Batten Briefing: Unleashing Innovation

BAT TEN BR IEFI N G IMPROVING THE WORLD THROUGH ENTREPRENEURSHIP AND INNOVATION

DEC 2013

Unleashing Innovation:

AFTER THE LIGHTBULB MOMENT, HARD WORK Like miniskirts and platform shoes, innovation initiatives have swung in and out of contributor

Malgorzata Glinska Senior Researcher, Batten Institute glinskam@darden.virginia.edu

fashion. But judging by recent headlines such as “Less Innovation, More Inequality,”1

“Is Innovation Leading to a New Age of Productivity in the U.S.?”2 and “Persistence,

Innovation, Save a Starving Owl,”3 not only is innovation in vogue again, it is viewed as a silver bullet for a myriad of today’s problems.

Successful innovation has certainly been a cure for stagnant growth. In once mature industries, such as consumer electronics, innovation has led to explosive sales. No wonder that executives are desperate to unlock its secrets. But as recent global studies attest,

CONTRARY TO THE ROMANTIC INNOVATION MYTH, WHICH GLORIFIES A LONE INVENTOR WITH A SUDDEN FLASH OF INSIGHT, INNOVATION IS A TEAM SPORT.”

that’s not easy. Despite increased investment in innovation, only 18% of executives

from more than 500 companies in France, the U.K. and the U.S. surveyed by Accenture believe their company’s innovation strategy delivers a competitive advantage.4

Contrary to the romantic innovation myth, which glorifies a lone inventor with a

sudden flash of insight, innovation is a team sport. It's about turning a brilliant idea

into a commercially viable product that people will buy. And that requires the focused effort of many people working together as well as formal methodologies and business processes that need to be systematically reinvented for speed and efficiency.

This Batten Briefing sheds light on the hard work that comes after “the lightbulb 1

Phelps, E.S. 2013. “Less Innovation, More Inequal-

ity.” The New York Times.

2

Chandra, S., Miller, R. and Burrows, P. 2013. “Is

Innovation Leading to a New Age of Productivity in the U.S.?” Bloomberg BusinessWeek.

3

Jouvenal, J. 2012. “Persistence, Innovation, Save a

Starving Owl.” The Washington Post.

4

Koetzier, W. and Alon, A. 2013. “Why ‘Low-Risk’

Innovation Is Costly: Overcoming the Perils of Renovation and Invention.” Accenture.

INNOVATORS' ROUNDTABLE REPORT

moment.” It considers the challenge of exploiting the potential of existing innova-

tions while simultaneously exploring the possibilities for breakthrough growth. It also discusses the need to engage customers in the innovation process in order to improve the fit between offerings and customer needs and speed up the development of new

products. Because one of the most critical aspects of collaboration with customers is

the creation and use of intellectual property, this Briefing discusses the challenges of

managing IP. And last but not least, there’s no innovation without mistakes and false

starts; that’s why, as this Briefing notes, it’s crucial to create a culture where employees are not afraid to experiment and fail.

Exploit and Explore THE INNOVATORS’ ROUNDTABLE For the past three years, innovation executives from some of the world’s largest and most innovative companies have come to Charlottesville, Virginia, to talk about innovation. They are members of the Innovators’ Roundtable, an initiative of Darden’s Batten Institute for Entrepreneurship and Innovation, and they all grapple with similar questions: In a time of fast change, how can we ensure that our organizations are as adaptable as they are focused and efficient? How, faced with creative destruction, can we innovate quickly and boldly enough to stay profitable? How, in a business landscape where entrepreneurial spark is the secret to success, can we encourage employees to be creative, imaginative and willing to experiment?

The fourth gathering of the Innovators’ Roundtable, hosted by the Batten Institute on 2 May 2013 at Montalto, overlooking Monticello, brought together executives from Corning, CSC, DuPont, MeadWestvaco and Siemens. Through the daylong

To remain competitive, companies need to pursue a variety of innovation efforts.

They must continually improve and grow their traditional core businesses, which

generate reliable cash flow, but they must also constantly renew themselves by de-

veloping breakthrough products, services and processes.5 In other words, they must attend to the here and now while simultaneously keeping an eye on the future.

