He may be right. The study may be right (though when you examine the source you find that the study, conducted by the Information Technology and Innovation foundation, is measuring IT infrastructure and other foundational elements rather than the innovation related capabilities that have actually driven US based innovation over history). But what Otellini failed to mention in his talk is how Intel is handling innovation. How are they managing it? How are they building, nurturing that expertise? That capability? Intel’s New Business Initiatives (NBI) group, part of Intel Capital for a number of years, no longer exists. Responsible for the beginnings of WiPro, among a number of other offerings that provided Intel with the options for developing whole new platforms for growth, NBI was largely viewed as an appendage to the mainstream organization. It was run by a strong willed, articulate person, Angela Biever, for a number of years in the early part of this decade. She wasn’t always the easiest to deal with, I’m certain. She fought uphill battles, for sure. She constantly had to justify her group’s existence. But the success rate of her portfolio was among the best in the ‘Corporate Entrepreneurship’ space. Once she left, and I’m certain for many apparently rational reasons, the NBI group’s mandate evolved to become ‘closer in’ to the mainstream business. Great.

Now I’m sure the NBI is not the only innovation related group in Intel, or Intel’s only approach to innovation. But this is just an example of which I’m aware. So the question is, if Intel wants innovation….how do they plan to make it happen? Is the lack of capable scientists and engineers really the root cause of Intel’s problem? Are tax incentives for building a plant the basis of Intel’s innovation issue? or is it, perhaps, the company’s ability to commercialize technologies that are new, unfamiliar, and perhaps risky???

Wow, what an experience. While some of them could not relate, a number of them really resonated with the problem. But their concern is just bordering on the issue of what to do with these people once they find them. Their major concern is how and where to find them and what should the skills be? One woman mentioned that the Sr. Vice President of Innovation and Marketing (another interesting title!) is trying to hire
a VP of Innovation. But everyone this Talent Acquisition woman finds for him is unsatisfactory. Yet he cannot articulate to her what he is looking for.

Others in the audience expressed the following concerns:
1. Many of the people in the company who have innovation skills have left or have been sidelined because they grate on the corporate nerves…they can be irritating.

2. Senior leadership wants to build an innovation group, and is great at telling us who they want in it now, but they cannot tell us (the Talent Management people who are concerned about such matters) what their plans are for these people.

So, I left them with a challenge: Who will join us for Phase III of the Radical Innovation Research Program? We need 6-7 companies, each of whom has a declared strategic intent to build a capability for breakthrough innovation, and has been at it for a bit, and is concerned with the issue of Talent Management. Talent Acquisition is key, but the killer, we’ve found, is how to develop meaningful career paths for these
people. If innovation is truly emerging as the next business function, this problem has to be solved.

We have three companies signed up so far…..and others are following on !!!

Well, the holiday season is well underway and 2009 is nearly gone. Lois, Ravi and I wish all of our readers a wonderful relaxing rest of the holiday season. It’s been great so far, and I’m still taking advantage of these final few days. But can’t wait to tell you about recent experiences with a certain energy company who is seeking to grow 10x. I’ve had many inquiries of late from firms interested in our work. AND we’re preparing for stage III of our research program. We’ve just developed a brand new relationship with a cool group focused on talent development in large companies. AND the data from our survey has just come in. So 2010 promises to be a wild year as far as learning about how firms are developing capabilities for breakthrough innovation. (And mind you, they are rapidly becoming much more sophisticated!). BTW, did you see our article in the December issue of HBR?????

Wishing you all a great year and Stay tuned to learn more about “INNOVATION”…..

Ravi is a professor of information systems at RPI, but don’t let that fool you. He’s all about innovation…in IT and in everything else. He’s made quite a contribution to our research program and we are happy he’s joining the blog scene.

Professor Henry Mintzberg of McGill University recently published a paper that caught my eye. First published in Sloan Management Review , and picked up by the Wall Street Journal, it’s a controversial idea: Do away with Executive Bonuses!

