Innovation Incentives

Slate Magazine in an article titled How to make America more innovative: give scientists more incentives to innovat: shows that just opportunity and skills are not enough to drive innovation.  Organizations need to align incentives with needed behavior to innovate successfully.

“Incentives matter for innovation, and it’s a critical lesson for the government bureaucrats set to disburse hundreds of billions of dollars through Obama’s national Innovation Strategy, which is supposed to return America to innovative pre-eminence. The way we spend those dollars will be at least as important as how much we spend, and if we want the next generation of ideas to be Made in America, Obama’s team had better get its incentives right.”

The authors point out that HHMI with guaranteed support for five years tends to have more publication than NSF/NIH funded project.  I think that in many R&D organizations, guaranteed employment may not have exactly the same results  – HHMI only allows people to work there for a few years.  Employees have to find a permanent home someplace else at the end of their stay.  This would probably drive some behavior.  Also, amount of money being awarded may have some impact on results as well.

Unfortunately, no simple solutions / rules.  Only thing for certain is that R&D managers have to keep incentives in mind when trying to drive innovation.

Freescale CTO on R&D Strategies

NE Asia Tech-On has interviewed Freescale CTO on R&D Strategies.  The interview does focus quite a bit on the semiconductor industry, but there are some useful hints for R&D managers everywhere.

First – a clearly defined strategy is quite useful do build focus and drive efficiency (even though it is not done very effectively in many organizations):

Before the Lehman Shock, we detected a sign of business recession. So, we decided to retreat from the business for mobile phones and announced it in October 2008. At the same time, we decided to focus on four areas, namely, automobiles, networking, consumer and industrial products.

Among them, we will cover almost everything in the fields of automobiles and networking, which we consider are our core businesses. In the fields of consumer and industrial products, we will cover part of them such as smartbook PCs and electronic book readers in the field of consumer products and smart meters, smart grids and home-use mobile medical devices in the field of industrial products.

It is also important to define what will be done in-house and what will be sourced from the outside.  Many organizations run into problems with open innovation when there is a conflict between what is being done internally and what is sourced:

We did basic researches when we were a part of Motorola. But, currently, we do not do basic researches in our company. We tie up with colleges and consortiums for them. For semiconductor makers, the day of technological development for technologies ended long ago. 

There is also a need for tighter communications between R&D and marketing, and FreeScale clearly recognizes it

What is important now is to solve customers’ problems. Therefore, the ideas of the R&D division are summarized as PowerPoint files. The sales stuff and marketing people bring them to our customers and ask their opinions. If the customers do not like the ideas, they will be dumped

However, I am not sure if PowerPoint files are the best approach to communicate R&D intent to customers for many organizations.  Who will be developing these documents?  How does one maintain version control?  How does one bring feedback from the customers back and incorporate the into R&D – through PPT?

Finally, one more hint about being responsive to customer needs vs. being submissive to customer demands:

We cannot make products that have an impact on business just by using the ideas of the R&D people. We are doing research and development by considering customers’ opinions and market needs as well as taking advantage of our technologies. I said that we tie up with colleges and consortiums. But, in addition to that, we are collaborating with the industry leaders and our partners to solve our customers’ problems. 

Customer Loyalty driving R&D

Corporate Executive Board has another one of their useful lists: Six Myths of Customer Loyalty. R&D managers probably are a key driver of customer retention and loyalty and three of these myths are relevant to R&D:

Myth 3: Customer Loyalty Efforts Should Focus on What Customers Say is Most Important
Myth 5: Developing Personal Relationships with Customers is the Best Way for Sales to Drive Loyalty
Myth 6: Employees Who Don’t Face Customers Cannot Affect Customer Loyalty

The idea is that one has to balance internal evaluation with voice of the customer.  Customers are becoming more fickle (necessarily – competitive pressure are enormous throughout the ecosystem.  As pointed out in a Forbes article: The New Normal: Your Customer Is In The Driver’s Seat:

“Today’s consumers are more diverse, more inter-connected and more demanding than ever. Their expectations are rising while their propensity to be loyal to companies is declining, so (let’s face it) they are in the driver’s seat. The questions for companies today are then: Are companies orchestrating where consumers go, and are they making the trip pleasant?”