The innovations that build on a firm’s competencies are incremental—they consist of refinements to existing products and services and address the needs of existing customers, delivering solutions that are better, faster and cheaper. Radical innovations,

such as the internet, the smart phone and the Boeing 747, however, represent major

technological changes that have the potential to create new markets before customers have even articulated a need.6 They are the seeds of growth.

Working diligently at exploiting existing capabilities—and doing it with increasing

efficiency—while exploring new opportunities is a tough balancing act.7 Not surpris-

ingly, the companies that have mastered this organizational ambidexterity are few and far between.

One example is Corning, whose innovations have improved many products and

revolutionized many industries. For example, by mass-producing TV tubes in the 1940s, Corning made TVs affordable for an average American consumer. Forty

years later, the company helped develop the “fusion” process to make glass for LCD

screens. In 2007, when Steve Jobs asked the company for a better cover glass for the

wave of Apple iPhones about to be launched, Corning responded with ultra-durable Gorilla Glass, which is now found on more than one billion mobile devices.8

gathering, facilitated by Darden faculty members Mike Lenox, Ed Hess and Jeremy Hutchison-Krupat, the group debated issues related to managing an innovation portfolio.

5

O’Reilly III, C.A. and Tushman, M.L. 2004. “The Ambidextrous Organization.” Harvard Business Review. 82 (4):

74-81.

6

Bröring, S., Leker, J. and Rühmer, S. 2006. “Radical or Not? Assessing Innovativeness and Its Organizational Implica-

tions.” International Journal of Product Development. 3 (2):152-166.

7

O’Reilly III, C.A. and Tushman, M.L. 2004.

8

Holstein, W.J. 2013. “The Gorilla of Agile Business Innovation.” strategy+business. Booz & Co. http://www.strategy-

business.com/article/00192?pg=all (Accessed 9 September 2013.)

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BALANCING INCREMENTAL AND RADICAL INNOVATION Agile Innovation Corning keeps refining not only its products but also its innovation processes. In 2012, CEO Wendell P. Weeks began calling for better and faster R&D. Today,

in addition to its traditional “keystone component” innovation model, Corning is implementing “agile innovation.”

The idea that companies need to be agile—fast and nimble in their responses to

a rapidly changing business environment—is not new. In the early 1990s, agility

became a popular concept in manufacturing as a suggested response to the threat posed by the newly industrialized nations around the Pacific Rim—the so-called

“Asian tigers.”9 Implementation of agility, however, was hindered by the hierarchical bureaucracy prevalent in large U.S. manufacturing companies.

Agility turned out to be a great fit with software companies. Thousands of software

WE HAVE TO HAVE AN OPPORTUNITIES-DRIVEN, CUSTOMER-CENTRIC PORTFOLIO MANAGEMENT MODEL. WE NEED TO DO THINGS FASTER. ‘AGILE’ IS HELPING US WITH THAT.” Gary S. Calabrese, Senior Vice President, Global Research, Corning

firms worldwide adopted an agile process for software development and system-

atized “agile” into management practices and values.10 Centered around customers

and their needs, the agile development process focuses on getting more feedback from customers up front; making numerous, rapid design iterations in the early

phases; and having a clear idea about the product’s features before the costly, backend development stages begin.

Similarly, Corning’s agile innovation model is driven by customers. Meeting with customers early in the development process allows Corning scientists to modify

designs to better meet market needs. During an iterative process, the company’s

researchers meet directly with customers such as Samsung Electronics and Sony not only to understand but also to anticipate their emerging needs in technology areas such as organic light-emitting diodes and 3-D television.11

Agile innovation also pushes the company to take the risks that exploration en-

tails. For example, showing customers prototypes early on to get their feedback can result in significant further development in a short time frame if customers request a feature that is technologically challenging. “Not everyone is comfortable with it,”

said said Gary S. Calabrese, senior VP of global research at Corning. “There’s a lot of angst from scientists and engineers. But we made a strategic decision that when the dust settles, we’d be better off doing this than not doing it.”

9

Kidd, P.T. 2000. “Agile Manufacturing: A Strategy for the 21st Century.” http://www.cheshirehenbury.com/agility/agili-

typapers/paper1095.html (Accessed 25 October 2013.)

10

Denning, S. 2013. “Why Agile Can Be a Game Changer for Managing Continuous Innovation in Many Industries.”

Strategy & Leadership. 41 (2): 5-11.

11

Holstein, W.J. 2013.

