PROFITING FROM INNOVATION*

by William G. Howard, Jr., and Bruce R. Guile Industrial competitiveness is influenced by many factors. Some, such as the macroeconomic environment and the legal and regulatory systems, are determined primarily by forces external to companies vying for places in world markets. Other factors are internal. Two internal competences, manufacturing skill and the effectiveness with which individual firms translate technical innovations into marketplace advantage, are complementary and lie at the heart of efficient industrial practice. Since private companies from the front line in the contest for share of world markets, success at practicing manufacturing and utilizing the entire range of innovation available to the company is an important factor in a nations industrial competitiveness. This paper is a preliminary report of a National Academy of Engineering study of industrial commercialization: the translation of innovative ideas into marketplace success as profitable products, processes, and services. The manufacturing successes of the Japanese, our primary competitors for many world markets, have been well publicized. Terms such as kanban, just-in-time inventory management, quality circles, total quality management, and Taguchi method have become accepted terms by U.S. company managers. Leading U.S. manufacturers have come to realize that they have serious manufacturing problems, and are beginning to address them. Progress has been evident at companies such as Ford, Motorola, Xerox, USX, and many other manufacturing-based companies and additional firms are following suit. _________________ *REPRINTED FROM: William G. Howard, Jr., and Bruce R. Guile, Profiting from Innovation, in Nathan Rosenberg, Ralph Landan, and David C. Mowery (eds.), Technology and

the Wealth of nations (Stanford Univ. Press; Stanford, 1992), Chapter 15, pp. 395-406. On the commercialization front, we have not been as responsive. In addition to manufacturing skills, the Japanese have cultivated the purchasing dollars of many customers. Unlike the case with manufacturing, U.S. industry has not shown a widespread appreciation for its commercialization shortcomings, and many firms will retreat to the observation that Americans are still the most inventive people on earth. That may be true but translating that inventiveness into manufacturing processes and marketed products is essential if we are to turn our ideas into industrial strength. Microelectronics, gene splicing, computer communications, and efficient airfoil design are great technologies. It is products based on these technologies, however, that provide competitive edge. We have been seeking clues to effective management of commercialization that apply across a wide range of industrial circumstances and which are useful for manufactured products, production processes and services those practices that seem to distinguish companies who are consistently successful at commercializing from those who have not performed as well. The study was conducted as a series of workshops where senior managers discussed aspects of their commercialization experiences, both good and bad. Several additional interviews were conducted to supplement workshop results. Participant experiences covered about 30 firs plus the financial community, business schools, research consortia, U.S. government laboratories, and independent research institutes. A limited number of European and Japanese experiences were sought, in addition to U.S. perspectives, for comparison. This study makes no pretense of completeness; our goal was to identify those practices that characterize successful commercialization in the widest possible spectrum of enterprises. Many successful techniques, which apply to particular companies or industries, did not survive the winnowing process that our methodology employed. Our activity focused primarily on the role and methods of management in promoting the commercialization of technological innovations in particular the senior decision-making leadership of a firm reasoning that these

people most companies.

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As expected, we found no magic bullets. Our findings re-emphasize ;the importance of the fundamentals of business management of a leadership preoccupation with producing a better product or service with higher quality at a lower price than anyone else. The results we will describe are preliminary results, as the report is still in preparation (as of this writing, in 1989, see note 1). Regrettably, there is not enough time to describe all of our conclusions, so we have selected a number of observations that seem to apply tot he theme of this book. 1 The Prepared Mind Louis Pasteur observed that fortune favors only the mind that is prepared. Nowhere is that more true than in the case of commercialization management. As we shall see, there are several types of commercialization processes, each with its own time frame, indicators of progress, organizational approaches, and risk factors. Understanding when each of these is under way, and the nature of the true challenges faced, is a major factor in consistently successful efforts. Intimate understanding of customer needs and technological potentials is essential if the two are to be mated. Finally, we have observed that successful commercialization leaders are constantly re-examining their business, always seeking the better way that must lie out there somewhere. They are prepared to continuously re-evaluate their activities. The ideal of a detached manager capable of overseeing a business at arms length did not apply to the successful leaders we found. 2 Commercialization Efforts We have encountered three distinct types of commercialization, distinguished according to their driving forces. Each has unique characteristics, each is measured according to different analytical tools, and each requires its own management techniques for successful application. Technology-enabled commercialization is driven by a revolutionary scientific or technical discovery. Rarely is

