Disruptive Innovation and IP

A quick article that elaborates on something that I have observed in many firms:

Though it may be difficult to convince a business to invest millions in pursuit of a speculative disruptive innovation, it is much easier for a small team to gain support in pursuing low-cost intellectual assets in the name of mitigating potential threats.

I have actually seen empirical data that the aggregate investment in these speculative patents far exceeds the net investment in innovation! The author repeats what many managers believe – patents are cheap so use them to protect markets:

A two-pronged approach is proposed that builds on the authors’ experience at Kimberly-Clark Corporation in dealing with disruptive threats and opportunities. The approach calls for generation of intellectual assets, often using small proactive teams

Specifically, the author suggests:

Protect yourself form other’s disruptive innovation by patenting first;
Use patents to create new business.

This approach though popular, is not easy to execute. It takes more than five years for a patent to issue. If one waits for patent issuance to decide which R&D projects to invest in, they will be far behind competitors and never be able to catch up. Millions of patents are issued each year.

It is pretty much impossible to keep up with issued patents, much less figure out who is infringing your patent and prevent them. So patents are a pretty weak approach to speculatively reducing competitive pressures. We sometimes see Motorola suing Apple. But Motorola has 10,000+ patents in cell phones. The cost of obtaining those patents $300M!

Even if one finds infringement, patent assertions are expensive and a pretty inefficient way to drive R&D strategy. In most cases, assertions take years to conclude. So from the time the inventor had an idea to asserting and changing market landscape will take 10-15 years at the minimum. How can one drive R&D strategy with that kind of a lag?

Finally, if the organization really knows which innovations are valuable, they could develop them in the first place. This approach of trying to do work around poor management decision making can lead to nothing but wasted effort.

Take home message from me is exactly the opposite of what the author suggests. Patent ONLY when you believe it is going to help you develop a significant product. Speculative patents should be limited to foundational technologies not individual products.

R&D Complexity Impacts Number of Concurrent Projects

Here is a quick article with some empirical proof of what we all suspected: Increased complexity of products under development leads to fewer concurrent development projects (Development Resource Planning: Complexity of Product Development and the Capacity to Launch New Products. Abraham Sin Oih Yu. 2010; Journal of Product Innovation Management):

The number of new product families that a firm can effectively undertake is bound by the complexity of its products or systems and the total amount of resources allocated to NPD. This study examines three manufacturing companies to verify the proposed model. The empirical results confirm the study’s initial hypothesis: The more complex the product family, the smaller the number of product families that are launched per unit of revenue. Several suggestions and implications for managing NPD resources are discussed, such as how this study’s model can establish an upper limit for the capacity to develop and launch new product families.

Impact of the Corporate Mind-set on New Product Launch

Here is an article that discusses the impact of the corporate mind-set on new product launch and its subsequent market performance. (Katrin Talke. 2010; Journal of Product Innovation Management). The article divides corporate mindsets into three types: analytical, risk-taking, and aggressive posture. Also, the product launch is boiled down to three decisions: Set launch objectives, Select target markets and position the product in the new market.Not sure how there are orthogonal or independent of each other, but lets play along for a minute.

A research model with mediating effects is proposed, where the corporate mind-set determines the launch strategy decisions, which in turn impact market performance. The model is tested with data on 113 industrial new products launched in business-to-business markets in Germany using a multiple informant approach.

The results show that of course, the corporate mindset has a strong impact on launch decisions. Analytical firms focus on all three launch objectives, risk taking firms focus on the first two and aggressive firms just go…

It is found that while an analytical posture relates to all three strategic launch decisions, risk taking and an aggressive posture have a significant impact on two, respectively one, launch strategy elements.

So you know as much as I do…

Categorizing Project Execution Risks

Here is an interesting article in the Project Management Journal about types of risks in project management:

Strategic risks: Those that relate to project goals (short-term or long-term)
Operational risks: Those that relate to project operations, individual outputs and results
Contextual risks: Those from circumstances outside of the project that may influence the scope of work and the performance of the organization. Examples are competing projects, change in ownership and management, legislation and governmental directives, media attention, market conditions, and accidents.

As is the case in most activities, project managers tend to focus on operational risk at the expense of strategic risks:

In this study, risks are categorized as risks to operational, long-term, or short-term strategic objectives, and, by studying a dataset of some 1,450 risk elements that make up the risk registers of seven large projects, we examine how operational and strategic risks are distributed in the projects. The study strongly indicates that risks to a project’s strategic objectives rarely occur in the project’s risk registers, though project success and failure stories indicate their importance.

Portfolio management organization cultures

The article Using R&D portfolio management to deal with dynamic risk by Serghei Floricel.in the journal R&D Management has some interesting insights into why organizations adopt adopt specific approaches for project portfolio management. Here is what I took away:

They theorize that portfolio management is driven by the competitive environment (characterized by velocity, turbulence, growth and instability).
This competitive environment requires managers to develop approaches to address it and learn some preferred approaches (what I would call “gut feelings”).
These approaches to portfolio management can be characterized in four dimensions (structure, commitment, emergence and integration).

