Month: April 2012

Steve Jobs: Innovation is the only way to succeed

INSEAD Knowledge has published an interview with Steve Jobs from 1996 which has a few very important points for R&D managers:  Innovation is the only way to succeed – you can not cut costs to get out of problems.

“All I can say is I think it was true back when we built Apple and I think it is just as true today which is innovation is the only way to succeed in these businesses. You can’t stand still.
You can’t cut expenses and get out of your problems. You can’t cut expenses and get out of your problems. You’ve got to innovate your way out of your problems.

image from Insead Knowledge

So, lets dig in…
We have discussed many of these points in the past, but this interview provides a few more details.  First is the recurring theme of user-centric design – products should not require customers to learn underlying technology:

Well, one of the reasons I’m so interested in graphics is that it makes things accessible to people without them having to know how it works. So as an example, the Macintosh was really that – we used graphics to make it easy to use; it was the computer for the rest of us. And you didn’t really have to know all this computerese to use it because of the great graphics and user interface.

Even more interesting is the fact that Jobs took the same approach with Pixar: Movie goers should be able to enjoy the experience without worrying about 10 years of R&D that went into creating the movie. We have discussed this in detail in the post about focus on your niche.

And it’s the same way with Toy Story at a much higher level. An audience between 80 and 100 million people will hopefully see Toy Story by the time it rolls out throughout the world, and yet none of them had to read a manual before they saw the movie to appreciate it. None of them had to understand the technology and the ten years of R&D and investment that went in to be able to create that movie to enjoy it, and that’s what’s so wonderful.

Another foundation of successful R&D management is a long-term vision. Steve Jobs again demonstrates his ability to think long-term.  He was working towards removing keyboard input back in the mid 90s:

And I see more and more of that infusing society where you have a tremendous technology but it has a face which is very approachable and you don’t have to understand the technology to interact or use the product….

You know I think that’s the potential of the Internet. We’re certainly not there today. Typing an H-T-T-P slash slash colon w-w-w, you know, is arcane. I mean, you shouldn’t even need a keyboard to use the Internet but we still do. And I think we’ll get to where it really is very simple, but we have a few years to go.

The next lesson for us R&D managers is that of hands-on involvement.  An engaged leader is critical to motivating teams and delivering innovation (by overcoming problems such as valley of death).  Jobs was not had the vision of where products need to go, he was involved in detailed technology development and the business models that need to be developed to support the new technology.  In this case, he was developing a vision about iTunes in mid-90s…

We look at the internet and it looks very exciting to us, but we don’t see how to make any money from it. We haven’t seen any business models emerge where we can put content on the Internet and end up being rewarded for that. And since our talented people always have opportunities to work on things where we do get financially rewarded, we’re not about to take them off that and put them on the Internet until we see a business model that makes sense. And I think we will, you know, in the next one to two years.

 We have a lot of interesting posts about innovation management…


Unilever’s Kees Kruythoff: Enthusiastic Employees Key to Success

A quick post about a lecture by Unilever’s Kees Kruythoff in Knowledge@Wharton (Global Leadership Lessons from Unilever’s Kees Kruythoff ).  Kruythoff mentions that a sense of enthusiasm and excitement is key to a company’s success and makes progress possible.  He sees that sense of enthusiasm has been a key to his own success:

“Kruythoff said that his enthusiasm for his job has always been what has propelled him. There is really no substitute for that, he noted, and, in reality, enthusiasm should be the primary reason anyone should work for an organization. “When you join a business, the most important part is to ask yourself how you can improve the values of the company,” Kruythoff stated. ” 

One way to get an enthusiastic workforce is to hire employees that clearly demonstrate the sense of excitement:

A new employee should have a sense of excitement, he added, and make sure that he or she is a good fit with the company. “Wherever you go, if it feels like the place where you want to be, then in all likelihood it is.”  

However,  the leaders still need to maintain and fuel that excitement.  A sense of excitement will help overcome any hurdles in the organizations path and build a positive environment.

