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 [email protected] 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?”

R&D Management Best Practices

The article An Examination of New Product Development Best Practice from Journal of Product Innovation Management has great best practice AND benchmarking information for all R&D organizations.  The authors of the article conducted a survey of 286 companies across USA and Europe.  The objective was to understand what best practices are implemented, what best practices are not implemented and what practices are understood to be poor (Please note, the article uses NPD for New Product Development): is unclear whether NPD practitioners as a group (not just researchers) are knowledgeable about what represents a NPD best practice. The importance of this is that it offers insight into how NPD practitioners are translating potential NPD knowledge into actual NPD practice. In other words, are practitioners aware of and able to implement NPD best practices designated by noteworthy studies? The answer to this question ascertains a current state of the field toward understanding NPD best practice and the maturity level of various practices. Answering this question further contributes to our understanding of the diffusion of NPD best practices knowledge by NPD professionals, possibly identifying gaps between prescribed and actual practice.

The article divides R&D into seven dimensions and looks into best practices for each.  Let us dig in:
1. Strategy: Strategic alignment for R&D was considered the most important dimension of the seven considered. The article defines strategy as everything from vision definition to prioritization of projects for resource allocation.

strategy involves the defining and planning of a vision and focus for research and development (R&D), technology management, and product development efforts at the SBU, division, product line, and/or individual project levels, including the identification, prioritization, selection, and resource support of preferred projects.

Within Strategy, most organizations aligned R&D to long-term company strategy and project goals seemed to be aligned well with the organization / mission.  Also, organizations were able to redirect projects as markets changed.  Here is the list of implemented best practices (again NPD=R&D):

  • Clearly defined and organizationally visible NPD goals 
  • The organization views NPD as a long-term strategy 
  • NPD goals are clearly aligned with organization mission and strategic plan 
  • NPD projects and programs are reviewed on a regular basis 
  • Opportunity identification is ongoing and can redirect the strategic plan real time to respond to market forces and new technologies

Some of the best practices that clearly did not get implemented deal with pet projects and managing R&D projects as portfolio.  Organizations did not have portfolio management processes implemented or they did not treat R&D projects as a portfolio (each was unique and not measured with respect to others.  We have quite a bit of information about R&D portfolio management here.

2. Market Research: Understanding of customer/market needs and having them drive the R&D process was the second most dimension of R&D management.

describes the application of methodologies and techniques to sense, learn about, and understand customers, competitors, and macro-environmental forces in the marketplace (e.g., focus groups, mail surveys, electronic surveys, and ethnographic study).

Within market research, the best practices were pretty straight forward: Use customer research to drive product development.  Also involve customer in testing the products at multiple stages of product development.

  • Ongoing market research is used to anticipate/identify future customer needs and problems 
  • Concept, product, and market testing is consistently undertaken and expected with all NPD projects 
  • Customer/user is an integral part of the NPD process
    Results of testing (concept, product, and market) are formally evaluated

We have discussed customer driven R&D in the past. We have also discussed that over dependence on customer can actually be harmful to R&D.  We have also seen Steve Jobs talk about user centric design, he did not directly involve customers in many stages of R&D.  For revolutionary products, customers are unlikely to be a good driver for R&D.

3. Product Launch: Processes associated with product commercialization / launch were rated the third most important area for best practices.

Commercialization describes activities related to the marketing, launch, and postlaunch management of new products that stimulate customer adoption and market diffusion.

Bar was not very high relative to launch related processes.  Most involved having a process, following it and tracking / learning from results.

  • A launch process exists 
  • The launch team is cross-functional in nature 
  • A project postmortem meeting is held after the new product is launched 
  • Logistics and marketing work closely together on new product launch 
  • Customer service and support are part of the launch team 
Product launch processes are quite important and we have discussed the impact of corporate cultures on new product launches. The key poor practice identified was keeping product launches secret to prevent unauthorized public announcement.  Not sure if that can be helped.

4. Processes: The article refers to stage gate reviews and knowledge management as key processes for R&D:

Within this framework, NPD process is defined as the implementation of product development stages and gates for moving products from concept to launch, coupled with those activities and systems that facilitate knowledge management for product development projects and the product development process.

It appears that most organizations recognized the need to have common processes for R&D: Stage gates, clear go/no-go criteria and well documented processes existed.

