How to Innovate When Platforms Won’t Stop Moving

The article How to Innovate When Platforms Won’t Stop Moving in MIT Sloan Review has several interesting pointers towards R&D management:

Businesses must cultivate agility — the ability to adapt quickly to or even anticipate and lead change. Businesses must develop deep differentiating capabilities that enable them both to separate themselves from competitors and endure disruptions. Companies such as Apple and IBM show how agility and capabilities can enable organizations to shape-shift as industry models rapidly change.”

Prof. Cusumano has four suggestions on how to be more agile (rearranged based on needs for R&D):
1. Emphasis on flexibility: As markets, customer needs and platforms are changing rapidly, we need to change our development approach so products can be successful despite changes. This is hard to do using current processes and tools for R&D management, however, it is good to keep in mind.

The key for many firms is not to always be creating plans and pushing products out to market but to find ways to react very quickly to new information or responses from customers and other partners to what you are doing or intending to do.

2. Capabilities rather than strategy: One approach to flexibility is to develop capabilities that can be reused if market changes. Capabilities are broad tools while products are targeted towards specific needs. My suggestion is for R&D managers to characterize plans and projects as leading towards key capabilities in addition to products that satisfy particular strategies. This way a minor change in processes can help lead us to flexibility.

For example, the future is unpredictable, so strategy needs to change, but companies can still build unique capabilities that provide a stable base for new products and services as well as help them navigate through change.

3. Economies of scope rather than scale: In case flexibility adds costs to development, one way to make the business case for the additional investment is to see that a broad set of capabilities will let companies address more market niches.

Economies of scope are also useful here because customers today often want a variety of new products and features but do not want to pay much money for them. Companies need to go beyond traditional scale economies and find ways to leverage existing knowledge in the form of reusable components and frameworks to produce a variety of products and services as efficiently as possible.

4. Information Pull Rather than push: To understand what capabilities to focus on, companies need better market information.

Managers also need to create mechanisms that “pull” information from the market in something resembling real time, such as customer-driven product development processes or production management systems that allow firms to change their product mix very quickly.

How do we identify what market information to focus on? Look for “megatrends”:

Managers certainly need to ask themselves — and the smartest people they can find around themselves, inside and outside the company — what are the potential megatrends that could disrupt their businesses in the future or make their business models obsolete. In the industries that I study, for example, there have been two such trends emerging over the last several decades: the rising importance of industrywide platforms as opposed to stand-alone products, and the rising importance of services or service-like versions of products.

That brings us to platform-based design (PBD), which underlies points 1 to 3 above. Prof. Cusumano is focusing on computing industry where platforms provide standards (e.g. PC, WCDMA, 802.11) and standard interfaces (e.g. PCI express, USB) that can be used to define flexibility. There are other forms of platform-based design that can be used in industries such as medical devices which do not depend on standardization. I recently presented a paper on this form of PBD. Please email if you would like to find out more.

Finally, this focus on flexibility may require more significant changes than just R&D:

IBM did a number of studies and figured out that it had all these processes that were designed to ensure quality, but they also meant that it was extremely slow to develop anything new. Different markets, like the PC market and then later the Internet market, required much faster decision making. They didn’t require the same kind of quality standards, but different kinds of standards. And so IBM did decentralize its decision making, but without physically breaking up the company. IBM reorganized into a small number of groups that mapped better to how customers needed to integrate the new technologies.

Kodak’s 30-year Slide into Bankruptcy

The article What’s Wrong with This Picture: Kodak’s 30-year Slide into Bankruptcy in Knowledge@Wharton makes some interesting points. Here is my summary. Kodak, once an industry leader and an innovator could not succeed because of the fear of cannibalizing existing film business.

The technology is one of countless innovations that Kodak developed over the years but failed to successfully commercialize, the most famous being the digital camera, invented by Kodak engineer Steven Sasson in 1975. Digital technology has all but done in the iconic filmmaker. Since 2003, Kodak has closed 13 manufacturing plants and 130 processing labs, and reduced its workforce by 47,000. It now employs 17,000 worldwide, down from 63,900 less than a decade ago.

The challenge in innovation is getting it into a product. Most companies either focus on incremental improvement of current products or long-term research.

Innovations that reach a middle ground — such as envisioning new product lines in the next two to five years — are much more elusive and often don’t have a champion pushing for them in the organization.

One of the root causes is that innovation disrupts the business model. Kodak made money on film and gave cameras away. They could not do the same with Digital imaging.

The company didn’t envision making money off cameras themselves, but rather the images it assumed people would store and print. “If you look at R&D, they were superfast. In terms of the business model, they were quite the opposite.

The problem is the the existing business model is the one generating all the profits. It is very difficult to divert those into new competing business models (because most companies I know allocate R&D resources to each product line based on the revenues they generate). Furthermore, many times Wall Street expectations drive businesses away from innovation.

Over the years he watched digital projects lose battles for research dollars. Even though film’s market share was declining, the profit margins were still high and digital seemed an expensive, risky bet.

Furthermore, a successful business model leads companies to try to change the customer needs to fit existing business model instead of trying to change the business model to fit the market needs.

“It succumbed to inside-out thinking,” says Day — that is, trying to push forward with the existing business model instead of focusing on changing consumer needs. Accustomed to the very high film margins, the company tried to protect its existing cash flow rather than look at what the market wanted.

