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Innovation
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 Innovation
EVERYONE TALKS ABOUT THE IMPORTANCE OF INNOVATION, but
talking is not walking the walk. For instance, by the time of its initial public
offering in 2004, Google was already a formidable rival of Microsoft, Amazon
and Yahoo. Why didn’t they see the same opportunities? One crucial reason
appears to be that industry giants—and large companies generally—concentrate
too much on relatively safe, incremental product improvements instead of
focusing on potentially more profitable—but riskier—breakthrough innovations.

Sustaining Corporate Growth

3 Contents
Requires ‘Big I’ and ‘small i’
Innovation
All companies face a common challenge: how to
grow their businesses so they can boost earnings
and enhance the value of their shares. Far too
often firms find it difficult to sustain growth
because they become risk averse and opt for
incremental product and service improvements
instead of major initiatives, according to a study
by George S. Day, co-director of Wharton’s
15
Finding Money for Innovation:
Mack Center for Technological Innovation.
Develop Those People Skills

7
Philips Lighting CEO Rudy
Provoost: Innovation Means
Putting Consumers’ Needs First
Philips, the world's largest producer of industrial
and consumer lighting products, has a big role
to play in the ongoing transformation from
incandescent to solid-state lighting using LED
technology. Figuring out needs, weeding out
needless complexity and innovating with an
eye on the bottom line are the keys to growth.
Innovations typically involve trial, error and
outright failure before turning into successful
products or services. For decades, leading
businesses have willingly shouldered the
expense and the risk of innovating as the
price of staying ahead of competitors. But
innovating has become a lot tougher lately,
according to a panel who recently spoke at
the University of Pennsylvania’s EMTM program.
17
Why an Economic Crisis
Could Be the Right Time for

Innovation ‘Out of Necessity’:

12 Companies to Engage in
‘Disruptive Innovation’
While globalization has witnessed the decline
Entrepreneurship during a of U.S. dominance in manufacturing, energy,
and even finance, one thing had long been
Downturn presumed unassailable: good old American
Looking for ways to incentivize entrepreneurial ingenuity. Now it appears that’s not safe, either.
activity and enhance corporate liquidity during
a recession has become a strategic focal point
for Spanish companies. Ignacio de la Vega,
director of the IE Business School's Center for
Entrepreneurial Management and president of
the Global Entrepreneurship Monitor (GEM),
discusses the impact of economic crisis on
innovation and entrepreneurship in Spain.

2 Wharton on Innovation ■ ©2009 University of Pennsylvania

 Sustaining Corporate
Growth Requires ‘Big
I’ and ‘small i’
Innovation

“These executives know that the

All companies, from major multinationals to start-ups, expectation of superior organic growth is
face a common challenge: how to grow their businesses the most important driver of enterprise
value in capital markets,” Day writes in
so they can boost earnings and enhance the value of their the paper, titled “Closing the Growth Gap:
shares. Far too often, however, firms find it difficult to Balancing BIG I and small i Innovation.”
sustain growth because they become risk averse and, as a It is also a less expensive way to grow
because a firm typically pays a premium
result, opt for incremental product and service improvements to acquire another business. Yet studies
instead of major initiatives, according to a study by a have shown that only 29% of managers
of major corporations are highly confident
Wharton marketing professor. they can reach their organic growth targets.

George S. Day, who also serves as
co-director of Wharton’s Mack Center
for Technological Innovation, says
companies can avoid lackluster growth
by better understanding the risks inherent
in different levels of innovation and
achieving a balance between—using two
terms he has coined—BIG I innovation
and small i innovation. In his study, Day
discusses how executives can properly
assess risks and then seek creative ways
to reduce risk exposure.
Day, a consultant to many Fortune 500
companies, says his research is the
outgrowth of years of thinking about the
problems that companies face in trying to
set and achieve growth targets. Growth—
particularly “organic” growth that comes
from improving a company’s performance
from within rather than relying on
acquisitions—is so important that it is at the
top of the agendas of some 80% of U.S.
chief executive officers, according to Day.
A combination of factors can make
organic growth hard to sustain. For one
thing, firms often find themselves in
saturated, price competitive markets—
pressured by customers who themselves
are squeezed—and are forced to
compete for incremental share gains with
rivals who follow similar strategies. One
answer to this challenge is to explore new
“blue ocean” markets with new business
models and offer a better customer
experience. While this is an appealing

