Whether more R&D Investments brings more Innovation Output

By: Gunjan Bhardwaj

Common sense says that if one wants to improve the innovation output, one needs to either (a) increase the size of the opportunity set that goes in the so called ‘Innovation Funnel’ ; (b) Speed up the throughput of the ‘Innovation Funnel’ and/or (c) improve the variety of the opportunity set passing through the ‘Innovation Funnel’.

Here I would like to emphasise two points (a) Innovation Funnel itself is a misnomer in Innovation Parlance as in a funnel whatever comes in goes out- this is not true as opportunities coming in are extensively filtered and only a limited few make to the end of the innovation pipeline and (b) Innovation is not an invention- it’s a product or service that actually solves a problem and eventually creates a business impact.

Typically the length of the throughput process (which many call the innovation funnel)  depends on the technology life cycle of the industry which can be 2-3 years for a software firm, 8-10 years for a pharmaceutical firm, 0,5 to 1 year for an Animation Studio and anywhere between 0,5-2 years for a consumer products firm. I believe the market complexity (pull) tends to shorten the life cycle whereas the inherent organisational complexity where there is a technological push tends to lengthen the life cycle. Both the push and the pull also determine the payoffs with respect to the respective products and services which again justify the investments in terms of resources committed over the life cycle.  Similarly the size of the opportunity set also depends on the industry.

In a paper in Research and Technology Management, Stevens and Burley, ‘ 3000 ideas = 1 commercial success’ chart down the mouth of the funnel or the size of the opportunity set for different industries. Pharmaceutical industry on an average for instance starts with around 10000 compounds to come out with one successful new molecular entity ( I knowingly am refraining from using the term ‘blockbuster’ as i don’t think over the last 5-7 years any pharmaceutical company has come up with any true blockbuster); Venture Capital Firms start with around 3000 prospective investments to eventually to find one profitable idea; consumer products companies work with 500-600 product ideas anytime to come out with one successful products etc.

The third element – improving the variety of the opportunity set can be achieved by either improving (a) diversity in the R&D organisation (b) having a global spread with respect to the R&D organisation or (c) Collaborative Innovation, procuring product ideas through an innovation ecosystem.

It is interesting to see that many companies even now believe that they can improve the chances of success with respect to innovation just by increasing their R&D investments. My research shows that majority of the R&D intensities (R&D investments as a percentage of Revenues)  in several industries are (a) grossly ineffective and (b) follow a zigzag pattern- first is increased for a couple of years; once a successful product comes out is again slashed down.

The Zigzag pattern is not typical of one industry and companies do slash R&D investments whenever products do well in general-notwithstanding the fact that a dollar spent today in R&D doesn’t bring revenues today but after some time. Most of the companies henceforth don’t have a R&D Governance in their organisations- they think they have but in fact they don’t.

For example if you look at Apple- it certainly does not have the highest level of R&D investments in its peer group then too it’s the most successful. Apple has built an R&D organisation which plays a technology broker. This enables Apple to source in product ideas from the outside ecosystem very fast.  Big R&D commitments actually sometimes hamper innovation as they (a) make people to run behind the ‘knowns’ rather than the ‘unknowns’ (b) people start framing problems in technological terms rather than what customers really want or need and (c) they make it more difficult for innovators to kill projects ( sunk costs become an irrational liability)  and also deincentivise collaboration (why should I collaborate with a garage start-up when I have a couple of billions earmarked to do crazy tests).

Motorola already sunk billions of dollars to support its Iridium project even though there were enough signals to show it did not have a market. Similarly stories of arm-twisting suppliers on the name of collaboration in automotive industry are common. Similarly size in other industries plays a key role in determining whether a collaboration is a collaboration on equal terms. In fact, collaboration between various organisations in ‘lead markets’ or ‘ cross-breed technologies or markets’ such as e-mobility is more equitable. There an automotive OEM cannot dictate terms to a utility OEM- both need to respect the expectations of each other.

Another reason is that a lot of process knowhow or product knowhow in patents is never monetised when R&D commitments are substantially larger as there is a big throughput pressure. It’s good to have a blockbuster out of 10000 NMEs (New molecular entitities)  tested- but are all of 9999 NMEs useless for any product use in any industry?

What about even a larger number of patents which researchers laboriously file? Some protect the IP around the drug that is launched, what happens to the auxiliary ones? Are they put to use in any form? 8-10 years of product development life cycle, 10000 NMEs, thousands of research papers, hundreds of patents and R&D investment worth billion(s)- just for one drug that might bring back billion(s) invested? Are we stuck in a box where we are made to think this is the only way it could work, only model of doing business?

R&D investments can improve the correlation to innovation input- however through some radical changes.

