3.4.D-Profiting From Innovation

8/6/2019 3.4.D-Profiting From Innovation

1/14

PROFITING FROM INNOVATION*

by

William G. Howard, Jr., and Bruce R. Guile

Industrial competitiveness is influenced by many factors.Some, such as the macroeconomic environment and the legaland regulatory systems, are determined primarily by forcesexternal to companies vying for places in world markets.Other factors are internal. Two internal competences,manufacturing skill and the effectiveness with whichindividual firms translate technical innovations intomarketplace advantage, are complementary and lie at theheart of efficient industrial practice. Since private

companies from the front line in the contest for share ofworld markets, success at practicing manufacturing andutilizing the entire range of innovation available to thecompany is an important factor in a nations industrialcompetitiveness.

This paper is a preliminary report of a NationalAcademy of Engineering study of industrialcommercialization: the translation of innovative ideasinto marketplace success as profitable products, processes,and services.

The manufacturing successes of the Japanese, ourprimary competitors for many world markets, have been wellpublicized. Terms such as kanban, just-in-time inventorymanagement, quality circles, total quality management, andTaguchi method have become accepted terms by U.S. companymanagers. Leading U.S. manufacturers have come to realizethat they have serious manufacturing problems, and arebeginning to address them. Progress has been evident atcompanies such as Ford, Motorola, Xerox, USX, and manyother manufacturing-based companies and additional firms

are following suit.

_________________

*REPRINTED FROM: William G. Howard, Jr., and Bruce R.Guile, Profiting from Innovation, in Nathan Rosenberg,Ralph Landan, and David C. Mowery (eds.), Technology and


2/14

the Wealth of nations (Stanford Univ. Press; Stanford,1992), Chapter 15, pp. 395-406.

On the commercialization front, we have not been asresponsive. In addition to manufacturing skills, theJapanese have cultivated the purchasing dollars of many

customers. Unlike the case with manufacturing, U.S.industry has not shown a widespread appreciation for itscommercialization shortcomings, and many firms will retreatto the observation that Americans are still the mostinventive people on earth. That may be true buttranslating that inventiveness into manufacturing processesand marketed products is essential if we are to turn ourideas into industrial strength. Microelectronics, genesplicing, computer communications, and efficient airfoildesign are great technologies. It is products based onthese technologies, however, that provide competitive edge.

We have been seeking clues to effective management ofcommercialization that apply across a wide range ofindustrial circumstances and which are useful formanufactured products, production processes and services those practices that seem to distinguish companies who areconsistently successful at commercializing from those whohave not performed as well.

The study was conducted as a series of workshops wheresenior managers discussed aspects of theircommercialization experiences, both good and bad. Several

additional interviews were conducted to supplement workshopresults. Participant experiences covered about 30 firsplus the financial community, business schools, researchconsortia, U.S. government laboratories, and independentresearch institutes. A limited number of European andJapanese experiences were sought, in addition to U.S.perspectives, for comparison.

This study makes no pretense of completeness; our goalwas to identify those practices that characterizesuccessful commercialization in the widest possible

spectrum of enterprises. Many successful techniques, whichapply to particular companies or industries, did notsurvive the winnowing process that our methodology employed.

Our activity focused primarily on the role and methodsof management in promoting the commercialization oftechnological innovations in particular the seniordecision-making leadership of a firm reasoning that these


3/14

people most directly shape ;the environment withincompanies.

As expected, we found no magic bullets. Our findingsre-emphasize ;the importance of the fundamentals of

business management

of a leadership preoccupation withproducing a better product or service with higher qualityat a lower price than anyone else.

The results we will describe are preliminary results,as the report is still in preparation (as of this writing,in 1989, see note 1). Regrettably, there is not enoughtime to describe all of our conclusions, so we haveselected a number of observations that seem to apply tot hetheme of this book.

1 The Prepared Mind

Louis Pasteur observed that fortune favors only the mindthat is prepared. Nowhere is that more true than in thecase of commercialization management. As we shall see,there are several types of commercialization processes,each with its own time frame, indicators of progress,organizational approaches, and risk factors. Understandingwhen each of these is under way, and the nature of the truechallenges faced, is a major factor in consistentlysuccessful efforts. Intimate understanding of customerneeds and technological potentials is essential if the two

are to be mated. Finally, we have observed that successfulcommercialization leaders are constantly re-examiningtheir business, always seeking the better way that mustlie out there somewhere. They are prepared to continuouslyre-evaluate their activities.

