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Managing Technological Innovation
From: Columbia University
| By:
Atul Nerkar |
EDITOR'S INTRODUCTION |
According to Atul Nerkar,  professor of management at the Columbia Business School, successful organizations search beyond their primary fields of expertise and also explore opportunities for collaboration within their own firms. Through researching technology patents, Nerkar (right) and his Wharton colleague Lori Rosenkopf have identified creative strategies that companies can employ to optimize their research and development and sustain technological innovation. |
 or the past five years I have been conducting research on the evolution of optical disc technology with colleagues at the Wharton School. The motivation for our project stems from two questions that have bothered researchers at large. First, why is it that the winners in one round of technological innovation tend to lose in the next round? Second, what drives technological evolution generally? |
Generally we see bursts in technological evolution--there are a lot of advances in a particular area of technology and then suddenly there will be a quiet period. Our research suggests that companies that win a round of technological advances are blindsided by their success; they get relaxed and refuse to look beyond the initial success. |
Innovation is the creation of new knowledge--something that has been created out of the current product market and process but which is a recombination of existing knowledge. For our purposes, we defined knowledge as any new patent that is filed in the area of optical technology. We collected approximately 4,000 patents in this area and then analyzed the creation of this knowledge. |
The first conclusion from our project was that companies often tend to do pure local search, to look within their organization and within their existing technologies. Second, in order for technological products to come about, certain key components need to evolve. Different technologies co-evolve over time; some technologies have to wait until other technologies catch up, and that's how new products will evolve. |
Local search
Local search is when companies tend to look within their existing fields of expertise and fail to explore beyond their domain. A popular example is the story of the drunk searching under a lamppost. He's been in a bar all evening and he's quite intoxicated, and on his way to his car he realizes that he's lost his keys. So he's walking back to the bar, looking for his keys, but it's pitch-dark and he can't see anything. Along the way there's only one light, coming from a lamppost. He could have dropped his keys anywhere, but he keeps searching under the lamppost because that's where the light is. |
Similarly, organizations generally tend to look for solutions, or new knowledge, in the neighborhood of existing expertise. The example of the drunk looking under the lamppost is really at an individual level, but companies also consist of individuals. Oftentimes they aren't able to go beyond local search, because the inventors at a firm have spent a lifetime trying to build expertise in certain areas and it's very difficult to change gears and explore something different. |
Another example is in the area of biotechnology, in which I have another research project under way. I was talking with the research-and-development managers at Smith-Kline Beecham and they were telling me that they have had a lot of success in the gastric area, but that they want to move away from that and into different areas. Unfortunately you can't tell the researchers to drop gastric research overnight; it has to take place over a period of time. Even if the inventors are able to shift focus from the current products, they're still making a lot of money from their current products and it's difficult to turn away from that. |
For example, IBM still makes 40 percent of its revenue from mainframe computers. They know that mainframes are no longer going to be the big game in town, and they've known that for many years. But the fact is that they make a lot of money from it, and it's hard to turn away from a cash cow. So there are two obstacles to overcoming local search: the individual inventors have to explore beyond their field of research, and the managers have to be willing to support that risk. |
Innovation and growth
Managers are expected to produce rapid and phenomenal growth. There are two possibilities for achieving growth through innovation: internal growth, which is basically doing all of your own research and development and building in-house, or external growth, which is acquisitive growth. |
For example, Cisco is a company that is driven entirely by acquisitions. They have been very successful in acquiring companies, digesting them and taking them to their bottom line. Another company that tried to do the same in the financial services, and was successful for many years, is Bank One. But later on the rules of the industry changed, and their acquisition strategy was no longer relevant. There are no clear-cut answers as to whether gobbling up other companies is going to result in real growth. To be successful in the long run, you have to have not only incremental products but also some blockbuster products that will give you phenomenal growth. |
If you look at their work over the past 25 to 50 years, 3M has been consistently regarded as a very good company internally. In my own research, I am partial to internal growth, primarily because internal growth is hard to capture. It offers a much greater competitive advantage, because it comes from a set of systems within the organization, and the competition cannot take that away easily. But external growth, that which a company can acquire in the marketplace, can also be purchased by someone else. If someone else can acquire it, then sooner or later that company's competitive advantage is going to dry up. |
Knowledge is often tacit; it can't be passed on or bought off the shelf. Even if you buy or license a patent, you may not be able to transfer that knowledge, because the knowledge has to come with the inventor. Let's say you move the inventor also, but even then the inventor may be linked to a larger set of systems. That happens in academia--a lot of universities will go out and hire star researchers. But when these star researchers move to another university they don't produce anymore, because they need a lot of complementary assets, such as collaborators and other resources. |
A lot of large firms are realizing that they are sitting on huge knowledge banks, and they are learning to mine that knowledge. They are looking back to see what technologies are lying fallow and whether there are new applications or complementary assets for those nuggets of knowledge. For example, aerodynamic automobile designs were created in the 1950s, but the physical technology to build the machines hadn't been developed yet. When the machine technology did come through, the automobile companies had to go back and rediscover those technologies that were before their time. |
Our observations in this project also shed light on the debate between punctuated and incremental changes. Punctuations are quick evolutions, when you see a lot of activity and innovation. Incremental changes are the steps or building blocks along the trail of evolution. But our research suggests that punctuations and incrementals are two sides of the same coin--the difference is what level you're looking at. When you look at the product level, it looks like a punctuated story, because the great innovations or inventions are what attract the most attention. But at the level of knowledge, it's really an incremental story, in which technology is always co-evolving. |
Boundary-spanning
In our research we defined two boundaries of innovation: a technological boundary and an organizational boundary. We found that companies that cross one boundary at a time tend to have more success. If a company goes out and does something really radical, they're not likely to find success, because if you try to cross a technological boundary as well as an organizational boundary, that means that you're purchasing something out in the marketplace which you don't know well and which can fail. |
In the 1970s, Xerox developed some very radical technologies and they didn't do anything with them, so other firms picked up on their knowledge. Steve Jobs, the founder of Apple Computers, has said that when he went to Xerox PARC in the 1970s he saw three things there: a graphical user interface, the mouse and a full internal Internet system. He took the first two ideas for Apple, but he didn't take the idea of the Internet. But if he had picked up the Internet, he said, Intel, Microsoft and IBM wouldn't exist--there would only be Apple Computers. Needless to say, Xerox has since realized their mistake in not taking those technologies to market. |
You're much more likely to be successful if you stay within your technological boundaries but cross an organizational boundary--for instance, if you take an existing knowledge and look for a place for it in the marketplace. The same is true of crossing technological boundaries within an organization--for example, combining two technologies to come up with a new product. Sony does that a lot by using new technology to make smaller-scale versions of existing products, such as the CD, Discman, Walkman and television. |
Most organizations realize that there is no one approach to success. They do some local search, some boundary-spanning, some radical exploration, and they do them together. In terms of actual product development innovation processes, they might create a new division, keep this new division away from other divisions or spin it out as a separate company. There are different techniques for managing these new ideas so that they're not affected by the regular procedures. In high-technology industries a company's success depends on the ability to innovate consistently. Our research shows that companies that move beyond local search are more likely to innovate and develop new products and technologies. |
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