Veverka, Mary Jo

English

Case Western Reserve University School of Law

Canada-United States Law JournalVolume 15 | Issue Article 9January 1989The Process of InnovationMary Jo VeverkaFollow this and additional works at: https://scholarlycommons.law.case.edu/cusljPart of the Transnational Law CommonsThis Speech is brought to you for free and open access by the Student Journals at Case Western Reserve University School of Law Scholarly Commons.It has been accepted for inclusion in Canada-United States Law Journal by an authorized administrator of Case Western Reserve University School ofLaw Scholarly Commons.Recommended CitationMary Jo Veverka, The Process of Innovation, 15 Can.-U.S. L.J. 29 (1989)Available at: https://scholarlycommons.law.case.edu/cuslj/vol15/iss/9The Process of InnovationMary Jo Veverka *How do leading companies succeed in achieving high returns on theirtechnology investments despite growing financial constraints andtraditional barriers to successful commercialization?The topic of innovation always draws high interest. My own experi-ence spans across fifteen years of looking at product development issues;five years in industry, and eleven years with Booz, Allen & Hamilton.Increasingly, my work in the last few years has been specific to dealingwith issues of research and development ("R&D") management.I plan to discuss some of the findings and conclusions drawn fromour work in helping clients deal with the issues of managing innovationthrough to successful commercialization. These findings are drawn fromthe broad-based industrial surveys we periodically take to better under-stand the issues and the companies' responses to those issues, and fromspending time with the leaders in the industry such as Dow and Merck toassess what they do so successfully.Technology investments have exploded in the last decade. Globally-based R&D expenditures over several successive decades, 1965-1985have increased. This spiraling trend has continued in the United Statesat almost twice the rate of inflation through the 1980s. The Japanesehave now surpassed the United States in R&D spending as a percentageof gross national product ("GNP"). This first occurred in 1986, and theyhave continued to outpace U.S. and other countries' spending. Othercountries are increasing their R&D investments as well.With more and more money at stake, it is no surprise that CEOs areconcerned about how this money is being spent. In the pharmaceuticalindustry, which is one of the leading spenders, the increases in worldwideR&D demonstrate the challenges presented to these companies. Allcompanies are increasing not only their absolute R&D expenditures, buttheir R&D expenditures as a percentage of sales. However, these greaterexpenditures have not yielded an increase in the number of new productsbeing approved for the marketplace. Because of increased competition,the risks attendant on these investments are also increasing. Moreover,managing these investments - choosing the research focus, finding ap-plications, taking a new technology to market - has become far morecomplex.Companies recognize that they are increasingly betting their futures* Vice-President, Booz, Allen & Hamilton, New York, New York.1Veverka: The Process of InnovationPublished by Case Western Reserve University School of Law Scholarly Commons, 1989CANADA-UNITED STATES LAW JOURNALon new technology. New technologies are dissolving natural divisions ofthe value-added chain and eroding competitive positions based on thesevery divisions.I am going to share the results of several surveys that we have takento get a better sense of what issues leading companies are wrestling withas they manage innovation. The first survey was taken in the late 1960sto give us a basis for understanding the issues that management faces.The second survey was taken in 1981. Seven hundred companies partici-pated in that survey. It represented their collective experience on intro-ducing over 13,000 new products over a five-year time span. We will beplanning another survey, probably next year, to update our perspective.Later I am going to discuss what we have seen happen in the 1980s, ascompanies have continued to wrestle with the issues related toinnovation.Briefly, the survey results in 1981 show that during the early 1980s,companies were counting on new products for growth. Over the fiveyears prior to 1981 new products had generated about 25% of the salesgrowth. Companies were expecting that to increase by a third, to yieldabout 33% of their growth over the next five years. Similarly, the por-tion of the total company profits generated by new products was ex-pected to increase by 40%. To accomplish this, companies expected todouble the number of new products introduced. These expectations ex-isted in all industries. Technology investments, in particular, have con-tinued to grow in order to fuel this. I presume that if we look at theresults from the next survey, we will see that these companies have notachieved their expectations with these increased technology investments.Our analysis of the surveys identified several key new product prac-tices and trends. An examination of the mix of new products introducedyielded several important findings. First, additions to existing productlines and improvements to existing products account for approximately52% of all new product introductions. This conservative investment isnecessary to manage the product life cycle and keep existing productsviable. Another 30% are new product lines ,for the company and newproducts for the world. These often become the firm's most successfulnew products. Indeed, they accounted for approximately 60% of thenew products that were viewed as most successful. Despite the obviousattractiveness of these categories, their variability of return is far greater.Truly innovative products involve far higher risks. Thus, managers arereluctant to put more investment into these areas.Innovation risks are extremely high. For example, within the phar-maceutical industry very high attrition rates, lengthy development peri-ods and escalating costs associated with new product development arewell documented. Anywhere from 2000 to 15,000 leads go into the ap-plied research stage. At the development stage, when clinical trials areundertaken, the fallout rate is about five out of six product ideas over aperiod of six to eight years. The cost for development of a successful newVol. 