17th level Hacker

R&D and the Innovation Curve

There’s a very interesting post about the correlation between R&D; spending and profitability. The post points to a great article at strategy+business. I don’t think the news that businesses are moving from a “closed” innovation cycle (all work done within the company) to an “open” innovation cycle (where ideas in particular are pulled from outside) is very surprising. The general movement towards business models where free agents play a large role certainly seems to fit together well with the shift. I do take issue with one bit however. It relates to the innovation effectiveness curve and this bit from the text:

Our recent work has shown that incremental innovation investments are subject to diminishing returns – in other words, each additional dollar spent on new product development ultimately yields a lower and lower return. This observation passes the test of common sense: Spending beyond a certain point on any development portfolio should result in lower returns, …

I agree with the statement in general, but that curve as illustrated ignores the “beyond a certain point” part of the statement. That curve seems to show what happens if companies overspend on innovation, charting how effectiveness falls off if the company overspends. What about underspending? I would assume that effectiveness also falls off in that direction.

I assume that the authors aren’t saying that zero spending on new product development is the way to go. It’s probably their response to previous suggestions that companies should be spending a lot more on R&D; which has shifted the focus down the line to overspending. For most of the companies I’ve worked with, overspending on product development is not the major issue. Granted, most of the companies I work with are smaller organizations, and the examples given in the article seem to be tilted towards larger companies. But I still want to say that in general the challenge to small companies that I’ve seen most often is hitting the right level of innovation. For startup companies the error seems most often to be too much stress on innovation. They plan big elaborate products and services, burn too much of their capital, and don’t have enough time or money left for the course corrections they inevitably need down the line. However, as soon as a company has a product out they tend to swing quickly back the other way. They become quickly focused on their existing customers and product lines, and tend to react negatively to any new idea they didn’t generate themselves.

For a small company just starting out I think there is an opportunity to adjust the maximal level of innovation payoff. Not many of the companies I’ve worked with have attempted to plan their business development along this line. For a startup company it can seem ridiculous to attempt to plan for the level of innovation they want to achieve when they don’t yet have a first product. But the rate of innovation within a company is one of the major influences on the overall tempo of the business, and once the beat is set it usually gets more difficult to change as time goes on. The discussion about the innovation curve from the article says that the innovation curve for a company normally does not change. I agree, but I think that it can change. If a company is looking to alter the way it innovates they can change that curve, but just throwing money at R&D; is not going to do it. The company needs to look at alternatives like creating internal marketplaces for ideas and tying together the different stages of the innovation cycle so that divergent ideas from all areas of the business (and outside the business) can be captured and explored. I think the reason that the innovation curve doesn’t move is because so few concentrate on moving it. I think that finding the point of maximal payback and making an effort to make that point correspond with the desired maximum is a necessary precursor to tuning performance along that curve.

On the other hand, I do think that the comment from David Patterson is perfect:

If they are right, and if Godin’s concept of what really constitutes viable innovation holds water, then small businesses can look forward to new and increased markets for their ability to innovate quickly.

I agree with that completely. It can be tricky trying to fit within the innovation cycle however. I’ve certainly found that to be true within my industry of choice, and I’m assuming it applies to others as well. Relationships in general have to be closer. Being engaged during the innovation cycle doesn’t mean just getting a technical specification and wandering off to implement it. Many companies are looking for someone to help them think through the process as they execute it. There needs to be a lot of dialog between the parties, occurring on a number of different levels. This can be tricky to establish at first, or it has been for me at least. A company wants a new product, they want it as soon as possible, and they’re groping around for help. The temptation for me is to attempt to give them answers. However I’ve found that the right course is normally to start a conversation. Once the dialog has started the result is normally a plan which blends outside insight with hard won internal skills and core competencies. The “not invented here” syndrome is pretty easy to beat if you can come at it from the right angle.