Scaling Innovation: An Introduction to Prahalad & Krishnan's The New Age of Innovation.

Scale matters. But when and how? For a time the theory of capitalism rested on the belief that in a competitive process large-scale capitalism always beats out the smaller counterpart. Among the first to articulate this view was Marx: "The battle of competition is fought by the cheapening of commodities. The cheapness of commodities depends, ceteris paribus, on the productiveness of labour, and this again on the scale of production. Therefore, the large capitals beat the smaller." Although the intellectual antecedents of "giantism" can be found in Marx, the theory of capitalism in the West as represented by Schumpeter, Galbraith and others in the 1950s and 1960s, also proclaimed the invincibility of the large firm. The concentration and centralization of capital leads to economies of scale, which in turn leads to the highest levels of productivity growth. Schumpeter, for example, wrote in 1942 that "What we have got to accept is that (the large establishment or unit of control) has come to be the most powerful engine of progress."

The thesis of giantism has proven to be economically suspect and historically unsound. Indeed, the pendulum has swung so far the other way that today "innovation" has become synonymous with entrepreneurship and the latent ingenuity in small firms. According to today's conventional wisdom it's the entrepreneur and the small business owner that innovates. By contrast large firms are inherently bureaucratic and sclerotic. Clayton Christensen in The Innovator's Dilemma has made the further point (in Hegelian fashion) that the very logic that drives incumbent firms to success later generates the seed of self destruction. Is there no hope then for large firms?

Prahalad and Krishnan's The New Age of Innovation is not an apologia for large-scale capitalism. However, it is one of the few recent books on innovation that approaches the problem synoptically and comprehensively. It can be read by firms small or large as a primer on innovation strategy. Their starting point is the claim that "traditional sources of competitive advantage, such as access to capital, physical location, and raw materials or technology, will become table stakes. These factors are diminishing in their importance as sources of competitive advantage. Access to these factors is becoming easier."

Value creation and new competitive advantage derive from a set of factors which Prahalad and Krishnan portray pictorially as a house. The two pillars are labelled as "N=1" and "R=G". N=1 asserts that "value is based on unique, personalized co-created experiences of customers" while "R=G" means that successful firms will draw on, though not necessarily own, ideas, talents, and resources globally. In addition to these two pillars an innovation strategy integrates business processes, analytics, technology, and social architecture. The individual elements in Prahalad and Krishnan's model are not new but their synthesis is original. Large firms need not throw in the towel just yet.

Stay tuned for more on Prahalad and Krishnan.