine co-founder Bill Taylor in a
recent arcle.
Innovaon, by denion, entails new and non-
obvious soluons to a problem, as well as
meeng customer needs that previously were
not even recognized. So, it stands to reason that
FIGURE 5
Contrasng coopeon mindsets
Companies that are not eecve at
managing coopeon
Companies that are highly eecve at
managing coopeon
View partnerships with competors as a last
resort, and embark on them with one foot out
the door
Regularly consider coopeon as a strategic
opon and commit themselves to success when
they enter into partnerships with competors
Expect partners to act counter to their own
self-interest
Expect that any partner will, and should, act to
maximize their own success
Do not fully explore how compeve overlaps
will be managed, and fail to align around clear
rules of engagement with partners
Dene clear rules of engagement to prevent
compeve interacons from undermining
collaboraon
Aribute problems to partner acons and
compeve overlap with partners
Aribute problems to the inherent diculty of
partnerships in general and to marketplace
challenges
Evaluate the results of partnerships with
competors against unrealisc, and oen
vague, expectaons
Evaluate the results of coopeon-based
partnerships against clearly dened goals and
realisc alternaves
Assume that an increase in compeon with a
partner indicates failure
Assume that the scope and intensity of
compeon with a partner is likely to change
over me and might well increase
Unlearning to Innovate
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FIGURE 6
Key dierences between biopharma and digital companies
many of the most signicant and valuable
innovaons will come from combining very
dierent perspecves and experse. That is a
major reason why external innovaon from
collaboraon with other companies proves so
eecve. Moreover, our research suggests that
going further, and acvely engaging in
collaboraon with companies in other
industries, has the potenal to amplify that
eect. Yet there are relavely few examples of
transformave innovaon coming from cross-
industry collaboraon. To explore why this
might be, we took a close look at the bio-
pharmaceucal industry.
Pharmaceucal companies have long relied on
external collaboraon to drive innovaon. Large
companies (those with annual revenues greater
than US$1 billion) accounted for more than 50
per cent of new drugs approved from 2009 to
2021 and an even greater share of revenues,
but they have only iniated about 20 per cent of
drugs currently in Phase III clinical trials; the rest
are the result of the pharmaceucal companies’
collaboraon with smaller bio-techs and other
external partners.
Over the past several years, biopharma
companies have increasingly looked outside
their own industry, in parcular to high-tech
companies, to achieve addional innovaon.
The strategic partnership between GSK and
23andMe is a notable example. This alliance
leverages GSK’s experse in developing and
commercializing medicines, combined with
23andMe’s extensive and growing database of
genec and phenotypic data, and its advanced
data science skills. But even with the pervasive
emphasis on digital transformaon in almost
every industry, such collaboraons sll are
relavely rare. Key reasons for this are the
profound dierences between biopharma and
high-tech companies, as summarized in the
table in Figure 6.
The great paradox of cross-industry innovaon
is this: The very dierences that promise
breakthrough innovaon also make
collaboraon that much more dicult. As
Graham Kenny noted in his arcle “Dialing Up
the Volume on Strategic Innovaon,” managers
oen lack the authority or mandate to step out
of their industry box. “Doing what you’ve always
done and in accordance with industry standards
and expectaons is far easier and more
comfortable than looking into other industries,”
Kenny commented. Harnessing the innovaon
potenal in cross-industry partnerships requires
investments to build competencies to navigate
and leverage dierences—including diering
business models; diering organizaonal
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operang systems; and the individual experse
and perspecves of senior execuves, project
managers, and individual contributors.
Despite the dicules, cross-industry
collaboraon is on the rise. For example, in
2019, Bristol Myers Squibb (BMS) entered into a
US$100 million-plus, mul-year development
agreement with ConcertAI to jointly idenfy
new potenal indicaons for BMS’s drug
pipeline. ConcertAI, a data and machine
learning company, owns signicant amounts of
paent data and has developed proprietary
algorithms to analyze this data. The
combinaon of BMS’s experse in drug
discovery and development and ConcertAI’s
data assets and digital technologies holds the
promise of breakthrough innovaon—more
novel therapies developed more quickly and
more eciently than could be accomplished
through tradional drug development. Working
together in the face of signicant dierences
proved extremely challenging at rst, but the
alliance is beginning to bear fruit. The two
companies have been able to increase the
eciency of pre-clinical research and reduce the
me and cost to launch clinical trials through
enhanced data analycs and automaon.
Another example of expanding innovaon
horizons beyond industry boundaries is LEGO.
