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…

Performance Management

A couple of articles (Handling the Underperformer on Your Team, & The Dirty Secret of Effective Sales Coaching) have good pointers on how to improve team efficiency:

One of the challenges that today’s busy managers struggle with is how to divvy up their precious people management time. Not everyone is a star performer so you should focus your limited bandwidth on the people who are doing the most for the organization, right? Unfortunately, high performers usually demand little time. They are self-sufficient, self-motivated, and often produce great work regardless of how much interaction they have with their manager.

Nor should the worst performers need a lot of attention. In fact, focusing on the tails is the wrong thing to do:

Left to their own devices, sales managers often skew their coaching efforts dramatically toward the ‘tails’ — the very best and the very worst reps on their team. They engage with poor reps because they feel they must in order to meet territory goals, and they work with their best reps because, well, it’s fun. Few managers can resist the lure of reliving their glory days by passing along their wisdom to the one or two reps who remind them most of their younger selves. To combat managers’ tendency to coach just laggards and leaders, companies implement elaborate systems to allocate coaching equally across the sales force. They imagine that ‘all boats will rise’ as a result.

The recommendation is to focus on the middle 60% (Not the top or bottom 20%)

The real payoff from good coaching lies among the middle 60% — your core performers. For this group, the best-quality coaching can improve performance up to 19%.* In fact, even moderate improvement in coaching quality — simply from below to above average — can mean a six to eight percent increase in performance across 50% of your sales force. Often as not, that makes the difference between hitting or missing goals.

And how do you provide constructive feedback to improve performance: Provide detailed and constructive feedback. Here are the four steps (pretty intuitive)

Diagnose the issue. Understand what can improve performance: lack of motivation, skill deficiency, misalignment with goals, personal conflicts, or home/ family issues.
Share what you are seeing. Discuss with the employee, Be specific and use examples. Ask for the employee’s perspective
Specify necessary changes. Decide what needs to change and how he should go about changing. It’s critical to set up processes by which the performance can be improved. Set clear goals and timelines. If you’re not sure how to support him, ask for help from an HR partner or an external coach.
Evaluate and take action. If the performance improves, congratulations. If not, take action.

Here are some important factors to consider if the employee is a perennial under-performer and you want to take action:

Reflect on the person’s value to the organization. He may be invaluable in one arena but underperforming in another. Can you change his job description so that it better plays to his strengths? Or can you find another position in the organization that’s better suited for his skills? If the answer is no, you may need to terminate. Of course, making a firing decision shouldn’t be taken lightly. Whatever you decide, don’t leave it up to them as to whether they leave. That’s a surefire way to create deadweight and hurt the morale of your team.

Here are related posts that you might find relevant: Mentoring, Performance Reviews, & Team Performance.

Asking Yourself the Hard Questions

Industry Week article Asking Yourself the Hard Questions has some interesting points about R&D strategy and planning:

Truth can’t be the first casualty when businesses are making major strategic decisions

The article suggests that leaders need to be more open and sincerely request feedback on strategy and plan. They need to encourage subordinates to ask tough questions:

Of course, asking tough questions won’t do you much good if you’re only talking to yourself. Good leaders need to be able to create an atmosphere in which employees can honestly say what they think. This can be particularly tricky if an executive is known to fall in love with his own ideas. Why risk the boss’s wrath, employees quickly figure out, if their views won’t be heard anyway? In situations where employees can speak freely, this is not a license to be disrespectful, nor is it an invitation to chaos. Think of it more as preventive medicine. It will almost always be cheaper and easier to prevent a problem, or to minimize a problem, than it will to fix it after months or years of denying there is a problem.

I think this approach of asking tough questions is absolutely critical while setting up R&D plans and technology roadmaps. Since most technology plans are developed by experts and there are not too many people who can question them without repercussions, it is important to institute a culture of constructive skepticism. Furthermore, most organizations have many myths surrounding R&D planning and a tough questioning is important to finding the right strategy. In fact, one can even consider having a well balanced checklist to ensure that the tough questions are asked and addressed in strategy formulation.
One thing not to do is form a tiger team or a commission tasked to study strategies.

In Washington, of course, politicians have developed a clever method for avoiding the hard questions. They appoint a commission to study difficult issues and then release a report. Washington is awash in commission reports, which is a barometer of how divisive and difficult our politics are now. These reports lay out the hard facts and suggested remedies and then, time and again, their remedies are ignored because — that’s right — the remedies require politicians to make tough choices.

