Facts about Innovation -Extract from an MIT Review article

Facts about Innovation -Extract from an MIT Review article
September 3, 2018 Etienne Coulon

Innovation Insight 1

Innovation isn’t necessarily about new things; it’s about new value.

Innovation isn’t just about developing new products or technologies. In a 2006 MIT SMRarticle “The 12 Different Ways for Companies to Innovate,”1 Mohanbir Sawhney, Robert C. Wolcott, and Inigo Arroniz encouraged executives to think broadly about what types of innovation are possible. The authors noted that companies within the same industry “tend to innovate along the same dimensions” — whether those dimensions are research and development (R&D), process innovations, or branding. Viewing innovation too narrowly, the authors pointed out, “blinds companies to opportunities and leaves them vulnerable to competitors with broader perspectives.” Sawhney, Wolcott, and Arroniz used examples such as Starbucks, which initially innovated not by producing a different product but instead by creating a different kind of customer experience — what the company termed a “third place” for gathering that was between home and work.

Business innovation, the authors stressed, has to do with new value, not necessarily new things — and comes in many flavors. The authors presented an “innovation radar” so companies can consider 12 different areas in which they might innovate — ranging from method of value capture to operating processes to platforms. “When a company identifies and pursues neglected innovation dimensions, it can change the basis of competition and leave other firms at a distinct disadvantage,” the authors concluded.

Innovation Insight 2

Challenge competitors by playing a different game.

Technological disruption is one way to upend a market, but it isn’t the only way. For some companies, the secret, according to Constantinos Markides of London Business School, is to change the rules of the game.

In researching his 1997 article “Strategic Innovation,”2 Markides studied more than 30 companies that had successfully attacked leaders in their industry without the benefit of a breakthrough technological innovation. The common element in such successes, Markides found, was that the attacker changed the rules of the game, a phenomenon he termed “strategic innovation.” For example, Southwest Airlines changed the rules of the airline industry when it chose to fly its planes point-to-point rather than through hub cities. “Strategic innovation occurs,” Markides wrote, “when a company identifies gaps in the industry positioning map, decides to fill them, and the gaps grow to become the new mass market.”

Markides offered a framework for thinking about strategic innovation that’s grounded in three basic questions: Who are your customers? What products or services should you offer them? And how should you offer them? To change the rules of the game in their industry, Markides noted, companies can either redefine the business, redefine who their customers are, redefine what they offer customers, redefine how they do business, or start the strategic thinking process at a different point — for example, the organization’s unique capabilities.

Of course, coming up with new ideas for strategic innovation does not guarantee success. “It’s worth reemphasizing that coming up with new ideas is one thing; succeeding in the market is another,” Markides wrote.

Innovation Insight 3

Focus on identifying and resolving uncertainties in innovation projects.

Breakthrough innovation projects necessarily involve a high degree of uncertainty, Mark P. Rice, Gina Colarelli O’Connor, and Ronald Pierantozzi observed in their 2008 article, “Implementing a Learning Plan to Counter Project Uncertainty.”3 So, rather than try to apply disciplined planning techniques to such innovation projects, they proposed that companies focus on identifying and prioritizing the uncertainties that need resolution.

The authors developed a framework for turning uncertainty into learning by studying large innovation projects at 10 technology-intensive companies, including GE and IBM, over a period of seven years. They concluded that, in breakthrough projects where the shape of the future market has yet to be determined and where it’s unclear which applications will succeed, identifying milestones to achieve may not be the best approach. “In such scenarios,” Rice, O’Connor, and Pierantozzi wrote, “it is more reasonable and useful to identify and prioritize uncertainties that must be resolved, to define alternative approaches to exploring them, and to continually assess the value of cumulative learning compared to the costs incurred.”

Rice, O’Connor, and Pierantozzi suggested that companies develop what they call a “learning plan” to help teams examine four types of uncertainty: technical, market, organizational, and resource. Managers can use the process, the authors wrote, “to uncover gaps in knowledge and create a record of what is known, to prioritize which uncertainties are most critical and propose alternative assumptions about the reality behind each uncertainty, and to find ways to test assumptions and resolve the uncertainties as quickly and inexpensively as possible.”