15:29 19892Canada-United States Law Journal, Vol. 15 [1989], Iss. , Art. 9https://scholarlycommons.law.case.edu/cuslj/vol15/iss/9Veverka-PROCESS OF INNOVATIONproduct currently stands at about $140 million, factoring in failures, andit is growing every year.What are companies doing about this? The new product develop-ment process has been well-documented. Researching our own work inthis area, I discovered that we first documented this process back in the1950s. The early documentation showed a six-step process which in-cluded idea/concept generation, screening and evaluating, business anal-ysis, development, testing and commercialization. Today companies stillfollow this process but lead it with a step which involves developing anexplicit new product strategy. Seventy-seven percent of the companiessurveyed in the early 1970s indicated that they were using this step. Theaddition of this step has changed the nature of the beginning of the pro-cess. The first three steps, new product strategy development, codifica-tion of the idea concept generation, and screening and evaluating thatidea, have become a very closely linked set of steps in managing the inno-vative process for successful companies.As a result, companies have shifted their resource allocation. An-other way to look at this, given increasing R&D expenditures, is thatcompanies have increased front-end expenditures at a far greater ratethan expenditures later in the process. This appears to have improvedproduct selection. R&D spent on successful new products has grownfrom about 30% historically to about 54% at the time of the secondsurvey.The more sophisticated new product process has had a profoundeffect on the number of ideas considered in developing one successfulnew product. In the 1968 survey, on average, across all industries, ittook about fifty-eight new product ideas or concepts to yield one newproduct in the marketplace. By 1981, this had dropped quite dramati-cally to about seven ideas. This begins to show you the impact andpower of the front-end strategy driving the whole new product develop-ment activity. Yet companies are not ranking their experience in termsof successftil new products on the marketplace any better than in 1968.This suggests that there are other factors also at work here, not just man-aging the overall R&D innovation process.There is common agreement on the R&D commercialization objec-tives. It is clearly important to foster innovation. Increasingly compa-nies are putting greater emphasis on winning the race to market. Thereis much greater recognition today that getting to market early with inno-vation is a key element of competitive strategy and success in the market-place. However, it is not only necessary to win that race, but also toposition products successfully against competitors in a local market.Positioning products well requires marketplace input very early, in defin-ing product features and how to proceed in the development process. Itis also being aware of what the competition is doing and how they areproceeding. Ongoing competitive assessment increasingly needs to bedone in a global context as competition globalizes, particularly in tech-3Veverka: The Process of InnovationPublished by Case Western Reserve University School of Law Scholarly Commons, 1989CANADA-UNITED STATES LAW JOURNALnology intensive industries. The emphasis on local markets cannot belost however. Some companies are beginning to think about globaliza-tion in the context of a single product which can be commercializedworldwide. There remains an increasingly complex requirement to man-age the innovation process to tailor products to local market needs. Afourth objective is one of minimizing the resources required to achievethe above goals.In our work with clients over the last several years, we observed anadded set of management issues. Technology continues to change. To-day there is a much-faster pace of change which needs to be factored in,both from a strategy as well as a planning and execution perspective.Many companies, as they have changed their strategies, have experienceduneven new product pipelines. That in turn drives companies to gooutside of their organization to external sources of technology. We areseeing more and more licensing and acquisitions, specifically for purposesof sourcing technology. New sourcing strategies yield multiple fundingopportunities which increase the complexity of the decision-making pro-cess, and cause greater competition for scarce development resources.Finally, as mentioned earlier, the global roll-out opportunities also addcomplexity, particularly with regard to the organizational aspect. Com-panies are struggling with ways to improve bringing together the variouselements of the organization on a worldwide basis.As we work with our clients in commercializing new technology, wefind that internal attitudes are a major contributor to the progression ofsuccessful ideas. Typically, the approach to the technology assessment isvery much a "can-do" approach. This is promoted by the technologychampion who believes that technology can do anything and solves manyproblems. Then the technologists encounter the marketing organizationwhich takes a very hard-nosed approach. One of the things that compa-nies then wrestle with is how to balance the technology champion whotruly believes