technology revolutionary. Developments such as the transistor, dry copying, the industrial robot, nylon, perhaps someday cold fusion or room temperature superconductors, are singular events. They sweep away the old ways and replace them with entirely new products and processes whose expanded capabilities were previously unimaginable. However, such revolutionary new technologies rarely live up to expectations initially. Development of successful products embodying such technological supernovas typically takes fifteen to twenty years and entails a great deal of risk, as technological developments, without which the revolution is nothing more than a curiosity. Only after this long investment in time and resources is the enormous market potential of such developments realized. In technology-enabled commercialization, the major risk lies in understanding problems entailed in producing the product in volume and in the market for products, much more than in the technology. DuPonts CORFAM (tm) plastic replacement for shoe leather was a major technological development, and DuPont was able to solve the problems of producing the material in high volume. DuPont reasoned that shoes made of this material that were longer lasting, water resilient, less expensive, and required less polishing were sure to be a market success. They did not correctly appreciate that failure of the shoes to break in to the wearers feet, the inability of the material to breathe moisture, and the failure of the public to develop an appreciation for foot odor would be problems. These market miscalculations led to the eventual failure of the CORFAM enterprise. A flash of brilliance, followed by dogged application of Yankee In genuity to overcome all obstacles I the basic stuff of the American industrial legend. This is where we Americans see that our distinctive competence lies. However, our discussants felt that, as a nation, our grasp of this process is slipping. In addition to accelerating diffusion of basic science and technology around the world, they felt that pressures for a shorterterm payoff and a general aversion to risk work against our success in technology-enabled commercialization efforts. This was observed to be a problem both in large corporations, where concentration on existing businesses is often the rule, and small, venture-capital-financed

concerns where the need on the part of financial backers to cash out within five to seven years has led to the dismemberment of otherwise promising enterprises. Successful practitioners of technology-enabled commercialization appear to understand how these projects progress. They are dazzled by initial announcements of discoveries than they are dedicated to the long, steady pull required to reduce truly new ideas to practice. In many instances, this is the result of tolerance of stubborn individuals, but a handful of companies (DuPont and 3M, for example) seem able to consistently make a success of technology-enabled innovation through more systematic means. Technology-enabled commercialization, however, is a very risky undertaking. Along with its successes in Kevlar, Rayon, Lycra, and Tyvek, DuPont can point to numerous products (such as CORFAM) that did not make the grade. Clearly, persistence at technologically driven efforts is a valuable trait. A major industrial nation cannot depend principally on technical revolutions. They occur infrequently, entail a level of risk that makes them haphazard, and they do not provide the sustained push that an economy must have to endure in the market marathon. Although technology-enabled commercialization occurs rarely, it is a particularly important part of the overall commercialization activity, for orthogonal innovations do not follow logical extrapolation of business growth. When successful, technology-enabled products, processes, and services not only produce extremely large and rapid business growth, but also render the competitions products or devices obsolete. The second type of commercialization effort is production or design driven. Once a concept has been proven in the market, competition shifts to price, performance, and design features with less competitive emphasis being put on fundamental differences in product or service concepts. In short, after one or two initial successes, competitors swarm in quickly, and the focus shifts from making it work to making it work better. Production- or design-driven commercialization is propelled principally by competition the need to contend with others in the same field.

