Apr 28, 2011

Impact of Employee Stock Options on Performance

Knowledge@Wharton has a great article Incentive or Gift? How Perception of Employee Stock Options Affects Performance.  It appears that the idea that stock options drive people to work harder to increase the stock price is not quite true.
The story is not that people work harder to make the share price go up,' Cappelli noted. 'It is that if the share price goes up and people make money, they feel an obligation to work harder. That's a bit of a surprise.
Employees seem to feel that the company has given them a gift ONLY if they can exercise the options at a profit.  Even then, they only work hard in that they feel some gratitude for the gift!  This is important for R&D managers to understand because options are increasingly a part of benefit packages.
The issue is significant because over the last two decades, American firms have both greatly increased use of a stock option plan as a form of employee compensation, and broadened the class of eligible employees to include more than just the most elite executives. According to the National Center for Employee Ownership, only one million U.S. employees held stock options in 1990. That figure has since skyrocketed to nine million workers now participating in roughly 30,000 different plans.
We have discussed incentives to drive R&D performance many times.  Most recently, we discussed that financial incentives alone might not be the best way to drive performance.  That post has a list of related articles that you might want to check out.  This article follows the same theme that we have discussed in the past. Lets dig in...

Apr 27, 2011

What Will Your Customers Buy Next?

A quick post about an article in Technology Review about What Will Your Customers Buy Next?
Using sophisticated math and vast amounts of data, predictive analytics software can help forecast and influence purchasing behavior. So why aren't more companies using it?
The thrust of the article seems to be about predictive analysis software that can help companies better forecast evolving customer preferences:
With predictive analytics software, companies can see which customers are most likely to buy a given product. The process begins by ranking customers according to how recently they purchased, how frequently they buy, and how much money they spend.
Clearly, having data is not enough.  We need a way to generate knowledge and information out of the data.  The idea is to evolve parameters that can be used as a foundation for the predictive analysis.  The key question in my mind is how can we link this data about customer preferences into R&D plans?  I am not sure if anyone is working on that...

Apr 26, 2011

How to Succeed in Distributed Product Development

MIT Sloan Management Review had a somewhat interesting article Putting It Together: How to Succeed in Distributed Product Development.  The idea is pretty straight forward: as products get increasingly complex and competitive pressures require companies to work ever faster, more companies are forced to distribute product development across multiple organizations.
COMPANIES HAVE TRADITIONALLY been protective of the innovation activities they use in product and process development, seeing the activities as part of their crown jewels. That thinking, however, is starting to change. The increase in outsourcing, offshoring and alliance building has resulted in innovation efforts that often require the orchestration of multiple organizations separated by cultural, geographic and legal boundaries.
As the article points out, distributed nature of R&D varies:
At one extreme are centralized arrangements, with a clear lead organization and subsidiary “supplier” organizations. At the other are innovation efforts performed by decentralized “open-source” networks. In between is the realm of outsourcing and offshoring — the key building blocks in a trend called distributed product development or DPD, whose success factors are still not widely understood.
We have discussed the impact of distributed R&D on innovation.  We have also seen that the impact of distributed teams on learning.  We have also seen how virtual teams multiple times in the past. This article points out that distributed development adds significantly to the uncertainty in team performance:
Outsourcing complex product development work subjects companies to significant uncertainty. Companies can make perfectly reasonable decisions and still find themselves needing to make expensive changes, ranging into the millions or even billions of dollars. Our contention is that, by anticipating some of these changes, managers can reduce risk and, ultimately, cost.
So how does the article suggest we manage distributed product development:
The flippant answer — “very carefully” — is also the right one.
1. Communication must be perfectly clear, especially if the project involves people from different cultures.
2. Incentives must be carefully aligned.
3. Despite upfront planning, you still should be ready to adapt and realign as the inevitable snags occur.
We have covered incentives in the past.  I guess the key to cross-cultural, cross-organizational and multi-location distributed R&D is communication.  May I suggest you take a look at InspiRD?

