How to Succeed in Distributed Product Development

MIT Sloan Management Review had a somewhat interesting article Putting It Together: How to Succeed in Distributed Product Development. The idea is pretty straight forward: as products get increasingly complex and competitive pressures require companies to work ever faster, more companies are forced to distribute product development across multiple organizations.

COMPANIES HAVE TRADITIONALLY been protective of the innovation activities they use in product and process development, seeing the activities as part of their crown jewels. That thinking, however, is starting to change. The increase in outsourcing, offshoring and alliance building has resulted in innovation efforts that often require the orchestration of multiple organizations separated by cultural, geographic and legal boundaries.

As the article points out, distributed nature of R&D varies:

At one extreme are centralized arrangements, with a clear lead organization and subsidiary “supplier” organizations. At the other are innovation efforts performed by decentralized “open-source” networks. In between is the realm of outsourcing and offshoring — the key building blocks in a trend called distributed product development or DPD, whose success factors are still not widely understood.

We have discussed the impact of distributed R&D on innovation. We have also seen that the impact of distributed teams on learning. We have also seen how virtual teams multiple times in the past. This article points out that distributed development adds significantly to the uncertainty in team performance:

Outsourcing complex product development work subjects companies to significant uncertainty. Companies can make perfectly reasonable decisions and still find themselves needing to make expensive changes, ranging into the millions or even billions of dollars. Our contention is that, by anticipating some of these changes, managers can reduce risk and, ultimately, cost.

So how does the article suggest we manage distributed product development:

The flippant answer — “very carefully” — is also the right one.
1. Communication must be perfectly clear, especially if the project involves people from different cultures.
2. Incentives must be carefully aligned.
3. Despite upfront planning, you still should be ready to adapt and realign as the inevitable snags occur.

We have covered incentives in the past. I guess the key to cross-cultural, cross-organizational and multi-location distributed R&D is communication. May I suggest you take a look at InspiRD?

Sparking creativity in teams

McKinsey Quarterly has a useful guide in Sparking creativity in teams:

In fact, our experience with hundreds of corporate teams, ranging from experienced C-level executives to entry-level customer service reps, suggests that companies can use relatively simple techniques to boost the creative output of employees at any level.

The article has four simple suggestions to increase creativity. Lets dig in:
1. Immerse yourself: As we discussed in Steve Jobs Methodology, an engaged R&D manager is crucial to motivating R&D teams. Many senior R&D managers I have met seem to have a hands-off approach to their teams. As the McKinsey article points out, there is no alternative to clear engagement from the leadership:

The antidote is personal experience:p in ways that abstract discussions around conference room tables can’t. It’s therefore extremely valuable to start creativity-building exercises or idea generation efforts outside the office, by engineering personal experiences that directly confront the participants’ implicit or explicit assumptions.

2. Overcome Orthodoxies: Personal engagement from leaders in required for the success of any organizational change. However, the leaders also need to question conventional thinking and challenge teams to do better:

All organizations have conventional wisdom about “the way we do things,” unchallenged assumptions about what customers want, or supposedly essential elements of strategy that are rarely if ever questioned.
By identifying and then systematically challenging such core beliefs, companies can not only improve their ability to embrace new ideas but also get a jump on the competition.

3. Use Analogies: This is a new and interesting point. As the article points out, leaders need to frame the problem with analogies to actually help the teams do better. The examples include: “How would Google manage this Data?” or “How would Southwest Airline cut these costs?”

Our own experience confirms the power of associations. We’ve found a straightforward, accessible way to begin harnessing it: using analogies. As we’ve seen, by forcing comparisons between one company and a second, seemingly unrelated one, teams make considerable creative progress, particularly in situations requiring greenfield ideas. We’re not suggesting that you emulate other organizations—a recipe for disappointment. Rather, this approach is about using other companies to stir your imagination.

4. Create Constraints: As we have discussed many times, managers are key to driving innovation. Only managers have the cross-enterprise visibility to help frame the challenge for the R&D teams.

Imposing constraints to spark innovation may seem counterintuitive—isn’t the idea to explore “white spaces” and “blue oceans”? Yet without some old-fashioned forcing mechanisms, many would-be creative thinkers spin their wheels aimlessly or never leave their intellectual comfort zones.

Does Wall Street hate innovation?

I found an interesting article in the Star Tribune Does Wall Street hate innovation?

