Innovation : The Invisible Advantage of Innovation

Jonathan Low was a senior research fellow at the Cap Gemini Ernst & Young Center for Business Innovation ( CBI ). Jonathan was the leader of the CBI’s Intangibles Valuation initiative and has produced four major studies in this area and published numerous articles and reports on their findings. Jonathan is the co-author of Invisible Advantage: How Intangibles Are Driving Business Performance.

Pam Cohen Kalafut is currently the president of Cohen Kalafut Associates, LLC, a consulting firm specializing in strategic business modeling and linkages to firm performance. As a behaviorist, Pam’s work has focused on intangible valuation, maximizing the utility of human capital, and researching the role of emotions in the workplace. Pam is the co-author of Invisible Advantage: How Intangibles Are Driving Business Performance.

Innovation has always been a key to business success and wealth creation. It has always been a central driver of economic development. But when people say “innovation” they usually mean some new invention, like the Walkman or the digital camera. As important as such products may be, to limit the discussion of innovation to new inventions or technologies is rather like limiting a discussion of marketing to the latest ad campaigns. It’s only the tip of a rather large iceberg.

In fact, a hallmark of the Intangibles Economy is that product innovation is no longer sufficient to stay in the competitive race. Rather, companies must innovate across a variety of fronts. The Intangibles Economy encourages, thrives on, and in fact requires companies to be innovative along many dimensions. So, instead of banishing innovation initiatives to the research division of a company, today’s organizations must innovate in: services, business models, organizational structures, internal processes, profit zones, alliances, marketing, and strategy.

Managing for Successful Innovation

There are four imperatives to managing intangibles in today’s economy :-

Leadership : Make Resources Available

In summer 2000, Eli Lilly was in trouble. The term of patent protection for Prozac, its blockbuster antidepression drug, had been challenged in court, and Lilly had lost; according to the judge’s ruling, Prozac would come off patent in a year rather than in three years, as Lilly had hoped. The company’s stock plunged, wiping out $36.8 billion in market cap. Twelve months later, generic pharmaceutical maker Barr Laboratories entered the market with its version of the chemical in Prozac, at a price 20 percent to 40 percent less than the original. Lilly expected to lose some $2.4 billion in annual sales, nearly a quarter of its total revenue. “As CEO Sidney Taurel often points out,” read one report, “no company has survived a patent expiration of this magnitude without losing its independence.”1

Taurel, however, had done just what a leader in this economy has to do: poured resources into innovation. He increased the R&D budget 30 percent, brought on 700 new scientists, and ordered the company’s researchers to focus on drugs capable of producing more than $500 million in revenue. The result: “Lilly now has a medicine cabinet stocked full of promising new drugs, including treatments for schizophrenia and for competitors, those new products could more than offset Prozac’s loss in just 12 months.”2 sepsis . . . Provided that management is able to handle some significant challenges from regulators and Lilly shares had partially rebounded by autumn 2001. Its market to book ratio by then was higher than the pharmaceutical industry average and considerably higher than the S&P 500 average.

Strategy Execution : Deliver on Your Innovative Promises
Innovation is such a hot commodity in today’s economy that companies are tempted to overpromise. Software firms are notorious for announcing “vaporware”-programs that are nowhere near ready for market-in hopes of discouraging competitors. New companies routinely promise the sky-and as the dot-coms showed, the sky is likely to fall in on them. But even well-respected businesses such as Palm Inc. can run into trouble from an inability to deliver an innovation.

Palm’s troubles began with the economic downturn of 2001. Sales of its hand-held computers were off, and the company wanted to announce an innovative new product right away in hopes of adding to its revenues. Managers promised senior executives that the product would be ready to go in two weeks. Palm made the announcement, but in fact it would be six weeks before the new devices-the so-called m500 line-were ready to ship in volume. Meanwhile, consumers decided to hold off on buying older Palm products. Sales slumped. So did Palm’s stock, which at one point was down 95 percent over a 10-month period. What happened ? Poor execution, pure and simple. Preoccupied with a new headquarters building, senior execs were paying little attention to operations. A key operations-management job went unfilled. There wasn’t enough time for testing the new models, so the manufacturing subcontractor ran into both design and performance problems. ( In one model, the battery didn’t fit. ) Eventually Palm had to lay off hundreds of people-and stop construction on that new headquarters.3

