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Weekly UpdatesEXECUTIVE SUMMARY
Growing demand for innovation is overwhelming manufacturers' ineffective invention-to-innovation processes. To match demand, firms must join an emerging market model--networked innovation--that lets practitioners co-invent with customers, source and market innovations anywhere, and anticipate as well as respond to supply and demand changes.
During the past three recession years, manufacturers focused single-mindedly on cost-cutting to stay afloat. But with economic recovery kicking in, these firms need to crank out innovative products and services to expand their top lines. Forrester Research defines innovation as occurring "when inventions intersect a business process and change the way something is done, experienced, or created."
Manufacturing firms recently interviewed by Forrester confirmed growing demand for innovation from customers, competitors, and government regulation. But while two-thirds of these respondents considered themselves more innovative, only 7 percent identified themselves as very successful in meeting their innovation performance goals. No wonder these firms expressed concern over their ability to meet growing innovation demand given their:
* Customer-blind innovations. Interviewees didn't use customer-focused metrics to measure the quality or the success of their innovations--despite the fact that 61 percent claimed the desire to make their innovation processes more responsive to customer requirements and 45 percent said that customers provide the main catalyst for today's accelerated innovation. Instead, the manufacturers used financial metrics that Wall Street comprehends--revenues, profits, and market share.
* Underfunded and risk-averse R&D. Despite growing pressure to innovate, recession-weary respondents have reined in their R&D efforts. Less than 7 percent expected a drastic increase in innovation dollars over the next three years. And conservative spending was joined by conservative sourcing--only 30 percent of interviewees had an R&D pipeline dominated by disruptive innovations and only 22 percent relied heavily on outsourced innovation to share the costs. In addition, a mere 5 percent tried to cover R&D expenses by licensing a big chunk of their inventions to others.
* Slow response to market changes. Barely 16 percent of companies boasted innovation processes that responded flexibly to changes in customer requirements. The pressure was there--67 percent expressed concern about improving time-to-market for their innovations--driven by unexpected events such as swift shifts in demand, out-of-the-blue competitive offerings, and rapid product obsolescence.
Failing to use technology
The manufacturers Forrester interviewed weren't convinced that their existing technologies will help them meet the demand for innovation. They confessed that their current IT:
* Dampens invention-to-innovation velocity Among respondents, miscommunications and haphazard coordination across the firm resulted in costly delays and wrong products marketed at the wrong time. Why? These companies relied on makeshift tools to manage every step in the innovation path from ideation to commercialization. For instance, marketing defines new product requirements in Excel spreadsheets and e-mails them to R&D. And engineering changes are relayed to manufacturing by fax. According to one food company, "Our existing tools were just not designed to support our current need for speed or agility. These homegrown tools were OK to support incremental innovation of our products, several of which are 100+ years old. But with drastic changes in customers' lifestyles--like the Atkins craze--our R&D needs must invent whole new products and these, in turn, need a market launch that's coordinated across both production and sales."
* Prevents knowledge discovery and dissemination. A lack of sophisticated collaboration and knowledge management tools hampered cross-unit interactions. The result? Distributed operations in these firms reinvented the wheel, failed to jointly develop and market new inventions, and couldn't cooperate to accelerate time-to-market. An aerospace manufacturer said, "We need an integrated collaboration platform that will allow us to share design ideas and reuse components across our energy, civil aviation, and defense businesses."
* Impairs enterprisewide innovation governance. The manufacturers we interviewed didn't manage R&D initiatives as an integrated, company-wide portfolio. Only 35 percent had either a formal governance committee or a senior executive responsible for funding and managing innovation initiatives across the enterprise. And they lacked tools that can track key milestones in the invention-to-innovation process or report the market success of past and future innovation investments. Reported one chemicals company, "Without a tool that gives us visibility into innovation projects going on at any time across all our business units, we struggle to track their market potential, let alone identify projects that need to be put on a fast track."
Networked innovation strategy
Finicky customers, ruthless competition, and stringent regulations are accelerating demand for technology-enabled innovation among manufacturers. But supply-side deficiency and ineffectiveness hamper many firms' ability to convert inventions into profitable innovations. The solution? A new market ecosystem called innovation networks in which companies collaborate--combining the roles of inventors, transformers, financiers, and brokers--to match collectively global demand for innovation with worldwide supply (Figure 1).
Firms can't thrive in innovation networks with internal processes built around a linear and only vertically integrated innovation model that is supported by yesteryear's technologies. To take advantage of innovation networks for compressing invention-to-innovation cycles and responding swiftly to opportunities and threats, growth-seeking firms should embrace a new, technology-enabled strategy that Forrester calls networked innovation: networking internally and externally available invention and innovation services to develop and market customer-valued products and services.
Networked innovation involves inventors and transformers who work with customers to develop and market innovations--facilitated by financiers and brokers--to drive an ongoing cycle of anticipation, rapid response, and continuous learning. Firms can revitalize these invention-to-innovation cycles by embracing the three principles underlying networked innovation:
* Engage customers as partners. By harvesting customer insights, firms can get the right innovations to the right customers at the right time. Rather than treat customers as passive recipients of their innovations, companies will keep customers engaged throughout the invention-to-innovation cycle.
* Source and market anywhere. Firms will source the best talent and ideas from anywhere--reaching deep inside their organization and halfway across the planet. And rather than eschew disruptive innovations, they will seek--through investments and partnerships--market opportunities for the ones they won't take advantage of.
* Anticipate as well as respond to changes. Manufacturers will learn to anticipate and respond proactively to ever-changing customer requirements and competitive threats by building flexibility into their invention-to-innovation processes.
Case in point: IBM. With a $5 billion R&D budget (close to 6 percent of its annual revenue), IBM employs 3,440 researchers who generated 22,357 patents over the past decade. Yet, in his speech on innovation to the Council on Competitiveness in 2003, IBM CEO Sam Palmisano mentioned patents only once. Rather, he explained that IBM must "focus on the pull for innovation, not merely the push of invention." He said that IBM's success will come from emerging "innovation ecosystems" and his firm's ability to apply its inventions--as well as inventions from others--to produce innovative offerings that solve clients' pressing needs. Doing this requires a three-pronged attack.
IBM's researchers spend 25 percent of their time with clients--up from 3 percent to 4 percent eight years ago. And scientists in IBM's On Demand Innovation Services group spend up to 50 percent of their time with clients to transform IBM's inventions into innovative solutions.
IBM sources inventions externally--like from Stanford University, which is conducting spintronics research with Big Blue. And IBM licenses its intellectual property to partners and even rivals, racking in $10 billion in royalties since 1993.
IBM relies on partnerships to drive inventions into innovations. Paul Horn, director of IBM research, believes external collaboration helps IBM harness valuable technology and business insights that get fed back into IBM's R&D, software, hardware, and services groups to unleash new inventions and innovations (Figure 2).
Engaging customers as partners to assure valuable innovations. R&D scientists and marketing tend to compensate for lack of market insights with instinct, resulting in blue-sky innovations that rarely meet customer expectations. Manufacturers that practice networked innovation will be able to increase hits and curb misses for their inventions by:
* Letting customer insights improve existing innovations. Smart consumer packaged goods firms coinnovate new products with consumers--from concept design to prototyping to pre-launch. For instance, PepsiCo uses Affinnova's software to let consumers choose among new packaging ideas online. And Medtronic--which generates 66 percent of its revenues from medical products that are less than two years old--dispatches field engineers to meet with physicians to collect qualified design insights. Industrial design boutiques like IDEO go one step further by consulting their customers' customers' customers to collect new product and service ideas.
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