Growth Through Innovation: Innovation Principles for the Technology-Driven Enterprise

By R. Boutellier and M. Heinzen

Technology is the key to our growth, but with it comes many risks. Below, Roman Boutellier and Mareike Heinzen explain that routinised technological innovations are, in the main, enough for many companies and can lead to even bigger waves of innovation. They provide managers with eight innovation principles for managing their innovations in technology-driven enterprises.

Technology for Good and for Bad
On September 11, 2001 the world changed: Technology is the key to our wealth, but it also makes us vulnerable. Thanks to technology we now live much better lives than our ancestors did, yet others may interrupt our comfortable life with exactly the same technology. Even world powers have changed or adapted their policies because of the emergence of new technologies. Many old technologies survive thanks to military interventions: The First Gulf War supported the survival of the dominant car engine, the Otto-Engine – a dual good that has served both civilians and military for decades.

Einstein intervened with president Roosevelt to start the atomic bomb, but later warned of the dangers of an uncontrolled use of nuclear same technology. Today, after the disaster of Fukushima, some nations have decided to give up nuclear power for good. Other markets, like China, continue to use it and are convinced that the positive aspects far outweigh the negative side effects. Management has to cope with these differences.

New technologies have simplified our lives with many dreams “just a mouse click away”. The Internet speeded up world trade and business, but it has also increased competition. Information is accessible everywhere. Smartphones and laptops make us available anywhere and anytime, privacy has become a luxury. Lifestyle habits have changed drastically. Our working life interacts more and more with our free time. Thus, technology has also led to deteriorating health, psychological problems and stress in companies. There are losers, not only winners. Whenever technology changes very fast, new jobs are created but old jobs also disappear, and not everyone can be retrained fast enough.

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Even though a technology such as the TV has had a dramatic impact on democracy, the democratic decision process is often slower than technological change. While consumers are marvelling at this year’s new tablet or Smartphone, researchers are already working hard on the next wave of technologies that will bring humanity closer to what we know from science-fiction: precision medicine, driverless cars, geriatric care, robots, intelligence-enhancing tools or 3D-printing in every home. Their economic potential and their side effects are still not fully known. Governments work hard to foster technical innovation while simultaneously attempting to protect us from its side effects with rules, laws and standards – a difficult balancing act.

 

Growth Driven by Technology
Growth has been the single most important aspect of the global economy of the last 200 years. The growth rate of GDP per person reflects the change in productivity and has a close correlation with an increase in living standards. Growth is the most important parameter determining the value of a company and is driven by technology. Recent estimates set its impact at 35 to 55% of total growth. Remember the flood of innovations we have had over the last 130 years!

But, in the end, growth depends on society and mankind – not on technology alone. Technological change is not a mechanical process of simply finding better innovations, but is driven by entrepreneurial spirit. We often forget that tinkering is one of the most important drivers of invention, while public acceptance is the most important factor of selection. The social system that has turned out to be very efficient in promoting innovation and technology is capitalism. In a capitalist society, innovation means either life or death for every firm: innovators are promoted, well paid and their inventions are protected through property rights. Even though capitalism encourages entrepreneurs to innovate and profit from their innovations, corruption may harm and destroy innovations. This can be observed in many countries where people are not promoted based on merit, but based on attitude and knowing the right people.

 

Technology Driven Companies
At the beginning of a technology lifecycle only the pioneers are interested. As rules do not exist, pirates commercialise and make money. With time, sometimes after hundreds of years, rules, dominant designs and standards develop and provide predictability. The big money can move in and big enterprises emerge, transaction costs go down; technology matures, until a new wave of technology starts the game again. These phases help to understand and manage Research & Development (R&D) processes in companies: with an analysis of patents and investments, the Japanese Kodama defined three industry types:
• In dominant design industries, such as the car industry, development projects can be frozen rather early without high risk, as the industry and customers stick to the dominant design and are able to invest long-term and extensively. Big technological change would need huge investments for training, production, sites and convincing end-users. Improvements come in small steps and in general it is possible to compensate for some technological  inferiority through marketing or services. R&D is driven by efficiency.

• In science-driven industries, such as specialty chemicals, R&D projects may be stopped during any phase. They heavily depend on serendipity and thus many rolls of the dice are needed until a successful project is found. This requires major investments and is the reason why it works better in big companies or close to universities. In 1953 the US spent some USD 40 billion on R&D and in 2005 an astounding USD 360 billion. Science has become big business. Science-driven companies need a specific type of organisation: they must create an atmosphere where the unexpected and the unexplained are taken seriously. R&D departments have to be closely linked to top management because research and science are the keys to survival and can be measured only through peer reviews. This is close to the environments we find in universities: small groups, professors with their PhD students, technicians and researchers, working for many years on a specific research field. In the neighbourhood of universities a new world of science-driven start-ups has evolved: since governments are spending more and more money on their universities they would like to see a bigger “bang for their buck”!