A Quirky Way of Innovating

I have often written about accessing innovation from outside the organization (open innovation, borderless innovation, etc). HBR article A Quirky Way of Innovating describes an innovation model that takes things one step further:

Enter Quirky. Quirky’s mission is to crowd-source innovation and product design. They create consumer products by first setting up a competition for solicited but fairly rudimentary product ideas. People evaluate these and some are selected to obtain further refinement. Individuals suggest different features, designs and then even the product name and marketing slogans. Then, if enough people look like they actually want to buy the product, Quirky manufactures and sells it. All along the way, people earn ‘influence points.’ It is not just coming up with the initial idea that wins you points — offering other idea components and playing an active role in voting for different suggestions also contribute — and depending on how many points you have, you may be entitled to a share of the earnings.

The Quirky business model is applicable to not very complex products with direct applicability to end users. However, the idea of incentivizing people to become part of innovation is quite interesting for all R&D managers. May be need a way to source innovation across R&D teams of strategic partners? For example, all companies involved in developing a cell phone together can set up a similar system to invigorate engineering teams? Key concerns here are going to be IP ownership and ability to extract economic value from the innovation. This might be difficult, but it should be possible, at least in theory, to pre-negotiate IP rights with strategic suppliers. Furthermore, there is clear evidence that quality of innovation improves when suppliers are included.

Microsoft vs. Apple – a lesson in IP protection

The Computer World blog had an interesting post “Microsoft dominates Apple in patents, so why does it lag in innovation?”

Just-released information shows that Microsoft was granted the third most U.S. patents of all companies in 2010, with Apple way down the list at number 46. Why, then, does Microsoft lag so far behind Apple when it comes to developing innovative products?

Let us get rid of one point of contention – patents DO NOT signify innovation. Patents are one approach to protect inventions. There are many others with different advantages (trade secrets, copyrights, trademarks etc.). Hence, the rest of this post is about what is the best approach to protect inventions or results or R&D in general. I lean towards keeping inventions secret as long as possible and choosing patent ONLY if:

The invention is fundamental and disruptive
The invention is easily visible and can not be kept a secret
The invention has a long life. Hence if and when the patent issues (six years), the patent will be still valuable
If some one were to infringe a patent on the invention, it would be easy to detect said infringement. For example, an algorithm to detect movement in video is not easily detectable as there are many possible alternates.
There are no simple workarounds. Even if the patented approach has value, people might just find an alternate way to achieve the same result (and hence the patent would be worthless).
There is a clear business case for patenting (it can cost tens or hundreds of thousands of dollars depending on coverage)

Here some BAD reasons to file for patents:

Patents to reward inventors: It might be better to give a cash award instead
Patents to protect near-term markets: By the time the patent issues, it might be completely irrelevant
Patents for incremental inventions: May not justify the investments

Here are my my suggestions for IP protection:

Innovate quickly: This what Apple does. If you are moving through technology quickly, there is no need to bother about other people copying some of your ideas (especially with some of the concepts below)
Use trade secrets: If you can keep your invention secret, you have to spend no money on protecting it. It also lasts indefinitely (as long as you can keep it a secret) as opposed to patent that expire.
Build a software-hardware ecosystem: The iPhone-iOS-iTunes market ecosystem protects each invention much better than any patents or individual invention protection could.
Use innovative barriers to entry: Even though Goolge gives away Android source code for free, the Android Market is a great way for Google to control IP. Only “authorized” devices are able to access Android market place. This helps Goolge control the IP AND make money from app sales!

In summary, Patents are not a measure of innovation, they are not a measure of how well a company is performing on R&D and they are not always the best way to protect IP.

Nokia R&D spending – a lesson in Portfolio Balancing

In a previous post, I discussed how bureaucracy stifled innovation at Nokia. I ventured a guess that a formalized R&D portfolio balancing process might have helped counteract the effects of bureaucracy. An engadget post finally led me to an article with some concrete data and useful learnings for R&D managers.

First observation is that Nokia’s R&D budget was almost five times that of Apple in 2007. Furthermore, Nokia is focused only on mobile communications, as opposed to Apple, which has significant markets outside of iPhone. Hence, clearly, Nokia’s problems with innovation did not come from lack of R&D budget.

Now lets look at the breakdown of R&D investments across the development portfolio:

It can be seen that Nokia invested as much in hardware development as on Symbian. Each of these were as large as Apple’s TOTAL R&D budget. So there are three fundamental problems here:

R&D budget is disproportionately large compared to competitors
Spending on software and OS is much larger than competitors
R&D investment is clearly NOT delivering the kind of performance competitors are able to get

The question Nokia should be asking when distributing R&D budgets are:

What is the right amount of R&D budget. A bottoms up analysis is one way to get to an answer. The other would be to compute affordability as a fraction of sales. A competitive positioning graph such as the one above could provide some much needed perspective.
What should Nokia expect in return for the R&D investment? It is absolutely critical to have CLEAR top level objectives and metrics. These objectives can help focus R&D community and drive innovation. A benchmarking study can help decide if the objectives are reasonable. For example, if Apple can develop a hardware / software ecosystem for $300M / year, should it not be possible for Nokia to achieve at least as much (may be much more because of economies of scale).
How should the R&D budget bet distributed across different requirements – Hardware vs. software vs long-term research? Again, a bottoms-up estimate can be a good starting point, but it has to be balanced by a external perspective. If none of the Nokia competitors are spending $1.2B in software development, what is the business case for doing so at Nokia? As we get into details, competitive information will be hard to find. The answer is to set up some objectives / metrics and then track performance. Many R&D managers do not track results because it might take a year or two to understand the consequences. However, not tracking means there is no way to change the direction or even to gage if the investments are performing. More on this later….