He points out that bonuses drive the wrong behavior. There’s lots of attention on figuring out how to fix the problems by redesigning the bonus structure. But bonuses rest on three faulty assumptions that make any fix impossible, Prof Mintzberg asserts. First is that a company’s health is represented by its stock price. He simply does not buy the well accepted argument that a firm’s stock price captures full information. Company culture, brand name, commitment to people, and other aspects of corporate ‘goodwill’ are not reflected in the daily ups and downs of the market. Stock price as full information may even encourage abusive decision making on the part of CEO’s…cost cutting, downsizing experienced employees, overworking those who remain, cutting back on customer service, etc.

Second, there’s the fallacy that performance measures, short or long term, represent the true strength of the company. Obviously not, as we know from cases like Enron, AIG, Merrill Lynch, etc. etc. etc. And, it’s impossible to assess the long term performance of a chief executive. Over how many years should we assess it? What, exactly, does long term mean?

Finally, there’s the assumption that those who get bonuses are the ones responsible for the company’s performance. How is this possible? How about the person in the lab? Or the account manager who goes the extra mile on a customer’s behalf? ???? Mintzberg points out that many, many influences, including the weather, affect a company’s performance. How divisive is it to pay some and not others, when teamwork is all the rage and “our people are our most important asset”? The class structure this imposes on a company all but ensures that the firm, as a whole, will not perform to its potential. It’s too discouraging as an employee.

Well said, professor. But not enough said. As challenging and confrontational as these thoughts are, it’s even scarier when we think about the impact of executive compensation on breakthrough innovation initiatives in companies. Why would a CEO invest to build such a capability, when we know that it takes time to bear fruit, that time horizons are long and success on any single project is uncertain, and that much of what is gained in striving for breakthroughs is immeasurable? Any time we bring a group of innovators together at RPI, at the Industrial Research Institute, or in the myriad other workshops we attend, the subject migrates to this topic. It’s the elephant in the room.

Other academics are beginning to demonstrate links between investment in major innovation and firm stock price. We have to. Otherwise it’s a non-starter. But you know, I like Professor Mintzberg’s approach better. He suggests firms use executive bonuses as a screening tool for hiring senior leadership. Those candidates for the job who insist on a bonus package should be screened out. Wow. Can you imagine the impact on firm’s investments in innovation?????

Reporting to someone at the Corporate level who is responsible for the future health of the company. It’s not expensive. And it’s not impossible. It’s the next wave of management discipline.
Of course, read Grabbing Lightning for the post -Defining Innovation-How to start the conversation.

So this week it was about Health Care. It was an absolutely fascinating discussion. The panelists included the following people:
1. Dr John Bennett ,President and CEO of Capital District Physician’s Health Plan, one of the largest insurance companies and HMO’s in our region. Dr. Bennett is also a well respected cardiologist with many years of clinical experience in his specialty, but also an entrepreneur in that he founded and ran a very large physicians’ practice that services both primary care and specialty needs.

2. Ms Eileen Murphy , Director and COO of the SMART practice for PriceWaterhouse Coopers. Eileen has been part of PWC’s health care practice for 25 years, where she has worked with hospital systems to ensure their financial health and survival, including helping with mergers, helping gain state authorization to add services in markets of need, and, most recently, in helping them with compliance issues with insurance and regulatory bodies through the adoption of specific IT systems that create efficiencies in their operations as well as improved accuracy in their reporting.

3. Ms. Sue Ellen Wagner, Executive Director of Health Trustees of New York State, an affiliate of Health Associates of New York State. HANYS and HTNYS are advocates for hospitals and other health care providers in the ongoing political conversations regarding health care reform.
4. Dr. Patrice Milos, VP and Chief Scientific Officer, Helicos Biosciences, a small firm working on DNA sequencing and digital gene expression processes. Previous to this role, Patrice was Executive Director at Pfizer Global Research &Development.

