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Thursday, November 4, 2010

How the most Innovative companies make it work

     Among the various and sundry things that land in my inbox, I receive the periodic "strategy + business" newsletter from booz&co.  I like getting this one as it usually contains at least one key article that is really interesting, timely, and compelling.  Such was the case for their most recent offering which had a link to the article, "The Global Innovation 1000:  How the Top Innovators Keep Winning", (pdf), by co-authors Barry Jaruzelski and Kevin Dehoff.

     The fact that Booz does an annual survey of the world's "biggest R&D spender" probably slipped my mind - I recall reading about past surveys several years ago - but thankfully I had a chance to catch up on the latest trends from the most recent results.  I would certainly encourage everyone to hit the links and check out the original work.  You will be enriched for having taken the time to do so.  The graphs and illustrations of the results and concepts are well worth the calories you'll burn clicking over to the page.  What I will try to do here is to pull a few of the key points that resonated with me and relate them to some of the things I see out in my neck of the industrial woods.

     Let me begin by mentioning that like (most) all consultants and "thought leaders" in their respective fields, Booz has developed a "model" to categorize the various modalities that companies fall into when it comes to their approach to R&D, innovation, and strategy.  We've all seen these before - Porter's model of low-cost versus differentiation, Treacy and Wiersema's value disciplines of operational excellence, product leadership, or customer intimacy, and the list goes on.  But as we all know, if any company is to survive, much less grow, it needs a steady stream of new products that grows revenue and hopefully the profits necessary to drive the development and delivery of yet newer products still. 

     The model that Booz has adopted in the specific case of innovation declares three operating modalities:  Need Seekers, Market Readers, and Technology Drivers.  They vary across the means by which they focus and engage throughout the four phases of the R&D value chain:  ideation, project selection, product development, and commercialization.  Interestingly, the authors declare that no one mode is superior to any other, although companies that have adopted a given mode can clearly out-perform their cohorts.  What determines a company's degree of success, or lack thereof, is "how closely (they) align their innovation strategy with their business strategy and how much effort they devote to directly understanding the needs of the end-users."  It all comes down to how the company chooses to utilize its capabilities, which they identify as "talent, knowledge, team structures, tools, and processes".

     The three modes share some commonalities in their execution.  Part of the survey asked respondents to rank the most important capabilities for each stage of the R&D value chain.  The clear winners were 
  • a deep understanding of the customer's needs during the ideation phase, 
  • ongoing assessments of the market potential during project selection,
  • strong engagements with customers to prove the validity of concepts during product development, and
  • to work with carefully selected pilot users to roll-out products carefully during commercialization.
Clearly there is a common thread to each of those and that is "it's all about the customer."  That should come as no surprise.

     Where the three modes differ is in their particular focus at the various stages of the R&D cycle.   Need seekers will focus the majority of their attention on the ideation and project selection phases to be certain they are aligning their innovation efforts to the specific articulated needs of their customer base.  Market readers are clearly all about stepping back and taking a comprehensive view of their markets and assessing the potential for projects they select to pursue.  Technology drivers, while always striving to meet the un-met, and often un-articulated, needs of their customers by delivering breakthrough innovations, are still focused on the customer when it comes to validating their concepts and rolling out new products.

     Another essential ingredient which distinguishes those that are successful from those who are not is the degree to which they focus.  The survey concluded that "the poorest-performing companies (the bottom 25%) take a less focused approach to the most critical innovation capabilities."  No surprise there.  If there is one thing that we all should have hammered into our minds these days is that to be great at anything we do, it takes relentless focus to hone the one or two key skills or capabilities that will give us the edge to win.  When it comes to innovation, focus implies that companies should choose the capabilities that are most important to their specific innovation strategy, and then execute them well. 

     On the whole, the surveyed executives agreed that there are "three customer- and market-oriented capabilities that matter most:
  • Gathering customer insight during the ideation stage
  • Assessing market potential during the selection stage
  • Engaging with customers during the development stage"
Even after doing this however, the best products with tremendous customer validation can still fall flat if commercialization is not carried out to a flawless degree.  This is where executives see the largest gaps within companies between their capability to innovate and commercialize. The extremely cross-functional nature of commercialization brings pressure to an entire organization, and weak links in the chain are mercilessly exposed.  So while companies may think the entire game of innovation resides with their R&D and engineering departments, they must spend time making sure all the other functions - manufacturing, logistics, sales, marketing and service - are also well-oiled machines.  If it all comes together and works well to deliver innovative products to eagerly awaiting customers, the authors paint a clear case as to why those companies out-perform their peers, and are in fact the beneficiaries of what they term a "coherence premium".

     From my perspective, sitting in the midst of a B2B, industrial, capital equipment sector of the economy, the lessons from the article ring true, in spite of the fact that none of the companies that top the survey hail from that space.  True that two of the "top ten most innovative companies" are Samsung and Intel (9th and 10th respectively), so at least there is exposure from the end-user portion of the food chain.  In an industry where the roadmaps are reasonably well defined as to which way technology is heading and the types of challenges that will have to be overcome to continue on the path we have navigated throughout most of the history of this industry, having a well defined innovation strategy tightly coupled to an over-arching business strategy is paramount.  But while our industry matures (and it hasn't necessarily been a graceful aging process), we see trends that speak clearly that our companies need to break out of their molds.  When 75% of the CapEx is derived from the top three consumers, and the market splits along lines of Logic/Memory and Foundry/Captive, it is clear to see how the growth in "sockets" (pieces of real-estate in fabs to park tools) is on a fixed, low-slope trajectory.  What is called for is a way to leverage the core business practices that the top companies in our sector exhibit, part of which is a sound innovation strategy.  The companies that are creative enough to find new promising outlets for that capability will be handsomely rewarded.

     And that's the way business go . . .

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