Frank T. Rothaermel and Andrew M. Hess, 07.30.10, 02:19 PM EDT
Some approaches to achieving innovation work well together–and some don’t.
Continuous innovation is the engine that drives highly successful companies such as Apple, General Electric, Google, Honda, Hewlett-Packard, Microsoft, Procter & Gamble, Sony, Tata group and many others. Innovation is an especially potent competitive weapon in tough economic times, because it allows companies to redefine the marketplace in their favor to achieve much-needed growth.
One increasingly popular way to think about innovation is to conceive of it as an open rather than closed system. To continue to be innovative in a world of widely distributed knowledge, many companies are recognizing that they must open their innovation process to combine internal with external research and development. If an open innovation system does in fact help drive growth and performance, managers need to answer two critical questions:
1. Which innovation strategies should the company pursue?
2. Which innovation strategies go well together?
To answer these questions, we spent five years studying how global pharmaceutical companies have built innovative capabilities in biotechnology. We documented the annual R&D expenses of 81 global pharmaceutical companies over a 22-year period, along with every biotech and non-biotech patent the companies filed, every scientist who worked for one of the companies, all alliances entered into and all acquisitions consummated during that period. In particular, we tracked approximately 900 acquisitions, 4,000 alliances, 13,200 biotechnology patents, 110,000 non-biotechnology patents and 135,000 scientists; we used U.S. biotechnology patents as a proxy for innovation in this industry.
Although researchers have a good understanding of innovation strategies individually, the effects of pursuing various innovation strategies simultaneously are not well known. Which innovation strategies go well together, and which do not? Our research indicates that a combination of star and non-star performers on a company’s R&D team enhances innovative performance, as measured by U.S. biotechnology patents. Moreover, our findings also show synergies between internal R&D expenditures and strategic alliances–and suggest that a strong internal R&D capability allows a company to select and pursue the most promising strategic alliances. In addition, strategic alliances and acquisitions frequently reinforce each other.
But in some cases the simultaneous pursuit of multiple innovation strategies can be a waste of resources. For instance, our findings suggest that the type of knowledge obtained through strategic alliances is often redundant with the knowledge obtained through an investment in rank-and-file workers. Likewise, investments in star performers and assertive R&D spending can also lead to redundant outcomes. Overall, our study found that the strategy that appears to have the greatest impact on innovative performance is developing and fostering human capital.
Although the results from our study are intriguing and valuable to managers, an important caution is in order. Our research is focused on understanding the innovation efforts of established and, for the most part, large companies (e.g., average inflation-adjusted annual R&D expenditures of more than $850 million). Given their size, many of the companies studied have already developed competencies in specific innovation levers. For example, one pharmaceutical company may have traditionally focused on internally developing its research capabilities, while several others may have more often chosen to build their innovation capabilities through acquisitions and alliances. What’s more, there is no clear overlap between the capabilities needed for developing a company’s human capital and those needed for successfully managing alliances. Consequently, for the companies we studied, the negative effects on innovation associated with combining certain innovation strategies may reflect the opportunity costs of not focusing more on an innovation approach that hones the company’s existing, underlying competencies and harnesses its prior experience.
In short, managers should carefully weigh the unforeseen costs associated with interdependencies between different innovative strategies. Managers should resist the siren song of the innovation grab bag–that is, pursuing as many innovation strategies as possible–in favor of a more deliberate approach.
This article is adapted from “Innovation Strategies Combined,” by Frank T. Rothaermel and Andrew M. Hess. Copyright © Massachusetts Institute of Technology, 2010. All rights reserved.