3

Exploit and Explore [ c o n t i n u e d ] Pursuit of Speed Endless reviews of new products by marketing, manufacturing and sales slows

down innovation in many large companies. Corning has addressed this through a

streamlined decision-making structure and process. The company’s Chief Innova-

tion Officer and Chief Technology Officer run the Corporate Technology Council,

which evaluates early-stage ideas and decides which ones to fund. They also run the

Growth Execution Council, where senior management meets to allocate resources to the corporate growth platforms. Funding is approved quickly, eliminating layers of reviews.12

Less Control, More Flexibility WE CAN’T DO THE RIGID STAGE-GATE, THE WAY WE USED TO. IT DOESN’T ALLOW FLEXIBILITY AND SPEED. PROJECT MANAGERS CAN’T THINK THAT WAY.” Gary S. Calabrese, Senior Vice President, Global Research, Corning

For agile innovation to work, companies need to change their attitude toward controls, including various mechanisms designed to bring efficiency to the innovation

process. One such mechanism is the widely used stage-gate model, which was originally designed to bring discipline to the “chaotic” new-product development process and to help firms introduce products faster, improve their performance and lower

costs.13 Stage-gate lets companies minimize uncertainty by helping them identify—

at various stages, or gates—projects that are “wrong” before too many resources are

invested. A gate serves as a go-or-kill decision point, where a project either dies or is moved forward to the next gate.

There is some concern, however, that the stage-gate model is ill-suited to managing game-changing innovations.14 Critics argue that most stage-gate processes are op-

timized around “typical” incremental innovations. As a result, many creative growth

opportunities don’t make it into the pipeline. And if they do, innovation is squeezed

out of them as they move through the gates so that they can conform to the model.15 The problem may lie not in stage-gate itself, however, but in the way companies

implement it. In their desire to exert control, managers sometimes make the project evaluation process overly rigorous, with lots of inflexible rules and mandatory regulations.16 As some literature cautions, stage-gate should not be restrictive, since it

was intended to be an efficient system to help speed new products to market, not a control mechanism for micromanaging projects.17

Many companies have modified their stage-gate system, making it more flexible and

capable of handling a range of projects.18 Corning, for example, designs separate gate

controls for higher-speed innovations. “We can’t do the rigid stage-gate, the way we

used to. It doesn’t allow flexibility and speed. Project managers can’t think that way,” said Corning’s Calabrese.

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Investing for the Long Term What enables Corning to come up with radical, life-changing inventions is its longstanding, steadfast commitment to investing heavily in R&D. Corning spends 20%

of gross margin on research, development and engineering, which in 2013 amounted to more than $700 million.19 “It’s a big investment, and the Street expects us to

deliver high growth with such a healthy spend,” said Corning’s Calabrese.

In today’s climate, which encourages a myopic focus on earnings per share, such heavy R&D spending involves some risk. In fear of being punished by equity

markets, many companies underinvest in innovation, diverting resources away from long-term projects that don’t promise immediate payoff. As Darden’s Ed Hess said, too often, “companies engage in the ‘earnings game’ to meet short-term projections

instead of focusing on the hard work of managing portfolios of organic growth opportunities.” Corning’s leadership, however, understands the importance of paying

attention to the company’s long-term health. As CEO Wendell Weeks likes to say, the company has been here for 160 years and is going to be here for another 160 years.20

Organizational ambidexterity will, no doubt, help the company achieve that goal.

ONE OF THE BIGGEST KILLERS OF INNOVATION IS QUARTERLY REPORTING.” L. Lemuel Lasher, Corporate Vice President for the Office of Innovation, CSC

Corning’s commitment to continuous investment in R&D and its openness to new innovation models that allow for more flexibility and speed strengthen its ability to exploit existing capabilities and explore future ones.

12

Ibid.

13

Cooper, R.G., Edgett, S.J. and Kleinschmidt, E.J. 2002. “Optimizing the Stage-Gate Process: What Best Practices

Companies Are Doing—Part I.” Research Technology Management. 45 (5): 21–27.

14

Hutchins, N. and Muller, A. 2012. “Beyond Stage-Gate: Restoring Learning and Adaptability to Commercialization.”

Strategy & Leadership. 40 (3): 30-35.

15

Ibid.

