The Influence of Prior Industry Affiliation on Framing in Nascent Industries

A very useful paper from the HBS Working Knowledge about The Influence of Prior Industry Affiliation on Framing in Nascent Industries explores the digital camera market to identify some useful trends in firms entering new markets:

New industries sparked by technological change are characterized by high uncertainty. In this paper we explore how a firm’s conceptualization of products in this context, as reflected by product feature choices, is influenced by prior industry affiliation. We study digital cameras introduced from 1991 to 2006 by firms from three prior industries.

The paper hypothesizes that firms entering new industries tend to continue to behave like the industry from which they originate. A unique perspective and one that can be useful for all of us to understand because the corporate mindset is critical to how products get launched.

We hypothesize and find first, that prior industry experience shapes a set of shared beliefs resulting in similar and concurrent firm behavior; second, that firms notice and imitate the behaviors of firms from the same prior industry; and third, that as firms gain experience with particular features, the influence of prior industry decreases. This study extends previous research on firm entry into new domains by examining heterogeneity in firms’ framing and feature-level entry choices.

Let us dig to see what we can learn…
R&D has to always address uncertainty when developing new products. We have to experiment with product configurations, functions and technologies. However, new industries are even more challenging:

Potential customers have little or no experience with products, and their preferences are therefore unformed and unarticulated. Even basic assumptions about what the product is and how it should be used are subject to debate. Similarly, from a technological perspective, uncertainty exists about the rate of performance improvement of the new technology, how components of a technological system will interact, and whether different technological variants will work at all. Market and technological uncertainty are often compounded by competitive uncertainty as firms grapple with shifting industry boundaries and the convergence of firms from previously distinct domains.

The paper intends to analyze and explain how different firms decide to enter new markets and what drives them to be different from each other (heterogeneity). The digital camera industry studied by the authors is quite appropriate because it was at the confluence of multiple technologies / markets:

…the emergence of consumer digital cameras was characterized by high uncertainty and the entry of firms from three prior industries, photography, computing, and consumer electronics, enabling a comparison of the influence of firm background on decisions about which features a digital camera should include.

This interesting. Digital cameras needed expertise from many different segments: Image Sensors (semiconductor), Optics, Digital Processing, Displays, User Experience (how a camera takes pictures – forte of vendors such as Nikon), film (Kodak) and consumer electronics (including mobile phones). Market entrant from each participating industry segment approached the market based on their predispositions:

We find that prior industry affiliation had a significant influence on a firm’s initial framing of the nascent product market. Qualitative data indicate that digital camera product concepts and expected uses varied systematically, ranging from an analog camera substitute (photography firms), to a video system component (consumer electronics firms), to a PC peripheral (computing firms) before converging on a product concept that included elements of all three frames.

Also, different entrants from the same industry focused on similar products (based on their prior belief). However, as participants gained more experience with a particular product, they moved away from behavior corresponding to their previous industry – following a three stage model including an era of ferment, convergence on a dominant design, and an era of incremental change:

Our results suggest that firms from the same prior industry shared similar beliefs about what consumers would value as reflected in their concurrent introduction of features — firms were significantly more likely to introduce a feature, such as optical zoom, to the extent that other firms from the same prior industry entered with the feature in the same year, whereas concurrent entry by firms from different prior industries had no influence. Firms were also likely to imitate the behavior of firms from the same prior industry, as opposed to that of firms from different prior industries in introducing some, but not all features. Finally, we find that as a firm’s experience with a particular feature increased, the influence of prior industry decreased.

The paper suggest that industry level (or at least multi-participant) beliefs are important because they tend to shape the industry and the competitive landscape. Sometimes inability to develop all product features allows new entrants in the market. For example, few firms were able to integrate digital cameras with GPS locations and provide a new user experiences. It took Apple to combine a touch screen display with a media player in a mobile phone. In new industries R&D managers lack a detailed understanding of customer preferences (they have not evolved yet) and hence the prior experience becomes even more important. May be we should focus on thematic similarities a bit more to address this competitive weakness in traditional R&D management models. An approach focused on how customer would use the product and its features would help the exploration of thematic similarity (may be we can learn from Steve Jobs) .

