# How Innovation Really Works ## Metadata * Author: [Anne Marie Knott](https://www.amazon.comundefined) * ASIN: B01MRZ52HH * Reference: https://www.amazon.com/dp/B01MRZ52HH * [Kindle link](kindle://book?action=open&asin=B01MRZ52HH) ## Highlights According to one study by the European Industrial Research Management Association, there are over 250 R&D metrics! Certainly one reason for the plethora of measures is that capturing project-level performance is quite different from capturing company-level performance. However, the more compelling reason appears to be that the measures are unsatisfactory: the data is difficult to collect, there aren’t uniform standards across business units, the measures can be gamed to make sure a given group looks good, the measures focus on inputs and outputs (rather than the conversion of inputs to outputs), and perhaps most important, the measures aren’t meaningful to shareholders.3 — location: [210](kindle://book?action=open&asin=B01MRZ52HH&location=210) ^ref-46349 --- wasn’t much better. Patents have a number of shortcomings that are acknowledged by academics and practitioners alike. In particular, patents are not universal, uniform, or reliable — location: [216](kindle://book?action=open&asin=B01MRZ52HH&location=216) ^ref-60087 --- On average, less than 10 percent of patents account for 80 to 85 percent of the economic value of all patents.6 — location: [227](kindle://book?action=open&asin=B01MRZ52HH&location=227) ^ref-40928 useful on pareto principle --- GE was a U.S. innovation treasure for a good part of the twentieth century. Indeed, its genesis was Thomas Edison’s lightbulb. It had one of the best central research labs in the country, reinvested 40 to 50 percent of profits in R&D each year, and had one of the highest returns on that investment in the entire economy—double the returns of the average company today. However, that changed when Jack Welch adopted the market power strategy (be number one and number two in the market) advocated in Michael Porter’s popular book Competitive Strategy. R&D plays no role in that strategy because it is a strategy about maximizing current profits. To execute its strategy, GE divested — location: [378](kindle://book?action=open&asin=B01MRZ52HH&location=378) ^ref-24191 --- many businesses that had been reliant on R&D (televisions, semiconductors, and aerospace) and expanded into businesses where R&D had no role: television broadcasting (NBC) and finance (Kidder, Peabody). So GE began cutting R&D (as a percentage of profits) from a high of 52 percent to below 15 percent. It divested Sarnoff lab when it acquired RCA, and it began outsourcing what R&D remained. In the end, GE had gutted one of the country’s greatest innovation engines, to a point where its R&D productivity was one-third its peak. There is no question shareholders enjoyed a tremendous ride. GE’s stock price increased from $1.30 in April 1981 when Jack Welch took office to a peak of $58.00. However, one of the costs of that ride was GE’s innovation engine, so by the time Jack Welch handed the baton to Jeffrey Immelt, the stock had fallen to $37.00. Worse, with no source of internal growth the stock continued to fall to a low of $10.00. Had Jack Welch known GE’s RQ in 1986 when he began reducing R&D, he might have taken a different course. He would have known that maintaining R&D would have provided even greater growth and market value. Had he further known GE’s RQ in the 1990s, he might have recognized that outsourcing R&D was dramatically reducing its returns and might therefore have kept R&D in-house. Thus this inability to measure innovative capability may have contributed to GE’s decline. — location: [383](kindle://book?action=open&asin=B01MRZ52HH&location=383) ^ref-45045 --- The exciting answer is that the source of most radical innovations is basic research, and fortunately the returns to basic research are positive. Moreover, the returns to basic research increase with company scale. Accordingly, while large companies are less willing to do radical innovation, they are willing to do basic research—the source of radical innovation. — location: [1227](kindle://book?action=open&asin=B01MRZ52HH&location=1227) ^ref-22069 wtf ---