The authors provided some helpful suggestions about how to apply their approach effectively. Rather than approaching the process in a linear fashion, they called for multiple passes, or “learning loops,” to allow teams to review results, clarify assumptions, and identify new tests to initiate. A critical aspect of the approach, they argued, is proper oversight by people with experience in highly uncertain projects. One risk of using people without such experience is that they may kill promising projects too early.

Innovation Insight 4

Remember that being first to market is no guarantee of success.

One of the most enduring axioms of business is that, irrespective of whether you’re running a startup or an established company, it pays to be first to market. But as authors Gerald J. Tellis and Peter N. Golder explained in a 1996 article titled “First to Market, First to Fail? Real Causes of Enduring Market Leadership,”4 the case for entering the market before anyone else can be — and often is — overstated and distorted by the nature of the data. The authors pointed out that previous studies finding that pioneering companies gained an advantage had only surveyed surviving pioneers.

The authors studied the history of 50 consumer product categories and found that pioneering companies had a high failure rate: 47%. Importantly, the authors found that being a market pioneer was less advantageous from a market-share perspective than being what they called an early leader, one who enters the market after pioneers but becomes a leader in the market’s early growth phase. Early leaders, the authors wrote, tend to have low failure rates and significantly higher market shares than pioneers.

Tellis and Golder found that the early leaders they studied excelled in comparison to pioneers on five factors. Early leaders had a “vision of the mass market” for the product; they persisted through business challenges; they were able to commit resources in line with their vision; they innovated relentlessly, even if it meant risking (or cannibalizing) their other products; and they leveraged their assets. In the disposable diaper market, for example, a well-reviewed product called Chux predated Procter & Gamble’s 1961 introduction of Pampers by decades. But P&G managed to leverage its technical and financial resources to build a position in the mass market. Likewise, in the U.S. market for light beer, several products predated the introduction of Miller Lite in the 1970s. To build market share for Miller Lite, its parent company was willing to spend heavily on advertising (something one of the market pioneers, Gablinger’s, didn’t do).

The takeaway, Tellis and Golder concluded, isn’t that it’s better to be a follower than a pioneer. It’s that paying attention to the five leadership factors will have more impact on long-term success than whether or not you enter the market first. “Being first,” they wrote, “does not automatically endow an advantage; it only provides an opportunity.”

Innovation Insight 5

Let your customers develop your next product.

When developing new products, how do you determine what customers want and what they need? This, of course, is a classic challenge, one that managers have labored over for many years. But in a 1977 article titled “Has a Customer Already Developed Your Next Product?5 Eric A. von Hippel of the MIT Sloan School of Management pointed out that many companies fail to take into account critical information that’s available to them. In studying manufacturers of scientific instruments and process equipment, von Hippel identified a pattern: “Most of the innovative products commercialized in those industries were invented, prototyped, and used in the field by innovative users before equipment or instrument manufacturing firms offered them commercially.” Von Hippel found further that “the manufacturer who takes advantage of user efforts needs only to contribute product engineering work to obtain a first-to-market product innovation.”

Users are willing to do innovation work and provide valuable information, von Hippel wrote, if they need the new product “as much as or more than you do.” This can save companies a good deal of money. A big challenge, though, is convincing internal people to accept the validity of information and ideas that come from the outside.

Von Hippel further explored the “user innovation” theme in subsequent MIT SMR articles, including “The Age of the Consumer-Innovator,”6 which he coauthored with Susumu Ogawa and Jeroen P.J. de Jong in 2011. In that article, von Hippel, Ogawa, and de Jong reported on new national surveys finding that individual consumers play an important role in both creating and modifying products. What’s more, the authors noted, advances in areas such as computer-aided design tools and 3-D printing mean that “consumers should realize that it is getting progressively easier to design and make what they want for themselves.” Businesses, von Hippel, Ogawa, and de Jong advised, “need to think about how to reorganize their product development systems to efficiently accept and build upon prototypes developed by users.”

Innovation Insight 6

Think of invention as a process of creating new combinations of elements — with results that have a highly skewed distribution.

