external channels to innovate

Most managers agree that continuous innovation is an inevitable requirement for companies to compete. At the same time, there is growing evidence that innovation processes in many industries are not producing the expected benefits. As a result, companies are increasingly looking beyond the enterprise, working with customers, research institutes, business partners, universities, user communities and even competitors to drive innovation.

Based on this consideration, Aker Kvaerner and ABB Ltd. developed the subsea oil extraction process. Aker Kvaerner specializes in oil and gas extraction technology, while ABB Ltd. is an engineering company. Because their mutual customers, the big oil companies, realized that neither company could solve the problem of drilling the seabed alone, they urged them to work together.

As far as research-intensive companies are concerned, it has traditionally been assumed that research in core skill areas must be carried out in-house, with external agencies providing only unimportant support activities. But now pharmaceutical industry research institutes are turning to small biotech companies to carry out groundbreaking work on next-generation medicines. In addition, chemical companies with long traditions of in-house research are signing up more and more Russian and Indian scientists, expanding their research teams and increasing their R&D budgets.

Channel selection, strategy is the most important

Regrettably, despite the growing acceptance of external innovation, many companies still do not have a channel selection strategy to effectively manage external innovation. They usually take a random approach, with ups and downs in their results—and that's what they've been trying to avoid.

The so-called random approach is to take the form of transactions (purchasing innovation results) to deal with the problem of external innovation. This means that managers make hasty decisions without analyzing how the purchase of one innovation will affect other innovations. In some companies, this can lead to duplication of effort, a waste of resources, and a dilemma for project managers.

Businesses that adopt transactional external innovation often fail to leverage organizational learning. Because to build successful innovation partnerships that achieve broad corporate goals while protecting intellectual assets, organizations must learn and acquire specific specialized skills. But many companies rely too heavily on project managers to coordinate teams across the enterprise, foster effective partnerships and ensure that complex initiatives don't drift apart. Because of the stochastic nature of transactional external innovation, while these companies have built multiple networks of relationships, they are unable to apply lessons learned in one relationship to others.

In addition to missed opportunities to apply learning outcomes, even worse, random external innovations can lead to an unintended loss of expertise. For example, when Toyota Motor Corporation outsources the design and manufacturing implementation of a vehicle's electrical power system, it is giving away a great opportunity to master the considerable expertise required for this hard work, as well as to gain a deep understanding of the complex interrelationships within the system.

The existence of the above problems shows how important it is to develop a sourcing strategy for external innovation. Some established companies have a production process outsourcing strategy, and managers in many functional departments are also adept at the "build it yourself or buy it" dilemma. However, only a few leading companies have developed innovative channel selection strategies, and there are even fewer companies that have the means to comprehensively manage various innovation channels and maximize the effectiveness of the innovation process!

Three questions and three methods, high innovation decision-making

Companies that manage innovation from a holistic perspective will answer the following three core questions according to the company's competitive positioning, risk tolerance and strategic planning period:

p> ●What is the overall innovation strategy of the organization, what are the innovation goals and final products?

●How to manage the internal and external innovation channels and put the innovation strategy into practice? What are the important principles for decision-making in choosing innovation channels?

●How does the organization effectively manage internal and external innovation channels to ensure business objectives are achieved?

Those companies that implement comprehensive innovation management often use "big ideas" as boosters. They use big ideas to open up new varieties of products and services, and create entirely new market spaces and business models. In the pharmaceutical industry, major ideas may be related to the type of disease; in the retail industry, major ideas revolve around the development of market space for consumer goods; in the automotive industry, it is the introduction of new vehicles. Once companies have identified these areas, they will use external innovation channels to fill the gaps.

Companies typically use three approaches to ensure that external innovation decisions are made in the context of big ideas: business model, scenario simulation, and product range. Here are three examples of how these three approaches are effectively used by three companies:

Business Model As a UK-based global pharmaceutical retailer, Boots Pharmaceuticals has developed a new business model to drive growth and innovation. For example, when the company realised that the NHS was having trouble responding to the demand for diagnostic tests for patients, it immediately devised a new business model to provide convenient access to patients at its 1,400 retail locations across the UK. Test service. But Boots doesn't think it needs to find solutions on its own, but instead turns to outside agencies to commercialize the new technologies they've developed. Boots has a head start on finding those innovative ideas because venture capital firms have given Boots the opportunity to scrutinize startups' market plans.

Scenario Simulation A luxury car manufacturer holds an annual "call for ideas" to improve its cars. Every year, hundreds of ideas roll in from customers, engineers, R&D centers in areas such as brake systems or engine design, and employees working on market intelligence. Each idea was condensed into a one-page document with an analysis of expected costs and benefits. Senior developers then prepare some practical situational simulations, each representing a different perspective on the car of the future. This top-down review enables managers to build on these bottom-up ideas to develop focused, targeted, long-term measures. In addition, the practice provides a broad stage for outsiders to contribute. Through the use of scenario simulations, a company can clearly define the areas it wants innovators to research.

