Innovation: Sometimes It Takes a Village

K@Wharton: Innovation: Sometimes It Takes A Village
Published 24 June 2009

Whether it's a faster way to move data, a cheaper way to power a car, or a cleaner way to sweep up dust bunnies, the right innovation can deliver huge profits to an organization. But given today's fast-paced global marketplace and limited resources for research and development, companies often struggle simply to survive, let alone innovate.

Yet the same forces that have flattened our world may also yield new directions for the future of innovation. During a recent conference at the Mack Center for Technological Innovation, academics and business leaders argued that, rather than going back to the drawing board, companies should go outside their walls and tap into "innovation networks."

An "innovation network" is a web of people, institutions or companies outside of a firm that help it solve problems or come up with new ideas. While organizations have formed alliances and strategic partnerships for hundreds of years, experts say this web of connections is becoming increasingly important today.

"It's all about diversity. It's about getting to everybody who might be able to bring an innovative idea to the table," said conference speaker Dwayne Spradlin, president and CEO of InnoCentive, of Waltham, Mass. "Almost all these things are about [being] better, faster and more cost-effective.... In this kind of economy, organizations have a phenomenal opportunity to think fundamentally differently about the innovation process, and restructure around that."

The conference, titled "Innovation Networks: New Insights, Open Questions and Management Fashions," explored the benefits of innovation networks and looked at different ways that firms manage their expanding webs of partners. Although there was general agreement that a company could benefit from shifting its focus outside its own world, questions remained about how to make innovation networks more successful. Companies often find it hard to open up to innovation from outside sources, or may use their networks poorly and not get the full benefit. A consensus emerged that many companies must change their culture to take full advantage of the power of network innovation.

Despite their importance, alliances between companies only succeed about 40% of the time, said Wharton management professor Harbir Singh, a conference organizer and Mack Center co-director. "Why is the success rate not higher?" Singh asked. "How do we improve performance above 40%?"

Organizations grapple with how to build external networks -- what Singh calls "the extended enterprise" -- without shifting too much focus away from the core needs of the firm. "In order to be successful in the extended enterprise world, you have to invest in alliances and network capabilities," Singh said. "But from a 'focused firm' approach, you would say that alliance and network capability is secondary to the core focus of the firm.... Really, what it comes down to is the tension between creating shared resources versus protecting one's own resources."

Existential questions emerge as alliances proliferate, said Harvard Business School professor and conference participant Ranjay Gulati. "You begin to ask, 'Who am I? Who are we, the firm? Who is 'us'? Who is 'them'? Who are we competing with? Who are we not competing with? Who are the good guys and who are the bad guys?'" Nevertheless, real-world examples show payoffs that can be worth the tension.

As vice president of knowledge and innovation at Procter & Gamble for many years, Larry Huston improved the company's innovation productivity by 60% through strategic alliances and partnerships. Huston created and led P&G's "Connect and Develop Strategy," which involved hundreds of outside partners in research and development. The strategy presumed that for every scientist at P&G, there were at least 200 outside the company who could do similar work. With that mindset, the company's intellectual assets became not just "our know-how" but also "who we knew," said Huston. The result: more than $10 billion in revenue from more than 400 new products -- most of which were created in collaboration with outside partners. In 2007, for example, 186 companies were involved in the 125 new products that went to market. "What we fundamentally did was redefine our organization as 1.8 million people," said Huston. "What you're doing is building an unbelievable infrastructure to innovate with other people's ideas."

From Inventing to Connecting

Now managing director of consulting firm 4iNNO in Cincinnati, Ohio, and a senior fellow at the Mack Center, Huston helps companies re-think their approach to innovation and open networks. "If you look at most organizations, they're focused on what is their intellectual IQ," Huston said. "What we're talking about is moving from inventing to connecting."
Spradlin of InnoCentive puts in another way: "Do you consider the lab your world or the world your lab?"

For InnoCentive, the answer is definitely the latter. The company's raison d'être is to solve problems by throwing them out to the world and seeing what comes back. Companies, foundations or groups of like-minded organizations define a problem and offer a financial reward to whoever comes up with the best solution. "Pick your problem," noted Spradlin. "You can assign an economic inducement to it, organize the masses and get them excited about solving the problem."