The dominant pattern is illustrated by medical imaging equipment, overnight package express, and automated bank teller services, which were as recently as 1975 new and different products. These items have now become standard offerings, and early providers and later entrants are now engaged in competition over incremental improvements in the product or service. Unlike the technology-enabled case, success at production- and design-driven commercialization depends upon a companys ability to push incremental innovation in the product process. This is a very different management challenge from running a revolution. This process must be a continuous series of small triumphs. Changes take place rapidly in fact, the faster the better. In spite of the need for speed, there is little tolerance for mistakes or slipshod work. Stumbling costs irreplaceable time and customer confidence. Two fundamental issues underlie product and design commercialization success rapid product cycle time, and starting early. As has been pointed out by Ralph Gomory, the effect is cumulative. As a company beats its competitors to the market time and time again, its rivals fall ever further behind, less likely ever to be able to catch up. Continuous product and process improvement doesnt just happen it must be driven by the expectation that such improvement is the basis of future competitive advantage, and must be eagerly sought if the firm is to succeed. U.S. industrys track record at continuous improvement is spotty we became complacent in the halcyon days of success over the past 40 years. The story of our steel industrys failure to continually upgrade its process and plant technology is well known. The Japanese, on the other hand, have rightly earned their reputation for relentlessly ;honing their products (such as television sets, cameras, and automobiles) until they drown their competition in a tidal way of improvements. One illustration of how this process works can be seen in the example of the competition between U.S. and Japanese semiconductor firms for share of the dynamic random access memory (or DRAM) merchant market. The U.S. semiconductor

industry, as inventor of the DRAM, led early with 1K, 4K, and 16K DRAM products. The business became fiercely competitive in the late 1970s when Japanese companies began to enter the world market with well-designed high-quality products. Both countries industries reached the market at about the same time with the 64K product. New generations reached the market about every two and a half years. Most U.S. merchant market semiconductor firms chose to concentrate their attention on one product generation at a time either designing the next product or fixing problems with the last one. Their speed in developing new product generations was as fast as any. But need for haste forced many technical shortcuts, which were reflected in customer applications problems, necessitating a series of redesign efforts that dissipated initial product momentum. Japanese firms that now lead in this business, followed a different strategy. At the time the 64K DRAM was introduced, they also had simultaneous efforts under way with two or three additional generations of product. The 256K DRAM was in advanced design, and the 1 megabit version was actively being reached. Very likely, a group was off thinking about what had to happen to make the 4 megabit product a reality as well. Products, when introduced to the market, were second or third generation designs, and thoroughly debugged. Thus while U.S. companies turned their swat teams from one generation to the next, they were confronted by a continuing series of well-designed competing new products in rapid succession. Japanese management drove DRAM development with the long haul in mind, and with commitment to development in depth. Continuous improvement of existing products and processes is where the United States can improve most. The sense of disquietude that prompts the management and work force of an entire company to continually seek better ways requires sustained attention to detail and persistence that comes harder to Americans than to those from some other cultures. Even our Cash Cow businesses require continuous investment to keep them current and competitive we have neglected to appreciate this over the past several decades, and must change.

The risk in productionand design-driven commercialization is in torpor. The failure to keep making improvements, and to keep aware of progress being made in competing products is to ensure eventual problems in currently successful businesses. The you can have it any color as long as its black mentality displays a rigidity of thought that provides entry opportunities for others. There are a number of U.S.-based firms that have recognized the need to continually update their products and process. Boeings commercial aircraft technology has undergone almost continual change as it has sought to incorporate the latest innovations into production airframes. Bill Boeings dictum to Let no advance in flying pass us by has been accepted as a basic philosophy of this successful companys business. The third commercialization category is market driven. In this instance, perception of customer needs in one product sector prompts a search for technology from other applications to open new opportunities. The perceived new market is the driving force in this case as opposed to a search for applications of a given new technology. In market-driven commercialization, the emphasis must be on detailed understanding of the customers needs (as opposed to wants) and on the selection of the best technology to fulfill those needs. The primary risk element is technological choosing the best technology on which to base a product to fill an identified customer need from the wide range of possible alternatives. The Bell & Howell Company confronted these tasks when it responded to a request from GM to apply its skill at microfiche publication to simplify the parts counter catalog used in many dealerships and parts stores. The problem was well know looking up parts numbers and prices in existing paper catalogs as a time-consuming effort that resulted in a great many errors. Further, the effort required to keep a comprehensive parts catalog up to date on a daily basis is substantial. Bell & Howell, as the leading publisher of microfiche documents, sought to use its traditional technology to meet the need, but discovered that the ease of access, document quality, and ability to incorporate illustrations on microfiche were

