Why don’t businesses experiment more

In a very interesting column in the Harvard Business Review, Dan Ariely writes about why organizations are willing to listen to experts and consultants but not do some experiments themselves and find the best answer:

I think this irrational behavior stems from two sources. One is the nature of experiments themselves. As the people at the consumer goods firm pointed out, experiments require short-term losses for long-term gains. Companies (and people) are notoriously bad at making those trade-offs. Second, there’s the false sense of security that heeding experts provides. When we pay consultants, we get an answer from them and not a list of experiments to conduct. We tend to value answers over questions because answers allow us to take action, while questions mean that we need to keep thinking. Never mind that asking good questions and gathering evidence usually guides us to better answers.

This is a very interesting observation. I have often wondered why people higher such highly paid consultants. One point that Dan does not make is an ability to CYA – the consequences of failure are much lesser if someone else (an outside expert) made the decision. I guess people are recognizing this:

Despite the fact that it goes against how business works, experimentation is making headway at some companies. Scott Cook, the founder of Intuit, tells me he’s trying to create a culture of experimentation in which failing is perfectly fine. Whatever happens, he tells his staff, you’re doing right because you’ve created evidence, which is better than anyone’s intuition. He says the organization is buzzing with experiments.

Borderless Innovation

Just like Open Innovation, there is another new trend in accessing innovation outside the captive R&D organization – Borderless Innovation. The article proposes four different models:

The Orchestra Model, which is highly structured and centralized. It is typically focused on upgrading an existing product or service that dominates a market, with tightly controlled ownership of intellectual property. Examples include the iPhone, whose developers have been releasing roughly 10,000 applications a month for use with it, or India’s ultra-low-cost Tata Nano car, which uses a localized network to manufacture units from a fixed design.

The Creative Bazaar Model, which is based on leading players in a particular market that want to acquire new ideas from small companies or individual inventors in order to broaden their range of products and market position. A case in point is Dial. The soap manufacturer aims to find 30% of its new ideas from outside the company through a program called “Partners in Innovation” that it launched with the New York-based United Inventors’ Association, an organization founded in 1990 to foster education and support for inventors.

The MOD (“MODification”) Station Model, in which ideas come from a broad, global community, with the goal of coming up with new uses for existing products. One example is Mappr, a photo service developed by Stamen, a company in San Francisco. As users of Facebook and other social networking sites tag open-source photos, they help to build a database that Mappr uses to create photographic guides to different geographic locations.

The Jam Central Model has the loosest organizational structure and mission, often involving experts asked to solve problems that might not fit well into a large corporate profit strategy. For example, for the Tropical Disease Initiative, volunteer scientists are using open-source collaborative software to address Third World health problems, such as malaria and dengue fever. The medicine needed to cure these diseases does not have the recurring revenues that pills for chronic conditions have, so it attracts little attention from the big pharmaceutical companies.

These are interesting models and each one if implemented effectively can bring significant benefits. However, much is left unsaid about implementation. Accessing innovation outside is not sufficient, organizations need processes, tools and cultures to mature the idea once brought inside. This is easier said than done. R&D teams frequently have Not-Invented-Here foreign body rejection of outside innovation (sometimes necessarily so because of the sense of pride in their team). Also, developing maturation plans and resource requirements for outside ideas gets more difficult the more out-of-the-box the idea is. Finally, these innovation seeds need special attention from the R&D managers to make sure they develop into successful products.

In summary, Borderless Innovation is a very good idea – if the organizations have processes, tools and metrics to manage it effectively. A strong intellectual property management skill is also needed to protect all this innovation.

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Performance reviews cause too much stress

The New York Times has an interesting article on the impact of performance reviews on supervisors and employees alike.

Annual reviews not only create a high level of stress for workers, he argues, but end up making everybody — bosses and subordinates — less effective at their jobs. He says reviews are so subjective — so dependent on the worker’s relationship with the boss — as to be meaningless. He says he has heard from countless workers who say their work life was ruined by an unfair review.

