Thursday, August 10, 2006

Innovation - Make or Buy?

I think there's a growing consensus in many organizations that innovation is similar to other business initiatives. Innovation requires commitment, focus, a dedicated team, defined business processes and metrics. It's becoming clear that innovation initiatives also face the same make versus buy decisions that other initiatives face. There are a couple of reasons for that.

One, larger firms are stuggling to bring incremental products to market. The size of the firm and the complexity of moving a new idea through the many stages and gates means that it's not easy to bring a new product to market, especially one that is new to the business. Second, some firms are recognizing that they simply aren't very good at innovation. They have strong processes in place and deliver great service, but innovation and new product development is not their focus or core competency. In that case they'll simply buy new products, patents or capabilities from other firms. Third, smaller, more nimble firms are more comfortable with the risk associated with nurturing an idea. A small firm can (and does) put all of its eggs in one basket - that one idea, or product or service. This means that the idea has a greater chance of becoming a product, but the smaller firms lack the ability to scale up production and market broadly. Fourth, innovation may disrupt or cannabalize an existing product or market, so there will be political pressure to slow down a new product that will undercut an existing product. All in all, it's hard to believe large firms will be able to consistently deliver gamechanging and disruptive innovations.

So, if all this is reasonably true, there should be a big opportunity for true business development in the innovation community. Larger firms, which increasingly need more new products to sustain revenue, simply can't fill a pipeline internally. Several well-known CPG firms have all but admitted this - P&G as an example. These firms need new products and services that have been developed externally, and someone needs to seek out those products and services. There needs to be a clear set of guidelines as to what technologies are acceptable, what markets are targeted and what costs are reasonable. Someone in the larger firm needs to play the role of Scout, to constantly survey the potential partners and rank order them.

There's a hitch in this plan, however, called legal. In the firms that have attempted to acquire more new ideas, patents and products from external parties, the reasonable step is to ensure that the seller owns the IP and it does not infringe on someone else's IP. So there's a rather significant hurdle to the business development path - and probably an opportunity to play the middleman and remove or reduce the risk of acquiring ideas, patents and technologies.

Clearly, this is not yet a frictionless marketplace, but I think larger firms increasingly will admit to themselves and the market that they simply don't have the insight, bandwidth or corporate culture to sustain revenues through internal innovation. The opportunity exists for larger firms to become the manufacturing, marketing and scalability components and smaller firms the true innovation engines, which is valuable for both parties. There are clear business opportunities to help larger firms identify promising technologies and products, and to remove the risk of infringing on someone else's IP during the acquisition process.
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posted by Jeffrey Phillips at 9:10 AM

32 Comments:

Anonymous Dave Bayless said...

Jeffrey, you wrote, "The opportunity exists for larger firms to become the manufacturing, marketing and scalability components and smaller firms the true innovation engines, which is valuable for both parties." We at Evergreen Innovation Partners are finding that there is, indeed, an opportunity for intermediaries to add value by helping to reduce the risk and cost of exploring for prospective innovations.

12:03 PM  
Anonymous Anonymous said...

Your proposal would mean that established companies sign their own death sentence. if you cannot innovate yourself recruit the people that can! otherwise competition will hand you your execution date.

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Blogger Tanny said...

The same could be of smaller companies finding and developing niche emerging markets which the larger more established firms miss becuase it does not yet appear on their radar. The costs for a larger more established firm is correspondingly higher which in turn requires a far greater return to justify investigating and developing the opportunity. The problem here is that many opportunities start out as being small markets.

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