In a fascinating 2007 article titled “Breakthroughs and the ‘Long Tail’ of Innovation,”7 Lee Fleming explored the dynamics of invention. Defining invention as a “new combination of components, ideas, or processes,” he explained that invention samples show an extremely skewed distribution, with the vast majority of inventions being useless, a few having some value, and only a very few representing breakthroughs.

As a result, Fleming argued that if companies want to achieve breakthroughs they should: (1) make lots of “shots on goal,” since only a few of the inventions they come up with will be breakthroughs; (2) try to increase the average value of each invention; and (3) increase the variability of the ideas they explore — in other words, “take wild shots at a rich target (or preferably a set of rich targets) because the wider range will be more likely to contain scores of maximum values.”

Taking such “wild shots” is one spot where lone inventors come in. Fleming’s research indicated that inventors “working by themselves can be the source of more failures as well as more breakthroughs.” On average, lone inventors are not as creative or as successful as innovative teams — but, paradoxically, the loners are more likely to be the source of breakthroughs because the value of their inventions is so highly variable. One challenge for companies, then, is finding ways to support and manage their lone inventors.

Innovation Insight 7

Understand your options for working with external innovators.

Knowing when and how to open up product development to outsiders is difficult. Which approach is better, working with external innovators organized into collaborative communities (as typified by Linux and other open-source software projects) or tapping into the competitive marketplace for products and services to complement your product? According to Kevin J. Boudreau and Karim R. Lakhani, it depends. In their 2009 article titled “How to Manage Outside Innovation,”8 the authors wrote that the decisions companies make about external innovation should be based on clarity about (1) the type of innovation they need from outside innovators; (2) the motivations of the outside innovators; and (3) the nature of the company’s business model.

The Type of Innovation

Some forms of innovation are simpler to manage than others. When the technology and consumer preferences are clear, Boudreau and Lakhani wrote, companies generally don’t need external innovation: They can develop products internally or hire contractors. However, in cases where some of the design elements are still being determined, opening up the innovation process can lead to significant benefits. Collaborative communities generally work best when dealing with problems that draw on cumulative knowledge that extends beyond what individuals are likely to know. Competitive markets, according to Boudreau and Lakhani, are better suited for problems that would benefit from “broad experimentation across a set of technical approaches or customer groups.”

The Innovators’ Motivations

Just as there are different forms of outside innovation, managers need to recognize that what motivates external innovators varies. Participants in competitive markets tend to be motivated by extrinsic factors such as financial rewards, while collaborative communities involve a greater emphasis on intrinsic rewards, such as intellectual challenge. When evaluating whether to work with collaborative communities or competitive markets, companies should be aware of the different motivators and consider the type of mechanisms needed to align with them.

The Business Model

The third issue managers need to take into consideration when deciding to open their products to external innovation is how that will affect their company’s business model. In determining whether to work with a collaborative community or a competitive market, the authors noted that it’s helpful to ask, “Who sells to whom?” The answer will affect the income streams, the company’s relationship with its customers, and the future role external innovators will play.

Opening your product to external innovation means that it will become a platform, Boudreau and Lakhani explained, and executives must decide which type of platform business model makes the most sense for their business. Companies can either integrate external innovators’ work into their platform, allow external innovators to sell products on top of the platform, or create two-sided markets where external innovators and customers can interact.

Luckily, the authors noted, a company’s innovation strategy needn’t be “cast in stone.” As the needs of the business change, the innovation strategy can change as well. Initially, for example, Apple had a small group of partners producing applications for its iPhone. But within a matter of months, outside developers had developed more than 100 unauthorized applications, prompting Apple to rethink its decision and to establish licensing terms and revenue-sharing arrangements. The lesson, Boudreau and Lakhani wrote, is that “a company needs to tailor its particular approach to the context of its specific business.”

Innovation Insight 8

Create systems and structures that support ongoing innovation.

The most innovative companies know how to do more than simply produce occasional winners. As Scott D. Anthony, Mark W. Johnson, and Joseph V. Sinfield explained in their 2008 article “Institutionalizing Innovation,”9 companies that are seasoned innovators have a set of capabilities that can take them from a plan for growth all the way through execution.

The authors developed their insights into innovation from interviews at more than 40 organizations in an array of industries, a survey, and fieldwork at more than 50 companies. They found that “companies that create blueprints for growth, construct innovation engines, and support the engines with the right systems and mindsets can establish favorable conditions for substantial innovation.”