16

Cooper, R.G. 2008. “Perspective: The Stage-Gate Idea-to-Launch Process—Update: What’s New, and NexGen Sys-

tems.” The Journal of Product Innovation Management. 25 (3):213-232.

17

Ibid.

18

Ibid.

19

2013. “Corning Spends 20% of Gross Margin on R&D, CFO Says.” Bloomberg TV. http://www.bloomberg.com/

video/corning-spends-20-of-gross-margin-on-r-d-cfo-says-R7uzSuCyRxONh71Sc3yXzA.html (Accessed 25 October 2013.)

20

Holstein, W.J. 2013.

5

Co-Creation It’s hard to find a company these days that doesn’t strive to develop new products

and services that meet or exceed customers’ needs. However, customer preferences

OUR PHILOSOPHY IS—WE ONLY INNOVATE WITH CUSTOMERS. YOU CAN’T APPLY THE TECHNOLOGY IF THERE’S NO CUSTOMER.”

change rapidly, and assessing them is often challenging and time-consuming.21

L. Lemuel Lasher, Corporate Vice

where speed to market is of the essence—are reaping benefits from actively engag-

President for the Office of Innovation, CSC

To improve the fit between offerings and customer needs, speed up the development of new products and keep costs from spiraling out of control, many firms integrate

customers into the innovation process. Consumer goods and high-tech companies— ing current and future customers in shaping new products, services and processes.

Nike is a case in point. In 2006, in collaboration with Apple, the company launched a customer-engagement platform, Nike+. With the help of a sensor in the running

shoe that can communicate with a receiver in the iPod Touch or iPhone, runners are able to set training goals, track their progress and interact with one another on the Nike+ website.

WE ENGAGE OUR CUSTOMERS MOSTLY ON THE FUZZY FRONT END OF INNOVATION. WE BELIEVE THAT’S WHERE THE GAME IS USUALLY WON OR LOST.” Daniel P. Edgar, Emerging Markets Innovation Leader, DuPont

In 2011, more than a million runners were registered on Nike+. Unlike NikeID,

an online platform where shoppers can build their own shoes from predetermined

components and colors, Nike+ goes beyond simple product customization; it delivers not just a product or service but a unique experience for each customer, bringing runners into the process of mutual value creation.22

Nike facilitates interactions among runners, coaches and trainers. It continuously enhances the experience of running; for example, users can track their runs with

great precision. They can also integrate music and running. At the same time, the

platform allows the company to engage runners in rich conversations that generate deep knowledge and insights into the real running experience.

Nike+ enabled the company to learn directly and rapidly from its customers and their interactions and, therefore, generate ideas faster and experiment with new 21

Thomke, S. and von Hippel, E. 2002. “Custom-

ers as Innovators: A New Way to Create Value.”

Harvard Business Review. 80 (4): 74-81.

22

Ramaswamy, V. and Gouillart, F. 2010. The

Power of Co-Creation: Build It with Them to Boost Growth, Productivity, and Profits. New York: Free Press.

23

Ibid.

24

Mootee, I. 2011. “Strategic Innovation and the

Fuzzy Front End.” Ivey Business Journal. 75 (2): 38-42.

25

Ogawa, S. and Piller, F.T. 2006. “Reducing the

Risks of New Product Development.” MIT Sloan Management Review. 47 (2): 65-71.

6

BATTEN BRIEFING

offerings at lower cost and risk. The commercial payoff was huge: In the first year, Nike’s market share increased by 10%.23

New Product Blueprinting at DuPont B2B suppliers also turn to customers to enhance their innovation performance. Take DuPont. In 2007, DuPont’s management wasn’t happy with the performance of the company’s new products. A benchmarking study revealed that a major culprit was the front end of the new-product development process.