  • A common NPD process cuts across organizational groups 
  • Go/no-go criteria are clear and predefined for each review gate 
  • The NPD process is flexible and adaptable to meet the needs, size, and risk of individual projects 
  • The NPD process is visible and well documented
    The NPD process can be circumvented without management approval 

The key poor practices seem to be about inadequate IT tool support, uneven access to R&D knowledge and poor implementation of project management practices.  May we suggest InspiRD?

5. Company Culture: The next highly rated dimension of R&D management was company culture, its acceptance of R&D management as an important constituent and ability for R&D teams to collaborate across disciplines and organizations/suppliers:

company culture is defined as the company management value system driving those means and ways that underlie and establish product development thinking and product development collaboration with external partners, including customers and suppliers. Characteristics of company culture include the level of managerial support for NPD, sources used for NPD ideas, and if creativity is rewarded and encouraged.

The key complaint about company culture was a rejection of external or disruptive ideas.  We have discussed this extensively.

6. R&D Climate: This dimension relates to R&D project organization (such as cross functional teams) including leadership and HR support.

Within this framework, project climate is defined as the means and ways that underlie and establish product development intra-company integration at the individual and team levels, including the leading, motivating, managing, and structuring of individual and team human resources.

The best practices are straight forward – cross functional teams and multiple means of inter/intra team communications.

  • Cross-functional teams underlie the NPD process 
  • NPD activities between functional areas are coordinated through formal and informal communication 

We have discussed project networks as a way to supplement cross-functional teams.  A key challenge seems to be the inability to gain support for ideas that cross functions. Also, knowledge transfer across disciplines is also a major challenge.

7. R&D Metrics: Although metrics was rated the least important area for R&D management, the authors rightly point out that it is because very few meaningful R&D-related metrics exist.

The metrics and performance measurement dimension of the framework includes the measurement, tracking, and reporting of product development project and product development program performance.

In fact, participants could not point out a single best practice for R&D metrics!  We have discussed plenty of interesting metrics.

How to Become a Better Leader

The McKinsey Quarterly article How centered leaders achieve extraordinary results has five pointers to become more effective leaders:

  1. Meaning: Find and communicate what the work actually means.  When building momentum around long-term R&D strategies, stories on how the product will impact the customer is extremely important. Using effective stories can generate team ownership in the vision (Steve Jobs provides a great example of how).

    …leaders often talk about how their purpose appeals to something greater than themselves and the importance of conveying their passion to others. Time and again, we heard that sharing meaning to inspire colleagues requires leaders to become great storytellers, touching hearts as well as minds.

  2. Connecting: Innovation requires connection between multiple technologies. Creativity requires connections between multiple concepts.  And delivering innovative products to market requires teams of creative people to come together.  An innovative leader should build/leverage connections and encourage networks to form within the organization.

    CEOs have always needed to select exemplary leadership teams. Increasingly, they must also be adept at building relationships with people scattered across the ecosystem in which they do business and at bringing together the right people to offer meaningful input and support in solving problems.

  3. Positive Framing: By reframing problems, leaders can convert fear or stress into opportunity, and engender creativity.  Leaders are also are aware of their impact on their teams.

    Psychologists have shown that some people tend to frame the world optimistically, others pessimistically. Optimists often have an edge: in our survey, three-quarters of the respondents who were particularly good at positive framing thought they had the right skills to lead change, while only 15 percent of those who weren’t thought so.

  4. Engaging: Leaders listen and engage their teams. They encourage balanced risk taking, act rationally in the face of risk and encourage experimentation.

    But for many leaders, encouraging others to take risks is extremely difficult. The responsibility CEOs feel for the performance of the entire organization can make the very notion of supporting risk taking extremely uncomfortable. What’s more, to acknowledge the existence of risk, CEOs must admit they don’t, in fact, have all the answers—an unusual mind-set for many leaders whose ascent has been built on a virtuous cycle of success and self-confidence.

  5. Sustaining energy: Changing / improving organizations and culture is hard.  Leaders need to be able to create a sense of urgency and maintain it for the duration necessary to implement the change.

    All too often, though, a change effort starts with a big bang of vision statements and detailed initiatives, only to see energy peter out. The opposite, when work escalates maniacally through a culture of “relentless enthusiasm,” is equally problematic. Either way, leaders will find it hard to sustain energy and commitment within the organization unless they systemically restore their own energy (physical, mental, emotional, and spiritual), as well as create the conditions and serve as role models for others to do the same. Our research suggests sustaining and restoring energy is something leaders often skimp on.

