Driving Innovation - Principles of Management

Here, we have discussed what managers must do to overcome inertia forces and lead a change in the strategy and organization of their enterprise so it can survive a technological paradigm shift in their industry. In this final section we discuss what a business might do to generate technological innovations—to be proactive and drive change in its industry.

These might be quantum innovations that incorporate new technology and disrupt competition, shifting the dominant paradigm; or they might be incremental innovations that represent improvements in product functionality within an established technology (that is, an established S-curve). For example, eBay’s adoption of Internet technology to run an auction business can be considered a quantum innovation:

It involved a radically different technology (compared to a human auctioneer running an auction), and it effectively transformed the auction industry. In contrast, the latest personal computers represent cumulative incremental improvements of a technology that was introduced in the 1970s (the first personal computers, in contrast, were quantum innovations because they represented a distinct break with the past).

In many ways innovation is the most important source of competitive advantage for a business organization. This is because innovation can create new products that better satisfy customer needs, improve the quality of existing products, or reduce the costs of making products customers want.

The ability to develop innovative new products, processes, or business models gives a business a major competitive advantage, allowing it to differentiate its products and charge a premium price or lower its cost structure below that of its rivals. Competitors, however, attempt to imitate successful innovations and often succeed. Therefore, maintaining a competitive advantage requires a continuing commitment to innovation.

Successful new product launches are major drivers of business success. Robert Cooper looked at more than 200 new product introductions and found that of those classified as successful, some 50 percent achieve a return on investment in excess of 33 percent; half have a payback period of two years or less; and half achieve a market share in excess of 35 percent.

Many companies have established a record of accomplishment for successful innovation:

Sony, whose successes include the Walkman, the compact disk, and the PlayStation; Nokia, which has been a leader in the development of wireless phones; Pfizer, a drug company that during the 1990s and early 2000s produced eight blockbuster new drugs; and 3M, which has applied its core competency in adhesives to develop a wide range of new products.


Although promoting innovation can be a source of competitive advantage, the failure rate of innovative new products is high. Research suggests that only 10–20 percent of major R&D projects give rise to commercially viable products. 30 Well-publicized product failures include Apple Computer’s Newton, a personal digital assistant; Sony’s Betamax format in the video player and recorder market; and Sega’s Dreamcast video game console.

Although many reasons have been advanced to explain why so many new products fail to generate an economic return, five explanations for failure appear on most lists.

First, many new products fail because the demand for innovations is inherently uncertain. It is impossible to know before market introduction whether a new product has tapped an unmet customer need or if there is sufficient market demand to justify making the product. Good market research can reduce but not eradicate uncertainty about likely future demand for a new technology, so some failures are to be expected.

Second, new products often fail because the technology is poorly commercialized. This occurs when there is definite customer demand for a new product, but the product is not well adapted to customer needs because of factors such as poor design and poor quality. For instance, the failure of Apple Computer to establish a market for the Newton, a handheld personal digital assistant that Apple introduced in the summer of 1993, can be traced to poor commercialization of a potentially attractive technology.

Apple predicted a $1 billion market for the Newton, but sales failed to materialize when it became clear that the Newton’s handwriting software (an attribute Apple chose to emphasize in its marketing) could not adequately recognize messages written on the Newton’s message pad. Subsequently Palm entered this market with the Palm Pilot, a very successful product that racked up over $1 billion in sales.

Third, new products may fail because of poor strategy, including inappropriate pricing, weak promotion, or a poor distribution strategy. Apart from poor product quality, another reason for the failure of the Apple Newton was poor positioning strategy. The Newton was introduced at such a high initial price (close to $1,000) that there would probably have been few buyers even if the technology had been well commercialized.

Another reason why many new product introductions fail is that companies often market a technology for which there is not enough demand. A company can be blinded by the wizardry of a new technology and fail to examine whether there is sufficient customer demand for the product. Finally, companies fail when they are slow to get their products to market. The more time that elapses between initial development and final marketing—the slower the “cycle time”—the more likely it is that someone else will beat the company to market and gain a first-mover advantage.

In the car industry General Motors has suffered from being a slow innovator. Its product development cycle has been about five years, compared with two to three years at Honda, Toyota, and Mazda and three to four years at Ford. Because they are based on five-year-old technology and design concepts, GM cars are already out of date when they reach the market.


Managers can take a number of steps to build innovation skills in their organizations and avoid failure. Six of the most important steps seem to be

Building skills in basic and applied scientific research.