Product Range Eli Lilly and Co. leverages both internal and external channels to implement innovation. The company collects innovations by focusing on hot topics in therapeutics such as central nervous system, oncology and diabetes. Managers at every level of the company have their own strategies, define what products they need to develop, and set priorities to guide innovation in internal and external channels. Because Eli Lilly uses industry-wide standard classifications of therapeutic hotspots, it facilitates communication with external innovators about innovation needs and priorities. For example, a company with a new compound for the treatment of oncology can easily know that Eli Lilly is seeking solutions in this area. One Eli Lilly and Company strategy researcher explained the many ways the company uses external channels: "You can't do all the work alone. We're also going for 1,000 to 1,500 opportunities to leverage other organizations' R&D this year."

Five channels of innovation, overall careful consideration

Just as experienced marketers use specific distribution channels to serve end customers, companies such as Eli Lilly have also established innovative channels to meet business needs. These companies select innovation channels based on innovation needs, and have established processes to manage these channels as a whole rather than in isolation.

Generally speaking, according to innovation needs, enterprises have five external innovation channels: purchasing innovation achievements in the market, investing in innovators, co-sourcing, user community innovation, and external seeking innovation resources (resourcing).

Buying innovations Organizations such as universities and private research laboratories often sell innovations. For example, ABB actively sponsors research activities at local universities. On the other hand, retailers and automakers with strong brands and market dominance pass the burden of product innovation on to suppliers through a process of "strategic sourcing". In this case, suppliers can only stand out in the competition for purchase orders by investing heavily in R&D and providing differentiated products. British retailers Boots Pharmaceuticals and J Sainsbury, for example, have outsourced not only the company's information technology, but also the discovery of innovative uses of information technology in business processes.

Investing in Innovators Many companies invest in organizations that focus on small and emerging markets, seeking to benefit from breakthrough innovations. The use of this channel by electronics companies is commonplace. For example, Nokia Corp. has moved away from the acquisitions it used to do in the past, and has instead set up venture funds to invest in companies that complement the company's product and business development. Some companies use "investing in innovators" as a strategy to change their rigid business models, company operating practices and management's resistance to investing in small markets. Through equity partnerships, companies can participate in and nurture an emerging market.

Co-innovation With the rising cost of innovation in certain areas, sometimes companies join forces to share the cost. The automotive industry is co-innovating in response to regulations that affect the entire industry, such as emissions standards. Much of Nokia's success in mobile phones stems from its joint innovation with the Wireless Industry Association. A leading high-tech company has placed its research laboratory in a university, sponsoring promising professors in their fields of research, and sharing the intellectual property rights of all their innovations.

Some organizations also form partnerships to bring together the diverse skills and talents needed for a project. For example, one of ABB's collaborative projects includes a technology company, a university team and four companies ready to buy innovations. Joint ventures—another form of cooperation—are also often used for joint innovation activities.

User Community Innovation For the past decade, companies have targeted loose communities of savvy customers. Ebay makes full use of user community innovation to discover new types of sales business and enhance its ability to provide services to customers. The company's senior manager admits that customers have discovered and established the company's largest business category - car sales. Other community members embed their own important new auction management tools into the Ebay company's platform, which greatly facilitates the auction of high-priced items. NTT doCoMo also uses the community innovation channel to allow other companies or individuals to create i-mode compatible websites, thereby greatly expanding the range of information that can be disseminated through i-mode mobile data services. Nokia relies on community channels to develop the applications needed for multimedia terminals -- the backbone of the company's home wireless entertainment system.

Looking outside for innovation resources Many companies support their R&D personnel by signing agreements with external suppliers, who provide resources such as talent and technical tools needed for company innovation. DuPont's Crop protection business unit is working with companies in India, Russia and China to increase the introduction of high-quality R&D personnel who are paid much less than those in the United States. By hiring these people, DuPont's crop protection business has gained considerable flexibility in R&D management and has grown in R&D capability by recruiting high-quality personnel around the world. In order to improve the efficiency of the company's product development, French pharmaceutical giant Aventis SA is also looking outside for cutting-edge technological tools that will help develop innovative products. When a technology is differentiated from competing technologies and its value is demonstrated by the company's internal R&D activities, then Aventis acquires the technology through external suppliers.

