Wednesday, August 30, 2006

The Innovation Equation

IBM conducted a very insightful study of 10 innovations which revealed an equation, so to speak, for innovation:

Market Insight
+ Technological Know-How

IBM shows this equation empirically through 10 examples. Here were two of the examples I thought were most compelling illustrations of this model of innovation:


Expensive equipment sits idle while waiting for cement deliveries
+ Satellite tracking technology and advanced scheduling software
Reduced the delivery window from 3 hours to 20 minutes

Progressive Insurance:

Good drivers want and expect cheaper rates
+ Satellite tracking technology & advanced risk calculating methods
Aggressive pricing for good drivers while increasing profit

Friday, August 18, 2006

Technology Scouting Topology

Research - Technology Management, a publication of IRI published an article in June 2006 in which the authors propose a new topology for thinking about the types of Technology Scouting conducted in Open Innovation. I thought the topology was very helpful because of all the debate regarding what constitutes Open Innovation and versus traditional out-sourcing, M&A, alliances, Business Development, Corporate VC, and sourcing. Here is their proposed topology.

External Technology Sourcing Topology

  • Level 1 - Cost and Supply Chain Management
  • Level 2 - Strategic Partnering
  • Level 3 - Extended External Networks
  • Level N - Integrated External Innovation

In Level 1, companies “focus on modifying existing products or processes to meet current market needs.” To me, this means Level 1 is for the Incremental Innovation Christensen talks about. It either adds a new bell/whistle to the product or helps lower the cost which can allow a company to lower their price.

In Level 2, the “focus…varies but includes specific market needs, development skills and market access.”

In Level 3, what the company needs is “determined by specific areas of business activity, such as identifying therapeutic candidates, new catalysts or other materials.”

In Level N, “the business drivers…include strategic issues that necessitate multiple sources of innovation, a fast pace of innovation as well as a leadership vision that sets expectations around truly discontinuous innovations.”

Thursday, August 17, 2006

Open Innovation Blueprint: Commandment 8

This continues my on-going blog on mapping out a blueprint for implementing Open Innovation. The first entry in this series talked about the framework I am using to analyze this question, the Ten Commandments of Change Management. Open Innovation is a big change, and therefore requires a change management program. In today's blog, I'll cover the eigth element of the framework:

8. Develop enabling structures
Enabling structures include policies, new roles, processes, etc. needed to run Open Innovation. You should plan to introduce these structures as you build toward running your Open Innovation system in the steady state.

Policies – P&G says all technology becomes available outside of P&G after 3-5 years. Likewise, for external scouting, they aim to have 50% come from outside.

Roles – The CIO’s full-time staff includes Technology Brokers and their research aids. Make the brokers responsible for both scouting and marketing since, as P&G says, “Often, we find that the most profitable arrangements are ones where we both license to and license from the same company.” (HBR p. 8) The CIO’s dotted-line reports include an innovation manager from each business unit as well as legal support for transactions. Have the business unit staff a Quality Assurance function to evaluate in-bound technology. QA will not typically be the same people as your senior scientists and engineers who need to integrate and continue to invent technology for internal and external application.

Process – There’s a lot to the processes for Technology Scouting and Technology Marketing, contact me if you’d like to talk in more detail. At a high level, Technology Scouting starts with understanding market and technology trends and the needs arising from them. From there, search your own company’s technology for solutions that provide the desired set of benefits. Continue the search externally until a suitable match is found. For Technology Marketing, begin by articulating the benefits of each technology in the portfolio. Devote a fixed amount of time to searching for evidence of the need for those benefits in different markets. At each stage of these processes, you must prioritize the opportunities and if you run into a brick wall, work on re-articulating the benefits and re-searching. For Innovation Roadmapping, there are many good tools and strategies that borrow from “Seeing What’s Next” by Clayton Christensen.

Budgeting – Technology Brokers need to have a lot of leeway if they’re supposed to be out doing deals with other companies. You don’t want them to lose a negotiation because your company’s budget cycle isn’t for another month.

Reward Structure – It’s tempting to reward based on the number of in-bound deals, but that misses the point. According to P&G’s experience, the best way is to reward for speed to market. Give R&D people their ordinary bonus, no matter the source of the technologies they apply. But give an extra bonus if they can get a product done in half the time. For Technology Marketing, consider replacing a bonus based on the number of patents to a bonus based on the number of uses of the technology internally or the revenues from licensing it externally. Another consideration is how much time researchers spend with your customers as IBM does with its First of a Kind (FOAK) projects. A more general point is to reward your R&D people for getting out of the technology to enrich their understanding of the market’s problem and adapting the technology to work well at fulfilling the customer need.

Measurement Systems – According to a recent study by BCG (“Innovation 2006” and “Measuring Innovation 2006”), most companies struggle with measuring innovation performance. The measurements that are seen as the most useful are: Time to market, new product sales, and Innovation ROI. I’d like to thank Steve Winters for letting me know about this study.

I'll mention again, in the spirit of being open, all of these ideas are open for discussion, so please share your thoughts!

Wednesday, August 09, 2006

IBM has identified three kinds of innovation

IBM recently published a continuation of its Global CEO Study entitled Expanding the Innovation Horizon. One key finding is that a large proportion of the 765 CEOs surveyed are beginning to pay a lot more attention to business model innovation.

IBM saw three types of innovation in general:

  1. Business model - Innovation in the structure and/or financial model of the business
  2. Operational - Innovation that improves the effectiveness and efficiency of core processes and functions
  3. Products/services/markets - Innovation applied to products or services or "go-to-market" activities

I always find it useful to think about business concepts in terms of their impact on shareholder value, since in many respects the buck stops with them. Most shareholders care about sustainable growth, generally meaning profit growth.

The third type of innovation, products/services/markets, gets to profit growth directly by creating new streams of revenue.

The second type of innovation, operational, gets to profit growth by attacking the cost side of the profit equation: make a business more efficient so it can claim more profit for itself. The other possible outcome of operational innovation is lowering your prices by reducing cost. That can allow you to capture more market share, albeit at a lower price, and grow by increasing volume--as long as the numbers work out.

The first type of innovation, business model, gets to growth by changing the game. By thinking creatively about how to deliver value to the customer you can achieve growth through new revenues, increased volume, lower costs, lower prices that increase volume, or all of the above.

A popular example of business model innovation is the DVD rental market. Blockbuster Video's business model was to deliver DVDs to customers in retail outlets. The rental terms were you rent for 3 days and return the video on time or pay a late fee. Then NetFlix came out with the same product but a different business model. With NetFlix you pay a subscription fee with all-you-can-eat DVDs. NetFlix recognized some of the problems customers hated about the Blockbuster business model and they solved them. For instance, customers didn't like it when all the videos they wanted to see were checked out, they didn't like late fees, and they didn't like not having some certainty the movie they were about to watch was any good or not.