This content relates to : NEW PRODUCT & SERVICE DEVELOPMENT
HIGHLIGHTS
Companies that are successful at innovation align marketing and R&D at the early stages of innovation.
Successful innovation requires eschewing traditional, short-term performance appraisal measures (e.g., return on investment).
Licensing or setting up separate incubation units can be better options for technology commercialization compared to the traditional vertical integration model.
Jagdish Sheth
Emory University
Because so many innovations fail, there are three or four learnings from corporations that do it very well.
The first thing is, great companies that successfully innovate better than others, usually have a team of R&D and Marketing working together. It’s not a sequence or process where R&D comes out with a product through Chemistry, for example, or through design or through whatever mechanism and then tosses it over to the Sales and Marketing Department to say, “Now go and sell it.” I think getting Marketing in the front end of product innovation is important. So, the alignment between marketing and R&D at a very early stage of innovation, the gating mechanism that you have is very key. Some companies always had that combination. Procter and Gamble is very famous for that.
Second thing I found is that companies that excel in innovation usually do not use measures that are the same as other performance appraisal measures – growth expectations, return on investment expectations, internal rate of return. They basically understand that we cannot take existing products and their measures about one-year or three-year expectations (financial) and work on new products. New products, surprisingly are more successes by accident than by design. Compared to the market report they have before new product introduction when compared to what happened, we find that many, many of the great successes as we think about are all accidental. Success just by being there kind of a notion; Mustang is an example. So relying on traditional measures will basically make your R&D not work well for you. So you have to have an R&D team not evaluated the same way as the traditional evaluation of their marketing activities or business activities.
Third thing I found is that some of the companies doing internal R&D and commercializing is very hard. So, for example, I was an advisor to Bell Labs which had so many great inventions to their credit. But they could not commercialize internally because it was a regulated industry where they had to get approval from both the FCC on one hand, but also local public service commissions on the other hand. So they had constraints. They were the inventors of cellular mobile technology during World War II. Bell Labs was also the inventor of transistor radios or transistors. But it was Sony who made a radio out of that technology by getting a license. So there are several options that that one needs to consider if you are serious about innovation. One of course, is to make sure that you have incubation within the company. And the best way to incubate is to take a senior executive who would like to start something on his own or her own, nurture that person, invest in that person, but keep a separate entity. In Silicon Valley, this is becoming more and more common. And Cisco Systems really designed that system. So you take a senior executive who says, “I’m just tired of working as a corporate person. I want to create some wealth for myself by this idea.” This idea will not work very well if it is put into the existing ecosystem of selling, for example. So that’s, so that’s creating incubation homes, incubation places. The other one is to create a separate corporate venture company, which is now very common. 20 years ago it was not thought about. But you set aside, let’s say a large corporation, 100 million dollars. So you don’t need a VC firm like in Silicon Valley, you have your own VC company. And the company person who heads it up has a complete experience of venture capital. But you allow internal R&D people who invent things and are looking for somewhere to commercialize it. But also you pick up outside knowledge. So having a venture capital fund by the corporation has more advantages in many ways than a traditional VC firm. So that will be one of my recommendations. The third recommendation I make to companies, is that, sometimes it’s better to organize a consortium of companies. Industry needs to evolve collectively. Like streaming services right now. Why should each one of them do it separately? Can we create a platform? While I was working and advising on cellular mobile phone commercialisation in America from 1983-85, I found that we basically allowed a free market process, where we said CDMA, TDMA, AMPS, all those standards are fine, let the market decide, but there’s too much pain, too much loss of time and capital. And here comes the European Union, (before the European Union was formed), that says, “We’ll have a single standard called GSM.” From a technology viewpoint, yes, GSM may not be the best standard. But because they are mandated, they created a market. And today it’s all GSM. Think about it. So sometimes you have to have collective thinking among the industry players, industry and government policy makers. And if you can do that, the industry comes about and everybody benefits in the process. Hopefully the public benefits by making their life simpler, better, etcetera.
And the last area, in which I have done a lot of work is very interesting. I began to believe that the traditional vertical integration model in a corporation may not work – I invent, therefore I make it, therefore I sell it, therefore I service it. IBM would be an example, General Motors was an example. These are the traditional companies who grew up with the idea of vertical integration. Which is fine because sometimes you don’t have the supply function, you have to create one. But vertical integration is the legacy theory. What I find is the speed of innovation is so fast in the digital age that the best strategy really is to make a de facto standard by licensing the technology. You invent, but you don’t have to make it. You license; the way you saw Google did a great job licensing the Android platform. And so it becomes the de facto standard. I have recommended that in many places. At Texas Instruments. I found it fascinating that Texas Instruments’ balance sheet had $600 million of R&D budget listed as a line item. And it was earning $1.2 or $1.3 billion in royalties. I said, show me a manufacturing case where you will make more money. And you pick up all the headaches about environmental issues, and labor issues in manufacturing. And therefore you will slow down. And you might have the next breakthrough in your invention laboratories because TI is a world-class R&D organization. It’s a joy to work with them. I must tell you, including kitchen people like General Mills and Pillsbury people, I personally enjoy working with the scientists more than with the marketers. I don’t know why that’s my bias. I’m so sorry. I apologize for that comment even. But I like scientists because they focus on the end-user. And the marketing people focus on the buyer. To me, focusing on the buyer is a selling mechanism. Focusing on the user, is ultimately what we should be studying.
So I enjoy working with the scientists. Interesting, it gets your creativity going. So basically licensing at TI, is what we did there. Hughes corporation, that brilliant R&D company, they make small elaborate satellite things, but they’re not a consumer products company. So we told them just license it to Thompson Electronics, Matsushita, which is a Panasonic brand name, anybody who knows how to manufacture hardware for the mass market, has the distribution to RadioShack at one time, or you know, Best Buy nowadays, they know their whole system properly. There’s no way you can enter as a B2B company, hardcore defence oriented company, into consumer markets. License it, which led to the creation of Direct TV. So you are a technology company and a service company, but manufacturing is taken out. Again, through licensing which generates much better returns now than ever before. Vertical integration was a good model, I think when we began because the whole supply chain was not organized when we were evolving the industrial age. But today supply chain is well organized in the digital age. And therefore, I do believe that licensing is the best strategy, which is another way to learn from best companies, who know how to license.
Author:
Jagdish Sheth
Charles H. Kellstadt Chaired Professor of Marketing, Goizueta Business School, Emory University