The ideal of a detached manager capable ofoverseeing a business at arms length did not apply to thesuccessful leaders we found.

2 Commercialization Efforts

We have encountered three distinct types ofcommercialization, distinguished according to their drivingforces. Each has unique characteristics, each is measuredaccording to different analytical tools, and each requiresits own management techniques for successful application.

Technology-enabled commercialization is driven by arevolutionary scientific or technical discovery. Rarely is


4/14

technology revolutionary. Developments such as thetransistor, dry copying, the industrial robot, nylon,perhaps someday cold fusion or room temperaturesuperconductors, are singular events. They sweep away theold ways and replace them with entirely new products and

processes whose expanded capabilities were previouslyunimaginable. However, such revolutionary new technologiesrarely live up to expectations initially. Development ofsuccessful products embodying such technologicalsupernovas typically takes fifteen to twenty years andentails a great deal of risk, as technologicaldevelopments, without which the revolution is nothingmore than a curiosity. Only after this long investment intime and resources is the enormous market potential of suchdevelopments realized.

In technology-enabled commercialization, the majorrisk lies in understanding problems entailed in producingthe product in volume and in the market for products, muchmore than in the technology. DuPonts CORFAM (tm) plasticreplacement for shoe leather was a major technologicaldevelopment, and DuPont was able to solve the problems ofproducing the material in high volume. DuPont reasonedthat shoes made of this material that were longer lasting,water resilient, less expensive, and required lesspolishing were sure to be a market success. They did notcorrectly appreciate that failure of the shoes to break into the wearers feet, the inability of the material to

breathe moisture, and the failure of the public to developan appreciation for foot odor would be problems. Thesemarket miscalculations led to the eventual failure of theCORFAM enterprise.

A flash of brilliance, followed by dogged applicationof Yankee In genuity to overcome all obstacles I thebasic stuff of the American industrial legend. This iswhere we Americans see that our distinctive competence lies.

However, our discussants felt that, as a nation, our

grasp of this process is slipping. In addition toaccelerating diffusion of basic science and technologyaround the world, they felt that pressures for a shorter-term payoff and a general aversion to risk work against oursuccess in technology-enabled commercialization efforts.This was observed to be a problem both in largecorporations, where concentration on existing businesses isoften the rule, and small, venture-capital-financed


5/14

concerns where the need on the part of financial backers tocash out within five to seven years has led to thedismemberment of otherwise promising enterprises.

Successful practitioners of technology-enabled

commercialization appear to understand how these projectsprogress. They are dazzled by initial announcements ofdiscoveries than they are dedicated to the long, steadypull required to reduce truly new ideas to practice. Inmany instances, this is the result of tolerance of stubbornindividuals, but a handful of companies (DuPont and 3M, forexample) seem able to consistently make a success oftechnology-enabled innovation through more systematicmeans. Technology-enabled commercialization, however, is avery risky undertaking. Along with its successes inKevlar, Rayon, Lycra, and Tyvek, DuPont can point tonumerous products (such as CORFAM) that did not make thegrade. Clearly, persistence at technologically drivenefforts is a valuable trait.

A major industrial nation cannot depend principally ontechnical revolutions. They occur infrequently, entail alevel of risk that makes them haphazard, and they do notprovide the sustained push that an economy must have toendure in the market marathon.

Although technology-enabled commercialization occursrarely, it is a particularly important part of the overall

commercialization activity, for orthogonal innovations donot follow logical extrapolation of business growth. Whensuccessful, technology-enabled products, processes, andservices not only produce extremely large and rapidbusiness growth, but also render the competitions productsor devices obsolete.

The second type of commercialization effort isproduction or design driven. Once a concept has beenproven in the market, competition shifts to price,performance, and design features with less competitive

emphasis being put on fundamental differences in product orservice concepts. In short, after one or two initialsuccesses, competitors swarm in quickly, and the focusshifts from making it work to making it work better.Production- or design-driven commercialization is propelledprincipally by competition the need to contend withothers in the same field.


6/14

The dominant pattern is illustrated by medical imagingequipment, overnight package express, and automated bankteller services, which were as recently as 1975 new anddifferent products. These items have now become standardofferings, and early providers and later entrants are now

engaged in competition over incremental improvements in theproduct or service.

Unlike the technology-enabled case, success atproduction- and design-driven commercialization dependsupon a companys ability to push incremental innovation inthe product process. This is a very different managementchallenge from running a revolution. This process must bea continuous series of small triumphs. Changes take placerapidly in fact, the faster the better. In spite of theneed for speed, there is little tolerance for mistakes orslipshod work. Stumbling costs irreplaceable time andcustomer confidence.