Recent studies by Mary Benner, an associate professor at the University of Minnesota’s Carlson School of Management, concludes that’s often the case for major players in their industries. She examined how analysts reacted when companies like Kodak and Polaroid shifted to digital photography or when telecommunications companies began pursuing Voice over Internet Protocol technology. Analysts showed a preference for incremental change rather than breakthrough innovation.

This is an interesting look at innovation – from the outside and from the financial analyst perspective. The research has some significant lessons for R&D managers. First, for publicly traded companies, innovation is expected/rewarded from growth companies and not from value companies.

The thing that separates the ones that are affected from those that aren’t is whether they’re publicly traded where expectations have been created that earnings, cash flow will be predictable. It’s very hard for them to change and do something entirely new. There are firms that are categorized as growth stocks where analysts and stakeholders are more willing to see them innovate. Even Amazon spent many years being a growth stock without a lot of expectations for predictable earnings. Private companies also have more leeway with their shareholders.

So how do companies get pressured? They get rewarded when they focus on process improvements and efficiency enhancements such as Six Sigma that provide predictable results. These processes actually squeeze out disruptive innovation and only allow companies to focus on incremental innovation.

They focus on mapping processes and predictable, measurable improvement. My research shows that tends to spur more incremental innovation and crowd out radical innovation. The direct effect is that Wall Street tends to react very positively when companies adopt these management practices. They can be wonderful in some parts of companies that need efficiency, stability. But they’re not always wonderful, particularly with technologies that are so new we don’t really know them yet.

Amazing! There is a cause and effect paradox here. Large companies are often blamed for not innovating. Everyone actually expects innovations to come from small nimble firms. But the behavior of large firms is governed by the rewards they get from their boards of directors. These rewards assure that the firms will actually not innovate! This is another reason why financial incentives do not work.
However, only large firms really have the resources and manufacturing capabilities to bring products to market. Knowing this, large corporations should be better served by setting up Xerox PARC-like innovation organizations that do not get hindered by processes. The problem then would be to have effective means of integrating the innovations into the product line. We have discussed that several times in the past.

Nurturing disruptive innovation

First of all, I really loved the ars technical article Is gravity not actually a force? Forcing theory to meet experiments. It has a great explanation of the new (perhaps revolutionary) theory of gravitation by Dutch theoretical physicist Erik Verlinde. I recommend reading the whole article. It has a great explanation of the
theory that made quite a stir last year.

More importantly, it points out how science has been able to take disruptive ideas and get them accepted for hundreds of years:

“How are controversial ideas handled by modern science? A common charge leveled against science (generally by those who are unhappy with its conclusions) is that the only way to get funding or continue your research is by going along with the current theories and not rocking the boat. For those who spend their careers in science, this is laughable—it is those who successfully rock the boat who are the most successful. In this article, we are going to look at a manuscript that purports to overturn hundreds of years of accepted ideas about gravity, and use it as an illustration of how controversial ideas are dealt with in modern physics.”

May be we can learn from science on how to integrate disruptive innovation into new products and over come the not-invented-here rejection plaguing most R&D organizations engaged in open innovation? I think we can. Here are the steps:

Publish the innovative idea (accessed through open innovation) to internal experts. Clearly, internal experts will be circumspect and disinclined to accept the new idea. So, it is critical to provide a compelling argument or test results that back up the actual work.
Invite internal experts to replicate the idea. This is quite common in science as the article points out. This will start getting some buy-in. IP issues will be critical and you will need to ensure that the external idea does not get integrated into your internal R&D without a proper license.
Review results to verify and validate the idea. This again is quite common in science and many people check the new theories on different scientific domains. Similarly, R&D managers need to ensure experts examine the value of the innovation from different perspectives (user experience, manufacturability, etc.). A big advantage of this step would be to reduce risks around integrating the disruptive innovation. This step will also further drive acceptance of the new innovation.
Solicit future involvement from experts and develop a plan to mature the innovation. It is critical that this step is executed very quickly after step 3. A plan and associated metrics will get over the valley of death in product innovation.

Sounds quite intuitive. I hope to try this in the near future. Any thoughts?

The Problem with Financial Incentives

We have often talked about incentive plans and their impact on motivating R&D teams. In”Impact of Incentive Bonus Plan” we discussed that unless the bonus plan can be tightly coupled with real metrics, they may actually reduce performance. The article “You are getting a bonus so why aren’t you motivated,” we learned that bonuses are not effective at motivating R&D teams. We have discussed other forms of motivation for R&D teams and what drives satisfaction in virtual R&D teams here.. Now there is another interesting article in Knowledge@Wharton: The Problem with Financial Incentives — and What to Do About It – Knowledge@Wharton that talks about aligning incentives with work.