insufficient to provide an attractive alternative. After a five-year search for the best technology fit, and three tries, involving microfiche, computer terminals, and a variety of document storage systems, Bell & Howell settled on a CD-ROM based system which not only solved the parts catalog problem at lower cost and provided a continuing publishing business for the company, but enabled the mechanic to specify and order parts directly without going through the parts counter clerk a major customer labor saving. Each of the types of commercialization technology enabled, product and design driven, and market driven is a different kind of problem. Each requires its own management approach. Few medium- and large-size firms can thrive on a single type of commercialization activity. Some firms have all three activities under way at any given time. The simultaneous search for ways to apply new technology, for means to serve new market opportunities, and for improvements in existing products, processes, and services requires leaders who understand the characteristics ;and who differentiate approaches to each. 3 Management Tools Traditionally, the primary management measures of the commercialization process are financial. Indeed, financial success (and being able to demonstrate its likelihood at the outset) is crucial to commercial technological innovation. In the language of financial analysis, the value of current and future returns must exceed the investment. The logic is inexorable and sound. The problem arises in making the simple and tight logic of financial analysis work for decision making about technological issues in real companies, about matters of great uncertainty using information provided by less than neutral parties to the decision. In fact, in the absence of other indicators of the promise and progress of commercialization efforts, financial data, with their apparent precision, fill the void to dominate decision making. Consider, for example, a decision to proceed with development of a technologically new product for an undeveloped market. If one assumes absolute technological

certainty, the calculation of return on investment for the development expenses still requires estimation of the cost of development of a prototype; the cost of manufacturing a product for which a prototype does not yet exist; and the market for and likely sales of a product that does not yet exist over the next several years (remembering that the product must be priced at a sufficient margin above a manufacturing cost that is not yet known).

Given that few technological developments proceed without many trial-and-error iterations, and decision maker will recognize the biases and negotiating positions that those who provide information are likely to bring to the table. Technological champions may underestimate development costs out of enthusiasm. The production staff may pad the estimates of production costs in an effort to give themselves some slack in scale-up. The marketing staff, really out on a limb measuring markets that do not exist, may bring any number of biases underestimation if they see their role as brakes on the technological champions or overestimation if they themselves have become champions of the product. There is yet another set of constraints on the usefulness of financial analysis: business strategy. What is the value of this product as part of the companys portfolio? Does the company need to offer this service to keep competitors out of the companys primary market? Will the company-wide learning-by-doing that comes from a new product in this area of technology be of long-term value even if the product loses money? What is the strategic cost of not proceeding with this development? Underlying all of these uncertain and often fuzzy judgments that must be translated into numbers for financial analysis are often fundamental questions about the technology and the technological capability of the company. Will the technology work? When somebody turns on the switch, will the product grind, whir, and whiz in ways that meet consumer demand? And, can the people in the company pull it off faster or as fast as the competition? Given the uncertainty of the whole process, it is a wonder that any manager ever considers financial analysis of corporate technological matters but the fact is that

virtually all decision makers do look at financial calculations, probably because there is no other tool so pervasive or so easily understood. Regrettably, this breeds a reliance on financial indicators as a substitute for a real understanding of the business financial measurements such as discounted cash flow and the profit and loss statement become an end in themselves rather than the short-term indicators of performance that they really are. An important aspect of our study, therefore, has been the search for useful tools to aid the management process. As a result of our activities, we have assembled a small catalog of commercialization indicators and techniques that assist the leader in assembling business information in a way to make sense of the chaos that pervades the commercialization activity. In addition to traditional financial tools that managers use to measure and plan the health of the business, we have identified methods such as technology road maps, learning curves, time to break-even analysis, and logistic curve considerations that can prompt action by leaders before chronic problems become acute. Many of these tools are not new, but use of them throughout the range of industry we have considered is spotty, and a more widespread understanding of them is useful. Particularly important is the fact that these tools are, in their very nature, more sensitive to the characteristics of the technological challenge being faced than traditional financial analysis. For technology-enabled instances, the tools of value fuzzy though they may be are those that allow a project team to develop the ability to look through current consumers to the market that will exist. In new product or service developments, an internally generated vision of the more sensitive to the characteristics of the technological challenge being faced than traditional financial analysis. For technology-enabled instances, the tools of value fuzzy though they may be are those that allow a project team to develop the ability to look through current consumers to the market that will exist. In new product or service developments, an internally generated vision of the market success factors must be developed and refined by exposure to critics and customers. Additional tools can help leaders keep track of project progress and to understand the characteristics of each stage of development.

