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Management Series: leadership-entrepreneurship

The best way to have a good idea is to have a stream of ideas

A prize-winning paper, co-authored by Dr. Elena Novelli of Cass Business School, illustrates how the most successful firms are those that develop streams of innovations from an initial idea. Apple's development of products from iPod to Apple Watch is cited as a prime example.

Author(s): Dr Elena Novelli - Cass Business School; Gautam Ahuja - University of Michigan; Curba Morris Lampert - Florida International University

To be successful many companies assume they need to come up with a single, disruptive idea that solves a problem or fulfills a customer need, with this idea then seamlessly and naturally translating into earnings. Elena Novelli from Cass Business School however says this assumption may be misguided.

In her prize-winning paper, "The Second Face of Appropriability", co-authored with Ahuja and Lampert and published on the Academy of Management Review. Dr. Novelli states that first iterations of inventions are not necessarily the most successful ones.

The most successful firms are often those that do not settle for one idea but instead develop streams of ideas that build cumulatively on a core, initial intuition. Apple is a notable example of a company that does this extremely well. Apple broke new ground with its creation of the iPod, a simple portable device that allowed users to play music through a digital library, but it didn't stop there. Realising the potential of the invention, Apple used the iPod as the foundation for an entirely new product, the iPhone. Then, by increasing the size and adding functions it created the iPad, a portable tablet computer. Now with the the launch of the Apple Watch we see the most recent result of this cumulative exercise.

Conversely, many companies often come up with individual - not necessarily related - new ideas that never fly. Take Xerox for example. Its research centre, Xerox PARC, came up with many innovative ideas such as the graphical user interface, the mouse, laser printing, and other technologies that would later become commonplace in modern computing. However, because it did not see many of the related possibilities of their use it did not necessarily profit from inventing them. Building on prior inventions is important for firms for multiple reasons. As the paper explains "First, initial iterations of most inventions are relatively rudimentary. Subsequent versions improve significantly and often have far greater commercial viability than the original. Second, even when inventions become commercially viable, fully exploiting a firm's investments in research often entails being able to create different versions for different uses and market segments. Third, sometimes the most valuable application of a given invention is often not the application for which it was originally conceived. For instance, Coming's Gorilla Glass product, now used very successfully for smartphone screens, is derived from a tough glass that was originally designed for use in car windshields".

What most companies don't realise is that launching an idea on the market implies disclosing that idea to other companies which might exploit the full potential of that idea more sucessfully than the originator. For instance, Yahoo Messenger was one of the first social products on the internet but it has been left behind by other innovative networks such as Facebook and Twitter.

The best defence therefore is to keep inventing; developing a stream of ideas that build on the first core intuition. "When companies come up with a new invention or product they should ask themselves: is there an alternative version of this product that could add more value? Are there other markets where this idea could create value? Are there complementary services or products that we can create around this idea?" says Novelli. "Often the best way to profit from an idea resides in the complementary products or services themselves. Apple iTunes is an excellent example of this mechanism".

How can companies develop streams of ideas? "Part of it comes from being able to build creatively - but cumulatively- on the first idea. Organisational practices that foster creativity and experimentation are good in this respect as long as they clearly mark the boundaries of experimentation, to avoid dispersion of energy. Pushing for stretch goals in innovation might also encourage research teams to find new value in what has already been done rather than wondering too far in the space of possibilities".

However slowing down rivals' attempts to build on your ideas is also important. "Dispersing research activities across different geographic locations can make it more difficult for competitors in a certain area from capitalizing on the R&D infrastructure you set up". Creating moderately sized research teams can also help. "If you have a research team of three people, someone hired away has 33 percent of the idea. But if you subdivide it into eight people, each one of those people becomes less attractive to a competitor."

Strategy literature has focused mainly on primary appropriability, or a firm's effectiveness in translating an invention into a product or licensable solution for customers. This paper acknowledges the importance of primary appropriability but develops the idea of generative appropriability, where multiple sequential inventions sustain earnings and value over time.

The Second Face of Appropriability: Generative Appropriability and its Determinants is published on the Academy of Management Review

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