Learning to innovate

What skills do you need to develop new technologies and enter new markets? You need, of course, to be able to turn technical innovations into great products. But research suggests you need another skill: the ability to learn.

In 2000, Erwin Danneels of Worcester Polytechnic Institute surveyed top managers from 145 publicly traded manufacturing companies and then tracked their profitability over three years, resurveying managers from 77 of those companies in 2004. All of the companies manufactured their own products and did most of their business in a single business segment.

Danneels concluded from his research that there are two types of "first-order" competences, which he defined as those needed to keep a company's current business humming. First is customer competence, which is a company's ability to serve a particular group of customers. And second is technological competence, which is a company's ability to use a particular technology to produce output.

Danneels notes that there are also "second-order" competences. These exist in both technology and marketing and affect the company's ability to renew itself beyond its current business. "A company may be good at serving a particular market, but that doesn't make it skilled at learning how to serve new markets," Danneels says. "Similarly, it may know a technology really well, but that does not make it skilled at learning and using new technologies." To illustrate: One could see Apple Inc.'s iPod franchise as an outgrowth not only of first-order electronics design skills, but also of the company's second-order abilities to learn about different sets of customer needs and then build technologies to serve them.

Danneels found that companies with second-order marketing competencies experienced short-term boosts to profits, as measured by return on assets - especially when markets were competitive. Second-order technological competences had more complex effects. They paid off in less than a year when markets weren't too competitive, but they took several years to pay off if competitive pressures increased.

The question is how companies can learn to learn. In part to answer this, Danneels looked at how respondents rated their organisations in terms of five variables: willingness to cannibalise, constructive conflict, tolerance for failure, environmental scanning and slack resources. Respondents reported differing levels of second-order competences in 2000 and 2004, which suggests that these capabilities are fluid and changing. But there was a strong positive relationship between the competences and four of these variables.

What leads to stronger second-order competences?

Constructive conflict is the most important variable - having open debates and honest exchanges of ideas. A willingness to cannibalise - to sacrifice some current business in order to develop longer-term initiatives - also strengthens companies.

Having slack resources - the time and money to explore future-oriented projects with uncertain returns - also helps. Allocating resources toward such long-term projects can pay off, even if doing so reduces margins temporarily. "Larger companies often try to drive out slack, because it is considered inefficiency," says Danneels. "That might actually be hurting [them], even in the short term."

Environmental scanning - the extent to which companies watch technology and market trends through outside sources - also significantly affects companies' success. Companies should allocate resources toward external activities like association memberships, trade publication subscriptions, university connections and networking events to encourage employees to tap into new opportunities.

And what about tolerating failure? "Failure is overrated," says Danneels. Tolerating failure actually negatively affected technological competence, which debunks the commonly held idea that failure helps companies learn. "Supporting failure may create a lax attitude and lack of accountability," Danneels says. "If a venture should fail, it's good to learn from the experience. But it's better to succeed in the first place."

Useful resources:
MIT Sloan Management Review
This is an edited version of an article that appeared in the MIT Sloan Management Review.
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