In summary, R&D investments in this changing and highly competitive environment need to be guided by 1) clear objectives, 2) precise metrics for objectives (both qualitative and quantitative), 3) competitive benchmarking, and 4) longer-term metrics tracking.

At Apple, the Platform Is the Engine of Growth – NYTimes.com

The article At Apple, the Platform Is the Engine of Growth: has some good lessons about platform-based R&D management:

Apple has hit that magical combination of gradually shifting from a product to a platform strategy,” says Michael A. Cusumano, a professor at the Sloan School of Management at M.I.T. and author of “Staying Power: Six Enduring Principles for Managing Strategy and Innovation in an Uncertain World” (Oxford University Press, 2010).

We have discussed Steve Job’s uncanny ability to find duds in Apple’s R&D portfolio. I think platform-based portfolio management is even more important than eliminating poor projects. It is not just about selling a single product – like a great phone. But about developing an ecosystem of related products and services that provide a much better value to the customers.

Apple provides the underlying technology and marketplace: iTunes software and the iTunes Store for managing, downloading and buying music and media; iPhone and iPad software for creating applications; and the App Store for sampling and buying them.

R&D managers need to look at this carefully. If we can make portfolios of related projects, each connected based on underlying platforms, we can do a much better job of funding R&D and ensuring all the different pieces are available simultaneously. This is clearly not easy. Even Apple has had trouble:
Things look different for Apple in the market for mobile devices. There is some debate whether

Apple has become a platform strategist by design or by default: When it introduced the iPhone in 2007, Apple did not have software tools for outside developers to make applications. That came in 2008.
“The iPhone was such a great product that lots of people wanted to write applications for it,” says Marco Iansiti, a professor at the Harvard Business School. “This was a case of the hit leading to the platform, and not necessarily voluntarily for Apple.”

But then they have Jobs… He will take fix the problems in the portfolio, right?

Intel Spreads Its University Research Bets

NY Times had a brief article on open innovation in Intel Spreads Its University Research Bets.

So Intel, the chip giant, has decided to take a more distributed approach to financing university research. The company said this week that it would pour $100 million over the next five years into projects at universities. Each of the projects will involve a few Intel researchers, typically four, with far-flung teams of researchers from several universities.

One key lesson here is teaming between Intel and academic teams. I think this is key to avoiding foreign body rejection in open innovation. Some Intel team members will feel ownership is the accessed innovation and will probably be proponents to get the innovation integrated into internal R&D. Another advantage here is that internal researchers remain “fresh” and involved in innovation. I think this is a great idea.

Intel has been accessing innovations from universities just like other companies. As the Intel press release points out, the old approach was to have collaboration centers near universities. The new approach is to set up innovation centers that are jointly run by the university and Intel.

Until now, Intel Labs ran open collaboration centers near research universities and a substantial portion of the company’s funding focused on operating, maintaining and staffing these facilities. The new centers will be Intel-funded and jointly led by Intel and university researchers. They are designed to providemore dollars in the hands of researchers, and to encourage tighter collaboration between academic thought leaders in essential technology areas such as visual computing, security and mobile computing.

This is an intriguing idea. Clearly, having universities integrally involved in management will add to the innovative environment. However, it will also reduce control and visibility because the environment will be less structured. Another interesting idea is the focus of innovation. As you can see above, Intel has already defined the areas in which it will access innovation. This will hopefully help provide some structure to these centers. They have even a tighter focus on the first center:

As an initial step, Intel Labs also announced that Stanford University will be the hub for the first center, which will focus on improving visual computing experiences for consumers and professionals. Researchers at Stanford will collaborate with a community of researchers from seven other universities. The recently introduced 2nd Generation Intel® Core™ processor with combined visual and 3-D graphics will be a key R&D platform for researchers to develop innovations which improve the quality and the way images are captured or created, manipulated or interpreted and ultimately displayed to the viewer.

I look forward to seeing how this experiment works out. Clearly, we can learn a lot from this.

Toyota’s ‘Devil’s Advocate’ Policy Looks to Restore Quality

We have talked about Toyota recalls and the announcement by Mr. Todyoda to fix the problems. You might recall that Mr. Toyoda’s solution to reducing errors was to increase quality control. Well, Toyota has followed through. The article Toyota’s ‘Devil’s Advocate’ Policy Looks to Restore Quality provides some details.