CEO says Ford won’t back off R&D spending

I have been gathering data about corporate response to difficult market conditions, especially the impact on R&D spending. Tough times impact every aspect of an organization’s operations and they have changed R&D spending as well (reduce focus on long-term R&D). Even so, organizations tend to fight to maintain R&D spending levels. We have seen that CEO of companies such as 3M have maintained R&D spending despite the downturn. Here is another data point from the Marketwatch post CEO says Ford won’t back off R&D spending:

Ford Motor Co. CEO Alan Mulally said Tuesday at the Geneva Motor Show that the auto maker will focus not on forging further alliances in Europe to help drive growth but on continuing to invest heavily in new products. “We have never backed off, even through this entire recession,” he said. “We actually have increased investment in our new vehicles during the toughest of times.

As a background, the European slowdown is likely to lead to a $0.6B loss in Ford’s European operations (Ford launches B-Max subcompact – seattlepi.com):

Ford will focus on cost containment to return to profitability until demand is restored, but he declined to speculate on possible measures. Booth said Ford Europe could lose $500 to $600 million dollars this year, after recording losses of $190 million in the last quarter of 2011.

Interestingly, the cost cuts are going to be in manufacturing operations rather than R&D – especially since R&D has probably more flexibility. Even more importantly, we have discussed many times that how you spend on R&D is far more important than how much. In fact, many leaders such as CTOs of Texas Instruments and Pfizer have found that R&D cost cuts actually improved results!
The effort to maintain budgets is even more surprising in light of the fact that surveys show most R&D executives do not see R&D as driver of innovation. May be some of these CxO statements are for public relations perspective, but still important to understand.

The second important point Mr. Mullaly makes is that Ford will not form R&D alliances. Sharing R&D across multiple companies is a simple way to reduce R&D costs near-term. Here is another article from MarketWatch discussion R&D alliances (BMW, GM still talking over technology cooperation):

BMW AG Chief Executive Norbert Reithofer confirmed Tuesday that the German car maker’s cooperation projects with PSA Peugeot Citroen remain unaffected after the French peer last week forged an alliance with General Motors Co.. He added that cooperation talks between BMW and GM over “future technologies” such as fuel cells are still ongoing, but declined to elaborate.

As we have discussed in the past, automotive companies make a complex web of alliances. May be the Ford approach has some value considering the difficulty and cost of managing these alliances and maintaining IP rights across them.

How can R&D Management help exploit Thematic Similarity?

The article In Praise of Dissimilarity from MIT Sloan Management Review has very important implications for R&D management. The article describes how most managers view similarity based on functionality or product taxonomy (e.g solid state drives and hard drives are similar). However, another way to look for similarity is based on how different products interact in a scenario or event (e.g. shoes and mp3 players are related through exercise). This is called thematic similarity. The article points out that thematic similarity can help focus innovation and provide a competitive advantage. However, it also raises some important challenges for R&D management. Lets dig in.
Traditionally similarity (taxonomic similarity) has been seen as a that based on overlap of functions and features:

Whether explicitly or implicitly, the traditional understanding of “similarity” by managers has been a taxonomic one. Simply put, the degree of similarity as traditionally measured depends on the extent to which two objects possess the same features. Personal computers, for instance, all have hard drives, processors and a video monitor.
…
Thus, taxonomic similarity is based on the properties of the objects themselves, and taxonomic categories cohere around shared internal properties. As a consequence, taxonomically related concepts tend to resemble one another.

Thematic similarity is probably as important but often overlooked:

…similarity is not just a matter of degree (how similar are two things), but also of kind (how are two things similar). Two things are thematically similar if they functionally interact in the same scenario or event. For example, an athletic shoe and an MP3 player are related through interacting in a workout theme, coffee and a computer interact in an office theme and a navigation system and a motor via an automobile theme. In each of these cases, the two things perform different roles.

However, managers are trained to focus on taxonomic similarity and hence prone to ignore thematic uncertainty:

When managers ignore the thematic similarity hidden behind taxonomic dissimilarity, they risk overlooking opportunity (as well as misdiagnosing threat).
…
The behavioral theory of the business enterprise has long acknowledged managers’ dangerous tendency to search for opportunity in familiar taxonomic domains.