Bonuses and stock options often improve performance. But they can also lead to unethical behavior, fuel turnover and foster envy and discontent. In this opinion piece, Wharton management professors Adam Grant and Jitendra Singh argue that it is time to cut back on money as a chief motivational force in business. Instead, they say, employers should pay greater attention to intrinsic motivation. That means designing jobs that provide opportunities to make choices, develop skills, do work that matters and build meaningful interpersonal connections.

There are three important risks that excessive reliance on financial incentives brings:
1. Incentives may enhance performance but do not guarantee that the performance improvement will come with ethical behavior and actual improvements

“Several years ago, Green Giant, a unit of General Mills, had a problem at one of its plants: Frozen peas were being packaged with insect parts. Hoping to improve product quality and cleanliness, managers designed an incentive scheme in which employees received a bonus for finding insect parts. Employees responded by bringing insect parts from home, planting them in frozen pea packages and then ‘finding’ them to earn the bonus.

This is even more difficult when behavior being rewarded (R&D) is so complex that the what expected results to be rewarded are difficult to measure at best and unknown until a much later date at worst.

Research by Wharton management professor Maurice Schweitzer and colleagues demonstrates that when people are rewarded for goal achievement, they are more likely to engage in unethical behavior, such as cheating by overstating their performance. This is especially likely when employees fall just short of their goals. Harvard Business School’s Michael Jensen has gone so far as to propose that cheating to earn bonuses — such as by shipping unfinished products or cooking the books to exceed analysts’ expectations — has become the norm at many companies.

It is the last statement above that I have seen abused often in bonuses in R&D environment.

When strong financial incentives are in place, many employees will cross ethical boundaries to earn them, convincing themselves that the ends justify the means. When we value a reward, we often choose the shortest, easiest path to attaining it — and then persuade ourselves that we did no wrong. This tendency to rationalize our own behavior is so pervasive that psychologists Carol Tavris and Elliot Aronson recently published a book called Mistakes Were Made (but not by me) to explain how we justify harmful decisions and unethical acts.

2. Incentives demoralize employees who do not get them and actually reduce performance and fuel turnover.

Numerous studies have shown that people judge the fairness of their pay not in absolute terms, but rather in terms of how it compares with the pay earned by peers. As a result, pay inequality can lead to frustration, jealousy, envy, disappointment and resentment. This is because compensation does not only enable us to support ourselves and our families; it is also a signal of our value and status in an organization. At Google in 2004, Larry Page and Sergey Brin created Founders’ Awards to give multimillion-dollar stock grants to employees who made major contributions. The goal was to attract, reward and retain key employees, but blogger Greg Linden reports that the grants “backfired because those who didn’t get them felt overlooked.”
This claim is supported by rigorous evidence. Notre Dame’s Matt Bloom has shown that companies with higher pay inequality suffer from greater manager and employee turnover. He also finds that major league baseball teams with larger gaps between the highest-paid and lowest-paid players lose more games; they score fewer runs and let in more runs than teams with more compressed pay distributions. The benefits to the high performers are seemingly outweighed by the costs to the low performers, who apparently feel unfairly treated and reduce their effort as a result.

Similarly, Phyllis Siegel at Rutgers and Donald Hambrick at Penn State have shown that high-technology firms with greater pay inequality in their top management teams have lower average market-to-book value and shareholder returns. The researchers explain: “Although a pay scheme that rewards individuals based on their respective values to the firm does not seem unhealthy on the surface, it can potentially generate negative effects on collaboration, as executives engage in invidious comparisons with each other.”

Other studies have shown that executives are more likely to leave companies with high pay inequality. The bottom line here is that financial incentives, by definition, create inequalities in pay that often undermine performance, collaboration and retention.

3. The final risk is that financial incentives generate a sort of addiction. Better performance requires increasingly higher bonuses.