Enthusiasm makes progress possible, Kruythoff said, and leaders must build that excitement and fire among their employees. Not every decision is a winner, but when employees are optimistic about the future of the firm, that atmosphere will help move the company in the right overall direction.

The article does not quite talk about how to build and maintain this sense of excitement.  Here is what we have learned in this blog:


Why Open Innovation is Hard to Implement (Netflix Example)

We have discussed the difficulties in implementing open innovation.  Netflix did an amazing job of leveraging open innovation with Netflix Prize. For a while they were receiving amazing results from the exercise. That is why, I was surprise when I read the article Netflix never used its $1 million algorithm due to engineering costs:

“Netflix awarded a $1 million prize to a developer team in 2009 for an algorithm that increased the accuracy of the company’s recommendation engine by 10 percent. But today it doesn’t use the million-dollar code, and has no plans to implement it in the future,”

Let us dig in to see what we can learn…
First of kudos to Netflix for engaging a very wide community in the innovation.  But more importantly, Netflix was great at setting up tools to keep the community engaged. The second point is overlooked by many organizations engaging in open innovation portals.  Let us go through each of the four challenges we identified about Open Innovation and see how Netflix was able to address them:

  1. Valley of Death is when organizations are unable to incorporate outside innovation into delivered products even after acquiring it. Netflix focused open innovation around a problem critical to their business – predicting what movies customers will like.  If the outside innovators were able to demonstrate those results, it would be hard for internal experts to resist implementation (because of not-invented-here mentality).  More importantly, there would be management attention on the subject because of its importance to overall business – which would surely help overcome the valley of death.
  2. Trade Secret Protection: Netflix was in a unique position because they did not have to disclose their current implementation in anyway.  All they had to do was to publish the output of their algorithm.  They were able to provide data to the outside innovators to test performance relative to Netflix’s performance.  In most Open Innovation problems, it will be hard for organizations to set up a problem so that they do not have to disclose any internal know-how.  But something everyone should consider…
  3. Evaluation / Management Costs: Although Netflix had to set up an extensive infrastructure to administer Open Innovation, the costs were some what mitigated.  Netflix was able to device an approach where the community was able to test their algorithms internally before sending it to Netflix.  Furthermore, Netflix provided clear guidelines and test data for the outside innovators.  This self evaluation by inventors reduced the overhead required to manage/test innovation ideas submitted for consideration. 
  4. IP Liability: Netflix bypassed the entire IP problem by only requiring the “implemented” algorithms be provided for evaluation against the test set.  The details of the algorithm need only be discolosed if the algorithm actually produced required results.  Furthermore, by requiring that the results be published (thereby leveraging advantages open source provides to open innovation). I am not sure how many companies will be able to the IP liability issues this way…

Even so, Netflix was not able to get full benefit from the $1M prize because of two factors. First, the cost of implementing the algorithm was so high that they could not close the business case:

We evaluated some of the new methods offline but the additional accuracy gains that we measured did not seem to justify the engineering effort needed to bring them into a production environment.

Second, the market had changed from DVD rentals at the time of innovation challenge to to on-line streaming so that the benefit of the innovation was minimized:

Also, our focus on improving Netflix personalization had shifted to the next level by then.

This is an important lesson for all R&D managers: Even if we can overcome most of the challenges in implementing Open Innovation, several other factors may still prevent us from gaining full benefit of the investment.  However, all was not lost. Netflix was able to use some of the algorithms developed at early stages of the challenge to gain significant benefits.

Netflix notes that it does still use two algorithms from the team that won the first Progress Prize for an 8.43 percent improvement to the recommendation engine’s root mean squared error (the full $1 million was awarded for a 10 percent improvement).

That too is an interesting idea: Set up intermediate goals for open innovation and incorporate them into the overall R&D planning process.


What You Wear Can Influence How You Perform

An interesting article in the Sloan Management Review discusses a paper that shows what you wear can influence how you perform.

