In a recent Harvard Business Review article, “The Right Way to Spend Your Innovation Budget,” authors Peder Inge Furseth and Richard Cuthbertson make the case for a more nuanced understanding of innovation investment, stating that the simple strategy of buying more R&D creates little proven value. In what seems to be a very reasonable – if anecdotal – discussion, they argue companies should prioritize innovation ability (new customer experiences, a revised service system, and/or new business models) over innovation capacity (assets and resources).
“Innovation projects often fail because the resources are spent on the wrong kind of innovation.”
To illustrate this point, the authors consider the experiences of a few large companies. Some, such as Nokia and Kodak, have erred by focusing on directionless capacity expansion. This model has, unsurprisingly, produced poor results. On the other hand, firms like Apple and Xerox have paired modest R&D investment with complementary “ability”-related activities (e.g., creating unique customer experiences and innovative business models). Critically, these companies seem adept at avoiding the sunk cost fallacy: they are willing to abandon past investments or pivot from one business model to another when they sense doing so is appropriate. Such firms are able to maximize returns on innovation spending.
I trust Furseth and Cuthbertson’s diagnosis that many technology-driven companies focus on enhancing innovation capacity because it’s more tangible and straightforward than the alternative. These publicly traded companies are under constant scrutiny from investors and are often evaluated by quantitative metric, so beefing up R&D capacity probably seems like a defensible strategy most of the time. Put another way, one might conceptualize research capacity investment as a CTO’s equivalent of a stock buyback: it’s an uncontroversial value transfer for times you can’t think of anything more creative to invest in.
The authors insist that this overemphasis on building assets limits flexibility, adaptability, and resilience over the long term, and that companies would do well to spend more time and money developing novel ways of interacting with customers and accessing new markets:
“[Kodak] famously spent over four billion dollars developing the digital camera, but chose not to develop a new business model to convert that innovation capacity into innovation ability — and as a result, failed to capture the value of what they’d invented.”
The problem, though, is that when Furseth and Cuthbertson write about “ability,” they aren’t writing purely about innovation. To some extent, they’re just describing the visible side effects of firms with excellent organizational cultures. Such firms can be expected to attract creative employees, promote the most talented people into management positions, and anticipate market disruptions. It sounds like this type of creativity and prescience is what Furseth and Cuthbertson really admire when they write about firms with high innovation ability – and I’d argue these characteristics are somewhat more fundamental than a firm’s R&D portfolio strategy.
The piece begs the question of whether a firm with low innovation ability can become a superior innovator. Furseth and Cuthbertson’s perspective suggests such an outcome can be achieved with a simple investment reallocation, but we’d guess it’s more about identity than strategy – and is therefore a more complicated challenge than the article might imply. Of course, the other side to that coin is that ability can be an enduring differentiator for firms that do it well, and the struggle of building a culture that supports flexible, agile, customer-centric innovation may well be worth it.