An Innovation Framework: The Foundation for Two Complementary Approaches to Innovation Management

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1 An Innovation Framework: The Foundation for Two Complementary Approaches to Innovation Management Leslie Martinich Competitive Focus 1114 Wild Basin Ledge Austin, TX Abstract-Innovation is critical to the future of the technology industry. Managers are confronted with conflicting pressures, on the one hand for innovation which requires flexibility and risk taking, and on the other hand for near-term results and short-term revenues, which require efficiency and well-defined processes. How can they resolve this dilemma? This paper presents two distinct and complementary approaches and an overarching innovation management framework. The framework fits within an ambidextrous organization and utilizes open innovation practices. I. INTRODUCTION Global senior executives consistently cite innovation among their top priorities. And innovation is notoriously difficult, often because executives lack a clear understanding of how to innovate; they lack a model or framework within which their organizations can successfully deliver innovative products or introduce innovative processes. In this paper, we describe an innovation framework which addresses that need. A. Types of Innovation We can categorize innovations in various ways, but for the purposes of this paper, we will utilize a simple distinction between incremental or continuous innovations, and radical or discontinuous or disruptive innovations. Incremental innovations include the enhancements found in the next release of a software product or the increased speed found in the next revision of a hardware product. Discontinuous (or radical) innovations are not on a continuum with previous technologies; they involve the application of a new technology. The printing press, telegraph, telephone and computers form a series of discontinuous innovations in the communications domain. Radical innovations cause a dramatic shift in the way people or firms perform some activity. The commercial use of the Internet provides a clear and obvious example of a discontinuous innovation. The Internet has fundamentally changed the way that businesses communicate with each other. In the pharmaceutical industry, researchers are concerned that enzyme-based therapies are reaching a natural limit. A discontinuous innovation, such as genebased therapies, can provide the basis for the next wave of growth. Discontinuous innovations typically disrupt an industry and often disrupt the way consumers engage in some activity. Despite the fact that an innovation disrupts existing systems and causes chaos, it still follows regular and predictable patterns. We will explore these patterns in the next section. B. The Innovation S-Curve Successful innovations follow a predictable pattern. They begin with a discontinuous innovation and proceed through several phases until the technology is mature, when it is once again disrupted by a discontinuous innovation. Foster [1] introduces the notion of an S-curve comparing performance and effort, a graph of the relationship between the effort put into improving a product or process and the results one gets back for the investment. 1 He is concerned with limits; reaching the limits of the technology spells the flattening out at the top of the S- curve. It becomes harder and harder to improve the performance of the technology. At the limit of technology, no matter how hard you try, you cannot continue to make improvements. Fig. 1 shows the S-curve as a graph of the cumulative number of adopters (or alternatively, the product performance) on the Y-axis and time on the X-axis. Three inflection points divide the S-curve into four distinct phases. The first inflection point represents the point in time at which entrepreneurs see the commercial value of the innovation. The second inflection point occurs when a standard or dominant design emerges, and the third inflection point occurs when users needs are met or exceeded or when few further performance improvements can expected. Cumulative Adopters OR Performance Innovation Chaos Standards Maturity Fig. 1. The Innovation S-Curve with Phases. 1 Foster, p. 31.

2 Each phase of the innovation S-curve has distinct characteristics and challenges. The innovation cycle begins with a discontinuous innovation. If the innovation is successful, it proceeds through subsequent phases and includes later incremental innovations. The first phase, the innovation phase, typically involves scientists or engineers experimenting with technologies from multiple disciplines. Outsiders might see them as tinkerers or hobbyists. And their results might have no clear application and little or no immediate commercial value. This phase often lasts for several years. When entrepreneurs see the commercial value of the innovation and try to build a business around the innovation, the first inflection point on the S-curve occurs. The innovation cycle shifts gears into what I refer to as the Chaos and Commercialization Phase. The characteristics of this Phase are hype, disappointments, fear, suspicion, many entrants, incompatible systems and no standards. Personal computers in the late 1970s and very early 1980s provide one vivid example. Apple, Tandy, KayPro and others provided incompatible systems. Hype and fear joined forces to cause people to believe that computer-based robots would clean their houses and take over their jobs. The next inflection point occurs when the market demands standards and interoperability. The Standards Phase is marked by three characteristics: the emergence of a standard or dominant design, rapid growth, and industry consolidation. The industry grows rapidly, and those participants aligned with the standard benefit. The personal computer industry in the late 1980s and early 1990s again provides a vivid illustration. The dominant design was IBM compatible PCs using hardware from Intel and operating systems (DOS and later Windows) from Microsoft. Lotus, Oracle, Compaq and Dell grew along with the central players. Incremental innovations provided improvements to speed and functionality and pushed consumers to replace their systems approximately every 18 months. Cost and efficiency become increasingly important at the later end of this phase. When customers needs are satisfied or exceeded, or when a technology reaches its natural limits, we reach our final inflection point. Competition shifts to customer service and to production and distribution efficiencies. To continue the example from the PC industry, as lower cost became the competitive advantage, Dell, with