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Extractive summaries and key takeaways from the articles curated from TOP TEN BUSINESS MAGAZINES to promote informed business decision-making | Since 2017 | Week 359 | July 26-August 1, 2024 | Archive
The Middle Path to Innovation
By Regina E. Herzlinger et al., | Harvard Business Review Magazine | July–August 2024
Extractive Summary of the Article | Read | Listen
An innovation crisis is brewing in the United States: Too many firms, both large and small, are failing to innovate. As a result, problems remain unsolved, technologies are never invented, and meaningful jobs go uncreated. According to one estimate, lost productivity cost the economy more than $10 trillion between 2006 and 2018, roughly equivalent to $95,000 per U.S. worker.
It is believed that a primary cause of this crisis is the polarized approach companies take to innovation. At one end of the spectrum, corporations increasingly focus R&D efforts on product refreshes and incremental line upgrades. Doing so maintains revenue streams and market share while minimizing R&D budgets. These incremental innovations protect profitability and generate modest growth with lower risk.
At the other end, venture capitalists favor high-risk “transformational” innovations that seek to upend industries and generate outsize returns. They anticipate that the returns from innovation efforts that succeed will more than compensate for the failures. In order to build a viable company for an eventual M&A or IPO, the entrepreneurial team behind the innovation is forced to devote considerable time and energy to building up a range of functional and operational capabilities. The exit prices that venture capitalists require to generate the returns they need, and the bidding wars to acquire the start-ups that arise, mean that a large firm must pay a hefty price to purchase a successfully launched innovative start-up. Although observers tend to celebrate when a start-up is acquired by an established company, there’s some inefficiency to this transaction. From an economic standpoint, it would be better if established companies did more innovation in-house—building, not buying.
For that reason, the authors suggest targeting the large gap in the middle of the innovation spectrum. This space is considered too risky for large firms, which worry about analysts’ disapproval when failures drag down short-term profitability. And it’s not risky enough for venture capitalists, who avoid investing in a return profile that’s unsatisfying to their own investors. Yet the middle is precisely where large firms are best positioned to execute their innovation efforts.
The authors present a new model of innovation, the growth driver model. The model has three stages. First, a corporation partners with an outside investor and identifies where riskier innovations are needed, how these innovations would fit into the firm’s strategy, and how they might be integrated into its operational and functional units. Second, again in partnership with the outside investor, the corporation sets up an off-balance-sheet “accelerator” company that identifies and builds out the innovation projects for which the corporation will be the customer. Finally, innovations are developed. As the accelerator takes form, corporate leaders, investor partners, and the accelerator’s management team identify a pipeline of “growth drivers”—products and services that will generate long-term revenue growth in markets where the firm is already established or in closely adjacent markets. The corporation then establishes an operating model for these new products that leverages its existing sales, manufacturing, regulatory, and management capabilities.
3 key takeaways from the article
- An innovation crisis is brewing in the United States: Too many firms, both large and small, are failing to innovate. As a result, problems remain unsolved, technologies are never invented, and meaningful jobs go uncreated.
- It is believed that a primary cause of this crisis is the polarized approach companies take to innovation. At one end of the spectrum, corporations increasingly focus R&D efforts on product refreshes and incremental line upgrades. At the other end, venture capitalists favor high-risk “transformational” innovations that seek to upend industries and generate outsize returns.
- The authors present a new model of innovation, the growth driver model. The model has three stages. First, a corporation partners with an outside investor and identifies where riskier innovations are needed, how these innovations would fit into the firm’s strategy, and how they might be integrated into its operational and functional units. Second, again in partnership with the outside investor, the corporation sets up an off-balance-sheet “accelerator” company that identifies and builds out the innovation projects for which the corporation will be the customer. Finally, innovations are developed.
(Copyright lies with the publisher)
Topics: Innovation, Strategy, Business Model