New research suggests that clothing can have an effect on our behavior if that clothing has a symbolic meaning and if we have the physical experience of wearing the clothes. 

Three experiments showed that knowing that you are wearing a doctor’s coat actually improved performance:

 In the first experiment, the researchers found that wearing a lab coat identified as a doctor’s coat did, in fact, increase subjects’ selective attention. In the second experiment, they found that people who wore the same coat but were told it was a painter’s coat did not have increased attention. And in the third experiment, they found that just looking at a doctor’s coat did not increase attention.

Here is the link to the research paper.


Update on Sony’s Future Plans

Two months ago, Sony’s president to-be had announced his plan to turn Sony around. Now, the new President has actually reconfirmed his plans and provided a few more details (Sony CEO wields ax, sets turnaround targets):

via engadget

The plans seem to not have changed much:

Key initiatives to transform the electronics business are:
1. Strengthening core businesses (Digital Imaging, Game, Mobile)
2. Turning around the television business
3. Expanding business in emerging markets
4. Creating new businesses and accelerating innovation
5. Realigning the business portfolio and optimizing resources

The main addition to the strategic plan announced earlier is numerical goals.  However, there is not much more detail compared to what we had discussed earlier (except the loss of 10,000 jobs).  There is no discussion about how the TV business can be turned around or how Sony plans to reenter OLED TV market after exiting it just a couple of months ago.  Nor is there any explanation of why innovation equates to medical devices… No wonder the financial community is underwhelmed:

“I can’t make out a growth story here. It’s good they’ve announced numerical targets, but you can’t tell how they’re going to achieve them,” said Kikuchi Makoto, CEO of Myojo Asset Management.

There is also no clear roadmap here that can drive R&D planning or help achieve these goals.


“It doesn’t feel like an aggressive makeover,” said Tetsuro Ii, president of Commons Asset Management, who oversees $33 million of assets and doesn’t hold Sony stock. “You can’t really see the roadmap for how they’re going to revive the electronics business, nor how they’re going to create new value.” 

 The full strategy presentation can be found here.


Toyota aims to spice up cars with new development methods

We have discussed Toyota’s R&D management processes extensively (here and here). You might also remember Toyota’s recalls and problems a couple of years ago.  Toyota’s president (Mr. Toyoda) had announced that he would beef up the quality control processes to address these problems.  In fact, Toyota did announce an increased cycle of quality control (see Devil’s Advocate Policy).  We had discussed that the root cause of Toyota’s problems was increased system complexity, and that increased quality control would not be able to address underlying problems. This analysis was later validated by others. Now Toyota is talking about changing their R&D processes (See Toyota aims to spice up cars with new development methods)

image from engadget

Details are scarce, but the three key points made in the article, if implemented correctly, will definitely benefit Toyota.  The first is to reduce the bureaucratic overhead on the development process.  It is amazing to know that 80 to 100 executives were previously included in the approval loop.  It appears that Toyota will eliminate some of the reviews:

“The company will also give greater authority to chief engineers and slash the number of executives involved in the design review process — about 80 to 100 previously — to eliminate layers of decision-making.”

This can be a step in the right direction. As we had discussed earlier, reviews and post design quality control are rarely effective because most design decisions have already been made by then.  The additional effort needs to be to drive risk management decisions into upfront planning. Toyota seems to be addressing that concern as well:

Greater cooperation between the planning and design divisions will allow more design freedom…

Finally, the company is going to move focus away from near-term sales volume and growth to longer-term customer/product focus.  We had also pointed out this to be a key problem.

“The feeling at the time was, ‘If we build it, they will come,'” Toyoda told reporters at the automaker’s headquarters in central Japan today. “Instead of developing what customers would want next, we were making cars that would rake in sales.”

I love Toyota products and wish them luck.