Processes: Encourage Bottom-Up Innovation or “Intrapreneurship”

No leader can do everything that needs to be done, because ideas about new products or production methods often must come from others in the organization. The question is whether a company stimulates or discourages the creation and testing of new ideas. At the level of workplace processes, the kind of empowerment described in the previous chapter is a requirement, along with a culture that encourages and rewards suggestions for improvements. Companies can also stimulate the development of new products and business units. 3M Corp. is legendary for doing so; others have learned in the past few years. Thus Royal Dutch Shell’s Exploration and Production division went so far as to set up an internal “venture board” to review new ideas and business plans created by division employees. Siemens’s Strategic Business Development Group sponsors business- plan competitions.4

One key to success in all such enterprises is to realize that many-perhaps most-new ideas may be wrongheaded and that even seemingly promising ones may wind up in failure. Strategy consultant Gary Hamel makes the point with his usual flair for colorful language:

In devoting themselves entirely to the pursuit of efficiency, top management inadvertently drives out the “waste” and “extravagance” that is the very fuel of innovation. As top management strives for ever greater efficiency, it must learn to tolerate “stupid” ideas and “failed” experiments. After all, when a man and a woman celebrate conception, they seldom bemoan the 59 million little swimmers that never made it.5

Brand : Manage for Innovation

Marketers long ago learned to manage line extensions, such as Bud Light and Crest mint gel, although exactly how far a line can productively be extended is always a matter of debate. But innovation of the kind required in today’s economy adds a whole new dimension to brand management. What happens to a retailer’s brand, for example, when the company puts some or all of its wares online ? The customer is no longer subject to the same kind of in-store merchandising, can no longer be wooed by professional salespeople, can no longer touch and feel the goods. So protecting the brand in this kind of innovation requires paying attention to a whole new kind of marketing. How is the site presented ? What goods are sold on it ? What kind of customer service and back-office support is available ? The answers will differ from one retailer to another, but none can afford to ignore the opportunities and constraints, presented by its brand.

The issues are even greater when a company branches beyond into new business arenas. IBM has famously recreated itself as a service company; its brand was strong enough to support the new emphasis on delivering solutions to customers, as opposed to simply delivering hardware. Had Hewlett-Packard succeeded in buying the consulting division of Pricewaterhouse- Coopers ( which it tried to do before acquiring Compaq Computer ), the prospects would have been much less clear. Is the H-P name-so well known in one arena- extendable into the wholly different arena of management consulting ? What has made Virgin so successful in extending its brand is the fact that the name stands for something-a style, a culture-that transcends any particular business. It’s not clear that the famous “H-P way” is anything comparable.

This list could go on, but we hope we have made our point. Nowhere, perhaps, is the interaction between one intangible and others so clear as it is in respect to innovation. An innovative company -one that is effective- almost by definition is a company that manages its other intangibles well.

  1. McLean, Bethany, “A Bitter Pill,” Fortune, Aug. 13, 2001.
  2. Arndt, Michael, “Eli Lilly: Life After Prozac,” Business Week,
  3. July 23, 2001.Tam, Pui-Wing, “How Palm Tumbled from Star of Tech to Target of Microsoft,” Wall Street Journal, Sep. 7, 2001.
  4. Hamel, Gary, “Bringing Silicon Valley Inside,” Harvard Business Review, September–October 1999; and Pinchot, Giffod, Intrapreneuring: Why You Don’t Have to Leave the Corporation to Be an Entrepreneur, Berrett-Koehler Publishers, 1999.
  5. Hamel, Gary, “Innovation’s New Math” Fortune,July 9, 2001.

This article is an excerpt from Invisible Advantage: How Intangibles Are Driving Business Performance ( Perseus, June 2002 ) by Jonathan Low and Pam Cohen Kalafut.

© Jonathan Low and Pam Cohen Kalafut

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