A winning corporate innovation strategy
Once-great companies such as Kodak, Motorola, Xerox and now General Electric have declined in stature. But it it is not just household names that are struggling – younger companies have also hit roadblocks.
There are many possible reasons for such outcomes, but I believe that they share a common obvious cause: their inability to meet new challenges as their products become commoditized, copied or rendered obsolete. What they lack is a successful innovation strategy and research and development investment.
Why? Because of the delusional management belief that somehow it will be different for their company and their lack of long-term vision for their businesses.
The easy part of innovation management is evolutionary product planning based on known customer needs and competitive threats. Much more difficult is anticipating the unknowns. The low-risk comfort is in continuing business as usual that maximizes short-term profitability while paying lip service to investing in speculative products or technologies where current markets may not exist but that their customers may be demanding some years away.
One popular way managers use to justify avoiding such speculative research and development is the belief that it will be possible to buy companies with the right products in the future when the market need is clear. Such hopes can easily be dashed by the inability to buy a company with the right features that is affordable. As a result, many companies make bad and costly acquisitions under pressure to add new capabilities urgently.
The prudent innovation strategy to secure the future combines internal leading-edge development with timely acquisitions that are well integrated into the organization. Because this strategy involves an investment that will reduce near-term profitability, it can only be executed by a CEO with long-term vision who can inspire the confidence of public market investors that this strategy will produce large returns in the future. Jeff Bezos at Amazon.com built a great company on a very successful innovation strategy that has delivered both growth and profitability after years of operating losses.
What are some of the key elements of implementing a successful innovation strategy in a manufacturing business? To answer that question we discuss Applied Materials Inc, a US company with a public capitalization of US$52 billion, revenues of $15.5 billion and profits of $2.7 billion in 2017. It is one of the four main equipment vendors in an $80-billion-a-year revenue industry having supplanted many competitors since the 1990s.
The prudent innovation strategy to secure the future combines internal leading-edge development with timely acquisitions that are well integrated into the organization
The remarkable progress made in electronics has been driven by the continuous (since the 1960s) reduction in computing costs. Generally widely referred to as “Moore’s law,” after Gordon Moore (the co-founder of Intel), who predicted in 1965 that the computing power of semiconductor chips would double every two years as a result of process innovations that packed more computing elements (transistors) – and reducing processing costs accordingly – on a single integrated-circuit silicon device.
Semiconductor technology has made such marvelous progress as the result of many innovations in chemistry, materials processing, robotics and software in enabling increasingly complex chips to be designed and in allowing production using autonomous robotics. As one thinks about this company it is important to understand how complex the products are – they include advanced robotics, ever-changing and innovative new materials and chemistries that need to be deposited on the silicon in tightly controlled layers. These systems operate under computer control, hence the need for sophisticated software and control systems built into the equipment.
This company’s successful growth results from a great innovation strategy that combines acquisitions and internal long-term product development. The overriding strategical principle is that long-term product development would continue even during the lean years when sales were depressed during the periodic market downturns when the semiconductor industry suffered from global economic recessions.
The innovation strategy is to control the emerging technologies that would be needed by its customers before there is a market for the products. And this was done at the expense of current profitability if necessary. A key element in this successful strategy is the role of the chief technology officer and his organization that is separate from product division development programs.
The company is organized in three business units, each with its own sales leadership, product-development budget and organization. In total, the company spends 12% of its revenues on product development. The special leading-edge corporate group is the organization that reports to the chief technology officer (who reports to the chief executive officer) whose organization is directly funded from the corporate budget. The mission of the CTO’s organization is to focus on technological developments that are beyond those being worked on by the product divisions but are likely to impact the business.
When a researcher comes up with a product idea that is believed to have significant potential, there is an internal process for selecting such exploratory projects for investment with successively increasing funding and the development teams of the product divisions get involved as the project progresses to the product stage. The normal cycle between concept and product launch is about three years.
Does this innovation strategy pay? It has contributed to keeping the company in a leadership position on a global scale while being exceptionally profitable. The CTO function is highly productive in charting new products. The company carefully monitors the effectiveness of the CTO’s organization: Over the past few years, it has produced a tenfold return on investment. This shows what is possible and serves as a model for others that need to manage highly complex technology businesses.