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Innovation Strategy

Why Ideas are Unprofitable

The U.S. Patent and Trademark office issues nearly 160,000 patents a year for everything from nanotechnology to jet-powered surfboards. Yet a mere 1 percent—just 1,600—reach the marketplace, according to the patent office. The dirty little secret about American ingenuity is that we’re terrible at translating original ideas into profit-producing businesses.

This might be considered heresy in the era of popular thinkfests such as TED and Davos, but ideas are inherently unprofitable. The value of an idea (and its inventor) is essentially zero. True economic value lies in the person or company that can figure out how to scale an idea and deliver it efficiently to market.

History tells us that what U.S. companies do best is combine innovation, technology, and productivity to popularize new concepts. Thomas Edison did not discover electricity, but he did invent a way to efficiently manufacture it and distribute it to the masses. Sam Walton and Michael Dell made similar achievements in retail and computers, respectively. Facebook wasn’t the first company to enter social networking; it was third. Apple (AAPL) didn’t invent the MP3 and was sixth to market with the smartphone.

Yet these “scalers” are more valuable than the inventors themselves and are the ones perceived as innovators. We tend to obsess about being first, but it is among the great paradoxes in business that what makes a company good at invention often makes it poor at capitalizing on the invention itself. Osborne Computer and Grid Systems were pioneers in portable computing, but they are long gone. Today, Toshiba, Dell (DELL), and Hewlett-Packard (HPQ) sell millions of laptop machines—the highly evolved digital offspring of those early devices.

In the 1970s, Xerox PARC was staffed with some of the greatest computer minds in the world, all given freedom to explore and invent. They were unbelievably prolific and invented many of the tent-pole concepts we now associate with personal computing: the desktop computer, the graphical user interface (a.k.a. Windows), the mouse, the laser printer, and the Ethernet local network. So why don’t we all use Xerox (XRX) computers, networks, and software?

Jobs Spotted Mouse at Xerox

Xerox failed to exploit or even recognize the commercial potential of its inventions. At 24, Steve Jobs did. The Apple co-founder visited PARC in 1979; among the new concepts he saw was a computer mouse. Jobs was so taken with the idea that he figured out how to manufacture the $400 Xerox mouse for $15. Today, Apple is a $66 billion company, with revenues three times those of Xerox. (Xerox did get stock in Apple for its troubles.)

Companies such as Apple, Dell, and Wal-Mart (WMT) share the ability to innovate and scale successfully. Unsuccessful innovators harm themselves by falling into “the innovation death spiral,” which begins when new products that were developed and launched with high hopes yield disappointing results. The company keeps spending more on innovation and getting less in return. Once those products do reach the field, they soak up valuable resources—manufacturing and purchasing capacity, marketing budgets, warehouse space, back-office systems, and management attention.

As a result, the company has to restrict its investments to safer, incremental innovations of existing products and services, which in turn contributes to a gradual contraction of market share and an inability to attract top talent.

To break out of the death spiral, companies need a balanced diet of the three types of innovation:

Renovate rather than innovate. Google (GOOG) owes much of its success to incremental improvements of its search engine, Web mail, and maps, along with upgrades to other existing products. An analog example would be Quaker Oats (PEP), which changed its packaging from cylindrical tubes to individual packets. This made the product more convenient for the user and lessened waste. It was a huge success.

Market-share innovations. Low-cost flights from Southwest Airlines (LUV) and tractors from Deere (DE) are examples of successful innovations that increased market share by offering a quality version of a ubiquitous service or product at a reduced price.

Game-changing innovations. A common misunderstanding is that breakthrough innovations are the result of technological inventions. In fact, these innovations often use existing technology in novel ways. An obvious example is Apple’s iPad. Another is the Nespresso system from Nestlé, which combines the machine and different-flavored Nespresso “pods” individually wrapped for one-time use. On the surface, Nestlé was just serving espresso coffee in a new way, but the method of preparation was something completely different. It made this product a big success.

Companies presently caught in the innovation death spiral need not despair. In 2002, Palo Alto Research Center was incorporated as an independent business. Today, it is a $60 million contract-research organization that helps clients leverage their own technologies while seasoning them with concepts originated in-house.

Reilly is a Senior Managing Director, Accenture Management Consulting, North America. To learn more about this study follow Accenture on Twitter.

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