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Innovate or die may be mantra for some, but flourishing firms are less likely than laggards to break new ground, research reveals

December 1, 2003

For more information, contact: Benjamin Haimowitz, HHaimowitz@aol.com

At a time when "innovate or die" has become something of a business mantra, companies like Motorola, Xerox, and Kodak are reviled almost as much for slowness to adopt new technology as Enron is tarred for executive greed.

But now new research on how and when companies innovate provides a dispassionate look at the phenomenon and finds that innovation is not only something less than an urgent imperative but less than an unmixed blessing as well.

According to the study in the Dec. 2003/Jan. 2004 issue of the Academy of Management Journal, innovation is significantly less likely to emerge from companies that are flourishing than from those that are declining.

True, companies that are doing well and have a lot of slack do tend to invest more in research and development than laggards. But R&D is one thing, and actually launching new technology is something else -- something, the study finds, that thriving companies have a natural reluctance to do.

With such corporate behemoths as Xerox, Kodak, and Motorola being regularly castigated as slowpokes in the high-tech sweepstakes, the research may provide some basis for second thoughts. While reluctant to comment on specific companies, the author of the AMJ study, Henrich Greve of the Norwegian School of Management, insists that it is not clear whether the slowness of successful firms to launch innovations really is harmful to them.

"It isn't just that innovations look risky; they really are risky," says Prof. Greve. "Firms and society-at-large see the risks differently. Innovations that can endanger next year's dividends are harmless and potentially valuable experiments from society's point of view. There is a degree of wisdom in the caution displayed by managers of successful firms, even if they sometimes seem to miss opportunities that in retrospect seem obvious."

The conclusions are based on 26 years' worth of data (1971 through 1996) from an industry that has a world reputation for innovation among students of management, namely the Japanese shipbuilding industry.

Says Prof. Greve: "Japanese shipbuilding has consistently accounted for more than one third of the world's new tonnage at a time when European nations, with labor-cost disadvantages similar to Japan's, have dramatically scaled back shipbuilding and when the United States has all but given up building civilian ships. The innovativeness and risk-taking of the Japanese shipbuilders have been key to their continued success -- for example, their ability to build oil tankers of a size that cannot be built anywhere else."

From 1971 through 1996, the 11 major Japanese shipbuilding firms studied by Greve accounted for 246 innovations, including the world's first two-stage supercharger for marine diesel engines, the world's largest crane ship and crane barge, and a compact device to reduce ship rolling by as much as one third. Greve counted innovations as such when they were reported by either of two monthly journals devoted to new Japanese technology. He also gathered data on the companies' research and development intensity (a firm's R&D expenditures divided by sales); corporate slack (the ratio of selling, general, and administrative expenses to sales); and financial performance (return on assets).

Greve found that a company that was doing well financially was significantly more likely to have slack than firms that were doing less well. And slack, he found, led to high R&D intensity.

But slack proved to have little or no effect on whether a firm actually introduced novel products. In fact, firms with high profits were less likely than lagging competitors to do so. And the tendency to shun innovation increased as companies rose above their "aspiration level" -- that is, a level of expectation based on the profits of a firm's competitors and its own results of the previous year.

As Greve puts it in the Academy of Management Journal, ?"The rate of launching innovations decreases more rapidly for performance increases above the aspiration level than for performance increases below the aspiration level."

Does the shipbuilding industry provide an apt model for present-day businesses in which technology is developing at high speed, such as software or telecommunications? Although Greve concedes that a definitive answer would require further research, he believes the basic pattern would be similar whether the product in question is software or ships.

"Clearly, firms need to stay apace with their industries or face risks of obsolescence, so even the most profitable firms will produce innovations in a fast-moving industry," he says. "But it will be the firms that are experiencing performance declines that will make more innovations. In that sense, the principle will be the same."

The Academy of Management Journal, a peer-reviewed publication now in its 47th year, is published every other month by the academy, which, with over 13,000 members in 90 countries, is the largest organization in the world devoted to management research and teaching. The academy's other publications are the Academy of Management Review, the Academy of Management Executive, and Academy of Management Learning and Education.

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