The benefits of thinking thematically are pretty significant:

Thematic similarity opens up a new area of the dissimilarity space. While Google Maps and Yellow Pages are taxonomically similar services, another Google service, Google Voice Search, and GPS are clearly in taxonomically dissimilar categories. And yet there is a thematic similarity between the two in the context of using cell phones.

Hence themes can actually help focus and direct long-term R&D and innovation:

The new area of thematic similarity holds particular promise for innovation and opportunity search. Focusing on areas of taxonomic dissimilarity can help managers identify novel products or services that result from the combination of strategic assets that are taxonomically dissimilar but thematically related.

As we have discussed many times, innovation occurs at the intersection of technologies. The more dissimilar the underlying technologies, more disruptive the innovation is likely to be. Thematic similarity provides a framework to bring normally dissimilar technologies together – and hence drive innovation:

This distant (in taxonomic terms) yet close search for opportunities created by thematic similarity provides a pragmatic guide to how (in which domains) strategists can find new potential for competitive advantage.

The underlying problem is that R&D management processes and cultures are developed around taxonomic similarity:

Taxonomic similarity underlies key frameworks of management such as strategic relatedness, the Standard Industry Classification (SIC) system, the definition of industry boundaries, including the forces within that industry, and the International Patent Classification (IPC). For example, the IPC category F02 (combustion engines) contains internal-combustion piston engines, gas-turbine plants, jet-propulsion plants and so on.

May be we can extend some of the traditional tools such as brainstorming and focus them around themes:

Methods such as brainstorming, which aim at identifying such distant domains, are often referred to in the general management literature. For example, in an attempt to move beyond mere product extension, companies often encourage their developers to think “outside the box”

But true exploitation of thematic similarity will require management innovation. We will need to develop new tools and processes to decide which thematic similarity to explore and how much to invest in it. One example provided by the article focuses on the integration of GPS technology with cameras. Thinking thematically, this would be pretty straight forward marriage. However, in reality, this very hard to do. The skills necessary to design cameras are very different form those required to design GPS receivers. Even if we can get the two technologists to brainstorm together, actual collaboration though workshops would be rather difficult. For managers, resource allocation for such development would be even more difficult. One approach would be to have detailed roadmaps that can be used to engender purpose driven communication between the two groups and portfolio balancing processes that effectively allocate resources for such activity.

…consider an extreme case in which two products are so strongly associated that they are combined in one product but not thematically integrated. Many cell phones sport a camera function and a GPS function. However, the GPS and camera functions have not been integrated in most phones, despite sharing a thematic similarity: Many photos are about places, just as GPS is about places. Thematic integration links these two functions, allowing users to “geotag” the location at which a photo is taken.

Another advantage of exploring thematic uncertainty is the ability to explore all potential competitors. For example, as the article points out Google did not see their business model as amenable to or at risk from social networking:

Google only openly acknowledged the threat posed by Facebook on November 1, 2007, when it launched Open Social, Google’s own social networking platform. In other words, Facebook remained a noncompetitor for Google for more than three years and six months after Facebook’s launch. In fact, Google managers actively dismissed Facebook precisely because it did not fit Google’s taxonomy of activities. Google CEO Eric Schmidt said, “We have address books, and the sum of our address books is the social graph.” And it was not until February 9, 2010, that Google acknowledged the thematic similarity between social networks and e-mail by making a determined foray into exploiting the integration of social networking and e-mail by launching Buzz, a networking service that was closely integrated with its e-mail offering, Gmail.

We will also need new strategic planning processes that can identify competitive threats from thematically similar firms. More importantly, we will need a better approach to evaluate those threats and find effective ways to respond to those threats. Finally, thematic similarity can be used to find acquisition targets. The article points out that Intel believes it acquired McAfee based on thematic similarities. The problem is that McAfee’sbusiness model is so different from Intel’s that integration of the two will take a very long time.

Actually, Intel and McAfee are remarkably similar thematically. According to Intel, the acquisition of McAfee would boost its strategy in mobile wireless, where it is beginning to produce chips for smart phones. Beyond smart phones, security is becoming a key requirement as new devices, from tablet computers and handsets to televisions and refrigerators, connect to the Internet. The purchase is therefore set to turn Intel, the world’s largest chip-maker, into a leader in security, extending its reach into Internet-connected devices.
…
While experts hope that chips can be improved to make them able to withstand malicious attacks, that prospect is seen as being years away.

