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Operationalizing Innovation Management

Taking IM to the operational level involves effecting a number of changes to the structure, cul­ture, and innovation practices. When it comes to structural changes, the hard borderlines between divisions, departments, and business units have to be relaxed to allow flexible allocation of human resources across the whole organization in cross-functional and cross-divisional teams. This means that instead of task-based divisions and arrangements, experts need to be grouped by reference to skill in competence centers where their skills can be brought together depending on the need of the innovation project. This structure has to be flexible enough to include the net­works of alliances that the organization builds to support its innovation process. Managing the innovation portfolio should be entrusted to a central department that coordinates between the var­ious competence centers, manages alliances as a portfolio, and oversees the NPD process.

The organizational culture as well needs to change to accommodate innovation as a way of doing business. For that to happen, the culture should be one that accepts failure as a part of the learning process and motivates employees to innovate. A number of practices designed for this purpose will be outlined. This overlaps with systems and methods that emerged to enable the organization to better tap into its IC by seeking employees' ideas (human capital), and customer feedback and contribution in innovation projects (customer capital).

Structural Changes - Loosen It Up or, in Jack Welch's Words: "Shake It, Shake It, Break It"

Under the network-based innovation model, organizations need to arrange their innovation resources into two networks - internal and external. Internally, expertise and competence should be arranged in competence centers (R&D labs, departments, or business units), to enable bring­ing the right team together from talent across the whole organization. Externally, overcoming the NIH (not invented here) syndrome, organizations should outsource more and form more strategic alliances to address their IM needs. Managed effectively as a portfolio of alliances, the external networks should be open enough for the organization to access talent and innovation resources whenever needed. A network-based innovation model requires the organization to undergo a number of structural changes, including the following:

•   Arranging organizational skills in competence centers or R&D facilities across the whole organization that can be tapped for flexible team formation

•   Arranging external skills in a portfolio of alliances to facilitate access when needed

•   Managing innovation projects centrally to reduce time to market and ensure that low-performing projects are weeded out to minimize investment losses.

Cross-Functional Teams and Competence Centers. One of the most prominent phenomena in IM in the knowledge economy is the increasing use of cross-functional teams for innovation proj -ects. Though seemingly a minor change, its implications transformed the management of the whole organization. The use of cross-functional teams is not a new phenomenon, particularly for the best organizations. It has been used in the NPD process since the 1970s. The PDMA's survey reports that projects with high and medium levels of innovativeness are always entrusted to cross-functional teams, while such teams are used for least-innovative projects only by the best,24 regardless of industry. However, since the 1990s, not only has the use of cross-functional teams increased, but the mix of the team has become more diversified as well.

To add to the complexity, these teams are increasingly becoming cross-divisional as well, where team members are also chosen from different business units. Take, for example, Dow Chemical. In 1994, Dow's Polyplefyn Research Lab identified elastomeric foam as a material that may be used in athletic shoes. To tap into their entire intellectual resources, Dow formed a team made up of researchers from four other labs and business units. The team consisted of researchers from the Ohio foams business group; technical service and marketing personnel from the Hong Kong operation, where most of the sales will be made; and researchers from Michigan Central R&D lab involved in fundamental foam research. Finally, the team was led by a material scientist from the Texas lab.25

The use of cross-functional teams has increased the challenge of allocating human resources. To enable the development and reconfiguration of innovation resources for IM, innovative organ­izations arranged and allowed the free development of skill, knowledge, and experience of employees into competence centers. This clustering of competencies happened naturally in some organizations where a certain unit or department developed a competency based on the skills and talents of its people and the focus on a certain area of knowledge or business process. Other organizations appreciating the effectiveness of the model systematized this arrangement, which multiplied their ability to bring the right people together and hence manage innovation projects more effectively. For example, on discovering that quality and time to market suffered as a result of inconsistent resource allocation, disorganized project schedules, and too many projects, IBM's AS/400 Division moved 40 people to key skill areas, where their expertise can be tapped depend­ing on the needs of the various projects.26 A central unit was formed to allocate teams to the var­ious proj ects in the innovation portfolio, with demonstrable reduction in time to market and waste of resources.

Systemizing and arranging skills across the organization in competence centers dramati­cally transformed the role and sometimes the structure of the R&D/NPD department. Most large organizations moved to partial decentralization, where R&D departments are kept on both the central (corporate) and the business unit levels, where the central department func­tions as an independent contractor. Usually, the central department/lab conducts basic research while the business unit labs focus on NPD projects. The central lab is also used as an inde­pendent lab to which business unit labs may outsource certain projects. In such cases, the busi­ness unit concerned funds the research. In 2000 75 percent of the funding of the central R&D department has shifted to business units.27 In many organizations where this model is used, the central R&D lab has been transformed into an incubator for new businesses.28 It has become more of an intellectual reservoir, which both internal units and external parties may tap. 3M, GE, Dow, and DuPont use this model.29

Even in organizations where the centralized R&D structure was kept,30 competence centers are represented by skill-based groupings in the R&D department itself, where again cross-functional teams get formed by accessing these groupings as well as other functional departments. For exam­ple, at Rohm & Haas Pharma, senior management hands down the innovation portfolio agreed to in the strategic planning phase to the NPD committee. The committee then allocates the various projects to cross-functional teams that are formed on the basis of the skills needed for each proj­ect. The team usually includes representatives from the legal department (patent attorney); the R&D department, based on their skills (scientists); and the manufacturing and sales departments.

