Will Boards of Directors please wake up?

I came across this article in Harvard Business Review the other day, titled “The Board’s New Innovation Imperative.”  Authors Linda Hill, a Harvard Business School professor and George Davis, Executive VP at MacAndrews and Forbes and formerly Global CEO and Board Practice Leader at Egon Zehnder Executive Search firm, interviewed a number of Fortune 500 Board members and CEO’s about the topic of…..you guessed in…breakthrough innovation.  They found what we already know…That CEO’s, already lacking confidence in their ability to benefit from investments in longer term, potentially game-changing innovation, are reluctant to push it unless their boards are in tune with the idea, and most are not.

Hill and Davis identify four reasons for the reluctance of board members to encourage real innovation:

  1. An Outdated Innovation and Risk Agenda: Board members believe their job is to protect companies from taking undue risks, and so they spend time on finance, operations and incremental innovation to sustain the core business.
  2. Insufficient Time: Boards don’t make time on their meeting agendas for strategic innovation. They are overwhelmed with the need to attend to compliance and financial monitoring.
  3. Lack of Expertise: Board members lack industry expertise or innovation experience, and so cannot make informed assessments about strategic innovation proposals.
  4. Unproductive Interactions between the board and management. The relationship between the board and senior management is shallow at best. Boards don’t want to press on touchy questions (such as, for example, how much time are we spending on the future?), and managers view the meetings as a time to “Tell and sell” rather than to have open, honest discussions about the opportunities and threats that lie ahead.

They make several suggestions for CEO’s, including setting the culture for honest dialogue, and reconsidering the board’s composition to ensure the talent needed is there.  Both are powerful ways to address the problem, though neither will work immediately.   Boards and Executive leaders of companies need to partner, and board members should extend themselves into their networks to help create new markets that the firm is working to enable.

It’s encouraging to see this article, especially given the turbulence that large companies have experienced of late with activist investors.  The severe shakeups that DuPont, GE and now P&G are undergoing given Trian Partners’ involvement seem to be having an effect. It’s easy to say that Activist investors invest to flip companies for short term gain of the partners.  But it’s hard to know for sure.  Trian’s white paper on P&G, detailing their rationale for their interest and recent investment to win a sit on the company’s board, for example, claims that the lack of breakthrough innovation is one of their chief concerns. We also know that Larry Fink, CEO of BlackRock investors, wrote a letter to Fortune 1000 CEO’s in 2016 decrying the short termism they exhibit in their innovation strategies and other governance decisions.

Could it be that large institutional investors, who are expected to deliver growth to those whose money they manage, will be the force that gets large established companies’ attention to breakthrough innovation?  I hate to see the iconic companies broken up in the heat of the battle.  Lots of Intellectual property is being tossed to the wind.  But maybe companies will finally learn that they can actually create new business platforms borne of breakthrough innovation if they have a persistent, high performing innovation function.

Introducing our New Book: Beyond the Champion: Institutionalizing Innovation through People

Companies lose their most talented innovation people all the time, due to frustration and the many challenges they face.  Not only is it a loss for companies, but also a threat because, as we show in the book, most of those people find jobs in innovation roles for other companies.  This doesn’t need to happen.  We know better.

We’re proud to announce that our third book has just been released.  Based on four years of research in eleven companies, and interviews of nearly 180 people, we’re making a bold claim in this book. And that is that Innovation has to become a business function, just like R&D, just like Marketing, just like manufacturing, just like engineering, in order to succeed for the company.

Ample evidence exists now to show that the processes, metrics, governance, organizational structure, skills and talent needed for breakthrough innovation are substantially different from those required of other business functions and processes.  Companies need to develop expertise in Discovery, Incubation and Acceleration.  Each is different in its own right. Companies also need to have a Portfolio of breakthrough opportunities, organized into domain areas, or strategic buckets, tied to the company’s vision of the far future and what it will be bringing to the market then.  Each domain area must have a variety of projects percolating along. They’re little experiments within Discovery to flesh out an opportunity landscape of that domain.  In incubation, they’re experiments to test out market, technical, resource and organizational uncertainties associated with each emerging business opportunity.   All of this needs to be orchestrated and led.  And it needs some support help, in the form of strategic coaches.

That’s 12 new roles. Yes. Discovery, Incubation and Acceleration roles at the project, domain, and portfolio level.  Add an orchestrator, strategic coaches, and the Chief Innovation Officer and you’ve got them all.  In Beyond the Champion: Institutionalizing Innovation through People we describe each of those roles, how to select people to fill them and how to measure their performance.  We also provide suggestions for career paths for innovation experts.  Companies should not be losing these people.  We need to figure out how to create a permanent source of expertise for breakthrough innovation, and how to strengthen it over time.  Champions are great, but we need to move beyond that as the answer.