5. Mr. Omid Moghadam, Personal Genomics Research, Harvard Medical School; Chair, National Development Board, Ignite Institute for Individual Health; and Founder and former CEO, Dossia Corporation. Omid has been an intrapreneur at Kodak and Intel, and holds 32 patents. Omid focuses on medical imaging, healthcare IT, personalized health records and the role of genomics in enabling personalized medicine.

I asked them 2 questions:

1. What are the biggest challenges facing our health care industry today?
2. What trends/opportunities/innovations are on the horizon that can help overcome these challenges?

Lots of the discussion had to do with people and politics. There are so many constituents in health care,
and they have competing interests. There’s no ‘leader’ and, in fact, the panelists noted, health care doesn’t even behave like an industry. It’s lots of mini industries. So that’s obviously a major problem, and potential solutions outside of the political arena seem to lie in the realm of business model innovations. A big one that came up was an experiment that the local HMO, CDPHP is trying in which they are moving to a different payment system for doctors, from fee-for-service to pay-for-performance, which, they believe, will deliver better service for patients, at a lower cost. Interesting that an Insurance company would view itself as the one to take this on, but John Bennett’s vision is just that. The timing is amazing. Time magazine just ran an article about payment systems for doctors. Check out this article.

But beyond the politics…there’s so much technological invention, it’s awe inspiring. According to these panelists, within a couple of years, we will be able to know our own genetic sequences for…..$1000! Once this is known, preventative care can move into action. And we can develop drugs for smaller, specific populations(at a lesser cost at right time), rather than work on blockbusters that we hope will work on everyone. As it stands now, some of us are overmedicated and others under-medicated by commonly prescribed drugs such as, for example, cholesterol meds. But since pharma companies must have major hits in order to support the R&D investments that fuel their growth, they’ve been reluctant to go down this personalized medicine route, which opens up small niche markets. Also, a major cost of drug commercialization is the long and arduous clinical trial process, to prove that the drug in question works across a large population. Well, turns out that most of them don’t…but as we learn more about specific smaller populations, we can custom make drugs to fit.

And that, of course, raises a host of additional political problems. Science can solve lots of problems, but alas, there are always, always, people issues.

View the Panel Video. Lots to think about in terms of innovation!

Happy Halloween by the way….

The term that is used to describe this phenomenon is ‘reverse innovation,’ which VG describes in his recent post as “any innovation likely to be adopted first in the developing world.” . Well, that’s one way to think about it…which focuses on the path of diffusion for the innovation.

But actually, these are really, truly breakthroughs. Cars that cost $2000 will enable new forms and uses for personal transportation. Portable water purifiers the size of a water cooler, priced at $43. Cooler sized refrigerators that can run on batteries in situations where power outages occur. ….priced at $70. Wood burning stoves for $23…that burn agricultural waste rather than hardwoods, and produce no smoke. Bank branches that operate off of a smart phone network. And electrocardiograph (EKG) machines for $1000.That’s 10% the price of the standard models. All of these are listed in the WSJ article as products that are in the market today. All of them are changing the way people live, bringing new to the world performance/cost combinations. That’s breakthrough, radical, game changing innovation.

Now imagine all of the new application areas that are enabled because of these breakthroughs. The most apparent markets are obviously the impoverished, since those were the markets that these companies had in mind. But water purifiers that could be owned by individuals could allow lots of new markets.So could banking by phone. So could high efficiency stoves.Watch out,developed nations. Breakthroughs are happening everywhere.

Then…the crash came. And guess what? All these graduates are re-focusing their talent into other industries, like, for example, solar energy. Some are becoming high school math and science teachers. Some mid-career technical types who’ve been laid off from the financial sector are starting their own companies. They can certainly afford to, given the salaries they’ve been making. Here’s an interesting quote from the article about the impact of having this talent flow back into value creating activities:

“Even a modest shift of talent could have an effect on society. When smart people become entrepreneurs, they improve technology in the line of business they pursue, and, as a result, productivity and income grow…By contrast..allocation of talent to professions such as finance and law—where returns come from distribution of wealth from others rather than wealth creation—leads to lower productivity growth., fewer technological opportunities and slower economic growth.” This is a result of a study by economists Kevin Murphy, Robert Vishny and Andrei Schleifer, quoted in the article. Reminds me of a statement one of our MBA students made recently: “Rather than trading companies’ stocks, I’d like to BE the stock that others find worthwhile trading!”

