Laura Birou, William Christensen, and Alison Wall


What if Harry Potter ran General Electric? This is not just an interesting thought, but the title of a book.1 Imagine the advantage a company would have if it were run by people who could do magic, magic that would create innovative processes, products, and services. Indeed, businesses and business leaders that are able to successfully and repeatedly introduce innovative products are sometimes referred to as "wizards." Such a group of modern wizards might include people such as Apple's Steve Jobs, GE's Jack Welch, and the founder and namesake of Walt Disney. One source of innovation magic is technology. As noted by Arthur C. Clarke, "Any sufficiently advanced technology is indistinguishable from magic."2 However, focusing on technology alone as a source of innovation is shortsighted because technology is transient but human need is not, and, innovation is worthless if it doesn't add value by satisfying human needs.3 Steve Jobs, referred to as the "Wizard of Oz,"4 quoted former Apple CEO John Scully as saying, "He (Jobs) was selling magic, and everyone else was selling technology." We thus need to better understand innovation and what makes it happen in order to establish organizational environments that nurture it and allow businesses to compete in an rapidly changing global business arena.

The purpose of this chapter is to explore innovation, what forms it takes, what types of environments nurture it, how it is related to value creation, and the role it plays in business strategy. Innovation is the ability to develop and successfully introduce new products and processes.5 It helps drive a virtuous cycle of increasing value and competitive advantage that is central to effective business strategy (Figure 10.1). Although an organization or an entrepreneur can enter the cycle at any point, since people generally think before they act, we believe that most organizations that enter the cycle will do so purposefully and incorporate it as part of their strategic planning process. From strategy emerge plans and objectives that create and maintain an environment in which innovation is nourished. The specific innovations that result are then vetted, and those that create customer value represent the master key to opening the door to sustainable competitive advantage (SCA), the ultimate objective of all business strategy.6

Figure 10.1. Innovation and Strategy

Innovation and Strategy


Virtually any attempt to distill strategy to its core ends up focusing on SCA because SCA is the fundamental objective of virtually all business strategy. Indeed, the fundamental reason why innovation is so sought after and valued is because we recognize the innate connection between value-adding innovation and SCA, as measured by long-term profitability, especially in hypercompetitive global markets.7 Specifically, the objective of strategy is to achieve and sustain competitive advantage. This occurs when organizations are able to consistently deliver superior value to their customers more efficiently and effectively than their competitors. Innovation is the magic that creates this superior value not only in products themselves, but also throughout entire value/supply chains. Central to this model is a focus on customers and their perceptions of value, both tangible and intangible.8

Innovation adds little to an organization unless it contributes to the creation and delivery of customer value by satisfying a customer's needs. Indeed, customer orientation and innovation are the two most important success factors of a new product.9 But what is value? It is simple enough to define value as the perception that something is worth having, but when one considers the power of value, one begins to understand its magic. Consumers intuitively recognize the power of value as they are motivated to give their business to organizations that they feel deliver superior value. Sometimes perceptions of value are not even conscious and may be more associated with intangible attributes than with tangible product features. Nevertheless, perceptions of value drive consumers to action, and provide advantage and profitability for those wizards capable of harnessing innovation. However, this reality seems to elude some business organizations that give in to the enticements of short-term profitability or other distractions, usually to the detriment of customer value and their own SCA. Most businesses would prefer to avoid risk and stick with known technologies, rather than take the chance of having an unsuccessful new product.10 However, when customers perceive they will receive superior value, they are willing to seek out corresponding products and even pay more for them.11 For example, consider the offering of iPod software as a free app for the iPhone when the latter was introduced. A product that many people already owned suddenly became a bonus feature on a product they wanted, allowing them to use one device for what used to require two.12 Conversely, when the perception of value is weak, so are the supplying organization's chances of survival. Coca-Cola's ingredients are virtually the same as those of store brand sodas, yet the cost savings from the latter are not of sufficient value for many people to purchase the cheaper product, thereby giving Coca-Cola a source of SCA.

Innovation in creating, producing, and delivering customer value also provides businesses with their greatest opportunities for differentiation.

Innovation throughout a value chain creates unique value propositions. From a high-level perspective, innovation contributes to SCA as organizations build and maintain value-adding capabilities, resources, and combinations thereof. An organization's capabilities and resources can be tangible or intangible, and consist of people, practices, processes, culture, leadership, philosophy, and other assets. These include unique tacit knowledge, skills, brands, location, patents, and management practices. Tacit knowledge differs from explicit knowledge in that it is experiential, practical, and skill based. It is also difficult to imitate, thus providing opportunities for differentiation and competitive advantage.13 Tacit knowledge includes practical skills and experience held by individuals and which reside within organizational processes and practices. In contrast, explicit knowledge can be defined simply as any knowledge that can be put in written form. As such, explicit knowledge is easy to copy and imitate.

It is important to understand and recognize the distinction between tacit and explicit knowledge within organizations because it is tacit rather than explicit knowledge from which emerges innovative ideas, products, services, and processes.14 In addition to it being unique and difficult to copy or imitate, different tacit knowledge, skills, capabilities, and resources can be combined in unique ways.15 It is most often combinations of skills, rather than any one skill or capability, that create value-adding innovations that are difficult to copy or imitate, thus providing excellent foundations upon which to build SCA.16

To better understand how unique combinations of resources and capabilities can drive SCA, consider the competition between chefs that occurs in a kitchen setting as seen in reality shows such as Top Chef, Iron Chef, or Hell's Kitchen. Chefs may be constrained by having the same resources (e.g., ingredients and equipment), working in the same physical setting, and having the same amount of time in which to create various dishes. In essence, the environment is controlled so that the only remaining source of potential advantage and differentiation is the tacit knowledge skills and capabilities of the individual chefs. Just as it is the superior tacit knowledge skills and capabilities of winning chefs that allows them to successfully innovate, add value, and win the competition, it is the tacit knowledge skills and capabilities (and combinations thereof) that allow business organizations to successfully innovate in their respective domains and establish SCA.

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