Source | https://sloanreview.mit.edu : By Joseph V. Sinfield and Freddy Solis
When people talk about innovation, they often envision the big technical or conceptual advances that change the way we live — developments that have profound and lasting impact. Corning Inc.’s research in low-loss fused silica in the 1970s, which paved the way for breakthroughs in fiber-optic communications, sensing, and imaging applications, falls into this category. Early research by the U.S. Defense Advanced Research Projects Agency (DARPA), which established the foundations of machine-to-machine communication protocols and the Internet, clearly does too. Another example is the technique of crowdsourcing, which has spawned dramatic and previously unimagined solutions to business and technical challenges (for example, the National Aeronautics and Space Administration’s [NASA’s] Citizen Science, Kiva’s crowdfunding platform, or Foldit, the online game about protein folding).
Stories of foundational investments that unleashed enduring growth for major companies have been etched into our business lore. Procter & Gamble Co.’s investments in science, for example, led to the formulation of Tide and other synthetic detergents as well as mass-produced diapers. DuPont’s early investments in synthetic fibers and polymers (which were considered highly uncertain at the time) led to the development of nylon and Teflon. For Procter & Gamble and DuPont, the innovations have spurred decades of growth and opened doors to an array of related businesses, while also generating beneficial impacts for their customers.
However, significant innovation breakthroughs are rare occurrences in most domains. In addition to being perceived as difficult (and costly) to orchestrate, pursuing breakthrough innovation is widely seen as extremely risky. In fact, in a number of industries, including pharmaceuticals and petrochemicals, tolerance for risk taking has fallen sharply in recent years. For several reasons, including near-term investor pressures, a tendency to “stick to what we know,” and concerns about general market volatility, making big bets on breakthrough innovations has become more difficult to justify.
The Risk-Return Paradox
The perception of risk that underlies these trends is founded in classical risk-return doctrine.1Innovation initiatives and the funding programs that support them are generally viewed as “investments,” with an expectation that taking higher risks should be rewarded with higher returns. At the low-risk, low-return end of the spectrum, we tend to see investments that drive incremental innovation or development of innovations that are already proven.