Two fundamental issues underlie product and designcommercialization success rapid product cycle time, andstarting early. As has been pointed out by Ralph Gomory,the effect is cumulative. As a company beats itscompetitors to the market time and time again, its rivalsfall ever further behind, less likely ever to be able tocatch up.

Continuous product and process improvement doesnt

just happen it must be driven by the expectation thatsuch improvement is the basis of future competitiveadvantage, and must be eagerly sought if the firm is tosucceed.

U.S. industrys track record at continuous improvementis spotty we became complacent in the halcyon days ofsuccess over the past 40 years. The story of our steelindustrys failure to continually upgrade its process andplant technology is well known. The Japanese, on theother hand, have rightly earned their reputation for

relentlessly ;honing their products (such as televisionsets, cameras, and automobiles) until they drown theircompetition in a tidal way of improvements.

One illustration of how this process works can be seenin the example of the competition between U.S. and Japanesesemiconductor firms for share of the dynamic random accessmemory (or DRAM) merchant market. The U.S. semiconductor


7/14

industry, as inventor of the DRAM, led early with 1K, 4K,and 16K DRAM products. The business became fiercelycompetitive in the late 1970s when Japanese companies beganto enter the world market with well-designed high-qualityproducts. Both countries industries reached the market at

about the same time with the 64K product. New generationsreached the market about every two and a half years.

Most U.S. merchant market semiconductor firms chose toconcentrate their attention on one product generation at atime either designing the next product or fixing problemswith the last one. Their speed in developing new productgenerations was as fast as any. But need for haste forcedmany technical shortcuts, which were reflected in customerapplications problems, necessitating a series of redesignefforts that dissipated initial product momentum.

Japanese firms that now lead in this business,followed a different strategy. At the time the 64K DRAMwas introduced, they also had simultaneous efforts underway with two or three additional generations of product.The 256K DRAM was in advanced design, and the 1 megabitversion was actively being reached. Very likely, a groupwas off thinking about what had to happen to make the 4megabit product a reality as well. Products, whenintroduced to the market, were second or third generationdesigns, and thoroughly debugged.

Thus while U.S. companies turned their swat teams fromone generation to the next, they were confronted by acontinuing series of well-designed competing new productsin rapid succession. Japanese management drove DRAMdevelopment with the long haul in mind, and with commitmentto development in depth.

Continuous improvement of existing products andprocesses is where the United States can improve most.The sense of disquietude that prompts the management andwork force of an entire company to continually seek better

ways requires sustained attention to detail and persistencethat comes harder to Americans than to those from someother cultures. Even our Cash Cow businesses requirecontinuous investment to keep them current and competitive we have neglected to appreciate this over the pastseveral decades, and must change.


8/14

The risk in production- and design-drivencommercialization is in torpor. The failure to keep makingimprovements, and to keep aware of progress being made incompeting products is to ensure eventual problems incurrently successful businesses. The you can have it any

color as long as its black mentality displays a rigidityof thought that provides entry opportunities for others.

There are a number of U.S.-based firms that haverecognized the need to continually update their productsand process. Boeings commercial aircraft technology hasundergone almost continual change as it has sought toincorporate the latest innovations into productionairframes. Bill Boeings dictum to Let no advance inflying pass us by has been accepted as a basic philosophyof this successful companys business.

The third commercialization category is market driven.In this instance, perception of customer needs in oneproduct sector prompts a search for technology from otherapplications to open new opportunities. The perceived newmarket is the driving force in this case as opposed to asearch for applications of a given new technology.

In market-driven commercialization, the emphasis mustbe on detailed understanding of the customers needs (asopposed to wants) and on the selection of the besttechnology to fulfill those needs.

The primary risk element is technological choosingthe best technology on which to base a product to fill anidentified customer need from the wide range of possiblealternatives.

The Bell & Howell Company confronted these tasks whenit responded to a request from GM to apply its skill atmicrofiche publication to simplify the parts countercatalog used in many dealerships and parts stores. Theproblem was well know looking up parts numbers and

prices in existing paper catalogs as a time-consumingeffort that resulted in a great many errors. Further, theeffort required to keep a comprehensive parts catalog up todate on a daily basis is substantial. Bell & Howell, asthe leading publisher of microfiche documents, sought touse its traditional technology to meet the need, butdiscovered that the ease of access, document quality, andability to incorporate illustrations on microfiche were


9/14

insufficient to provide an attractive alternative. After afive-year search for the best technology fit, and threetries, involving microfiche, computer terminals, and avariety of document storage systems, Bell & Howell settledon a CD-ROM based system which not only solved the parts

catalog problem at lower cost and provided a continuingpublishing business for the company, but enabled themechanic to specify and order parts directly without goingthrough the parts counter clerk a major customer laborsaving.

