Technology innovation

Newton & iPad by mac_ivan (cc) (from Flickr)
Newton & iPad by mac_ivan (cc) (from Flickr)

A recent post by Mark Lewis on innovation in large companies (see Episode 105: Innovation – a process problem?) brought to mind some ideas that have been intriguing me for quite awhile now.  While Mark’s post is only the start of his discussion on the management of innovation, I think the problem goes far beyond what he has outlined there.

Outside of Apple and a few select others, there doesn’t appear to be many large corporate organization that continually succeed at technology innovation.  On the other hand there are a number of large organizations which spend $Millions, if not $Billions on R&D with at best, mediocre return on such investments.

Why do startups innovate so well and corporations do so poorly.

  • Most startup cost is sweat equity and not money, at least until business success is more assured.  Well run companies have a gate review process which provide more resources as new ideas mature over time, but the cost of “fully burdened” resources applied to any project is much higher and more monetary right from the start.  As such, corporate innovation costs, for the exact same product/project, are higher at every stage in the process, hurting ROI.
  • Most successful startups engage with customers very early in the development of a product. Alpha testing is the life blood of technical startups. Find a customer that has (hopefully, a hard) problem you want to solve and take small, incremental steps to solve it, giving the customer everything you have, the moment you have it, so they can determine if it helped and where to go next.  If their problem is shared by enough other customers you have a business.  Large companies cannot readily perform alpha tests or in some cases even beta tests in real customer environments.  Falling down and taking the many missteps that alpha testing would require might have significant brand repercussions.  So large companies end up funding test labs to do this activity.  Naturally, such testing increases the real and virtual costs of corporate innovation projects versus a startup with alpha testing.  Also, any “simulated testing” may be far removed from real customer experience, often leading corporate projects down unproductive development paths, increasing development time and costs.
  • Many startups fail, hopefully before monetary investment has been significant. Large corporate innovation activities also fail often but typically much later in the development process and only after encountering higher real and virtual monetary costs.  Thus, the motivation for continuing innovation in major corporations typically diminishes after every failure, as does the ROI on R&D in general.  On the other hand, startup failures, as they generally cost little actual money, typically induce participants to re-examine customer concerns to better target future innovations.  Such failures often lead to an even higher motivation in startup personnel to successfully innovate.

There are probably many other problems with innovation in large corporate organizations but these seem most significant to me.  Solutions to such issues within large corporations are not difficult to imagine, but the cultural changes that may be needed to go along with such solutions may represent the truly harder problem to solve.

Comments?

 

R&D effectiveness

A recent Gizmodo blog post compared a decade of R&D at Sony, Microsoft and Apple.  There were some interesting charts but mostly it showed that R&D as a percent of revenue, fluctuates from year to year and R&D spend has been rising for all the companies (although at different rates).

R&D Effectiveness, (C) 2010 Silverton Consulting, All Rights Reserved
R&D Effectiveness, (C) 2010 Silverton Consulting, All Rights Reserved

Overall from a percentage of Revenue basis, Microsoft wins, spending ~15% of revenue on R&D over the past decade, Apple loses, spending only ~4% on R&D and Sony is right in the middle at spending ~7% on R&D.  Yet viewing the impact on corporate revenue R&D spending had significantly different impacts on each company than what pure % R&D spending would indicate.

How can one measure R&D effectiveness.

  • Number of patents – this is often used as an indicator, but unclear how this correlates to business success.  Patents can be licensed but only if they prove important to other companies. However, patent counts can be gauged early on during the R&D activities rather than much later when a product reaches the market.
  • Number of projects – by projects we mean an idea from research taken into development.  Such projectst may or may not make it out to market.  At one level this can be a leading indicator of “research” effectiveness, as this means an idea was deemed at least of commercial interest.  A problem with this is that not all projects get released to the market or become commercially viable.
  • Number of products – by products, we mean something sold to customers.  At least such a measure reflects that the total R&D effort was deemed worthy enough to take to market.  How successful such a product is still to be determined.
  • Revenue of products – product revenue seems easy enough but often can be hard to allocate properly.  Looking at the iPhone, do we count just handset revenues or include application and cell service revenues. But assuming one can properly allocate revenue sources to R&D efforts, one can come up with a revenue from R&D spending.  The main problem with revenue generated from R&D ratios are all the other non-R&D factors confound it, e.g., marketing, manufacturing, competition, etc.
  • Profitability of products – product profitability is even messier than revenue when it comes to confoundability.  But ultimately profitability of R&D efforts may be the best factor to use as any product that’s truly effective should generate the most profits.

There are probably other R&D effectiveness factors that could be considered but these will suffice for now.

How did they do?