Some people are recommending doing away with review altogether.

“I say, ‘Throw it out,’ because it becomes a very biased, error-prone and abuse-prone system,” said Dr. Namie, the author of “The Bully at Work” (Sourcebooks, 2000). “It should be replaced by daily ongoing contact with managers who know the work and who can become coaches.”

I see the limitations with current system of performance reviews – especially in larger R&D organizations. Each team member has at least two bosses – a project manager and a functional manager. The functional manager can compare individual’s performance to their peers, while the project manager can actually understand how well they have performed on a team. The two managers communicate infrequently at best and many times speak in completely different jargons. This results in the functional supervisor making somewhat misinformed decisions that she or he is not well prepared to explain.

“Who is the biggest source of stress on the job? It’s your immediate supervisor,” he said. “The pile of evidence coming out shows that if you want to be an effective organization or an effective boss, you’ve got to strike a balance between humanity and performance.”

I think a new system, process and tools are needed to provide continuous feedback in this complex world.

Using rivalry to spur innovation

Mckinsey Quarterly has an interesting article on how to spur innovation. Their suggestion is to use rivalry to drive innovation. As in the case of GE and reverse innovation in India, the underlying thesis is that innovation does not just happen – R&D managers need to actually provide the circumstances to fuel it.

One such approach is to through rivalry as it happened in Renaissance Italy. The author proposes three approaches to get the rivalry going in modern R&D organizations:

Forming teams. Competing teams could come from different divisions, include a diverse array of experts, and take explicitly different approaches to the same problem. After all, there are often many ways (sometimes coming out of different disciplines) to resolve an R&D challenge, and there is often no way of knowing which one is best without trying them out. Moreover, teams can have biases and narrow specializations, making it all the more important to have an explicit diversity of approaches.
Appreciating differences. During the Renaissance, paintings were placed side by side so that viewers could compare and appreciate them and other artists could borrow from them. In the same way, the various solutions that teams develop can be held up next to one another in order to judge them on their relative merits. On many occasions, ideas from one can be integrated into the other. Or a solution that is ultimately passed over can be sent back to the labs for development in new directions.
Conducting “market tests.” Another way to replicate the practice of paragone is to bring designs to an internal jury or group of customers and let them weigh and contrast the different solutions. In some cases, more than one of the products may find customers who appreciate them, just as Renaissance artists each had their own following.

If you have the luxury of setting up competing teams to do the same development, more power to you. Clearly, the other two suggestions are valid however you decide to evaluate innovation. Another interesting approach I remember is through “Theme-Based Innovation” – something I read in an RTEC case study of Coloplast‘s go-to-market strategy. They define launch slots for products and have a primary and an alternate candidate. Whichever makes it goes first. This way, you are not wasting any development resources.

CEOs really want more creativity?

Here is an interesting article in Business Week penned by a Senior Vice President from IBM. The article claims that CEO priorities are changing fundamentally:

There is compelling new evidence that CEOs’ priorities in this area are changing in important ways. According to a new survey of 1,500 chief executives conducted by IBM’s Institute for Business Value (IBM), CEOs identify “creativity” as the most important leadership competency for the successful enterprise of the future.

There are a couple of key take aways in the article.

CEOs have started valuing creativity and continuous innovation.
CEOs want to be disruptive: “Disrupt status quo, disrupt business models and disrupt organizational paralysis.”

Clearly, all these things are very important to do – in any company, in any economy. What the article does not explain is why the CEOs did not value creativity earlier! Did they really believe that it was better to be unoriginal? Did they actually want organizational paralysis?

The take aways are also very difficult to realize. For one to disrupt status quo, one needs to understand what needs to be disrupted and what the desired end state should be. To do that, an organization needs a good evaluation of its processes or a way to get that evaluation in the first place. If you have that capability, then you probably do not have organizational paralysis to start with. Driving innovation has always been a big challenge.

