Innovation

Launching new ventures outside a corporation's core business is risky and failure-prone -- yet often perceived as vital to innovation and organic growth. Can investing in new ventures add value to a company despite the risks? To explore that question, the authors conducted an in-depth study of corporate venturing at Nokia Corp. between 1998 and 2002; the study included two years of dissertation research by one of the authors. The research yielded a number of lessons about corporate venturing. For example, Nokia discovered that looking at the success or failure of an individual project as a business was the wrong way to evaluate the effectiveness of the venturing program. Whether or not they succeeded as businesses, Nokia's corporate ventures often added important capabilities to the core business, such as familiarity with a new customer segment for the company. In fact, seemingly unrelated investments sometimes led to technologies that later benefited the company's core business. The authors conclude that, to extract value from corporate ventures, companies must use different management practices than in their established businesses, structure new ventures so that they don't face pressure to deliver immediate results, and emphasize learning. Although 70% of Nokia's corporate venturing investments during the period studied were either discontinued or completely divested, the capabilities and technologies developed nonetheless played an important role in helping the company's core businesses respond to change.

Innovation is typically a group effort, but how exactly do researchers collaborate with one another to innovate? To answer this question, the authors compiled a dataset identifying all co-authorship relationships of U.S. patent inventors from 1975 through 1999. That dataset revealed that the social network of innovators is a "small world," with various clusters of people interconnected by different "gatekeepers," individuals who bridge one group with another. Historically, engineers and scientists tended to work within local clusters of collaboration that were isolated within a company. Recently, though, people have become increasingly mobile, changing jobs with greater frequency, and these formerly isolated clusters have begun to interconnect into larger networks through which information flows more freely between companies. Such environments provide both strategic opportunity and potential threat: They can increase creativity within a company, but they also aid in the diffusion of creative knowledge to other firms through personnel and knowledge transfer. The trick, then, is to manage innovation in ways that exploit the opportunities while minimizing the risks.

The history of the Swedish retailer IKEA illustrates the role that adaptation and experimentation play in the development of an innovative strategy.

Despite the importance of management innovation, it is poorly understood and usually not systematically fostered. To research the process, the authors first conducted an historical analysis of more than 100 management innovations that took place over 130 years. Then they studied 11 recent cases of management innovation, in most cases interviewing one or more of the key innovators. The research revealed that, compared with the process of technological innovation, management innovation tends to be more diffuse and gradual. It typically follows four stages. The first stage is some type of dissatisfaction with the status quo, such as a crisis or strategic threat. That stage is followed by inspiration from other sources. The third stage is the invention of the management innovation itself. While most innovators identified a precipitating event that preceded the innovation, such as a challenge from a boss or a new assignment, few recalled a distinct "eureka moment"when the innovation occurred. The fourth stage is validation, both internally and through external sources such as academics, consultants, media organizations or industry associations.

Research and development projects fail more often than they succeed. In fact, out of every 10 R&;D projects, five are flops, three are abandoned and only two ultimately become commercially successful. A principal problem is that many companies don't know how best to organize their labs to conduct R&;D work. A classic hierarchical structure, for instance, tends to impede the rapid spread of knowledge. Matrix organizations, on the other hand, can lead to information logjams, confusion and conflict among employees. To investigate how companies can best manage their efforts to innovate, the author conducted an in-depth study of six R&;D projects at the laboratory of a Fortune 500 corporation. She found that highly successful R&;D projects have four crucial factors that reinforce each other. The first is strong and sustained corporate support. The second is the presence of open communication patterns and a low degree of formal reporting. Beyond this, R&;D teams must be organized in specific ways so that informal social networks are reinforced -- not thwarted -- by the formal organizational structures. This leads to other crucial factors: third, R&;D projects must include a person who is central to the "technical-advice network" (a "technical star"); and fourth, they must include someone key to the "organizational-advice network" (a "managerial star"). An understanding of the interplay between informal social networks and formal organizational structures can help companies design and maintain learning organizations in which employees exchange pertinent knowledge efficiently and willingly, leading to more successful R&;D efforts.