Wharton Executive Education ■ Knowledge@Wharton 3

 growth path, the returns may not
compensate for the higher risk and
long delay before any returns are realized.
This approach also does not account for
the consistent growth records of Wal-Mart,
Dell and IKEA, which have been methodically
leveraging their low-cost business
models in closely adjacent markets.
In other cases, disappointing growth can
stem from organizational impediments
(such as short-term incentives that
subvert long-term objectives), risk-averse
cultures and inferior innovation
capabilities. Day says 80% of CFOs of
major corporations would reportedly hold
14% of a sample
of business
launches that
were substantial
innovations
accounted for
61% of profits.
back on discretionary spending designed
to fuel growth if they were likely to miss
their quarterly earnings target.
The combined effect of these external
and internal impediments to growth is
that incremental small i innovation
displaces BIG I innovation growth
initiatives. Small i projects make up 85%
to 90% of the average corporate
development portfolio. These projects are
necessary for continuous improvement
but do not change the competitive
balance or contribute much to
profitability. By contrast, 14% of a sample
of business launches that were
substantial innovations accounted for
4 Wharton on Innovation ■ ©2009 University of Pennsylvania
61% of profits, according to a study cited
in Day’s paper.
This bias toward safer, incremental line
extensions and product improvements
seems to be intensifying. Between 1990
and 2004, the proportion of “new-to-the-
world, true innovations” in development
portfolios dropped from 20% to 11.5%,
Day writes. Even the less ambitious
development of products “new to the
company” dropped by a third.
Crippling Consequences
There are any number of reasons why
companies are placing a growing
emphasis on small i innovations. Long
established, incumbent firms may suffer
from tunnel vision, that is, they miss early
signals of market opportunities that offer
openings for rivals. For instance, by the
time of its initial public offering in 2004,
Google was already a formidable rival of
Microsoft, Amazon and Yahoo. Why
didn’t they see the same opportunity
sooner?
In other cases, firms may opt for
“exploitation” activities over “exploration”
activities. “There is a well-known
organizational trade-off between activities
that exploit existing capabilities and those
that explore new market spaces and
create breakthrough innovations that
stretch capabilities,” Day writes. “This
uneasy trade-off is tilted toward
exploitation by process management
methods that emphasize the reduction of
variance in organization processes. When
the mindset and methods of business
process re-engineering, Six Sigma and
ISO 9000, are applied to innovation
processes, they tend to displace the
inherently divergent and variance
increasing activities needed for creative
exploration. Slowly—and perhaps
imperceptibly—the choices of research
projects to select and products to
develop are steered toward the
incremental and more certain
opportunities.”
At other times, companies may succumb
to short-term thinking. Most financial
yardsticks used to choose which
development projects to fund are biased
against the lengthy pay-offs and
uncertainty of BIG I innovations.
Finally, longer-term investments in
innovation may decrease when
companies use up scarce development
time and resources to react to urgent,
short-term requests from customers and
salespeople. “These requests stem from
fragmenting markets, demanding channel
partners and new forms of competition
that require a proliferation of product
offerings and accelerated development
cycles,” Day writes. “Meanwhile, R&D
budgets are being held constant or
tightened to meet short-term earnings
targets. This leaves firms with more
projects than they can handle, and
pressing small i projects get priority.”
Companies that avoid BIG I initiatives
also believe that the potential rewards will
be received too far in the future at too
high a risk. But this risk aversion imposes
costs that need to be understood and
contained. For example, while the actual
rewards may be realized far in the future,
the equity markets account for them in
their expectations of earnings. If the firm
is viewed as mired in slow-growth
markets, vulnerable to emerging
technologies and lacking a compelling
story about its future growth thrust, its
stock price will suffer.
Indeed, risk aversion may have even
more crippling consequences. “Certainly
the probability of failure goes up sharply
when the business ventures beyond
incremental initiatives in familiar
markets,” according to Day. “But this
should not be an excuse for passivity. It’s
healthier to properly assess the risks and
then seek creative ways to reduce the
risk exposure.”
McDonald’s vs. GE
In his paper, Day includes a “risk matrix”
diagram that can help firms assess the
probability of failure of different growth
paths and calibrate the risks of unfamiliar
markets and technologies. In essence,
the matrix shows that it is far less risky
for a business to launch a new product or
technology into a familiar served market
than to adapt the current product to a
new end-use market.
“Market risks are much greater than
product risks because there are more
dimensions of uncertainty, including
competitors, channels and consumers,”
writes Day. “If the market is entirely
unfamiliar, the firm doesn’t even know
what it doesn’t know—and the
knowledge is hard to acquire. Market
risks are not only less controllable than
technology risks, they tend to be
confronted much later in the product
development process, and are harder to
resolve. A further complication is that an
Wharton Executive Education ■ Knowledge@Wharton
existing brand name has no meaning in a
‘new-to-the-company’ market. It is not
simply a lack of awareness. Because the
prospective buyers lack any experience,
they view the new entrant as risky and
have to be given special inducements to
try the new product.”
For example, McDonald’s abortive effort
to offer pizza in its restaurants was
initially viewed as a “related product” for
the current market. But pizza was actually
a “new-to-the-company” product
because it didn’t fit the basic service
delivery model. “No one could figure out
how to serve a pizza in 30 seconds or
less,” according to Day. “This meant that
service flow rates were disrupted, and
pizzas couldn’t be served through the
drive-in window. The post-mortem of the
failure revealed that the brand name
didn’t give them permission to offer pizza.
They lacked credibility.”
Day says GE is an example of a firm that
has struck the right balance in working to
achieve organic growth by growing on a
number of fronts. After he replaced Jack
Welch, CEO Jeff Immelt boosted the
organic growth goal from 5% to 8% per
year, which translates into finding an
additional $3.4 billion in organic growth
annually. Many moves were made within
GE to encourage fresh thinking. These
ranged from diversifying the top ranks
with outsiders, in a break from the
company’s promote-from-within history,
to keeping executives in their positions
longer so they become immersed in their
industries, and then tying more of their
compensation to new ideas, improved
customer satisfaction and top-line
growth.
The leaders of each GE business were
required to submit at least three
“Imagination Breakthrough” proposals
per year promising at least $100 million in
additional growth. Day notes that such
growth initiatives, which offer true
breakthrough potential, are awkward to
manage within the constraints of the
existing organization. There will inevitably
be conflicts over resource allocation, with
small i initiatives gaining the upper hand.
Yet the fledgling Big I initiatives may need
to share resources, such as brand
presence, manufacturing expertise or
market access, with the established units.
An “ambidextrous” solution to the tension
between small i and BIG I initiatives is to
“house the initiative in a structurally
independent unit with its own processes,
structures and culture, but still integrated
within the existing senior management
hierarchy,” according to Day’s paper.
“The lead role for the ‘Imagination
Breakthrough’ growth initiative within GE
was given to the marketing team within
each of the 11 business units, while
holding the business leaders accountable
for results. This is a startling departure for
a company with a belief that superior
products and technology are what really
count. Until recently, there were no
marketers among the senior ranks and no
coherent approach to marketing beyond
building communication programs and
designing product launches.”
The “Imagination Breakthrough” effort
aims to shift the balance toward BIG I
growth initiatives by giving the
organization permission to break away
from the tyranny of past success and
take calculated risks with departures from
the way the business has been run. By
early 2006, there were about 100 growth
initiatives underway within GE, ranging
from business-model innovations and
new ways to segment and serve the
global energy market, to products for new
market spaces, such as bio-detection of
security threats and small super-efficient
jet engines for the next generation of air
taxis, according to Day.
Preliminary projections were for an extra
$33 billion to $35 billion of top-line
growth from three to five years in the
future. GE’s 35 best projects are subject
to monthly CEO reviews, a strong signal
of commitment. This procedure also
encourages the sharing of best practices
and the further search for cross-division
business opportunities.
The Praxair Case
Another company with a noteworthy
approach to organic growth is Praxair, a
Fortune 300 global producer of industrial
gases based in Danbury, Conn.
In 2003, Praxair set out to find $2 billion
in revenue growth by 2008, Day says.
One half was to come from acquisitions;
the other half required double-digit
organic growth of $200 million per year.
This was far beyond the annual growth
that could be realized from repackaging
helium, hydrogen, oxygen and other
gases. So the company broke down its
5
organic growth into actionable
categories: The first 15% would come
from incremental growth in the base
business and new channels for serving
current markets; the rest would come
from new services, such as nitrogen
injection of oil and gas wells, servicing
the helium coolant used in magnets in
magnetic resonance imaging machines
and developing new reactor cooling and
nitrogen injection cooling methods for the
bioscience industry.
“These initiatives grew out of intimate
knowledge of changing customer needs
that could be met with Praxair’s existing
capabilities,” writes Day. “The lead role in
exploring the market, articulating and
screening the opportunities, and
orchestrating the specific projects was
assigned to marketing, with sustained top
management support and oversight. As a
clear signal of commitment, the CEO of
Praxair spent one day per quarter
reviewing the growth prospects for each
6 Wharton on Innovation ■ ©2009 University of Pennsylvania
business.” Day adds that the pay-off was
immediate: The $200 million growth
target was exceeded by $30 million
in 2004.
Day says that the ideas presented in his
paper began to come together several
years ago when he attended a CMO
summit conference on innovation
sponsored by Wharton, McKinsey and
the Marketing Science Institute. “There
was a persistent theme to the
conversation: Our companies have
scarce resources and we’re always
pressured to think about the short term,”
Day notes. “At the same time, I had been
reading about how process management
methods, such as Six Sigma, tend to cut
down on a company’s willingness to take
risks. It then occurred to me that maybe
there was an increase in the tendency for
companies to rely too heavily on what I
call small i incremental innovations like
product-line extensions, product
upgrades and feature improvements.
“If you have constrained budgets, these
incremental efforts tend to soak up a lot
of that budget at the expense of BIG I
projects, which are risky and long term—
so long term, in fact, that senior
managers may no longer be with the
company once the project finally is
completed. Then I read a great study by
another researcher, who demonstrated
persuasively that there was a relative
shrinking of innovations in corporate
development portfolios. So the evidence
was mounting that there was a trend
working against Big I innovation. That’s
when I asked, ‘How can companies fight
that tendency?’”
The antidote described in the paper, Day
says, “is a disciplined process for
realistically assessing the growth gap to
be filled, expanding the search for
opportunities, calibrating the risks and
using the latest thinking on screening,
real option analysis and partnering to
contain but not avoid these risks.”
Philips Lighting CEO Rudy Provoost:
Innovation Means Putting Consumers’ Needs First

Approximately 19% of the world’s electricity bill comes from

lighting, according to Rudy Provoost, CEO of Philips Lighting. As
such, Philips, the world’s largest producer of industrial and consumer
lighting products, has a big role to play in the ongoing transformation from incandescent to
solid-state lighting using LED [light-emitting diode] technology. Provoost, who until 2007
was CEO of Philips Consumer Electronics, is no stranger to new technologies, which he
says are “just a vehicle to respond to needs.” Figuring out what those needs are, weeding
out needless complexity and innovating with an eye on the bottom line are the keys to
growth, Provoost says. He recently spoke with Wharton marketing professor George Day,
academic director of Wharton Executive Education’s program Full-Spectrum Innovation:
Driving Organic Growth, and with Knowledge@Wharton, about the challenges of staying
ahead in a rapidly changing industry.