They then surveyed 795 firms in a variety of sectors and on four continents to find the following results:

high-velocity environments favor structured as well as integrated portfolio management approaches
high-growth environments favor approaches that are structured but commit significant resources to each project as well
Turbulent environments favor approaches that are emergent, but also, contrary to our expectations, have high resource commitment levels
Finally, firms in unstable environments have a marginal preference for emergent approaches

Pretty good stuff to keep in mind when designing or improving product portfolio management processes.

Tough Times Spur Shifts in Corporate R&D Spending – BusinessWeek

Lots of intersting data about R&D budgets in the Business Week article Tough Times Spur Shifts in Corporate R&D Spending:

Domestic R&D spending by all U.S. companies fell 13.1 percent, to $233.92 billion, in 2008, the most recent year for which data are available, from $269.27 billion in 2007, according to the National Science Foundation. (Including R&D paid for by other U.S. concerns, but performed in U.S. companies’ domestic locations, spending rose to $283 billion in 2008 from $269 billion in 2007, according to the NSF.) During the prior recession, which was far milder, domestic R&D spending was down 0.5 percent, to $198.51 billion, in 2001 from $199.54 billion in 2000.

R&D budgets have actually INCREASED through the downturn!

Yet even amid the sharpest economic downturn since the Great Depression, the 232 companies in the Standard & Poor’s 500 index for which data were available increased their aggregate research and development expenditures to $163.37 billion in 2008 and $166.42 billion in 2009 from $154.44 billion in 2007, before the recession began, according to Bloomberg data. (Of those 232 companies, 115 spent more on R&D in both 2008 and 2009 than they did in 2007.)

Even so, R&D seems to have been moved towards nearterm maintenance and away from invention/innovation.

Total utility patent applications—covering inventions and excluding patents for ornamental design of manufactured goods—have stayed flat at around 456,100 for the past three years, while total utility patent grants have been frozen at around 167,300 per year since 2002, according to data on the U.S.Patent & Trademark Office’s website.

3M has cut R&D budget but not heads by eliminating bonuses.

Cuts in R&D may not signal a reduced commitment to innovation. Even outfits noted for their heavy emphasis on R&D, such as 3M (MMM), have pared their R&D budgets since before the 2008-09 recession. (3M’s $1.29 billion R&D budget in 2009 was down 5.8 percent from 2007.)

Dow maintains 20% of its R&D budget (see below) for innovation projects whose ROI is difficult to measure.

Dow’s $1.49 billion in R&D spending in 2009 represented a 14.6 percent increase from 2007, while revenue fell 16.1 percent over the same period.

P&G has been flat over the period, but they are increasing focus on accessing innovation from the outside:

P&G’s R&D spending was nearly $2.0 billion in fiscal 2010 (ended June), up from $1.95 billion in fiscal 2008, when adjusted to exclude its pharmaceuticals unit sold in October 2009. Net sales—adjusted for the disposal of the pharmaceuticals business and the company’s coffee business in November 2008—fell 0.4 percent over the same period.

Monsanto has formed a strategic allinace with BASF to gain more leverage from R&D – helping them relatively cut R&D budget even though their revenues have actually incresed through the downturn.

Monsanto’s total R&D spending reached $1.1 billion in 2009, up 14.2 percent from 2007, vs. a 40 percent increase in revenue over the same period.)

Here are some others:

Danaher’s R&D budget rose 5.2 percent from 2007, to $632.65 million in 2009. Danaher has doubled its R&D spending as a percentage of sales over the past 10 years, to about 6 percent in 2010, even as its total revenue has tripled over that same period.

[BHI] The oilfield service company’s R&D budget climbed 6.7% from 2007, to $397 million in 2009, despite a 7.3 percent drop in revenue over the same period.

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.

Why firms introduce new management practices?

Here is another article from Prof. Birkinshaw in the same vein as Management Innovation. The last article talked about internal organizations context and external environment. This one brings in the concept of external search (looking for management innovation outside the firms):

Management innovation is the introduction of management practices new to the firm and intended to enhance firm performance. Building on the organizational reference group literature, this article shows that management innovation is a consequence of a firm’s internal context and of the external search for new knowledge. Furthermore the article demonstrates a trade-off between context and search, in that there is a negative effect on management innovation associated with their joint occurrence. Finally the article shows that management innovation is positively associated with firm performance in the form of subsequent productivity growth.

Below is some background:

Hamel (2006, 2007) in particular has forcefully argued that in today’s age management innovation may represent one of the most important and sustainable sources of competitive advantage for firms because of its context specific nature among others.

The introduction of newmanagement practices is an important issue for firms as they seek to upgrade their productivity, improve the quality of customer offerings and retain competitiveness (Ichniowski et al., 1995; Pil and MacDuffie, 1996).