  • Developing a good process for project selection and project management
  • Using cross-functional inte gration.
  • Creating product development teams.
  • Implementing partly parallel development processes.
  • Placing a radically new technology in an autonomous organization unit.

Building Skills in Basic and Applied Research Building skills in basic and applied research requires the employment of research scientists and engineers and the establishment of a work environment that fosters creativity. A number of top companies try to achieve this by setting up university-style research facilities, where scientists and engineers are given time to work on their own research projects in addition to projects that are linked directly to ongoing company research.

At Hewlett-Packard, for example, company labs are open to engineers around the clock. Hewlett-Packard even encourages its corporate researchers to devote 10 percent of company time to exploring their own ideas and does not penalize them if they fail. 3M allows researchers to spend 15 percent of the workweek researching any topic that intrigues them, as long as there is the potential of a payoff for the company.

The most famous outcome of this policy is the ubiquitous Post-its. The idea for them evolved from a researcher’s desire to find a way to keep the bookmark from falling out of his hymnal. Post-its are now a major 3M business, with annual revenues of around $300 million.

Project Selection and Management Project management is the overall management of the innovation process, from generation of the original concept through development and into final
production and shipping. Project management requires three important skills: the ability to generate as many good ideas as possible, the ability to select among competing projects at an early stage of development so that the most promising receive funding and potential costly failures are killed off, and the ability to minimize time to market.

The concept of the development funnel, divided into three phases, summarizes what is required to build these skills (see Figure above ). The objective in phase 1 is to widen the mouth of the funnel and encourage as much idea generation as possible. To this end, a company should solicit input from all its functions as well as from customers, competitors, and suppliers. At gate 1 the funnel narrows. Here ideas are reviewed by a cross-functional team of managers who did not participate in the original concept development.

A Development Funnel

A Development Funnel

Concepts that are ready to proceed then move to phase 2, where the details of the project proposals are worked out. Note that gate 1 is not a go/no-go evaluation point. At this screen ideas may be sent back for further concept development and then resubmitted for evaluation.

During phase 2, which typically lasts only one or two months, the data and information from phase 1 are put into a form that will enable senior management to compare proposed projects.

Normally this requires the development of a careful project plan, complete with details of the proposed target market, attainable market share, likely revenues, development costs, production costs, key milestones, and the like. The next selection point, gate 2, is a go/no-go evaluation point. Senior managers review the projects under consideration and select those that seem likely winners and make the most sense from a strategic perspective given the long-term goals of the company.

The overriding objective is to select projects whose successful completion will help to maintain or build a competitive advantage for the company. A related objective is to ensure that the company does not spread its scarce capital and human resources too thinly over too many projects, instead concentrating resources where the chances of success and potential returns are most attractive.

Any project selected to go forward at this stage will be funded and staffed with the expectation that it will be carried through to market introduction. In phase 3 the project development proposal is executed by a cross-functional product development team.

Cross-Functional Integration Tight cross-functional integration between R&D, production, and marketing can help a company to ensure that

  • Product development projects are driven by customer needs.
  • New products are designed for ease of manufacture.
  • Development costs are kept in check.
  • Time to market is minimized.

Close integration between R&D and marketing ensures that product development projects are driven by the needs of customers. A company’s customers can be one of its primary sources of new product ideas. The identification of customer needs—particularly unmet needs—can set the context within which successful product innovation takes place. As the point of contact with customers, the marketing function can provide valuable information.

Moreover, integrating R&D and marketing is crucial if a new product is to be properly commercialized. Otherwise a company runs the risk of developing products for which there is little or no demand.

The case of Techsonic Industries illustrates the benefits of integrating R&D and marketing. This company manufactures depth finders—electronic devices that fishers use to measure the depth of water beneath a boat and to track their prey. Techsonic had weathered nine consecutive new product failures when the company decided to interview sportspeople across the country to identify what they needed.

They discovered an unmet need for a depth finder with a gauge that could be read in bright sunlight, so that is what Techsonic developed. In the year after the $250 depth finder hit the market, Techsonic’s sales tripled to $80 million, and its market share surged to 40 percent.

Integration between R&D and production can help managers ensure that products are designed with manufacturing requirements in mind. Design for manufacturing lowers manufacturing costs and leaves less room for mistakes—and thus can lower costs and increase product quality. Integrating R&D and production can help cut development costs and speed products to market. If a new product is not designed with manufacturing capabilities in mind, it may prove too difficult to build.

