Since 1994, the Mack Institute has produced an array of seminal ideas and insights to help managers across industries address the challenges and opportunities of innovation. These core concepts include strategies, best practices, and a variety of sensemaking frameworks. Notable examples drawn from our research are included here, along with references to related readings.
A billion dollar corporation needs to generate new business opportunities in the range of $100 to $500 million, just to sustain single-digit revenue growth. To develop these opportunities, firms such as IBM and Procter and Gamble process as many as 1,000 or more new business ideas every year–but only a handful of ideas make it all the way through these enormous pipelines. For senior managers, choosing from this “plethora of possibilities” is a daunting challenge. Managing these innovation portfolios—before and after the innovations are developed—requires special skills and capabilities. Most successful companies have formal processes that funnel new ideas into a pipeline or funnel that filter the ideas using a rigorous process. Increasingly, new ideas are coming from outside the company, through a variety of open innovation initiatives.
Managing Uncertainty and Risk
Early in our research, our faculty observed that managing technological innovation is really about managing under conditions of high uncertainty and risk. This requires managers to be extremely flexible and to incorporate contingencies in their strategic plans. This theme runs through virtually all of our research in the Mack Institute.
Most emerging technologies become visible long before they “cross the chasm” to the mass market, although their impact and significance—including which technologies will succeed—is not clear. This increases the risk and complicates the decision process. The timing and amount of investment to commit poses another uncertainty, since emerging technologies do not lend themselves well to traditional analysis techniques such as Net Present Value (see Real Options).
While it is virtually impossible to eliminate these risks, it is possible to manage risk. Our faculty has explored a variety of strategies for managing the risks associated with technological innovation, from strengthening your peripheral vision and detecting weak signals, to using scenario development. This important concept will remain a major theme of our research.
Networks of Innovation
In a 2006 Mack Institute conference report entitled “Creating and Managing Networks of Innovation,” organizers Harbir Singh and Lori Rosenkopf observed that “Rapid economic change and resource scarcity has motivated decision-makers to seek creative ways to access resources of other organizations, to create and sustain value. One of these strategies involves creating or accessing networks of innovation that enable firms to draw on resources far beyond their immediate boundaries.”
In her presentation, Lori Rosenkopf discussed firm dynamics in networks of innovation. She observed that in a typical network there are “focal” firms that serve as hubs in the network with many connections. Some firms are connected to these focal firms, but not to each other. Some are connected to one firm in the network and gain access only through that connection. And some firms exist completely outside the network. There are strategic advantages in all of these positions. Lori has developed network diagrams to describe many types of innovation networks and interfirm dynamics.
Harbir Singh presented a framework that described how the role of alliances and network alliances change from when an industry is formed to when the industry is fully defined. He observed that when a new technology emerges, the uncertainties and risks are very high in the beginning—however, there is also a window of opportunity for participation and fewer barriers to entry, possibly lower entry costs, etc. As time progresses and the prospects for the technology and market opportunity become more clear and better defined, the uncertainties diminish and firms have the ability to participate by taking options on the technology through licenses, investments, collaboration, etc. When the technology is better developed or commercialized and the uncertainties are lowest, firms can position for fuller participation by making strategic alliances or acquisitions. The firm may have more choices if it is active in an innovation network that provides access to alliance partners or acquisition candidates
Prof. Rosenkopf has conducted extensive research on networks of innovation, describing the dynamics of innovation networks, how companies gain access to knowledge in technology-driven industries, the impact of interfirm mobility of technical professionals, and more. An example of her research is a 2010 research paper entitled “Innovating Knowledge Communities: An Analysis of Group Collaboration and Competition in Science and Technology” (Upham, Rosenkopf, and Ungar; Scientometrics, 2010).
Open innovation is the use of inflows and outflows of knowledge to accelerate internal innovation. This is one of the most powerful trends influencing the innovation process, today. Procter and Gamble, the longest industry partner in the Mack Institute, is a terrific example of open innovation in practice. In 2000, Procter and Gamble’s CEO A. G. Lafley, challenged the company to reinvent its innovation business model. He established a goal to acquire 50 percent of the company’s innovations from outside the company. The company had learned that most of P&G best innovations had come from connecting ideas across internal businesses.
This realization led the company to develop its “Connect and Develop” innovation model. “By 2000, it was clear to us that our invent-it-ourselves model was not capable of sustaining high levels of top-line growth,” recalls Larry Huston, retired VP-Worldwide Innovation (now a senior fellow in the Mack Institute). “We estimated that for every P&G researcher there were 200 scientists or engineers elsewhere in the world who were just as good—a total of 1.5 million people whose talents we could potentially use.”
In 2009, Chris Thoen, currently Director of Innovation & Knowledge Management, described “Connect and Develop” at the Mack Institute’s conference on “Borderless Innovation.” He said that P&G has about 70 C+D Leaders that are globally dispersed. Some are embedded in business units. He recognized the importance of having close ties between the technical and commercial and a truly global presence, noting that P&G has six regional hubs, in North America, Latin America, Europe, India, China and Japan, and a Global Bioscience organization. In 2001, Eli Lilly incubated a web-based venture called “InnoCentive.com”—which may be the first “open innovation company.” InnoCentive.com brings together problem solvers and solution seekers across a broad range of domains.
The objective is to let anyone in the world compete for bounties offered by the “solution seekers” who pay a cash incentive for the best solution received. Incentives typically range from $10,000 to $100,000. The solution seekers, mostly large corporations, remain anonymous. Bounties are paid for the best solution. Over $3 million has been awarded to solvers. These are only a few examples of the powerful trend called “Open Innovation” that has opened the world of scientific research, technological innovation and business problem solving in general, to the entire world.
