When Western executives discuss innovation, they tend to focus more on products than on processes and mostly on breakthroughs rather than incremental product innovations. Supercomputers, blockbuster pharmaceuticals, fuel cells, nanotechnology, lasers — innovations like these capture the imagination and attention of executives in developed countries.

Yet very few companies create significant shareholder value through breakthrough product innovations; most economic wealth comes from more modest ones that accumulate over time. Process innovations may be even more important for building competitive advantage and generating wealth. Dell and Wal-Mart Stores, for instance, have used them to generate enormous amounts of it.

In fact, most innovation involves creatively recombining existing components of technologies, products, or business systems. Schumpeter's "gales of creative destruction," for example, came not from isolated, discontinuous events but rather from ongoing efforts by entrepreneurs to find better ways of serving markets. Silicon Valley — for many, the epicenter of innovation — generates most of its economic wealth by incrementally enhancing technology.

If executives expand their view of innovation, they may be better prepared to see it in terms of institutional capacity and pace. For example, developing a more modular and loosely coupled product architecture — as Cummins and the Chongqing motorcycle assemblers did — increases the institutional capacity for innovation and thus promotes incremental improvement. Specialization, as in the example of the Aravind Eye Care System, helps an organization develop innovative processes more rapidly by providing it with lessons from a larger number of comparable experiences.

More important still, a broader view of innovation that values the role of incremental change communicates the power of bootstrapping. Companies that start out with limited capabilities — such as those in many developing economies — can rapidly build them over time through a series of modest process and product innovations. Ultimately, individual innovations may matter less than the institutional capacity to sustain a rapid series of improvements and the pace at which they are developed and disseminated through the network.

John Seely Brown is the former head of Xerox's Palo Alto Research Center and chief scientist at Xerox; John Hagel, an alumnus of McKinsey's Silicon Valley office, is now a senior adviser to McKinsey. This article is adapted from their upcoming book, The Only Sustainable Edge: Why Business Strategy Depends on Productive Friction and Dynamic Specialization, with permission from Harvard Business School Press. Copyright © 2005 John Hagel III and John Seely Brown. All rights reserved.

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