So, one lesson is to periodically ask the question about what is our core competency? What is our businessbeyond our business model – the way in which we are making money right now? Is our competency in customer understanding (e.g. Nordstrom), technological superiority (e.g. Intel) or execution efficiency (e.g. Walmart). Then focus the investment around the competency:

Innovation is “the match between a solution and a need, connected in a novel way,” Terwiesch says. Kodak had a choice in how it pursued innovation: If it focused on the need, it would have to find new ways to take and store photos. If it focused on the solution, it would have to find new markets for its chemical coating technologies. Kodak’s competitor, Tokyo-based Fujifilm, focused on the solution, applying its film-making expertise to LCD flat-panel screens, drugs and cosmetics. “You have to make a decision: What are you as a company? Is it understanding the need or understanding the solution?” Terwiesch asks. “These are simply two very different strategies that require very different capabilities.

Another approach is to spin out companies that focus on new innovation and business model. It is hard to focus on disruptive innovation within an existing business.

He recalls efforts in the 1980s to drive innovation by setting up smaller spin-off companies within Kodak, but “it just didn’t work.” Venture companies in Silicon Valley are “pretty wild,” Larish adds. “In Rochester, people come to work at 8 and go home at 5.”

On the other hand, the same problem makes spinning out businesses also hard. Who is going to decide how much investment should go into which spin off? Does one set up completely separate infrastructure for the spin off or bring it back once it succeeds? How does one measure success of the spin off? Hence, once the spiral of business model driving the business starts, it is difficult to get out of it.

The digital era pushed Kodak into “a position of reacting,” and the company seemed to lose focus. “They had reorganization efforts … [and] brought in CEO after CEO. When you have that much disruption and change,” it becomes difficult to implement a long-term strategy

The final quote is one we should all remember:

“Don’t assume that just because you’re not willing to do it, somebody else won’t.”

Why Open Innovation is hard to implement

We have often discussed how innovation has become a buzzword with many myths surrounding what drives innovation. I was recently discussing Open Innovation with an R&D executive. He made a pretty significant remark: There are lots of positive articles around open innovation, but there do not seem to be many balanced evaluations of the approach. Fortuitously, Knowledge@Wharton has an interesting note about The ‘Flip Side’ of Open Innovation that addresses some of the concerns.

A lot of people have been writing about open innovation,” says Wharton management professor Felipe Monteiro. A typical example, he adds, is Procter & Gamble’s Connect + Develop strategy, which encourages collaboration with outside organizations as a way to bring new products to market faster and more efficiently.

While the P&G approach “has gained a lot of traction,” Monteiro notes, it also raises questions about whether, and when, companies should be concerned about protecting their own knowledge. Monteiro’s research into this issue has led to a paper titled, “Does Strategic Protection of Knowledge Undermine the Effectiveness of External Knowledge Sourcing?” co-authored with professor Michael Mol from the Warwick Business School, and professor Julian Birkinshaw from the London Business School.

I am going to use the article as backdrop to summarize four key concerns about Open Innovation and why it appears that many companies are not really recouping their open innovation investments (much less earn a return on them). We should all think carefully about these before investing in open innovation:

Valley of Death: A key concern in innovation is getting it transitioned into delivered products. Many companies I have worked with fail pretty frequently at this stage. We have discussed the valley of death extensively. The more disruptive (and hence the most valuable) the innovation, the more difficult it is to get it to market because it disrupts company culture and bureaucracy. When accessing innovation from the outside, this becomes even more difficult because of “Not Invented Here” mentality. Unless one can find an internal technologist or champion, open innovation just withers on the vine. This is very hard to overcome and needs active management involvement.
Trade Secrets Protection: We have often discussed how innovation is not about an aha moment or one brilliant idea. Innovation happens at the interface of multiple disciplines and technologies. (For example, iPhone could be seen as combining a capacitive touch screen with low power processing and an intuitive user interface. Each was available in the market, but the integration generated value). To access innovation from the outside, companies will need to share their problems in enough detail that potential suppliers can describe solutions. However, this description will also be available to all competitors – which defeats the whole purpose.
Evaluation / Management costs: As discussed earlier, managers need to consider many potential issues before deciding on accessing any innovation from the outside. A key issue that is forgotten is the time involved in evaluating innovation ideas. Because of trade secrets related problems described above, most companies use open innovation to access ALL innovation. Broad ideas need to be filtered before they can be sent to the technical teams – a task that requires management involvement. Companies quickly realize that this is VERY expensive. Even when ideas sound interesting, the value is difficult to estimate. Innovation needs to be accessed when needed – we can not just let innovative ideas sit on a shelf and get to them when the need arises. Innovative ideas require maturation and many cospecialized assets to get them to market. This is not cheap to evaluate.
Liability: When suppliers submit their ideas to companies, how should they be protected? Any implied protection exposes the company to potential litigation liability. Disregarding inadvertent public release, consider the possibility of independent discovery. The company may have independently developed ideas similar to those accessed through open innovation. If they decide to use internal ideas, they might still be exposed to IP litigation. Hence, most companies ask suppliers to submit ideas with all rights released! Most people are not willing to do so…

I welcome comments…