Competence centers also facilitate the building of external innovation networks and alliances. It is more feasible for a competence center to forge relationships with outside experts and parties practicing in the same area of knowledge. With the focus on networks, another change to the structure of IM is needed to incorporate these networks and alliances in the organization's base of innovation resources.

Alliances Portfolio - Who's Who.As R&D departments became more open to incoming and outgoing contract-based research, central R&D departments increasingly accept projects from outside the organization as well as outsource their own projects. PricewaterhouseCoopers reports that in 2000 the number of companies that outsource parts of their R&D to university labs and other R&D organizations had grown to 41 percent, spending 16.9 percent of their annual R&D expenditure.31 In the chemical industry, this figure reached 50 percent in 1997.32 The systemiza-tion of organizational skills into competence centers facilitated further the building of alliances and external networks. This is because employees in a competence center are usually aware of experts in their area, whether these experts work for suppliers, distributors, customers, consulting firms, university labs, government agencies, or even the competition. To enhance their perform­ance, competence centers usually forge a number of relations with these experts either in the form of an informal network with the experts themselves or a formal alliance with their organization.33

The main driver of these alliances and networks is to reduce time to market, augment mutual expertise and share knowledge.34 In many cases, alliances are forged with competitors wherever sharing knowledge will be in the interest of both parties. However, while collaboration with non-competitors is usually carried out through contractual arrangements, those with competitors are usually forged as joint ventures, for the obvious reason of keeping things under close control. Regardless of who the alliance is with, one strategy seems always to be employed. This strategy revolves around developing key technologies, or solutions in the case of service organizations, in house while co-developing or outsourcing supporting and complementary technologies. Overall, this multiplied the number of alliances and networks that an organization's various departments and units forge with external parties. This made it necessary for organizations to keep track of the various networks, hence the alliance portfolio.35

The alliance portfolio enables the organization to keep track of whom the organization has an alliance with at a particular point in time with reference to the project, value added, length of the alliance, and potential further collaboration. The portfolio should be managed by a central unit that keeps track of the alliances at any one time to avoid duplication of effort and the risk of hav­ing more than one business unit competing for the same alliance. This brings us to the last struc­tural change.

The Central Unit - To Set the Rules. Decentralization of any organizational function always brings into play a myriad of approaches, giving rise sometimes to conflicting criteria and priorities. This is multiplied in the IM stage by the establishment of competence centers and the formation of external networks. Though this decentralization enhances the organization's innovative capability and the quality of its innovation resources, it may jeopardize the innovation process as a whole. Lacking a central management function will result in innovation projects being managed according to various criteria, introducing chaos and competition over resources. The structure of the organi­zation should therefore incorporate a central unit responsible for systematizing and managing the innovation process through the various stages of the NPD process and across the whole organiza­tion. The central unit has the significant task of defining the criteria upon which innovation proj ects will be prioritized, evaluated at the various NPD stages, and terminated if need be. Adopting for­malized systematic criteria to carry out this task is integral for developing the ability to get to mar­ket fast. HP, for example, reported a reduction in half of its time to market time following the systemization and supervision of the NPD process by a central unit.36

Given the fact that only one out of 6.6 projects makes it to market success,37 the central unit is faced with the main challenge of weeding out less-performing projects as soon as possible to reduce investment losses. This should be done within each of the strategic buckets. Many central units, therefore, adopted the role of the gatekeeper. Under the gatekeeping concept, an innovation project has to satisfy a set of defined criteria before it can pass the gate to the next stage of the NPD process. Common gates include strategic fit for the idea generation stage, and establishing market feasibil­ity of product concepts before they are passed to the development stage. It is important that the eval­uation criteria be applied uniformly across divisions and throughout the NPD process to create consistency and to ensure that projects that fail to satisfy the set criteria are weeded out as early as possible. To be effective, gatekeeping should incorporate "defined gatekeepers per gate, clear gate outputs, and rules of management for the gatekeeping or leadership team."38 Gatekeeping has been reported to reduce time to market and cost, and enable prioritization of projects more effectively.39

Ineffective gatekeeping may result in maintaining mediocre projects to the detriment of more worthy ones; or worse, it may result in launching a defective product. It is thus important not to skip any gate as the project may be terminated at any of these gates, with reduction of cost and loss. In one case, UniLever skipped the testing gate and launched the product to beat Procter & Gamble (P&G) to the laundry detergent market. When used domestically, the detergent shredded clothes and had to be withdrawn from the market. Meanwhile, P&G perfected its detergent and launched it into the market using the shredded clothes comparison in its advertising campaign. Overall, UniLever sustained $300 million in losses.

In addition to weeding out low-performing projects, gatekeeping guards against a "do it all" approach. Baxter IV Systems Division, for example, found in 1996 that its 95-project portfolio, in which new platform projects received a third of the resources, was both imbalanced and slow. The "do everything" approach proved to be fatal, affecting time to market and overall perform­ance. To solve this problem, Baxter IV adopted a clear stage-gate process, with clear criteria for each gate. A central team was also appointed, with four full-time facilitators as the gatekeepers of all the projects across the division.40

No structural changes will be fully effective without having innovative values engrained in the organizational culture. Like the knowledge-sharing culture, the innovation-enabling culture is one that fosters teamwork and collaboration. However, a number of other cultural values are cru­cial for IM, particularly the empowerment of employees.

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