Research Report




Innovation
Sourcing Strategy
Matters
Jane C. Linder, Sirkka L. Jarvenpaa,
Thomas H. Davenport



Innov...
Accenture Institute for Strategic Change · March 2003




Innovation Sourcing Strategy Matters
Most executives would agree...
Innovation Sourcing Strategy Matters




Sidebar A: Research approach                                         Continuous i...
Accenture Institute for Strategic Change · March 2003




While most companies tend to focus innovative activities on     ...
Innovation Sourcing Strategy Matters




We are also making many new external connections that expand             executiv...
Accenture Institute for Strategic Change · March 2003




Sidebar B: Components of an Innovation Strategy
An innovation so...
Innovation Sourcing Strategy Matters




innovation objectives (see Exhibit 4). Community sourcing, for                   ...
Accenture Institute for Strategic Change · March 2003




Exhibit 3: Types of innovation sourcing channels

Buying innovat...
Innovation Sourcing Strategy Matters




Exhibit 4: The relative strengths and weaknesses of alternative innovation sourci...
Accenture Institute for Strategic Change · March 2003




Sidebar C: Common Boundaries That Innovation-Sourcing Processing...
Innovation Sourcing Strategy Matters




commercialize that untapped pipeline." To address the mindset gap,        Manage ...
Accenture Institute for Strategic Change · March 2003




its 1400 UK "high street" locations. Barry Clare, executive     ...
Innovation Sourcing Strategy Matters




What practices are missing from this list? Two prominent ones         Implication...
Accenture Institute for Strategic Change · March 2003




About the Authors                                               ...
Innovation Sourcing Strategy Matters




Notes:

1 Investment in innovation does not always            6 Innovation is def...
Accenture Institute for Strategic Change
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Innovation Sourcing Strategy Matters

