A Brief History of Inventing Innovation

by Rita McGrath  |   1:00 PM October 25, 2012

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With today's breathless enthusiasm for innovation, it's hard to remember when, as far as the management literature was concerned, innovation was something that guys in white coats who worked for companies like DuPont did in the R&D lab. Expanding an existing business into new corporate territory, or corporate venturing, was called "diversification," not innovation. It is also hard to remember that before the 1980s, very little in the way of empirical evidence existed as to what companies should expect when they ventured into new territory. We had little theory and even less evidence to guide us. Most decisions executives made were based on their own experience or intuition (to be charitable) or on the basis of their pet projects and personal biases (to be a little less charitable).
E. Ralph Biggadike's breakthrough research on the realities of corporate venturing, reported in his 1979 HBR article, "The Risky Business of Diversification," therefore broke new ground by collecting actual data about what companies could expect as they explored new markets or extended their reach to new product categories. It was in the mold of many classic HBR pieces of the day — using rigorous academic research to inform an interesting managerial question. Ralph used the then-new Profit Impact of Market Strategies (or PIMS) database and his own original research to create a sample of 68 ventures launched by 35 companies, mostly in industrial goods businesses. He examined the fates of these ventures (which had all survived for some time) to try to determine how long a company could expect to wait for them to be profitable, and how well they would ultimately do financially. One of his most significant conclusions was that "new ventures need, on the average, eight years before they reach profitability." Further, that it took another two to four years before the return on investment of the new businesses equated to returns from the existing businesses. At the time, interestingly, as now, executives often gave a fledgling business three years or so to prove themselves, after which they lost interest. It didn't make sense then, and makes even less sense now.
I first read Ralph's article about ten years after it was first published. I had gone back to school after eight years in management to begin my own Ph.D. program at the Wharton School. I was fascinated by what I'd seen of just how hard it is to get large-scale organizations to adapt. This was an era in which the leaders of American businesses were first being confronted with forces which would cause barriers to entry to erode, technologies to move faster, and competitors to come from unexpected places. Japanese companies were only the first of many that had expanded into U.S. markets with devastating impacts on American industries as varied as automobiles, steel, textiles, and heavy manufacturing. Innovation, or venturing, was slowly working its way onto the leadership agenda. Ralph's article set me on a path of trying to understand the quirky, often completely irrational, and of course uncertain, process of corporate venturing. It was one of the foundational pieces for my own longitudinal dissertation work on how companies build new capabilities.
A lot has changed since that article was published, and I had to smile upon re-reading it to revisit ideas that have evolved since then in their original, fresh, new-to-the-world form. One is the primacy of market share. For instance, Ralph was critical of what he called "timid" target-setting by venture leaders which caused them to target relatively modest market shares in their launch plans. He argued that his data suggested that aggressive entry would lead to more rapid profitability, as long as growth in revenue exceeded growth in expenses. Today, we might be more forgiving of an experimental approach to new markets, often under the rubric of a learning or options view. Our vocabulary has also changed. Today, we talk about venturing, new business development, and innovation and we don't limit ourselves to industrial firms extending their reach into new product categories, but to all kinds of companies exploring new business models. Today, the creation of entirely new categories is taking place at a clip that was unthinkable then.
Years after I first encountered his work, I encountered the man. After a successful career as an academic, and then a senior executive at Becton Dickinson, Ralph decided to explore rejoining academia and teaching at Columbia Business School for his next act. I was thrilled to be one of the faculty members selected to speak with him to see if there could be a good fit. Our conversation took place in 1994, the year after I myself joined the Columbia faculty. I recall his enthusiasm for the recently published book Built to Last; he described how energizing it had been for his company's senior executive team to think about the vision for the company in a decades-long timeframe and in terms of core purpose. Ralph did join Columbia and became one of the most beloved teachers in our MBA program and a highly popular faculty leader of our executive programs. He was a mentor to more junior people and a constant advocate for the importance of the job of the general manager to the future of their organizations. I was deeply saddened to learn last month that Ralph had passed away. The impact of his ideas, however, endures.

Source:hbr.com