InnoCentive now boasts 175,000 "solvers" from more than 200 countries around the world. About 90% are individuals, 10% are organizations and 60% have masters degrees or PhDs. Last year, nearly 50% of the "challenges" posted on InnoCentive's web site generated a solution that was put to use.

Academics who polled InnoCentive's winning solvers discovered something "both startling and intuitively obvious," said Spradlin. "What they found was that typically ... the background of the solver who solved the problem" was "no less than six disciplines away" from the subject area in which the problem emerged. "What that means is, if all the Stanford PhDs in your chemistry lab could have solved the problem, they would have solved it already."

Case in point: Twenty years after the Exxon Valdez oil spill in 1989, as many as 80,000 barrels of oil remain on the floor of Prince William Sound because the oil has been frozen by sub-arctic temperatures, making it difficult to pump to the surface. The Oil Spill Recovery Institute, established by Congress after the spill, ran a $20,000 challenge with InnoCentive in 2007 to try to solve the dilemma, which had perpetually stumped the world's oil experts. After three months, a construction engineer from the Midwest came up with the winning answer, surmising that vibrating the oil could keep it in a semi-fluid state, in the same way cement is kept flowing while it is poured into a form. Modify the drilling equipment, vibrate the oil and you'll be able to pump it, he suggested. It worked.

"When you're ready to move the problem to the outside world, what you really need is some fresh thinking," Spradlin said. "Organizations today aren't set up to do that very well. That's why this network innovation is such a powerful idea."

Conference speaker Mervyn Turner, senior vice president of worldwide licensing and external research at Merck, agreed that the crowd can be powerful. The pharmaceutical giant, based in Whitehouse Station, N.J., cultivates dozens of strategic partnerships and joint programs with external companies worldwide every year. "You have to expand your horizons about where innovation can be found and what it means to innovate in our business," said Turner. "The idea is to celebrate the global nature of innovation, not fight it."

But to make full use of those external networks, the company has to be strong internally, Turner added. "We came to the conclusion that you [need] a really strong internal research and development capability if you are going to leverage external opportunities." Out of 6,000 potential external opportunities annually, the company chooses to purse only about 45 or 50, he stated. "We say 'no' nicely about 6,000 times a year... .You [need] a really good organization to filter through that many opportunities and leverage that capability through collaboration.... [We] continually evaluate things in a highly coordinated way."

Managing the network is even more vital in the aerospace and defense industries, where a handful of companies compete for contracts that can make or break business for decades. "Every aerospace and defense company has mastered alliance formation and alliance management," said Michael Langman, who leads the aerospace and defense practice of PCE Investment Bankers in Winter Park, Fla. In the aerospace and defense industries, external networks are often a substitute for internal innovation, Langman said. "Co-opetition is a fact of life. It just costs so much money to develop the next generation aircraft."

Companies rely on "risk-sharing partners" in dozens of countries to help meet industry demands. In one case, Raytheon won a $11.2 billion contract by assembling a team of 64 different companies across the United States.

"Managing the network is incredibly important," Langman said. "It's a winner-take-all game. If an airline buys a 707, it's going to be 20 or 30 years before it buys the next generation aircraft.... In the [defense] market, it's the same thing. If you're not part of that program, you're going to be shut out for 20 years. It's not like fashion or consumer goods."

Harnessing the power of innovation networks requires not just tight management but vision -- and sometimes a shift in company culture. That was the case for GE, which embarked on a systematic approach to building its innovation network once the company realized it was necessary to maintain a competitive edge. "Historically GE didn't partner very well," said conference speaker Patia McGrath, GE's global director of innovation & strategic connections. "We would either acquire it or build it ourselves."

GE developed a firm-wide initiative to identify key network players and map their importance to the company. In small groups, project teams brainstormed about their immediate network by dividing it into five broad categories: customers, competitors, influencers, scientific development players and suppliers. Categories were then subdivided, analyzed and drawn into maps. Once the team maps were linked together, a clear picture of the company's network began to emerge, and an action plan for leveraging that network took shape.

"The individual maps themselves are terrific, but when you combine them ... you really start to see some key data points emerging," McGrath said. Lesson learned: "If it's simple and cheap -- all it takes is people's time -- you'll get some adoption."