  1. 1. Research Report Innovation Sourcing Strategy Matters Jane C. Linder, Sirkka L. Jarvenpaa, Thomas H. Davenport Innovation in products, services and processes has been the key to long-term growth and competitive success. However, despite increasing investments in research and development, many firms are not achieving the benefits they seek from innovation. To ramp up their levels of innovation, companies have shifted more of their focus from internal innovation to a range of outside sources. Our research in five industries concludes that companies are increasing their reliance on external sourcing for innovation, but most lack an innovation sourcing strategy. Avid innovators create and manage a diverse set of innovation "channels" that incorporate not only sets of sources, but also well- established approaches for managing at the interfaces. Finally, leading companies manage the entire innovation-sourcing network holistically— including both internal and external sources.
  2. 2. Accenture Institute for Strategic Change · March 2003 Innovation Sourcing Strategy Matters Most executives would agree that innovation is critical to the long-term growth and prosperity of companies. However, innovation processes are not yielding the benefits they should.1 To ramp up their levels of innovation, companies have shifted external partnerships with drug research firms at various stages of more of their focus from internal innovation to a range of outside the drug development process. Lilly also turns to individuals for sources such as customers, research companies, business partners innovation, using community sourcing to solve hard chemistry and universities. Fifty percent of the executives we interviewed problems. It posts these on its website, InnoCentive.com, and offers for this study assert that the percentage of external innovation payments up to $100,000 for verified solutions. Establishing the will grow even further over the next three years. One noted, "We channel—the Internet site, the awareness among scientists, its are seeing an enormous shift in our industry, with all the players own acceptance procedures, and the payment mechanisms— doing far less product innovation internally. If we're going into a gives Lilly ready access to a world of talent when it encounters a new long-term growth area, we're getting there with involvement challenging problem. Lilly also has venture capital funds with in venture capital, alliances or acquisition of technology. The last which it invests in early-stage biotech research. Establishing place we would look for innovation is in-house R&D."2 these and other clear innovation channels enables Lilly to excel at drug development. According to financial analysts, Lilly has the This trend is not new.3 Researchers from Accenture's Institute for fullest and most productive late-stage pipeline in the industry.5 Strategic Change and the McCombs School of Business at the University of Texas partnered to understand how companies are The purpose of this study was to understand how companies are managing these increasingly important activities (see Sidebar A: effectively establishing and using external sources for innovation. Research approach). Despite the growth of external innovation, we Based on our research, we conclude that: found that many companies lack a sourcing strategy that guides them in managing it. Companies may look to other organizations • Companies are increasing their reliance on external sourcing for innovation, but they often do so unconsciously, or stick for innovation, but most lack an innovation sourcing strategy. rigidly to a single innovation source that no longer suits them. They transact with a few familiar external innovation sources, An innovation sourcing strategy not only helps companies decide but they are not getting the most out of this important activity. what combination of internal and external sources they should consider but also how to leverage these throughout the innovation • Avid innovators create and manage a diverse set of innovation chain. Sophisticated firms clearly have sourcing strategies for "channels" that incorporate not only sets of sources, but also production processes, and managers of many functions have well-established approaches for managing at the interfaces. well-defined approaches to "build vs. buy" questions. Yet only a They cultivate multiple external sources and explicitly master few leading-edge firms can be said to have a sourcing strategy a range of boundary-spanning approaches in support of a clear for innovation. Even fewer have a holistic way to manage diverse innovation sourcing strategy. innovation sources to get the most out of the process. • Leading companies manage the entire innovation-sourcing Consider, for example, the pharmaceutical firm Eli Lilly and network holistically—including both internal and external Company. The company drives innovation with a notably holistic sources. In addition to accepted project- and risk- approach. It extends from an innovation-hungry business strategy management techniques, they use big ideas to define agendas to a set of detailed tactics for managing partnerships with external and drive new sources of value. innovation providers. A Lilly strategist asserted that external sources are essential for success: "Innovation is occurring around As a firm matures in its ability to manage innovation, it expands the world; you flat cannot do it all yourself. We'll look at 1000 to the types of innovation it undertakes and the sources it uses. 1500 opportunities this year to acquire someone else's intellectual Besides product innovations, firms create value from service and property."4 At any given time, Lilly is managing more than 140 business model innovations. They create value not only by 2
  3. 3. Innovation Sourcing Strategy Matters Sidebar A: Research approach Continuous innovation is a competitive necessity in the industries we studied. One electronics executive put it this way, "Out there Researchers from the Accenture Institute for Strategic Change in some garage is an entrepreneur who is forging a bullet with and the McCombs School of Business at the University of Texas your company's name on it. You have got to shoot first." identified five broad industrial categories in which innovation is competitively important: pharmaceuticals, high technology/ Unfortunately, however, most firms tend to concentrate their electronics, automotive, retail, and oil and chemicals. These are innovative activities explicitly in a small number of areas. In our certainly not the only industries in which innovation matters, study, by far the most common area was product innovation but we chose them to reflect a broad spectrum of approaches (Exhibit 1). Even executives who describe a broader innovation to external innovation sourcing. We conducted in-depth, agenda for their firms frequently focus on product innovation personal interviews with 40 senior executives responsible for when it comes to questions of sourcing. some facet of innovation in firms across these industries. Of these firms, 52 percent were headquartered in the United The specific innovation focus we found might have more to do with the responsibility of the individuals we interviewed rather States, 43 percent in Europe and 5 percent in the Asia/Pacific than any overarching corporate plan. At the very least, we can region. conclude that few companies had clearly stated a corporate focus for innovation. The firms in our study rarely targeted business model innovation, and business process innovation tended to happen primarily during occasional "reengineering" initiatives. One executive attributed his firm's bias against these types of innovations to funding issues and incentives. Organizational discovering or designing new products, but by bringing those ownership for these kinds of innovations is often unclear, and products to market. As firms increase the number of innovation corporations provide little in the form of reward structures to sources they use, they integrate these sources into channels of motivate innovation in this area. innovation across the different phases of innovation. To cope with the rising complexity of types, sources and channels, the leading firms manage innovation holistically by targeting new market spaces and innovative business models, then assembling a sourcing strategy that leverages the various channels in a complementary way. Holistic management of innovation sourcing is rare, but it is an increasingly important strategic capability. Exhibit 1: Innovation often focuses on products Products External Sourcing Brings Greater Services & customer experiences Complexity in Innovation Processes Business processes Manufacturing processes Innovators implement new ideas that create value. Firms 6 Technology can innovate in many areas including new product and service development development; new or better work processes like logistics and Business models human resource management, marketing and customer management; and new tools and processes like production Lines of business machinery and information systems, financing and capital Store design management, and innovative business models. In short, companies can innovate in just about everything they do. In addition, Packaging innovation involves more than just ideation. It is an end-to-end 0 5 10 15 20 25 30 process that stretches from discovery through commercialization. (n=40, multiple responses accepted) 3
