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Innovation: The New Route to NewWealth
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BY GARY HAMEL AND PETER SKARZYNSKI

here does new wealth come from? Like a four-year-old’s curiosity about how babies are born, it’s a deceptively direct question that often disarms our capacity to answer. To be sure, we’re ready with pat responses peppered with references toreturn on investment, return on net assets, and economic value added, but these measures tell us more about how revenues are rearranged than about how they’re created anew. After all, we’re not talking about market share sliced loose from a competitor or revenues boosted by an acquisitions binge—but truly new wealth: revenues from new customers buying products or services that yesterday they didn’tknow they needed and today can’t live without. Creating new wealth requires more than simply responding to market demand. Think about some of the path-breaking products of the past few decades. No car buyers walked into Chrysler dealerships in 1983 saying that what they really wanted was a van mounted on a car chassis with folding seats—and don’t forget some cupholders. No customers told Sony theonly thing wrong with its tape players was that you couldn’t strap one on your head. Neither the BBC nor any of the Big Three U.S. TV networks saw a market for 24-hour news; it took a renegade named Turner operating out of Atlanta to wed three developments—the shoulder-held minicam, more affordable access to satellite transmission, and the fact people no longer make it home in time for the sixo’clock news—into the concept of a continuous news format. Innovations like the minivan, the Walkman, and CNN succeeded not because they responded to market need but because they created a need consumers had yet to sense themselves. All of which attests to the fact that in the New Economy, the greatest rewards go to companies that create new business models—ideas that spark new sources of revenue based onchanging technology, demographics, and consumer habits. By definition, new business models destroy old ones, which is why creating new wealth is a threat

16 Leader to Leader

to every traditional, unimaginative business. Never before have strategy life cycles been shorter and market leadership counted for less. Call it the First Law of the Innovation Economy: Companies that are notconstantly pursuing innovation will soon be overwhelmed by it. Strategy innovation is the only way to deal with discontinuous—and disruptive—change.

You’re Never Too Old to Innovate

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chwab is not an upstart. And innovation isn’t the special preserve of Internet upstarts or the denizens of the dot-com motels of Silicon Valley. In fact, innovation can happen at any company, regardless of its lineof business, age, or location. Can a century-old company learn to innovate like an industry ingenue? The answer is yes—provided the company is willing to examine its orthodoxies, abandon its strategy-by-habit ways, and engage its employees broadly and deeply in the effort to envision the new markets and new opportunities that promise new wealth. Consider the experience of PECO EnergyCorporation—the old Philadelphia Electric Company. Founded in 1881, PECO had operated for its entire existence within the public utility paradigm, with a regulatory strategy that brought it significant success. In June 1997, however, the company was looking to transform its regulatory strategy to fit the dawning deregulated environment.

The Innovation Imperative
ome companies seem to understand the innovationimperative instinctively. Consider Charles Schwab’s daring plunge into the online unknown:When the bricks-andmortar broker took the view that online trading was inevitable, it faced a choice between leading the brokerage industry to the future or being a victim of some dot-com start-up that got there first. Thus, on the fateful day in 1995 when a technology team within Schwab presented a demo...