The ‘devil’s advocate’ approach to vehicle design is a key element of the new Toyota. Under the plan, the company gives engineers four extra weeks to tear down and evaluate new vehicles.

The goal is to use the car in ways the owner’s manual doesn’t even consider. That’s because Toyota found out the hard way last year that customers use cars in unpredictable ways. It traced some unintended acceleration cases to gas pedals being jammed by stacked floor mats — an ill-advised practice for which Toyota engineers didn’t plan.

Interesting! So, if the customers use the car in an unpredictable way, why think of it AFTER the design is complete? Also, if the use is unpredictable, how can you account for it? If it can be predicted, why not change design objectives to address those use cases? You might have guessed it: I do not believe this way of implementing a devil’s advocate process will do much to mitigate risks of recall.

But not everyone agrees Toyota has solved the problems that led to last year’s crisis. One skeptic is Mr. Ditlow of the Center for Auto Safety. He said Toyota’s new approach to dealing with complaints of quality glitches such as unintended acceleration still is “pretty much the same-old, same-old.”

What is needed is a new process to manage automotive R&D. You might also recall that the root cause of the recalls was NOT poor quality control, but a large increase in complexity or vehicles being developed. I believe that adding extra quality control steps at the END of development does little to address the complexity. Here is what I suggest:

Make sure the system objectives are defined correctly. Use the devil’s advocates in helping balance and guide objectives.
Link objectives to detailed requirements across the entire system hierarchy
Link requirements to risks of failure. That is, perform concurrent risk assessment and integrate quality control in the design process.
Integrate devil’s advocates in the risk assessment process and fix it while there is time!

If you don’t do this, you run into many problems. The so-called Toyota Devil’s Advocate quality control process did this :

Toyota and the supplier switched to crisis mode. They designed a new pinchless wiper and the Yaris still made the scheduled start of production in November.
“We really had to push hard,” recalled Katsutoshi Sakata, Toyota Motor Corp.’s lead executive for quality research and development. “But there’s a new mindset here that we will address even the smallest of issues.”

We can surely do better.

GE – Interesting perspectives on R&D strategy

The NY Times article For G.E. and Jeffrey Immelt, a Return to Basics has some interesting sound bites from the CEO Jeffery Immelt:

Strategies are useful, he says, but only if they can quickly adjust to nasty real-world surprises. “In the words of the great philosopher Mike Tyson,” Mr. Immelt says, smiling, “everybody has a plan till they get punched in the mouth.”

The focus seems to be adaptability in face of a rapidly changing environment

And what wisdom is on tap at the United States Military Academy? “Adaptability” and “resiliency” amid uncertainty, says Mr. Immelt — skills as vital to surviving in business as they are on the battlefield.

I think effective R&D planning and portfolio management is key to adaptability. If market forces require a change in products under development, managers need to have detailed visibility into every single R&D project. This access needs to be so comprehensive that executives can quickly perform what-if scenarios on what new products can be developed by minimal tweaking of existing projects. More on this below.

The other GE strategic focus is Technology-differentiated Manufacturing:

He’s most animated talking about heavyweight products that take patience and piles of cash to develop, weigh tons and last for years — next-generation jet engines, power turbines, locomotives, nuclear plants, water-treatment systems, medical-imaging equipment, solar panels and windmills. Mr. Immelt notes, for example, that the cost of a good-sized solar-panel plant, about $70 million, is more than twice the total investment in Google in the six years before it went public in 2004.
The costs and complexities of such businesses, he adds, make it hard for just any company to compete. These are markets, he says, that have “big moats. They’re tough to get in.”

So, if there is significant investment (both capital and R&D) in developing these moats, then being adaptable is going to be rather difficult. So, if the jet engine market shifts from higher efficiency / lower operating costs to higher speeds, how will GE be able to respond? Or if the solar business sees new entrants with low cost organic cells, how will GE be able to change its $70M plant? This will be rather difficult:

Despite the financial crisis and recession, Mr. Immelt has kept investing for the long haul. Research and development spending increased last year to $3.3 billion, and will be still higher this year. “It would have been easy to say times are tough and we’ll pull back on research spending and long-range projects, but he didn’t do any of that,” says Vijay Govindarajan, a professor at the Tuck School of Business at Dartmouth and a former consultant to G.E. “Jeff Immelt really held onto his technology-led-innovation agenda.”

It is not just that the Mr. Immelt held onto his strategy, it is also that it is very difficult to change these strategies mid-stream. Most differentiating technologies take years to develop and a start-stop-restart approach just will not work. Furthermore, most R&D is still managed using gut feelings. It is extremely difficult to adapt to new markets when one does not know what drove old decisions to start with… We need a new paradigm to managing R&D!