When people think of services, they often think about offerings that are neutral or routine. These tend to be services they use regularly -- for example, dry cleaning, haircutting or gardening. However, there is a third type of service that is not often considered or well understood. The authors refer to these as "negative" services because they are related to events most people hope they will not have to deal with: toothaches, leaky roofs or collision repairs, for example. Because the events that trigger the need for negative services are not everyday occurrences, many people are not equipped to diagnose the needs or to make informed judgments about the solutions required; furthermore, even after the service has been provided, most people are in a poor position to judge its quality or the price they paid for it. Negative services are offered by many kinds of companies in many industries, including health care, insurance, household repair, pest control, ambulance use and so on. Companies discussed in the article include Laidlaw International, Multiasistencia Group, American Home Shield, Terminix, Fresenius Medical Care AG, Enterprise Rent-A-Car and Sears. Sears HomeCentral, for example, is an attempt to turn negative services for homeowners into a profitable segment of Sears' overall business. Even companies that are not primarily negative-service providers have negative-service aspects to their offerings. For example, product companies often provide warranties as a means of staying competitive. Companies hoping to build positions in negative services face two major challenges: (1) how to access inexperienced customers who are not in a strong position to evaluate the service being provided and may have a poor idea of its cost and (2) how to organize and deploy their services to meet customer needs when demand is unpredictable.

Advanced tools like computer simulations can significantly increase developers' problem-solving capacity as well as their productivity, enabling them to address categories of problems that would otherwise be impossible to tackle. This is particularly true in the pharmaceutical, aerospace, semiconductor and automotive industries, among others. Furthermore, state-of-the-art tools can enhance the communication and interaction among communities of developers, even those who are "distributed" in time and space. In short, new development tools (particularly those that exploit information technology) hold the promise of being faster, better and cheaper, which is why companies like Intel and BMW have made substantial investments in these technologies. But that enthusiasm should be tempered: New tools must first be integrated into a system that's already in place. It is important to remember that tools are embedded both within the organizations that deploy them and within the tasks the tools themselves are dedicated to performing. Moreover, each organization's approach to how people, processes and tools are integrated is unique -- a result of formal and informal routines, culture and habits. All too often, companies spend millions of dollars on tools that fail to deliver on their promise, and the culprit is typically not the technology itself but the use of the technology. When new tools are incorrectly integrated into an organization (or not integrated at all), they can actually inhibit performance, increase costs and cause innovation to founder. To avoid this, companies should beware three common pitfalls: (1) using new tools merely as substitutes, (2) adding -- instead of minimizing -- organizational interfaces and (3) changing tools but not people's behavior.

Research has repeatedly demonstrated that managers contribute to a company's bottom line by enabling the emergence of work processes in constantly changing situations. But managers have received insufficient guidance about what exactly they should be doing to manage these emergent processes. The authors contend that managers must actively facilitate the confluence of participatory "spurts" of innovation. By examining the methods of companies such as Novell, IDS Scheer AG and Entergy, the authors identify four methods successful managers employ to address an emergent environment. First, these managers structure the work so that information, assumptions and interpretations are continually being challenged. Second, they accept that changing circumstance will continually require new knowledge and skill sets. Third, they understand that emergent processes involve unpredictable inputs from suppliers, employees, customers and other stakeholders. Lastly, they understand that they alone cannot induce participatory innovation, so they have learned to create or identify existing "reputation networks." Managers who have mastered these principles help their organizations to react so quickly to unpredictable events that the reactions often appear to have been planned and preemptive.

New products suffer from notoriously high failure rates. Many new products fail, not because of technical shortcomings, but because they simply have no market. Not surprisingly, then, studies have found that timely and reliable knowledge about customer preferences and requirements is the single most important area of information necessary for product development. To obtain such data, many organizations have made heavy -- but often unsuccessful -- investments in traditional market research. The authors provide an alternative. Companies including Threadless, Yamaha and Ryohin Keikaku have begun to integrate customers into the innovation process by soliciting new product concepts directly from them. These firms also ask for commitments from customers to purchase a new product before the companies commence final development and manufacturing. This process -- called "collective customer commitment"-- can help companies avoid costly product failures. In essence, collective customer commitment enables firms to serve a market segment efficiently without first having to identify that segment, and it helps convert expenditures in market research directly into sales.

For several decades, research about large companies' internal corporate venturing has shown that such activities frequently exhibit substantial cyclicality. Companies may enthusiastically launch ICV initiatives, later shut them down, and still later launch new ICV programs again. In this article, the authors describe four common situations that occur in cycles of corporate venturing. They argue that, unless properly managed, corporate commitment to ICV is apt to fluctuate according to the availability of uncommitted financial resources and the growth prospects of the organization's primary businesses. For example, if the corporation has uncommitted financial resources but the growth prospects of the main business are perceived to be insufficient, then the company may launch a top-down "all-out ICV drive" that is vulnerable to costly mistakes. If, however, the growth prospects of the primary business are perceived to be adequate and there are few uncommitted financial resources, top management is likely to perceive ICV as largely irrelevant. The authors examine factors contributing to ICV cyclicality; they then suggest that companies can achieve better outcomes if executives recognize the strategic importance of internal corporate venturing activities and view them as a way of gaining insights into emerging opportunities.