  4. 4. Accenture Institute for Strategic Change · March 2003 While most companies tend to focus innovative activities on line.” Yet, studies show that the most successful innovators products, their approaches to sourcing range widely. On average, are distinguished by their ability to kill poor projects.8 the executives in our study who could specify a percentage of Executives often find they can pull the plug more easily when external innovation estimate that their firms source 45 percent a project is externally sourced. of their innovation from outside. This average hides a great deal of diversity. Some of the retail firms in our study report that they • Stimulating internal innovation. Executives find that inviting get 90 percent of their innovation from outside sources—primarily in outside innovation sparks more innovation on the inside in the form of the products they sell. In contrast, discovery- as well. They believe their own work improves when it's intensive pharmaceutical and chemical organizations like Lilly and subjected to competition from external ideas and when they DuPont Crop Protection rely on internal sources for more than 70 add outsiders with new capabilities to their teams. Tapping percent of innovation. into the idea flow also helps a firm loft its strategic agenda in the right direction.9 As noted by other researchers,7 executives see improvements from greater external sourcing. They cite several appealing benefits: Greater external sourcing means greater variety in sources of innovation. Firms are tapping new types of external sources, • Opening up new doors. By accessing new types of expertise, from user communities and consultants to consortia of competing companies can extend products and services in ways that were firms. For example, at the behest of a consortium of large previously closed to them. For example, a small firm in the customers, Aker Kvaerner, a specialist in oil and gas recovery automotive industry partnered with a marine engine firm to technology, is collaborating with a competitor to develop a sub- develop a new cast aluminum engine block. Both firms sea oil recovery process. According to Simon Davies, Aker benefited—vehicle firm got a light-weight, high-performance Kvaerner's vice president of group technology, “Our customers engine, and its partner established a new line of products for looked at their sub-sea processing vision and concluded that no water craft. single company had all the solutions. They then persuaded us to work with ABB to push the technology forward.” • Delivering quality results faster. Executives report that externally sourced projects benefit from the focusing power With new types of innovation sources available, executives are of explicit financial obligations. Says one vice president, “Our expanding the purposes for which they consider external sources people pay more attention when they have to write a check appropriate. In research-intensive companies, for example, the for the work. And the development firms we work with force conventional wisdom holds that employees conduct research in us to be more explicit about what we want so they can ensure the firm's core area of expertise, and outsiders provide less their own success.” Clarity of objectives and focused important support activities.10 Yet research powerhouses in the management attention drive the project to a better, faster pharmaceutical industry are turning to small biotech firms for conclusion. their next generation drug breakthroughs. Chemical companies with strong internal research traditions are lining up contract • Cutting the cost of innovation. Whether by sharing the scientists in Russia and India to strengthen their staffs and stretch financial burden with other firms or by working with lower- their R&D budgets. Firms that are edging into new product cost external providers, executives are finding that external domains are looking to outside sources not for support capabilities, sourcing can reduce their innovation costs and spread the risks but for the critical skills these new arenas require. among other firms. The vice president of engineering in a small automotive firm explains, “The big automotive companies have Perhaps most importantly, firms are using external sources for all ten to a hundred times more resources than we do. If we all phases of innovation from discovery and development to need a particular innovation, we let them plow that row ahead commercialization and even product maintenance. Also, they use of us and position ourselves as adroit followers.” different sources at different times—for example, university research during a product's discovery phase, a strategic partner to bring a • Facilitating tough priority calls. When internal staff members new service to market, and a consulting company for business become committed to a project, shelving it in favor of activities process innovation. Reports Jeff Weedman, vice president of with higher potential can create dissent. In one company known external business development and global licensing for Procter & for its innovation culture, the executive we interviewed noted, Gamble, "We extract value from our own intellectual property “People innovate for the innovation's sake, not for the bottom through just about every kind of relationship you can imagine. 4
  5. 5. Innovation Sourcing Strategy Matters We are also making many new external connections that expand executives do not have comprehensive frameworks for managing our capability beyond our core competencies. Given our global external innovation effectively. Most do not have explicit scale, we are able to sense new innovations early in their guidelines for establishing when to use external sources in development and increase alliances or acquisitions to bring them general, and when to use each type of source in particular. Firms to market more quickly and more broadly. The goals? To incubate do not tap all the sources at their disposal. Very few firms, for businesses that fit our initiatives, to accelerate the innovation example, take advantage of community sourcing.12 Companies cycle and to extract value from our own unique intellectual assets.” tend to choose specific partners in an ad hoc manner. Further, they do not spell out how to interface with or coordinate among different sources. In addition, they frequently manage externally sourced projects in the same way as they manage internal ones, Firms Need an Explicit Innovation Sourcing whether or not the project has the same profile. As a result, Strategy projects stumble over differences in culture, pace and expectations. Most companies do not track the proportion of external In addition to its benefits, sourcing innovation externally carries innovation, nor do they measure the performance of their external many risks and costs—some of them hidden.11 Constructing deals innovation suppliers. About half of the firms in our study assert that achieve their objectives and protect a firm's intellectual assets they measure their own firm's innovativeness in some way—most demand specialized skills. This is particularly difficult where often by the percentage of sales due to products introduced in innovation relies on a complex network of internal and external the past several years. However, no firm measures the relationships. Innovation sourcing sometimes results in the comparative results of internally and externally sourced unintended loss of knowledge. Toyota, by outsourcing the design innovations. As a result, executives have no concrete and manufacture of the electrical systems for its automobiles, information about whether or not innovation sourcing is paying surrendered its grasp of the detailed knowledge this painstaking off. piece of work entailed. With that knowledge went the in-depth understanding of and appreciation for the complex interactions These problems underscore the need to manage external within the system. One electronics company found that changing innovation sourcing through an explicit strategy. The companies its role from a manufacturer (i.e., manufacturing products from in our study illustrated two stages of progress toward this. First, components) to an assembler (i.e., manufacturing products from they developed sourcing channels rather than an ad hoc portfolio subcontracted subassemblies) made it uncomfortably reliant on of independent sources. Secondly, they managed innovation subcontractors for innovation. In the