OFFENSIVE INNOVATION - MAKING YOUR R&D MATTER: Carleen Hawn writes a great piece on how established companies may be disadvantaged in the market when it comes to producing innovative technologies. Carleen particularly takes Microsoft to task for arguably being too timid in its R&D:

The failure to consistently produce dramatic and successful innovations may be less a comment on Microsoft than it is on the nature of innovation. Innovation is capricious - a function of luck and good timing as much as brains. It's tough to score once, much less repeatedly. Harder still to feed and mine creativity in established organisations, where scale becomes the enemy. It's more difficult for a $US37 billion business to find and commercialise inventions that will sustain profitable growth at the same rate as in smaller rivals.

Microsoft may be the most striking example of the phenomenon that Harvard academic Clayton Christensen identified in his 1997 book, The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail. Good managers, Christensen wrote, tend to direct resources toward protecting established lines of business, usually by investing in incremental improvements that help pad profit margins.

Christensen called these "sustaining innovations"; defensive tactics. It's not that Microsoft lacks creative talent or that it simply has run out of ideas - it has an abundance of both. But for most of the past 25 years, it has overwhelmingly devoted these vast resources to the innovative defence of its existing franchises. That's why it has missed opportunities to launch important new businesses. And why it will miss many more.

And the investment world has a different take on "innovation" than the technical world has. While Microsoft may keep shareholders happy by entrenching existing technologies, establishing new innovative technologies may provide more risk than reward in terms of Microsoft's bottom line:

[I]nnovation experts argue Microsoft isn't investing enough in offensive innovation to define its future. And the research it does seems wildly inefficient. Over the past five years, Microsoft spent an average of $US9 million per patent, nearly twice its peer group.

Ultimately, observes Gary Hamel, innovation guru and chairman of Strategos, "really good ideas are just few and far between".

Venture capitalists typically pore over 50 to 100 deals to find a good $20-million software investment. By that logic, Microsoft, with its $6.8-billion annual R&D budget, must consider as many as 35,000 new ideas just to find a few hundred worth investing in every year. There just might not be enough opportunities out there for Microsoft to employ its vast resources effectively.

"Microsoft has to create the third- or fourth-largest software company in the world every year to be considered innovative," says Brian Skiba, managing director of the San Francisco-based hedge fund Viant Group. Even if Microsoft had been able to replicate Google's dominance in search technology, Google's $US1.5 billion in revenue would have lifted Microsoft's own top line by just 4 per cent.

But so long as Microsoft enjoys its dual annuities from Windows and Office, it needn't worry much about the revenue generated by its research.