The Influence of Prior Industry Affiliation on Framing in Nascent Industries

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

How can R&D Management help exploit Thematic Similarity?

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

Whether explicitly or implicitly, the traditional understanding of “similarity” by managers has been a taxonomic one. Simply put, the degree of similarity as traditionally measured depends on the extent to which two objects possess the same features. Personal computers, for instance, all have hard drives, processors and a video monitor.

Thus, taxonomic similarity is based on the properties of the objects themselves, and taxonomic categories cohere around shared internal properties. As a consequence, taxonomically related concepts tend to resemble one another.

Thematic similarity is probably as important but often overlooked:

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

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

When managers ignore the thematic similarity hidden behind taxonomic dissimilarity, they risk overlooking opportunity (as well as misdiagnosing threat).

The behavioral theory of the business enterprise has long acknowledged managers’ dangerous tendency to search for opportunity in familiar taxonomic domains.

The benefits of thinking thematically are pretty significant:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Actually, Intel and McAfee are remarkably similar thematically. According to Intel, the acquisition of McAfee would boost its strategy in mobile wireless, where it is beginning to produce chips for smart phones. Beyond smart phones, security is becoming a key requirement as new devices, from tablet computers and handsets to televisions and refrigerators, connect to the Internet. The purchase is therefore set to turn Intel, the world’s largest chip-maker, into a leader in security, extending its reach into Internet-connected devices.

While experts hope that chips can be improved to make them able to withstand malicious attacks, that prospect is seen as being years away.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

1. Establish a vision for the future.

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

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

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

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

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

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

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

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

Pretty self explanatory and some what related to point 1.

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

The executive’s guide to better listening

A quick post about an interesting article in the McKinsey Quarterly: The executive’s guide to better listening:

“Listening is the front end of decision making. It’s the surest, most efficient route to informing the judgments we need to make, yet many of us have heard, at one point or other in our careers, that we could be better listeners. Indeed, many executives take listening skills for granted and focus instead on learning how to articulate and present their own views more effectively.”

The article provides three very useful suggestions:

1. Show Respect: We need to trust our colleagues, give them a chance explain their perspective, and more importantly, give them some time to work their way to a solution instead of just providing one to them. May be encourage them to experiment a bit more.

Our conversation partners often have the know-how to develop good solutions, and part of being a good listener is simply helping them to draw out critical information and put it in a new light. To harness the power of those ideas, senior executives must fight the urge to “help” more junior colleagues by providing immediate solutions. Leaders should also respect a colleague’s potential to provide insights in areas far afield from his or her job description.

2. Keep Quiet: Something very hard to do for me, but the rule is to only speak for 20% of the time and keep quite for 80%.

Many executives struggle as listeners because they never think to relax their assumptions and open themselves to the possibilities that can be drawn from conversations with others. … But many executives will have to undergo a deeper mind-set shift—toward an embrace of ambiguity and a quest to uncover “what we both need to get from this interaction so that we can come out smarter.”
… Too many good executives, even exceptional ones who are highly respectful of their colleagues, inadvertently act as if they know it all, or at least what’s most important, and subsequently remain closed to anything that undermines their beliefs.

3.Question Assumptions: It is important to question assumptions (both our own and those of our colleagues to have a meaningful conversation:

So it takes real effort for executives to become better listeners by forcing themselves to lay bare their assumptions for scrutiny and to shake up their thinking with an eye to reevaluating what they know, don’t know, and—an important point—can’t know.

Here is a useful technique to question assumptions:

Duncan uses a technique I find helpful in certain situations: he will deliberately alter a single fact or assumption to see how that changes his team’s approach to a problem. This technique can help senior executives of all stripes step back and refresh their thinking. In a planning session, for example, you might ask, “We’re assuming a 10 percent attrition rate in our customer base. What if that rate was 20 percent? How would our strategy change?

Necessity is the mother of Innovation (Continued)

A quick post about the article Can Medical Innovation in Developing Countries Disrupt the U.S. Healthcare System?:

While American and European healthcare are characterized by high costs and government regulations, the industry in Asia is booming and producing cost-effective equipment to serve millions.

Western firms have become somewhat complacent in their operating models:

Many U.S. companies have become comfortable operating in a system in which top-of-the-line technologies are reimbursed at premium prices and patients are accustomed to [receiving] “the best,” regardless of price,” the firm notes in its report, ‘Smaller, Faster, Cheaper: The Future of Medical Technology.’

The markets in developing countries are becoming large enough to support innovation:

According to The Economist, medical technology sales in China should reach US$43 billion by 2019, and over US$10 billion in India. And according to a report on global healthcare innovation by PricewaterhouseCoopers (PwC), China has shown the strongest improvement in innovative capacity in the last five years, and its healthcare industry will nearly reach parity with Europe by the end of the decade. 

Once they develop low cost innovative products, new players are likely to target western markets and compete for the business.

There is actually enormous amount of innovation at the bottom of the market,” Christensen says. The challenge that lies ahead is whether companies in developing countries can scale up their products to meet global demands.

