Large businesses don’t have to be lousy innovators

In his new book, Harvard Business School prof Gary Pisano offers senior leaders a three-part
solution to the innovation challenge.

by Theodore Kinni

Creative Construction: The DNA of Sustained Innovation

by Gary P. Pisano, PublicAffairs, 2019

Gary Pisano doesn’t buy the idea that large enterprises are inherently lousy innovators. Back in
2006, Pisano, the Harry E. Figgie Professor of Business Administration at Harvard Business
School, traced the origin of every drug approved by the FDA over a 20-year period to either one
of the world’s 20 largest pharmaceutical companies or one of the 250 smaller, supposedly more
innovative biotechs. When he compared the two groups, he discovered a “statistical dead heat”
— R&D productivity was no better in the smaller biotechs than in big pharma.

Pisano also points to anecdotal evidence to support his opposition to the conventional wisdom
about innovation in large enterprises. For every big, established company that failed at
transformational innovation (think Blockbuster, Kodak, and Polaroid), he points to another that
has succeeded. In 1964, when IBM announced its revolutionary 360 mainframe computers, it
was already the largest computer company in the world and ranked 18th on the Fortune 500. In
1982, when Monsanto scientists invented the foundational technology for GMOs (genetically
modified organisms), the company was 81 years old and number 50 on the Fortune 500. And in
2007, when Apple launched the iPhone, it had sales of US$24 billion and already stood at 123rd
on the Fortune 500.

Pisano says that the difference between a Blockbuster and an IBM is the ability of leaders to
sustain and rejuvenate the innovation capacity of their companies. It’s an ability he calls
“creative construction,” and he writes that it “requires a delicate balance of exploiting existing
resources and capabilities without becoming imprisoned by them.”

Walking that tightrope is a challenge for large companies. It’s tough to move the needle with
innovation when the needle’s scale is measured in billions of dollars. “For J&J [Johnson &
Johnson] to maintain its historical rate of top-line growth,” reports Pisano, “it must generate
about $3 billion–$4 billion of new revenue per year.” The complexity of managing innovation in
large organizations can also be daunting. “When you get to be the scale of a J&J, you have a lot
of moving parts,” he explains. “You now have a system with serious frictions. Friction impedes
mobility. Lack of mobility means lack of innovation.”
But large companies also have some advantages that can give them a leg up in innovation.
“Larger enterprises like J&J have massive financial resources to explore new opportunities,” says
Pisano. They can hedge their bets, tap deep reservoirs of talent, navigate regulatory agencies,
and use their huge distribution networks and strong brands to roll out new products to millions
of existing customers.

So how do leaders of large companies meet the challenges and leverage the benefits of
innovation? Pisano’s answer to that question is the core content of Creative Construction, a
readable practicum of a book aimed at senior leaders. He writes, “Building an organization’s
capacity to innovate involves three essential leadership tasks: (1) creating an innovation strategy,
(2) designing an innovation system, and (3) building an innovation culture.”

Bromides, such as “eat your own lunch before someone else does,” are the bane of innovation
strategy, according to Pisano. Take IBM’s mainframe business: “Eat your own lunch” suggests
that IBM should have cannibalized its success and jumped wholeheartedly into the PC business
back in the 1980s. But it didn’t, and now that cloud computing and big data are ubiquitous,
mainframes are back and IBM’s System Z dominates the market. “In 2017, almost 90 percent of
all credit card transactions were processed by an IBM mainframe,” reports Pisano.

Bromides, such as “eat your own lunch before someone else does,” are the bane of innovation
strategy.

Instead of chasing clichés, says the author, leaders need to map and clarify their options for both
product and business-model innovation. Then, they must allocate their resources according to
the best available choices in terms of value creation and capture.

The successful execution of an innovation strategy requires what Pisano calls an innovation
system. He writes, “Innovation systems need to perform three basic tasks: (1) search for novel
and valuable problems and solutions, (2) synthesis of diverse streams of ideas into coherent
business concepts, and (3) selection among opportunities.”

The last of these tasks — selection — is where many of the exemplars of innovation failure have
tripped up. “Xerox, AT&T, and Polaroid didn’t fail from lack of ability to discover a problem
(search) or bring together diverse ideas into a novel solution (synthesis),” argues Pisano. “They
failed from an inability to make good project-selection decisions.”