Book Review: The Innovation Paradox

The Innovation Paradox: Why Good Businesses Kill Breakthroughs and How They Can Change. 2014. Tony Davila and Marc J. Epstein.

Innovation drives many companies. The concept of “creative destruction,” first popularized by economist Joseph Schumpeter in the 1940s, holds that old products are eventually killed off and replaced by new products. Over the past half century, society has observed the demise of numerous products, from the displacement of mainframe computers by desktop computers (which, in turn, were displaced by laptops and tablets) to the replacement of landline phones with cell phones. In many instances, small companies using radical innovations have surpassed well-established firms through the creative destruction process. But as these small companies grow into large, established firms, how do they maintain a culture that allows them to continue to innovate so they are not displaced by a new wave of smaller, more innovative firms? Such companies as Apple and Google were once small, extremely innovative firms that are now very large corporations. This book looks at how such companies can remain on the cutting edge of innovation.

Although the term innovation is commonly used by business, not all innovation is the same. Clayton Christensen of Harvard Business School first popularized the notion that firms can engage in two types of innovation: sustaining and disruptive. Sustaining innovations incrementally improve an existing product and are the purview of established corporations, whereas disruptive innovations eventually displace existing products by offering products that provide value on a new, different dimension. Disruptive innovations tend to come from small, less established companies that are not seeking to serve the needs of an existing client base.

The reader might well wonder whether the authors of The Innovation Paradox: Why Good Businesses Kill Breakthroughs and How They Can Change — Tony Davila of the Entrepreneurship and Innovation Center at IESE Business School in Barcelona, Spain, and Marc J. Epstein of the Jones Graduate School of Business at Rice University — have anything new to add. Is this a rehashing of Christensen and his Innovator’s Dilemma with a new catch phrase? Although the beginning of the book certainly reads like a rehashing of Christensen (with no mention of his name), as the reader moves through the book, the authors’ goal becomes clear: to lay out a systematic approach for dealing with creative destruction, or disruptive innovation, via the “Startup Corporation,” a separate entity within a larger company used to spur revolutionary innovation.

Davila and Epstein take the reader through the details of establishing a Startup Corporation. A Startup Corporation can drive innovation in a number of ways, and the authors provide numerous examples of firms that are using these methods. According to Davila and Epstein, the Startup Corporation combines the philosophy of a startup with the experience, resources, and network of an established corporation: “Many established companies have a unique combination of access to networks, global presence, knowledge, resources, and management expertise that makes them well-positioned to address the complex challenges that our society faces.” The Startup Corporation allows companies to harness all these resources in order to create the breakthrough innovations needed to address these challenges.

Apple — one of the most innovative companies of the last three decades, with such revolutionary products as the Macintosh computer, iMac all-in-one computer, iPod, iPhone, and iPad — has lacked a truly revolutionary product since the launch of the iPad, in 2010. Apple’s success may have been due, in large part, to its late visionary leader, Steve Jobs; today’s leaders of most corporations seem to lack a similar sense of what consumers will want. Thus, Davila and Epstein would likely argue that the creation of a Startup Corporation is essential in allowing the firm to continue to innovate.

Many of the ideas for the Startup Corporation are drawn from examples of such innovative companies as Google, Amazon.com, and 3M. The authors go beyond the traditional approach to spurring innovation at large corporations by forming “skunkworks” projects or simply purchasing smaller, innovative companies. The Startup Corporation allows the firm to leverage the resources of the parent company in taking an innovative idea to market. In some cases, the Startup Corporation will allow the firm to dominate the market — not by being first but by being “fast second.” The Startup Corporation can use the resources of the parent company to commercialize the innovation successfully.

Davila and Epstein begin by laying out the six stages of creating a Startup Corporation and then go on to show how these stages can be implemented. They show how managers have used various approaches that have led to breakthrough innovations. To illustrate the different approaches, the authors provide examples of such exemplary leaders as Helmut Panke of BMW, Lou Gerstner of IBM, and Jeff Bezos of Amazon.com.

The authors take the reader through the steps of creating an environment that avoids the innovation paradox and offer a unique hands-on approach by ending each chapter not with a summary of the main points but with “Questions for Action” that need to be addressed to move the company toward a more innovative culture.

The Innovation Paradox provides a step-by-step approach for firms to use in maintaining the innovative culture of a young startup within a larger corporation. Although written for managers who are looking to inspire their employees to create breakthrough innovations, the book has implications for investors as well. The market is likely to handsomely reward those investors who can identify companies with cultures that encourage them to use their own resources to generate revolutionary innovations to help maintain their competitive position.

More book reviews are available on the CFA Institute website or in the Financial Analysts Journal.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.