Government and Innovation

http://www.nytimes.com/2009/06/21/technology/21unboxed.html?

June 21, 2009

UNBOXED

Can Governments Till the Fields of Innovation?

By STEVE LOHR

INNOVATION — the tricky, many-step process by which ideas become products and services — has typically been seen, studied and celebrated at the micro level, as a pursuit for entrepreneurs and clever companies.

But governments are increasingly wading into the innovation game, declaring innovation agendas and appointing senior innovation officials. The impetus comes from two fronts: daunting challenges in fields like energy, the environment and health care that require collaboration between the public and private sectors; and shortcomings of traditional economic development and industrial policies.

Innovation policy, to be sure, is an emerging discipline. It lacks crisp definitions or metrics. The most explicit embrace of it has been outside the United States, though the Obama administration is taking some initial steps. Its new budget directs the Bureau of Economic Analysis to develop statistics that “uniquely measure the role of innovation” in the economy. And the government’s new chief technology officer, Aneesh Chopra, speaks of building “innovation platforms” to spur growth.

The rising worldwide interest in innovation policy represents the search to answer an important question: What is the appropriate government role in creating industries and jobs in today’s high-technology, global economy?

That central issue animated much of the discussion at an unusual gathering earlier this month at a lodge north of San Francisco. This invitation-only affair was organized and moderated by John Kao, a former professor at Harvard Business School and founder of the Large Scale Innovation.

A few speakers covered big-think issues like climate-altering geoengineering and water-management technologies. But the main participants were innovation-policy practitioners from nine countries: Australia, Brazil, Britain, Chile, Colombia, Finland, India, Norway and Singapore.

The meeting offered a window onto the state of innovation policy — how it is being defined, and what countries are doing. Above all, innovation policy is an attempt to bring some coordination to often disparate government initiatives in scientific research, education, business incentives, immigration and even intellectual property.

“It’s about setting an agenda and helping build a portfolio of skills that let an economy and a society move forward in smarter, faster ways,” Mr. Kao said.

Yet if the reach of innovation policy is broad, the attendees agreed, it is best done with a lighter touch than industrial policies of the past, which often focused on specific companies for government support. They used metaphors like “impresario” and “orchestra conductor” to describe government’s role. The ideal, they said, is “stewardship,” not command and control.

In Britain, a national innovation agenda is beginning to take shape with policy documents and the creation of a Department for Business, Innovation and Skills. “We’re determined not to second-guess the future by trying to pick winners and losers,” said Philip Rycroft, a senior government official overseeing innovation policy. “But we do think government can create the conditions so that new industries can rise more easily.”

Finland has long taken a comprehensive approach to innovation policy, investing in areas as varied as an outstanding national education system and high-speed Internet connections for its residents. It has also produced a power in the cellphone industry, Nokia.

But Mikko Kosonen, president of the Finnish Innovation Fund, a public investment fund, says Finland now needs an “innovation policy 2.0” to climb the economic ladder to remain competitive. “We see value migrating to software and services,” he explained.

The country has the second-fastest-aging society in the world, after Japan, and its health care costs are rising rapidly. To turn that challenge into a growth engine, Finland intends to become a global leader in developing software and services for medical monitoring and preventive health services. “We think well-being services are the next big opportunity for Finland,” said Mr. Kosonen, a former senior executive at Nokia.

Other governments are also focusing on targets of potential advantage. In Australia, the government is looking to nurture industries that arise from its harsh climate and a scattered population. So research centers are working to improve strains of drought-resistant wheat and cotton for export as adaptive technologies to cope with climate change, said Terry Cutler, who recently headed a government-appointed expert panel on innovation in Australia. And Boeing last year selected Australia as the location for a Phantom Works lab for developing unmanned aircraft, he said.

“Test flights don’t bump into things,” he said. “Sparsity can be a global competitive advantage.”

In India, the government and industry have financed research into products and services that reverse the traditional pattern of innovation flowing gradually from wealthy nations to the rest of the world, said R. A. Mashelkar, chairman of the country’s National Innovation Foundation. Early evidence of the trend, he said, includes the $2,000 Nano automobile, and low-cost drugs for tuberculosis and psoriasis.