Breakthrough Innovations in Internal Combustion Engines

Introduced for the 2018 model year, Nissan/Infiniti has introduced a revolutionary new engine innovation that, for the first time, allows an engine to vary its compression ratio. For background, engines traditionally have either a high compression ratio, for efficiency, or a low compression ratio, tuned for power. However, Nissan has been working for more than 20 years on an engine that can do both- the efficiency of a high compression ratio with the performance of a low compression ratio. They have accomplished an astonishing 10% gain in efficiency compared to similar engines with the same performance, with half the cost of a hybrid system that would give similar gains in efficiency.

The question remains, though, was this a smart innovation to pursue? Companies are aggressively pursuing electrification, Nissan included. This would have been a breakthrough if it were introduced 10 or 15 years ago, but currently the breakthroughs in efficiency come from hybridization and electrification, from all segments of cars, from supercars, to minivans, to hatchbacks. While this could prolong the inevitable disappearance of the internal combustion engine, will it contribute enough to make up for its enormous R&D costs? At over 20 years and over 100 prototypes, Nissan made a long and expensive commitment to this technology. Does it even have 20 years of use in it? Furthermore, could they utilize this technology in new applications, such as truck engines, generators, etc.? Licensing could be a lucrative task if they could make large improvements in industrial engines that have traditional had poor efficiencies. Only time will tell, but this is definitely an innovation to follow closely.

–Ryan Gavin

Another Corporate Restructure or a “Cool, not Cold” Business Model?

The Chinese collective Haier, a multinational consumer electronics and home appliances headquartered in Qingdao Shandong Province, had been led by CEO Zhang Ruimin over its turnaround since the 1980’s. Its first wave of expansion was in Southeast Asia with countries like Indonesia, Philippines, Malaysia, etc. in the late 1990’s. The collective, a state-owned enterprise that resembles a consumer conglomerate, bought off GE Appliance in early 2016. With a foothold in the US, it seeks to inject innovation to spur growth in the company. It has also expanded and operates in the Middle East with countries like Pakistan, Jordan, etc., making Haier an international player. Ruimin’s next strategy is breaking up Haier to spur stagnating growth in the company.

Two factors play into this- Bill Fischer and Denis Simon of HBR state that although China is the second largest investor in R&D, their companies are not pushing out innovative technologies, so they usually doesn’t introduce disruptive business models. This comes from state policy of appropriating foreign IP coupled with lax IP enforcement. Second, Dominic Barton of Mckinsey has finally shown proof that meeting short-term expectations at the expense of neglecting long term investments in breakthroughs is like shooting yourself in the foot. He’s shown that, in a state of normalization (i.e. not an economic recession), corporations who follow a long-term strategy perform better against their short-term strategy counterparts. Many CEOs and business leaders (e.g. BlackRock CEO Larry Fink) have been rallying against short-termism for good reason; Gary Hamel and Michele Zanini show that the start-up culture hasn’t been giving America high economic growth like it used to as more wealth and power is appropriated to larger corporations. These CEOs have been sending out calls to action to these large corporations to embrace long-termism, and maybe Ruimin’s ambitious experiments will give a sustainable model to support innovation to inject a new growth mentality in Haier.

Haier has entered a new phase of its strategy, Networking Strategy. Essentially the strategy states that Haier will be producing products that meets the personalized demands of the consumers. They employ tactics such gauging customer feedback in social media forums. Ruimin moves further by adopting Open Innovation that has these tenants; user personalization, product innovation acceleration, and industry disruption. Its emphasis is “The world is our R&D center” through a focus on the customer.  Only time will tell whether he’s successful, but Ruimin’s entrepreneurial vigor has already produced a success, the Tianzun or Heaven in Mandarin which reflects this approach and its core principle of “customer service leadership.” Even the slogan comes from its customers that want to feel “Cool, not Cold.”

The major component of the restructure is splitting off existing units into smaller ZZJYT (zi zhu jing ying ti; Independent operating unit) which act has independent start-ups that compete for resources from corporate.  Haier maintains the corporate function in accounting, finance, and human-resource support. This is akin to a network of micro-enterprises with corporate acting like a venture-capital incubator. Ruimin has also taken a tactic from Zappos playbook by adopting Holacracy, a flat management system. The outcome is a customer focus embedded into these ZZJYT’s. With autonomy and control over various functions (i.e. R&D, marketing, sales and finance) to properly leverage the internet to connect with customers and each other. Most certainly, their short-term bottom line will have critics worried, but the new Haier might pan out and give critics those double-digit growth numbers they’ve been craving. Since this a long-term strategy, increase in profits and revenues maybe compromised as they invest in new ventures from the ZZJYT’s.