• In high-tech industries, such as the computer industry, teams must be able to stop projects even at later stages when R&D expenditures are high. High-tech means differentiation through better technologies and it improves fast. You cannot sell old performance for the same price when the new generation of products is ten times better. Top specialists change employers, company loyalty is low and technology spreads fast. Since the speed is so high, patents may sometimes be helpful, but they may be out-dated within months. Therefore, investment in knowledge is the key. In statistical terms, high-tech is defined in the US as an industry that spends more than 10% of its revenues on R&D or whose workforce has a high percentage of engineers and scientists – more than 15%. Since the advantages of high-tech products can easily be seen, they are likely to receive subsidies. Today’s concerns about global warming have led to large subsidies for clean technologies such as photo-voltaics or fuel cells. The main political argument to subsidise high-tech firms is the creation of jobs. But high-tech is risky as well: Subsidising specific technologies is an expensive game. A much safer approach is penalising those technologies with negative side effects: they increase costs. Engineers have been trained to reduce costs for hundreds of years. With penalties, the choice of the technology remains with the engineers. With subsidies, politicians make the choice.

 

Routinisation of Technological Innovation
Many companies look for radical innovation. But radical innovations are difficult and many are hidden. You realise their revolutionary character only in hindsight. They are not planned, despite the fact that it is much easier today to innovate than it was 50 years ago. In practice, most innovations are routine due to lower levels of uncertainty and easier processing. By accumulating many routine innovations they can have the same final impact as one radical change.

Today every organisation is urged to improve its processes. Process management is applied to all areas of management, even innovation. Important prerequisites for process management are reproducibility and routine. Processes should not be individual or exceptional. Many argue that in today’s R&D departments routine should not be applied because the environment is changing and new challenges frequently arise. However, small changes with high predictability are good enough for most companies: administrative costs can be lowered with continuous business process optimisations. Automation and standardisation reduce labour cost and miniaturisation reduces material cost.

As soon as we have a modular design with self-contained modules and weak interactions between the modules, design becomes much easier. Modularisation has made huge progress thanks mainly to miniaturisation. With self-contained modules, parts and components can be combined more easily. But there is no free lunch: miniaturisation needs tighter tolerances for material and production processes as well. Tighter tolerances can be achieved with better-trained staff or even through automation alone. Low labour cost loses its importance!

Miniaturisation and modularity with standard interfaces are two trends that have created new industry infrastructures: whenever a product is split up into modules, R&D can be delegated to the suppliers of the modules, usually with an increased economy of scale. The system producer can concentrate its own resources on system design. The supplier can sell its module for other applications as well. Thus, an economy of R&D and manufacturing evolves.

The combination of modules will lead to a wave of new innovations – modular innovations. Modules can be combined to form new innovations, “mix and match”. We could call them “Lego-type innovations“. Current examples of such combinatorial innovations are Smartphones that combine the functionalities of MP3, camera, organiser and phone etc. in one mobile phone.

Modularity has a significant impact on work-sharing and competition within an industry. The development of new products is today characterised by specialisation and by the integration of specific functions. Co-operation between suppliers and OEMs is one central element of staying competitive. This leads to a combination of co-operation and competition: co-opetition.

 

Trust in Technology
With shorter development times, an increasing diversity in applications and a much higher complexity we have more technical failures. Reliability has to be designed into the product. To overcome complexity, technical risk management relies heavily on mathematics and simplification. Usually the simplifications are chosen so that the resulting loss expectations show the worst case. Despite the many minor failures, technology has never been as broadly accepted as it is today. There are, however, three exceptions: nuclear, bio and genetic technology. Whether a technology is accepted or not depends less on rational arguments and more on whether we trust the people who run and supervise the technology.

The risks of big failures have been reduced substantially due to the experience gained over decades. Despite some potentially dangerous technologies, life prospers. However, diseconomies of scale can occur: big technologies have become very complex. No single individual fully understands how a Boeing 737 works or what the function of every single component of a big chemical plant is: this is one of the sources of uncertainty. Whenever anxiety driven by a technology coincides with wealth, emotions overcome rational judgement. Society should not be surprised by these apparent inconsistencies. Many catastrophes have arisen in a climate of increased confidence that was supported by common sense and experience.