“If you make something for the rich, the poor cannot afford it,” Mr. Mashelkar said. “But if you design for the poor, everyone can afford it.”

CLEARLY, the innovation meeting in California was a gathering of enthusiasts. One view not heard was that innovation policy itself is a mistake — government meddling in decisions best left to the marketplace — as free-market purists contend.

Lars Aukrust, executive director for innovation at the Research Council of Norway, answered that criticism by comparing a nation with a large corporation. “If you are going to run a big company,” he said, “are you going to leave it all to serendipity or make some strategic choices?”

“Innovation policy is a probability game,” Mr. Aukrust added. “You can improve the odds of success.”

Jobless MBAs opt for entrepreneurship in the US

See businessweek article.
http://www.businessweek.com/bschools/content/jun2009/bs20090618_346720.htm?campaign_id=rss_smlbz

SBICS Keep Capital Flowing in a Dry Time - BusinessWeek, 5 Jun 09

SBICs Keep Capital Flowing in a Dry Time
The program that has helped such businesses as Apple, Costco, and FedEx is attracting lots of attention from businesses and banks
http://images.businessweek.com/mz/09/66/600/0966_22sbic.jpg


By Jeremy Quittner
Small Biz


Apple, COSTCO, and FedEx (FDX) all have something in common: Early in their histories, each received aid from the Small Business Investment Co. program.

Now, this somewhat obscure program is suddenly in vogue as banks have all but abandoned mezzanine financing, a later-stage funding for private companies. "There is a scarcity of capital for small businesses out there, so a lot of small businesses are looking to SBICs," says Kristi Craig, a senior investment adviser for the Small Business Administration. SBICs are privately held investment companies—in some cases, small private equity or venture capital funds—licensed by the SBA. Some 345 SBICs nationwide can each draw down as much as $150 million from the agency to invest alongside their own funds. SBICs invest, on average, less than $1 million in each of their companies.

Robert Stewart, general partner of Spring Capital Partners, an SBIC in Baltimore, expects to see 300 business plans this year, nearly one-third more than usual. SBICs such as Orinda (Calif.)-based Pacific Mezzanine have seen additional demand from companies whose banks have reduced their loan exposure and from companies looking to buy back their loans. "This didn't exist two years ago," says Nathan Bell, managing partner at Pacific.

SBIC money can be considerably more expensive than a bank loan. Before the credit crisis, bank financing at the mezzanine level was typically structured as subordinated debt with warrants for eventual equity ownership and carried interest rates of about 7% to 10%, compared with twice that for SBIC money now. "A year ago there were plenty of alternative forms of subordinated debt from senior lenders," says Steve Vivian, principal at SBIC Prism Capital in Chicago. Now, SBICs' interest rates suddenly seem a lot more palatable.

SBICs tend to focus on companies with dependable revenue streams that have made it through the startup phase. SBIC-funded companies are often in less cyclical industries such as manufacturing or business services, or as Howard Anderson, professor of entrepreneurial management at Sloan School at Massachusetts Institute of Technology puts it, "lower-risk but lower-gain companies." These companies rarely if ever go public, and they seldom get bought. So while SBICs may take equity stakes, they don't typically install new management, and they're not looking for quick sales.

That's exactly the sort of funding CRS Reprocessing Services, a Louisville company that recycles by-products of the silicon chip manufacturing process, needed to fund its spin-off from BP (BP). In 2007, its management held talks with six private equity firms, but Argosy Partners, the only SBIC it spoke with, offered the best terms. "We liked their management team and style, and we liked the fact they would give us a bigger share of equity than most," says William Lawrence, president and chief executive of CRS. Management was able to keep about 27% of the company, which now has 62 employees and about $50 million in sales. Argosy won't say how much it invested.

Earlier-stage companies certainly can win SBIC backing, too. Red Smith and Larry Henry were originally seeking millions of dollars in venture capital for their company, Emeryville (Calif.)-based ContainerTrac, to beta test its patented technology that tracks shipping containers as they are offloaded at ports. They talked to 50 VCs, but struck out. "Very few companies that are pre-revenue would get the $2 million to $5 million we were after," says Smith, the company's chief operating officer. And VCs were concerned that the company could not grow quickly enough, due to a limited number of seaports.

