Is innovation dead?

March 8, 2010: 10:00 AM ET

Management gurus preach the virtues of 'continuous innovation' but a new kind of reinvention may be taking hold.

By Cédric Laguerre, Senior Analyst, lecturer at SKEMA Business School and Eric Viardot, strategy professor, SKEMA Business School

It has become an unassailable tenet of business: Companies must Always Be Innovating. Indeed, some proponents of so-called continuous innovation talk as if failing to reinvent your company every few weeks is tantamount to an assault on capitalism: Any profit-driven enterprise needs to innovate to reduce its costs or create new markets, which ultimately benefit consumers. Who knew perpetual innovation was the natural force guiding Adam Smith's "invisible hand"?

We would submit that real technological innovation for consumers actually has been stalled for some time. Yes, we saw an explosion of true innovation in the late 90s, as computer, telecommunications and software technologies converged.

But more recently novelties such as smart phones or social networking sites are more related to smart marketing than sheer technology. In the last three years the number of technology driven start-up companies has significantly decreased, and what passes for innovation seems to be restricted to a group of large companies who that are either acquiring or destroying their smallest competitors.

Why the slowdown?

First, the commoditization of innovation is coming faster than ever. Companies are turning to standardization of everything from raw materials to back-office services in a bid to decrease costs. This, alas, results in heightened price competition and drastically fewer proprietary solutions. Look at the PC market. Computers were boiling with innovative frenzy in the 80s. Today this mature business is boring and amorphous, with only cosmetic evolutions in the product (and in some cases, only cosmetic differences among computers).

Secondly, considering the increasing risks entailed in launching an innovation, the current context favours conservatism over innovation. It isn't always the innovator who financially profits from its innovation, but the followers. Nintendo (NTDO) Wii has dominated the videogame market since its launch, but the Wii remains an overall laggard, trailing Sony's (SNE) Playstation and other console systems whose machines have a longer market life and additional features which will help them succeed financially in the long run.

Finally the tech refresh cycle is getting so short that consumers are getting overwhelmed and, ironically, sticking with older technologies, to the detriment of innovators. Consider high definition video players: Blu-Ray is a great technology, but old-fashioned DVD players are hanging on, and video-on-demand threatenes to overtake this next generation of video player.  Blu-Ray could disappear before finding a market.

Microsoft (MSFT) is another illuminating example: the firm sells Windows 7 while its main competitor in the market are its incumbent Windows operating systems (a cash cow for Microsoft) and a new generation of technologies that rivals such as Google are advancing.

Considering these observations, can we conclude that innovation will disappear? We do not think so, but it will surely evolve.

We think two trends will drive innovation: consolidation and environmental concerns. As hardware firms become bigger, they'll focus on cost cutting and other considerations, creating sectorial monopolies in hardware and leaving innovation to software makers.

Secondly, for cultural or regulatory reasons, companies will invest more in so-called green innovations. That will force businesses to embrace less expensive, technically less complex and ecologically more acceptable products than throwing away that which is still functioning.

The Golden Age of frenetic consumption is over. We must welcome an era of innovation that that will be good for the wallet and the Earth.

Laguerre is a senior analyst and lecturer at SKEMA Business School. He may be reached at cedriclaguerre@yahoo.fr. Viardot is a profesor in strategy, SKEMA Business School. He may be reached at e.viardot@skema.edu.

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