For years, LEGO has focused on increasing sales
through new product lines that expand its core
business and aract new customers. In the case
of its Star Wars collaboraon, the co-branded
product was also parlayed into its own video
game series. LEGO’s collaboraon model with
Disney also covers addional assets like Indiana
Jones and Pirates of the Caribbean. Its cross-
industry partnership with Nintendo led to the
creaon of LEGO Super Mario—an innovave
combinaon of physical-world LEGOs that are
used to mirror the Super Mario video game,
along with a Bluetooth-connected app to enable
social gaming. LEGO has also entered into
collaboraons with IKEA and Adidas to bring
crossover products to market. Since 2003, LEGO
has increased its revenue 552 per cent, or 33
per cent year over year.
GO BEYOND THE TANGIBLE
Innovaon is, understandably but unhelpfully,
associated with tangible arfacts. Think iPhone.
But innovaons in business processes can have
enormous value as well, as in Henry Ford’s novel
assembly line producon process. Likewise, the
development of innovave business models,
such as Amazon’s pioneering marketplace
business, can be extremely valuable. Or Apple
Music—exemplied in the popular imaginaon
by the (now exnct) iPod. But while the iPod
FIGURE 7
Types of innovaon
Unlearning to Innovate
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Published in Ivey Business Journal | January – February 2024
FIGURE 8
“What form of innovaon has delivered the most value to your company over the past ve years?”
was an innovave device that improved in many
ways on its predecessors (such as the Sony
Walkman), the real innovaon was the value
proposion Apple oered to music labels and
producers, and the intersecon of that
proposion with aordable consumer pricing by
song.
Our research into these dierent forms of
innovaon is suggesve rather than conclusive.
Interviews and case study analysis, coupled with
the survey data shown in the chart below,
indicate that more companies focus on product
innovaon than on innovaons to business
processes or business models. We believe this
accounts for the fact that roughly twice as many
companies report realizing more value from
product innovaon versus innovaon focused
on business models or business processes.
Interesngly, the relavely small number of
companies reporng the most value from
business model innovaon achieved 119 per
cent more revenue growth than the other
companies in our dataset, and their stock price
increased by 271 per cent more, over the 2014–
2018 period.
While parcipants in our research were most
likely to report that product innovaon
delivered the greatest value, revenue for
companies focused on all three forms of
innovaon (product, business process, and
business model) grew 20 per cent more from
2014 to 2018 than revenue for companies
focused on product innovaon. Product
innovaon that produces a lasng compeve
advantage is increasingly hard to come by.
When Apple introduced the iPhone, it was a
groundbreaking product. But a mere decade
later, hundreds of dierent smartphones are
available, and the iPhone has gone through
mulple cycles of incremental innovaon. The
iPad, the Apple Watch, and AirPods were also
quickly copied. Apple has succeeded not so
much through “big-bang” product innovaon,
but rather by running faster innovaon cycles
than its competors, and by connuing to
combine product innovaon with connuous
innovaon in linked services and business
models.
EMPHASIZE EXTERNAL SOURCES OF
INNOVATION
An ongoing debate in the literature concerns
the relave merits of internal versus externally
driven innovaon. The Akcigit-Kerr Model,
introduced by Ufuk Akcigit and William Kerr in
2015, disnguishes between the two
approaches:
• Internal innovaon, somemes called
“exploitaon” innovaon by
Unlearning to Innovate
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Published in Ivey Business Journal | January – February 2024
organizaonal behavior scholars,
concentrates on improvements to a
company’s exisng product lines,
enhancing the capabilies and oerings
that the company already has to
increase prots.
• External innovaon, somemes referred
to as “exploraon” innovaon, focuses
on creang new ideas to add to the
company’s product range.
Companies can harness external assets in
various ways—in-licencing new technologies,
for example, or invesng in or acquiring
innovave start-ups (Cisco is noted for its serial
success at the laer pracce). Companies also
can combine experse and resources to pursue
innovaon through collaboraons. As one
example, “Tencent has expanded its partnership
with JD.com step by step, beginning with an
equity investment, moving into data sharing for
beer customer insight, and then making joint
investments totaling more than $6 billion in e-
tailor VIPshop and mall operator Wanda
Commercial,” note David Harding and Andrew
Schwedel in Harvard Business Review.
P&G is a classic case study in the benets of
pursuing external innovaon. In 2000, only 15
per cent of P&G’s innovaon projects met prot
and revenue targets. By 2011, 10 years aer the
launch of the company’s external innovaon
program, Connect + Develop, that number was
50 per cent. By 2016, 35 per cent of products
originated outside of P&G. Since 2000, P&G’s
stock price has increased by 255 per cent—19
per cent and 54 per cent more than its peers
Unilever and Colgate, respecvely.
On the other hand, in their arcle “Why
Innovaon’s Future Isn’t (Just) Open,” Neil C.