The article has some benchmark data on what could happen if we master these skills:

A recent McKinsey global survey of executives shows that leaders who have mastered even one of these skills are twice as likely as those who have mastered none to feel that they can lead through change; masters of all five are more than four times as likely. Strikingly, leaders who have mastered all five capabilities are also more than 20 times as likely to say they are satisfied with their performance as leaders and their lives in general (for more on the research, see “The value of centered leadership: McKinsey Global Survey results”).”

How to Be More Creative

Wall Street Journal article Jonah Lehrer on How to Be Creative has a list of items that can improve creativity (or innovation).   :

  1. Color Blue: Subjects solved twice as many puzzles when surrounded by blue.
  2. Broaden the scope: Try to find ways to rephrase the problem so the solution space increases.  For example, instead of driving, think of the problem space as transportation or movement.
  3. Think like a child: People who imagine themselves as 7-year-olds are significantly better at divergent problem solving.
  4. Laughing: People who are exposed to short comedy video are 20% better at insight puzzles.
  5. Imagine distance from the puzzle: People are better at solving problems that come from far away.
  6. Work at unusual times: People working at their least alert time of the day are more creative.
  7. Relax: Being relaxed and not focusing too much on the problem improves creativity. As Einstein once declared, “Creativity is the residue of time wasted.”
  8. Be persistent: Not every problem can be solved immediately.  Keeping at it is important.”All great artists and thinkers are great workers,” Nietzsche wrote.
  9. Measure progress: If you are getting close, work harder. If you have hit a wall, take a break.
  10. Work outside the box: People who had a 5’x5′ box next to them did better at creativity problems.
  11. Daydream: People who daydream are better at creativity.  
  12. Get diverse experiences: Steve Jobs believed creativity is about making connections.  To make diverse connections, one needs to have a broad set of experiences.
  13. Develop a diverse network: Another Steve Jobs approach to obtaining diverse experiences is to talk to a diverse set of people.
  14. See the world: People exposed to different cultures or who have lived abroad are more creative.
  15. Move to a metropolis:  Moving to a larger city is shown to increase inventions. 

We have discussed approaches to become more innovativeenhance team creativitynurture disruptive ideas or engender innovation.  We have discussed Steve Jobs methods extensively.  Here is an excerpt from the article about Steve Jobs:

 Steve Jobs famously declared that “creativity is just connecting things.” Although we think of inventors as dreaming up breakthroughs out of thin air, Mr. Jobs was pointing out that even the most far-fetched concepts are usually just new combinations of stuff that already exists. Under Mr. Jobs’s leadership, for instance, Apple didn’t invent MP3 players or tablet computers—the company just made them better, adding design features that were new to the product category.

He found that those entrepreneurs with the most diverse friendships scored three times higher on a metric of innovation. Instead of getting stuck in the rut of conformity, they were able to translate their expansive social circle into profitable new concepts.

Finally, not included in the article, but another way to improve ability to tackle problems is to consume some glucose.

Beliefs + Experimentation = Success

Another interesting article from MIT Sloan Review discusses how to develop unique strategies and plans.  The article points out that many organizations follow strategic frameworks taught in business schools to formulate their strategies.

…many deploy frameworks and models from the strategist’s toolbox — industry analysis, market segmentation, benchmarking and outsourcing. By jumping straight to generic game plans (such as cost leadership, total quality or product innovation), companies short-circuit the real work of strategy and miss out on finding new insights into the preferences or behaviors of current or potential customers.

If all we do is follow a standard process for developing a strategic plan, we would probably not be able to build a distinct, differentiated business:

In a world of fierce competition and rapid imitation, companies that dare to be different capture our attention and our admiration. Some are globally recognized, such as Apple, Google, Tata, Virgin and Zara; others are less well known, or are niche or local players.

The article points out that a good strategic plan starts from determining what are the organizations fundamental beliefs (or culture, values, points of view, differentiators, etc) that set it apart:

Good strategies start from a distinctive point of view: for example, an insight into evolving customer needs or about how the world is changing. 

However, what are our unique beliefs or viewpoints? It is not easy to figure out what are an organizations true cultural traits that lead to success and what are just approaches that we have developed along the way.
The article gives a good example of Ikea trying to figure out the root causes of its success:

Consider the case of Ikea, the Swedish furniture retailer that continues to be highly distinctive almost five decades after its founding in 1963. Built on Ingvar Kamprad’s belief that he could “create a better everyday life for the many people” by providing affordable, good-quality furniture, the company grew internationally in the late 1960s and early 1970s by replicating what worked in Sweden.7 However, Kamprad and his colleagues didn’t fully understand which parts of their offering people actually cared about: Was it the expansive and customer-friendly showrooms? Was it the low prices and the products requiring relatively easy assembly? Was it the quirky Swedish product names and blue-and-yellow branding? Ikea’s repeated success in new markets it entered made executives wary of changing any part of the original formula.