New technologies characteristically must pass a number of critical decision points in the life of the development. At each such point, the investment commitment rises typically by an order of magnitude. Descriptions of such decision points exist, and are useful particularly to managers engaged in technology-enabled commercialization. In production- and design-driven commercialization continuous improvement in existing products and processes analytical tools are much more developed if not widely used. These tools help build a leaders anticipation of possible improvements in products and processes and where to seek them, and help to compare internal company operations with efforts of other organizations. Experience curves, benchmarking, product life cycle analysis, and product-age portfolio approaches are all part of a growing set of tools that are demonstrated in a growing literature on manufacturing and technology management. In the final type of commercialization challenge moving developed or developing technologies into new markets the approaches are again different. Most applications can be satisfied with a variety of technological approaches. Sometimes the application of an existing technology to a new market is quite dramatic, for example, technology-enabled creation of a totally new product or service drawing mostly on existing knowledge. In other cases, efforts at moving existing products and services lines into new markets are more incremental, and the technological challenge is in packaging and applying an existing technology in such a way that it matches the particular characteristics of the market sought. These are nontrivial technical challenges. As with production- and design-driven developments, there is no substitute for knowing what the customer wants, but the challenge is similar to that in technology enabled developments envisioning how customers will respond to a product or service that does not yet exist. Tools for this commercialization type emphasize frequent market trials and iterations in the real-life environment. 4 Joint Development Efforts As our study progressed, it became apparent that important changes are taking place in the technology development structure of several U.S. industries. Increasing research and development costs, limited skill pools, and external

competitive pressures are forcing companies to rely upon government laboratories, universities, and consortia for longer range developments. The problem of establishing constructive joint programs, technology transfer, and timely utilization of the results of such disaggregated joint efforts are major new challenges facing industry. Universities, consortia, and government laboratories that participated in our study agree that most companies do not manage joint activities well. Firms that commit to programs such as the MCC consortium, or university industrial liaison programs generally honor their financial obligations, but the relationship often stops there. Those companies who join such programs, making operational, as well as financial commitments, seem to do much better. The clue came from observing the way Japanese companies band together in co-development projects. Since each participants fears that another partner will gain a competitive advantage over them as a result of the joint activity, and establishes its own mirror effort which closely follows consortium progress, it is not uncommon for researchers to move back and forth between joint and proprietary groups. Thus as results are produced by the joint program, each participant is immediately on board and ready to use the fruits of the joint efforts have followed a similar course, making a commitment to an internal shadow group to track joint activities in each university and consortium program at the same time that the financial obligation is assumed. Companies that see joint research and development efforts strictly in terms of financial obligations are poorly positioned to realize the benefits of the results, since they must create internal uses after the ideas are developed, rather than concurrently. As a consequence, the lead time advantage potential of a pooled relationship is frittered away in internal decision-making and organizational activities. Joint research and development activities are into a substitute for internal efforts; they can only complement them. Successful participants see joint research and development activities as dual commitments half external and half internal. Companies that do not understand the need for the internal part of the effort become dissillusioned with the idea of joint research and

development, and soon drop out. The prosecution of the internal portion of the joint effort is just as important as the joint program itself. In conclusion, this has been a very fast look at some of the results emerging from our commercialization study. Clearly, commercialization is not a simple process, and consists of at least three distinct kinds of activities, each with its own management challenges. If we were to summarize a single conclusion, it would be that the chances of commercialization success are highest when the leader is personally involved with the process, has a restless desire to do better, and understands the nature of his particular activity. He must be engaged in a continual search for new ways to characterize his business and the competition that go beyond the limitations of strictly financial considerations.
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