Those interviewed for the article noted that being forced to think about new careers was a relief, and that moving into an innovation related role or a service oriented role was something they’d always wanted to do, but the allure of big salaries just made it too hard.

Well, I, for one, would like to congratulate all those who do make those decisions, and would like to let you know how valuable your talents are in the world of technological innovation, where you can really change the game!

Announcing an R&D facility near Detroit last June, GE chairman and CEO Jeffrey Immelt slammed the decline in America’s manufacturing base and its investment in R&D. “You know something is wrong when a mortgage broker is pulling down $5 million a year while a Ph.D. chemist is earning $100,000,” Immelt said. He called on the U.S. to “significantly increase investment in research and development from an all-time low of 2 percent of the GDP.”

That’s fine, breakthrough innovation scholar Gina Colarelli O’Connor responded on her blog ,“but it begs the question that we hear repeatedly from corporations around the country. Where do we begin. How do we capture breakthrough opportunities? What processes must be aligned to realize the full potential and earnings from new discoveries, new services, and new technologies?

“The answer is not simple,” O’Connor continued, “but requires a change in perspective and a change in how corporations fund, resource and manage innovation platforms and the functions that support them. The
learning we as researchers impart to corporations working to develop innovation capabilities is that the management processes developed by large companies to provide incremental innovation will kill off breakthrough innovations, and that companies must develop fundamentally different methods of managing breakthrough innovations. It’s the only sure bet.”

Really? Incremental innovation processes by large companies kill off breakthrough innovations? Fundamentally different methods are needed?

O’Connor is an associate professor of marketing and academic director of the Radical Innovation Research Program at Rensselaer Polytechnic Institute’s Lally School of Management and Technology .The 2008 book she and her research team published, Grabbing Lightning: Building a Capability for Breakthrough Innovation, captures the experiences and lessons from 28 companies observed over more than five years. Given that background, CIMS TMR was anxious to ask her to expand on her remarks, as follows.

Why do you believe the management processes developed by large companies for incremental innovation will kill breakthrough innovation? How will this come about?

Most management processes for new product development are based on the premise that we know our customer well, and need to respond quickly to his/her needs. This means we a) stay close to the customer, conducting ongoing market research regarding wants and needs, and satisfaction with current products, b) continuously improve our current offerings, and provide variety expansions and perhaps next-generation products that operate along the same technology and value proposition trajectories that the market is familiar with, and c) are very focused on introducing new products ahead of competitors, in a manner that differentiates us from competitors.

To accomplish these objectives, firms must be extremely disciplined regarding a) product features that get designed in, ensuring that customers will value them, b) speed to market, and c) adherence to a budget so that the ultimate price will be competitive, and breakeven volumes can be determined.

All of these conditions assume that we know our customers, know our technology capabilities, understand the resource requirements needed for achieving the appropriate product and launch schedule, and can forecast sales and costs in such a manner that profitability levels can be predicted. Indeed, decisions to proceed with projects are made based on those profitability predictions. This means we are dealing with higher levels of certainty. Cumulative experience with the market and technology/product category is highly valuable under this scenario.

That’s not the case with breakthrough innovation?

Not one of these conditions is the case with breakthrough innovation. A novel technology may have numerous applications, none of which may be familiar to the company. The technology may not be well understood, especially in combination with other technologies required to really make for a breakthrough value proposition. Rather than focusing on one product, there may be many alternative ways to formulate the offering. The timing, the market, the costs are all unknown.

If we apply decision rules and management techniques that work well under conditions of relatively high certainty to a domain in which our past experience may not really help us in predicting the path of the emerging market/technology space for a breakthrough, we will always get a ‘kill’ decision. The risks and unknowns are so high that any Discounted Cash Flow, Net Present Value, or Internal Rate of Return projection will always have to be discounted at such a high rate that their values will be too small for managers to approve such projects.