an emphasis on manufacturing efficiency, moved into a stronger competitive position. entirely different set of capabilities. Moreover, an incumbent firm needs both sets of capabilities at the same time. Profit from ongoing operations funds research activity for the emerging technologies. Ongoing operations to deliver a mature technology compete in increasingly cost-conscious environments, and thus require an emphasis on process, repeatability, and efficiency. This is in stark contrast to the sorts of capabilities needed for radical innovation: flexibility, risk-taking and patience. This establishes a breeding ground for mistrust and misunderstanding. The ongoing operations side of the organization wonders when the emerging technology group is ever going to get any work done. And the emerging technology group considers the ongoing operations group to be mired in old technology and stuck in unrealistically rigid processes. It is easy for the two sides of the firm to become polarized and uncooperative. How can executives steer their organizations through the Scylla and Charybdis of too much process or too much flexibility? Of a focus on the near term or a focus on the distant and unpredictable future? Tushman, Anderson and O Reilly [2] propose that ambidextrous organizations, which can concurrently nurture diverse groups within a firm, provide the required infrastructure. The emerging business needs the financial resources generated from the firm s existing capabilities and strengths in order to fund the research and exploration necessary to bring an emerging technology to market. A. Ambidextrous Organizations O Reilly and Tushman [3] studied 35 attempts to launch radical innovations within 15 firms in 9 industries. They characterize the organizational structures in a variety of ways and note that only the ambidextrous organizations succeeded, and in fact that they succeeded 90% of the time. My own study of software development firms yields similar conclusions. How are ambidextrous organizations structured and how do they work? Let s consider the organizational structure first. The ambidextrous organization shown in Fig. 2 includes independent teams for both the ongoing operations and the emerging business, each with its own value structures and processes. Ongoing Operations General Manager Emerging Business II. THE INNOVATION FRAMEWORK The innovation process requires different management, research, engineering, marketing, manufacturing and operations capabilities at different phases. During the early phases firms need one set of capabilities and during the later phases they need an Mfg Sales R&D Mfg Sales Fig. 2 Ambidextrous Organizational Structure. R&D

3 How does an ambidextrous organization work? The teams are integrated into the organization at the executive level of the organization, and coordination takes place through the executive team. Management shares a commitment to supporting both the ongoing and the emerging development efforts. Since the ongoing operations aim at existing customers and the exploratory or emerging technology may aim at an entirely different set of customers, it is important to have different reward structures and different sales teams. In this structure, both the ongoing operations and the emerging technology operations have independent R&D, sales and manufacturing teams. The predictable, efficient ongoing operations are sheltered from the chaos of an exploratory organization which needs flexibility and must tolerate unpredictability. B. Management and Organizational Capabilities Managers within an ambidextrous organization must be able to handle (or juggle) conflicting divisional goals. One of the firm s goals is a longterm one: to support the continued success of the mature operations and at the same time fund the efforts of the emerging business. Firms supporting multiple organizations have ample opportunity for contention at resource allocation time. To overcome the potential risk, ambidextrous organizations need managers who 1. understand the needs of both the mature and emerging businesses, 2. recognize the value of both the mature and emerging businesses, 3. are committed to operating ambidextrously, and 4. clearly communicate the vision. Table I shows, for both the ongoing operations and the emerging or exploratory operations, the needed focus and capabilities. We consider ongoing operations first. C. Ongoing Operations Focus and Capabilities Innovation. Managers are familiar with the capabilities needed in an ongoing, mature operation. When a technology is at or nearing the top of the S- curve, industry competition focuses on providing products cheaply and providing services. Process improvements help to maintain efficiency. Managers need to prioritize the incremental product innovations so that products are not stuck in scope creep paralysis. TABLE I FOCUS AND CAPABILITIES FOR BOTH ONGOING OPERATIONS AND EXPLORATORY OPERATIONS Innovation Product Characteristics Incremental, Process Ongoing Operations Exploratory Operations Focus Capabilities Focus Capabilities Cost, Incremental speed improvements Product breadth Focus on core competency and enable partners for non-core areas Product driver Scheduling Customer involvement Product completion driven by routine processes and team effort Efficient, processoriented Good relations with customers but with more distance Prioritization within the strategic direction; depth in manufacturing process Performance improvement skills, pragmatic approach Negotiation and partnering skills; ability to divest nonessential product lines Strong project management Ability to scope and estimate schedules Project management, well-defined processes Customer support, support for user groups Discontinuous or radical Features Provide end-toend solution Inventor / engineer / champion drives development to completion Flexible, adaptable Close relationship with customers Exploratory, able to bring together multiple disciplines, tenacity. Ability to find a business case for new technology. Imagination, willingness to consider alternate application areas, ability to see the big picture Organizational ability to provide the entire infrastructure for the innovation s commercial viability, entrepreneurial skills Perseverance despite setbacks, conviction in the merits of the innovation. Negotiation skills within the organization. Resource acquisition skills. Trust. Ability to function in a chaotic environment. Tight partnering with one or more customers to test possible applications of new technology Posture Defensive Skill at maintaining customer loyalty; financial management Aggressive, Take Risks Evangelist skills. Communication skills.

