READING PRACTICE TEST. COMPANY
INNOVATION
A. In a scruffy office in midtown Manhattan, a team of 30 artificial intelligence programmers is
trying to simulate the brains of an eminent sexologist, a well-known dietician, a celebrity fitness
trainer and several other experts. Umagic Systems is a young firm, setting up websites that will
allow clients to consult the virtual versions of these personalities. Subscribers will feed in details
about themselves and their goals; Umagic‘s software will come up with the advice that the star
expert would give. Although few people have lost money betting on the neuroses of the
American consumer, Umagic‘s prospects are hard to gauge (in ten years‘ time, consulting a
computer about your sex life might seem natural, or it might seem absurd). But the company
and others like it are beginning to spook large American firms, because they see such half-
barmy “innovative” ideas as the key to their own future success.
B. Innovation has become the buzz-word of American management. Firms have found that
most of the things that can be outsourced or reengineered have been (worryingly, by their
competitors as well). The stars of American business tend today to be innovators such as Dell,
Amazon and WalMart, which have produced ideas or products that have changed their
industries.
C. A new book by two consultants from Arthur D. Little records that, over the past 15 years, the
top 20% of firms in an annual innovation poll by Fortune magazine have achieved double the
shareholder returns of their peers. Much of today‘s merger boom is driven by a desperate
search for new ideas. So is the fortune now spent on licensing and buying others‘ intellectual
property. According to the Pasadena-based Patent & Licence Exchange, trading in intangible
assets in the United States has risen from $15 billion in 1990 to $100 billion in 1998, with an
increasing proportion of the rewards going to small firms and individuals.
D. And therein lies the terror for big companies: that innovation seems to work best outside
them. Several big established “ideas factories”, including 3M, Procter & Gamble and
Rubbermaid, have had dry spells recently. Gillette spent ten years and $1 billion developing its
new Mach 3 razor; it took a British supermarket only a year or so to produce a reasonable
imitation. “In the management of creativity, size is your enemy”, argues Peter Chernin, who runs
the Fox TV and film empire for News Corporation. One person managing 20 movies is never
going to be as involved as one doing five movies. He has thus tried to break down the studio
into smaller units—even at the risk of incurring higher costs.
E. It is easier for ideas to thrive outside big firms these days. In the past, if a clever scientist had
an idea he wanted to commercialize, he would take it first to a big company. Now, with plenty of
cheap venture capital, he is more likely to set up on his own. Umagic has already raised $5m
and is about to raise $25m more. Even in capital-intensive businesses such as pharmaceuticals,
entrepreneurs can conduct early-stage research, selling out to the big firms when they reach
expensive, risky clinical trials. Around a third of drug firms‘ total revenue now comes from
licensed-in technology.
F. Some giants, including General Electric and Cisco, have been remarkably successful at
snapping up and integrating scores of small companies. But many others worry about the prices
they have to pay and the difficulty in hanging on to the talent that dreamt up the idea. Everybody
would like to develop more ideas inhouse. Procter & Gamble is now shifting its entire business
focus from countries to products; one aim is to get innovations accepted across the company.