Firms in developing nations have to be innovative out of necessity.  As we have discussed in the past (here and here), necessity is the mother of innovation.  Western R&D managers should be thinking about new challenges they can pose for their R&D teams so that they can also become innovative.

Some interesting examples of innovation in the paper…

More Effective Financial Incentives

Over the weekend I had a long discussion with a friend about Occupy Wall Street and what is wrong with our corporations. A few themes emerged that may actually be interesting for R&D management as well.  It has been shown that executive remuneration has grown much faster than average worker.  It is also felt that the pay is disproportionately large.

A key problem with driving executive performance is the inability to tie pay to performance.  Decisions made by executives have impact months (if not years) later.  So, rewards based on current stock price do little to guide executive performance.  Traditional approach has been to provide stock options that vest over a long period.  However, stock options have shown to be ineffective in driving performance.  This is mainly because the vesting of options does not have a direct relationship to the decisions made by the manager.  Stock price in the  future will depend on performance across multiple products. Furthermore, options will vest either with time, no matter what happens in the future.

So, here is a proposal: Why not tie rewards to performance based on actual performance of new products developed by a set of executives?  R&D executives are responsible for deciding which products to develop and how.  The primary and largest reward could be a fraction of the profits generated by these products when they actually reach the market (True Profit Sharing).  Most organizations develop (and maintain) a business case for pursing any new product.  Hence the executive reward can be built directly into that business case.  Boards of directors can monitor performance using the same business case.  This approach ties rewards to actual decisions executives make on new product development.

One concern of this approach might be that True Profit Sharing will generate bonuses over a long time frame.  Executives are also responsible for managing  R&D execution, operations and guiding sales. So, We need other bonuses that encourage performance for near and mid-term.  To do that, we can tie a part of bonuses to operational effectiveness:

  • Health of R&D pipeline (various metrics can be used) generates annual rewards (bonuses)
  • Cost and schedule performance of each new product generates near-term rewards
  • Third party reviews and market reaction when the product is introduced contributes to mid-term rewards
We can construct similar approaches for marketing, sales, manufacturing etc. This model has the advantage that each decision has direct consequences to rewards.  Just a thought…

Impact of Open Source on Open Innovation

McKinsey Quarterly talks about the impact of IP (particularly Open Source development) in a somewhat confusingly titled article (Managing the business risks of open innovation):

“… after all, who would give away patents to make more money from innovation? But as open-source innovation, “crowd sourcing,” and engaging with open communities become increasingly prevalent, could IP-free zones appear in the competitive landscape of other industries? “

Open Innovation is not the same thing as Open Source.  As we have discussed in the past, Open Innovation implementation is quite challenging. A key risk involves sharing product development plans in details to identify and incorporate innovation into a delivered product.  This is hard to do while maintaining IP ownership rights.  One approach to overcome these constraints is to work in Open Source or Shared IP environment.  The McKinsey article calls this Open Competition (do we really need another buzzword?).  They have evaluated various industries for the potential of Open Source development by asking three questions:

1.Do specialized firms offer proprietary solutions within certain layers of my industry’s value chain?
2.Do integrated firms seek to cut development costs in my industry by drawing on open technologies to substitute for these proprietary solutions?
3.Are the underlying technologies complex—consisting of so many bits and pieces that a significant number could inadvertently infringe on proprietary IP held by specialized firms?

 Their results are summarized in the following graphic:

The overall message is pretty intuitive.  However, my key message for R&D managers remains that open innovation is hard to implement.  In a few industries (such as software), it may be possible to ease implementation by using open source.

Can R&D management be strengthened through certification?

The International Journal of Technology, Policy and Management had an interesting article Evaluating R&D management systems: strengths and weaknesses of universities and government-funded research institutes:

This study was conducted to determine relative areas of improvement in R&D management systems for universities and research institutes in the Republic of Korea. The research was motivated partly by recent efforts of the Ministry of Science and Technology (MOST), Republic of Korea to strengthen the management system of R&D accounts in order to promote efficiency and best practices in handling R&D budgeting and account matters.

CMMI has a guide (and certification) for R&D management.  I am not sure how widely this certification is adopted. I am also unsure of the value of this certification because of the breadth of processes and tools it covers.  The guide covers the entire practice of requirements management (systems engineering) is in three pages.  I understand CMMI’s value in a single discipline development environment such as software development.  I am unsure of the value of certification for R&D management in physical systems with long development cycles and complex interdependencies..  Korean government clearly so value in the idea:

To this end, MOST introduced a binding certification system that is able to evaluate the ability and skill of government-funded national research institutes and universities under its jurisdiction to manage R&D accounts. The certification system is based on a set of criteria, broken down into 3 categories and 27 subcategories. This study analyses and compares the government-funded research institutes and major universities applying for the certification of R&D accounts, based on all the categories.

The overall conclusion is intuitive: Pure research institutes were better at management processes, while universities tended to capture information better.

This study shows that the research institutes boast comparatively better systems for self-audit, the precontrol of R&D accounts, the R&D management organisation, the perfection of R&D management manuals and the items of trial production cost and travel expenditures. On the other hand, the universities are better organised in such aspects as the computerisation of R&D management and the database maintenance of R&D accounts.