So, how can companies move in this direction? As a starting point, management needs to develop a “growth blueprint” that articulates what the company “wants to be” — and the specific options it will and won’t consider to reach its objectives.

Another important element, according to Anthony, Johnson, and Sinfield, is determining how the company wants to allocate resources — both money and time — to satisfy its growth objectives. One approach is balancing the innovation portfolio with a mix of improvements to the core business, extensions to it, and growth initiatives in new areas. If a company fails to consciously allocate innovation resources among different types of projects, the authors noted, it will often end up with mostly incremental innovation projects. What’s more, “if the core business runs into trouble, there is an overwhelming temptation to tap resources that the company has allocated to more speculative ventures in order to save the company,” they wrote. “In the short run, this may make perfect sense; in the long run, it can be disastrous.”

Although Anthony, Johnson, and Sinfield highlighted numerous questions that would-be innovators need to confront, they were careful not to be overly prescriptive about the answers. Even within a single company, they argued, managers should be prepared to manage and measure different types of growth opportunities differently.

Companies also need to construct what the authors called “an innovation engine” — which involves structures to screen, develop, and oversee innovative projects. The authors pointed out that there are a number of different innovation structures that companies can use.

Innovation Insight 9

Connect the people in your organization who identify new ideas with those who can commercialize them.

Companies are increasingly trying to bring outside ideas into their innovation processes. To do so effectively requires an understanding of two types of innovation brokers, according to Eoin Whelan, Salvatore Parise, Jasper de Valk, and Rick Aalbers. In their 2011 article “Creating Employee Networks That Deliver Open Innovation,”10 the authors drew on research they had conducted on the diffusion of innovative ideas through personal networks in companies. Whelan, Parise, de Valk, and Aalbers explained the importance of both “idea scouts” and “idea connectors.” Idea scouts excel at identifying novel external ideas, often via the web. But, to effectively implement such ideas, the external focus of idea scouts needs to be complemented by interactions with employees who have extensive networks and influence within the company and a broad knowledge base — a group the authors called idea connectors.

Many R&D leaders pursuing external ideas through open innovation tend to emphasize only the role of idea scouts — which the authors see as a mistake. Companies, they advised, should be thinking about formal mechanisms that bring idea scouts and idea connectors together. “Promising ideas,” the authors wrote, “will not mature into innovative outcomes unless they reach the parts of the employee network that have the expertise and influence to exploit them.”

Innovation Insight 10

Innovation doesn’t have to entail major breakthroughs; it can also involve making new product development faster and cheaper.

According to Peter J. Williamson and Eden Yin, Chinese companies are tackling innovation in a fundamentally different way: Rather than going for major breakthroughs, they aim for faster development cycles. For their 2014 article “Accelerated Innovation: The New Challenge From China,”11 Williamson and Yin studied more than 20 Chinese companies in a variety of industries and found that by breaking the innovation process into small steps and parceling it out to teams, companies were able to complete projects and deliver results faster. These companies, the authors wrote, are “pushing the boundaries of systemization and scale to a whole new level in their efforts to accelerate innovation, leverage the potential of a large pool of competent but often unexceptional technicians and engineers, and reduce costs.”

For example, an outsourcing company serving the pharmaceutical, biopharmaceutical, and medical device industries was able to complete projects two to five times faster than comparable projects using conventional techniques. Similar gains were achieved by Lenovo Group Ltd., which had acquired IBM’s personal computer business. By breaking product designs into modules handled by small teams in parallel, it managed to cut its new product development cycle time in half. Williamson and Yin acknowledged that many of the processes and techniques used by Chinese companies are also being employed by technology companies in places like Silicon Valley. What’s significant, they wrote, is how Chinese companies are bringing “accelerated innovation, with rapid scale-up, low cost, and ‘good enough’ quality” to many different industries.

Innovation Insight 11

Make customer communities your allies.