business model change, it holistically and used the company's overall innovation strategy lost the capability to participate in and monitor critical (the role innovation plays in the company's value-creating agenda) subassembly-level innovations. to shape a supporting innovation sourcing strategy (see Sidebar B: Components of an innovation sourcing strategy). Nurturing strategic relationships also takes management time and attention. One leading high technology firm recognizes universities as a source for cutting-edge intelligence and research. However, From Innovation Sources to Innovation Channels to take advantage of these innovations, management has to spend time with the professors as well as develop internal relationships The executives in our study told us they use a wide variety of to ready its own organization to make use of the ideas. Creating external innovation sources, ranging from strategic partnerships a culture in which external contributions are accepted, let alone and standing customer panels to university research. However, welcomed, continues to be problematic in many companies. many choose sources in case-by-case manner and rely on local management skills to make sure projects deliver the promised Nevertheless, the executives in our study are convinced that benefits. In a word, they source "transactionally." For the most external innovation has value. “It has been proven beyond doubt part, these decisions are taken without analyzing how this that, in many areas, you get more out of doing outside innovation transaction affects other internal or external innovations or how than inside,” says Rune Strømquist, senior vice president of it relates to transactions in other phases of the innovation chain. technology at ABB Oil, Gas and Petrochemicals, a market leader in oil and gas and power and automation technologies. More sophisticated innovators shape the menu of external However, much of the potential remains unrealized because sources explicitly into innovation channels. Just as experienced 5
  6. 6. Accenture Institute for Strategic Change · March 2003 Sidebar B: Components of an Innovation Strategy An innovation sourcing strategy addresses five central questions. These must be answered in the context of competitive positioning, risk tolerance and strategic time horizons: What is the organization's innovation Sigmundstad, senior vice president of matched specific sets of sources with strategy, including desirable domains industry and commercialization for the innovation needs and managed them as a and end products for innovation? Norwegian oil firm Statoil, "Statoil works group, through established processes, In pharmaceuticals, the domains might closely with suppliers to develop technical rather than as separate and independent be disease categories; in retailing they solutions to improve Statoil's performance. relationships. might be consumer market spaces; in the The main value for us is being able to use automobile industry they could be vehicle the technology to establish our strategic How are the interfaces across channels categories. The end products might position as the leading operator. As a identified and managed? include products and services, customer result, our primary goal is to achieve Companies that managed innovation experiences or creative financial availability—through one or more sources as channels established and instruments. suppliers—rather than ownership of new managed relationships through regular technology. However, ownership can be "standard operating procedures." What are the key sourcing principles? useful to accelerate the process of Some firms were able to articulate their making technology available, and is What internal organizational key principles for sourcing quite clearly. sometimes necessary to ensure that the mechanisms need to be established to Brent Bellm, director of corporate technology is made available at all." leverage external sourcing effectively? strategy for eBay, encapsulated its view of A small number of firms in our study innovation this way: "We are What are the firm's innovation established processes to evaluate philosophically committed to community- sourcing channels and what needs do important relationships regularly—not based innovation. And we do not think of they address? just at the outset of a sourcing deal, but it as 'sourcing' innovation, but enabling it. While no firm in our study used the word throughout its course. Strategic sourcers We use our internal resources to create "channel" to describe its innovation would also implement measures to assess new features that stimulate and enable sources, some explicitly managed sets of the competitive effectiveness of each new waves of innovation from our sources in the same way marketers channel. community." According to Martin manage distribution channels. They had marketers reach their end customers through specific the organization has established a strategic partnering program. distribution channels—not an ad hoc collection of resellers and This involves recruiting the "right" partners—five or six firms outlets—these firms set up innovation sourcing channels to meet with a compatible technology interest and need—and particular business needs. They set goals and objectives across establishing processes for managing the relationships effectively. the innovation chain—the series of value-adding processes that Donna Smith, division leader for industrial business development reach from discovery through development to commercialization. explains, "We assign one of our seasoned researchers to live in Then they develop external innovation channels, based on the partner firm for two years. The individual's job is to learn the articulated sourcing principles, to reach their goals. We illustrate company, understand its research interests and future direction, some of the sourcing channels across the innovation chain in and help groom the relationship." Because of the way it manages Exhibit 2. Exhibit 3 describes the channel types in more detail. these activities, Los Alamos National Laboratories does not just have strategic partners; it has a strategic partnering channel. For example, Los Alamos National Laboratories partners with private sector firms to develop technologies. Past partnerships We determined from our interviews that each channel has a often started when researchers met at conferences. More recently different set of strengths and weaknesses relative to various 6
  7. 7. Innovation Sourcing Strategy Matters innovation objectives (see Exhibit 4). Community sourcing, for unique relationships with a stable, committed supply base. example, has the benefit of low costs because a company typically They will invest in new ideas, and we will reward them with pays little or nothing for the work of community-based innovators. orders. Historically, much of this business has been done on However, executives often find it more difficult to direct this a handshake." channel than others. Co-sourcing and community sourcing present complex intellectual property challenges.13 Different sourcing • A leading supplier of application software to the retail industry channels require different internal management capabilities, partners with customers to drive innovation. It maintains a innovation processes, external relationships, information flows pool of ideas for potential new software features and functions and intellectual property arrangements. and consistently trolls for customer interest in one of its development candidates. It kicks off a development project The firms that leverage innovation channels go beyond a simple when one of its leading customers is willing to provide funding. transactional approach to sourcing. They still occasionally do one- The firm's chief strategy officer notes, "It is not enough to be off deals, but most of their externally sourced innovation comes right about whether your customers want a particular new through channels they establish deliberately. The company cultivates capability, you have to be right about the timing too. external channels it wants to use so they are available consistently. Otherwise you don't get the value. We make sure each Moreover, it chooses channels that match its strategic requirements. innovation is supported by a market-leading retailer who is Once established, these channels can be used fluidly as needs arise. willing to put dollars behind it." Some examples will illustrate the point. Establish Innovation Channels through • Unlike most retailers, Marks & Spencer, a UK food, clothing, Organizational Processes home ware and beauty chain, distinguishes itself through product innovation. For example, it offers a line of men's wool Just like other types of channels, companies establish innovation- suits that are machine washable. It relies on suppliers to invest sourcing channels through organizational structures and processes. in innovative new types of products that will