Some key concepts to keep in mind when R&D managers interact with Product Managers or Marketing…

Big Pharma’s stalled R&D machines

Reuters has a Special Report: Big Pharma’s stalled R&D machine.  The industry is under tremendous pressure to develop new products and address new emerging markets:

One factor forcing Big Pharma to rethink its business model is the huge number of patents that are set to expire over the next five years. As patents run out on blockbuster prescription tablets like Pfizer’s $12 billion-a-year cholesterol medicine Lipitor and AstraZeneca’s $5 billion heartburn pill Nexium, cut-price generics are sure to rush in and slash margins. Between now and 2015 products with sales of more than $142 billion will face copycat competition, according to IMS Health, the leading global supplier of prescription drug data. It is the biggest “cliff” of patent expiries in the history of the pharmaceuticals industry.

Add in tougher regulatory hurdles and a brutal squeeze on healthcare budgets as cash-strapped governments push austerity programs and it’s little wonder that drug companies are cutting back and shifting focus. The strategy so far has been to buy promising new drugs from outside developers and boost investment in the relative safety of non-prescription consumer products. Big drugmakers are also moving into new markets — with Asia at the top of everybody’s list. It all adds up to a redesign of the multinational pharmaceutical company. In the 21st century, says Isaly, Big Pharma will primarily be a distribution business.

However, the existing/historic R&D model does not seem to work effectively:

The problem is, Big Pharma doesn’t have nearly enough new drugs in the pipeline to replace all those it is about to lose. Since 1950 — virtually the dawn of the modern era of medicine — a total of 1,256 new drugs have been approved by the U.S. Food and Drug Administration (FDA). But the industry today produces roughly the same number of new medicines that it did 60 years ago.

Ten years ago there was a lot of hope that process-led research systems would industrialize the hunt for new drugs. But that optimism may have been misplaced. A spike in drug approvals in the mid-1990s, it turns out, was not the result of any fundamental improvement in productivity but largely down to the FDA clearing a backlog of applications after the introduction of a new system under which companies paid “user fees” to help speed the process.

Despite pouring billions into research — more than $65 billion last year in the U.S. alone — the number of new drugs launched annually has fallen 44 percent since 1997, according to CMR International, a Thomson Reuters subsidiary.

It appears that the PE ratio of pharmaceutical firms have dropped below that of consumer goods companies such as P&G.  Instead of figuring out a way to make R&D more effective, the industry seems to want to move towards a more consumer goods model and cut R&D as much as possible:

The move to cut R&D, he says, is one of the most profound changes in the industry in decades. Some firms are pulling back from problematic areas like depression, where proving the value of new medicines in clinical trials is fiendishly difficult. Lack of progress in this field is a prime reason behind Glaxo’s decision to cut research in Verona. Other firms are cutting back in areas that used to be their bread and butter. Pfizer, for instance, is trimming research into cardiovascular drugs and AstraZeneca is ending discovery in psychiatric medicine. Instead of pouring money into R&D themselves, drugmakers are turning to smaller firms, outsourcing routine research functions and even buying in smart blue-sky discovery work.

However, the large gross margins can not be sustained in a non-R&D discriminated business.  Hence the industry seems to want to outsource R&D to contract research organizations (CRO):

They’re also happy to pick up Big Pharma’s leftovers. Glaxo, for example, is negotiating to sell its Verona site to a U.S.-based CRO called Aptuit. Parexel International Corp, which is based in Boston and conducts clinical trials for drugmakers around the world, is busy hiring hundreds of new staff — many of them refugees from Big Pharma. “It’s a brain shift,” says Parexel’s chief executive and founder Josef von Rickenbach. “The rate of outsourcing has continued to tick up pretty much every year across all clinical trial activities.”

