Innovation and risk: to boldly go

Risk has become a dirty word. In the current economic climate, many firms
instinctively seek to protect past successes instead of commercialising
radically new products.

But businesses bold enough to develop a forward-looking, risk-taking
corporate culture and brave enough to cannibalise existing successful products,
in order to commercialise radically new ones, are more likely to dominate world
markets and increase the competitiveness of their national economies.

My research, which analysed the experience of over 750 businesses in 17
countries, concluded it is a firm’s corporate culture that is the strongest
driver of radical innovation. And it is this radical innovation, more than many
other frequently cited factors, which translates into financial value for firms.

But how do you define corporate culture? More importantly, how do you develop
it? The research suggests that corporate culture ­ which we describe as a set of
attitudes and practices that are shared by
the members of a firm ­ is somewhat intangible, difficult to measure and
extremely difficult to change.

Culture of innovation

Innovative companies appear to have a similar corporate culture, wherever
they may be located in the world. They don’t need to be in a traditionally
innovative country in order to develop a forward-looking, risk-taking culture.

Take the US for example, which is home to radically innovative enterprises
such as Apple and FedEx but also to Kodak and Kmart, which have failed to
cannibalise successful products in order to innovate.

Look at the lagging economies of India and Korea, where innovative businesses
like Samsung and Infosys have leapfrogged ahead of slumbering giants in more
advanced countries. Indeed, their innovative corporate culture has developed
precisely to overcome obstacles in their home economies.

So, it seems that the traditional country level drivers of success such as
government, culture, labour and capital, while not unimportant, have become less
significant in the current environment.

This is because markets for labour and capital, which have been evolving in
capitalist economies during the past 400 years, are now relatively efficient,
mature and interconnected ­ particularly since the advent of
information technology. In particular, the presence of markets for venture
capital enables entrepreneurial firms to gain access to capital for radical
innovations.

Shock of the new

Furthermore, there has been an increased convergence across nations in the
extent to which labour and capital are accessible. Novel ideas, whether in
emerging economies or in the established markets of the OECD, now attract
capital in a way that is historically unprecedented.

The importance of investing in education and other labour-related investment
is also more widely accepted.
Even in India and China, where the proportion of qualified technical personnel
is small relative to the population, the vast number of them make it possible
for companies to meet current innovation needs.

Government policies are also increasingly synchronised. Policymakers in many
countries have learned to keep an eye on regulatory and technological
developments elsewhere and have unilaterally integrated their own countries to
international markets.

So, it is clear that while capital, labour, and government regulation may
still be significant, in today’s converging economies a forward-looking,
risk-taking corporate culture is most likely to keep a firm at the leading edge
of innovation. But how is this elusive corporate culture created?

We have identified three specific attitudes and three practices within
innovative firms that make them special and drive radical innovation. These are
risk tolerance, a willingness to cannibalise existing products, future market
orientation, empowering product champions, fostering internal competition and
providing incentives for enterprise.

Embedding enterprising spirit

Our research provides a new diagnostic tool that allows firms to test their
own corporate culture and benchmark themselves against others of their size,
history, or industry. In this way, managers can become attuned to cultural
factors, measure them, and foster them to maintain a culture of relentless
innovation. This is likely to be more useful than relying on government to
invest in or protect markets. In fact, our experience suggests that the appeal
for government relief and intervention may well be a cover for cultural
deficiencies in firms, which managers have overlooked.

But changing a corporate culture so that it fosters innovation is not easy.
One of the greatest obstacles is the stream of profits that emerge from current
products and services. Success in one generation of technology often breeds
attitudes of complacency and invulnerability. Managers focus on protecting the
profits that brought success, vetoing any innovation that might threaten it.
Furthermore a business is often under pressure to manage the micro problems of
its successful products. These cultural traits can blind it to radical
innovations of the future.

On the other hand, a company that is willing to cannibalise its assets can
review and sacrifice current profitable innovations to get ahead with the next
generation of innovations. A future orientation allows it to see the limitations
of the current technology and the emergence of a new generation of technology
that may become dominant in the future.

But, of course, trading a current sure stream of profits for a future
uncertain stream of profits is risky and does not come naturally to managers.
This is where firms need to take practical steps in order to create a culture
that promotes a tolerance of risk.

Firms can empower talented individuals with the resources to explore,
research and build on promising but uncertain future technologies. This will em
bed within the firm the enterprising spirit that enabled it to initiate the
original successful innovation. Instead of rewarding seniority or the management
of current products, firms can provide significant incentives for employees who
venture to explore or build new enterprises for the firm. Firms can also
encourage groups of employees to compete among themselves to identify promising
technologies and build innovations on those technologies. A firm with an active
internal market brings the marketplace into the firm. This will help prevent the
firm from being caught out by an innovator from outside.

Our results question some long held premises about radical innovation.
Policymakers who rely exclusively on scientific talent, patents and intellectual
property protection as drivers of success may be missing the real battle.

The battle is within. It is a cultural one between glorifying the past or
being paranoid about the future, between protecting successes or being willing
to cannibalise them, between averting risk or embracing it. The battle is for
the soul of the firm. Innovative firms are those that clearly understand this
battle and adopt decisive practices to win it.

Jaideep C Prabhu is Jawaharlal Nehru Professor of Indian
Business and Enterprise at Judge Business School, Cambridge University, and
innovation fellow at the
Advanced Institute of
Management (AIM) Research