Vertical Integration Works for Apple — But It Won’t for Everyone

An interesting article from Knowledge@Wharton has good info for R&D managers Vertical Integration Works for Apple — But It Won’t for Everyone. Apple’s success with iPhone has increased the emphasis on vertical integration – controlling most parts of the value chain to the consumer:

“Vertical integration dictates that one company controls the end product as well as its component parts. In technology, Apple for 35 years has championed a vertical model, which features an integrated hardware and software approach. For instance, the iPhone and iPad have hardware and software designed by Apple, which also designed its own processors for the devices. This integration has allowed Apple to set the pace for mobile computing. “Despite the benefits of specialization, it can make sense to have everything under one roof,” says Wharton management professor David Hsu.”

As the article points out, Google’s purchase of Motorola, Oracle’s acquisition of Sun etc all point towards more vertical integration. Clearly, more pieces of the value chain a company controls, the better it will be at differentiating itself from competitors. Vertical integration will allow organizations to develop better products faster because of fewer IP constraints and better collaboration.

what Apple’s competitors really envy is the company’s control of its ecosystem. 

However, control of the ecosystem requires more than controlling the product.  Google and Oracle are attempting to control hardware and software aspects of their products.  
It is not easy to align hardware and software development paths.  As we have seen in the past, Steve Jobs actually disconnected the two during  iPhone development. 

Hrebiniak notes that hardware and software require different competencies and skill-sets in areas such as manufacturing, procurement and supply chains. In that respect, the challenges these firms face will be similar to what many diversified multinationals deal with when managing disparate business units.

However, to achieve Apple like results, they will need to control many other parts of the value chain as well.

“It is important to distinguish between a motivation to manage the interface between hardware and software and a desire to manage one’s ecosystem.

One key point that people forget is that Apple has had a 30 year history of vertical integration. Their corporate culture is built around that concept.

.”Apple does well, but has had top-down integration of hardware and software for more than 30 years,” Hrebiniak states. That integration, which requires centralization foreign to Google and many other companies, is hard to deliver.

There are many  negatives to vertical integration.  Larger R&D organizations become virtually connected regardless of the physical location and suffer the same disadvantages of a multi-organization team. Add to it the fact that large teams pay a performance penalty.  Vertical integration will also expose companies to significant other risks ranging from culture clash to development efficiency:

For instance, Hsu suggests that the advancement and growth of Google’s Android technology may slow if the company is juggling hardware and software efforts. Even though Android is technically open source, Google drives development. “Google integration with Motorola Mobility could make products better, but the risk is that Android may not evolve at the same pace it would under a specialization model.”

Companies planning vertical integration should consider approaches to build focused R&D communities. Companies will also need to enhance their management processes for virtual teams. They will also need to master distributed product development.  Finally, they will need to learn from Apple and improve their R&D project portfolio management.  Alternatively, companies can use Codesign  to work around vertical integration. More importantly, it is essential to remember that all business models can lead to success and that different business models lead to a more vibrant and vital competitive landscape.

but you need multiple models in the technology industry,” she says. “If every tech company followed Apple, there would be a degree of novelty and innovation lost.”

More importantly, no one knows how much of Apple’s success was tied to Steve Jobs:

After all, Apple’s success may be largely a function of a command and control structure instituted under former CEO Steve Jobs.

learly, there is an increasing trend towards vertical integration in the technology industry.  However, this is not a new phenomenon.  Companies such as GE have ventured down the path many decades ago and are now actually scaling back to achieve focus.

“Haven’t we seen this movie before?” asks Whitehouse, pointing to the rise of multinational conglomerates in the mid-20th century. For example, Vivendi transformed itself from a water company to one focused on media, while GE started as an electric company but later expanded into such disparate businesses as microwave ovens and the NBC television network (which it recently sold to Comcast.) “Conglomerates are now refocusing after spreading themselves too thin,” says Whitehouse. “Can expanding tech companies learn the lessons of an earlier wave of conglomerates?”