Research confirms that the first step in new product or service development is

critically important. Often refered to as the “fuzzy front end,” it’s a process used to

identify customer needs, collect insights and create new possibilities.24 Faulty under-

standing of customer needs is blamed for notoriously high new-product failure rates, which often reach 50% or more.25

INNOVATING WITH CUSTOMERS In 2008, DuPont set out to fix this problem by deepening customers’ involvement

in the fuzzy front end. The company implemented a software application for B2B companies called New Product Blueprinting,26 which builds on the stage-gate

process and engages customers in a set of discovery and preference interviews. For

example, a tool called Market Satisfaction Gap measures customer interest in each

new product attribute. “It helps us to see what our customers value, and our customers help us to prioritize what’s important,” said Daniel P. Edgar, emerging markets

innovation leader at DuPont. He described how New Product Blueprinting works: “When you start with what your customers want, it’s a process for major business development. You’re going to talk to companies in the industry along the value

chain. ‘Tell me what your problems are?’ You don’t lead them; you let them take you

WE TAKE A HALF-BAKED IDEA OR A PROTOTYPE, AND WE SHOW IT TO OUR CUSTOMERS. WE’RE GETTING INCREDIBLE FEEDBACK, WHICH ACCELERATES OUR CYCLES OF LEARNING. IT’S BEEN COMPLETELY TRANSFORMATIONAL FOR CORNING.” Gary S. Calabrese, Senior Vice President, Global Research, Corning

to what’s important. Then you go back for quantitative questions: ‘How important is this to you, and how satisfied are you with your current solution?’”

Rapid Concept Prototyping Another technique companies use on the front end of the innovation process is

rapid concept prototyping (RCP).27 Prototyping is an iterative process that uses a

tangible output—a prototype—to collect meaningful feedback about a new product idea and design.28

To Tim Brown—CEO of IDEO—the essence of prototyping is “learning by mak-

ing.”29 As he explains in his book Change by Design: How Design Thinking Transforms

Organizations and Inspires Innovation, “Instead of thinking about what to build,”

prototyping is about “building in order to think,” which creates endless opportunities for discovering new and better ideas.30

Prototyping allows firms to observe how customers relate to products and services; it

WHEN YOU’RE WORKING WITH A CUSTOMER, HOW DO YOU MANAGE THE RISK OF OVERCUSTOMIZING? HOW DO YOU AVOID CREATING SOMETHING THAT ONE CUSTOMER WANTS BUT NO ONE ELSE DOES?” Arturo Pizano, University Collaboration, Siemens Corporation

also helps test new ideas faster. As Corning’s Calabrese said, “We take a half-baked

idea or a prototype, and we show it to our customers. We’re getting incredible feedback, which accelerates our cycles of learning.”

Because prototypes can be made relatively quickly and inexpensively, prototyping

also helps companies reduce the risk and cost of product development by revealing mistakes early.31

Becoming deeply attuned to customers’ needs has benefits, but it’s not without challenges. On one hand, companies face the demand for customization. On the other

hand, they are aware of the risk of over-customizing. As Siemens's Arutro Pizano,

manager of university collaboration, put it, “When you’re working with a customer,

how do you manage the risk of over-customizing? How do you avoid creating something that one customer wants but no one else does?”

26

New Product Blueprinting is a software application

developed by Advanced Industrial Marketing for B2B businesses.

27

Mootee, I. 2011.

28

Ibid.

29

Brown, T. 2009. Change by Design: How Design

Thinking Transforms Organizations and Inspires Innovation. New York: HarperBusiness.

30

Brown, T. 2009.

31

Mootee, I. 2011.

7

Managing Intellectual Property in Collaborations FROM CLOSED TO OPEN INNOVATION For most of the 20th century, firms tried to hire the smartest people in the industry and invest heavily in R&D in order to generate the best ideas internally and bring them quickly to market.32 R&D was a strategic asset that competitors used to create a barrier to entry.

In today’s global economy, firms operate in complex webs of collaborative relation-

In the era of “open innovation,” when collaboration among companies and universities, research centers, customers and even competitors is increasingly necessary to

generate ideas for new products and services, firms need to pay careful attention to managing intellectual property (IP).

Companies engaging in collaborations share proprietary IP and develop new IP to-

gether.37 This creates a number of challenges, such as finding and evaluating external

sources of technology and using the right tools and metrics to implement collaborative relationships. Having a clear IP strategy and making sure that appropriate legal agreements are in place before starting to collaborate are effective ways to deal with the challenges.38

ships that are an integral part of corporate strategies worldwide.33 The reason? The traditional R&D and commercialization process, or “closed innovation,” is no longer sustainable.34 First, it’s unlikely that the smartest people and best ideas can be found in one company. Second, even with a great idea, why