An edited transcript of the conversation
follows.
Day: Tell us a little bit about why you are
here at Wharton, and about the
transformation that you are undergoing,
both in a new job and in an industry that
is undergoing a transformation.
Provoost: I recently became the CEO
of Philips Lighting, after having been, for
three years, the CEO of [Philips]
Consumer Electronics, which I call the
“University of Life.” So, I thought that it
was the right way to start a new life by
going through a full immersion to refresh
everything that I’ve ever been exposed to
when it comes to strategies and how to
make growth happen and drive
innovation. It’s “Ful-Spectrum Innovation”
week [at Wharton], and that fits into my
full immersion program.
Day: Philips is the worldwide leader in
lighting and has been for many, many
years. You’re coming into this business at
a pivotal time, with a very interesting
background. The pivotal time, of course,
is the steady and perhaps accelerating
transition into solid-state lighting. Could
you tell us what the consequences of this
big transformation are for Philips
Lighting? And, at the same time, maybe
talk a little bit about how you’re going to

Wharton Executive Education ■ Knowledge@Wharton 7

manage the decline of the traditional
business while this is going on?
Provoost: [Those are] many questions
at the same time, but indeed lighting is at
the crossroads—and I say that both from
a marketing perspective and from a
company perspective. There are some
very important real trends that change the
dynamics of the business and even the
business models that go with it. There’s
the whole shift from incandescent lighting
to new forms of lighting, solid-state
lighting in particular.
There is the whole energy efficiency
“green wave” that really forces society
to change, and lighting can contribute
significantly. I mean, 19% of the
electricity bill in the world is lighting,
and so we have a contribution to make.
Obviously, there are many, many
companies with new disruptive
technologies that are coming in, who
maybe will become part of the lighting
game—which until now was very much
an oligopolistic game, where the giants
like Matsushita, GE, OSRAM and Philips
were fighting the war.
The whole landscape is changing. Now,
change means opportunity, and in that
sense we have actually been anticipating
what is happening. In the past two years,
we did a $4 billion acquisition program.
We acquired five companies: Color
Kinetics, Genlyte, many of them are U.S.-
based. That allows us to step up
significantly. I think that we have all of the
ingredients and we have the building
blocks. And now the fact of the matter is
that we need to put the pieces of the
jigsaw puzzle together, take all of those
ingredients and bring them together into
a winning formula. That is what I’m
supposed to do. It’s a very exciting
moment and I look forward to it. This is
like writing history.
Day: Yes, it’s a daunting prospect. But,
you’ve had some really exceptional
experience that I think equips you for this
particularly, and maybe you can reflect on
your experience in consumer electronics
and how that might help guide you
through this transformation.
Consumer Electronics, which I always call talked about consumer electronics, the
a “life-altering experience.” That’s a place emphasis was on the electronics, on the
where all forces come together. You hardware. And now it’s about a unique
know, consumer electronics, the whole combination of hardware, software
ICT sector has gone through a dramatic services and content.
transformation.
So, if you think about paradigm shifts and
transformational change—that is what I
have been dealing with for the past seven
“The whole energy years. And there’s no escape: I will have
to deal with it again in lighting. But,
having gone through that “University of
efficiency ‘green Life” and having been exposed to it, I
think that we’ve found a successful
wave’ really forces formula to compete in a very global and
dynamic market. It is hopefully going to
society to change, help me to be successful going forward.
So, yes, I hope that I can use everything
and lighting can that I have learned in the past years and
apply it again and add to the learning.
contribute Day: I have this vision of a lighting plant
that I was in one time which was
significantly.” immense and automated, and they could
tell me the cost of everything down to a
Rudy Provoost, tenth of a pfennig. They managed that all
for efficiency. And I’m sure that Philips is
CEO, Philips Lighting fabulous at that sort of thing. And so,
you’ve got that kind of model, that culture
and that system. How are you going to
transform and disrupt that? And, what are
the assets that you bring from that into
the new game?
Provoost: I think the issue is not so
much how good we are in the process
industry, or whether we should
manufacture everything ourselves. I
really believe that the issue is: Where
do we have to be a vertically integrated
business? And/or, where should we
depend on others or partner with others,
whoever that might be?
In that sense, again, we will not be a
successful lighting company by
excelling in manufacturing processes.
It’s really about [looking] outside and
understanding what the market needs
are, what the future applications are, what
the requirements are for lighting solutions
and experiences in various places and
spaces: What does it mean in the office?
What does it mean in the shop? What
does it mean in terms of city
beautification, street lighting?

Provoost: There must be a reason why
they have asked me to do this job.
[Laughs] And so, yes, I’ve been working
in different businesses: Procter &
Gamble, Canon, Whirlpool, and Philips
Lighting—the last seven years in Philips
Also, there are the shifts from analog to
digital; in the TV business, there are the
shifts from CRT to LCD and plasma.
There was a notion before that when we
On the technology side, we very much
know what is possible. On the marketing
side, we have to be more specific in
answering the question of what is
required—and then bring the two
together. Technologies are just a vehicle

