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:

The Valley of Death is used as a metaphor to describe the relative lack of resources and expertise in this area of development. The metaphor suggests that there are relative more resources on one side of the valley in the form of research expertise and on the other side by commercialization expertise and resources. Within this valley a set of interlocking roles are examined that move projects from one side to the other.

The idea is pretty clear: Companies acquire or generate innovation and then do not find a way to nurture it to the stage that it delivers results.  The underlying problem is that existing product lines and culture rejects home grown innovation.  The innovation accessed from the outside (open innovation) is rejected because of the traditional “Not Invented Here” problem.  The authors provide empirical evident to support these conclusions after studying 272 PDMA members.

“The data also support the roles of champion, sponsor, and gatekeeper as major actors that work together to develop and promote projects for introduction into the formal process. Champions make the organization aware of opportunities by conceptualizing the idea and preparing business cases. Sponsors support the development of promising ideas by providing resources to demonstrate the project’s viability. Gatekeepers set criteria and make acceptance decisions. The data also reveal a dynamic interdependence between role players. It is concluded that the Valley of Death is a productive tool for identifying and understanding a critical area of development that has not been adequately addressed”

This research finds a dynamic interplay between roles to accomplish tasks that are not well understood in practice or the literature. The implications of this research are far-ranging. It suggests that companies must understand the challenges in the valley, must develop the skills, and must make resources available to master the front end of product innovation. Recognizing roles, providing resources, and establishing expectations and accountability in this area of development become manageable in light of these results. Theoretically, this research informs role theory of a dynamic set of relationships previously treated as static. It also empirically investigates an area of product development where there is limited data. This paper opens profitable inquiries by focusing on an area of development not adequately researched yet drives the activities and investment made in subsequent steps of product development.

Innovation Grows Among Older Workers

Newsweek has an interesting article about research that suggests that Innovation Grows Among Older Workers:

Duke University scholar Vivek Wadhwa, who studied 549 successful technology ventures. What’s more, older entrepreneurs have higher success rates when they start companies. That’s because they have accumulated expertise in their technological fields, have deep knowledge of their customers’ needs, and have years of developing a network of supporters (often including financial backers). “Older entrepreneurs are just able to build companies that are more advanced in their technology and more sophisticated in the way they deal with customers,”Wadhwa says.”

Somethings to keep in mind building an R&D team…

And the age at which entrepreneurs are more innovative and willing to take risks seems to be going up. According to data from the Kauffman Foundation, the highest rate of entrepreneurship in America has shifted to the 55–64 age group, with people over 55 almost twice as likely to found successful companies than those between 20 and 34. And while the entrepreneurship rate has gone up since 1996 in most other age brackets as well, it has actually declined among Americans under 35.


One of Germany’s largest companies had a researcher examine its system for continuous improvement, expecting the findings to back up its policy of pushing workers into early retirement. The numbers, however, showed that older workers not only had great ideas for making procedures and processes more efficient, but their innovations also produced significantly higher returns for the company than those of workers in younger age groups. Birgit Verwonk, a Dresden University of Applied Sciences economist and author of the study, says the findings were so surprising for the company (which wasn’t named in the study) that it is now phasing out its early retirement program.

The take home message for me is that innovation is not tied to an age group. In fact, younger employees always need help learning the ropes (as in the case of Toyota).  The R&D managers challenge there for is to build virtual and focused communities that facilitate knowledge exchange and transfer.

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.
Of the three factors, connectedness and diversity are challenging in distributed virtual R&D teams.  Here are two articles on managing and driving satisfaction in virtual teams.

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)

Between Invention and Innovation

Here is something different – an excellent report developed for the National Institute of Standards & Technology on analysis of funding for early-stage technology development.  You might want to dig through the 150+ page report when you have time, but here are my notes on what I learned from it:

The project has sought to answer two sets of questions:
– What is the distribution of funding for early-stage technology development across different institutional categories? How do government programs compare with private sources in terms of magnitude?
– What kinds of difficulties do firms face when attempting to find funding for early stage, high-risk R&D projects? To what extent are such difficulties due to structural barriers or market failures?

Some findings:

We found that most funding for technology development in the phase between invention and innovation comes from individual private-equity “angel” investors, corporations, and the federal government-not venture capitalists. Our findings support the view that markets for allocating risk capital to early-stage technology ventures are not efficient. Despite (or in response to) market inefficiencies, many institutional arrangements have developed for funding early-stage technology development. This suggests that funding mechanisms evolve to match the incentives and motivations of entrepreneurs and investors alike.

We also found that the conditions for success in science-based, high-tech innovation are strongly concentrated in a few geographical regions and industrial sectors, indicating the importance in this process of innovator-investor proximity and networks of supporting people and institutions. Among corporations, the fraction of R&D spending that is dedicated to early-stage technology development varies both among firms and within industries. The latter variation may be related to industry life cycles. Overall, we found that the federal role in early-stage technology development is far more significant than would be suggested by an uncritical glance at aggregate R&D statistics. Federal technology development funds complement, rather than substitute for, private funds. Decisions made today regarding the nature and magnitude of federal support for early-stage technology development are likely to have an impact far into the future. 

1: Most innovation funding comes from everyone but venture capitalists. As per the article venture capitalists are not in R&D / innovation business, they are in financial business.

Most funding for technology development in the phase between invention and innovation comes from individual private equity “angel” investors, corporations, and the federal government — not venture capitalists.

 2. Markets for allocating risk capital to early stage technology ventures are not efficient.  Many entrepreneurs remain thirsty for funds while venture capitalist are sitting on funds.

A report from the National Commission on Entrepreneurship notes that “the substantial amount of funding provided through informal channels, orders of magnitude greater than provided by formal venture capital investments and heretofore unknown and unappreciated, suggests some mechanisms for filling the gap may have developed without recognition” (Zacharakis et al. 1999: 33).

3. Geographic concentration because of angels and technologists (needs virtual teams to get products to market?)

Conditions for success in science-based, high-tech innovation are strongly concentrated in a few geographical regions, indicating the importance in the process of innovator-investor proximity and networks of supporting people and institutions. 

 4. Early stage technology development funding (as a fraction of total R&D spend) varies from 0% in software to 30% in biotech)

Among corporations, the fraction of R&D spending that is dedicated to early-stage development varies both among firms and within industries. The latter variation may be related to industry lifecycles.

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,

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.