The Three Phases of Open Innovation

should one organization manage all the

Exploration

technical and market risks involved in com-

INCUBATION

mercializing it? Companies that get that optional steps

to be competitive, companies must be-

Detailed Discussion

Develop Relationship

Initial Contact

Mutual, One-Way or Two-Way Confidentiality Agreements

activity

The concept of open innovation holds that

Identification of Interest Areas, Business and Cultural Fit

Clear Understanding of What Each Party Brings; Technology Expertise and Areas of Interest

Initial Testing to Develop Joint Technical Statement of Work

deliverables

innovation” model.

contracts

logic right have long adopted the “open

Open Discussion

Agreement on Vision for Success

Joint Technical Plan

Non-Confidential Letter

come adept at identifying, accessing and

Material Transfer Agreement

exploiting outside knowledge while giving others access to their internal expertise.

Not only can firms benefit from ideas they find outside their own four walls, they can profit from sharing their ideas with others.35 Today, open innovation includes customer input, crowdsourcing, IP acquisitions, the solicitation of external insights, supplier integration and joint development projects.

It allows companies to expand their ideas, opportunities and know-how while minimizing the risks associated with bringing new technologies to market.36

8

BATTEN BRIEFING

Source: Mehlman, et al. 2010.

It is also important to keep in mind that activities and deliverables change over the course of a collaborative relationship. They are governed by a series of agreements

that include provisions for protecting the IP of each company and allocating rights to newly created IP between the companies.

INTELLECTUAL PROPERTY For the purposes of this report the definition of IP includes intangible business assets that are legally protected or given

To better understand what’s involved, it may be helpful to think of collaborations as involving three phases:39

ownership rights, such as patents, trademarks, copyrights, trade secrets as well as a variety of know-how that differentiates a

EXPLORATION, during which the parties consider the possibility of collaborating

company from its competitors.

JOINT DEVELOPMENT, which involves writing the collaboration agreement and

conducting the collaborative project

COMMERCIALIZATION, during which a product or technology is prepared for

market and begins to generate financial rewards

32

Joint Development DEVELOPMENT

Commercialization

Chesbrough, H. 2003. “The Era of Open Innovation.”

MIT Sloan Management Review. 44 (3): 35-41.

33

Pisano, G. 2006. “Profiting from Innovation and the

Intellectual Property Revolution.” Research Policy. 35 (8): 1122–1130.

Exploratory Co-Development

Exploratory Research Agreement

34

Co-Development

Detailed JDA or Alliance Agreement

Commercialization

License, Buy, or Commercial Supply Agreement

Chesbrough, H. 2003. “The Logic of Open Innovation:

Managing Intellectual Property.” California Management Review. 45 (3): 33-58.

35

Chesbrough, H. 2003. “A Better Way to Innovate.” Har-

vard Business Review. 81 (7): 12-13.

36

Chao, R. 2012. “The Ins and Outs of Open Innovation.”

http://www.forbes.com/sites/darden/2012/05/06/the-ins-

Successful Laboratory Test & Proof of Concept

Successful Field Test & Valuation Model

Market Success for Both Firms

and-outs-of-open-innovation-3/ (Accessed 30 August 2013.)

37

Slowinski, G. and Zerby, K.W. 2006. “Intellectual Property

Issues in Collaborative Research Agreements.” The Alliance Management Group, Inc. http://www.strategicalliance.com/ articles/Intellectual_Property_Issues.html (Accessed 26

Understand Value Chain

Understand Valuation Thoroughly

August 2013.)

Equitable Division of Profits

38

Slowinski, G. and Zerby, K.W. 2008. “Protecting IP in

Collaborative Research.” Research Technology Management. 51 (6):58-65.

39

Mehlman, S.K., et al. 2010. “Better Practices for Managing

Intellectual Assets in Collaborations.” Research Technology Management. 53 (1): 55-66.