In the 1970s, Stanford’s Mark Lepper and colleagues designed a study in which participants were invited to play games for fun. The researchers then began providing rewards for success. When they took away the rewards, participants stopped playing. What started as a fun game became work when performance was rewarded. This is known as the overjustification effect: Our intrinsic interest in a task can be overshadowed by a strong incentive, which convinces us that we are working for the incentive. Numerous studies spearheaded by University of Rochester psychologists Edward Deci and Richard Ryan have shown that rewards often undermine our intrinsic motivation to work on interesting, challenging tasks — especially when they are announced in advance or delivered in a controlling manner.

The authors suggest emphasizing the intrinsic reward of doing something interesting and being creative. In fact, I have personally been in situations where the financial incentives were more than adequate, but my creativity, ability to learn new skills and a sense of purpose were completely unfulfilled. I was dissatisfied and had to leave. So, the solution the authors suggest follow rather logically from the risks: provide employees with Autonomy, Mastery and Purpose.

Autonomy means the freedom to create new solutions, when to do it and how to do it. Creativity, in my opinion, is one of the strongest motivators.

Extensive research has shown that when individuals and teams are given autonomy, they experience greater responsibility for their work, invest more time and energy in it, develop more efficient and innovative processes for completing it and ultimately produce higher quality and quantity. For example, in a study at a printing company, Michigan State’s Fred Morgeson and colleagues found that when teams lacked clear feedback and information systems, giving them autonomy led them to expend more effort, use more skills and spend more time solving problems. Numerous other studies have shown that allowing employees to exercise choices about goals, tasks, work schedules and work methods can increase their motivation and performance.

The problem with autonomy is also R&D management. Unless managers are able to generate clear goals and metrics for measuring results, autonomy will not actually produce any results. Since these objectives and metrics are hard to define, many managers just avoid giving autonomy.

Mastery involves ability to learn new skills and develop knowledge / expertise. Ability to learn is limited because it requires exploration of new problems. R&D managers need to setup interesting challenges for their employees – this is probably the single most important driver of innovation.

Research shows that when employees are given opportunities for mastery, they naturally pursue opportunities to learn and contribute. For instance, research by the University of Sheffield’s Toby Wall and colleagues documented the benefits of giving operators of manufacturing equipment the chance to develop the skills to repair machines, rather than waiting for engineers, programmers and supervisors to fix them. The operators took advantage of this opportunity for mastery to create strategies for reducing machine downtime, and worked to learn how to prevent problems in the future. As a result, they were able to complete repairs more quickly and reduce the overall number of repairs.

Purpose is the experience that one is contributing in meaningful ways:

Adam Grant (one of the authors of this piece) has shown that when employees meet even a single client, customer or end user who benefits from their work, they gain a clearer understanding of the purpose of their jobs, which motivates them to work harder and smarter. For example, when university fundraisers met a single scholarship student who benefited from the money that they raised, the number of calls they made per hour more than doubled and their weekly revenue jumped by 500%. And when radiologists saw a photo of the patient whose X-ray they were evaluating, they felt more empathy, worked harder and achieved greater diagnostic accuracy. In The India Way, Wharton management professors Peter Cappelli, Harbir Singh, Jitendra Singh (one author of this piece) and Michael Useem observe that Indian companies have found success in motivating employees by cultivating a strong sense of purpose and mission. As Adam Smith, the father of economics, wrote in A Theory of Moral Sentiments: “How selfish soever man may be supposed there are evidently some principles in his nature which interest him in the fortunes of others, and render their happiness necessary to him, although he derives nothing from it except the pleasure of seeing it.”

Neither the authors nor I think that financial incentives are a bad idea. I believe that bonuses can be a great motivator for R&D teams / managers. However, they have to be tied to real metrics to ensure that the resulting behavior is what the company needs. Many companies decide on short-term measures such as stock prices to determine performance bonuses because metrics that actually measure performance in longer-term R&D / long product development cycles are much harder to develop.

Researchers Amy Mickel of California State University, Sacramento, and Lisa Barron of the University of California, Irvine, have argued that managers should think more carefully about the symbolic power of financial incentives: who distributes them, why they are distributed, where they are distributed and to whom they are distributed.

Why Hasn’t Innovation Provided a Reliable Alternative to Oil?

The article Out of Fuel: Why Hasn’t Innovation Provided a Reliable Alternative to Oil? in Knowledge@Wharton has some good pointers about innovation management in general:

“Innovation consists of matching a solution to a need,” says Wharton professor of operations and information management Christian Terwiesch. “As it stands right now, the sad reality in the U.S. is there is simply little need for alternative energy from the mass markets. Energy is too cheap. You might look at US$4 a gallon and disagree, but in countries that are moving faster on the alternative energy side, gas is taxed at much higher rates. Cheap traditional energy makes innovation in alternative energy simply less profitable.”