Does it not mean that the fundamental problem is not necessarily that R&D is ineffective, but that is costs too much?  R&D will be not outsourced to CRO who can maintain lower costs and higher efficiencies by leveraging economies of scale.  My question is: How large does a company have to be for economies of scale to be no longer make a difference?  What does a company give up in strategic / competitive advantage by outsourcing critical R&D?

How to improve performance reviews

The article Yes, Everyone Really Does Hate Performance Reviews  in Wall Street Journal has some good advice on making performance reviews more effective:

The good news is that none of this is the way things have to be. The one-sided, boss-dominated performance review needs to be replaced by a straight-talking relationship where the focus is on results, not personality, and where the boss is held accountable for the success of the subordinate (instead of just using the performance review to blame the subordinate for any problems they’re having). In this new system, managers will stop labeling people ‘good guys’ and ‘bad guys’ — or, in the sick parlance of performance reviews, outstanding performers, average performers, and poor performers to be put on notice. Instead, they’ll get it straight that their job is to make everyone reporting to them good guys.

This is important (if difficult) in R&D management – especially larger organizations.  Most engineers tend to dislike performance reviews any way.  The fact that engineers work in cross-functional teams and have multiple bosses makes reviews even more difficult.  Functional managers may not have all the information about actual work performed by an engineer on a project team, while the project manager may not know the discipline involved sufficiently to value the effort.  Interesting conundrum.

Building focused R&D commuities

As organizations grow larger in size, it becomes more and more difficult for R&D team members to know all the development in progress.  Furthermore, as disciplines get more specialized and demands for lower costs and higher efficiency increase, cross-disciplinary communications decline and the need for building focused R&D communities increase.  Many companies like Caterpillar have taken web-based or wiki-based approaches to drive communications across geographic locations (with varying degree of success).  MIT Sloan Review has a useful article on How Reputation Affects Knowledge Sharing Among Colleagues.

Social networks are a defining feature of 21st-century information exchange. Within research and development-intensive industries, in particular, social networks have always been key to fostering innovation. But what lies at the heart of a researcher’s decision to share information within a network of fellow researchers?”

As anticipated, people who have known one another longer and have meaningful relationships are more likely to share knowledge. Predictability and reciprocity are also positive factors. But being indebted to someone is a negative factor: Someone can’t be seen as taking more than giving. There are surprising results as well. The frequency with which people correspond, for instance, doesn’t correlate to them being more likely to share knowledge.

So, what are the drivers to building focused communities?  Clearly physical distance is one.  The other is familiarity or shared connections (a way to know who to contact and how) and lastly reputation (is it worth going through the effort?):

The research has a number of practical implications. It suggests that physical distance, for instance, poses barriers for those seeking knowledge. The best course of action is to talk to someone in the same city, or at least the same state. It’s also best to request information from those with whom you have a shared connection within an organization. Other scientists within the same company are most likely to share unique and not easily replicated scientific knowhow–that which could potentially provide a greater contribution. So someone seeking assistance will more likely succeed if he or she can make the case that the knowledge is vital to accomplishing a task and that the source has the expertise to provide it.

Because both proximity and organizational ties positively influence people to share knowledge, R&D workers may be more innovative if they are closely connected. The study even lends support to the idea of rotating groups of workers to improve knowledge sharing.

However, most R&D managers do not have simple approaches to change physical locations or drive familiarity.  The cost and efficiency pressures are such that there is not enough budget to allow for social networking across large distances.  Furthermore, the effect of social contacts fall off rapidly with time, so even if R&D managers hold internal meetings the return-on-investment in increased interaction is not guaranteed.  Furthermore, disciplines are getting so specialized communications needs are for very specialized expertise (e.g. not just any electronics, GaN LNA implementation at 40 GHz).  Hence, R&D managers need new tools that automatically build an expertise directory that allows engineers to quickly locate people who are working in exactly the same area.