Apr 25, 2011

Sparking creativity in teams

McKinsey Quarterly has a useful guide in Sparking creativity in teams:
In fact, our experience with hundreds of corporate teams, ranging from experienced C-level executives to entry-level customer service reps, suggests that companies can use relatively simple techniques to boost the creative output of employees at any level.
The article has four simple suggestions to increase creativity.  Lets dig in:
1. Immerse yourself: As we discussed in Steve Jobs Methodology, an engaged R&D manager is crucial to motivating R&D teams.  Many senior R&D managers I have met seem to have a hands-off approach to their teams.  As the McKinsey article points out, there is no alternative to clear engagement from the leadership:
The antidote is personal experience:p in ways that abstract discussions around conference room tables can’t. It’s therefore extremely valuable to start creativity-building exercises or idea generation efforts outside the office, by engineering personal experiences that directly confront the participants’ implicit or explicit assumptions. 
2. Overcome Orthodoxies: Personal engagement from leaders in required for the success of any organizational change.  However, the leaders also need to question conventional thinking and challenge teams to do better:
All organizations have conventional wisdom about “the way we do things,” unchallenged assumptions about what customers want, or supposedly essential elements of strategy that are rarely if ever questioned.
By identifying and then systematically challenging such core beliefs, companies can not only improve their ability to embrace new ideas but also get a jump on the competition.
3. Use Analogies: This is a new and interesting point. As the article points out, leaders need to frame the problem with analogies to actually help the teams do better.  The examples include: "How would Google manage this Data?" or "How would Southwest Airline cut these costs?"
Our own experience confirms the power of associations. We’ve found a straightforward, accessible way to begin harnessing it: using analogies. As we’ve seen, by forcing comparisons between one company and a second, seemingly unrelated one, teams make considerable creative progress, particularly in situations requiring greenfield ideas. We’re not suggesting that you emulate other organizations—a recipe for disappointment. Rather, this approach is about using other companies to stir your imagination.
4. Create Constraints: As we have discussed many times, managers are key to driving innovation.  Only managers have the cross-enterprise visibility to help frame the challenge for the R&D teams.
Imposing constraints to spark innovation may seem counterintuitive—isn’t the idea to explore “white spaces” and “blue oceans”? Yet without some old-fashioned forcing mechanisms, many would-be creative thinkers spin their wheels aimlessly or never leave their intellectual comfort zones.

Apr 20, 2011

Does Wall Street hate innovation?

I found an interesting article in the Star Tribune Does Wall Street hate innovation?
Recent studies by Mary Benner, an associate professor at the University of Minnesota's Carlson School of Management, concludes that's often the case for major players in their industries. She examined how analysts reacted when companies like Kodak and Polaroid shifted to digital photography or when telecommunications companies began pursuing Voice over Internet Protocol technology. Analysts showed a preference for incremental change rather than breakthrough innovation. 
This is an interesting look at innovation - from the outside and from the financial analyst perspective.  The research has some significant lessons for R&D managers.  First, for publicly traded companies, innovation is expected/rewarded from growth companies and not from value companies.
The thing that separates the ones that are affected from those that aren't is whether they're publicly traded where expectations have been created that earnings, cash flow will be predictable. It's very hard for them to change and do something entirely new. There are firms that are categorized as growth stocks where analysts and stakeholders are more willing to see them innovate. Even Amazon spent many years being a growth stock without a lot of expectations for predictable earnings. Private companies also have more leeway with their shareholders.
So how do companies get pressured?  They get rewarded when they focus on process improvements and efficiency enhancements such as Six Sigma that provide predictable results.  These processes actually squeeze out disruptive innovation and only allow companies to focus on incremental innovation.
They focus on mapping processes and predictable, measurable improvement. My research shows that tends to spur more incremental innovation and crowd out radical innovation. The direct effect is that Wall Street tends to react very positively when companies adopt these management practices. They can be wonderful in some parts of companies that need efficiency, stability. But they're not always wonderful, particularly with technologies that are so new we don't really know them yet.
Amazing! There is a cause and effect paradox here.  Large companies are often blamed for not innovating.  Everyone actually expects innovations to come from small nimble firms.  But the behavior of large firms is governed by the rewards they get from their boards of directors.  These rewards assure that the firms will actually not innovate!  This is another reason why financial incentives do not work.
However, only large firms really have the resources and manufacturing capabilities to bring products to market. Knowing this, large corporations should be better served by setting up Xerox PARC-like innovation organizations that do not get hindered by processes.  The problem then would be to have effective means of integrating the innovations into the product line.  We have discussed that several times in the past.