9

Intellectual Property [ c o n t i n u e d ] One challenge during the exploration phase is balancing the need for both par-

ties to learn about each other’s technology without sharing too much information,

especially if the collaboration does not move past this initial stage. One way to avoid such “IP pollution” is for potential collaborators to assess each other’s IP using pub-

licly available information and to exchange as much non-proprietary information as

SUCCESSFUL INNOVATION REQUIRES BOTH CREATIVITY AND APPROPRIABILITY. IT IS OFTEN NOT ENOUGH TO SIMPLY INVENT A NEW PRODUCT OR BUSINESS MODEL. YOU HAVE TO CONSIDER HOW YOU MAY APPROPRIATE THE GAINS FROM INNOVATION. INTELLECTUAL PROPERTY STRATEGY IS CRITICAL TO CAPTURING VALUE FROM INNOVATION.” Michael Lenox, Samuel L. Slover Professor of Business, Associate Dean and Academic Director, Batten Institute

possible.40

The joint development phase is when collaborators negotiate future IP rights to

the intellectual assets they hope to develop together. By exchanging a summary of

each party’s IP strategy and needs for the collaboration agreement, the parties can shorten the negotiation period.41

During the commercialization phase, there are two critical activities: developing the business model and creating a financial model that enables both parties to share the risks and rewards associated with bringing a new technology to market.42

The importance of having the right business model for an invention cannot be

overstated. There’s no doubt that IP has huge potential value and that it should be

properly managed. However, it’s helpful to remember that technology has no inherent value by itself and that most patents aren’t worth much; the economic value of

technology arises only when it is taken to market via an effective business model.43 Therefore, in addition to evaluating research discoveries on their technical merit,

companies should make sure that those discoveries enhance their ability to create and capture value in the marketplace.44

What should companies do with discoveries that don’t fit their business model?

They may seek out new business models or release the public patents they won’t use.

They can also enter licensing agreements with other firms, encouraging the development of technologies that might otherwise languish “on the shelf.”45 40

Ibid.

43

Chesbrough, H. 2003. “The Logic of Open Innovation.”

44

Ibid.

45

Rivette, K.G. and Kline, D. 1999. Rembrandts in the

41

Ibid.

42

Ibid.

Attic: Unlocking the Hidden Value of Patents. Boston: Harvard Business School Press.

46

Hall, B.H. 2010. “Open Innovation & Intellectual Prop-

erty Rights—The Two-Edged Sword.” http://elsa.berkeley. edu/~bhhall/papers/BHH09_IPR_openinnovation.pdf (Accessed 25 October 2013.)

10 BATTEN BRIEFING

IP management is an important area in today’s fast-changing innovation landscape, where collaboration with a wide range of constituents, open innovation and crowd-

sourcing have become increasingly prevalent. IP management can assist in structuring collaboration agreements and in negotiating cross licenses with others in the

industry that hold complementary technologies. If managed well, IP ownership can

provide a framework that allows collaborating companies to profit from their inventions without damaging their competitive advantage.46

A Culture That Fosters Innovation Firms can turbocharge their R&D spending. They can hire the best talent there is.

But if their corporate culture stifles creativity and discourages experimentation, their innovation efforts will not produce life-changing innovations. Many studies dem-

onstrate that the right culture is what separates the companies that have the ability to create and market breakthrough products and services from those that fail to innovate successfully.

THE CULTURE—THE FEAR OF FAILURE—CAN INHIBIT INNOVATION. IT’S HARD TO BE INNOVATIVE IF YOU’RE AFRAID OF MAKING MISTAKES. HOW MANY COMPANIES CELEBRATE THE LEARNING THAT COMES FROM FAILURE?”

This raises two questions: First, why is culture so significant? Second, what are the cultural attributes that lead to successful innovation?

Why Culture Matters Culture matters because it is all about execution.47 It’s a system of shared values that

define appropriate attitudes and behaviors for members of an organization.48 Strong

corporate cultures help in the execution of strategy, because they energize employees,

Edward D. Hess, Professor of

appealing to their higher ideals and values, rallying them around a set of meaningful,

Business Administration and Batten

unified goals. Strong cultures also boost performance by shaping and coordinating 49

Executive-in-Residence

employees’ behavior. Stated values and norms focus employees’ attention on organi-

zational priorities that then guide their behavior and decision making. Unlike formal control systems, however, cultural values don’t constrain the autonomy necessary for excellent performance under changing conditions.50

Cultural Attributes of Innovative Companies A global study of 759 companies found that the three cultural attributes that had

the strongest positive effect on radical innovation were a willingness to cannibalize

the company’s existing products, an orientation toward the future and a tolerance for risk.51

Tolerance for risk is especially important. In order to foster innovation, teams need to be able to experiment, and experimentation involves risk and failure. Therefore, leaders can have a powerful impact on their organization’s ability to innovate by creating a culture that accepts failure as a part of learning.