Differentiators are even harder to figure out in case of R&D.  Many organizations make strategic decisions based on gut feelings without really having an approach to guide decision making. As we have discussed many times, most companies tend to develop product strategies without careful thought or experimentation.

However, few companies manage to develop original strategies by formulating hypotheses and then testing them out in a competitive setting. 

In case of Ikea, market realities in United States and Japan forced them to understand what are their true core values.  :

It was only when the company experienced problems in Japan and the United States that executives undertook to sort out the truths and falsehoods and create a more flexible business approach. 

The article provides a new approach for discovering an organization’s discriminators by focusing on beliefs.

Our perspective is built on two core premises: 1) that companies need a unique set of beliefs to stand out from the crowd, and 2) that some beliefs ring truer with customers and employees than others.

As such the article focuses on three types of beliefs: 1) about the market, 2) about the internal culture, and 3) vision of the future:

Beliefs can take many forms, but the three most important ones are: 1) those that predict how the market will respond to the company’s strategic choices, such as a new technology or service offering; 2) those that predict how employees will respond to organizational and managerial choices, such as a more flexible or empowered working environment; and 3) those that predict how the future will be different, for example in terms of emerging consumer needs, new technological possibilities or shifts in the geopolitical system.

 The idea is that companies in any market segment will share some common beliefs.  However, each organization will also have some unique differentiators or uncommon beliefs.  Some of these beliefs are true  and others are false.  The true uncommon beliefs (uncommon sense) are key drivers of success.

However, no one really knows the whole truth, so the article provides a unique perspective on how to use all beliefs to gain a strategic edge. The article suggest we could discover our uncommon true beliefs and focus on them.  Or we could discard our uncommon false beliefs and again gain more strategic focus. We could also change the industry landscape by neutralizing commonly held beliefs.  Or finally, we can exploit commonly held false beliefs to maroon competitors and gaining market share.

So how does one actually find these beliefs in the first place? Once found, how does one evaluate whether beliefs are common or uncommon, true or false? It is very hard to do.  I guess by constantly challenging the status quo, being entrepreneurial and encouraging questioning.  May be we could focus on some innovation in management processes?

Finding a distinctive place in a competitive marketplace can be extremely challenging. Studying and working with dozens of companies across a range of industries, we have found that it frequently requires willingness on the part of top management to examine and re-examine the prevailing industry norms — and from a variety of perspectives.

 Once you have found your beliefs, the only path to success is experimentation:

So how do companies put ideas they develop through our process into action? Based on our experience, successful companies don’t just talk about their novel beliefs or make risky bets on unproven ideas. Instead, they rely on a deliberate process of experimentation. They turn one of their novel beliefs into an operational hypothesis and then test it in as low-risk a way as possible. The feedback they get from the market informs their further testing, ultimately shaping the company’s decision to make a tangible change.

How to get the best from corporate R&D

MIT Sloan Review has an interesting article about corporate functions (Are CEOs Getting the Best From Corporate Functions?).  Many of the larger organizations I worked with have a central R&D organization that focuses on longer term, disruptive or innovative research.  Some of the lessons in the article are quite useful to these organizations. Overall it appears that most corporate functions feel that they are not tightly coupled in to the business and their performance is rarely evaluated for their true contributions:

In our survey, fewer than one in 10 function heads felt they had received sufficient guidance on how their function should contribute to the company’s overall strategy. Instead, they were expected to develop their own ideas and functional strategies.

The root cause seems to be poor strategic alignment and inadequate guidance from the executive team. The result is that the corporate functions become self serving and are not incentivized to provide practical support to business divisions:

Without sufficient guidance, corporate functions can become — often unintentionally — self-serving. Instead of developing policies and processes to give divisions the practical support they want and need, corporate functions measure themselves against industrywide best practices or implement initiatives that increase their influence or simplify their own work. The result is often a lack of cooperation from operating managers.

