Managing Breakthrough Innovation

Mike Wolff , good friend and editor of the newsletter for CIMS (Center for Innovation Management Studies at North Carolina State University),contacted to follow up on my recent post about Jeff Immelt’s remarks in Detroit. Thought you might find our conversation of interest..

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.

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