In the Classroom

Double Down: Stepping Up Investment in Innovation

Despite the economic downturn, now is not the time to save money by spending less on innovation. "Innovation is a tough sell in a recession," says Wharton Professor of Marketing George S. Day, academic co-director of Wharton's Full-Spectrum Innovation: Driving Organic Growth program. "The innovation process is a target for cost cutters. But some companies are doubling down. Now is a good time to grab customers from competitors who are scaling back."

Giving Air to Growth

Innovation is critical to organic growth. Although an October 2007 survey found organic growth is at the top of CEO agendas at four out of five public companies, only 29 percent of senior managers in large-cap firms were highly confident they would reach their organic growth target.

Companies that have been able to harness the power of innovation have been able to achieve rapid growth. Day points to Praxair — a worldwide provider of industrial gases, including atmospheric, process, and specialty gases — which creatively rethought its business to reach its growth objectives. In 2003, Praxair laid out a four-year growth plan to increase revenue growth by $2 billion. It looked like an uphill battle because the company's market was considered to be saturated.

But Praxair leveraged its mastery of technologies to offer services in new areas such as maintaining the helium coolant in MRI magnets, overseeing nitrogen injection in oil and gas wells, and offering new cooling methods to the growing biosciences industry. In three years, it had more than beat its growth objectives.

Praxair was successful in altering its business model and moving into adjacencies. To do this successfully, companies must sharpen their peripheral vision and adopt an "outside-in" development process to anticipate emerging customer needs. To drive innovation, Day recommends:

• Engage in business model innovation: Challenge the existing business model to find a new value profile and expand the market boundaries.
  
  
• Examine the periphery: Leverage the existing network and use scenario planning to envision future alternatives. Use a systematic search for opportunities versus reactive ones.
  
  
• Emphasize adjacencies: Coca-Cola created its North American bottled water business by leveraging its brand and distribution systems for soft drinks.
  
  
• Create an innovative culture: Google employees are encouraged to spend 20 percent of their time on innovation. "The organization is built in such a way that people are always thinking of new ideas," Day says.

Managing Risk

Innovation has high failure rates, so investing successfully requires managing risks effectively. "No one wants to be the person who puts money in a long project that goes nowhere," Day says. Among the strategies he recommends for managing risk are:

• Experiment, probe, and learn: Start with products close to what you already have and then move outwards.
  
  
• Limit scale: Start with small projects so you're not betting the farm on innovations.
  
  
• Share risk: Look for a partner in the venture, someone who has marketplace access or experience. Consider joint development agreements.

Risk averse organizations often focus on "small i" innovations rather than more daring "BIG I" innovations, which have a bigger payoff. Innovation with a small i includes product line extension and upgrades, things that are low risk but also bring small rewards. While such innovations may temporarily appease bottom liners, they often involve cannibalizing one's own products or leading to fierce competition in which competitors kill each other off. BIG I means looking beyond the immediate product and trying something that, while high risk, could bring high reward.

To successfully drive innovation in cost-constrained times, Day recommends an entrepreneurial approach: "Think big. Start small. Fail cheap. Scale fast."

• Full-Spectrum Innovation: Driving Organic Growth