PASSAGE

Company Innovation

A

In a scruffy office in midtown Manhattan, a team of 30 artificial-intelligence programmers is trying to simulate the brains of an eminent sexologist, a wellknown dietician, a celebrity fitness trainer and several other experts. Umagic Systems is a young firm, setting up websites that will allow clients to consult the virtual versions of these personalities. Subscribers will feed in details about themselves and their goals; Umagic’s software will come up with the advice that the star expert would give. Although few people have lost money betting on the neuroses of the American consumer, Umagic’s prospects are hard to gauge (in ten years’ time, consulting a computer about your sex life might seem natural, or it might seem absurd). But the company and others like it are beginning to spook large American firms, because they see such half-barmy “innovative” ideas as the key to their own future success.

B

Innovation has become the buzz-word of American management. Firms have found that most of the things that can be outsourced or re-engineered have been (worryingly, by their competitors as well). The stars of American business tend today to be innovators such as Dell, Amazon and Wal-Mart, which have produced ideas or products that have changed their industries.

Company Innovation

C

A new book by two consultants from Arthur D. Little records that, over the past 15 years, the top 20% of firms in an annual innovation poll by Fortune magazine have achieved double the shareholder returns of their peers. Much of today’s merger boom is driven by a desperate search for new ideas. So is the fortune now spent on licensing and buying others’ intellectual property. According to the Pasadena-based Patent & Licence Exchange, trading in intangible assets in the United States has risen from $15 billion in 1990 to $100 billion in 1998, with an increasing proportion of the rewards going to small firms and individuals.

D

And therein lies the terror for big companies: that innovation seems to work best outside them. Several big established “ideas factories”, including 3M, Procter & Gamble and Rubbermaid, have had dry spells recently. Gillette spent ten years and $1 billion developing its new Mach 3 razor; it took a British supermarket only a year or so to produce a reasonable imitation. “In the management of creativity, size is your enemy,” argues Peter Chemin, who runs the Fox TV and film empire for News Corporation. One person managing 20 movies is never going to be as involved as one doing five movies. He has thus tried to break down the studio into smaller units—even at the risk of incurring higher costs.

Company Innovation

E

It is easier for ideas to thrive outside big firms these days. In the past, if a clever scientist had an idea he wanted to commercialise, he would take it first to a big company. Now, with plenty of cheap venture capital, he is more likely to set up on his own. Umagic has already raised $5m and is about to raise $25m more. Even in capital-intensive businesses such as pharmaceuticals, entrepreneurs can conduct early-stage research, selling out to the big firms when they reach expensive, risky clinical trials. Around a third of drug firms’ total revenue now comes from licensed-in technology.

F

Some giants, including General Electric and Cisco, have been remarkably successful at snapping up and integrating scores of small companies. But many others — T ^ worry about the prices they have to pay and the difficulty in hanging on to the talent that dreamt up the idea. Everybody would like to develop more ideas in-house. Procter & Gamble is now shifting its entire business focus from countries to products; one aim is to get innovations accepted across the company. Elsewhere, the search for innovation has led to a craze for “intrapreneurship”—devolving power and setting up internal ideas-factories and tracking stocks so that talented staff will not leave.

G

Some people think that such restructuring is not enough. In a new book Clayton Christensen argues that many things which established firms do well, such as looking after their current customers, can hinder the sort of innovative behaviour needed to deal with disruptive technologies. Hence the fashion for cannibalisation—setting up businesses that will actually fight your existing ones. Bank One, for instance, has established Wingspan, an Internet bank that competes with its real branches (see article). Jack Welch’s Internet initiative at General Electric is called “Destroyyourbusiness.com”.

H

Nobody could doubt that innovation matters. But need large firms be quite so pessimistic? A recent survey of the top 50 innovations in America, by Industry Week, a journal, suggested that ideas are as likely to come from big firms as from small ones. Another skeptical note is sounded by Amar Bhidé, a colleague of Mr Christensen’s at the Harvard Business School and the author of another book on entrepreneurship. Rather than having to reinvent themselves, big companies, he believes, should concentrate on projects with high costs and low uncertainty, leaving those with low costs and high uncertainty to small entrepreneurs. As ideas mature and the risks and rewards become more quantifiable, big companies can adopt them.

I

At Kimberly-Clark, Mr Sanders had to discredit the view that jobs working on new products were for “those who couldn’t hack it in the real business.” He has tried to change the culture not just by preaching fuzzy concepts but also by introducing hard incentives, such as increasing the rewards for those who come up with successful new ideas and, particularly, not punishing those whose experiments fail. The genesis of one of the firm’s current hits, Depend, a more dignified incontinence garment, lay in a previous miss, Kotex Personals, a form of disposable underwear for menstruating women.

J

Will all this creative destruction, cannibalisation and culture tweaking make big firms more creative? David Post, the founder of Umagic, is sceptical: “The only successful intrapreneurs are ones who leave and become entrepreneurs.” He also recalls with glee the looks of total incomprehension when he tried to hawk his “virtual experts” idea three years ago to the idea labs of firms such as IBM though, as he cheerfully adds, “of course, they could have been right.” Innovation unlike, apparently, sex, parenting and fitness is one area where a computer cannot tell you what to do.