It’s common for companies to solicit ideas and feedback from their customers and then incorporate what they learn into future products and services. But few have taken customer knowledge as seriously or as far as the Lego Group. In recent years, the Danish toy company, whose multicolored plastic construction toys have been popular with children for decades, has actively explored new and productive ways to engage with the users of its products. As Yun Mi Antorini, Albert M. Muñiz, Jr., and Tormod Askildsen noted, “Through trial and error, Lego has developed a solid understanding of what it takes to build and maintain profitable and beneficial collaborations with users.” These collaborations have led Lego to surprising new areas of growth, the authors wrote in their 2012 article “Collaborating With Customer Communities: Lessons From the Lego Group.”12

Historically, Lego built products for younger children, but in the 1990s, it unveiled a new series of products that appealed to older users. At the same time, the internet facilitated the growth of Lego user groups consisting of adult Lego fans. Lego user groups expanded globally, and innovative products produced by users (for example, a computer-aided design software program for designing Lego models) began appearing. As the authors pointed out, many of the innovations from fans “improved and extended the Lego building system or introduced new ways to use it that dovetailed well with how Lego itself thought of its products.” The company began reaching out to the fan community to solicit marketing ideas or feedback on products in development.

Collaborating with users has it challenges. At times, Lego management found that adult fans lost sight of the fact that the company’s primary end users were children, not adults. In some cases, fans suggested applications that went “beyond the parameters of what the products were designed for.”

From its experience working with its user groups, Lego developed a number of principles for working with customers in product development. One key lesson was the importance of setting expectations up front. After all, users may be eager to contribute their time, but they also have busy lives. (This includes being as clear as possible about the company’s parameters for when projects are expected to begin and end.) Another lesson management learned was that relationships can’t be one way: They need to be not only good for the company but also rewarding for users. “Instead of regarding collaboration as something that needs to be managed exclusively by the company,” the authors wrote, “it is fruitful to think of it as an ongoing dialogue between two allies. Both sides contribute important resources to a common purpose. Frequently, the two sets of resources complement each other and advance the conversation and collaboration.”

Innovation Insight 12

Don’t antagonize your creative people.

In the past, corporate managers often rose through the ranks and thus were very knowledgeable about the activities they supervised. But the rapid changes brought about by technology have created a widening gulf between the expertise of managers and specialized technical employees — something Robert D. Austin and Richard L. Nolan warned that companies aspiring to be technologically innovative will need to address or suffer the consequences. In a 2007 article titled “Bridging the Gap Between Stewards and Creators,”13 they wrote: “Being a good supervisor traditionally meant encouraging sound business practices and introducing changes to those practices as conditions changed. … Now the changes sometimes come from key employees whose work managers don’t completely understand.”

Conflicts between business-oriented managers and technical employees aren’t new. Almost 50 years ago, management guru Peter Drucker highlighted both the importance of knowledge workers and the challenges companies face in managing them. From a study of the development of the internet and interviews with internet pioneers, Austin and Nolan saw how misunderstandings between business-oriented managers (whom the authors called “stewards”) and highly skilled technical employees (whom they termed “creators”) caused delays in the adoption of new technologies. The stewards were most concerned about efficient allocation of resources. Creators, on the other hand, were less concerned about overall efficiency and what was in the business plan and more focused on what they saw as a “higher purpose” and vision.

To a certain extent, Austin and Nolan concluded, disputes between stewards and creators are an inevitable — even useful — part of the innovation process. The challenge, they explained, is learning how to manage the tension, for which they put forth a set of guidelines. One of their guidelines for managers is to avoid antagonizing creators, even if it means putting up with someone who is difficult to manage; an effort to get rid of one creator could snowball into losing two or three, leaving the company short on key creative talent. As Austin and Nolan wrote, “Putting up with a certain amount of maddening behavior by creators may be a price worth paying to keep great talent.” Another recommendation is to cultivate people who can speak the language of both creators and stewards — they may be helpful in mediating internal conflicts.

“The challenges in managing someone who never wants to do the same thing twice and who keeps going off on tangents are substantial and quite different from the more traditional challenges” managers face, the authors observed. But managers who don’t learn how to manage creators run the risk of missing big opportunities, and they “won’t have much fun in the process, either.”

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ABOUT THE AUTHORS

Bruce Posner is a senior editor at MIT Sloan Management Review. Martha E. Mangelsdorf is the editorial director of MIT Sloan Management Review.

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