Thompson, Didier Bonnet, and Yun Ye argue
that “internal innovaon may be even more
crical [than external innovaon] because it
oers the possibility of dierenaon [and] it
helps maintain trade secrets and protect
intellectual property.” As noted above, we
believe that thinking and pracce related to the
protecon of intellectual property is oen
counterproducve. And while our research
supports the need for both internal and external
innovaon, it also suggests a substanal benet
from a primary focus on externally driven
innovaon. Companies in our dataset that
emphasized external innovaon signicantly
outperformed those that relied primarily on
internal innovaon. Companies that reported
that “most” or “a great deal” of their innovaon
comes through external collaboraon
experienced a 178 per cent greater increase in
FIGURE 9
Revenue change of companies by level of external innovaon
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Published in Ivey Business Journal | January – February 2024
FIGURE 10
External innovaon today versus ve years ago
their revenue from 2014 to 2018 compared to
those who reported relying “lile to none” on
external sources.
General Electric (GE) oers a cauonary case
study in the dangers of overreliance on internal
capabilies to drive innovaon. In 2015, the
company embarked on an ambious plan for
digital transformaon by establishing GE Digital,
a standalone business unit with the goal of
driving US$20 billion in sales by 2020 through
transformaon of the internet of things. GE
invested US$4 billion-plus in the development
of analycs and its Predix plaorm, which is
designed to help customers collect and analyze
data to manage equipment. By 2020, GE Digital
was not on track to hit even a signicantly
reduced target of US$12 billion in revenue.
Aer ve years, the Predix plaorm had never
been protable, and key parts of the digital
business were put up for sale as GE refocused
on its core power and aviaon businesses. GE
tried to develop innovave soluons very
dierent from its historical business—but
without help from outside its own walls.
FIGURE 11
External innovaon expected to rise in next ve years regardless of recent changes in external innovaon
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Published in Ivey Business Journal | January – February 2024
Our research shows an accelerang trend of
companies sourcing innovaon externally.
Based on our study, 93 per cent more
companies get “most” of their innovaon
through external sources today compared to
ve years ago. Looking to the future, 75 per
cent of respondents report that they expect
externally sourced innovaon within their
companies to increase over the next ve years.
Innovaon failures are more than failures to
invent the next new thing, be that a product or
a business model. GE is number eight on the list
of total patents held by a company, but this was
not sucient to stem a rapid decline in its
fortunes over the past 10 years. Successful
innovaon requires companies to look outside
their own walls, and even outside their own
industries. It requires rethinking the risks and
benets of collaborang with other
companies—even competors. Innovaon not
only requires embracing risk and accepng
failure, but also rethinking ingrained
assumpons about what “success” and “failure”
mean. Failing to innovate carries a high cost.
Even as the market reallocates capital to more
producve uses and creates new jobs to replace
lost jobs, individual workers and savers incur
enormous pain in the process. The stunningly
rapid demise of companies like Research in
Moon and Blockbuster Video are two of
myriad examples. Leaders owe it to both their
employees and their shareholders to up their
innovaon game.
About the Authors
Jonathan Hughes is Naonal Managing Principal and Global Pracce Leader for Management Consulng at BDO.
He has worked with leading companies and state-owned enterprises across a range of industries in North and
South America, Europe, Asia, Australia, and Africa, with a focus on growth strategies, iniang and responding to
disrupve compeon, external innovaon, and supply chain transformaon. In addion to Ivey Business Journal,
Jonathan’s arcles have appeared in Harvard Business Review, California Management Review, MIT Sloan
Management Review, and other journals. A graduate of Harvard University, Jonathan has been a guest lecturer at
the Fuqua School of Business at Duke University, the Darden School of Business at the University of Virginia, the US
Military Academy at West Point, the Wharton School of Business at the University of Pennsylvania, and the
Advanced Program of Instrucon for Lawyers at Harvard Law School.
Jessica Wadd is Principal and leader of the Strategy and Innovaon segment for BDO Management Consulng. Her
work focuses on strategy development, business model innovaon, commercializaon strategies for new
technology, and the use of strategic alliances to enhance compeve advantage and increase strategic agility.
Jessica frequently leverages ideas from the elds of behavioral economics and game theory to help clients in
diverse industries, including high-tech, manufacturing, nancial services, life sciences, healthcare, and professional
services. Jessica holds an MSc in Behavioral Economics from the University of Nongham as well as BAs in both
English and Economics from Bryn Mawr College.
Drew Roberts is a Senior Analyst, Sales Strategy, at HubSpot. Prior to joining HubSpot, he worked as a consultant
with Jonathan and Jessica. He received his BS and MS in Economics from Northeastern University.
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