Also, a very interesting graphic showing US government R&D investments over last 50 years.

So, what is the single most important driver of innovation: Funding! Clearly, funding itself is driven by perceived need. In case of energy R&D, all of the funding disappeared once the 70s oil crisis was over.

According to a study done by the Pacific Northwest National Laboratory for the U.S. Department of Energy, the U.S. government spent nearly US$4 trillion on research and development (R&D) from 1961 to 2008. Of that amount, energy technology development received nearly US$172 billion. But the bulk of that spending was done during the oil crises; since the mid-1990s, the study found, energy R&D has accounted for only 1% of all federal investment.

So what are the lessons an R&D manager should be learning from this? First, carefully study the target market before committing to a large investment beyond technology exploration:

One of the challenges facing energy innovators in creating an alternative to oil is that Mother Nature’s version is hard to beat. “Oil is attractive as an energy source,” Gately says. “It is abundant, easy and cheap to produce, store, transport and convert to many usable forms of energy.”
“No single solution is able to replace oil,” agrees A.T. Kearney’s Besland. “One liter of oil gives more energy than any other resource. Oil is denser. It is also easier to transport and to stock … so nothing will be found which can be comparable to oil. It should be a combination, a mix of alternative energy solutions.”

Second, innovation projects that have a very long timeline to maturation are much harder to fund. Be careful about taking on innovation projects that will take ten years or more to get to market – unless of course there is a clear government funding thrust in the area (as you can see in the figure above).

Another issue alternative energy innovators say they face is the intense pressure to quickly prove their work can become commercially viable. Entrepreneurs in ‘clean tech’ say convincing investors to make long-term commitments to fund their work is an uphill battle, though this problem is not unique to their field.

There have been major innovations in the digital technology but there are a couple of key points that make oil different. 1) There has been a very significant investment in maturing digital technologies from the US Government (part of the defense slice); 2) There is no serious alternative to digital technologies that can provide the user experience – clearly not the case in oil; 3) The technology cycle is much shorter (at least now) and self sustaining in digital than in energy.
Final point to remember is the business model that supports the innovation. Many energy innovations have gotten bogged down because the business model just does not make it profitable to invest in R&D:

Besland believes solar and natural gas are alternatives with the best potential for future development. “Gas pockets are discovered continuously,” he says. “Amazingly, it is not developed in the Gulf region because gas resources have been sold on long term export contracts. Biomass energy faces a concurrency issue with food. However research on seaweed and used oil are in development. It would take 10 or 15 years for these to reach maturity.”

Build a Flexible Business Plan

Harvard Business Review has a very good four minute video on how Build a Flexible Business Plan, Here are the take home messages:

Start from the heart: Only go after what you are passionate about
Think big but start small: Have a large vision but figure out small steps on how to get to it
Have a basic framework: PIMM – or People, Idea, Model (business model) and Market
Know your trade-offs: People are more important than Idea (A-team can improve the idea, but idea can not improve a B-team). Idea is more important than business model (you can change a business model around an idea). And business model is more important than market (you can change the market applicable to a business model).
Keep it iterative.

Great video worth watching.

Why Failure Breeds Winners

Business Week article Intelligent Growth: Why Failure Breeds Winners has two important lessons for R&D managers consider growth or innovation investments (and R&D planning in general):

(1) Define what failure looks like for growth investments—specify when and why disinvestment should occur. Then stick to the plan.

This is quite intuitive, but I have been consistently surprised at the lack of clearly defined goals/objectives for R&D projects. This lack of discipline always results in goal creep, waste of resources and reduction in R&D team morale.
So, the take home message is to develop a clear plan on how the growth bet (or innovation bet) is going to get delivered in products and tie investments to that plan. Also decides what signals a clear departure from the plan and have the discipline to cancel projects if they do. This plan would help combat the valley of death that frequently leads to innovation project failure. Furthermore, this plan would also help to

(2) Upgrade your growth investment process by shifting analytical resources away from up-front screening toward life-cycle analysis. Create a ‘learning loop’ for management by dedicating staff to mid-cycle and post-completion project evaluations.