Even with time, I am not sure how easy or valuable this integration will be. May be there is a limit to how much taxonomically dissimilar firms can be before they can no longer be merged effectively. Furthermore, if integration is going to take many years, can we actually forecast how the market place will function at that time?
A few more questions than answers, but still a very useful concept.

Apple’s R&D portfolio strategy – “Get Rid of the Crappy Stuff” (Continued)

I had been meaning to write about the article For the good of the company? Five Apple products Steve Jobs killed from Ars Technica:

When Steven P. Jobs returned to Apple 1997, he returned to a slew of ill-conceived product lines. Some were excessive, and some were downright silly, but many were ultimately killed off for their poor alignment with consumer needs and wants. Still, even with Jobs’ discerning eye, he wasn’t immune to having to deal with a few bad product decisions.

We discussed the Jobs’ portfolio management methodology here. I had mentioned that it is hard to make the right decision about what is crap. This prevents some leaders from making any decision at all. The idea should be to find failures early before a significant investment has been made. In fact, we should encourage some amount of risk taking in R&D organizations to ensure that we are somewhat pushing the boundaries. The only way to ensure sufficient risks are taken is to see some projects fail and rewarding failure. Even Steve Jobs occasionally made bad product decisions. The only answer is to have a good risk management process in place to catch failures. We also want to make sure we learn something from each failure so we can improve decision making for the future. So, here is an example of a bad product decision by Jobs:

The Power Mac G4 Cube, a computer suspended in a clear plastic box, was designed by Jonathan Ive and released in July 2000. The Cube sported a 450MHz G4 processor, 20GB hard drive, and 64MB of RAM for $1,799, but no PCI slots or conventional audio outputs or inputs, favoring instead a USB amplifier and a set of Harman Kardon speakers. The machine was known in certain circles as Jobs’ baby.

While Apple hoped the computer would be a smash hit, few customers could see their way to buying the monitor-less Cube when the all-in-one iMac could be purchased for less, and a full-sized PowerMac G4 introduced a month later with the same specs could be had for $1,599. Apple attempted to re-price and re-spec the Cube in the following months, but Jobs ended up murdering one of his own darlings, suspending production of the model exactly one year after its release. While the Cube’s design is still revered (it’s part of the MoMA’s collection), it proved consumers won’t buy a product for its design alone.

Roadmaps as a foundation for effective R&D management (Part 1)

I am writing a paper on the use of R&D plans as a foundation for effective R&D management. As a part of the effort, I am collecting prior research on R&D planning and roadmapping. I plan to summarize some of the interesting papers I find along the way. The first is from a roadmap seminar given by two MIT professors at Harvard Business School in 2004. It provides a good background on some work done on longer-term technology planning and touches upon near-term product planning.

Roadmaps provide a framework for thinking about the future. They create a structure for strategic planning and development, for exploring potential development paths, and for ensuring that future goals are met.

One reason for developing roadmaps is to address many sources of uncertainty in the face of complexity:

One must weigh many sources of uncertainty and try to comprehend how a large number of complex and dynamic factors might interrelate and influence development of a process or a technology. … Roadmapping is not the only tool for this type of strategic planning, but it is practical and straightforward in its approach and gaining increased attention and usage.

The article lays out two types of roadmaps: Exploratory and Target Driven.

Exploratory roadmaps are what are sometimes called Technology Push roadmaps that are envisioning emerging technologies. These roadmaps are used to “Push” technologies into products without there being a well defined need for the technology’s benefits:

Exploratory Mapping is used as a framework to explore emerging technologies and to examine potentially disruptive technologies. The process creates a map of the technology landscape by surveying possible future scenarios. There is not necessarily consensus on the technology or its evolution at this stage.

It appears that some of the leading work on exploratory roadmaps was done at Motorola:

“Roadmaps provide an extended look at the future of a chosen field of inquiry drawn from the collective knowledge and imagination of the groups and individuals driving change in that field. Roadmaps include statements of theories and trends, the formulation of models, identification of linkages among and within the sciences, identification of discontinuities and knowledge voids, and interpretation of investigations and experiments.” – Robert Galvin

Roadmap implementation is hard, and data shows that less than 10% of R&D organizations use roadmaps. In my experience, exploratory roadmaps are the prevalent form of roadmaps implemented. They are used more like a marketing document for the technologists to get continuing funding rather than a real planning document (More on this in a future post). The other form of roadmaps is to communicate products under development: Target Driven Roadmaps:

Target-Driven Roadmapping used to drive toward a specific technical target. The technology objective is clearly articulated and there is a level of consensus on what the targets should be. The roadmap serves to drive innovation and resources toward reaching that end goal.

