Tuesday, February 5, 2008

When the Going Gets Tough, the Tough Invest In Innovation

Recession fears continue to dominate the headlines. I was somewhat heartened to read some recent research in the Harvard Business Review from the eminent innovation scholar Clayton Christensen (and colleagues Stephen P Kaufman and Willy Shih). It doesn't hurt that he has that Harvard glow does it? Give these guys credit, they have articulated something especially important in these uncertain times.

Essentially Christensen and colleagues looked at three classic financial evaluation tools to see if they hinder or assist companies in innovation (for more detail go to the actual article http://harvardbusinessonline.hbsp.harvard.edu, do a search on Christensen and you'll find the article Innovation Killers: How Financial Tools Destroy Your Capacity to Do New Things).

For many of us these tools are arcane but in big business they are essential and commonly used to determine investment of all kinds. The research shows that the tools don't account for the future and that managers won't be investing enough in innovation as a result (this is my simple synopsis of a fairly complex study.) The tools assume that current levels of investment in innovation are good enough to maintain the company and the companies worth. What a poor assumption!

For me the study adds credibility to the argument that companies should be investing more in innovation if a recession is in our future. Idea management systems, innovation process training, and research and development should be getting more attention and resources, not less.

It's intuitive to high innovators that sometimes breakthrough's require extraordinary measures, in other words, more money, to make something happen. Innovative managers often don't get the funds they need because these classic financial tools back up the numbers guys. Clayton is saying the tools aren't bad in and of themselves but they have a built in bias against innovation investment. Many top managers rely on these financial tools and make decisions not from an intuitive sense of the market, but instead "do it by the numbers." Evidence is all around us of how this can be deadly -- the US car industry and the US steel industry are two obvious examples. They did not invest heavily when the times called for it and they simply got out-innovated and destroyed in the process.

To my point -- managers who invest in innovation over and above what seems to be called for -- particularly when others are cutting back in a recession, are the managers that are positioning their organizations for a strategic long term competitive advantage.

When the going gets tough, the tough invest in innovation.


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