In 2005, the Georgia Ports Authority in Savannah, Ga., decided to try ContainerTrac's technology. This piqued the interest of Pacific Mezzanine. "They were very clearly a startup," says Pacific's Bell, but "if they were successful, they would get contracts." His fund fronted ContainerTrac about $800,000. This persuaded a second private equity firm to pitch in an additional $1 million, enough for ContainerTrac to conduct its test. If ContainerTrac is unable to pay back the money, the debt will convert to preferred stock. In the event of a sale, it would convert to common stock.

Now, four years later, ContainerTrac is just about to sign its first contract, worth upward of $5 million. It looks like patient capital may finally pay off—for both the company and its backers.

Return to the BWSmallBiz June/July 2009 Table of Contents

Nokia Technopolis Innovation Mill

Helsinki, Finland May 12, 2009 -- Nokia, Technopolis and Tekes today unveiled the Nokia Technopolis Innovation Mill, a ground breaking initiative to recycle Nokia's unused ideas and innovations to selected Finnish ICT companies for further development and exploitation. Prepared and launched in cooperation with several Finnish cities, the initiative aims to match ideas with companies that will be able to develop them into world-class products and services.
Nokia's research and development efforts produce massive amounts of new mobile innovations. Only a fraction of the ideas and concepts finally make it in the market as part of Nokia's offering. Consequently, over the years, thousands of potentially successful innovations have been shelved.
This unique initiative to recycle innovations stems from the founding organizations' commitment to strengthen the Finnish ICT sector and generate new, internationally competitive businesses. The investments in the development projects to be launched as part of the Nokia Technopolis Innovation Mill are expected to total up to 8 Million Euros, including 4.5 Million Euros of public funding.
The three-year initiative is a joint effort by Nokia, Technopolis, Tekes and several Finnish cities. Tekes, the Finnish Funding Agency for Technology and Innovation, has granted a significant amount of the public funding. Technopolis, one of Europe's largest science and technology park chains, will coordinate the initiative and provide business development services to support and enhance the funding effort. The participating cities add to the funding with the aim of boosting the ICT sector in their regions.
"We feel it's important to support the birth and growth of Finnish companies that base their offering on technology and service innovations and aim to build internationally competitive businesses," said Mr. Esko Aho, Nokia's Executive Vice President, Corporate Relations and Responsibility. "As we will not take all of the innovations generated by our R&D into production, we are happy to give other competent companies the opportunity to turn these innovations into success stories."
"Speeding up the economy calls for a new degree of openness. We hope that the Nokia Technopolis Innovation Mill sets an example that companies across other sectors will follow. The current economic climate is just right for a critical evaluation of intellectual property portfolios and the release of the innovations that are more suitable for others to exploit," continued Aho.
The innovations released by Nokia are in areas such as environmental and energy-related solutions, location based services and advertising, near field communication, mobile security, health care applications and future internet services, among others. The objective is to evaluate the thousands of available innovations and select around one hundred to be matched with a company which demonstrates the best ability to exploit them, and which is then granted funding for further development and commercialization.
"More efficient utilization of existing innovations is a novel and interesting perspective in boosting R&D and innovation," said Mr. Martti af Heurlin, Deputy Director General of Tekes."The Nokia Technopolis Innovation Mill is fully aligned with the Finnish national strategic intent to develop new knowledge intensive ventures. Ideally, the initiative will create significant volumes of new international business."
"Nokia is demonstrating exceptional corporate responsibility by releasing innovations for further development and use without compensation," said Mr. Keith Silverang, CEO of Technopolis. "In economically challenging times we need these kinds of collaborative initiatives that benefit the community as a whole. On top of the innovation and financial support, the participating companies will be offered a wide range of Technopolis business development services to help them ramp-up their businesses swiftly."
A selection committee formed by Nokia, Technopolis and Tekes representatives has already started screening and evaluating the available innovations and candidate companies interested in one or more of the ideas. Potential companies are being screened primarily from the databases of Technopolis, Tekes and the participating cities.

SBIR Innovations

NIH Tosses Small Business a Few Crumbs

http://sbircoach.blogspot.com/2009/06/nih-tosses-small-business-few-crumbs.html

I'm not ungrateful. Really. Small technology businesses appreciate any funding opportunities, and the NIH is doing the right thing. But why did it take so long for them to do it? And why is it so pitifully small?