Flexible across borders and cleverly structured processes

After a company has formulated an overall innovation strategy and an innovative channel selection strategy, the next step is to set the organizational mechanisms and workflows required to implement these strategies. Some companies have created separate divisions responsible for tasks such as building new channels, regularly evaluating relationships, and measuring the competitive effectiveness of each channel. Procter & Gamble, for example, has a business development group responsible for building and managing external relationships. Nokia has established a third organization outside its two core businesses -- mobile phones and networks -- to explore future business directions.

Another organizational task is to create workflow and related document templates that guide managers in structuring partnerships with external channels. For example, the medical device company GMP Cos has developed standardized operating procedures for signing agreements with university researchers.

A unique challenge that companies face in managing innovation pipelines is working across corporate boundaries. To use external channels effectively, managers must identify internal and external boundaries and establish workflows that effectively connect the two together. Some boundary issues can be effectively addressed through common business practices on a day-to-day basis. For example, most external channel selection processes are negotiated and signed to deal with differences in goals, schedules, and financial interests between different organizations. The boundary issues involving corporate culture and work rhythm require more in-depth intervention.

A company's innovation process typically includes three broad categories of activities—discovery, development, and commercialization—with distinct workflows. In a successful innovation partnership, the collaborators will link their own similar processes, such as researchers from one organization working together with researchers from other organizations. ABB manages projects in collaboration with academia through the company's R&D center - as the two are the most well-connected, while the company's business units manage development projects with smaller companies. At the company level, ABB has established a special organization to manage the development of larger projects in cooperation with external organizations of the same size. Regardless of the level, innovative activities are carried out in a certain link of the innovation chain, so although the project crosses the boundaries of different organizations, the members participating in the cooperation have a similar way of thinking and are easy to communicate.

The pace of work is another issue to be concerned about. Relative to large companies, small businesses are more agile and decisive. Likewise, private labs are more productive than university labs. So a large organization and a small company formed a partnership to take advantage of their speed. Some universities have established institutions that connect academia and business—for example, MIT's Industry Liaison Program—to manage university research, define project deadlines, produce progress reports, and realize commercial value. output results.

Communication and integration, time and space distance disappears

The innovation channel chosen by the company must ensure the adequate exchange of information. Only in this way can innovation activities stay on track. For example, senior managers at Limited Brands firmly believe that external partners can only truly contribute if they fully understand the nuances between the company's different brands. The company spends a lot of energy communicating these nuances to these external partners, but the external partners must also be willing to understand Limited Brands in depth, otherwise the partner is not very credible in the eyes of Limited Brands.

In a globally integrated economy, despite the rapid advancement of technology, time and space may become one of the difficulties of management. Face-to-face visits, conference calls, and online communication tools are all useful, but long-lasting relationships require constant attention and open lines of communication. For example, DuPont's Crop Protection business has established many research allies in Europe, Russia, India, China and the United States -- a daunting management challenge.

A final issue that requires additional attention is the specialization of job skills. As one manager explained, "Biochemists have no respect for professional clinicians, and engineers are reluctant to talk to researchers." In addition to these cultural barriers, these trained professionals have their own set of Compatible reward system. Established companies use employees with multidisciplinary backgrounds and build team incentives to bring diverse work teams together.

It is often difficult for university researchers to commercialize their own patented research findings, and GMP Cos is here to help them achieve this. The company successfully combines the interests of both universities and patent holders with the goal of commercialization. Patent holders participate in the development team, but do not hold leadership positions. This move allows the project to have key technologies as a guarantee, and gives the inventor sufficient respect, but also maintains the authority of the project leader, aligns everyone with the same goals, and works together to meet the deadline. With this ingenious process of turning patents into products, GMP's partnership manager is well versed in this communication-demanding task.

Companies leveraging innovation channels typically actively track how each innovation channel contributes to the company's overall innovation goals. For example, some pharmaceutical companies compare the profitability of drugs according to criteria such as whether the drugs in the product portfolio are developed internally or jointly with partners, and whether they are marketed alone or jointly, and the comparison is considered in future partnership decisions. result. Some high-tech companies track results by comparing the time to market of internally developed products and jointly developed products.

Managers are always happy to show off how their companies have improved the speed and quality of innovation through external channels, easier access to disruptive ideas, and improved ability to make difficult prioritization decisions. While these benefits are quite tempting, they are not easy to obtain. External channel innovation faces numerous challenges and risks. In order to effectively balance the risks and benefits that external channel innovation brings to enterprises, formulating an innovative channel strategy is a key step!

Reproduced with permission from the Summer 2003 issue of the MIT Sloan Management Review. Copyright MIT Registered 2003. Provided by Tribune Media Services International. Translated by Li Jian.

Jane C. Linder is associate director of the Accenture Institute for Strategic Change. Sirkka Jarvenpaa is a professor at the University of Texas McCombs School of Business. Thomas Davenport is director of the Accenture Institute and a professor at Babson College in Massachusetts.