8 Wharton on Innovation ■ ©2009 University of Pennsylvania

to respond to needs and come up with
absolutely brilliant solutions and
applications. In that sense, my focus will
[much more] be outside-in, understanding
what needs to be done and how I can
connect the dots also between the
capabilities and competencies we have
now in the new lighting company, which
is a mix of existing Philips businesses
and acquired companies, then make sure
that we are obsessed with end-user-
driven innovation and just take that to its
full consequence.
Again, if you want to be successful and in
terms of business model control points, in
some aspects, if we need to be vertically
integrated, we will be. It’s really more
about the business model than about bits
and pieces of processes—you cannot
disconnect the two.
Day: It’s market-driven innovation at a
scale beyond anything that you’ve ever
had to manage—or at least Philips
Lighting has ever had to manage.
What will be the biggest barriers that
you think you will have to overcome,
[especially] around maintaining your
leadership position?
Provoost: I guess it’s a bit of a paradox,
but the success of the past could be the
biggest barrier for the future. This lighting
company has been extremely powerful and
has invented the space and came up with
particularly winning technologies and there
were many control points. Right now, it’s all
about mindset. It’s about, at the end of the
day, we, me, the people are probably the
most important limiting factors, and so
that’s where the challenge is.
What I learned here is that statement of
Darwin’s—that it’s not about being the
strongest, but it’s about being the most
responsive and agile [when it comes to]
change. That is what it’s really all about.
And so, making sure that we have the
culture right and that we use the DNA of
success in the past, but blend it with
new DNA.
As a matter of fact, in the world of solid-
state lighting, LEDs, everybody has
access to LEDs; everybody has access to
the basic technologies. If you have IP,
fine, but a lot of the IP can be bought. It’s
really about a more segmented end-user
application solution approach to it, rather
than a pure technology view of it. This will
require people changing, it will require
different prioritization, and it will require
Wharton Executive Education ■ Knowledge@Wharton
different ways of spending our money
and allocating resources.
Day: We did talk about one of your
competitors, GE, who has seen the need
to bring in a lot of outsiders, a lot of fresh
faces, different mental models. Do you
see a substantial number of new
employees, or will the acquisitions that
you have already made bring in enough
fresh talent for you?
Provoost: We have got all of the fresh
talent, of course, through these
acquisitions. There is a very intense
exchange of talent between the different
sectors, within Philips. And, it is
remarkable how you can blend everything
together. We have a consumer lifestyle
business, a lighting business, a
healthcare business. There is a lot of
internal talent. But, absolutely, the team
of today is not the team of the future and
so we will have to strengthen it.
But the answer is not only in our own
talent pool. It’s also about connecting with
the world and working with the right
partners. I mean, just here, during this
week, we had the chance to listen to the
lighting science group and CEO—well,
he’s actually a partner. And that is
typically the case, where you work with
companies who, for example, can act as,
to put it in IT terminology, value-added
resellers or system integrators. So, it’s not
only about your own talent pool; it’s about
an extended pool of resources. To win, in
the future, we need to add brain power
and horsepower; and then, make sure that
we have the willpower to stay the course.
Day: So, you’ve got a number of partners
out there. One of the big challenges
always in managing open innovation, with
lots and lots of partners, both providing
ideas and helping you to commercialize
them, is who gets to keep the intellectual
property and monetize that?
Provoost: Well you know, through the
acquisitions that we made, we made sure
that we have a very good intellectual
property platform [laughs].
Day: That’s definitely one way to do that.
[Laughs]
Provoost: We have quite a lot of
intellectual property there, but if you really
want to and have to partner, then you
have to make sure it’s a win/win. So, I
guess in the way we structure
partnerships, in whatever shapes or
forms—from joint ventures to alliances—
you need to make sure that it’s a mutually
rewarding partnership. It’s not only about
the IP, but the IP of course is an element.
It can be an enabler, or it can simply be a
control point; or it can be a shared
interest. And so, I would say that we
should be open to any business model
and just pick the one that creates the
most value.
Day: We’ve talked about two of what I
think are the four main levers that you are
working with. One is leadership and you
are exercising that and you have a vision.
The second of course would be the
structure that you put in place, including
all of the people. The third, which is the
one that I want to turn to now, is the
motivation part of it, the incentives and
the metrics. Do you see the need for new
metrics and new kinds of incentives?
Provoost: Yes, but you need all three—
I call it the “Triple As.” One, the leader
has to be an advocate—he has to be an
activist almost for innovation. The second
A is accountability. I don’t like the word
“structure” too much. For me it’s about
accountability, it’s not about org charts
and re-drawing the reporting lines. It’s
really about accountability—make sure
you have owners with a face and a name
and then connect the right people
together. So, the informal network, so to
speak—that is very critical.
The third A for me is you need amplifiers.
Now, one amplifier is the reward schemes
that you use. And there, it’s always about
the trade-off between incentive schemes
that stimulate the feeling of belonging
and the joining forces behavior versus the
incentives that reward individual or team
accomplishments. Now, we’ve made a
very deliberate choice to actually go for
the incentive scheme that stimulates the
kind of “one lighting,” joined forces, all-
hands approach.
This is because if you want to win in the
future, particularly in the context of
Philips Lighting today, you need to make
sure that all of the business groups, all of
the units, all of the acquired companies
as well as the existing teams—you need
to make sure that these teams are
working together. I mean, if you just let
Lamps do what they think is the best for
lamps, or Lighting Electronics do what is
best for lighting electronics or the
Luminaires Group do just what is best
9
 for luminaires—we will end up with a
suboptimal situation.
For me, the innovation agenda is actually
part of a larger growth agenda and I want
to make sure that everybody feels part of
that same growth objective and signs up
for the same bottom line. This will make
resource allocation, reprioritization or
sharing of competencies and capabilities
much easier. So, that is the way we are
going to deal with it.
Day: This goes hand in hand with a
partnering orientation, or a share-to-gain
mindset.
Provoost: Absolutely.
Day: I have one final question, which
is really looking at innovation in large
organizations, at a time of recession. For
the last five years, we have had a robust
economy, notably in North America,
Europe and in Asia. Innovation is at the
top of most CEOs’ agendas as it is in
yours. Now, looking at your experience
and thinking about your competitors and
companies that you know, what do you
think is going to happen in recession?
What will happen to innovation, the
enthusiasm for it, the willingness to
support it and make the long-term
investments that are necessary?
Provoost: Well, I cannot answer for the
world or for other companies. But
certainly from a Philips Lighting
perspective, in times of recession, the
last thing you want to do is cut off the
oxygen. In times of recession, you need
to work harder, run faster and so you
need a lot of oxygen and for me
innovation is about oxygen. So, we are
not going to cut the oxygen and we’re not
going to cut the lifeline—because no
lifeline means no survival.
Of course, recession will probably force
us to make choices. So, it’s not about
doing less, it’s about picking the right
battles. And I think that in times of
recession, actually, it’s a bit of a paradox.
Value becomes more valuable. At the end
of the day, consumers have to make
choices too. And so, it’s about share of
wallet and the choices they are going to
make. Are they going to buy Philips
Lighting or something else?
Now, if the value proposition is attractive
enough—and it can only be attractive if
there is a real innovative component to it.
10
And, that could be a real energy efficient
lighting solution, which helps in time of
recession to keep the costs down. Then,
we should be the most attractive offer for
that consumer. I don’t think the answer
should be or could be to cut budgets.
But, as consumers need to make
choices, we have to maybe make
choices. And that is, for me, the way that
we will deal with it. So, in that sense, I am
very optimistic.
For me innovation is a little bit like
acupuncture: You need to put the needles
where the energy points are. This is true
“It’s not about being
the strongest, but
it’s about being the
most responsive
and agile when it
comes to change.”
Rudy Provoost,
CEO, Philips Lighting
in general, but in times of recession,
that’s probably even truer. And so, I hope
that we can manage it in the proper way
going forward. Again, I am optimistic,
even in times of possible recession.
Day: Some years ago, there was a very
interesting study which looked at a
couple of recessions and looked at the
changes in industry structure, both before
and after the recession. And it turned out
that was when market shares shifted
because there were some competitors
who were forced, or who chose to
maximize current earnings—cut back on
marketing, cut back on innovation, not to
mention executive education and all of
those other things—and they invariably
lost a lot of ground.... And that is when
you can pile on and gain share.
Provoost: We referred to Darwin
earlier and this is again Darwin at work; it
is survival of the fittest. A recession can
indeed trigger shake-outs and the one
that prevails is the one that was the most
Wharton on Innovation ■ ©2009 University of Pennsylvania
flexible and responsive to change—and
the one that speaks to the hearts and
minds of the consumer.
Knowledge@Wharton: I have a
couple of questions. Whose job is it to
innovate in your company?
Provoost: There are probably two
answers to that. One, it is everybody’s job
because innovation is not only about
product innovation or service innovation.
In essence, you can innovate everything,
every day, in every process. I think the
notion of innovation, in my opinion,
should be a very inclusive notion. This is
so everybody can ask themselves, every
morning: What can I do differently? And
that goes from taking out unrewarded
complexity in the spirit of Philips’ “Sense
and Simplicity” to just challenging the
status quo—and I think that that is
everybody’s job.
Now, at the end of the day, if you really
want to push the envelope, and you do
not want to limit yourself to the small “i’s”
(incremental innovation) but you also
want to hit the big “I’s” (breakthrough
innovation), you will need to have the big
boss to have skin in the game, too. And
so, I think that it’s very important that the
leader is the chief activist, so to speak,
and leads by example.
Knowledge@Wharton: You referred
to the sort of disruption that innovation
causes. Innovation is inherently a
somewhat messy process. How do you
manage the balance between creativity
and organization in managing innovation?
Provoost: I don’t think that the
process should be messy. I think that the
process should be very structured and
disciplined. But what you put into the
process—and what comes out of it—and
the cycles of, I would say, diverging and
converging solutions and elements of
innovation—that could be a very creative
process. But, the best creative process is
the one that is well structured at the end.
You look to the benchmarks, from the
ideas of this world, to some companies
that are very well known for their success.
I mean, they all have a very structured
and disciplined way of dealing with
innovation, but within the boundaries,
their bandwidths, they allow a lot of
creativity. And, I guess that is the way to
handle it and to manage it.
Wharton Executive Education ■ Knowledge@Wharton
Knowledge@Wharton: How do you
measure the returns that you earn on your
investment in innovation?
Provoost: I think it is extremely
important that with whatever point of
measurement you take, whether it’s what
you put into the innovation process, like
R&D resources, or the process itself, the
effectiveness of the innovation, or the
output of it—that there is always the
notion of profitability. So, in one way or
another, if you think about outcomes,
things like R&D as a percentage of sales,
I don’t believe in. R&D in relation to
EBITDA, I believe in.
Every innovation project should have a
return on investment, an internal rate of
return, a net present value. And, you need
to hardwire it and keep yourself honest,
because at the end of the day, it’s about
generating returns. The top line is
interesting, but the bottom line is what
matters. You need that bottom line in
order to continue to generate resources
and to continue to invest in innovation.
And so, that for me is a very important
element—the most important element.
And of course, there are many lagging
indicators, like new products that were
brought to the market in the last two
years or three years. That is for me a
lagging indicator. I’d rather have leading
indicators like: What do we have in the
pipeline? And, there again, that should
stimulate that culture of innovation, of
not just trying to be satisfied with simple
measures that do not mean a lot.
11
Innovation ‘Out of Necessity’:
Entrepreneurship during a Downturn