These can sometimes be called as Technology Pull roadmaps – where different technologies are “pulled” forward to satisfy specific market needs. Some work has also been done in Target Driven roadmaps.

“Typically based on strategic plan requirements, roadmaps incorporate product attributes and layout goals, development requirements, allocations priorities, and defined evolution plans for flagship or core products and platforms.- Strauss, Radnor & Peterson

Even so, the roadmaps are still used mainly for communication rather than as a foundation for R&D management:

The output of the technology roamapping process is typically a product-specific roadmap which, in simple visual representations of hardware, software and algorithm evolution, links customer-driven features and functions to specific clusters of technologies.” – Strauss, Radnor & Peterson

This is borne out by the article as well. They suggest that

While the processes and outputs of these two types of roadmapping can vary significantly,
there are common elements. Roadmapping requires:
– a social and collaborative process;
– an analytical method of assessing and planning future development;
– a means of communicating using visual or graphic representations of key targets or goals as a function of time.

Clearly, roadmaps do provide a structured foundation for R&D collaboration. Although the second bullet mentions an analytical method for assessing R&D, I am yet to come across an organization that uses roadmaps for that purpose. In fact, very little of the article is dedicated to the second point. The article focuses on social / collaborative use of roadmaps and outlines a workshops-based process to develop roadmaps. This seems to have become the primary form of roadmapping. In many organizations I have visited, roadmapping has a tendency to become a bureaucratic check box and is hardly ever used for driving innovation. In fact, most of the benefits of true roadmapping process outlined in the article (and described below) are hardly ever achieved.

1. Establish a vision for the future.

Roadmaps can definitely communicate a vision and is a great benefit of roadmaps.

2. Encourage systems-thinking. A comprehensive roadmapping framework forces the roadmap participants to think about technology development within the context of a larger system and aids better understanding of the linkages among technology, policy, and industry dynamics.

This is where structured target driven roadmapping becomes important. In most physical systems, this is hard to do in a workshop / social environment. Product development plans are complex and require knowledge of tens (if not hundreds) of engineers. Organizations need better roadmapping processes that places technology roadmaps in a system context.

3. Planning and coordination tool. Roadmaps align technologies and products with market demand by representing the co-evolution of technology and markets. Roadmaps can help in uncovering common technology needs within an organization, enabling the sharing and consolidation of R&D, supply-line and other common resources

This is probably the most important benefit of roadmaps. However, as President Eisenhower said, “Plans are worthless, planning is everything.” Most roadmaps are static, kept in PowerPoint documents and revisited once a year (at best). Hardly an effective foundation for planning and coordination.

4. Accelerate innovation. Roadmapping provides a better understanding of the potential paths for innovation, helping to visualize new opportunities for future generations of product developments.

This is the critical and often overlooked benefit of roadmaps. Innovation happens at the intersection of technologies (not just one technology). So, an iPhone requires capacitive touch screen, low power electronics and user interface (among others) to come together for innovation to be delivered to market. Nokia for example had a touch screen phone years before iPhone, but could not bring it to market. Not only do the technologies need to mature simultaneously, all the related engineers need to know what others are capable of doing with them. Roadmaps can allow all team members to understand the projected state of other technologies and hence drive innovation. Since the number of technologies involved in modern systems is quite large, the workshop-based roadmapping process described in the paper is probably not sufficient to drive innovation.

5. Communications. Within corporations, roadmaps can provide a crucial link between management teams, marketing, engineering and R&D – improving communications and providing a clear sense of near term and long term targets.

Pretty self explanatory and some what related to point 1.

My thesis remains that R&D plans can actually become a foundation for effective R&D management and can do much more than the five benefits outlined above. Plans can help optimize resource allocation. R&D plans can be used to measure and guide R&D operations. They can also be used to forecast skill-set needs. However, that will require plans that are a bit more controlled than those developed primarily for communication. More on this soon…