appeal to the They do the following: Marks & Spencer customer. Says James Stafford, technical executive for intellectual property division, "I think we have • Establish an organizational locus for sourcing. In some organizations, such as Procter & Gamble, a business development group is charged with the responsibility to solicit and manage outside relationships. In others, like Boots, the group that concerns itself with future products and services shoulders this responsibility. Some firms create separate Exhibit 2: Companies use a wide variety of channels for organizations for each important channel. Explains Dave external sourcing Thompson, Lilly’s senior vice president of strategy and corporate development, "We have two venture capital funds, and a The Innovation Chain Discovery Development Commercialization separate group focused solely on alliance management." In 1998, Nokia established a third division or "leg," separate from Channel Types its two core businesses of mobile phones and networks, to Buying innovation Sponsored Innovation-for- Strategic focus on exploring and developing the future. This organization, on the market Research hire procurement Nokia Ventures, is headed by the president of the Nokia Group. Investing in Early-stage Late-stage Equity plays One arm of the organization invests in businesses, often in innovators venture capital venture capital consort with other investors, that help complement and expand Co-sourcing Discovery Development Commercialization long-term growth in business areas of Nokia, and the other partnership partnership partnership is a "greenhouse" or information gathering tool for exploring the future of the mobile information society. Community Open problem Enabled Standing customer sourcing solving development panel • Codify practices that work. Each partnership and deal will Resourcing Contracting for Contracting for Contracting for outside tools and outside tools and outside tools and have its own important nuances, but this does not prevent talent talent talent the leading firms from establishing principles, processes, and 7
  8. 8. Accenture Institute for Strategic Change · March 2003 Exhibit 3: Types of innovation sourcing channels Buying innovation on the market: Co-sourcing innovation through consortia, partnerships, and joint Organizations ranging from universities and consulting firms to private research ventures: labs offer innovation for hire. This type of channel is well established in all the As innovation in some arenas becomes more expensive, firms band together to industries we studied, although firms in different industries invoke it more share the costs. In industries like oil and chemicals, these groups often include frequently at different parts of the innovation chain. ABB, an oil and gas direct competitors. Automotive firms use co-sourcing to address regulatory technology firm, for example, actively sponsors research at local universities. In requirements like emissions standards that affect them all. Much of Nokia's contrast, retailers and automotive firms with strong brands and market power success with mobile phones stems from innovative co-sourcing through the shift the onus of innovation onto suppliers through a process called "strategic consortia and technology standardization boards of GSM and 3G, wireless procurement." These suppliers compete for purchase orders by investing in and industry associations. One leading high technology firm locates its own research offering differentiated products. For example, UK retailers Boots and Sainsbury's laboratories inside universities. Partnerships across all segments of the innovation have not only contracted out their information technology to outsourcers, but chain are also used to bring together the diverse skills and talents a project also the identification of innovative uses of IT in business processes. requires. ABB's Rune Stromquist describes one innovative partnership like this, "We felt we had most of the competency we needed, but there were a few gaps. Investing in innovators: We selected a technology partner, and we had participation from a university as Companies take equity positions in innovative firms to benefit from well as four of the firms that would ultimately buy the solution." breakthroughs. Lilly has two small venture capital funds to seed technologies in the biotech arena and in the information technology space. Dave Thompson Community sourcing: explains, "We will do 250+ confidentiality agreements, 100 negotiations, and 30 Over the past decade, a new approach to innovation has captured the attention of to 40 deals. It is a massive, systematized process to search the world for the business community. It involves tapping loosely connected communities of innovation." Electronics companies also make heavy use of this channel. For sophisticated users. This approach has been successful in the software industry, example, Nokia, a global leader in wireless telecom equipment and handsets, has where one form of it is called the "open source" movement.14 eBay uses shied away from acquisitions, preferring instead to set up venture funds to invest community-based innovation extensively to identify new sales categories and in companies that complement its own product and business development. Some expand the capabilities it offers customers. For example, eBay executives would companies invest in innovators as a strategy to skirt entrenched business models, say that its community of buyers and sellers identified and built what is today its corporate inertia or top management resistance to investing in small markets. One largest sales category, automobiles. Additional community members built high technology executive notes that investing in innovators helps to resolve the important new auction management tools that plug into the eBay platform to "innovator's dilemma," where established firms resist innovation that might facilitate these high-ticket auctions. NTT DoCoMo employs community sourcing cannibalize existing offerings.13 Through an equity partnership, a firm can for the information content it distributes over its I-Mode mobile data service by participate in and nurture an emerging market. allowing any company or individual to set up an I-Mode compatible website. Nokia relies on community sourcing for the applications software for its Media Resourcing: Terminal, the centerpiece of the firm's wireless home entertainment system. Companies support their staffs by contracting with outside suppliers for on- demand talent and innovative new tools. DuPont Crop Protection is increasingly looking to firms in India, Russia and China for a cost effective supply of high- quality researchers. This provides flexibility in managing R&D and recognizes the increasingly global nature of a high quality research capability. Aventis looks outside for cutting edge technologies to improve its product development productivity. It brings these in house when a clear leader emerges among competing technologies and its value for the internal efforts has been proven. even document templates they can pull off the shelf to make This information also helps our partners know how to build deals easy. Says Donna Smith of Los Alamos National successful relationships with the Laboratory." GMP Companies, Laboratory, which is known for its successes at technology a pharmaceuticals, diagnostics and medical device company, transfer and commercialization: "We engage in a number of insists that every one of its licensing, sponsored research and different types of interactions with companies, including consulting agreements with university researchers is thoroughly shared staff, shared facilities, straight-up licensing, sponsored reviewed at the beginning. Dr. Michael Salem explains, research and collaborative research." Smith tailors management "We have spent a lot of time developing standard operating practices to the type of relationship at hand. She continues, procedures, including a review by the appropriate conflict of "In the last year, we went through an exercise to analyze our interest and conflict of commitment committees. We prefer successful partnerships. We identified the common factors, to disclose everything up front rather than having unpleasant and we will try to replicate them in every strategic relationship. surprises later on." 8