Apr 15, 2011

Nurturing disruptive innovation

First of all, I really loved the ars technical article Is gravity not actually a force? Forcing theory to meet experiments.  It has a great explanation of the new (perhaps revolutionary) theory of gravitation by Dutch theoretical physicist Erik Verlinde. I recommend reading the whole article. It has a great explanation of the
theory that made quite a stir last year.

More importantly, it points out how science has been able to take disruptive ideas and get them accepted for hundreds of years:
"How are controversial ideas handled by modern science? A common charge leveled against science (generally by those who are unhappy with its conclusions) is that the only way to get funding or continue your research is by going along with the current theories and not rocking the boat. For those who spend their careers in science, this is laughable—it is those who successfully rock the boat who are the most successful. In this article, we are going to look at a manuscript that purports to overturn hundreds of years of accepted ideas about gravity, and use it as an illustration of how controversial ideas are dealt with in modern physics."
May be we can learn from science on how to integrate disruptive innovation into new products and over come the not-invented-here rejection plaguing most R&D organizations engaged in open innovation?  I think we can.  Here are the steps:

  1. Publish the innovative idea (accessed through open innovation) to  internal experts.  Clearly, internal experts will be circumspect and disinclined to accept the new idea.  So, it is critical to provide a compelling argument or test results that back up the actual work.
  2. Invite internal experts to replicate the idea.  This is quite common in science as the article points out.  This will start getting some buy-in.  IP issues will be critical and you will need to ensure that the external idea does not get integrated into your internal R&D without a proper license.  
  3. Review results to verify and validate the idea.  This again is quite common in science and many people check the new theories on different scientific domains.  Similarly, R&D managers need to ensure experts examine the value of the innovation from different perspectives (user experience, manufacturability, etc.).   A big advantage of this step would be to reduce risks around integrating the disruptive innovation.  This step will also further drive acceptance of the new innovation.
  4. Solicit future involvement from experts and develop a plan to mature the innovation.  It is critical that this step is executed very quickly after step 3.  A plan and associated metrics will get over the valley of death in product innovation.

 Sounds quite intuitive.  I hope to try this in the near future.  Any thoughts?

Apr 14, 2011

The Problem with Financial Incentives

We have often talked about incentive plans and their impact on motivating R&D teams.  In"Impact of Incentive Bonus Plan" we discussed that unless the bonus plan can be tightly coupled with real metrics, they may actually reduce performance.  The article "You are getting a bonus so why aren't you motivated," we learned that bonuses are not effective at motivating R&D teams.  We have discussed other forms of motivation for R&D teams and what drives satisfaction in virtual R&D teams here..  Now there is another interesting article in Knowledge@Wharton: The Problem with Financial Incentives -- and What to Do About It - Knowledge@Wharton that talks about aligning incentives with work.
Bonuses and stock options often improve performance. But they can also lead to unethical behavior, fuel turnover and foster envy and discontent. In this opinion piece, Wharton management professors Adam Grant and Jitendra Singh argue that it is time to cut back on money as a chief motivational force in business. Instead, they say, employers should pay greater attention to intrinsic motivation. That means designing jobs that provide opportunities to make choices, develop skills, do work that matters and build meaningful interpersonal connections.
There are three important risks that excessive reliance on financial incentives brings:

Apr 11, 2011

Why Hasn't Innovation Provided a Reliable Alternative to Oil?