Six Myths of Corporate Strategy

Corporate Executive Board had a very good summary of Six Myths of Corporate Strategy:

  • Myth 1: Most Executives Want a Clear Strategy
  • Myth 2: Employees Want Strategies to Succeed
  • Myth 3: Visionary Strategists Deliver Premium Returns, Silencing all Opposition
  • Myth 4: Executives Should Force-Rank Investment Opportunities Based on Expected Return
  • Myth 5: Strategists want to Maximize Shareholder Value
  • Myth 6: Strategists Should Start with the End in Mind

I have found many an organization where executives do not wholeheartedly support a well defined strategy / plan because it would make them more accountable (someone can measure performance relative to plan – probably erroneously).  Sometimes organizations are very afraid of failure and this makes executives hedge plans to make sure success can be declared every time.  This has been a very important lesson for me to learn:  In one of my consulting engagements I followed what the executive said literally and tried to come up with a clear strategy.  I was redirected quietly and quickly.  This is not a criticism of executives in any way. Just something all R&D managers must keep in mind.  One has to deliver the right results within the boundaries of existing culture and organization.

Employees pretty consistently vote for their personal gain rather than company strategy.  One example of this behavior is patent protection.  Patents are very very expensive to obtain.  In most cases, patent protection will not generate a positive return on its investment.  Most employees understand this quite well, but still want patents because it makes their resume much stronger.

I think processes and tools need to be flexible enough to allow R&D managers to make practical decisions within organizational realities.  For example, it may not be optimal to rank all R&D opportunities based on pure financial metrics.  R&D investment management is a balancing act – satisfying a plethora of conflicting needs – from near-term market entries to long-term disruptive technologies to skill-set improvements.  We need tools that effective allow R&D managers to make these trades.

Management Innovation

I have had quite a few posts about innovation management.  However, this one is even better – Management Innovation – innovation in the management process.  Prof. Birkinshaw, Prof. Gary Hamel et. al have written an interesting article on how innovation takes place in management:

Management innovation involves the introduction of novelty in an established organization, and as such it represents a particular form of organizational change. In its broadest sense, then, management innovation can be defined as a difference in the form, quality, or state over time of the management activities in an organization, where the change is a novel or unprecedented departure from the past

It is a great article with a history of research into management innovation.  I plan to dig into some of this background in the near future and I will definitely post what I learn.  In the meantime, there are some interesting concepts in this paper worth discussing.

The authors point out that according to prior research, there are four “perspectives” on how management innovation takes place:

  • Institutional Perspective: What institutional conditions give rise to the emergence and diffusion of management innovations?
  • Fashion Perspective: How do aspects of the supply of and demand for new management ideas affect their propagation?
  • Cultural Perspective: How do management innovations shape, and get shaped by, cultural conditions
    inside an organization?
  • Rational Perspective: What is the role of managers in inventing and implementing new management

I think this is a very important concept.  If we want to manage R&D into increasingly complex systems in increasingly diverse environment, we will need some strong management innovation.  To achieve this leap in management processes, tools and metrics, we will probably need to encourage and nurture all four types of innovation. 

The authors have also laid out this really cool figure outlining the R&D process and delineating where management innovation could take place:

I think we will probably need to examine processes and tools used for every step in the figure above and determine whether the existing processes are adequate or if we need to come up with something much better.  For example, two organizations co-designing a product at motivation stage might actually see the development completely differently: One as a novel problem because they are developing a new technology (internal change) OR the other as a threat because a competitor is changing the playing-field (external change).  R&D managers will need to bridge this gap and provide a process that lets both organizations work together and communicate effectively.  Interesting times!