  9. 9. Innovation Sourcing Strategy Matters Exhibit 4: The relative strengths and weaknesses of alternative innovation sourcing channels Innovation Ease of Ease of Ability to retain Control over Ease of Sourcing Channels Cost integration differentiation ownership results management Buying innovation on the market Sponsored research Innovation for hire Strategic procurement Investing in innovators Venture capital/ Equity plays Co-sourcing Within innovation sectors Across innovation sectors Community sourcing Resourcing Worst Best • Implement performance measures. This sounds simple, but companies, but acting as a due diligence gatekeeper gives Boots very few organizations have anything but anecdotal data about executives an early look at emerging health care products. their innovation partnerships. Leading firms such as Nokia assess long-term development relationships regularly and include an innovation metric on supplier scorecards. Firms An Innovation Channel Means Managing At the that use innovation channels actively will opt for measures Interface that capture each innovation channel's contribution to the organization's overall innovation goal. Establishing innovation channels involves working across a series of boundaries—across the innovation chain, across organizational To institutionalize channels, companies manage innovation in a cultures, and across time and space. To use external sourcing way that invites external opportunities. By positioning effectively, executives must identify the boundaries they are trying themselves as the partner of choice, these firms attract new to cross and establish processes to bridge them on both the ideas. Lilly, Boots, IBM, Nokia and GMP Companies all review rational and emotional levels (see Sidebar C: Common boundaries thousands of opportunities a year, most of which are unsolicited. that innovation-sourcing processes must bridge). Some boundaries Dr. Michael Salem of GMP remarks, "We keep our patent-holders are more easily addressed through routine, accepted business and inventors involved throughout the process. If you do right by practices. For example, most sourcing processes use some kind of them with the first technology, they will consider you for their contractual negotiation to deal with organizations' differing goals other discoveries and they will also tell their colleagues." Boots and agendas and financial interests. As one executive says, "The takes a different approach. It helps venture capital firms most important issue is who pays, and who profits." evaluate the market potential of biotech start-ups looking for funds. Boots prefers not to take equity positions in these 9
  10. 10. Accenture Institute for Strategic Change · March 2003 Sidebar C: Common Boundaries That Innovation-Sourcing Processing Must Bridge Work process expectations. large firms when they arrange external Time and space differences. DuPont The innovation process varies among sourcing. Small firms are often more agile Crop Protection's efforts are global, companies, but it usually includes three and decisive. Several companies in our encompassing research alliances in broad categories of activities: discovery, study asserted they are shifting work Europe, Russia, India, China and the development and commercialization. from universities to private labs because United States. This entails managing Each of these segments of the innovation the latter are more likely to work at a across time zones and appreciating chain involves a very different work commercial pace. cultural differences. process. The way an organization discovers new molecules, for example, is dramatically Information boundaries. The sourcing Disciplinary specialties. External different from the way it develops salable approach must provide enough sourcing frequently means seeking out products, which is again different from information flow to keep the innovative firms specifically for their unique set of the way it commercializes new drugs. activities on track. Executives at both skills or expertise. However, as one When external sourcing is intended to Limited Brands and a premier automotive executive wryly put it, "The biochemists give a company access to other segments company believe that the subtle nuances do not respect the clinicians; the of the innovation chain, the sourcing of their brands need to be fully understood engineers do not want to speak to the approach must create a bridge between by outside partners before they can scientists.” Different disciplinary these different mindsets. contribute effectively. This requires outside specialties also have their own entrenched partners to make a knowledge investment and incompatible reward systems. Pace. Some firms are particularly sensitive up front or risk undermining their to the differences between small and credibility with the sourcing firm. Innovation sourcing also involves bridging some more subtle and Successful firms also bridge "like to like" processes. For example, problematic boundaries. More often, these are the unspoken and ABB manages projects with the academic world through its own emotional ones. They include culture, pace, information flows and closest equivalent, the corporate research center. Its business units work processes. Most external sourcing processes, for example, manage focused development projects with smaller firms. At the have no formal way to deal with cultural fit. Lilly's is an exception. corporate level, it establishes and manages larger development When Lilly considers a new alliance partner, it completes a partnerships with external partners of its own size. In each of cultural "due diligence" assessment along with the rest of the these cases, the innovative activities are comfortably settled within business case. one segment of the innovation chain. Even though the project crosses firm boundaries, the individuals share a common mindset. How do leading firms bridge these gulfs to create effective Ph.D.'s manage relationships with Ph.D.'s; developers work with innovation channels? First, they recognize barriers and boundaries developers. explicitly. Successful partners acknowledge the differences that separate the organizations and build the bridges they need. Los Sourcing innovation across sectors of the innovation chain requires Alamos National Lab improves partnerships by stationing individuals a different approach. In these situations, effective processes must in the partner organization for two-year stints. Says Donna Smith, be designed to cross mindset differences as well as corporate "When issues arise, we use the informal communication channels boundaries. For example, many commercial firms report they have our person has set up to get us through the rough spots. This often difficulty working with universities because academic institutions lets us turn problems into opportunities." Some universities have often lack a commercial approach to deadlines and deliverables. established organizations that sit on the boundary between private Dr. Michael Salem of GMP Companies explains, "The great industry and academia—for example, MIT's Industrial Liaison universities have up to hundreds of patents disclosures a year and Program—to manage university research with a commercial mentality. may commercialize very few of them. Our company was set up to 10
  11. 11. Innovation Sourcing Strategy Matters commercialize that untapped pipeline." To address the mindset gap, Manage Innovation Holistically GMP helps both the university and the patent holders align their interests toward achieving commercial success. It establishes a The most sophisticated innovators are not content just to drive separate legal entity for the venture and shares equity with the product and service advances through innovation channels. They university. The patent holder participates on the development aim for bigger ideas (Exhibit 5). These companies focus internal team, but does not lead it. This keeps critical knowledge close to innovation on creating entirely new market spaces and business the project and accords the inventor respect, but maintains models. These big ideas define new problems—whole new project leadership with a focused, deadline-driven mindset. categories of need, which these firms use to orchestrate Throughout a well-defined process for turning patents into innovation holistically across all sources. products, GMP relationship managers—ex-academics, physicians and scientists—shepherd the communication-intensive process. The firms that manage innovation holistically use external sources very differently from the companies that source Though many of the executives we interviewed acknowledged transactionally. They don't look to outsiders primarily to support the existence of cultural barriers, they did not take them as given. internal staff or to provide "non-core" development. Because One of the most frequently mentioned barriers to external sourcing these leading firms are using big ideas to open new categories is organizational pride, which appears as the not-invented-here of products and services, they often find themselves short on the syndrome. This barrier can exist at any level of the organization, critical expertise they require. They turn to outsiders, then, for from bench scientists to senior executives. Open-minded executives these core skills. The firms in our study used three main often deal with it through a combination of goal setting and organizing principles for driving innovation holistically. recognition processes that reward people not for internal innovation, but for ideas successfully