During a recession with fast-growing unemployment, looking for ways to incentivize

entrepreneurial activity and enhance corporate liquidity has become a strategic focal point
for Spanish companies. Ignacio de la Vega, director of the IE Business School’s Center for
Entrepreneurial Management and president of the Global Entrepreneurship Monitor
(GEM), which analyzes entrepreneurial conditions in 43 countries, spoke with Universia
Knowledge@Wharton about the current economic crisis and its impact on entrepreneurship.
The GEM 2008 Global Report is sponsored by the Ministry of Industry’s small and midsize
business division and the Banesto Foundation for Society and Technology.
Universia Knowledge@Wharton: 7.78%. If we think about what was economic climate. Then the Internet
What has been the impact of the global happening at that time in the market, we bubble burst, and there was a serious
economic crisis on entrepreneurial activity see that it was a period of boom, when crisis in the technology sector—a sector
in Spain? What differences are there the Internet bubble in Spain was at its crisis, not a systemic crisis like today—and
compared with previous crises? In what decisive moment. There were lots of there were the attacks of September 11 …
ways will entrepreneurial activity evolve? opportunities to start companies and, and finally, optimism declined along with
unlike the current situation, when the rate of entrepreneurial activity.
Ignacio de la Vega: Starting from entrepreneurial activity did not bear fruit it
2000, we have measured the macro- was not because of a shortage of work Ever since then, we’ve been experiencing
climate and environment in Spain very opportunities but purely because of the rising economic activity, until this year
carefully at our organization. We began particular opportunity. In 2002, we with some isolated declines, but that
with an entrepreneurial activity rate of practically returned to the levels of 2000, reflects the growth of our economy since
4.55% that year, and we see an extremely with a 24% drop in the rate of 2000. Analysts began to notice the crisis
important turning point between 2000 entrepreneurial activity, which is an in July 2007, but at that time it was a
and 2001, when the rate climbed to accurate reflection of the overall crisis in financial markets that had yet to

12 Wharton on Innovation ■ ©2009 University of Pennsylvania

spread into the real economy. In July
2008, at the time of our annual study, the
financial crisis already had a very
important impact on the real economy
and we were expecting successive
declines in the rate of economic activity in
coming years. Given today’s challenging
conditions, including the climate of
pessimism, scarcity of financing and so
forth, the rate [of entrepreneurial activity]
will continue to drop. Nevertheless, we
have been living through a new era ever
since 2000, and an amazing drop-off in
job opportunities—the unemployment
rate is over 15%. Obviously,
entrepreneurial projects are a very
important source of development that
takes place “out of necessity.” For the
same reason, the decline will not be as
steep as in the 2000-2002 period
because, since there are fewer job
opportunities today, many unemployed
people will have to look for refuge in self-
employment.
UK@W: What barriers are today’s
entrepreneurs facing?
I.D.V.: There are three fundamental
barriers at the moment. The first is
psychological. Given the problems in the
market, starting a business appears to be
very risky, especially in a country like ours,
which has a culture where there is a clear
fear of failure and risk. We find ourselves in
a tense position, halfway between the
need to find means for income and
professional activity, and the psychological
fear of failure and risk. In my view, the
need [for income] will win out.
Once that barrier has been overcome, the
second big barrier is [a shortage of]
financial resources. Fewer financial
resources are coming from the two
principal sources for financing
entrepreneurial activity: First, debt, which
you get from financial institutions, and
public support is not functioning at this
time. Second, it’s not coming from
informal investors, either; especially when
it comes to the smaller companies we’re
talking about, where [entrepreneurial]
activity has fallen by 13%. The figure of
the “business angel” was already weak in
Spain [before the crisis], and in the
current situation, those people who are
liquid expect to make money [on their
investments], and those who have already
invested [their funds] don’t have any more
cash to invest. Our 2008 report already
reflects this situation; it shows there has
Wharton Executive Education ■ Knowledge@Wharton
been a significant increase in the number
of entrepreneurs who develop a business
project and contribute 100% of the
financing. Nowadays, given the rate of
unemployment, a normative change is
going to permit people to capitalize up to
60% of their unemployment subsidies
and dedicate it to entrepreneurial activity.
This will add some fuel to the system.
The third barrier is real demand. Demand
has shrunk a great deal, and it is very
hard to find [business] opportunities in
many sectors. Competition between
companies is already well established
and, in an attempt to survive and grow,
many companies are becoming more
aggressive. That occasionally means
lowering their prices, and taking
competitive positions in the marketplace
that make it hard for someone who does
not have these competitive advantages to
enter the market.
UK@W: How are people dealing with
those obstacles? What concrete
measures are they implementing, and
what’s your assessment of them?
I.D.V: The solutions involve laying out
public policies that are more efficient than
those we have today; that includes
making it a clear responsibility of financial
institutions to get more involved in the
system, and really bring to the market
some of the rescue measures for small
companies that have already begun as
commitments by the communications
media to develop some optimism within
the system. As long as we do not see the
light [at the end of the tunnel], we won’t
be spending. When demand contracts in
the ugly way it is contracting today,
entrepreneurial activity becomes
paralyzed. Companies leave the market,
and it is very hard for others to enter it.
The Spanish government has limited
resources. For example, its monetary
policy is determined by the EU. However,
there are some things it can do. It has
tried to inject confidence in the market
with its bank rescue plan, but it has had
some mediocre results because many
banks are not participating or are doing
so only by dribs and drabs; that way,
banks are not required to provide liquidity
to the market. The problem is if the small
companies don’t get any liquidity, and
they turn off the flow of credit, and then
even if they sell less and many of them
don’t get paid when they do sell, they
wind up not being able to take care of
their [debt] obligations—not making
nominal payments, payments to
suppliers, and so forth. The vicious circle
tightens, and it is very harmful. To remedy
this situation, you create a rescue plan for
small companies that basically consists
of providing them with some 10 billion
euros, but there is the problem of
communication here. Financial aid is
available through the ICO [the Ministry of
Economics’ Official Credit Institute], but
the catch is that this operates through
financial institutions that have a maximum
level of requirements when it comes to
[providing] guarantees. As a result, small
companies continue to lack access to
that financing.
There is a need for more aggressive
solutions such as if the government were
to strongly guarantee help through the
ICO for small companies that have a
certain degree of insolvency. There are
3.5 million small companies, of which
80% have financing problems. On the
other hand, you could jointly create a
public bank to develop projects aimed at
smaller companies, although that is also
difficult to communicate given today’s
community norms. The solution definitely
involves injecting liquidity and confidence
into the system. Some banks do that, but
with complex criteria and in sectors of
activity that are not subject to so much
risk. In addition, the criteria for solvency
are especially high, leaving out strong
companies that could survive and that, at
best, have a cash flow problem.
Starting from there, there are lots of other
measures: A fiscal agreement for the
serious reduction of taxes so that small
companies can delay some tax
payments—so that they can spread out
payments of VAT [Value Added Taxes];
and for social security liquidations,
something that they can do now but
which will have an extremely high cost
when there is a bank guarantee.
UK@W: Experts talk a lot about
innovation and exports as two good tools
for getting around the crisis. Do you
believe that the right policies for
addressing those subjects are getting off
the ground today?
I.D.V: Innovation is not just about
developing innovative R&D in technology.
That is just one sort of innovation that is
possible for a very specific sort of
company. Many small companies don’t fit
in that category. The sort of innovation
13
 within reach of small companies often
involves some technology but, especially,
it involves an innovative business model.
For example, a neighborhood
supermarket faces a very trying situation
such as declining revenues, higher costs
for all sorts of things including logistics,
and so forth. For this sort of entrepreneur,
innovation could mean trying to generate
additional value for customers with
classic solutions such as discounting, or
it could mean looking for more innovative
products, since competing simply on the
basis of price has become so difficult.
“Small and midsize companies
generate more than 80% of all
new jobs.”
Ignacio de la Vega, Director, Center for
Entrepreneurial Management, IE Business School
You have to invest in R&D and have a
public policy [to support that], but people
need to know this is about long-term
investment. It doesn’t make sense to say
that [R&D] is a [short-term] solution to the
crisis. If we begin to invest seriously now
and, for example, create a Ministry of
Innovation, perhaps we can diversify the
business model of the country in ten
years. The reality is that the government’s
R&D funding has been squandered; on
occasion, it was used for buying new
machinery and other initiatives that are
not really R&D.
As for exports, diversified companies are
more sustainable, according to the
textbooks. But we are talking about small
companies exporting and, at times, that
is an oxymoron, a contradiction in terms.
Ultimately, it is a problem of
competitiveness. In order to export, you
need to be competitive, and in this
country we have a very troubling situation
in that regard. At times, the origins of that
problem are in public policy; we have
trouble exporting because we have
exhausted our options for exporting in
many sectors. In addition, we start with
an unfavorable scenario in many low-cost
markets in that salaries in those countries
are up to eight or 10 times lower than in
Spain; absenteeism is practically zero
there; quality control requirements are
14
very lax, with no controls, etc. Things that
we do not require of companies of [non-
European] origin [such as China] are
requirements for our companies [in the
EU], and this makes our competitiveness
deficit even a bit deeper. You have to
start from the root of the problem: We
need to educate our companies, provide
them with resources so that they can be
more competitive. And we all need to
play with the same rules.
UK@W: The database for your report
includes 50 countries. What is the profile
of the typical Spanish entrepreneur? Has
it changed a great deal in recent times? If
so, why? How does it differ from that of
neighboring countries?
I.D.V.: Our rate of entrepreneurial activity
is a bit lower than in English-speaking
countries, but higher than in the countries
surrounding us. The profile of the
entrepreneur is becoming more uniform,
but the interesting thing is the change
that has occurred in the last two or three
years; the typical entrepreneur is
maturing and aging. The average age has
gone up by almost four years, and it is
approaching forty [years of age]. These
days, an entrepreneur coming into the
market needs more professional
baggage—more knowledge of the sector
and so forth. This is very common among
entrepreneurs older than fifty. This is
related to the concept of becoming an
entrepreneur “out of necessity”—starting
at that age because your professional
career in Spain has come to an end even
though that shouldn’t be the case. In
addition, today’s entrepreneur has a
higher level of training, and education
now provides an additional competitive
advantage. Today’s entrepreneur also
invests more [in his or her business], and
the average cost of an initial investment
in a project has gone up. The
entrepreneur contributes part of the
Wharton on Innovation ■ ©2009 University of Pennsylvania
funding from his own pocket, which
means that there are fewer and fewer
[external] sources of funding.
In times of crisis, the ratio between male
and female entrepreneurs evens out. This
is something positive, and it obscures a
reality of our environment. In families where
there are not workers, the woman often
develops her entrepreneurial project on her
own. This can even happen, at times, in
traditionally masculine business sectors.
Declining activity in sectors such as real
estate, construction and automobiles
means that male entrepreneurs are
disappearing and female entrepreneurs
are being created in the service sector.
Traditionally, Spaniards invest in the service
sector because it is more welcoming, and
it has minimal risk. However, we also
observe that over the past twelve months,
there has been a significant increase in the
industrial sector of renewable energy.
UK@W: Do you believe that the crisis will
change business habits in Spain?
I.D.V.: For some years, you’ve already
been seeing a certain change, but this is
a little like R&D in that it is a long-term
process. Nowadays, few Spanish college
students want to become entrepreneurs.
We need a profound change that begins
with training, a change in values and
society. So long as the communications
media do not recognize the entrepreneur,
rather than the speculator, as the person
who generates value, things will go poorly
for us. This change was beginning to
occur before the crisis, building on the
boom. Now we are moving in the right
direction. In addition, the government is
very interested because small and
midsize companies generate more than
80% of all new jobs. The responsibility
belongs to all of us—the people, the
government, the business schools, the
universities and so forth. What kind of
country do we want to be in the future?
Finding Money for Innovation:
Develop Those People Skills

