Indirect Benefits of R&D – Chrysler Example

The article Heritage: Prowler was a vehicle ahead of its time. | driveSRT has some interesting data points about R&D portfolio executives. New technologies can have benefit far beyond the product for which they were developed. 

“Magnesium instrument panels, aluminum hoods and aluminum suspensions, vital crash safety design. All are key traits featured on new SRT vehicles that originated on the Prowler.”

Focusing solely or primarily on NPV for financial metrics to prioritize portfolios will lead us away from long-term discriminators. It is possible to compute financial return on sustaining product development or on products that are close to getting to market. However, it is difficult, if not impossible to accurately compute the return on investment for technologies that apply to multiple products (it requires estimating the part of the products NPV is generated by the technology). In fact, focusing solely on financial metrics will likely scuttle innovation.

What are some solutions:

  • Use financial metrics as one of many criteria for prioritization.
  • Set aside a fraction of the overall R&D budget for innovation and do not use financial metrics for innovation projects.
  • Demonstrate R&D value by tracking insertion of technologies across product lines (InspiRD can help)
  • Design off-ramps and integration of technologies along the path to full productization. This is what Chrysler SRT appears to have done successfully in case of Prowler.

How to measure R&D Effectiveness?

Metrics that measure effectiveness of ongoing R&D have been difficult to obtain. Four types of R&D metrics have traditionally been used:
  • R&D Investments / Expenses
    • Total R&D Headcount
    • Total R&D Expense
    • R&D Expense as % of Revenue
    • R&D Expense increase/decrease from prior year
    • R&D Expense compared with peers/industry average
  • Project execution status
    • Performance relative to plans (costs and schedule)
    • Concept to Market Time
    • Number of Projects in the Pipeline
  • Historic results-based Metrics
    • Fraction of Revenues from New Products
    • Number of Patents generated
    • Number of Papers Published
    • Customer satisfaction with new products
  • ROI-based metrics
    • Return on Innovation Investment
    • Target NPV for each new product
The problem with most of these metrics is that they are not actionable. As we discussed earlier, R&D effectiveness needs to drive real business results. It is hard for managers to take concrete actions using these metrics to improve R&D effectiveness. All metrics need to be able to aggregate information across the R&D portfolio to help managers see trends and make decisions. Good metrics should allow segregation of management decisions into individual project level actions.
The first two types of metrics are not directly related to ongoing R&D and its projected results. For example, what would happen if we increased our headcount or reduced it? There is no easy way to understand the impact on R&D pipeline. Will it improve revenues? When? Are there key technologies that will take time to develop no matter how much money you invest? It is not easy to tie headcounts to R&D results in the future.
Historic results-based metrics such as number of patents generated are all approximate indicators of R&D performance several years in the past. Managers can gain little direct insight into ongoing R&D effectiveness from these metrics. Nothing a manager can do now will impact number of patents issued or number of papers published. More importantly, it might be better for
ROI-based metrics tend to work better with product development projects near delivery, but they are very hard to use for early stage development. Furthermore, it is hard (if not impossible) to develop ROI on technology development effort that might impact a feature in several different products (think a new type of metal that can be used in different types of cars). ROI computation becomes even more difficult for disruptive innovation.
Over the next few weeks, we will discuss new kinds of metrics that can help managers improve R&D effectiveness…

Yahoo!’s new CEO

Sorry I have been gone for a while – starting a business requires a lot more effort than I had thought.  The rewards more than make up for effort, but some important things like this blog get dropped along the way…

A quick post about Yahoo!’s new CEO from INSEAD Knowledge.  The article provides many interesting facts about the new CEO, however one stands out:

“Some Googlers who worked with Mayer found her style abrasive and her pace hard to sustain. In her early years, apparently, her interpersonal skills were inferior to her user focus and technical prowess. Many engineers relished working for her nevertheless, and her management skills improved with experience” 

The key points here is that R&D teams are willing to put up with a lot of hardship as long as the leaders are engaged in the development. As long as the leaders are able to provide the teams with a long-term vision, progress can be made.  Finally, leaders need to provide challenges that the teams can utilize to innovate. Each of these themes we have discussed many times on this blog.

The media frenzy about Mayer’s appointment, however, requires some examination on our part.  The author of the article has summarized it so well, I have reproduced it below (even though it is not quite related to R&D)

The lessons we must draw from this exceptional event, which reveals less about Mayer and Yahoo! than it does about our norms, is the following: Leaders, especially such visible ones, have to accept constant and ruthless scrutiny that won’t stop at their results. Followers, opponents and observers will always question their motives and lives. And they will account for the leader’s story in ways that reveal and serve their interest. Good leaders know it and work with it. 

At the same time, we must take this opportunity to scrutinise, for once, not just the leader but also ourselves. To cast a light on the ways in which the stories we tell about our leaders – the patterns of thinking and feeling, actions and talk, which we take for granted – affect the efforts and opportunities to lead of those who appear different from us, and may not be as different as we make them to be.

Amgen CEO: Why I’m a listener

McKinsey Quarterly has an interview of Amgen CEO Kevin Sharea (Why I’m a listener: Amgen CEO Kevin Sharer) where he emphasizes the importance of listening for leaders.  We have talked about listening a couple of times in the past (here and here).

He says that the best way to listen is to do so with just one objective – comprehension.  It is important not to be focused on criticism or arguments for or against what the other person is saying.

““Because I learned to listen.” And I thought, “That’s pretty amazing.” He also said, “I learned to listen by having only one objective: comprehension. I was only trying to understand what the person was trying to convey to me. I wasn’t listening to critique or object or convince.””

Listening for comprehension can also help demonstrate respect and teach your team to be flexible by example. It builds and environment of trust, partnership and teamwork.

Listening for comprehension helps you get that information, of course, but it’s more than that: it’s also the greatest sign of respect you can give someone. So I shifted, by necessity, to try to become more relaxed in what I was doing and just to be more patient and open to new ideas. And as I started focusing on comprehension, I found that my bandwidth for listening increased in a very meaningful way.

Listening can help leaders immerse themselves in the organization and gather the right information, generate new connections and spark creativity / innovation. Leaders need to talk with different people – not just their direct reports because useful pieces of information reside in different places.

My method of gathering the tiles involves regularly visiting with, and listening to, people in the company who don’t necessarily report to me. I also read as much as I possibly can: surveys, operating data, analyst reports, regulatory reports, outside analyses, and so on. I meet with our top ten investors twice a year to listen, and at shareholder conferences I consider the Q&As very important. The key is making yourself open to the possibility that information can and will come from almost anywhere.

Listening can help us become more engaged and innovative leaders. Listening can also help us question assumptions and get our teams to experiment more.

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 [email protected] (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.