47

Chatman, J.A. and Eunyoung Cha, S. 2003. “Leading by

Leveraging Culture.” California Management Review. 45 (4): 20-34.

48

O’Reilly, C.A. and Chatman, J.A. 1996. “Culture as Social

Control: Corporations, Cults, and Commitment.” Research in Organizational Behavior. 18 (1): 157-200.

49

Chatman, J.A. and Eunyoung Cha, S. 2003.

50

Tushman, M.L. and O’Reilly, C.A. 1997. Winning

through Innovation: A Practical Guide to Leading Organizational Change and Renewal. Boston: Harvard Business School Press.

51

Tellis, G.J., et al. 2009. “Radical Innovation across Nations:

The Preeminence of Corporate Culture.” Journal of Marketing. 73 (1): 3-23.

11

A Culture That Fosters Innovation [ c o n t i n u e d ] CORPORATE CULTURE Time after time, studies confirm that the most important ingredient of successful innovation is corporate culture. For example, a global research effort that looked at 759 manufacturing companies based in 17 of the largest economies revealed that the in-

One such leader is Jeff Bezos, the founder and CEO of Amazon. “A big piece of

the story we tell ourselves about who we are is that we are willing to invent,” he told shareholders at Amazon’s annual meeting in 2011. Bezos encourages a culture of experimentation, where failure is accepted so long as it yields new lessons. Ama-

zon’s incentive and reward systems reflect the importance of learning and discovery throughout the organization. Employee reviews include a section on what was learned from experiments, regardless of success or failure.55

ternal culture of the company was a much more important driver of radical innovation than national culture, capital, skilled

I’VE NEVER SEEN PEOPLE FAILING ONCE AND GETTING HAMMERED, BUT FAILING OFTEN WITHOUT LEARNING IS UNACCEPTABLE. PEOPLE WHO FAIL REPEATEDLY BECAUSE OF STUPIDITY—THEY’RE OUT THE DOOR.”

labor and innovation-friendly government policies.52 When Booz & Company conducted its annual Global Innovation 1000 study in

Paul France, Vice President, Innovation Systems, MeadWestvaco

2011, concentrating on the effect of culture on corporate innovation performance, the findings were similar: A company’s culture is the most critical source of business success or failure—more critical than strategy, leadership and R&D spending.53 That isn’t to say that strategy doesn’t matter. It does. Companies that innovate successfully have a clear innovation strategy that is in alignment with their overall business strategy. The quality of their talent, processes and decision making also matters. The most critical factor, however, is the culture that ties together all those

A climate where employees feel safe to take risks, where failure is not punished, and where mistakes made in the pursuit of novel solutions are accepted as part of the

innovation process is one of the building blocks of a culture that promotes innovation.56 Such a climate fosters engagement and enthusiasm, encouraging employees

to experiment.57

When it comes to fostering innovation, paying attention to resources and processes and measuring success matter. However, it’s the “soft stuff ”—the people-oriented, intangible and harder-to-measure attributes of corporate culture, such as values,

behaviors and climate, that have the most impact on a company’s ability to innovate successfully.58

elements.54

c o p y r i g h t i n f o r m at i o n BATTEN BRIEFINGS, December, 2013. Published

52

Tellis, G.J., et al. 2009.

53

Jaruzelski, B. and Loehr, J. 2011. “The Global Innovation 1000: Why Culture Is Key.” strategy + business. Booz & Co.

http://www.strategy-business.com/media/file/sb65-11404-Global-Innovation-1000-Why-Culture-Is-Key.pdf (Accessed

by the Batten Institute at the Darden School of

25 October 2013.)

Business, 100 Darden Boulevard, Charlottesville, VA

54

Ibid.

55

Sims, P. 2013. “Why Google CEO Page Should Friend Amazon’s Bezos.” Market Watch. http://www.marketwatch.

22903. email: batten@darden.virginia.edu www.batteninstitute.org ©2013 The Darden School Foundation. All rights reserved.

com/story/why-google-ceo-page-should-friend-amazons-bezos-2013-03-27 (Accessed 25 October 2013.)

56

Rao, J. and Weintraub, J. 2013. “How Innovative Is Your Company’s Culture?” MIT Sloan Management Review. 54

(3): 29-37.

57

Ibid.

58

Ibid.