Scientists take on risks not because they are careless, but because they feel the need to move into unknown fields. In general, scientists are not interested in probing what is already known. They want to discover something new, a surprise, which often means that they have to go beyond the frontiers of today’s know-how. Many of the early researchers in nuclear energy died of cancer; they were not aware of the dangers of nuclear radiation: Marie Curie’s lab books are still radioactive today. However, science is not the big danger. Researchers in laboratories work with very small doses of dangerous materials in strictly controlled environments. Big risks occur when new technology is moved to industrial scales because many risks do not increase linearly with scale but may grow much faster. Society has to live with systemic risks. When a risk becomes a political issue, a decision has to be made as to what kind of risks should be accepted and what kind of risks should be avoided. The human perception of risk becomes as important as the technical view. However, learning about the risk potential of a new technology takes time and thus increases costs. The most prominent examples are new drugs.

 

Eight Important Innovation Principles for Technology-Driven Enterprises
Innovation became the buzzword of the managerial world at the beginning of the 21st century. The greatest innovation is innovation! Most people expect differentiation from competitors, application of scientific knowledge and finally growth whenever they are confronted with innovation. A closer look shows that innovation is indeed important for most companies, but has to be carried out in a systematic way in order to keep risks, cost and opportunities balanced. Eight principles have emerged as having a significant effect on the outcome – and in the end on growth:
• No innovation outside strategy: in order to keep employees of a company on a chosen track, it is essential that they know the strategy of the company by heart. A proven tool to achieve this is the strategic roadmap. This may be a one–pager, a single precise report, which presents a mixture of financial and non-financial measures.
• If it goes outside the company’s strategy, spin it off: if the innovation process leads to products outside the firm’s strategy it is sometimes easier to spin it off than to change direction. Changing direction destroys motivation.
• Everyone knows the value proposition: the value proposition is the answer to the question: why should the customer buy our product? As long as everybody on the innovation project wants to satisfy this question, innovation remains customer-driven. Why should the customer buy your product and not the competitor’s? Competitive advantages can be achieved by short delivery times, a fast service network and reliability in all aspects. To realise these features, fundamental changes may be needed in product design such as modularity, standardisation and miniaturisation. All have profound consequences for the organisation.
• Open one valve at the project start: most innovations do not achieve the functionality that was originally planned (quality), need twice as much time to be developed (time) and costs three times the budget allocated (cost). This is a natural consequence of planning the unpredictable. To avoid surprise, top management has to define which needs have to be met regardless and where there is a degree of flexibility. The valve should be opened where it hurts the least. Please do not forget that short projects tend to be cheap projects. So, opening the cost-valve is not too risky if time is kept under control.
• Go for a quick start: this is why, at the beginning, project costs are always below budget and increase towards the end in the typical end-race. Management has to ensure that costs are on budget from the beginning! It is better to spend too much too early than too much too late.
• Innovation management = project management: the three project phases – early chaos, disciplined project and market introduction – are completely different and usually need three different leaders – the first a creative geek, the second a disciplined engineer and the third a convincing salesman. Many innovation projects are similar: only a few feasible ideas can be turned into development projects. As soon as they are development projects, they need teams of dedicated people and disciplined project managers. After the introduction of the innovation in the market, there should be zero doubt about the usability of the innovation. Otherwise salesmen cannot convince customers.
• Innovation management = profit management: innovation is useful to the organisation only if it makes money. That is why a simple business plan is a must from the beginning.
• Innovation management = people management: R&D projects succeed because of some rare individuals who fight until the end against all adversities and win. The most important individual is certainly the project leader. S/he knows the customer from direct contacts and knows what market segment s/he is targeting with the innovation. S/he has a project team at hand that has all of the specific expertise needed or at least has the contacts with a network of experts. In order for such a network to exist, most teams need to be diverse and cross-functional.

Innovation will always be an undertaking with many risks and many surprises but with great opportunities as well. Without innovation there is no progress and more and more innovations become a routine. We increase the R&D capacity not only to innovate, but to be able to copy as well! Most of our innovations are simply combinations of existing modules, the result from copying and exploiting market opportunities no-one else has seen before.

This article is adapted from Growth through Innovation: Managing the Technology-Driven Enterprise by Roman Boutellier and Mareike Heinzen, published by Springer. Copyright 2014. All rights reserved.

About the Authors

Roman Boutellier is a Vice President of Human Resources and Infrastructure and full Professor of Technology and Innovation Management at ETH Zurich, Switzerland. The focus of his research is the management of technology-driven enterprises with a specific focus on innovation. He is the author and co-author of 8 books and over 100 publications. Roman Boutellier has been CEO and held several leading positions in multinational companies. Today, he is member of the board of directors of several Swiss multinationals.

Mareike Heinzen is a postdoctoral researcher and lecturer at the Chair of Technology and Innovation Management at ETH Zurich, Switzerland. She conducts research on organisational dynamics and business processes in various companies and sectors. Before obtaining her PhD, she worked as a product manager at Daimler AG. From September 2014 she will take up a Professorship for Management at the University of Applied Sciences in Koblenz, Germany.

 

 

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