Gary Hamel looks at innovation.

• Author: Hamel, Gary
• Position: Summit Preview - Tells what he thinks companies must do to thrive

The noted author and business thinker tells Editor-in-Chief Jeffrey Marshall what he thinks companies must do to thrive.

FE: You've written and spoken a great deal about innovation, but that's been a more difficult proposition for many companies in the past two years -- they may be just trying to survive. Can innovation flourish without optimism and dollops of capital?

Hamel: It is a natural reaction in cyclical times for companies to retrench. They are discovering is that retrenchment does not improve your margins; retrenchment does not help you grow, and does not provide the organization with any point of view about the future, much less any hope about the future. So retrenchment can be no more than a temporary reaction to an unexpected change in the demand function for your business. It's natural that if you wake up one morning and see a significant drop-off in demand, of course, you have to resize the business for that new reality, but I think it's a mistake if you see that as some kind of a long-term strategy for creating wealth -- it's clearly not.

In recent quarters, companies have told themselves that what they have to do is start focusing on the basics. And in a way, I don't disagree with that -- except that business never changes. The basics are: how do I grow revenues, how do I get permission to raise my prices and how do I cut my costs? That is the fundamental arithmetic of business.

On the other hand, I do believe that very few companies can make any kind of impact on the basic parameters of their business unless they bring radical thinking to those dimensions. For example, most companies today find it very difficult to raise revenues by flogging the same old products and services through the same old channels. Likewise, in a deflationary world, very few companies out there would tell you that they have the power to push through price increases.

And finally, on the cost side, most companies are reaching a point of diminishing returns on their cost reductions. They are having to expend greater and greater amounts of effort to take out smaller and smaller increments of cost.

There are a lot of misapprehensions about the question of innovation versus optimization. Many people feel that optimization is less risky or less expensive than innovation, and I would beg to differ.

FE: By optimization, do you mean working with what you already have?

Hamel: Yes, and that could mean continuous improvement. For example, think about the...