There is significant evidence that consistent evaluation of innovation projects can have tremendous benefits to the organization in terms of management learning and market understanding. However, this is difficult to do:

Cycle discipline is intuitive but difficult to recreate in a large, complex corporation. Less than 10% of the companies we examined exhibited this kind of financial savvy for more than a few consecutive years at a time.

But well worth trying because the results are impressive:

Companies that are able to consistently grow sales and improve margin across multiple business cycles realize a 4.4% compound total shareholder return (TSR) advantage relative to industry returns over pure growth leaders, and a 5.4% compound TSR advantage over pure margin leaders.

Apple R&D and Steve Jobs Methodology: Focus on your Niche

We have discussed four components of the Steve Jobs methodology (at least what I have gleaned of it).

User centric design: The entire R&D process revolves around delivering an experience to the users
Long-term vision: User centric design is supported by deep understanding of technology roadmaps
Engaged leader: R&D managers have to be personally engaged in R&D to make the vision of a user centric design practical.
Small focused R&D Team: High visibility and a lot of respect for key designers.

Let us now focus on next attribute of successful R&D management: Razor sharp focus on a strategic niche. As we have seen:

This goes back to Steve’s philosophy that the most important decisions are the things you decide NOT to do, not what you decide to do.

Again, I will be gleaning information from several sources to see if we can build a better picture. Let us start off with the information from the transcript of an interview with ex-Apple CEO John Sculley and see what we can learn…
Just to recap, the strategic niche for Apple was the absolute best user interface (or at least what Jobs would consider the best) and an industrial design to go with it:

Here’s someone who starts with the user experience, who believes that industrial design shouldn’t be compared to what other people were doing with technology products but it should be compared to people were doing with jewelry… Go back to my lock example, and hinges and a door with beautiful brass, finely machined, mechanical devices. And I think that reflects everything that I have ever seen that Steve has touched.

This strategic choice forces many decisions along the way. Some of them might not be popular, but Jobs clearly made them to stay true to the strategic niche:

Steve believed that if you opened the system up people would start to make little changes and those changes would be compromises in the experience and he would not be able to deliver the kind of experience that he wanted.

The strategic niche is a thread that tied EVERY aspect of Apple’s business together:

Absolutely. The user experience has to go through the whole end-to-end system, whether it’s desktop publishing or iTunes. It is all part of the end-to-end system. It is also the manufacturing. The supply chain. The marketing. The stores. I remember I was brought in because I had a design background and because I was a marketer. I had product marketing experience. Not because I knew anything about computers.

As we all know, Apple has a unique way to do its marketing that is tied in with the overall user interface focused strategic niche:

Steve loved those ideas. A lot of the stuff we were doing and our marketing was focused on when we bring the Mac to market. It has to be done at such a high level of perception of expectation that he will sort of tease people to want to find out what the product is capable of.

The same goes for advertising:

Most big companies delegate it way down in the organization. The CEO rarely knows anything about the advertising except when it’s presented, when it’s all done. That’s not how we did it at Pepsi, not how we did it at Apple, and I’m sure it’s not how Steve does it now. He always adamantly involved in the advertising, the design and everything.

It may not be possible for every leader to be as involved in every decision as Jobs was, but the next best would be to hire the right people to make those decisions and guide them appropriately. An example is the Apple stores (wildly more successful than any competitor)

He brought one of the top retailers in the world on his board to learn about retail ( Mickey Drexler from The Gap, who advised Jobs to build a prototype store before launch). Not only did he learn about retail, I’ve never been in a better store than an Apple store. It has the highest revenue per square foot of any store in the world but it’s not just the revenue, it’s the experience.
Apple stores are packed. You can go to the Sony center — go in the San Francisco center at the Moscone. There’s nobody there. You can go into the Nokia store, they have one in New York on 57th St. There’s nobody there.

It is also critical to emphasize the strategic niche in every aspect of the company’s business:

Once you realize that Apple leads through design, than you can start to see, that’s what makes it different. Look at the stores, at the stairs in the stores. They are made of some special glass that had to be fabricated.

Or here is an example from tying the user centric design strategic niche to manufacturing:

He was fascinated by the Sony factories. We went through them. They would have different people in different colored uniforms. Some would have red uniforms, some green, some blue, depending on what their functions were. It was all carefully thought out and the factories were spotless. Those things made a huge impression on him.
The Mac factory was exactly like that. They didn’t have colored uniforms, but it was every bit as elegant as the early Sony factories that we saw. Steve’s point of reference was Sony at the time. He really wanted to be Sony. He didn’t want to be IBM. He didn’t want to be Microsoft. He wanted to be Sony.