Can you provide some specific examples?

We studied one project for an electronic book years ago. The team had a combination of technologies that, taken together, could really move the e-book concept forward. But they could not forecast the rate at which each of these would develop, nor could they make any forecasts regarding sales, since the early markets for e-books were likely going to be markets such as health care, newspaper reporting, and perhaps technical manuals (these were some of the early applications they considered). Surely nothing like Kindle was expected to be an early application–they had to all be more specialized, since books could not yet be easily digitized, and the sales infrastructure did not exist.

Anyway, the technical team presented the project idea, and their forecasts were such that they did not meet the required hurdle rates for approval. So, their project was rejected. The next time projects were being presented to the funding board, the team took the same project forward. This time, they’d altered their assumptions in their economic models to ensure they met the required hurdle rates and voila! They were approved.

Of course, they had no confidence in their numbers, either time that they presented. They simply could not know. The future for them was unknowable. But they did what they had to in order for their project to get approved. What does this say about the level of honesty with which these discussions are conducted? Why not simply recognize that some things are simply unknowable, and proceed accordingly, with small steps to learn more each time, and redirect as we learn? These are the philosophies behind some of the more recent project management tools for breakthrough innovations that are being developed and adopted.

You imply this comes from learnings by you and other researchers. Please cite a few.

From a project management perspective, there is our Learning Plan tool (1) and there is also Rita McGrath and Ian MacMillan’s Discovery-Driven Planning tool (2). In terms of evaluating project progress, we know now that adopting a real options mentality is a much healthier approach to high-uncertainty innovation than are the conventional financial decision tools such as Discounted Cash Flow and Net Present Value. Real options thinking was being applied at Air Products, Corning, and Dupont during the period we studied them.

But that’s just the beginning of what we’re learning regarding project management. We’ve also learned an incredible amount about how companies build a capability for breakthrough innovation that can be sustained over time. We know that, rather than only focusing on a new project management process, for example, companies need to develop a complete management system for major innovation. This means attending to its governance, its structure (yes, there needs to be a group of people whose mandate is to orchestrate and implement the breakthrough innovation agenda for the company), talent development and career paths for individuals who have innovation expertise, resources, appropriate processes and tools, and finally, its metrics. We call this the governance model for Breakthrough innovation.

What exactly do you mean by governance here?

Governance in this context means decision making and oversight regarding a number of issues, including 1) which projects in the portfolio to continue to invest in, and which ones to back burner, 2) composition of the project teams (which changes frequently as the project faces new challenges and matures), 3) location of the group in the company, and its connection/interfaces with others involved in innovation, and 4) clarifying roles and responsibilities of staff members and leadership team of the innovation group.

What else did you learn from your research program?

Another key learning that emerged from our work is that a capability for breakthrough innovation really encompasses three distinct competency sets. The first is called Discovery. The second is called Incubation. And the third is called Acceleration. We write about each of these in our Grabbing Lightning book. We find that these must be managed together as a system. For example, if a company has a strong Discovery capability, but weak Incubation and Acceleration capabilities, we get great ideas that don’t go anywhere. If a company has a strong Discovery and Acceleration capabilities, but a weak incubation capability (which is what we see most often in large R&D-intensive companies), we get great ideas that are under-leveraged commercially.

There are many combinations to consider, but the point is that, if any one of these competencies is weak, breakthrough innovation cannot result in a sustained manner.

Thanks, Gina

References

1. Rice, Mark P.; O’Connor Gina Colarelli and Pierantozzi, Ronald. 2008. Implementing a Learning Plan to Counter Project Uncertainty. Sloan Management Review, Winter, Vol 49 (2), pp. 54-62.

2. McGrath, Rita Gunther and MacMillan, Ian. Discovery Driven Planning, Harvard Business Review, July-August, 1995.