Innovations typically involve trial, error and outright “Street-Smart Innovation to Align
Emerging Technology and Business.” In
failure before turning into successful products or addition, future scientists, researchers
services. Thomas Edison, for example, conducted and program managers should focus on
aligning innovative projects with company
approximately 10,000 failed experiments before goals. As panelist Nicholas D. Evans, vice
perfecting the incandescent light bulb. For decades, president of the innovation division at
Unisys, pointed out, it’s much easier to
leading businesses have willingly shouldered the justify budgets for speculative projects
expense and the risk of innovating as the price of that show an obvious commercial benefit
to the parent company.
staying ahead of competitors.
That lesson became painfully obvious this
But innovating has become a lot tougher expertise to convince their employers to past summer to employees of the storied
lately, according to a panel of technology keep the research funding spigots open. Bell Labs research group, based in
experts who recently spoke at the northern New Jersey. Alcatel-Lucent,
University of Pennsylvania’s Executive Indeed, the ability to communicate well owner of Bell Labs, all but gutted much of
Master’s in Technology Management and other “soft skills” are just as the non-commercial “basic research”
program. With R&D budgets shrinking important as technological expertise when performed by the lab. The product of a
and markets retrenching in a worldwide it comes to selling new ideas to investors rocky 2006 merger, struggling Alcatel-
economic crisis, the panelists noted, or senior management, suggested several Lucent sought to align Bell Labs’
technologists will need more than lab members of the panel, which was titled operations more closely with the parent’s

