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

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 next year.

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
, 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


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 little i and Big
I innovation. The largest gains in business come from more daring
innovations that challenge the paradigm and the organization, Schoemaker

Business of Being Disruptive

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
(EMTM) 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

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 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

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.

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.

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 startups.

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 startups, 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 like
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.

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.

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

Kim offered a case
study from Alcatel-Lucent -- Lucent Technologies at the 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 Lab's basic physics research over the summer. Company officials
said the move was done to align the Lab 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.

Republished with permission from Knowledge@Wharton (http://knowledge.wharton.upenn.edu), the online research and business analysis journal of the Wharton School of the University of Pennsylvania.