Exploratory and Exploitative Market Learning

A quick note from Using Exploratory and Exploitative Market Learning for New Product Development divides R&D organizational learning into two types: Exploratory and Exploitative:

More specifically, this study argues that exploratory market learning contributes to the differentiation of the new product because it involves the firm’s learning about uncertain and new opportunities through the acquisition of knowledge distant from existing organizational skills and experiences. By contrast, this study posits that exploitative market learning enhances cost efficiency in developing new products as it aims to best use the currently available market information that is closely related to existing organizational experience.

So we can think about Innovation as exploratory learning and invention as exploitative learning.  The paper explores this theory based on a survey:

“This study is based on survey data from 157 manufacturing firms in China that encompass various industries. The empirical findings support the two-dimensional market learning efforts that increase new product differentiation and cost efficiency, respectively. The study confirms that exploratory market learning becomes more effective under a turbulent market environment and that exploitative market learning is more contributive when competitive intensity is high. It also suggests that because of their differential direct and moderating effects on new product advantage either exploratory or exploitative market learning may not be used exclusively, but the two should be implemented in parallel. Such learning implementations will help to secure both the feature and cost-based new product advantage components and will consequently lead to the new product success.

To summarize: Innovation is useful (and probably caused by) a turbulent market with lots of changes and discontinuities, while invention or sustaining development is useful in stable / competitive markets.

Lessons on innovation Management from DuPont

If you remember the post from a couple of days ago about Chief Innovations Officer, here are Lessons on innovation from DuPont’s CInO:

I think you keep things fresh by continuing to challenge the organization to look for the next new thing. When you maintain high standards and keep track of the frontiers of science — where the rate of change for technologies is the greatest — then the opportunities will follow. Our willingness to follow new technologies and project in advance the markets for these technologies keeps things new and interesting.

I guess this is pretty much along the lines of our discussion about roles of CInO: To scan and access innovation wherever it might be.  On the other hand, there seems to be a significant focus on the market place:

For me, the key is in the marketplace. It is vital to get an in-depth understanding of the needs and wants of the customer, even if they are unspoken needs. That depth of understanding is what guides our innovation. Without it, our efforts would not be successful.

This might be good, but may prevent organizations from driving breakthrough inventions or disruptive innovation – as by definition, the marketplace does not have a clear understanding of what would disrupt it!

For DuPont, it is about getting external input very early on in the process. The clear demarcation between success and failure is that early external input. It means testing externally before we try and perfect it and getting it right the first time. We are constantly working to better collaborate with our customers and get their input early on in the process.

As we have discussed in the past, collaboration with customers is fraught with dangers.  So, may be CInO needs to find ways of understanding market needs AFTER the proof of concept has been developed and the innovative idea is clear?

The Role of the Chief Innovation Officer

A short article in Business week on The Role of the Chief Innovation Officer:

A primary task then, of the chief innovation officer, is to oversee someone who is responsible for executive training and can make sure that the company’s language of innovation and the principles it embodies are widely disseminated and practiced.

 Interesting concept.  I clearly agree that a consistent definition of innovation is critical to measuring innovation effectiveness and ensuring that innovation delivers results.  However, I would hope that a Chief Innovation Officer (CInO) would do more than provide a consistent language. As per the author:

Managing the learning process when innovating for new-business growth is the second critical area of responsibility for the chief innovation officer. Core-business innovation proceeds largely on established knowledge about markets, customers, competition, and capabilities, which can be extended to bring something new to market at scale. New-business innovation proceeds in small-scale, controlled experiments conducted in a foothold market—a small geographic region or customer group that will serve as a low-cost laboratory.

This is interesting.  We have discussed the valley of death before, organizations face significant challenges in bringing innovation to fruition.  The author points out that it is the CInO’s job to close the valley of death.  The problem with this broad statement is the overlap in roles between CInO, CTO and VP of R&D.  An organization will need to think through this conflict clearly before establishing a CInO (more on it below).  Lastly, as per the author:

The failure rate, a critical learning metric, is likely to be high. Generally, in the absence of a structured approach to new-business innovation, about 1 in 10 new ideas works out. By taking the test-and-learn approach, the chief innovation officer can increase the hit rate to as much as 3 out of 10—a batting average that might be unacceptable in core-business innovation but can get you into the Hall of Fame in new-business innovation.

 The author is acknowledging what we discussed above and points out that CInO can help improve organizational learning based on the failures of innovation project.  A pretty good idea.

Here are my thoughts on the role of a CInO:

• Encourage disclosure of innovative ideas from in-house engineers
• Work with partners and customers on identifying and accessing innovation (and needs for it)
• Scan external environments (universities, other small businesses) for accessing innovation
• Provide seed fundings to develop proof-of-concept projects for innovation ideas
• Monitor innovation projects and transition them to CTO / R&D for development
• Nurture innovation projects and ensure they are not killed by not-invented-here mentality
• Measure results of innovation projects and maintain metrics
• Institute organizational learning from external and internal innovation projects
• Develop and implement and innovation IP strategy
• Others?

The Valley of Death in Product Innovation

Journal of Product Innovation Management has a great article on The Valley of Death as Context for Role Theory in Product Innovation:

What makes innovation thrive

The blog post Why Innovation Thrives at the Mayo Clinic in Harvard Business Review has a few interesting points to learn about encouraging innovation as learned from the Mayo Clinic:

Yet in the extensive research my team has done to uncover the mystery of successful innovation, we’ve found few track records to rival that of The Mayo Clinic, in decidedly non-urban Rochester, Minnesota. The World Database of Innovation we are compiling, as a collaborative effort between my firm, Generate Companies, and several universities, represents over 20,000 hours of work to date. As well as over 200 in-depth case studies, it compiles the ideas of 4,500 or so innovation experts and consultancies.