Returning to the Gizmodo discussion, their post didn’t include any patent counts, project counts (only visibly internally), product counts, or profitability measures but they did show revenue for each company.  From a purely Revenue impact one would have to say that Apple’s R&D was a clear winner with Microsoft a clear second.  Although we would have to say that Apple started from considerable smaller revenue than Sony or Microsoft but Apple’s ~$148B of revenue in 2005 was only small in comparison to other giants.  We all know the success of the iPhone and iPod but they also stumbled on the Apple TV.

Why did they do so well?

What then makes Apple do so good?  We have talked before about an elusive quality we called visionary leadership.  Certainly Bill Gates is as technically astute as Steve Jobs and there can be no denying that their respective marketing machines are evenly matched.  But both Microsoft and Apple were certainly led by more technical individuals than Sony over the last decade.   Both Microsoft and Apple have had significant revenue increases over the past ten years, that parallel one another while Sony, in comparison, has remained relatively flat.

I would say both Microsoft and Apple results show that “visionary leadership” has a certain portion of technicality to it that can’t be denied.  Moreover, I think that if one looked at Sony under Akio Morita, HP under Bill Hewlett and Dave Packard or many other large companies today, one could conclude that technical excellence is a significant component of visionary leadership.  All these companies highest revenue growth came under leadership which had significant technical knowledge.  There’s more to visionary leadership then technicality alone but it seems at least foundational.

I still owe a post on just what constitute’s visionary leadership, but I seem to be surrounding it rather than attacking it directly.

Is M and A the only way to grow?

Photograph of Women Working at a Bell System Telephone Switchboard by US National Archives (cc) (from flickr)
Photograph of Women Working at a Bell System Telephone Switchboard by US National Archives (cc) (from flickr)

Oracle buys Sun, EMC buys Data Domain, Cisco buys Tandberg, it seems like every month another major billion dollar acquisition occurs.  Part of this is because of the recent economic troubles, which now values many companies at the lowest they have been for many years and thus, making it cheaper to acquire good (and/or failing) companies.  But one has to wonder is this the only way to grow?

I don’t think so.

Corporate growth can be purely internally driven or organic just as well as from acquisition.  But it’s definitely harder to do internally.  Why?

  • Companies are focused on current revenue producing products – Revolutionary products rarely make it into development in today’s corporations because they take resources away from other (revenue producing) products.
  • Companies are focused on their current customer base – Products that serve other customers rarely make out into the market from today’s corporations because such markets are foreign to the companies current marketing channels.
  • Company personnel understand current customer problems – To be successful, any new product must address it’s customer pain points and offer some sort of a unique, differentiated solution to those issues and because this takes understanding other customer problems, it seldom happens.
  • New products can sometimes threaten old product revenue streams – It’s a rare new product that doesn’t take market share aware from some old way of doing business.  As companies focus on a particular market, any new product development will no doubt focus on those customers as well.  Thus, many new internally developed products will often displace (or eat away at) current product revenue.  Early on, it’s hard to see how any such product can be justified with respect to current corporate revenue.
  • New products often take efforts above and beyond current product activities – To develop, market and sell revolutionary products takes enormous, “all-out” efforts to get off the ground.  Most corporations are unable to sustain this level of effort for long, as their startup phase was long ago and long forgotten.

We now know how hard it can be but how does Apple do it?  The iPod and iPhone were revolutionary products (at least from Apple’s perspective) and yet they both undeniably became great successes and helped to redefine industries in the process.  And no one can argue that they haven’t helped Apple to grow significantly in the process.  So how can this be done?

  • It takes strong visionary leadership in the company at the highest level – Such management can make the tough decisions to take resources away from current, revenue producting products and devote time and effort to new ones.
  • It takes marketing genius – Going after new markets, even if they are adjacent, requires in-depth understanding of new market dynamics and total engagement to be succesful.
  • It takes development genius – Developing entirely new products, even if based on current technology, takes development expertise above and beyond evolutionary product enhancement.
  • It takes hard work and a dedicated team – Getting new products off the ground takes a level of effort above and beyond current ongoing product activities.
  • It takes a willingness to fail – Most new internally developed products and/or startups fail.  This fact can be hard to live with and makes justifying future products even harder.

In general, all these items are easier to find in startups rather than an ongoing corporation today.  This is why most companies today find it easier and more successful to grow through acquisitions rather than through organic or internal development.

However, it’s not the only way.  ATT did it for almost a century in the telecom industry but they owned a monopoly.  IBM and HP did it occasionally over the past 60 years or so, but they had strong visionary leadership for much of that time and stumbled miserably, when such leadership was lacking.  Apple has done it over the past couple of decades or so but this is mainly due to Steve Jobs.  There are others of course, but I would venture to say all had strong leadership at the helm.

But these are the exceptions.  Strong visionary leaders usually don’t make it to the top of today’s corporations.  Why that’s the case needs to be the subject of a future post…