Wharton Executive Education ■ Knowledge@Wharton 15

 commercial interests in wireless, optics,
networking and computer science.
So, how do organizational entrepreneurs
keep innovation alive in companies
looking to slash costs? And how do start-
ups and growth companies attract
investors when the rest of the economy is
melting? That’s another place where
those soft skills come in handy. Several of
the panelists suggested that while
technical people are generally not known
for soft skills, those individuals who
desire funding to continue their work
would do well to acquire them.
Anthony P. Green, a vice president with
first-round funding group Ben Franklin
Technology Partners, said he frequently
sees entrepreneurs stumble because they
lack such skills. All too often, entrepreneurs
come across as rude, dismissive and dis-
respectful to audiences of potential
investors, thereby “infuriating the
investment community.” Panelist Eric F.
Bernstein, a laser surgeon, dermatologist
and technology entrepreneur, echoed that
point. “Business is all about relationships.
They need to like your idea, but they also
need to like you.”
Suzanne Taylor, portfolio director of
corporate operations for Unisys, pointed
out that budget handlers are also more
inclined to favor innovation if it can be
shown to cut costs. Innovation department
heads must become adept at “making the
case for maximizing productivity and
reducing waste,” Taylor said. This requires
excellent communication skills, she added,
including the fine art of schmoozing. And
the higher up the case is made, the better
for the innovator, added Sanjoy Ray,
director of global application engineering
for pharmaceutical giant Merck. “Executive
sponsorship is very powerful. It provides
‘air cover.’”
From Nanotech to Alternative Energy
The panelists agreed that amid the ruins
of the current economy lie vast
opportunities. The question is: Where?
Bernstein, who is involved as an investor
in four companies, said a huge
opportunity exists in digitizing and
networking medical information. Medicine
is a final frontier for information
technology as paper records contribute
to the escalating costs and delays of
healthcare. Green also sees possibilities
16
in nanotechnology, which involves
engineering at the atomic level. Some
products have already come to market,
but the technology has yet to reach its
commercial promise. Bioethicists have
noted that nanotech presents a host of
as-yet unanswered questions, including
the issue of what it will mean to be
human if, as predicted, “nanobots” are
developed to attack disease and enhance
performance. “If [nanotechnology] is
really as disruptive as biotech was, it will
make a big difference,” said Green, a self-
described “veteran of the biotech wars.”
Alternative energy, which had been
gaining steam in 2008, has been
undermined as an investment because
the global slowdown has resulted in lower
prices for traditional fossil fuels, the
panelists said. That makes alternative
energy projects tougher to justify to jittery
lenders, who bank on the projects being
cost competitive with fuels such as oil
and natural gas. “The ills of Western
banks mean, inevitably, that the supply of
debt finance for wind farms, solar parks,
biofuel plants and the like will be less
plentiful, and more expensive, in the
months ahead than it has been in the last
two years,” notes a recent report by New
Energy Finance, a research firm that
covers the deal-making environment for
renewable energy projects. On the other
hand, President Barack Obama has
pledged to devote much of his economic
stimulus plan to investments in green
technologies.
But in times like these, is there any
money for enterprising business people
with superb ideas in these fields? Are
angels and venture capitalists still in the
game? Green conceded that “it’s brutal”
for those seeking early-stage, non-seed
funding. “No one is funding at the $1
million level,” he said. The problem
surfacing right now is that full-blown
venture capital groups want to deal only
with requests in the $6 million to $8
million range. “Not everybody needs or
wants that” amount to get a business to
the next stage, he said.
Where the Toys Are
Jim Senior, a speechwriter for Unisys who
was the panel moderator, noted that
cost-conscious executives might want to
carefully consider any cuts they make to
innovation departments if they are
Wharton on Innovation ■ ©2009 University of Pennsylvania
interested in retaining top talent. Many
brilliant and highly marketable
technologists will remain in an otherwise
unremarkable place if the company has
the financial muscle to invest capital in
labs and equipment. Senior recounted
the story of one researcher who was
asked why he stayed at a large
bureaucratic company. His response:
“Because you have all the toys.”
According to Wharton marketing
professor George S. Day, many well-
known companies remain committed to
innovation in spite of downturns and
earnings myopia. “There are some
companies that see beyond that and
continuously invest in innovation and
growth,” said Day, co-director of
Wharton’s Mack Center for Technological
Innovation. “The best known ones are
Samsung, American Express, Nokia.
These companies are not cutting back on
innovation. We’re not just talking about
products and services, but about
customer experience.” For example,
American Express last year invested $50
million in its “Chairman’s Innovation
Fund,” money that is reserved for
financing employee ideas to improve the
business long-term.
“Since true innovation entails uncertainty,
as opposed to quantifiable risk, there will
always be an element of vision,
entrepreneurship and faith involved,”
noted Mack Center research director Paul
J. H. Schoemaker. “The C-suite
recognizes that business is about taking
risks and that not everything can be
analytically proved or supported when
venturing into the unknown. Too often,
companies focus on incremental
innovation—since it is more predictable
and less disruptive.”
What’s more, Schoemaker said, a difficult
economic climate is an ideal time to
diagnose defects that may have gone
unnoticed when the economy was
stronger. “Tough times present an
opportunity to assess systemic weakness
in one’s industry, company and
leadership team,” said Schoemaker, who
is also an adjunct professor of marketing
at Wharton. “Just think of a sport like golf
or tennis. When conditions are tough, the
weaknesses in your game will show more
clearly.” His advice: “Use the bad times to
conduct a deep self-audit.”
Why an Economic Crisis Could Be
the Right Time for Companies to
Engage in ‘Disruptive Innovation’
While globalization has
witnessed the decline of
U.S. dominance in
manufacturing, energy and
even finance, one thing had
long been presumed
unassailable: good old
American ingenuity.
Now it appears that’s not safe, either.
China, whose industries have been envied
in the West more for their tenacity than their
ingenuity, has established a multi-year
framework to become more innovative and,
therefore, competitive. So has Singapore.
Finland is merging its top business school,
design school and technology school to
create a multi-disciplinary “university of
innovation”.
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Council members of the National
Academy of Sciences and the National
Academy of Engineering have “expressed
concern that a weakening of science and
technology in the United States would
inevitably degrade its social and
economic conditions and in particular
erode the ability of its citizens to compete
for high-quality jobs,” according to a 600-
page report from the National Academies
published in 2007 and titled “Rising
Above the Gathering Storm.”
The wild card these days is what will
happen to innovation—the advance of
progressive ideas in science, technology
and business—now that the world
economy is in a tailspin. The conventional
wisdom might suggest that business,
government and academia will be less
willing to embrace the risk-taking and
short-term costs that come with the
territory of innovating.
Yet Paul J. H. Schoemaker, research
director for the Mack Center for
Technological Innovation, suggests that,
for some companies, the economic crisis
can actually provide an innovation
platform. “The crisis has multiple
impacts,” Schoemaker says. “Loss of
revenue and profit will at first instill a
cost-cutting mentality, which is not good
for innovation. But if the patient is
bleeding you need to stop that first. Then,
however, a phase starts where leaders
ask which parts of their business model
are weak (and perhaps unsustainable)
and that, in turn, can lead to restructuring
and reinvention.”
He also cautions against too much
caution—over-reliance on incremental
innovation versus transformative, or
“disruptive,” innovation. In innovation
circles, the two have come to be
differentiated as “small i” and “Big I”
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 innovation. “The largest gains in business
come from more daring innovations that
challenge the paradigm and the
organization,” Schoemaker says.
The Business of Being Disruptive
While “disruptive innovation” has enjoyed
office buzz-phrase status for only about a
decade, the idea is quite old: Austrian
economist Joseph Schumpeter had it in
mind when he borrowed the phrase
“creative destruction” to describe his
theories of how entrepreneurs sustain the
capitalist system.
So just how does an entrepreneur or
business go about being “disruptive”?
How does one convince investors or top
brass of a radical idea’s worth?
One person who knows something about
bringing disruptive innovations to market
is Jeong Kim, president of Bell Labs at
Alcatel-Lucent and a successful tech
entrepreneur. He offered some
suggestions in a recent presentation
titled “Paving the Way for Disruptive
Innovation” that was part of the Executive
Master’s in Technology Management
program’s ongoing lecture series: Aligning
Emerging Technology and Business.
Among the most critical assets one can
possess, he says, is company-wide
recognition that disruptive innovation is
actually important. In a company that’s
already successful—or one with layers of
bureaucracy that hinder new ideas—this
can prove difficult. The firm also must
commit itself to research. “Disruptive
research is absolutely critical, especially
in the technology space.”
Furthermore, it is not enough to simply
have brilliant engineers. Without competent
management on the business side, the
most elegant technology can wind up on
the scrap heap of business history, or even
worse, usurped by a competitor:
“Disruptive innovation is not sufficient,”
says Kim. “You can [cite] numerous
examples of companies that came up with
[new] technology but eventually were
displaced by somebody else.”
