Book Review: Innovation that Fits

    By: PDMA Headquarters on Oct 02, 2013

    Book Review: Innovation that Fits  

    By: Michael Lord, Donald DeBethizy, and Jeffrey Wager,Upper Saddle River, NJ : Prentice Hall , 2005 . 248 + xiv pages. 
    Review by: Geroge Kingston

    Innovate or die, or innovate and die? Innovation is essential to corporate growth and long-term viability, but innovation done the wrong way also can damage a company. Michael Lord, Donald DeBethizy, and Jeffrey Wager take a hard look at several approaches to innovation that have gained popularity in the past decade, discussing the strengths and weaknesses of each. They observe that when any one of these approaches is overemphasized, it can lead to failure. Their conclusion is that when crafting an innovation strategy to fit a particular business or company, the best approach is to drive innovation from the core, while using the new tools to power it, where appropriate. This book will be of interest to anyone involved in designing or executing an innovation strategy in a corporate setting. The combination of academic, business, and consulting credentials the authors bring to the subject results in a balanced presentation that is well illustrated with brief case studies.

    The authors' intent is “not to debunk or discard any of these approaches to innovation … but to help rescue the good ideas from being needlessly discarded” (p. 22). They focus on five major new approaches to innovation: corporate venturing, intellectual property licensing, alliances, acquisitions, and spins. Each approach receives similar treatment. The concept is explained clearly; several case studies are cited to illustrate the weaknesses of the approach; the problems with the approach are summarized; successful applications of the approach are examined; and a proposal is developed for using aspects of the approach to power innovation in the core of a company. Although much of this material has been covered by others—for example, see the October 2004 JPIM review of Chesbrough (2003) and the January 2005 JPIM reviews of Slowinski and Sagal (2003) and Bamford et al. (2003)—these authors take a different approach by focusing on the relationship between the core of a business and these outward-looking innovation tactics.

    The analysis is thorough, with 35 to 40 pages devoted to each approach to innovation. The discussion of corporate venturing includes its many variations, ranging from pure corporate venture capital funds to intrapreneuring and skunk works. Xerox and Lucent are both analyzed as case studies of how corporate venturing, even when it results in important new technologies, can fail if it gets too far from the parent company's own core technology and markets. Other examples of corporate venturing include Intel, GM's Saturn Division, and IBM. In most cases, as corporate venturing expands, it gets further from the company's core and becomes less relevant, more distracting, and, ultimately, far less profitable.

    In discussing intellectual property licensing, the authors consider both in-licensing and out-licensing. Intellectual property management has been touted as a way to generate profits with a minimum of physical assets, resulting in high margins and return on investment. The authors refer to this as the “virtual asset-lite model” (p. 67). They observe that the actual value of intellectual property, such as patents, is much lower when it has not been realized in an active business model. Thus, noncore technology that has not been commercialized by the originating company will require significant additional investment by the purchasing company, which will therefore offer a lower price. On the other hand, out-licensing a fully commercialized core technology to a noncompetitive application can yield handsome rewards, as illustrated by a case involving TRW and RF Micro Devices. In-licensing is the other side of any intellectual property (IP) deal. As illustrated by case studies of Merck and Bristol-Myers-Squibb, when in-licensing IP price is inversely related to risk. In-licensing early-stage IP in particular carries high risk and high development cost that can drain internal, core innovation. The most successful IP deals are those essential to the core and that involve well-developed and demonstrated technology.

    Innovation by alliance encompasses strategic alliances, independent joint ventures, multipartner consortia, and looser consortia and networks. Examining such alliances as Iridium, Airbus, and Fuji Xerox, the authors conclude that alliances are inherently incapable of providing sustainable competitive advantage to any one partner, are generally slower and more cumbersome in innovation, and usually result in lower profits all around. The one area where alliances are necessary, if still inefficient, is in setting industry standards.

    Cisco Systems popularized innovation by acquisition, which involves buying companies that have the technology or the talent a business needs. The authors identify the pitfalls of overpaying, failing to retain talent, and moving too quickly for proper due diligence in a number of cases involving Cisco, Nortel, and Lucent. They conclude that acquiring a company for its technology or its people only makes sense when these are essential to supplement core innovation, are already well developed and proven, and the price of the acquisition is in line with the expected returns.

    In the fifth approach, they study the Thermo-Electric model of spinning out innovations to separate new companies and highlight the risks from faulty implementation. Numerous examples of spin-outs that did not work are given, and detailed case studies of Thermo-Electric and the RJR-Targacept spin-out are analyzed. The most successful spin-outs do not involve the core innovation of the parent; are viable, stand-alone businesses; and are not tethered to the parent by onerous commercial or financial agreements.

    The final chapter brings it all together, showing how successful innovation that comes from the core of a business provides the most sustainable competitive advantage. The model the authors propose “requires organizations to focus on generating and nourishing core innovation, even while simultaneously maintaining a more active balance of innovation sourcing and peripheral experimentation from both inside and outside” (p. 209). This concept of the core is central to the authors' model, yet they never clearly define it, except by example. In general, though, the core of a business is a segment, market, or business model that accounts for the majority of income and profit. This will vary by both industry and company. Thus, Cisco's core is networking, whereas MacDonald's core is not food service or even fast food—it is the restaurants.

    As long as the ability to carry out this core innovation is maintained in house, the various new approaches can be used to supplement and extend it. Corporate venturing can be used to limit the risk in developing noncore technology while not distracting from internal development of the core. In-licensing of intellectual property in noncore areas can supplement core innovation and can avoid the distractions of trying to innovate in areas where the company does not have experience or expertise. Conversely, out-licensing noncore innovations can generate some cash without risking the core business. Alliances can result in industry standards but are unlikely to produce competitive advantage. Acquisitions, like in-licensing, can bring in noncore technologies, but the price paid needs to be consistent with the value received and talent retention requires careful handling. Spinning off noncore innovations may allow them to develop into strong, stand-alone businesses, but core innovations must be retained.

    The overall message of the book is that management must understand what the core of the business is and then should focus on controlling innovation in that core while carefully picking from the available tools to supplement that innovation in essential but noncore areas.

    Released: October 2, 2013, 11:34 am | Updated: October 30, 2013, 2:27 pm
    Keywords: PDMA Blog

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