Some approaches to achieving innovation work well together — but some don’t.

Courtesy of BMW.

Continuous innovation is the engine that drives highly successful companies such as Apple, General Electric, Google, Honda, Hewlett-Packard, Microsoft, Procter & Gamble, Sony, Tata group and many others. Innovation is an especially potent competitive weapon in tough economic times because it allows companies to redefine the marketplace in their favor and achieve much-needed growth. However, achieving continuous innovation is very hard, and most attempts fail.

One increasingly popular way to think about innovation is to conceive of it as an open rather than a closed system — a concept Henry Chesbrough and others have written about. To continue to be innovative in a world of widely distributed knowledge, many companies are recognizing that they must open their innovation process to combine internal with external R&D. That can be done by bringing in new human capital, engaging in strategic alliances or acquiring technology ventures. By the same token, internal inventions that a company decides not to pursue should not simply be shelved, but rather considered for commercialization through licenses, spin-offs or joint ventures.

If an open innovation system does in fact help drive growth and performance, managers need to answer two critical questions:

  1. Which innovation strategies should the company pursue?
  2. Which innovation strategies go well together?

To answer these important questions, we spent five years studying how global pharmaceutical companies have built innovative capabilities in biotechnology. We documented, in great detail, the annual R&D expenses of 81 global pharmaceutical companies over a 22-year period, along with every biotech and non-biotech patent the companies filed, every scientist who worked for one of the companies, all alliances entered into and all acquisitions consummated during that period. In particular, we tracked approximately 900 acquisitions, 4,000 alliances, 13,200 biotechnology patents, 110,000 non-biotechnology patents and 135,000 scientists; we used U.S. biotechnology patents granted as a proxy for innovation in this industry. Although the global pharmaceutical industry is unique to some extent, we believe that our findings also hold for many other industries, because new knowledge, human capital, strategic alliances and acquisitions increasingly determine the success or failure of individual businesses across a large number of industries today.

Deciding Which Innovation Strategy to Pursue

The question of which innovation strategies to pursue is critical, because corporate executives have multiple strategies for achieving innovation at their disposal.