commercialized. When the Business Models. Boots, a global retailer headquartered in the barrier is at the top of the organization, however, perseverance United Kingdom, develops new business models to drive growth across generations of management is often the only solution. and focus innovation. For example, Boots recognized that the UK National Health Service was having difficulty responding to patient demands for diagnostic tests. Leveraging its trusted brand and customer franchise in pharmaceutical retailing, Boots devised a new business model whereby it offers convenient and accessible well-being and disease management services through Exhibit 5: Innovations range from incremental improvements to big ideas Oil and High Tech/ Retail Pharmaceuticals Chemicals Electronics Automotive Big ideas New branded New disease areas New solution New technology Wholly new formats paradigms platforms transportation Most long lead, solutions highest investment, highest risk New branded New drugs product lines Effective new New generations New models and compounds line extensions Wholly new New applications products of currently Incremental approved drugs improvements Fastest, New applications Upgrades and new lowest investment, New packaging or of existing releases of existing New features and lowest risk me-too products New formulations compounds products functions 11
  12. 12. Accenture Institute for Strategic Change · March 2003 its 1400 UK "high street" locations. Barry Clare, executive clear market logic. It also opens up white space that makes room director of strategy explains, "We have access to consumers. for external contributions. One senior executive explains, “Our goal When we can develop innovative tests that can be provided in is to have one major breakthrough innovation per year. In the past, our stores, we can take enormous costs out of the system." This we had a very analytical process in which we tried to rank the promising new business model frames an open space for product hundreds of individual ideas. By introducing functional scenarios, and service innovation, and Boots turns to outside sources for we have defined the areas we want to search in. It also gives more answers. Clare continues, "We do not need to invent all the top management weight and attention to innovation management.” solutions. We prefer to make money by being the exclusive commercializer of new technology—by bringing these valuable Product domains. Lilly's innovation philosophy is "discovery new services to our customers. We are working with venture without walls." It aims for a fluid approach, using internal and capitalists to spot interesting opportunities." external sources to generate a surfeit of innovation. (Exhibit 6 shows an example of its holistic innovation sourcing strategy.) Scenarios. A luxury automobile firm uses mind-maps and Explains Dave Thompson, "We aggregate innovation by scenarios to orchestrate automobile innovation. It manages the therapeutic focus—such as central nervous system, oncology and innovation process on two levels: bottom-up and top-down. Each diabetes. Each of these areas has its own strategy and knows the year it collects hundreds of ideas for distinctive ways to improve products it would like to have that it does not yet have. Out of its cars from customers, engineers, centers of competence and that the area develops a priority list that guides both internal competitive intelligence. Each idea is summarized in a one-page efforts and external sourcing." Lilly employs standard categories document that describes anticipated costs and benefits. In addition, for therapeutic focus that are common throughout the industry, the senior development staff prepares a series of functional which makes it easy to communicate priorities and needs to scenarios, each one describing a different view of the car of the external suppliers of innovation. future. This top-down, big idea look enables executives to bundle collections of good ideas into focused, long-term initiatives with Exhibit 6: Innovation sourcing strategy example from Eli Lilly and Company* Discovery Development Commercialization Have the “stuff”—distinctive products Innovation strategy Use a surfeit of innovation to maximize value Innovation arenas Focus innovation through therapeutic categories and technology platforms Sourcing “Discovery without walls:” Get innovation wherever possible Sourcing approaches Access other pharmaceutical firms’ products Collaborating with independent labs and Use community sourcing to solve hard within sectors of the and sales and marketing resources through universities chemistry problems innovation chain collaboration • Partnering with biotech firms for • Late-stage venture capital Sourcing across sectors discoveries • Partnering with competitors to capture of the innovation chain • Early stage venture capital to invest in value by commercializing IP biotech exploration • Portfolio management • Stage gate management Managing the • Annual relationship physical for strategic partnerships innovation chain • Central relationship management organization to manage external sourcing • "Company within a company" organization to manage development and commercialization * Illustrative; includes only selected examples in each category. 12
  13. 13. Innovation Sourcing Strategy Matters What practices are missing from this list? Two prominent ones Implications for Executives are portfolio management and stage-gate processes. Many of the firms we researched rely on these well-known approaches to An economic downturn is both a blessing and a challenge for organize and evaluate innovation projects. They do provide an establishing an innovation sourcing strategy and broadening overall financial and risk-related portrait of a company's external sources. As margins have come under pressure, employees innovations-in-process. They do not, however, create the same have been laid off, and the slack that enables fresh ideas has kind of innovation guidance found in the three types of big ideas shrunk, many firms are forced to replenish the innovation outlined above. Even the best portfolio management process pipeline with outsiders' contributions. Many will take a gives no indication about where to look for the next innovation. transactional approach. We highly recommend an alternative: an That is exactly what a big idea does do. explicit innovation sourcing strategy driven by a holistic approach to innovation. Still, portfolio management and stage-gate processes are important components of innovation management. However, Adopting an innovation sourcing strategy implies a very different they must be tailored to the nature and context of the firm's model for managing innovation than most companies now employ. innovation agenda to be effective.14 Lilly, for example, has a Because of companies' strong focus on product innovation, useful variation on the traditional "yes/no" decisions made at many innovation executives currently have scientific or technical stage gates: "no for us, yes for someone else." If a new drug backgrounds. With an innovation sourcing strategy, expertise in compound is not right to take to the next stage at Lilly, the commercialization and channel management may be more company's corporate business development function considers relevant to innovation success. Similarly, innovation management licensing it to another firm outright, licensing it with the option processes such as portfolio management approaches or stage- to bring it back into Lilly later, or joint development with a gates may have to be tilted toward value capture rather than partner. Lilly also pays careful attention to time cycles in its internal development. In addition, performance measurement is stage gates, employing an "early warning system" for essential, even if it is imperfect. Companies should certainly not compounds that are within 90 days of the time scheduled to abandon internal, product-based innovation. However, there is a pass through a stage. However, portfolio management and much wider and richer array of innovation sources available, and stage-gate processes do not distinguish firms that manage companies should weld these into effective channels. This is a innovation holistically from those that do not. much more complex world for innovation-oriented executives to manage, but a potentially much more rewarding one as well. Viewed broadly as a process that includes not only ideation and discovery, but also commercialization and value capture, innovation is the key to long-term growth in any business. In fact, successful commercialization can be a more reliable route to financial returns than other aspects of innovation in some industries. One of the retail executives we interviewed commented, "It is not the product innovators who end up rich— it is the merchants." Companies that can bring innovative products to market—whether they developed them or not—are the big winners. 13
