Innovation: Sometimes It Takes a VillagePublished: June 24, 2009 in Knowledge@Wharton
Whether it's a faster way to move data, a cheaper way to power a car, or a cleaner way to sweep up dust bunnies, the right innovation can deliver huge profits to an organization. But given today's fast-paced global marketplace and limited resources for research and development, companies often struggle simply to survive, let alone innovate.
Yet the same forces that have flattened our world may also yield new directions for the future of innovation. During a recent conference at the Mack Center for Technological Innovation, academics and business leaders argued that, rather than going back to the drawing board, companies should go outside their walls and tap into "innovation networks."
An "innovation network" is a web of people, institutions or companies outside of a firm that help it solve problems or come up with new ideas. While organizations have formed alliances and strategic partnerships for hundreds of years, experts say this web of connections is becoming increasingly important today.
"It's all about diversity. It's about getting to everybody who might be able to bring an innovative idea to the table," said conference speaker Dwayne Spradlin, president and CEO of InnoCentive, of Waltham, Mass. "Almost all these things are about [being] better, faster and more cost-effective.... In this kind of economy, organizations have a phenomenal opportunity to think fundamentally differently about the innovation process, and restructure around that."
The conference, titled "Innovation Networks: New Insights, Open Questions and Management Fashions," explored the benefits of innovation networks and looked at different ways that firms manage their expanding webs of partners. Although there was general agreement that a company could benefit from shifting its focus outside its own world, questions remained about how to make innovation networks more successful. Companies often find it hard to open up to innovation from outside sources, or may use their networks poorly and not get the full benefit. A consensus emerged that many companies must change their culture to take full advantage of the power of network innovation.
Despite their importance, alliances between companies only succeed about 40% of the time, said Wharton management professor Harbir Singh, a conference organizer and Mack Center co-director. "Why is the success rate not higher?" Singh asked. "How do we improve performance above 40%?"
Organizations grapple with how to build external networks -- what Singh calls "the extended enterprise" -- without shifting too much focus away from the core needs of the firm. "In order to be successful in the extended enterprise world, you have to invest in alliances and network capabilities," Singh said. "But from a 'focused firm' approach, you would say that alliance and network capability is secondary to the core focus of the firm.... Really, what it comes down to is the tension between creating shared resources versus protecting one's own resources."
Existential questions emerge as alliances proliferate, said Harvard Business School professor and conference participant Ranjay Gulati. "You begin to ask, 'Who am I? Who are we, the firm? Who is 'us'? Who is 'them'? Who are we competing with? Who are we not competing with? Who are the good guys and who are the bad guys?'"
Nevertheless, real-world examples show payoffs that can be worth the tension.
As vice president of knowledge and innovation at Procter & Gamble for many years, Larry Huston improved the company's innovation productivity by 60% through strategic alliances and partnerships. Huston created and led P&G's "Connect and Develop Strategy," which involved hundreds of outside partners in research and development. The strategy presumed that for every scientist at P&G, there were at least 200 outside the company who could do similar work. With that mindset, the company's intellectual assets became not just "our know-how" but also "who we knew," said Huston. The result: more than $10 billion in revenue from more than 400 new products -- most of which were created in collaboration with outside partners. In 2007, for example, 186 companies were involved in the 125 new products that went to market. "What we fundamentally did was redefine our organization as 1.8 million people," said Huston. "What you're doing is building an unbelievable infrastructure to innovate with other people's ideas."
'From Inventing to Connecting'
Now managing director of consulting firm 4iNNO in Cincinnati, Ohio, and a senior fellow at the Mack Center, Huston helps companies re-think their approach to innovation and open networks. "If you look at most organizations, they're focused on what is their intellectual IQ," Huston said. "What we're talking about is moving from inventing to connecting."
Spradlin of InnoCentive puts in another way: "Do you consider the lab your world or the world your lab?"
For InnoCentive, the answer is definitely the latter. The company's raison d'être is to solve problems by throwing them out to the world and seeing what comes back. Companies, foundations or groups of like-minded organizations define a problem and offer a financial reward to whoever comes up with the best solution. "Pick your problem," noted Spradlin. "You can assign an economic inducement to it, organize the masses and get them excited about solving the problem."