Each of the types of commercialization technologyenabled, product and design driven, and market driven isa different kind of problem. Each requires its ownmanagement approach.

Few medium- and large-size firms can thrive on asingle type of commercialization activity. Some firms haveall three activities under way at any given time. Thesimultaneous search for ways to apply new technology, formeans to serve new market opportunities, and forimprovements in existing products, processes, and servicesrequires leaders who understand the characteristics ;andwho differentiate approaches to each.

3 Management Tools

Traditionally, the primary management measures of thecommercialization process are financial. Indeed, financial

success (and being able to demonstrate its likelihood atthe outset) is crucial to commercial technologicalinnovation. In the language of financial analysis, thevalue of current and future returns must exceed theinvestment. The logic is inexorable and sound. Theproblem arises in making the simple and tight logic offinancial analysis work for decision making abouttechnological issues in real companies, about matters ofgreat uncertainty using information provided by less thanneutral parties to the decision. In fact, in the absenceof other indicators of the promise and progress of

commercialization efforts, financial data, with theirapparent precision, fill the void to dominate decisionmaking.

Consider, for example, a decision to proceed withdevelopment of a technologically new product for anundeveloped market. If one assumes absolute technological


10/14

certainty, the calculation of return on investment for thedevelopment expenses still requires estimation of

the cost of development of a prototype;

the cost of manufacturing a product for which a

prototype does not yet exist; and the market for and likely sales of a product that

does not yet exist over the next several years(remembering that the product must be priced at asufficient margin above a manufacturing cost that isnot yet known).

Given that few technological developments proceedwithout many trial-and-error iterations, and decision makerwill recognize the biases and negotiating positions thatthose who provide information are likely to bring to thetable. Technological champions may underestimatedevelopment costs out of enthusiasm. The production staffmay pad the estimates of production costs in an effort togive themselves some slack in scale-up. The marketingstaff, really out on a limb measuring markets that do notexist, may bring any number of biases underestimation ifthey see their role as brakes on the technologicalchampions or overestimation if they themselves have becomechampions of the product.

There is yet another set of constraints on theusefulness of financial analysis: business strategy. What

is the value of this product as part of the companysportfolio? Does the company need to offer this service tokeep competitors out of the companys primary market?Will the company-wide learning-by-doing that comes from anew product in this area of technology be of long-termvalue even if the product loses money? What is thestrategic cost of not proceeding with this development?

Underlying all of these uncertain and often fuzzyjudgments that must be translated into numbers forfinancial analysis are often fundamental questions about

the technology and the technological capability of thecompany. Will the technology work? When somebody turns onthe switch, will the product grind, whir, and whiz in waysthat meet consumer demand? And, can the people in thecompany pull it off faster or as fast as the competition?Given the uncertainty of the whole process, it is a wonderthat any manager ever considers financial analysis ofcorporate technological matters but the fact is that


11/14

virtually all decision makers do look at financialcalculations, probably because there is no other tool sopervasive or so easily understood. Regrettably, thisbreeds a reliance on financial indicators as a substitutefor a real understanding of the business financial

measurements such as discounted cash flow and the profitand loss statement become an end in themselves rather thanthe short-term indicators of performance that they reallyare.

An important aspect of our study, therefore, has beenthe search for useful tools to aid the management process.As a result of our activities, we have assembled a smallcatalog of commercialization indicators and techniquesthat assist the leader in assembling business informationin a way to make sense of the chaos that pervades thecommercialization activity. In addition to traditionalfinancial tools that managers use to measure and plan thehealth of the business, we have identified methods such astechnology road maps, learning curves, time to break-evenanalysis, and logistic curve considerations that can promptaction by leaders before chronic problems become acute.Many of these tools are not new, but use of them throughoutthe range of industry we have considered is spotty, and amore widespread understanding of them is useful.Particularly important is the fact that these tools are, intheir very nature, more sensitive to the characteristics ofthe technological challenge being faced than traditional

financial analysis.

For technology-enabled instances, the tools of value fuzzy though they may be are those that allow a projectteam to develop the ability to look through currentconsumers to the market that will exist. In new product orservice developments, an internally generated vision of themore sensitive to the characteristics of the technologicalchallenge being faced than traditional financial analysis.

