How Inventive Americans Fall Into Innovation Gap
By now the videocassette-recorder story is familiar. It’s an unsettling tale of an innovation gap between U.S. and Japanese companies. Americans developed the VCR’s basic technology, but Japanese firms commercialized it. They now dominate an immense market: In 1987, Americans bought an estimated 12 million VCRs.
The VCR was no freak accident. Anyone who thinks that it was will be disappointed by a new study from economist Edwin Mansfield of the University of Pennsylvania. Innovation isn’t inventing; it’s converting technology and new ideas into viable products. Mansfield finds that Japanese companies do this faster and less expensively--at least 10% to 20% less expensively--than similar U.S. companies.
Why? Americans haven’t become unimaginative. Our basic research, the quest for knowledge for its own sake, is still acknowledged to be the world’s best. Nor is low spending on research and development to blame; our research and development spending exceeds the combined total of Japan’s and West Germany’s. The problem lies mainly with large companies, which do most of the research and development.
For many people, innovation creates a Catch-22 situation. Engineers and scientists prefer to work on major breakthroughs, which are exciting and challenging. But corporate executives are leery of the huge investments and risks associated with entirely new projects. A standoff results. Improving existing technologies and products suffers from low status. But big new projects get bogged down in corporate politics and bureaucratic planning.
The VCR story show what goes wrong. The U.S. firm that invented the videotape recorder, Ampex, specialized in expensive machines for broadcasters. It had little interest in developing a product for a mass consumer market. Meanwhile, RCA and CBS attempted to perfect new technologies that would let viewers play pre-recorded programs on their television sets.
By contrast, the Japanese tinkered with the basic Ampex technology. In 1965 Sony introduced a videotape machine for consumers. Other companies followed. Many of these early machines were flops. But from them the Japanese learned what features were necessary for success.
The Japanese didn’t simply copy the U.S. technology. Many of their changes involved crucial improvements that made VCRs smaller, more reliable and less expensive. When RCA finally marketed its Videodisc technology in 1981, it was too little and too late. The company ultimately abandoned the product at a total loss of more than $500 million.
Mansfield’s study suggests that the VCR episode isn’t unique. The study covered 30 firms in each country, and not all the news is bad for Americans. In some industries, notably chemicals, there are few differences between American and Japanese companies. And companies in both countries do equally well at introducing products based primarily on their own research.
The great Japanese strength lies in developing products from existing technologies. Like the VCR, these products often aren’t copies; they involve major refinements. Japanese costs are about 50% lower and introduction times 30% shorter. Much of the Japanese advantage stems from less spending on marketing studies designed to discover what consumers want.
One obvious need is for U.S. companies to pay more attention to foreign technology. When U.S. industries enjoyed global leadership, they ignored developments abroad. To do that now is suicidal; there are too many good ideas elsewhere. Yet bad habits linger. In 1983 only 10% of large U.S. machinery manufacturers spent as much in monitoring international technology as did the average Japanese machinery firm.
Watching foreign markets for new ideas usually requires being there, either through exports or local production. It’s a mistake to think that only big companies can manage this. A study by the American Business Conference, a group of medium-sized firms, found that many member companies had gone overseas in the first years of their businesses.
The greatest need, though, is for U.S. companies to become less compartmentalized. Products succeed when there’s a sharing of information and enthusiasm across the boundaries of corporate fiefdoms. RCA’s Videodisc failed in part because the company’s industrial laboratory, where the machine was developed, and the rest of the company were suspicious of each other.
“In too many corporations any business opportunity that originates in the laboratory is automatically suspect. Researchers . . . are believed to be incapable of sound commercial judgment,” Margaret Graham of Boston University writes in “RCA & the Videodisc.”
At the Japanese electronic companies there is more cooperation and informality. American companies often use marketing studies for political purposes--to settle disputes over which products should be developed. The Japanese recognize that these studies can be time-consuming, expensive make-work. The best way to find out whether a product will succeed is to try to sell it. People don’t know what they want until it exists.
The innovation gap mostly reflects bad management. American companies ache for great innovations, but recoil at the risks. Marketing studies are supposed to resolve the contradiction by predicting the unpredictable. In practice they’re a formula for spending more on innovation and getting less.