What do you think? What are some examples of organizational paralysis that you have seen? Are then any stories or challenges that you would like to share?

R&D spending does not guarantee profits

In an article that corroborates TI’s findings, here is a 2005 article in Management Issues suggesting that higher R&D spending does not necessarily result in better profits. In some ways the material is still relevant, especially if one wants to find savings in R&D budgets.

Companies which invest heavily in research and development may be wasting their money. According to a new study, there is no direct relationship between R&D investment and significant measures of corporate performance such as growth, profitability, and shareholder return.

The article has some useful data about the R&D spending on the top 1,000 global players:

According to consultants Booz Allen Hamilton, who analyzed the world’s top 1,000 corporate research and development spenders, innovation spending is still a growth business. This 2004 Global Innovation 1,000 spent $384 billion on R&D in 2004, representing 6.5 per cent annual growth since 1999.
And the pace is accelerating. Measured from 2002, the annual growth rate jumps to 11.0 per cent.
While the top 1,000 corporate R&D spenders invested $384 billion in 2004, the second 1,000 spent only $26 billion – only an additional 6.8 per cent beyond the top 1,000 spenders.

This article points out the need for coordinated processes R&D planning, project portfolio management and R&D investment management: “How you spend is more important than how much you spend.”
However, getting coordinated processes in place for planning, portfolio management and investment management is rather difficult. Add to it the complexity of aligning investments with changing market needs and project progress/delays, and the real task of guiding R&D and invention becomes rather difficult.

In other words, the study argues, it is the process, not the pocketbook that counts. For example, Apple’s 2004 R&D-to-sales ratio of 5.9 per cent trails the computer industry average of 7.6 per cent, while its $489 million spend is a fraction of its larger competitors.

What do you think? Do you have any stories to share about success or failure around project portfolio management? Or are there any challenges that you face that you would like to discuss?

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R&D spending cuts sharpen vision?

A recent article in the Dallas News mentions that TI has cut its R&D budget by more than 25%. These cuts appear to be permanent.

Texas Instruments Inc., a legendary font of innovation, cut its budget for research and development by almost half a billion dollars in 2009. Those reductions are expected to stay in place this year as well. But the Dallas-based company, producer of landmark technology such as the integrated circuit and the pocket calculator, says the approximately 25 percent drop isn’t a sign of declining innovation. Rather, it’s a mark of a maturing, streamlined product portfolio.

TI believes that the cuts are actually helping it sharpen its vision on more important R&D and eliminate unnecessary efforts.
Instead, the company is focused on embedded processors and analog chips, the devices inside cellphones and other mobile goodies that crunch video and handle other complex tasks.

“We’re looking at markets that were maturing or not developing the way we had anticipated” for cuts, said chief financial officer Kevin March.
One source of savings is that TI stopped doing much research into ways to mass-produce its products, leaving that work to manufacturers in Asia that crank out the chips.
TI has also been extricating itself over the last few years from designing baseband chips that connect mobile phones to cellular networks.

The question here is the impact of sudden large changes in the R&D budgets on the overall health of the R&D project portfolio. An underlying theme is that organizations get complacent in their view of their R&D priorities. Or that unproductive projects are really difficult to kill once they have been funded for a while. A large discontinuity forces the organization to revaluate priorities and see how the R&D pipeline is aligned with the priorities.

A concern may be that a sudden large change may actually get rid of good projects along with the bad. One needs to have a good handle on what is in the project pipeline and what results those projects are targetting. If a good view of the pipeline exists, should there be a need for large changes? What is the need for large R&D direction changes if the organization has effective periodic R&D project portfolio reviews? Should not the weak projects be eliminated because their proejcted results would not meet requirements? If such a view of the pipeline does not exist, would not a large discontinuity be a difficult time to develop such a view?

What do you think? Has your organization successfully made large changes in R&D spending? If your organization has an efficient portfolio management process, do you think large changes such as this would be necessary or effective?

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