4 Product Characteristics. Improving the speed or reducing the size or cost of a product becomes more important as a technology matures. When new features were important for the PC industry, customers upgraded frequently. As the industry has matured, customers upgrade less frequently so firms look to new applications to provide revenues. Product Breadth. As the supply chain of an industry matures, firms can focus their efforts where they have a competitive advantage. They no longer need to provide an end-to-end solution; the breadth of their offerings can be limited. Managers leverage partnerships to provide parts, accessories or add-on value. Managers can divest their firms of nonstrategic functions. Product Driver. Regular processes drive the delivery of incremental improvements to products. In order to be efficient, managers define clear and predictable processes for new releases. Scheduling. Project managers need skill at scoping and estimating, as well as skill at keeping a project on schedule in order to meet the demands for efficiency. Customer Involvement. For mature technologies, firms cannot afford to be spun around by individual customer requests. Managers can make judicious use of user groups, allowing users to take some ownership of the product direction. Christensen [5] describes the pitfalls of relying too heavily on customer input during the mature phase. Posture. As products become commoditized, firms need to defend their positions within the marketplace through a variety of means including maintaining customer loyalty and effective financial management. D. Emerging Operations Focus and Capabilities The emerging side of the business needs a far different set of capabilities. Innovation. Dedicated, tenacious technologically astute groups, able to cross-pollinate ideas across disciplines and find a business case for a new technology, produce radical innovations. Product Characteristics. Emerging or exploratory operations focus on product features, asking the question, what activity will a customer perform with this new product and how? When one application area turns out to be unsuitable, the product team or champion is able to consider alternatives. Product Breadth. Radical innovations, by their very nature, lack a product supply chain and most likely lack a support infrastructure. When automobile manufacturers introduced their first products, they had to be prepared to build all the parts themselves and supply parts for repair, as well. They had to work to foster the infrastructure which includes a system of roads and bridges, regulatory systems including licensing and traffic rules, refueling stations, repair services and insurance providers. Small entrepreneurial firms typically lack the resources to effect the required and dramatic infrastructure changes. Product Driver. In stark contrast with the capabilities needed for ongoing operations, emerging operations need strong product champions to maneuver a product through to commercialization. The road to delivery may last for 10 years and frequently suffer setbacks. The leader who takes an innovation through to commercialization must have the skills to acquire needed financial and human resources. After a setback such as the loss of a partner firm willing to try out a particular application area, the leader needs the persuasive skills to go back to the executive team and ask for additional resources. Such leaders or product champions need high levels of integrity and an ability to maintain the trust of the entire organization. In addition, they need strong business skills to assess appropriate application areas, strong negotiating skills and strong communication skills. Scheduling. For radical innovations, the word scheduling must be understood to be very different from the same word used in mature product phases. The project manager s job includes reducing the number of risks outstanding. I know of no radical innovations that emerged in an environment in which people were able to scope, estimate and schedule the project plan with reasonable accuracy. The project manager needs skill and tenacity in persisting through setbacks and chaos. Project managers who possess the skills for delivering mature products are unlikely to also possess the skills needed to commercialize a radical innovation. Different sets of skills require different people. Customer Involvement. Researchers can concoct innovative products, but emerging technology teams need at least one customer willing to try out an application area for that technology. Firms need partners to participate in the cycle of refining and testing the innovation. Posture. The emerging operations team requires technological and business savvy along with the passion needed to risk careers and futures to take a radical innovation through to commercialization. Whereas team members in the ongoing operations might derive satisfaction from knowing that on a regular basis they deliver quality products to customers, team members in the emerging operations business derive satisfaction from knowing that they are changing the world. These are different types of people. E. Supporting Processes and Activities In addition to the important activities related to commercializing an innovation, firms need activities and processes to gather innovative ideas, determine which ideas merit further consideration, nurture those ideas and refine others. Leifer, et al. [6] describe a radical innovation hub. The processes we consider here, in what I call the Innovation Farm, are similar. In the Innovation Farm, the seeds of ideas are gathered, culled, nurtured, refined and harvested. Fig. 3 depicts the flow of activities in the Innovation Farm.