And the lessons are:

1. Scarcity of resources: scarcity of resources shows up in our database as the single strongest driver of innovation in organizations in general.
2. Connectedness: Internally, Mayo has achieved a high level of connectedness among employees with systems and processes that enable — and oblige — everyone across the organization to find and connect with the expertise they need at any moment.
3. Diversity: Their approach is sometimes called cross-functional teaming, and is now common in health care and corporate innovation practices.

Product Innovation collaboration analysis

The article Heterogeneous Firm-Level Effects of Knowledge Exchanges on Product Innovation: Differences between Dynamic and Lagging Product Innovators is quite difficult to read but has some interesting findings (or at least more empirical evidence of some intuitive conclusions).
The article divides firms as either dynamic innovators or those that follow other’s innovation (lagging innovators).  It also divides innovation information exchange (or collaboration) along three dimensions:

(1) information gathering applied in new product development,
(2) research cooperation on particular innovation projects, and
(3) managing information outflows to “appropriate” the innovation.

Thar article analyzes performance of firms engaging in knowledge exchange (collaboration for innovation) along three different dimensions:

(1) research intensity (a measure of innovative input);
(2) the share of revenue realized through innovative product sales (a measure of innovative output); and
(3) their impact on the growth in total revenue.

Here are the results:

1. Amount of innovation (research intensity) is positively influenced by external input or collaborations – regardless of  the type of information exchange.  Also, this innovation drives innovative product sales (duh) and growth.
2. Dynamic innovators gain more from collaborations than lagging (in terms off innovative product sales and growth)
3. Dynamic innovators are open and do not try to “appropriate” innovation by keeping it from others
4. Lagging innovators try to “appropriate”  innovations and benefit from that appropriation – although overall benefit of collaboration remains less than dynamic innovators (2 and 3 above)

Does management involvement drive down R&D efficiency?

In a press release titled Secret to Successful New Product Innovation, the marketing firm Nielsen publishes shocking results that management involvement reduces the effectiveness of R&D:

Nielsen’s research of the innovation processes at 30 large CPG companies operating in the U.S. reveals that companies with less senior management involvement in the new product development process generate 80 percent more new product revenue than those with heavy senior management involvement. Companies that employ this and other best innovation practices derive on average 650 percent more revenue from new products compared to companies that do not.

Also interesting is a result that if the R&D team is located at the corporate HQ, the overall new product development results are poorer:

Nielsen’s research shows that simply being physically near corporate headquarters can stifle new idea generation.  In fact, it turns out that having no Blue Sky innovation team at all is better than having a team on-site at corporate headquarters.  The best place for your breakthrough innovators?  Far, far away.  According to Nielsen, companies with an off-site Blue Sky innovation team report 5.7 percent of revenues coming from new products, compared to 4.8 percent from companies with no Blue Sky team at all.  Companies with Blue Sky teams on site report just 2.7 percent of revenues coming from new products.  

Here is one key take away: R&D managers must manage R&D process, not interfere in the actual research or development:

Nielsen’s research shows that another important key to success is for senior management to precisely manage the new product development process, not the ideas themselves. According to Nielsen, CPG companies with rigid stage gates – – decision points in the process where a new product idea must pass certain criteria to proceed forward – – average 130 percent more new product revenue than companies with loose processes.

And a few more short takes:

• Two to three stage gates that are strictly followed across the organization. The first stage gate is typically designed to identify ideas that will then be developed into a concept and prototype, while the last stage gate is usually designed to determine whether a product should be committed to production and market.
• A development focus two to three years out
• A formal scorecard to provide structure to organizational learning
• A standardized and required post-mortem on all new product development efforts
• A knowledge management system to retain learnings from previous product launches.

How to define Innovation?

We have discussed the problem surrounding definition of what constitutes innovation and what is invention or just engineering. The issue is important because funding and management of innovation is different from other R&D. Here is a paper in the Journal R&D Management that gives a background on what is innovation:

‘Innovation’ was defined by Schumpeter (1934) as the commercialisation of combinations of the following:
(i) new materials and components,
(ii) the introduction of new processes,
(iii) the opening of new markets,
(iv) the introduction of new organisational forms.
According to this definition, innovations are the composite of two worlds – namely, the technical world and the business world. When only a change in technology is involved, Schumpeter
terms this invention; when the business world is involved, it becomes an innovation (Janszen,
2000).

Another definition of Innovation is:

In this paper, innovation is defined as ‘the successful exploitation of new ideas incorporating new technologies, design and best practice’ (BIS, 2008).

This is what Peter Drucker had to say about it:

It is the means by which the entrepreneur either creates new wealth-producing resources or endows existing resources with enhanced potential for creating wealth – The Discipline of Innovation (HBR 1985).

Here is another definition – radical or disruptive innovation as opposed to incremental innovation:

Incremental innovation reinforces the capabilities of established organisations, while radical innovation forces them to ask a new set of questions, to draw on new technical and commercial skills and to use new problem-solving approaches (Tushman and Anderson, 1986; Burns and Stalker, 1966). Incremental and radical innovations require different organisational capabilities and may require different management processes.