(Note: Alph Bingham, InnoCentive’s co-founder, keynoted the ET Update Day in 2002, giving our industry partners an early glimpse at this pioneering enterprise. Prof. Henry Chesbrough (UC-Berkeley) who coined the term “Open Innovation” has also been a keynote speaker at the ET Update Day).
Most emerging technologies first appear as weak signals at the “periphery” of our vision as managers. It is vital for innovation managers to scan and scout for emerging technologies at the edges of their radar screens, in other industries, and outside their field of expertise. Disruptive technologies that threaten incumbent firms and markets often come from unexpected sources. Research by Professors George Day and Paul Schoemaker show that less than 20 percent of firms have developed their peripheral vision in sufficient capability to remain competitive. They have developed a set of practical frameworks and tools to help decision makers cope with this problem. In their 2006 book on this topic, they present a systematic process for developing peripheral vision, including “seven steps to bridge the vigilance gap.” These steps include: 1) Scoping (where to look), 2) Scanning (how to look), 3) Interpreting (what the data mean), 4) Probing (what to explore more closely), 5) Acting (what to do with these insights), 6) Organizing (how to develop vigilance), and 7) Leading (an agenda for action). For more information see Peripheral Vision: Detecting the Weak Signals That Will Make or Break Your Company, Day & Schoemaker, Wiley & Sons, 2006.
Real Options and Discovery Driven Management
This concept of Real Options involves treating high risk investments in emerging technologies like stock options. These “options” may include licensing arrangements, right of first refusal, acquisition rights, staged investments based on benchmarks, etc. Real options are especially effective for making technology bets before winning technologies, form factors, and markets are known or understood—in high-risk, uncertain areas of innovation where the traditional metric of Net Present Value (NPV) is not adequate. Real options can be used to scan, scout, test and participate in, emerging technologies and new markets. Using real options enables a company to conserve resources by investing in several emerging technologies simultaneously, instead of investing fully in one particular high-risk technology that may ultimately fail. When a successful technology and market direction is confirmed, the company can shift to traditional analysis frameworks such as NPV.
The concept of “real options” was originated at the Wharton School in the 1980s by two Wharton professors (Bill Hamilton and Graham Mitchell). With Mack Institute sponsorship, the real options framework was developed into a “toolkit” by Wharton Professor Ian Macmillan and his colleague Rita McGrath (CITE).Their research led to the development of a strategic framework called “Discovery Driven Management” These concepts were tested at DuPont by Dr. John Ranieri, who has worked with Prof. Macmillan to apply this approach to DuPont’s development of biobutanol, which is in the process of being commercialized.
Scenario Thinking and Decision Strategies
Scenario Thinking involves creating “scenarios” as part of the company’s planning process, to describe several possible futures that may result in markets where high uncertainty and risk are present, or expected to occur. Dr. Paul Schoemaker’s approach includes identifying trends (factors that are known) and uncertainties (factors that are largely unknown), which are used to develop a matrix with four (or more) scenarios that describe what will occur, depending which uncertainties prevail.
This approach has been used in the Mack Institute to design ground-breaking conferences and research reports on the Future of BioSciences, the Future of the Energy Grid, the Future of Medical Devices…to name a few. In 2006, Dr. Schoemaker co-edited (with Michael Tomczyk) a 132 research report entitled “The Future of BioSciences: Four Scenarios for 2020 and Their Implications for Human Healthcare.”
This research was expanded in a 2009 book by Dr. Schoemaker and Dr. Joyce Shoemaker entitled Chips, Clones, and Living Beyond 100.
Dr. Schoemaker, a senior fellow of the Mack Institute and Chairman of Decision Strategies International, is a pioneer in the development of scenario planning, dating back to an extended sabbatical he took with the scenario planning group at Royal Dutch Shell, where modern scenario planning originated. Dr. Schoemaker has refined the practice of scenario planning into a strategic toolkit and has incorporated scenario planning into several Mack Institute events and research reports.
Learning to identify weak signals can help CEOs and other senior decision makers recognize and anticipate “surprise attacks” that can wreak havoc with companies, industries and markets. There are numerous examples of “missed signals” that range from ignored intelligence that signaled the attack at Pearl Harbor, to signals that revealed the collapse of the sub-prime financial market. One of the problems that interferes with the recognition of weak signals is the fact that “organizational sense making is usually driven toward a single interpretation, so new data are force-fit into the existing mental model…organizations need competing hypotheses to escape the trap of getting stuck on a simple, single view that is wrong. These concepts are elaborated on in a 2009 MIT/Sloan Management Review article “How to Make Sense of Weak Signals” by Paul J.H. Schoemaker and George S. Day.
Schoemaker and Day suggest that managers who can identify and minimize both their personal and organizational biases are less likely to get blindsided. Catching and capturing distant threats and opportunities means applying different search methods—and looking for overlapping results.
Teasing out the implications of any finding requires fitting it into different frameworks. Three stages are described for incorporating these signals into the decision making process:scanning for weak signals, sense-making and probing and acting on these signals. Furthermore, the intelligence gathering process requires companies to: 1) tap local intelligence, 2) leverage extended networks, 3) mobilize search parties, 4) test multiple hypotheses, 5) canvas the wisdom of the crowd, 6) develop diverse scenarios, 7) seek new information to “confront reality”, 8) encourage constructive conflict, 9) trust seasoned intuition, 10) deploy multiple lenses and 11) talk to customers and competitors.
Their conclusion: There is a major difference between taking in signals and realizing what they mean. In a fast-moving marketplace, none of us can afford to miss what we are seeing.