iTunes shows innovation is about imagination, not dollars

Do you panic when you see that U.S. companies are spending less on R&D, as a percent of worldwide R&D, from 43 percent in 1986 to 32 percent in 2006?

It's easy to buy into the gloom-and-doom scenario being painted for the U.S. economy, run for cover, and, like super model Gisele Bundchen, require payment in Euros. But perhaps there's more to this story than the current moment of crisis.

“Innovation has nothing to do with how many R&D dollars you have. When Apple came up with the Mac, IBM was spending at least 100 times more on R&D. It's not about money. It's about the people you have, how you're led, and how much you get it.”

- Steve Jobs, Fortune, Nov. 9, 1998

The greatest innovators today aren't product innovators, they're companies and people who build new business models. This doesn't come from increasing R&D spending. It instead comes from a change in the way an entire organization looks at opportunities to innovate itself and its markets. That takes guts, courage and leadership to buck the incumbent business model, no matter how established. The fact is that it's always easier to stay the course than to set a new course.

True innovation is not about product

Take Apple. I love Apple, always have, but please don't tell me that the iPod is a new product. Every piece of the product already existed and was sourced elsewhere by Apple. The true innovation was the iTunes business model, which was considered absolutely nuts by competitors and analysts. It was nuts, until it changed the way we all behave. Now it seems that "we" were all nuts not to have figured it out sooner - at least Sony sure feels that way.

But what's really amazing is that during the iPod's build up and success, Apple's percent of R&D (relative to sales) dropped from eight percent to three percent (2001 to 2007). Yet during this time, it's stock price increased more than 2,400 percent while it also became an innovation poster child. Is this a quirk? I don't think so. It reflects a much deeper set of values that are emerging around innovation.

Look, R&D is not going to go away, it's still a vital part of our economy and we need to keep investing in new ideas. But traditional R&D (the product stuff) will play a smaller role in creating value and wealth going forward than it has in the past. So it's no surprise that when you apply an old yardstick to a new model, you'll get meaningless results.

Sounds like anathema, right? Perhaps, but are we so conditioned by the past that we can't see the future? We certainly wouldn't be the first to suffer from that syndrome. The U.S. auto industry is a great example. Even in a mature industry, you can revolutionize the business model without changing the fundamental product.

Toyota turned the auto industry upside down by simply hearing the voice of the customer (the GLOBAL customer) and delivering a quality car. It then did it again with Lexus, building on quality and again, revolutionizing the industry by getting out of "used" cars and instead selling "Certified Pre Owned" cars. "Nice car Tom. Is it new?" "Why, no. It's Certified PreOwned Luxury!" Toyota documents a million internal innovation submissions a year. The vast majority have nothing to do with product.

Rewarding innovation

The good news is that there is an antidote for those companies who still haven't figured out that innovation is about more than R&D: get your act in gear and start figuring out how to measure the way you invest in and reward innovation beyond R&D. Easier said than done. Unfortunately, too many people believe that you just can't measure innovation outside of R&D. Don't believe it.

There was a time when few believed you could be scientific about quality in manufacturing as well. We've learned that lesson, haven't we? Still most points of view, like a recent one I saw in the New York Times, make it look like a black art. Or worse yet, make it out to be a question not even worth asking.

The lessons we need are few:

• Look for the value in how you change your business model. Reward and measure business model change.

• Listen to the customer's voice and rank yourself against how well you move toward it - nothing else matters.

• Play global. The U.S. represents five percent of the world's population. Get over the protectionist, neo-socialist thinking that ties us to our own backyard.

If you're doing any of that, then, by all means, panic.

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