The article Out of Fuel: Why Hasn't Innovation Provided a Reliable Alternative to Oil? in Knowledge@Wharton has some good pointers about innovation management in general:
Innovation consists of matching a solution to a need,” says Wharton professor of operations and information management Christian Terwiesch. “As it stands right now, the sad reality in the U.S. is there is simply little need for alternative energy from the mass markets. Energy is too cheap. You might look at US$4 a gallon and disagree, but in countries that are moving faster on the alternative energy side, gas is taxed at much higher rates. Cheap traditional energy makes innovation in alternative energy simply less profitable.”
Also, a very interesting graphic showing US government R&D investments over last 50 years.
So, what is the single most important driver of innovation: Funding! Clearly, funding itself is driven by perceived need.  In case of energy R&D, all of the funding disappeared once the 70s oil crisis was over.
According to a study done by the Pacific Northwest National Laboratory for the U.S. Department of Energy, the U.S. government spent nearly US$4 trillion on research and development (R&D) from 1961 to 2008. Of that amount, energy technology development received nearly US$172 billion. But the bulk of that spending was done during the oil crises; since the mid-1990s, the study found, energy R&D has accounted for only 1% of all federal investment.
So what are the lessons an R&D manager should be learning from this? First, carefully study the target market before committing to a large investment beyond technology exploration:
One of the challenges facing energy innovators in creating an alternative to oil is that Mother Nature’s version is hard to beat. “Oil is attractive as an energy source,” Gately says. “It is abundant, easy and cheap to produce, store, transport and convert to many usable forms of energy.”
“No single solution is able to replace oil,” agrees A.T. Kearney’s Besland. “One liter of oil gives more energy than any other resource. Oil is denser. It is also easier to transport and to stock … so nothing will be found which can be comparable to oil. It should be a combination, a mix of alternative energy solutions.”
Second, innovation projects that have a very long timeline to maturation are much harder to fund. Be careful about taking on innovation projects that will take ten years or more to get to market - unless of course there is a clear government funding thrust in the area (as you can see in the figure above).
Another issue alternative energy innovators say they face is the intense pressure to quickly prove their work can become commercially viable. Entrepreneurs in ‘clean tech’ say convincing investors to make long-term commitments to fund their work is an uphill battle, though this problem is not unique to their field.
There have been major innovations in the digital technology but there are a couple of key points that make oil different. 1) There has been a very significant investment in maturing digital technologies from the US Government (part of the defense slice); 2) There is no serious alternative to digital technologies that can provide the user experience - clearly not the case in oil; 3) The technology cycle is much shorter (at least now) and self sustaining in digital than in energy.
Final point to remember is the business model that supports the innovation.  Many energy innovations have gotten bogged down because the business model just does not make it profitable to invest in R&D:
Besland believes solar and natural gas are alternatives with the best potential for future development. “Gas pockets are discovered continuously,” he says. “Amazingly, it is not developed in the Gulf region because gas resources have been sold on long term export contracts. Biomass energy faces a concurrency issue with food. However research on seaweed and used oil are in development. It would take 10 or 15 years for these to reach maturity.”

Apr 5, 2011

Build a Flexible Business Plan

Harvard Business Review has a very good four minute video on how Build a Flexible Business Plan,  Here are the take home messages:
  1. Start from the heart: Only go after what you are passionate about
  2. Think big but start small: Have a large vision but figure out small steps on how to get to it
  3. Have a basic framework: PIMM - or People, Idea, Model (business model) and Market
  4. Know your trade-offs: People are more important than Idea (A-team can improve the idea, but idea can not improve a B-team).  Idea is more important than business model (you can change a business model around an idea). And business model is more important than market (you can change the market applicable to a business model).
  5. Keep it iterative.
Great video worth watching.

Apr 4, 2011

Why Failure Breeds Winners

Business Week article Intelligent Growth: Why Failure Breeds Winners has two important lessons for R&D managers consider growth or innovation investments (and R&D planning in general):
(1) Define what failure looks like for growth investments—specify when and why disinvestment should occur. Then stick to the plan.
This is quite intuitive, but I have been consistently surprised at the lack of clearly defined goals/objectives for R&D projects. This lack of discipline always results in goal creep, waste of resources and reduction in R&D team morale.
So, the take home message is to develop a clear plan on how the growth bet (or innovation bet) is going to get delivered in products and tie investments to that plan.  Also decides what signals a clear departure from the plan and have the discipline to cancel projects if they do.  This plan would help combat the valley of death that frequently leads to innovation project failure.  Furthermore, this plan would also help to
(2) Upgrade your growth investment process by shifting analytical resources away from up-front screening toward life-cycle analysis. Create a 'learning loop' for management by dedicating staff to mid-cycle and post-completion project evaluations.
There is significant evidence that consistent evaluation of innovation projects can have tremendous benefits to the organization in terms of management learning and market understanding.  However, this is difficult to do:
Cycle discipline is intuitive but difficult to recreate in a large, complex corporation. Less than 10% of the companies we examined exhibited this kind of financial savvy for more than a few consecutive years at a time.
But well worth trying because the results are impressive:
Companies that are able to consistently grow sales and improve margin across multiple business cycles realize a 4.4% compound total shareholder return (TSR) advantage relative to industry returns over pure growth leaders, and a 5.4% compound TSR advantage over pure margin leaders.