Want to see what they tossed us for Stimulus-funded SBIRs?: RFA-OD-09-009, Recovery Act Limited Competition: Small Business Catalyst Awards for Accelerating Innovative Research

Small business (via SBIR) should have been allocated 2.5% of the NIH's Stimulus pop for R&D. That's something over $200 million. What are they offering us? $5 million. (Hmmmm.... That's 2.5% of 2.5%! Huh! Coincidence or are they sending us a not-so-subtle message?) Funding on these is for up to one year not to exceed $200K. That means a scant 25 awards. Big deal.

Yeah, there's an alleged pot sweetener. Another $35 million to "Spur the Acceleration of New Technologies". But this isn't a small-business only competition. Sure, we can apply. Gee, thanks. Another Challenge Grant-type competition? 

Here's that announcement: RFA-OD-09-008, Recovery Act Limited Competition: Biomedical Research, Development, and Growth to Spur the Acceleration of New Technologies (BRDG-SPAN) Pilot Program 

Well, whaddya know? Valley of Death funding! This is a whole new category for NIH, and I do congratulate them for introducing this. It's a good start. For a company extending SBIR funded technology, to get this award means it's a Phase III by definition. But it's not limited to SBIR funded companies or subject to SBIR eligibility rules. It's NOT an SBIR program. It even has a new NIH Grant Code: RC3.

You see, there's some interesting wording in the Eligibility section that says: "Applications received under this FOA may be given funding priority if the applicant is associated with an enterprise/commercial organization that is of small size (e.g., 500 or fewer employees), and/or of limited resources, such as an early-stage company, and/or one positioned for receiving funding or in-kind support from a third-party investor and/or strategic partner, etc." The key words are "MAY BE given funding priority". 

A friend of mine is the CEO of a small bio-tech company that has won several SBIR awards. He recently made the following observation: "For many years the SBTC and others opposed to BIO’s legislative efforts have argued that VC owned firms should procure NIH funding from outside the SBIR set aside. BIO and NIH have always responded that there are no business funding opportunities outside of SBIR. This new RC3 program -- not SBIR -- is precisely where VC owned firms should be competing for NIH support."

Indeed, there's enough on the table here to attract a VC funded (dare I say controlled) company -- $3 million over 3 years. Much better than SBIR and more focused on where they probably are in their product development life-cycle. 

A new sandbox for the bigger boys to play in. Now will you please stay out of ours? How this new NIH funding category will color the SBIR Reauthorization debate remains to be seen. 

But we have had some crumbs tossed our way, so let's get busy. Due date for grant applications in both of these programs is September 1st.

Help for Small Biz: SBA Backs Interest Free Loans to Ease Cash Crunch, Start-up Nation, 31 May

Help for Small Biz: SBA Backs Interest Free Loans to Ease Cash Crunch

As part of the American Recovery and Reinvestment Act of 2009, the Small Business Administration (SBA) has now added a 100% interest free SBA backed loan with no fees attached. With so many businesses (big and small) crumbling in the current economic climate, the new loan program is an attempt by the SBA to reach out to its small business community. They are hoping to help companies that have been profitable in the past but are currently struggling due to sales declines, inability to access credit, or sky rocketing debt payments.

The loan is for amounts up to $35,000 and meant to be a short-term solution to stimulate cash flow. The goal of the ARC loan is get owners investing in their businesses again, instead of just scrapping by with their heads barely above water. The loan proceeds are systemically paid out over a period of six months and repayment does not begin until the last disbursement has been received. Repayments can be made for up to five years. The loans are available starting June 15^th, 2009 through September 10, 2010 or until the all the funding has been disbursed. The loans will be issued by commercial lenders and then backed by the SBA. The SBA will then pay the commercial lenders a monthly interest rate.

Ideal candidates will have a plan for future cash flow, a history of profitability in at least one of the business’s previous three years, and are no longer than 60 days past due on their current debt payments. The loan program is not available to start-ups, non-profits, or companies that can not prove viability.

This new program just might be the break many small business owners have been hoping for to get them back in control of their finances. For more information, visit http://www.sba.gov/recovery/arcloanprogram or contact your current SBA approved lender for application details.