The article addresses this gap by considering two questions. First, under what conditions do firms introduce new management practices? The focus is on two sets of variables, around context and search.

is management innovation something new to the state of the art (Abrahamson, 1996; Hamel, 2006), or simply new to the firm that is implementing it (Stjernberg and Philips, 1993; Zbaracki, 1998)?

does management innovation involve conceptualizing a new practice, implementing a new practice, or both?

Here are three hypothesis the article presents and tests successfully:

Hypothesis 1. The larger the firm, the higher the level of introduction of new management practices.
Hypothesis 2. The more highly educated the workforce of the firm, the higher the level of introduction of new management practices.
Hypothesis 3. The greater the geographical scope of the market the firm is operating in, the higher the level of introduction of new management practices.

These are pretty intuitive except for the third one. I guess working across cultures requires firms to innovate their management processes. On the flip side, here are some other hypothesis (although they did not test with as much significance as others) that balance out the above:

Hypothesis 5a. The effect of internal sources on the introduction of new management practices is mitigated by size, education of the workforce, and geographic scope of the firm.
Hypothesis 5b. The effect of market-based sources on the introduction of new management practices is mitigated by size, education of the workforce, and geographic scope of the firm.
Hypothesis 5c. The effect of professional sources on the introduction of new management practices is mitigated by size, education of the workforce, and geographic scope of the firm.

A few more intuitive hypothesis that tested successfully. The more interactions between different people and organizations, the more management innovation there is:

Hypothesis 4a. The more internal sources the firm interacts with, the higher the level of introduction of new management practices.
Hypothesis 4b. The more market-based sources the firm interacts with, the higher the level of introduction of newmanagement practices.
Hypothesis 4c. The more professional sources the firm interacts with, the higher the level of introduction of new management practices.
Hypothesis 6. The introduction of new management practices is positively associated with future firm performance, in the form of productivity growth.

Planning as learning

Here is a a very influential HBR article from Arie deGeus from back in 1988 (it has been cited over 1,200 times). The key message is this:

Benefits accruing from planning are not just the objectives and strategies that emerge, but the learning that occurs during the planning process

Planning as learning is very important in R&D management as well. It is not just the planning at senior management level – it is the institutional learning from distributed planning.

… they depend on company’s senior manager to absorb what is going on in the business environment and to act on the information with appropriate business moves. In other words, they depend on learning. Or, more precisely, on institutional learning, which is the process by management teams change their shared mental models of their company, their markets, and their competitors. For this reason, we think of planning a learning and of corporate planning a institutional learning.

deGeus is talking about corporate strategy which can be planned by a select few. R&D, however, requires knowledge a lot of people to come together. Most managers I know depend on their various technologists to bring forward plans. More importantly, to get a product to market requires knowledge of many different technologists and planning is extremely critical to get all the pieces moving in synchrony.

Even so, planning is not as formalized in R&D as in corporate strategy / finance. One reason for this might be that R&D planning is much more complicated and full of jargon. There are few who can understand jargons of two or at best three disciplines (e.g., structures, life and CFD). Plans for each discipline are filled with discipline specific jargon, and it is often difficult to combine them. Unfortunately, it takes many more disciplines to get a product to market. That does not mean we should not try though. The software I am developing is proposing a new framework to do just that…

While I am on the subject, here is another HBR article that talks about planning as learning…

Aire deGeus, Planning as Learning, Harvard Business Review Vol 66 (2), pages 70-74.

Marketing and Manufacturing involvement in R&D

The paper A Cross-National Comparative Study of Senior Management Policy, Marketing–Manufacturing Involvement, and Innovation Performance in the Journal of Product Innovation Management has some useful data to support many intuitive judgments.

The proposed framework is contingent on the national culture of the country in which product development occurs. Structural equation modeling is used to test the framework with data from a sample of 146 U.S. marketing managers and 185 Japanese marketing managers.

First takeaway is the senior managers have a huge impact on how cross-organizational collaboration works.

The results suggest that a number of senior management policies are effective in promoting joint involvement between the marketing and manufacturing functions during the innovation process.

Another takeaway is the cultural has a significant impact. Individual behavior / rewards worked in US when they encouraged the R&D team leader, but not in Japan. More clarity and structure worked in Japan and not in the USA.

While the use of formal cross-functional integration policies was found to promote marketing–manufacturing involvement both in the United States and Japan, team leader autonomy, team rewards, and job rotation were found to promote marketing involvement in the United States but not in Japan. On the other hand, promoting marketing–manufacturing involvement via goal clarity and promotion of teamwork proved to be effective in Japan.

These findings go very well with the research on how IT helps collaboration between R&D and marketing.

The results have a number of implications for product development practice. Foremost among these is the finding that, despite the fundamental ideological differences separating the marketing and manufacturing functions, senior management policies can enhance the level of marketing–manufacturing involvement, and consequently can improve the likelihood of new product success. The second implication is that the effectiveness of specific senior management policies depends on national culture. Thus, managers wishing to improve the marketing–manufacturing interface should select the policies that match the culture in which the product development project is located.