In the innovator’s lingo, these “somebody
elses” are known as “fast followers”—that
is, companies with better funding or
sharper management who were able to
exploit a technology more quickly and
effectively in the marketplace than the
original creator. “You like to be the first to
develop technologies,” Kim says. “But
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the more flexible, the more innovative
in terms of business model that the
company is, the longer you can maintain
advantage.”
That point gives rise to the question:
What is the best business model for
fostering innovation? As it turns out,
numerous decision-making tools exist to
help firms systematically manage an
innovation program, says Schoemaker,
co-author of a book titled Wharton on
Managing Emerging Technologies.
According to Schoemaker, when it comes
to innovating, the analogy is to firing a
shotgun, not a rifle. Given the high failure
rate of innovative projects, companies are
smart to develop an array of possible
situations and contingencies, rather than
pin all their hopes on one plan. “Sticking
to our knitting” might appear to be a
sound business cliché—it worked for a lot
of companies that survived the dot.com
era. But Schoemaker and other
innovation gurus advocate looking at
areas adjacent to one’s main business as
fertile soil for innovative breakthroughs.
Old-fashioned, linear approaches that rely
on standard measurement schemes are
often outdated if relied upon solely. “By
examining a company’s growth gap,
developing scenarios, exploring
adjacencies and venturing more into blue
oceans, companies can reap greater
benefits,” Schoemaker says. (“Blue
ocean” is innovator-speak for unrealized,
and therefore uncontested, markets.)
“The investment approach, however, has
to emphasize more of an options and
portfolio strategy rather than static NPV
[Net Present Value valuation method].”
Wharton management professor Mary
Benner sees the “stick to our knitting”
syndrome as impinging on large
companies’ ability to react to competitive
threats. “I find that firms’ innovation into
radically new technologies or new markets
can seem to shareholders and securities
analysts like too great a departure from
their expectations for these firms. Investors
and analysts often prefer that firms
maximize shareholder value by ‘sticking to
their knitting.’ The result is that large firms,
particularly those expected to have stable,
predictable earnings and dividend
payments—i.e., “income stocks”—are not
likely to be rewarded by the stock market
for entering new technologies or
undertaking radical innovation, and instead
may be punished by reductions in stock
price and market value.”
Wharton on Innovation ■ ©2009 University of Pennsylvania
A prime example she has found in
her own research, she noted, is
Verizon Communications, the giant
telecommunications firm. Stock analysts
questioned Verizon’s large capital outlays
on FiOS, a high-volume fiber-optic
network intended to counter a “triple-
play” threat to its business posed by
Comcast’s cable television, high-speed
Internet and voice-over-Internet phone
service.
“Recent research suggests the stock
market is not good at valuing intangibles,
uncertain innovation or technological
change,” Benner says. “What this means
for large, publicly traded firms is that they
may face a disadvantage in engaging in
radical innovation, and this innovation
may instead take place in venture
capital—funded start-ups.”
Indeed, outsourcing of innovation itself
could turn out to be the wave of the not-
so-distant future. “Particularly in the
pharmaceutical area, there has been a
focus on how firms acquire innovation
that has been undertaken by small,
privately funded firms such as biotech
start-ups,” Benner says. “It may be that
the locus of much really radical
innovation is shifting outside of the large
organizations to small start-ups.”
That points to a “big trend” emerging in
product development, so-called “Open
Innovation,” according to Wharton
marketing professor George S. Day, co-
director of the Mack Center for
Technological Innovation and co-author
of Wharton on Managing Emerging
Technologies. Open Innovation, also
known as “crowdsourcing,” entails
collaborating with partners to solve
business problems.
The archetype of that model is Waltham,
Mass.–based InnoCentive. It matches
corporate “seekers” who have science,
engineering and business problems with
amateur “solvers” worldwide. The
“solvers” then compete—for bragging
rights and often token rewards—to
provide the best answers to the corporate
problems. “Most companies are not
looking for a big innovation they can
knock out of the ballpark,” Day says.
Rather, they want a relatively quick fix for
a specific piece of a larger puzzle.
For firms that want the “secret sauce” to
always come from in-house, previous
success can present a huge roadblock to
innovation, according to Kim. The
problem is that success creates a virtual
construct, a paradigm of “How to Do
Things,” inside of which new thinking
cannot flourish. Kim calls it “The Curse of
Knowledge.” Cross-discipline teaming “is
one way of breaking the Curse of
Knowledge,” he says. Another is
“experience pairing,” or matching a senior
employee with an individual who has
considerably less experience, but a fresh
perspective on how to solve problems.
An incredible opportunity to innovate
disruptively lies in the problem of
information overload, says Kim.
Knowledge is being created at a far faster
rate than any one human can ever hope
to assimilate. The flip side is that we
constantly filter out vast stores of data
because we are bombarded with
information as never before in history.
To prove his point, Kim showed audience
members a movie clip that repeated an
old psychology experiment. Two teams,
one dressed in white, the other in black,
dribbled basketballs and passed them
back and forth. Audience members were
told to count the number of passes made
by the black-shirted players. A few of the
students missed the person in the gorilla
suit who nonchalantly walked through the
middle of the scene, because they were
not looking for it. “I can assure you that
all of you saw the gorilla. But some
people processed it, stored it, some
people missed it. You were looking for a
particular thing.”
Seven Hours of Whitewater Rafting
The term “disruptive technology” went
viral in the late 1990s after the release of
Harvard Business School professor
Clayton Christensen’s book, The
Innovator’s Dilemma. But in practice, Bell
Laboratories has served as an incubator of
paradigm-shifting, “disruptive” innovations
since its creation in 1925 as a joint venture
of AT&T and Western Electric.
Researchers at northern New Jersey–
based Bell Labs have won six Nobel
Prizes and take credit for an inventory of
innovations: The photovoltaic cell, the
silicon-based transistor, statistical
process control, the UNIX operating
system, the C programming language,
digital cell phone technology and wireless
local area networks are just a few of the
better-recognized innovations that have
taken shape there.
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Today, Kim said, Bell Labs researchers
are working on similarly ground-breaking
technologies. They are developing, for
instance, a liquid sensor that can be
transformed to any shape by applying
voltage—Kim envisions it being used as a
zoomable lens. The division is also using
nanotechnology to create 3-D images. “You
have seen, in science fiction movies, 3-D
holographic movie images? It can be done.
It can be done using these technologies
today. It’s just not very cost effective.”
Kim offered a case study from Alcatel-
Lucent—Lucent Technologies at the
“The largest gains
in business come
from more daring
innovations that
challenge the
paradigm and the
organization.”
Paul J. H. Schoemaker,
Research Director, The Mack
Center for Technological
Innovation, The Wharton
School
time—on how to inject a spirit of
disruptive innovation into an existing and
stagnant culture. Lucent’s optical
networking division was severely
underperforming, and the company fired
the unit’s top managers. “I was really
convinced that the reason I was put in
there was that nobody else would do it,
and they needed somebody to blame,”
says Kim.
The division was moribund: Financial
results were disappointing and morale
was low. Kim shook up the management
team and took the survivors to an off-site
retreat that featured whitewater rafting.
“First thing they do is say, ‘Why are we
doing this ...?’ After a while, they get
really bored.” The exercise, intended to
foster teamwork and cooperation, was
designed with the help of a psychologist.
Instead of cooperating, the managers
began splashing one another with their
oars, “like little kids.”
But the exercise-psychology experiment
wasn’t over at the end of the rafting run.
“After six or seven hours of whitewater
rafting like this, they were tired.” That
evening over dinner, people let their “at-
work” guardedness down and spent time
learning about one another.
The next day included all the off-site
strategizing and white board sessions
one might expect, but Kim says the
interaction was more genuine and
productive than if they had met as they
were previously, a grouping of near-
strangers. In the first quarter following
that meeting, he says, the group posted
revenues of $510 million, $560 million
the next quarter, then $730 million, then
$970 million. The point, he adds, is that
“teamwork is so critical for the success
of a company.”
Kim’s advice for jumpstarting disruptive
innovation is not exactly revolutionary,
though it can seem exceedingly rare
when many companies still think quarter-
to-quarter and employees take a similarly
short-ranged view.
Not even storied Bell Labs, it seems, is
immune from the pressure to produce
quickly exploitable technology. In a shock
to the science world, Alcatel-Lucent all
but shuttered its funding for the Labs’
basic physics research. Company officials
said the move was done to align the Labs
more closely with the parent company’s
commercial pursuits in wireless, optics,
networking and computer science. Or, as
Alcatel-Lucent spokesman Peter Benedict
told Wired Magazine in August, “In the
new innovation model, research needs
to keep addressing the needs of the
mother company.”
Basic research investigates the most
fundamental of scientific questions and
has no direct commercial application. At
the same time, it has laid the groundwork
for most of the modern technological
conveniences we enjoy today, including
commercial aviation, the GPS system
and lasers.
“You have to make an investment in
capital, human knowledge and
networking,” says Kim. “That’s the
way to get ahead.”
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