  14. 14. Accenture Institute for Strategic Change · March 2003 About the Authors About Accenture Jane C. Linder is a Senior Research Fellow and Director of Accenture is the world's leading management consulting and Research at the Accenture Institute for Strategic Change. She technology services company. Committed to delivering joined the Institute from a large manufacturing firm, where she innovation, Accenture collaborates with its clients to help them was director of demand/supply planning in the worldwide realize their visions and create tangible value. With deep industry logistics organization. Previously, Jane was a professor at expertise, broad global resources and proven experience in Harvard Business School in the information management area. consulting and outsourcing, Accenture can mobilize the right Jane also spent more than 10 years implementing business people, skills, alliances and technologies. With more than 75,000 processes and the associated information systems at major people in 47 countries, the company generated net revenues of manufacturing firms. Jane may be reached at 1+ 617 454-8461 $11.6 billion for the fiscal year ended August 31, 2002. Its home or at jane.c.linder@accenture.com. page is www.accenture.com. Sirkka L. Jarvenpaa is the James Bayless/Rauscher Pierce Refsnes Chair in Business Administration at the University of Texas at Austin. She is the editor-in-chief of the Journal of About the Institute for Strategic Change Association for Information Systems and Joint Editor-in-Chief of the Journal of Strategic Information Systems. Srikka can be The Accenture Institute for Strategic Change was founded in reached at sjarvenpaa@mail.utexas.edu. 1996 and conducts original research focused on business innovation. Based in Cambridge, Massachusetts, the Institute Thomas H. Davenport is the Director of the Accenture Institute consists of management researchers working collaboratively for Strategic Change and holds the President's Chair in with executives and other researchers to bring innovative and Management and Information Technology at Babson College. He actionable ideas to decision-makers. is a widely published author and acclaimed speaker on the topics of information and knowledge management, reengineering, The Accenture Institute for Strategic Change publishes its own enterprise systems, and electronic business and markets. His "Research Notes" (short single issue commentaries) and latest book, published by Harvard Business School Press, is "Research Reports" (in depth, comprehensive findings). In entitled The Attention Economy: Understanding the New Currency addition, it has published hundreds of articles in such leading of Business. He can be reached at 1+ 617 454-8201 or at publications as Harvard Business Review, Sloan Management thomas.h.davenport@accenture.com. Review, CIO Magazine, Across the Board, Leader to Leader and many other top publications. The Institute is often referenced in major newspapers including the New York Times, Wall St. Journal, Financial Times, USA Today, Los Angeles Times and Boston Globe. Institute researchers have taught at leading business schools including Harvard Business School, Tuck School of Management at Dartmouth College, Sloan School at the Massachusetts Institute of Technology, and the Graduate School of Business at the University of Chicago. Harvard Business School Press and other top-tier business presses regularly publish the Institute's books. We have worked with hundreds of organizations across the globe to apply our findings and ideas in order to help them accelerate and achieve their strategic visions. Its home page is www.accenture.com/isc. Please contact us at institute@accenture.com. 14
  15. 15. Innovation Sourcing Strategy Matters Notes: 1 Investment in innovation does not always 6 Innovation is defined by Webster's Ninth New 14 Stage-gate processes can be problematic in translate into economic returns. See Edwin Collegiate Dictionary as "a new idea, method, or highly uncertain and dynamic environments. Mansfield et al., "Social and Private Rates of device." Executives we interviewed have much See V. Krishnan and B. Shantanu, "Technology Return from Industrial Innovation," Quarterly broader and varying interpretations of what Selection and Commitment in New Product Journal of Economics 91, no. 2 (1977): 221-40. comprises innovation, for example, "doing it Development: The Role of Uncertainty and An Accenture study by Paul Nunes and Brian better, faster, [and/or] cheaper," "a different Design Flexibility," Management Science 48, Johnson found that while measures of innova- way to solve a problem," "something that has no.3 (March 2002): 313-328. tion, e.g., the overall number of patents grant- never been done before" or "an accumulation of ed, are up, consumers still express dissatisfac- inspiration." tion with the level of innovativeness in products 7 See, for example, J.B. Quinn, "Outsourcing and services. See "Mind the Gap: Consumer Innovation," for a discussion of the benefits of Attitudes to Innovation," Accenture Institute for outsourcing of innovation as capacity, expertise, Strategic Change Research Report (November speed and risk diversification. 2002) available on www.accenture.com/isc. According to some studies, the growth in inno- 8 Robert G. Cooper and Elko J. Kleinschmidt, vation has not uniformly improved overall pro- "Winning businesses in product development: ductivity and economic performance. See R. The critical success factors," Research-Technology Barrell, G. Mason and M. O'Mahony, Productivity, Management 39, no. 4 (July/August 1996): 18-29. Innovation, and Economic Performance 9 This point is discussed at length by J. B. Quinn, (Cambridge, UK: Cambridge University Press, J.J. Baruch, and K.A. Zien, Innovation Explosion. 2000). Finally, despite increasing investments in The pace of innovation in the company can be research and development, large firms in the affected both positively and negatively by the chemical and pharmaceutical industries have use of external relationships for innovation. On declining rates of innovation. For example, US the one hand, entering into such an agreement Patent data in the chemicals class indicates may threaten those within the company who that the number of US patents granted to the are affected, and the incorporation of the top 100 private sector companies (as measured externally generated ideas may be resisted. On by the total number of patents granted the other hand, an internal group may be between 1977 and 2001) declined between spurred to innovation by competitive spirit upon 1993 and 2001. (Source: US Patent and seeing the entrance of a challenger. Trademark Office.) 10 H. W. Chesbrough and D. J. Teece, "When is 2 Interview on September 6, 2002 with Greg Virtual Virtuous? Organizing for Innovation," Sedgwick, group business development director Harvard Business Review (January/February of BOC Group. 1996): 65-73. 3 See, for example, the following articles: D. 11 See the following: Clayton M. Christensen, The Rigby and C. Zook, "Open-Market Innovation," Innovator's Dilemma: When New Technologies Harvard Business Review 10, no. 10 (October Cause Great Firms to Fail, (Boston: Harvard 2002): 80-90; J.B. Quinn, "Outsourcing Business School Press, 1997), and C. H. Fine, Innovation: The New Engine of Growth," Sloan Clockspeed: Winning Industry Control in an Age Management Review 41, no. 4 (2000): 13-28; of Temporary Advantage (Reading: Perseus R.M. Kanter, J. Kao, and F. Wiersema, eds., Books, 1998). Innovation: Breakthrough Thinking at 3M, DuPont, GE, Pfizer, and Rubbermaid (New York: 12 E. Von Hippel, "Innovation by User HarperBusiness, 1997); D. Leonard-Barton, Communities: Learning from Open-Source Wellsprings of Knowledge: Building and Software," MIT Sloan Management Review 42, Sustaining the Sources of Innovation (Boston: no. 4 (summer 2001): 82-87. Harvard Business School Press, 1995). 13 Firms in our study reported surprisingly few IP 4 Interview on September 26, 2002 with Dave problems with co-sourcing. This might be a Thompson, senior vice president of strategy and result of having mostly large firms in our sam- corporate development at Lilly. ple. Large firms tend to have sizeable profes- sional legal staffs and formal IP processes for 5 See reports by C.J. Sylvester, UBS Warburg, managing their interests in collaborative activi- December 19, 2002 and Ken Kulju et al, Credit ties. Small firms operate more informally, and Suisse First Boston, December 19, 2002. the costs arising from litigation against those who violate the agreements are often beyond the financial means of the organization. 15
  16. 16. Accenture Institute for Strategic Change One Canal Park Cambridge, MA 02141 +1 617 454 4180 www.accenture.com/isc institute@accenture.com Copyright © 2003 Accenture. All rights reserved. Accenture, its logo, and Accenture Innovation Delivered are trademarks of Accenture.

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