For technology-enabled instances, the tools of value

fuzzy though they may be are those that allow a projectteam to develop the ability to look through currentconsumers to the market that will exist. In new product orservice developments, an internally generated vision of themarket success factors must be developed and refined byexposure to critics and customers. Additional tools canhelp leaders keep track of project progress and tounderstand the characteristics of each stage of development.


12/14

New technologies characteristically must pass a numberof critical decision points in the life of the development.At each such point, the investment commitment rises typically by an order of magnitude. Descriptions of such

decision points exist, and are useful particularly tomanagers engaged in technology-enabled commercialization.

In production- and design-driven commercialization continuous improvement in existing products and processes analytical tools are much more developed if not widelyused. These tools help build a leaders anticipation ofpossible improvements in products and processes and whereto seek them, and help to compare internal companyoperations with efforts of other organizations. Experiencecurves, benchmarking, product life cycle analysis, andproduct-age portfolio approaches are all part of a growingset of tools that are demonstrated in a growing literatureon manufacturing and technology management.

In the final type of commercialization challenge moving developed or developing technologies into newmarkets the approaches are again different. Mostapplications can be satisfied with a variety oftechnological approaches. Sometimes the application of anexisting technology to a new market is quite dramatic, forexample, technology-enabled creation of a totally newproduct or service drawing mostly on existing knowledge.

In other cases, efforts at moving existing products andservices lines into new markets are more incremental, andthe technological challenge is in packaging and applying anexisting technology in such a way that it matches theparticular characteristics of the market sought. These arenontrivial technical challenges. As with production- anddesign-driven developments, there is no substitute forknowing what the customer wants, but the challenge issimilar to that in technology enabled developments envisioning how customers will respond to a product orservice that does not yet exist. Tools for this

commercialization type emphasize frequent market trials anditerations in the real-life environment.

4 Joint Development Efforts

As our study progressed, it became apparent that importantchanges are taking place in the technology developmentstructure of several U.S. industries. Increasing researchand development costs, limited skill pools, and external


13/14

competitive pressures are forcing companies to rely upongovernment laboratories, universities, and consortia forlonger range developments. The problem of establishingconstructive joint programs, technology transfer, andtimely utilization of the results of such disaggregated

joint efforts are major new challenges facing industry.

Universities, consortia, and government laboratoriesthat participated in our study agree that most companies donot manage joint activities well. Firms that commit toprograms such as the MCC consortium, or universityindustrial liaison programs generally honor their financialobligations, but the relationship often stops there. Thosecompanies who join such programs, making operational, aswell as financial commitments, seem to do much better.

The clue came from observing the way Japanesecompanies band together in co-development projects. Sinceeach participants fears that another partner will gain acompetitive advantage over them as a result of the jointactivity, and establishes its own mirror effort whichclosely follows consortium progress, it is not uncommon forresearchers to move back and forth between joint andproprietary groups. Thus as results are produced by thejoint program, each participant is immediately on board andready to use the fruits of the joint efforts have followeda similar course, making a commitment to an internalshadow group to track joint activities in each university

and consortium program at the same time that the financialobligation is assumed.

Companies that see joint research and developmentefforts strictly in terms of financial obligations arepoorly positioned to realize the benefits of the results,since they must create internal uses after the ideas aredeveloped, rather than concurrently. As a consequence, thelead time advantage potential of a pooled relationship isfrittered away in internal decision-making andorganizational activities. Joint research and development

activities are into a substitute for internal efforts; theycan only complement them.

Successful participants see joint research anddevelopment activities as dual commitments half externaland half internal. Companies that do not understand theneed for the internal part of the effort becomedissillusioned with the idea of joint research and


14/14

development, and soon drop out. The prosecution of theinternal portion of the joint effort is just as importantas the joint program itself.

In conclusion, this has been a very fast look at some

of the results emerging from our commercialization study.Clearly, commercialization is not a simple process, andconsists of at least three distinct kinds of activities,each with its own management challenges. If we were tosummarize a single conclusion, it would be that the chancesof commercialization success are highest when the leader ispersonally involved with the process, has a restless desireto do better, and understands the nature of his particularactivity. He must be engaged in a continual search for newways to characterize his business and the competition thatgo beyond the limitations of strictly financialconsiderations.

* * * *

3.4.D-Profiting From Innovation

Documents

Transcript of 3.4.D-Profiting From Innovation