Innovation is the third primary distinctive capability. Yet firms often fail to gain competitive advantage from innovation. In this chapter I explain why. I describe the costs and uncertainties associated with the process of innovation, and the difficulties firms encounter in securing the returns to innovation for themselves. What appear to be the rewards of innovation are often really the product of the firm's architecture. Some firms have established an architecture which stimulates a continuous process of innovations. Other firms have created an architecture which enables them to implement innovation particularly effectively.
The process of innovation often involves complex interactions between firms. Two common problems are those situations in which the innovator can often scoop the pool (patent races) and those in which success for all depends on the establishment of common technical standards (standards battles). This chapter introduces the problems of achieving competitive advantage which is sustainable and appropriable. I discuss these issues-- which apply to all distinctive capabilities--more extensively in Chapters 11 and 12.
Business history is full of the stories of firms which innovated but failed to turn that innovation into sustainable competitive advantage. European business history seems to be particularly full of such stories. The British company EMI was one of the most effectively innovative companies there has ever been. It was a pioneer in television, a leader in computers, its music business was at the centre of a revolution in popular culture, and its scanner technology transformed radiology. Today only its music business survives.
Philips pioneered almost every major area of consumer electronics. The company invented the audio cassette and the compact disc and led in the development and manufacture of video-cassette recorders. Europe has often enjoyed an innovative lead in aircraft manufacture. Jet engines were invented here, and first put into commercial operation by de Havilland. Collaboration between Aérospatiale and the British Aircraft Corporation produced the