Financing innovation in tough times.

• Author: Gibson, Rowan
• Position: INNOVATION

The big challenge facing many organizations today is not a shortage of ideas, but rather finding the capital to finance them. Many industries have dramatically scaled back their innovation budgets in response to the global economic crisis.

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Yet, most senior executives would admit they fully recognize the innovation imperative. They know developing new products and services represents their firm's lifeblood--its only real hope for driving growth, valuation and strategic renewal. But with budget cuts, where exactly are the resources for innovation supposed to come from?

The good news: innovation can actually cost a lot less than most think. The implicit assumption that big breakthroughs require big budgets is kind of like the Gershwin lyrics articulate: "it ain't necessarily so."

In fact, the correlation between innovation resources and competitive outcomes is much weaker than most imagine. To the contrary, incredible innovation achievement does not necessarily require a massive budget. Noted strategist Gary Hamel says companies can successfully innovate "on the cheap." In practice, there are several ways of multiplying available resources to deliver a whole lot more bang for each innovation buck.

Leveraging Limited Resources

When Steve Jobs and his Apple Inc. team created the original Macintosh computer in the early 1980s, International Business Machines Corp. was spending at least 100 times more on research and development than Apple.

Where Apple scored big was in combining existing but underutilized technologies--such as the mouse, the full-page monitor and the graphic user interface (which were invented by Xerox Corp. but not commercialized)--in a cleverly designed and consumer-friendly package.

Fast forward to 2001 when the same was essentially true for the iPod. Before iPod, there was flash memory, MP3 decoders, digital-to-analog converters, lithium batteries and basically everything else inside the device. None of iPod's essential components are unique and can almost be bought off the shelf. (The guts of iPod are even put together by a reference-design company, PortalPlayer Inc.) What made iPod a hit was the way Apple infused the device with its classic attributes--user-friendliness, cool design and iconic branding--and then linked it to the iTunes business model.

Similarly, before the iTunes Music Store came Napster. The idea of a digital download service for music wasn't new. What was new was the legality and...