in the value of the technology against the marketing skep-tic. A more successful approach is to flip those attitudes; get the technol-ogists to take a hard-nosed approach, to be realistic about the true valueof the technology. How does it stack up against competition? How willit be valued in the marketplace? Then challenge marketing to make thiswork, to start small, find a success, and to move it to more successes inthe marketplace. Those companies who really manage innovation suc-cessfully balance the realistic assessment of the technology and the valueof the technology with the creativity of the marketing people who de-velop and position that product in the marketplace. The orientation ofhow you manage the process and think about the performance require-ments begins to change.Product strategies must be developed in the context of the product,the technology and the market life cycles. There are unique skills re-quired at each stage of this cycle. For example, in the advanced materi-als area, one must look at the various dimensions of the customer'sVol. 15:29 19894Canada-United States Law Journal, Vol. 15 [1989], Iss. , Art. 9https://scholarlycommons.law.case.edu/cuslj/vol15/iss/9Veverka-PROCESS OF INNOVATIONability to pay for innovation, the value that innovation provides to thecustomer and how the success requirements, from a technology and skillbase, change over the life cycle. The success requirements change as thebusiness evolves from the introduction of the material to processing re-finements to much heavier reliance on application skills, and ultimatelyto process scale. A company must understand the skill requirementscoupled with these customer and supplier economics. A breakdown atany stage of this process can slow or stall the development of thematerial.A portfolio approach to project selection is also important and canprovide a bridge between the critical issue of management control re-quirements and the inherent risks associated with R&D technology.Technology maturity and the specific technology emphasis required -research, development or business support - define the various compo-nents of a corporate portfolio of technology applications and activities.Companies need to look at their overall technology investments in thecontext of the overall portfolio, to manage risk, technology evolution andthe allocation of these efforts.There are several "Best Practices" for successful innovation andtechnology commercialization. First is the need to make a long-termcommitment to support innovation in new product development. Sec-ond, companies need to implement company specific approaches, drivenby corporate objectives and strategies with a well-defined new productstrategy at the core. Companies have gone through various diversifica-tion stages. Now companies are focusing more on core businesses due tothe realization that making a company specific approach, based on expe-rience and unique technical skills, is very important to continuing tomanage the innovation process successfully. Third, companies need tocapitalize on accumulated experience to achieve and maintain competi-tive advantage in the marketplace. That includes experience from thetotal commercialization and marketing cycle, not just the accumulatedexperience from technology. Finally, companies must establish an envi-ronment conducive to achieving new product and corporate objectives interms of management style, organizational design and the degree of topmanagement support.In our 1968 survey, organizational problems were the key obstaclesto success in R&D management. By 1981 management practices andplanning attitudes had surfaced as the major deterrence. Lack of atten-tion to new products and emphasis on short-term problems are some-thing that has not disappeared in the 1980s. Also, from a managementpractice standpoint, the need for more market research remains. We stillsee many of the organizational problems. In fact, through the 1980s theorganizational problems have resurfaced. Today the combination ofglobalization, the increasing pace of change, the niche strategies neces-sary in the competitive environment and the resulting complexity haveexacerbated the problems in the decision-making process.5Veverka: The Process of InnovationPublished by Case Western Reserve University School of Law Scholarly Commons, 198934 CANADA-UNITED STATES LAW JOURNAL Vol. 15:29 1989That leaves a number of management imperatives for the future.Companies must aggressively pursue opportunities to accelerate productdevelopment by focusing on where the development cycle can be short-ened. This requires making timely decisions, within a strategic context.It also requires an understanding of the trade-offs and the implications ofthose decisions. Companies need to allow the decisions to be made at thelowest appropriate level in the organization. New mechanisms will beneeded for improving the decision-making process. It also requires a re-newed effort to ensure that an effective organization will support the de-cision-making process and ensure expeditious implementation.The future R&D organization must concentrate on continuous self-improvement ("CSI"), a critical building block of world-class perform-ance. CSI is the ability of an organization to achieve continuously higherlevels of performance through a steady stream of seemingly small, inter-nally generated improvements in methods, tools and procedures. R&Dleaders will energize and actualize their organizations for CSI throughchanges in process and culture.6Canada-United States Law Journal, Vol. 15 [1989], Iss. , Art. 9https://scholarlycommons.law.case.edu/cuslj/vol15/iss/9

The Process of Innovation

https://scholarlycommons.law.case.edu/cgi/viewcontent.cgi?article=2154&amp;context=cuslj

The Process of Innovation

Abstract

Similar works

Full text

Available Versions

Case Western Reserve University School of Law