Musings on Entrepreneurship and Innovation
Saturday, January 13, 2007BigCos' (Potentially) Slow Road to Open Innovation
Innovation may be the hottest buzzword in business today. A Google search on the word returns 127 million hits. Among those at the forefront of the innovation wave are Henry Chesbrough, who sees a paradigm shift toward Open Innovation (see here, here, and here), and Procter & Gamble, who has championed the virtues of its connect and develop model (see here):
We believe that connect and develop will become the dominant innovation model in the twenty-first century. For most companies...the alternative invent-it-ourselves model is a sure path to diminishing returns.
Obviously, we at Evergreen Innovation Partners are true believers. Nevertheless, our conviction is tempered by the realization that the shift toward Open Innovation may take a long time. Indeed, in many industries, it may require a generational change in management who have grown up with a mindset of embracing collaboration.
Consider a simple model, where revenue is derived from the stock of commercialized products, and the stock of commercialized products is fed by the inflow of commercializing products:
The rate of commercializing products is constrained, in part, by the resources applied to the task. That's one of the reasons that large, branded manufacturers of consumer products ("BigCos") are so attractive to individual inventors: BigCos, by definition, have accumulated significant resources. On paper, at least, BigCos would seem to have a high capacity to take new products to market.
However, effective capacity is determined by the product of resources and capability, the rate at which resources can be applied productively. In this sense, not all BigCos are created equal. Some are more capable than others. Those having the largest accumulations of resources may not have the highest commercialization capacity.
Capability, in turn, might be thought of as the product of mindset, skillset, and toolset. In today's environment, a "not invented here" mindset characterized by lack of trust, disincentives to collaborate, and a lack of urgency can effectively negate commercialization capacity, notwithstanding otherwise high levels of resources, skills, and tools.
Of course, the levels of the components of capability aren't static. They can be increased through study and learning. The ideas of Chesbrough and others are a starting point, but aren't sufficient. Capability and capacity building requiring learning by doing:
Frustratingly, capability building through learning is subject to the characteristic S-curve, so increasing capacity by building capability is, at least initially, slower than the alternative route of increasing capacity by increasing the amount of resources thrown at the problem.
Procter & Gamble's development and implementation of connect and develop has unfolded over many years...it has been a methodical process of learning by doing...
Changing mindset to effectively embrace the opportunities presented by Open Innovation may be the most challenging. Even when one assumes that a company has embraced the logic of the Red Queen Effect, the CEO has mandated an Open Innovation strategy, and incentive systems are in place to reinforce collaborative behavior and a sense of urgency, there remains a daunting barrier to capability building: lack of trust.
I'm not talking about the xenophobia that characterizes NIH. Rather, I'm referring to pragmatic, valid concerns on the part of BigCos regarding the quality of ideas sourced externally. Consider this warning by P&G:
Never assume that "ready to go" ideas found outside are truly ready to go. There will always be development work to do, including risky scale-up.
Likewise, the researches of Chesbrough and others have identified this rational reason for resisting the incorporation of external ideas:
One such component is the need to manage risk in executing R&D projects, especially when the cycle time to complete a project is accelerating. When cycle times accelerate in a project, there is less time to evaluate and incorporate external technologies.
So, companies face two countervailing dynamics in regard to their successful adoption of Open Innovation. On the one hand, an increase in clockspeed mandates an increase in commercialization capacity. In addition, a sustainable increase in capacity requires increased capability, not just an increase in committed resources. As discussed above, capability building requires learning by doing, and such doing requires a sufficient degree of trust in the work product of collaborators. On the other hand, the same increase in clockspeed can result in a lack of effective trust in others' work. Only time will tell which force is stronger within a given company, even if Chesbrough has correctly identified a paradigm shift toward Open Innovation.
Even for the largest, most successful companies in the world, the prognosis for successful adaptation is not encouraging. Consider the following analysis of a study of the performance of the world's largest 100 industrial companies between 1912 and 1995 (see here for more):
In total, forty-eight out of the top 100 disappeared as independent entities, and only twenty-eight were larger in 1995 than they were in 1912. A small number of the companies, such as Procter and Gamble and BP, were very much larger, expanding shareholder value by a factor of at least seven. But these were the exception rather than the rule. Disappearance or decline was almost three times as likely as growth.
In other words, just because Procter & Gamble has made connect and develop work doesn't mean many other BigCos will be able to adapt to an environment of Open Innovation.
Here at EIP, we are working hard to learn the difficult art of gauging a prospective collaborator's capacity to commercialize externally sourced products. To that end, we pay attention to resources such as financial capacity, established distribution channels, and brand strength. Increasingly, however, we also think hard about softer indications of capability - most particularly mindset - because those may be the slowest and hardest to change. Sometimes, a relatively less well endowed company may be the right partner for us, because the smaller company's mindset and skills (including its ability to learn) may represent offsetting capability, which allows it to make the most use of its relatively limited resources.