Here is my interpretation of the four suggestions from the article to address this situation:

1. Define key performance measures beyond division (P&L) goals: Develop a strategy for how the corporation can function better. Express the strategy in three to seven sources of corporate value creation. Ask each corporate functions to develop a plan on how they will contribute to the said value creation. In case of corporate R&D, this can be as simple as number of technologies or innovations transitioned into product development. We have discussed many such metrics for R&D in the past.  We can even develop similar approaches for functions such as training:

A Danish company recently defined three main sources of added value at the corporate level: helping businesses make better capital investment decisions, ensuring that businesses drive down costs even in good years and building a pool of executive talent superior to its competitors’. All corporate functions were then asked to assess their activities against these objectives. Significant changes resulted.

2. Monitor and guide corporate function performance to meet the defined measures: The article suggests at least annual reviews to ensure that functions are progressing along the defined strategy. As we have discussed in the past, large reviews and meetings tend to waste a lot of time, so these reviews need to be focused:

Most companies occasionally conduct a major review of the size and value of the corporate headquarters. However these large-scale projects can engender a defensive response that gets in the way of the objective, and any staff reductions that result often disappear again in the following years. Annual reviews allow the CEO and the heads of divisions to nudge corporate functions regularly toward better performance.

3. Develop a comprehensive approach to corporate improvement initiatives: Many disjointed initiatives from different functions may reduce the effectiveness of initiatives AND reduce morale in corporate functions. We have discussed that organizations need to build a sense of urgency before taking on change initiatives. This article suggests that the corporations develop a central matrix of all ongoing initiatives and coordinate their impact:

This helps different functions take an integrated approach and helps anticipate potential problems. For example, the CEO can see whether an initiative is likely to place unreasonable demands on an individual business unit, given the unit’s commercial pressures. The head of IT can assess whether IT resources are sufficient to support all initiatives.

4. Break out shared services from corporate functions: Pretty self explanatory. Services should be managed differently from functions.

The result is often an order of magnitude change in performance: better service at lower cost in the shared-services division, as well as clearer policies and controls that focus on adding value within the remaining corporate functions. In the early 1990s, Shell was one of the first companies to create a separate services division, transforming its sprawling corporate functions into a headquarters team of 100 and a professional services division of some thousands. More recently, the Dutch specialty chemicals company DSM completed a major project to separate all of its corporate services into a shared-services division.

Globalization Penalty

Ford recently announced it is investing $1B for a new plant in India (U.S. automakers in race for Indian market – The Washington Post). Ford is going to change its strategy for the region and design new products designed specifically for the market:

This new focus on India has required something of a philosophical shift for America’s big auto manufacturers, a post-downturn realization that the old ways of doing business no longer guarantee success, said Michael Dunne, president of Dunne and Co., a Hong-Kong based investment advisory firm specializing in Asia’s car markets.
In the past, U.S. carmakers tended to launch products in emerging markets that were successful in Europe “and anticipate that customers will trade up to the higher price level,” Dunne said.”

The article points out that the Indian market is going to grow at more than 12% per year and Ford needs to ensure a share of that market.  The effort to reduce product costs while still delivering reasonable products might even have some benefits to the core business from reverse innovation or frugal engineering.
As we have discussed recently, the drive to reduce cost might even drive innovation in general.  However, there is some penalty to globalization as pointed out by McKinsey Quarterly (Understanding your ‘globalization penalty:

The rapid growth of emerging markets is providing fresh impetus for companies to become ever more global in scope. Deep experience in other international markets means that many companies know globalization’s potential benefits—which include accessing new markets and talent pools and capturing economies of scale—as well as a number of risks: creeping complexity, culture clashes, and vigorous responses from local competitors, to name just a few.

The article analyzes data from hundreds of thousands of employees to arrive at three major risks of globalization: 1) Dilution of company vision / focus, 2) Reduced innovation and learning and 3) Ineffective collaboration and partnership between locations.

Clearly, having a larger product portfolio increases complexity, which reduces focus, dilutes vision and increases risks to overall performance.

Complicating matters further, our interviews suggested that, for most companies, about 30 to 40 percent of existing internal networks and linkages are ineffective for managing global–local trade-offs and instead just add costs and complexity. 

We have also seen that modularity can actually negatively impact innovation.  We have discussed some approaches to address global product development:

Managing culture / training across a diverse organization is clearly more difficult which might account for the lack of learning.  May be organizations need to improve global talent management? Or R&D managers can get involved to increase creativity.  The article finds that motivation for team members actually improved under globalization. This is counter to some of the work from Wharton which suggest that motivation reduces as team size increases.  May be rivalry actually improves performance?