5 Gather Fig. 3 Activities of the Innovation Farm. In the ambidextrous organization, a team of people with a clear understanding of the firm s goals as well as the technological and business skills to make informed decisions participates in the Innovation Farm. They gather the seeds of ideas both within the firm and from outside the firm, placing them in a central repository. They participate in industry conferences and exchange ideas with others both within their domain of expertise and in other domains. The team regularly culls the repository, and decides whether to return an idea to the repository for further refinement, or to nurture an idea to take it to the next stage. Experienced project champions join teams designated to nurture an idea to the next stage. The champions secure both human and financial resources for further development of an idea. Ultimately the firm reaps some financial reward, either by commercializing the innovation or by selling or licensing it to another firm to take it forward. When a firm cannot commercialize an innovation, the firm can license or sell the technology, providing multiple paths to market and multiple mechanisms for monetizing the innovation. F. Open Innovation During the first half of the twentieth century, innovative ideas retained their usefulness to a firm for many years. Firms hired engineering and research talent in an effort to dominate their industries. Employees stayed with their firms for many years, often through retirement. Their ideas might sit on the shelf for years, waiting for an opportunity for commercialization. Innovations came from within a firm; this is the closed innovation approach. That is less likely to be true in the twenty-first century. What changed? Two things. First, employees and employers have less loyalty to one another. Employees are more transient, often taking their ideas with them. Second, the pace of change has quickened, rendering an innovative idea today obsolete within a brief time. An innovative idea has a shorter shelf life. Consider an idea for pagers or for conventional photography. It may have had some value 10 years ago, but in 2004 it is likely to be of little value; it has exceeded its Use By date. Internal Research Projects Cull External Research Projects Venture Investing Refine Nurture Technology in-licensing Fig. 4 Open Innovation. Harvest: Sell or license the technology Harvest: commercialize innovation Technology acquisition How can firms derive benefit from their employees innovative ideas? Chesbrough [4] describes mechanisms for open innovation, in which firms derive revenues (1) by commercializing an innovation themselves, or (2) by licensing or selling the rights to the innovative idea, or (3) by spinning out an entrepreneurial firm that has the ability to take the concept to market. Moreover, firms acquire innovative technology from multiple sources, including their own internal research activities, licensing or acquiring the technology from a university or another firm that cannot commercialize the product. Fig. 4 depicts the flow of ideas in an open innovation model, some of which reach the stage of a commercialized product. Some of the ideas are not suitable for commercialization within the firm; they are licensed or sold. Some ideas are generated outside the firm, are brought in and incorporated into commercialization efforts. Wolpert [7] describes a mechanism for using trusted intermediaries to facilitate the exchange of ideas from innovators to firms that have the capacity to successfully commercialize the innovation. Wolpert is currently establishing the InnovationXchange Network in Australia, putting the open innovation concepts into a nationwide reality. Academics, industry leaders, marketers, researchers, venture capitalists and inventors all participate in the InnovationXchange Network. Through the use of trusted intermediaries, firms are able to leverage a collaborative network and gather ideas from a much broader source, expanding the participation in the Innovation Farm. III. CONCLUSION Executives face the daunting task of balancing the needs of both an ongoing business and innovating for the future business. An ambidextrous organization provides the structure within which those needs can be balanced. And the Innovation Farm defines the activities and processes to support the firm s innovation efforts. An open innovation approach recognizes the realities of transient employees and ideas with a short shelf life, and expands the boundaries for both gathering ideas and harvesting the results. REFERENCES [1] R. N. Foster, Innovation: The Attacker s Advantage, New York: Summit Books, [2] M. L. Tushman, P. Anderson, and C. A. O Reilly, Technology cycles, innovation streams, and ambidextrous organizations: organizational renewal through innovation streams and strategic change in Managing Strategic Innovation and Change, M. L. Tushman and P. Anderson, Eds. Oxford: Oxford University Press, 1997, pp [3] C. A. O Reilly and M. L. Tushman, The ambidextrous organization, Harvard Business Review, vol. 82. no. 4, pp , April 2004.

6 [4] H. Chesbrough, Open Innovation: The New Imperative for Creating and Profiting from Technology, Boston: Harvard Business School Press, [5] C. Christensen, The Innovator s Dilemma: When New Technologies Cause Great Firms to Fail. Boston, MA: Harvard Business School Press, [6] R. Leifer, C. M. McDermott, G. C. O Connor, L. S. Peters, M. P. Rice, R. W. Veryzer, Radical Innovation: How Mature Companies Can Outsmart Upstarts, Boston, MA: Harvard Business School Press, [7] J. D. Wolpert, Breaking out of the innovation box, Harvard Business Review, vol. 80, no. 6, pp , Aug