In that case the product will have to be redesigned, and both overall development costs and time to market may increase significantly. For example, making design changes during product planning could increase overall development costs by 50 percent and add 25 percent to the time it takes to bring a product to market. Moreover, many quantum product innovations require new manufacturing processes, which makes it even more important to achieve close integration between R&D and production: Minimizing time to market and development costs may require the simultaneous development of new products and new processes.

Product Development Teams One of the best ways to achieve cross-functional integration is to establish product development teams composed of representatives from R&D, marketing, and production. The objective of a team should be to take a product development project from the initial concept development to market introduction. A number of attributes seem to be important for a product development team to function effectively and meet all its development milestones.

First, a heavyweight project manager —one who has high status within the organization and the power and authority required to get the financial and human resources the team needs—should lead the team and be dedicated primarily (if not entirely) to the project. The leader should believe in the project (that is, be a champion) and be skilled at integrating the perspectives of different functions and helping personnel from different departments work together for a common goal. The leader should also be able to act as an advocate of the team to senior management.

Second, the team should have at least one member from each key function. The team members should possess a number of attributes, including the ability to contribute functional expertise, high standing within their functions, willingness to share responsibility for team results, and the ability to put functional advocacy aside. It is generally preferable if core team members are 100 percent dedicated to the project for its duration. This keeps their focus on the project, not on the ongoing work of their function.

Third, the team members should be physically colocated to create a sense of camaraderie and facilitate communication. Fourth, the team should have a clear plan and clear goals, particularly for critical development milestones and development budgets. The team should have incentives to attain those goals, such as pay bonuses when major development milestones are hit. Finally, each team needs to develop processes for communication and conflict resolution.

For example, one product development team at Quantum Corporation, a California-based manufacturer of disk drives for personal computers, instituted a rule that all major decisions would be made and conflicts resolved at meetings that were held every Monday afternoon.

A Sequential Process

A Sequential Process

This simple rule helped the team meet its development goals.

Partly Parallel Development Processes One way to compress the time it takes to develop a product and bring it to market is to use a partly parallel development process. Traditionally product development processes have been organized sequentially, as illustrated in Figure above.

A problem with this kind of process is that product development proceeds without manufacturing issues in mind. Because the basic product design is completed prior to the design of a manufacturing process and full-scale commercial production, there is no early evaluation of manufacturability. Consequently the company may find that it cannot efficiently manufacture the product and have to send it back for redesign. Cycle time lengthens as a product bounces back and forth between stages.

To solve this problem, organizations can use a process similar to that illustrated in Figure below. In a partly parallel development process, development stages overlap so that, for example, work starts on the development of the production process before the product design is complete. By reducing the need for expensive and time-consuming product redesign, such a process can significantly reduce the time it takes to develop a new product and bring it to market.

Creating an Autonomous Unit When a firm develops a quantum innovation—one that might usher in a technological paradigm shift in its industry—there is a danger that managers within the firm may fear the consequences of unleashing this innovation on the established business of the enterprise. 40 They may worry that the innovation will cannibalize sales of the firm’s established business.

Thus even though Kodak was a leader in developing digital imaging, for years Kodak reportedly hesitated to aggressively push digital cameras because managers knew the new technology would disrupt the industry and cut film sales.

In addition, a quantum innovation often requires a radically different business model. It may require a different manufacturing system, a different distribution system, and different pricing strategies from those used by the established business. For example, the business model associated with digital cameras is radically different from the business model associated with Kodak’s traditional film business.

Research suggests that it is almost impossible for two distinct business models to coexist within the same organization. Almost inevitably the established business model will suffocate the business model associated with the disruptive technology.

The solution to these problems is to separate the new technology and place it in its own autonomous division. For example, during the early 1980s Hewlett-Packard built a successful laserjet printer business. Then HP invented inkjet technology. Some people in the company believed inkjet printers would cannibalize sales of laserjets and consequently argued that HP should not produce inkjets.

Fortunately for HP, senior managers at the time saw inkjet technology for what it was: a potentially powerful disruptive technology. They allocated significant R&D funds toward its commercialization. Furthermore, when the technology was ready for market introduction, they established an autonomous inkjet division at a different geographic location with its own manufacturing, marketing, and distribution activities.

HP managers accepted that the inkjet division would take sales away from the laserjet division and decided that it was better to have an HP division cannibalize the sales of another HP division than have those sales taken by another company.

A Partly Parallel Process

A Partly Parallel Process

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