InnoCentive now boasts 175,000 "solvers" from more than 200 countries around the world. About 90% are individuals, 10% are organizations and 60% have masters degrees or PhDs. Last year, nearly 50% of the "challenges" posted on InnoCentive's web site generated a solution that was put to use.
Academics who polled InnoCentive's winning solvers discovered something "both startling and intuitively obvious," said Spradlin. "What they found was that typically ... the background of the solver who solved the problem" was "no less than six disciplines away" from the subject area in which the problem emerged. "What that means is, if all the Stanford PhDs in your chemistry lab could have solved the problem, they would have solved it already."
Case in point: Twenty years after the Exxon Valdez oil spill in 1989, as many as 80,000 barrels of oil remain on the floor of Prince William Sound because the oil has been frozen by sub-arctic temperatures, making it difficult to pump to the surface. The Oil Spill Recovery Institute, established by Congress after the spill, ran a $20,000 challenge with InnoCentive in 2007 to try to solve the dilemma, which had perpetually stumped the world's oil experts. After three months, a construction engineer from the Midwest came up with the winning answer, surmising that vibrating the oil could keep it in a semi-fluid state, in the same way cement is kept flowing while it is poured into a form. Modify the drilling equipment, vibrate the oil and you'll be able to pump it, he suggested. It worked.
"When you're ready to move the problem to the outside world, what you really need is some fresh thinking," Spradlin said. "Organizations today aren't set up to do that very well. That's why this network innovation is such a powerful idea."
Conference speaker Mervyn Turner, senior vice president of worldwide licensing and external research at Merck, agreed that the crowd can be powerful. The pharmaceutical giant, based in Whitehouse Station, N.J., cultivates dozens of strategic partnerships and joint programs with external companies worldwide every year. "You have to expand your horizons about where innovation can be found and what it means to innovate in our business," said Turner. "The idea is to celebrate the global nature of innovation, not fight it."
But to make full use of those external networks, the company has to be strong internally, Turner added. "We came to the conclusion that you [need] a really strong internal research and development capability if you are going to leverage external opportunities." Out of 6,000 potential external opportunities annually, the company chooses to purse only about 45 or 50, he stated. "We say 'no' nicely about 6,000 times a year... .You [need] a really good organization to filter through that many opportunities and leverage that capability through collaboration.... [We] continually evaluate things in a highly coordinated way."
Managing the network is even more vital in the aerospace and defense industries, where a handful of companies compete for contracts that can make or break business for decades. "Every aerospace and defense company has mastered alliance formation and alliance management," said Michael Langman, who leads the aerospace and defense practice of PCE Investment Bankers in Winter Park, Fla. In the aerospace and defense industries, external networks are often a substitute for internal innovation, Langman said. "Co-opetition is a fact of life. It just costs so much money to develop the next generation aircraft."
Companies rely on "risk-sharing partners" in dozens of countries to help meet industry demands. In one case, Raytheon won a $11.2 billion contract by assembling a team of 64 different companies across the United States.
"Managing the network is incredibly important," Langman said. "It's a winner-take-all game. If an airline buys a 707, it's going to be 20 or 30 years before it buys the next generation aircraft.... In the [defense] market, it's the same thing. If you're not part of that program, you're going to be shut out for 20 years. It's not like fashion or consumer goods."
Harnessing the power of innovation networks requires not just tight management but vision -- and sometimes a shift in company culture. That was the case for GE, which embarked on a systematic approach to building its innovation network once the company realized it was necessary to maintain a competitive edge. "Historically GE didn't partner very well," said conference speaker Patia McGrath, GE's global director of innovation & strategic connections. "We would either acquire it or build it ourselves."
GE developed a firm-wide initiative to identify key network players and map their importance to the company. In small groups, project teams brainstormed about their immediate network by dividing it into five broad categories: customers, competitors, influencers, scientific development players and suppliers. Categories were then subdivided, analyzed and drawn into maps. Once the team maps were linked together, a clear picture of the company's network began to emerge, and an action plan for leveraging that network took shape.
"The individual maps themselves are terrific, but when you combine them ... you really start to see some key data points emerging," McGrath said. Lesson learned: "If it's simple and cheap -- all it takes is people's time -- you'll get some adoption."