Companies move away from vertical integration when their market becomes commoditized.  In commodity markets, it is important to focus on efficiency which can only be achieved through focus.  When that will happen in the tech industry in unknown.

 Typically, companies back away from vertical integration as products become more commoditized. It is unclear when that will happen in the smartphone or tablet markets, but the advent of that period would likely mean trouble for vertically integrated firms.

Apple has been able to successfully avoid  commoditizing by moving into new market segments.  Any company considering vertical integration should also keep that in mind.  When Apple tried to compete in the commodity market with vertical integration, it failed!

“What Apple has done well is stay ahead of commoditization,” Hsu notes. “Apple is more of a trailblazer and that opens up possibilities.” The catch is that a vertical approach does not provide a significant advantage if a firm is unable to stay ahead of the competition. Indeed, Apple’s integrated approach in the PC market did not work to the firm’s benefit when it was battling Microsoft in the 1980s and 1990s.


Does the compensation plan provide the right incentives?

Incentives are key to driving R&D manager behavior.  We have often discussed different approaches to improve financial incentives. A new article from McKinsey Quarterly has a unique take on how to evaluate compensations plans (Does the CEO compensation plan provide the right incentives?).  The premise is that in addition to the remuneration for the current year, the accumulated wealth from the entire tenure drives executive behavior.

Boards, shareholders, and journalists often look at a chief executive’s annual compensation plan to determine whether the company is offering the right incentives to increase shareholder value. But few consider another key question: how does the compensation that the CEO has already received over the years in the form of stock and stock options influence managerial decision making?

The authors compared the median total annual compensation of chief executives and comparing it with their median total accumulated wealth. Their analysis shows that median accumulated wealth is nine times the year-to-year compensation for a CEO of a large company.

Our research shows that for most CEOs in the United States, accumulated wealth effects are likely to swamp those of year-to-year compensation—meriting serious attention when boards evaluate how risk structures and incentives of executive pay packages align with the company’s strategy.

We have discussed the inability to tie pay to executive performance (See Problem with Financial Incentives). We have also talked about longer vesting periods to better align performance with pay.  This article gives a somewhat new perspective that longer vesting periods might actually have a negative impact because the accumulated wealth might start outweighing new compensation.

Another unique perspective in the article is the convexity of the compensation package. If the compensation package is shares, the wealth change is linear with the stock price.  Stock options on the other hand increase in value much more rapidly.

If the CEO’s portfolio contains only shares, it will tend to rise and fall one-for-one with a change in stock price. We refer to this as “low convexity.” If, however, the CEO’s portfolio contains a large number of stock options, and especially multiple tranches of out-of-the-money stock options, the payoff curve can become quite steep (high convexity). Convex payoff structures such as these provide more financial incentives for CEOs to take on promising—albeit risky—investments because the CEO stands to earn very large rewards if successful.

Hence, as we have discussed before, stock options encourage risk taking to get to the higher payoff.  More risk taking may or may not be advantageous for the company and the board needs to be cognizant of its implications.  The article does not address it, but we have discussed the inability of stock options to actually drive good behavior.

So what is the overall recommendation? Understand the accumulated wealth effect before deciding on a compensation plan.  This is especially pertinent for a longer term manager who is likely to have accumulated a large wealth.  Decide whether you want more risk taking before granting stock options.  Finally, benchmark with other companies and industries to decide the appropriate balance.

“Since this analysis is relatively new, and wealth effects aren’t routinely calculated and reported, we suggest boards do some benchmarking against peers to see if it raises questions about the financial incentives they have created for their CEO. Is risk in line with industry peers, and, more importantly, is it in line with the company’s strategic objectives? Have changes in the stock market changed the convexity of the CEO’s reward curve in a way that encourages excessive risk? If so, should the board change the mix of future annual pay grants to get the curve back in line with objectives? Should it reprice existing options to reduce convexity? If the CEO wants to sell or hedge some of his or her personal portfolio in order to reduce personal-investment risk, how will this change the incentives to perform?”