The other problem may be with collaboration between multicultural teams:

Many companies, for example, can’t identify transferable lessons about low-income consumers in one high-growth emerging market and apply them in another. Some struggle to coalesce rapidly around market-specific responses when local entrants undermine traditional business models and disrupt previously successful strategies.

On the other hand, research shows that very little dispersion is needed before a team becomes virtual.  Since the teams are likely virtual to start with, the only major challenge would be different cultures.  We have discussed several approaches to improve multicultural team performance (here and here).

Innovation at Bell Labs (The Idea Factory)

A couple of articles in the Oil and Glory blog describe innovation at Bell Labs (Book Review: Jon Gertner’s “The Idea Factory” and What Obama could learn from Bell Labs).  Bell Labs, as the article points out, delivered many of the innovations that made modern devices possible:

“The name Bell Labs is synonymous with cutting-edge invention, winning seven Nobel Prizes (including by Energy Secretary Steven Chu) and turning out world-changing inventions like the transistor (pictured above), the silicon photovoltaic solar cell and radio astronomy. 

It is interesting to see that even fifty years back, Bell Labs had a clear understanding that innovation requires new technology and manufacturing processes integrated into a system that provides concrete benefits for the  user:

“It is not just the discovery of new phenomena, nor the development of a new product or manufacturing technique, nor the creation of a new market. Rather the process is all these things acting together in an integrated way toward a common industrial goal,” he quotes Jack Morton, a Bell Labs engineer.”

Even the leadership had a definition of what innovation meant that could be easily communicated. As we have discussed in the past, if the leaders do not know what innovation is, how are they going to encourage it?:

At Bell Labs, Mervin Kelly’s shorthand definition of innovation was something that is “better, or cheaper, or both.” If this succeeds, it will certainly fall into that category.

They even realized that the key to innovation is the ability to effectively address technological complexity and then mask it in the user experience.

“One of the more intriguing attributes of the Bell System was that an apparent simplicity — just pick up the phone and dial — hid its fiendish and increasing interior complexity,” Gertner writes. 

So, what made innovation happen at Bell Labs?  The most important factor was vast resources (probably funded by AT&T profits in addition to limitless government funding).  These resources meant a large and brilliant work force had the freedom to pursue many problems.  More importantly, they had a never ending stream of challenges that focused innovation:

Structurally, what defined Bell Labs was a large, brilliant, interdisciplinary work force that was supplied with freedom and vast resources and a never-ending stream of technical problems within the phone system that drew on the staff’s expertise. 

As we have discussed in the past, innovation happens at the intersection of technologies.  The Bell Labs model encouraged informal interactions between multiple disciplines and the abundance of resources facilitated experimentation:

In Bell Labs’ old days, an informal exchange of ideas (over lunch, during a stroll in the hallways, and so forth) was part of the innovation process. At universities and research institutions everywhere, it still is.

Furthermore, business processes were flexible enough to allow a variety organizational structures to nurture innovation in multiple ways – any thing from three person groups to very large teams:

With an invention like the transistor, Bell Labs used an orchestrated effort and a mid-sized team; but the silicon solar cell was quite different. Indeed, the latter breakthrough was serendipitous: Three men, each working in different buildings, somehow connected the right technology with the right problem at the right time. Meanwhile, later innovations such as cellular phone networks and the development of fiber optic systems required vast teams of hundreds of people. I think all these approaches — perhaps with the exception of the solar cell — were quite targeted, and are thus still viable today. 

So what can we learn from Bell Labs?  The author is uncertain.  I think we would be hard pressed to show a business case for the level of investment.  It is true that a lot of great innovations came out of the organization. However, we tend to forget major failures.

More important, perhaps, was that the Labs management at times made big errors in judging what technologies to pursue for the future. In my book I focus on two in particular: the waveguide and the Picturephone. 

Also, it is easy to forget that not everyone working at the lab was an innovator and the management really knew how to enable success.

And I think that’s a mistake. Bell Labs was not a great experience for everyone employed there; there were internal politics, personality clashes, miscommunications, and every other problem that affects a big organization. 

Much more importantly, the world has changed quite a bit in the last few decades and the idea of a walled garden for innovation probably will not be successful in the current environment.

Research efforts are expected to move faster today, and there seems to be a lower tolerance for failure, especially if any public funding is involved. Also, an ability (or willingness) to invest for the distant future, and to thus work with a new technology through an arduous and expensive development process, seems to be in shorter supply.