However, this may not be easy at all times. For example, Sony was an analog component focused company while Apple was focused on user experience. Jobs had to modify the Sony manufacturing processes to better suit Apple’s culture. The wired article The Untold Story: How the iPhone Blew Up the Wireless Industry shows us how following a strategic niche can be very expensive, but it can pay off if followed wisely:

The conversation about which operating system to use was at least one that all of Apple’s top executives were familiar with. They were less prepared to discuss the intricacies of the mobile phone world: things like antenna design, radio-frequency radiation, and network simulations. To ensure the iPhone’s tiny antenna could do its job effectively, Apple spent millions buying and assembling special robot-equipped testing rooms. To make sure the iPhone didn’t generate too much radiation, Apple built models of human heads — complete with goo to simulate brain density — and measured the effects. To predict the iPhone’s performance on a network, Apple engineers bought nearly a dozen server-sized radio-frequency simulators for millions of dollars apiece. Even Apple’s experience designing screens for iPods didn’t help the company design the iPhone screen, as Jobs discovered while toting a prototype in his pocket: To minimize scratching, the touchscreen needed to be made of glass, not hard plastic like on the iPod. One insider estimates that Apple spent roughly $150 million building the iPhone.

The question is what should an R&D manager do when different elements within the strategic niche conflict with each other. For example, Jobs was focused on BOTH user experience and industrial design:

Because Steve’s design methodology was so correct even 25 years ago he was able to make a design methodology – his first principles — of user experience, focus on just a few things, look at the system, never compromise, compare yourself not to other electronic products but compare yourself to the finest pieces of jewelry — all those criteria — no one else was thinking about that.

What would happen when strategic choices pitted user experience vs. industrial design? Apple selected user experience. Here is an example. This is what the Japanese engineers had to say about the original MacBook Air: No Waste Outside, Nothing but Waste Inside’

Can we say that the MacBook Air has a perfect, sophisticated external appearance, but its insides are full of waste?’ asked Mayuko Uno, a squad member, as if speaking for the engineers that had finished the teardown process.

Here is what the same publication had to say about the New MacBook Air:

“We were impressed by Apple’s commitment to good design while seeing the LED lamp that is located on the decorative laminate around the display and is lit when the camera is in use.”

So, if push came to shove, Apple was willing to compromise on everything but the user experience. Jobs was also willing to spend resources and make unpopular decisions to maintain the strategic niche around user experience. This is a pretty important lesson for all of us to learn. That is the level at which we need to define a strategic niche to develop successful products.

Enhanced R&D Risk Management

An interesting article from Sloan about How to Manage Risk (After Risk Management Has Failed). The article is talking about risk management in financial companies, but probably applies even more to R&D.

Yet at these companies, and at others with comparable “cultures,” risk management apparently performed quite dismally. How could this be? We contend that the answer lies in the concepts and practices of traditional risk management, which tend to look for risk in all the wrong places. That is, failure did not stem from merely paying lip service to risk management or from applying it poorly, as some have suggested. Instead, collapse resulted from taking on overly large risks under the seeming security of a risk-management approach that was in fact flawed.
emphasis added

Overall message from the article is pretty straight forward:

The traditional “frequentist” approach is based entirely on the historical record.
The alternative “Bayesian” approach incorporates judgments to complement historical data.
The Bayesian perspective provides more powerful and accurate results.

It is surprising that even many advanced R&D organizations delegate risk management to the quality control organization. Many quality engineers are removed from detailed R&D activities and identify risks mainly based on past history of similar products. So, as the article points out, R&D risks are identified based on historical failures (frequentist approach). However, new products often bring new failure modes that are not anticipated from older products. For example, electronic accelerators in Toyota resulted in uncontrolled acceleration. Quality engineers had failure modes and effects only for legacy mechanical accelerators. Hence, traditional risk management would not be able to identify these new failure modes.

A better way to address this situation is the integrate risk assessment into the R&D process directly. Engineers can then identify failure modes that they are concerned about and estimate risks based on their judgement (expert opinion). Results from testing can then be used to validate and enhance risk judgments using Bayesian statistics. This concurrent risk assessment is much better than increasing on quality control after the design is complete. Hence, this approach (unlike Toyota’s Devil’s Advocate Process) will improve quality AND reduce costs.