Industry Jolted by EV Engineer Shortage

Here is a short article describing of key skill-set shortages in hybrid / EV automobiles: Industry Jolted by EV Engineer Shortage.  On one hand this is a new skill-set that was not really in existence a decade ago.
The already-tight market for mechatronics engineers just got more competitive with Thursday’s announcement of a proposed joint venture, led by Magna International Inc. founder Frank Stronach, to develop vehicle-electrification technology.
On the other hand, the industry has known about this trend for more than 10 years.  They could have easily trained new engineers if strategic skill-set planning had been in place (or tools existed to forecast skill-set needs for long-term).  As was pointed out in Toyota Way lost on the road to phenomenal worldwide growth, it takes years to get engineers trained to work effectively.  That training and management is even more difficult when new disciplines or technologies are being introduced in the products.  Even so, some people believe that market forces will take care of everything:
Veteran engineer Chris Theodore, whose fingerprints are on the Dodge Viper and Ford GT, also is unfazed.
“There is an imbalance,” Theodore says, referring to the dearth of mechatronics engineers. “There’s more knowledge required.”
But the shortage is temporary, and the impact of EVs on automotive engineering should not be exaggerated.
“The pendulum will swing the other way,” he tells Ward’s. “When all is said and done, we’re in a physical world.”
What do you think?  Does your organization face similar problems?

Codesign – Another increase in R&D management complexity

An article in Nikkei Electronics Asia describes a new trend in consumer electronics: Codesign Begins with Product Implementation.  Codesign is simultaneous development of different subsystems, features and manufacturing process of a product across suppliers leading to cost and performance optimization at a system level.

Digital consumer electronics manufacturers are beginning to adopt codesign in product implementation. They hope to achieve both improved performance and reduced cost by optimizing chips, packages and boards in toto. PC-class performance at the implementation cost of consumer electronics would mean competitiveness sufficient for the global marketplace. Codesign is being implemented full-scale in digital consumer electronics. Until now separate design tasks were optimized individually, but now codesign is being used to improve overall system optimization. This approach makes it possible to cut design margins to the limit and develop products delivering powerful functionality for minimal price. 

With increasing complexity and somewhat nascent processes for cross-cultural cross-organizational R&D management, this can be a very challenging task for managers.  Especially, the biggest bang-for-the-buck for codesign is if it is implemented during concept development phase.  That means that all the different organizations have to align their processes, tools and metrics during the entire R&D pipeline.

Codesign can be applied to a wide range of design phases, but the most important one is concept design. The design enjoys the greatest freedom in the initial design phase, and as a result this is there the greatest optimization is possible. Codesign is entering use now in the conceptual design phase of digital consumer electronics. 

Furthermore, communications between different organizations gets to be even more critical (and difficult). As the article explains with an example of consumer electronics design, not only does design / development need to be synchronized, but also the testing / evaluation as well.  Reliability analysis & risk assessment can also become a nightmare.

There are two axes in codesign, the first of which is the target of the codesign process. There are three targets involved here, namely the chip design and package design (handled by the semiconductor manufacturer), and the board design (handled by the set manufacturer). The second axis is the set of indices used for design evaluation, such as signal integrity† and power integrity†. These indices are essential guides in avoiding product problems, and the goal in codesign is to satisfy all of the simultaneously. 

 However, this trend is likely to not be a passing fad.  As competition becomes global and need to address developing market becomes even greater, innovation will likely move to system level from components.

Better Performance at Lower Cost Digital consumer electronics designers are being pressed to slash margins to the bone, delivering better performance than prior models at the same or lower cost. ‘It used to be that we could afford a little cost increase if the product was the smallest one in the world, for example, and we could utilize high-performance boards or components. Not any more. Even if we make the smallest one in the world, the key point now is how cheap the parts are,’ complains Makoto Suzuki, Chief Distinguished Engineer, General Manager, EDA Design Technology Solutions Dept., MONO-ZUKURI Technology Div., Production Group, Sony Corp. of Japan. In this situation, continuing the established approach of individual design optimization would result in excessively large margins, and a loss in product competitiveness.