-Eric Dominguez

R&D directors….there’s hope.

A couple of weeks ago I got an email from a person who’d attended one of our workshops many years ago on how to build innovation management systems with staying power. He had moved from his former company about two years back to assume the role of Vice President of R&D for a much smaller specialty chemicals company. He had a group of about 40 people, and had recently been given the directive to double the size of his group and add a second location. He wanted to talk through how to design the R&D organization now that he had this opportunity.

It was such fun to help him design an organization from the ground up.  He was concerned about how to allocate the expertise across the two locations, and how to ensure there was a critical mass of expertise across specific technical areas.  He was concerned about how projects would be managed and how the relationships with the Business units would be handled given the additional staff.  But the part of the conversation that was the most fun was how, now that his group was growing, he could build in some expertise for longer term research.  He knew that, even with the added talent, he would not have enough to span all of the technical areas they’d need to invent their breakthroughs for the future.

Ultimately he decided to incorporate technology scouts who would scan universities, start-ups, and other external sources of discoveries and inventions, and help develop partnerships between them and the R&D group to leverage that technology in ways that suited the company’s future needs.   His current mandate is to serve the needs of the company’s business units, but he’s preparing for the future. When the time comes, he’ll be ready to start to build an incubation capability.

I came away with two thoughts: First, R&D isn’t going away, as so many say it is.  Discovery doesn’t always happen inside the company’s boundaries, as we know.  The open innovation model can work. While large central R&D labs are under threat and have been for many years, smaller and medium sized firms are getting in the game more and more.  Scouting is important.

Second, organizational design for R&D affords the opportunity to set up the company’s potential to manage for the short term and the long term at the outset.  It’s not the whole story, to be sure, but getting Discovery right is certainly a start.

Welcome MS Tech Commercialization Students!

School has been back in session for about a month now.  One of our programs, the Masters in Technology Commercialization and Entrepreneurship, is all about breakthrough innovation.  They learn how to manage projects that are very early stage technologies, with potential to offer real value.  They use the Learning Plan, the Technology Translation table, Patent Mapping, and spider diagrams.  They develop skills in interviewing scientists about their discoveries to ferret out potential applications that they then pursue, as budding incubation specialists.  They trace how emerging technologies are disrupting industries and launching new ones. They start companies, and they learn how established companies manage for breakthrough innovation.  They learn the law associated with partnership development and intellectual property management.  Needless to say, it’s a cool program.

Even more interesting is the students themselves.  They’re our most eclectic bunch.  They come from engineering, all walks of science, and even architecture and the digital arts. They see opportunity everywhere.  They share a common interest in finding big solutions to big problems.  One team is exploring a new business model for salt water batteries as a source of energy storage in emergency conditions.  Another is looking at models for carbon capture and re-use. Others are working with faculty in our school of science to explore medical clinics’ interests in a new method they’ve developed to detect which cells in a tumor are most likely to metastasize. Still others are working with RPI’s Lighting Enabled Systems and Applications (LESA) Center to pursue a broad range of applications for a new sensor embedded lighting system.  There’s a team working on identifying ethical issues associated with commercializing a sampling of emerging technologies. We’ll be posting their finished cases on this blog.

This year they’ll be traveling to Silicon Valley and to Washington D.C.  to understand the cultural and policy angles of our country’s innovation system. Their program director is infusing in them the confidence to go beyond one project, one start-up, one first job, to think about economic and innovation policy.  They are up to the task, and it’s great to have their energy, their intellect and their curiosity as part of our Lally community.

Losing one Colleague, Gaining many others: Breakthrough Innovation Scholars around the World

This summer we lost our friend and colleague, Professor Lois Peters, who passed away suddenly.  Not only was her death a shock, but leaves such a gaping hole.  She was a major force behind the Radical Innovation Research Program at RPI, a wonderful professor of innovation, a prodigious intellect, and just plain fun to work with.  She was a true partner.

Over the years, Lois and I began hosting a number of visiting faculty and post-docs.  She worked with them more closely than I have, but now I have the bittersweet pleasure of taking that up.  This year we have hosted scholars from Australia, Denmark, and Japan.  Last year, we hosted from Denmark and Australia as well as a Professor from University of Sao Paolo, Brazil, and are making plans for his former student to complete a post-doc with us in the next year.  I sat on the Ph.D committee of a student from Canada recently as well.

Everyone is interested in breakthrough innovation. We’re making progress on many issues, and now we have an opportunity to learn about the global differences in our approaches to managing it. Again, it’s time to set up these functions in companies.  We have a small but growing supply of educated students, a much better understanding of how to make it happen, and the need to implement what we know.

Lois….you would be so proud.