Some of the elements an organisation needs to look at with respect to the internal organisation are:

(a) aligning the process framework (stage-gate process, product launch, downstream sales readiness and Product life cycle management)

(b) adopting a comprehensive communication management framework (both for internal as well as external stakeholders)

(c) implementing a performance and reward mechanism that motivates especially marketing & sales as well as R&D to collaborate for aligned incentives and

(d) implementing an innovation performance management / controlling system to measure what goes in and what comes out.

Aligning the innovation process framework is key to innovation throughput. How steep the innovation funnel is (the throughput efficiency of various gates) and whether the throughput rate can be increased by using rule-based workflow software or other standard software available are the two questions to be looked into.

Sometimes companies tend to loosen up the throughput efficiency (what percentage of product ideas pass through a gate) in initial phases in order to make their innovation funnel look good. This can have short term benefits, however in the long term it negatively impacts the credibility of the organisation with respect to the viability of its R&D projects. Also it is equally important to look at product launch, downstream sales readiness and product life cycle management. Especially in Pharmaceutical industry Product launch process is a standardised process that is critical to a drug’s success. Same is true however for other industries as well!

The time to appropriate premium from the market from a market is limited as the competition starts bringing a lot of ‘me-too’ products as soon as the product is launched (in stringent patent protected products also time is critical anyways). A good launch ensures that the right price point(s) is attained and the market is informed about the value of the product in a right fashion. This preparation by the marketing team has to be upfront and not ‘ad-hoc’.

Similarly sales force needs to realign its negotiation strategy (in consumer product industry for example), in order to push a product; also bringing in relevant inputs for the product to be launched from the field. Finally, product life cycle view helps the organisation bring in inputs to the labs again for a generation next product or feature tweaks when the product is mature and is facing stiff competition.

Communication management is key to innovation output as well. Internal stakeholders need to be informed about a product as a right time with timely content to manage expectations- same goes for the customers. Research shows that if the technology life cycle is longer than 3 years, analysts have difficulties understanding R&D projects (especially with respect to complex products) and often the stock price takes a dive when projects are announced. An organisation needs to manage these expectations and take a methodical approach in deciding what quantum of information should be released when, to whom and in what possible ways.

It is also important to align performance and reward mechanisms in such a way that employees and incentivised to collaborate not just to bring out a product from the labs that has a high potential but also a product that does well in the market. It is key that the R&D teams ‘speak’ to the marketing & sales teams continuously and take joint ownership till the product is successfully stabilising.

Bell labs for instance sends R&D colleagues who work on a product idea on deputation (part)  to Business Units ( which own the product) and coordinate launch, thereby enabling a smooth transition from labs to the market. Here, one workshop or technical or functional specification document (s) are not enough.

Last but not the least of course it is important that organisations ‘measure’ innovation performance and benchmark themselves with respect to themselves as well as with respect to competition. In doing all of this, leadership and culture play a strong role. However I will like to emphasise that ‘culture’ is in the making, it is dynamic- a lot of it evolves with right leadership and incentives set by the organisation. Organisations often tend to use culture as an alibi for their poor innovation performance. There is no straight path to create a culture- no short cuts.

From an ecosystem perspective, an organisation can create open domains, venture funds, ecosystem governance framework that is coupled, outside in or inside out, depending on the requirements or the context an organisation is. This helps from an innovation process perspective in essentially increasing the variety of ideas getting into the funnel (they come from different sources) and also to increase the number of ideas (in new product niches or for companies not having resources to invest in a large number of ideas upfront).

Open domains can be created over web like P&G has done with its connect and develop program, with scientific advisory boards like those of some of the european hi-tech companies or physically like KPN has done in the Netherlands.

Web2.0 based open domains have traditionally served well with software, design and consumer product industries where upfront investments to develop new product ideas or prototypes is not that high. Scientific boards also serve the purpose well wherein members can act as nodes in their larger network(s) in the academia bringing in cutting edge ideas.

Physical open domains like the one created by Philips bring a myriad of potential collaborators physically closer also creating shared facilities for the ecosystem partners. Corporate venture funds can also help organisations share product development costs of ecosystem partner in terms of equity contributions as well as spinning of non core R&D capabilities in separate businesses (potentially with external equity contribution and/or other industry partners as well).Such funds can quickly leverage ecosystem(s) for new businesses and at the same time help monetise sleeping IP inside the organisation.

Lastly organisations need an ecosystem governance framework. Many a times, partnerships and collaborations happen in an ad hoc fashion in large organisations. Different R&D labs collaborate with different research organisations, academic institutes and universities. Absence of a Governance framework around the whole ecosystem makes such collaborations inefficient. Many a times, cross R&D team collaborations, relationships of these ROs or universities is not tapped to their full potential. Also absence of the life cycle view towards the scientific community also does not let an organisation to build long term relationships (with the organisation) as well as create a reputational capital in the same.

However such a governance framework should take into context the culture, business imperative, size, position on the value chain and leadership in order to tailor the way the organisation builds, communicates and collaborates with its ecosystem partners.