Chapter 1

Why This Book?

Many leaders are blind to the potentials, company pitfalls, and day-to-day challenges presented by technical change. Managers, financiers, and entrepreneurs generally appreciate the value of experienced management, an educated work force, abundant low-cost capital, a good location, or a recognized brand name. They are often less comfortable with technology, too often regarded as simply "R&D" or "patents." Most managers regard technology as important in some undefined way, but not as pressing a concern as meeting next month's sales targets or structuring the company so that it is unattractive to hostile takeover artists. This attitude, bred of a lack of sophistication about the uses, management, and pervasive effect of technology on the structure and competitive environment of business, can cripple a company.

Profiting from Innovation is intended to help managers make informed judgments about managing innovation to add value in a technologically dynamic world. It is meant to help company leaders make better decisions about investing in or managing technologies that can add value to products, processes, or services. The focus is not necessarily on producing new or technologically advanced products, processes, and services, but on ways of effectively applying and managing innovation for profit. The goal of using technology in business is not just technological excellence, but business success. Such business success may arise serendipitously from a truly new technology, but more likely it will follow from a focused program of technical and business work and from making improvements to existing products and processes faster and more effectively than competitors.

Microelectronics, gene splicing, computer communications, and efficient airfoil design are technologies pregnant with possibilities. It is, however, the products that result from their application that produce business success. These technologies have spawned a host of new products and services, such as personal computers, bioengineered pharmaceuticals, networked computer applications, and jumbo jets, that could not have existed 25 years ago.

Often the range of products and services that incorporate such new technologies quickly grows beyond the capacity of a single firm to exploit. With rare exception, knowledge that products based on a technology are market successes spreads quickly and belongs to the world almost immediately-knowledge that a technology is effective in production diffuses only a little more slowly.

This forms an important baseline for thinking about managing technology: Static monopoly of a given technology and its applications is unsustainable in the long haul. As disconcerting as this may be, it is important to realize that there is no safe or permanent success in technological or business matters. Success is only the opportunity to compete in the next round. Thus, the challenge of profiting from innovation lies in understanding how to transform new ideas efficiently and routinely into marketplace advantage -- in mastering a dynamic process.

Profiting from Innovation seeks to encourage business success in two ways. First, it is an introduction to four patterns for incorporating innovative technical ideas in new products, processes, and services. It also discusses management practices that are important in creating the drive to use technology effectively. A key to realizing the business potential of technology lies in understanding the nature of commercialization processes -- their driving forces, pace, risks, and impact. Technological advance is not separable from its uses or from the organizations, people, and markets it affects. Managers and entrepreneurs must understand the complex web of interactions between technology and people, markets and organizations. They need to know where their products, processes, and services fit technologically and in the market, the best way to structure and prosecute commercialization activities, and how internal capabilities can be used to match external opportunities. Profiting from Innovation provides a basis for harnessing innovation by describing the nature of several types of commercialization activities. Knowledge of when specific commercialization activities are under way and understanding the characteristics of those activities are important elements in effective commercialization management. This is not exclusively, or even predominantly, an issue for high-technology industries. It is as true of the paper clip business as it is of microelectronics.

Second, Profiting from Innovation will help a manager or entrepreneur recognize and act on opportunities for adding value, opportunities that differ at various stages in the life of products, processes, and services. At the outset, value lies in the search for applications and means, and the benefits come from being early to market. Later, value comes from executing product, process, quality, or service improvements sooner than others do. Still later, value comes from correctly managing maturity. As simple as it sounds, there are many ways to be distracted. We will discuss tools and techniques to help managers keep on track and not lose sight of commercialization goals in the confusion of day-to-day activities.

The insights, ideas, and analysis in this book can provide an alternative to what some business observers have called the triumph of paper over product. In his 1989 book The Resurgent Liberal, Robert Reich, a scholar and prominent critic of U.S. business strategy, drew the following distinction:

Paper entrepreneurs -- trained in law, finance, accountancy-manipulate complex systems of rules and numbers. They innovate by using the systems in novel ways: establishing joint ventures, consortia, holding companies, mutual funds; finding companies to acquire, "white knights" to be acquired by, stock-index and commodity futures to invest in, tax shelters to hide in; engaging in proxy fights, tender offers, antitrust suits, stock splits, leveraged buy-outs, divestitures; buying and selling notes, junk bonds, convertible debentures; going private, going public, going bankrupt.

Product entrepreneurs -- inventors, design engineers, production engineers, production managers, marketers, owners of small businesses -- produce goods and services people want. They innovate by creating better products at less cost; establishing more-efficient techniques of manufacture, distribution, sales; finding cheaper sources of materials, new markets, consumer needs; providing better training of employees, attention-getting advertising, speedier consumer service and complaint handling, more-reliable warranty coverage and repair.

Our economic system needs both. Paper entrepreneurs ensure that capital is allocated efficiently among product entrepreneurs. They also coordinate the activities of product entrepreneurs, facilitating readjustments and realignments in supply and demand.

But paper entrepreneurs do not directly enlarge the economic pie; they only arrange and define the slices. They provide nothing of tangible use. For an economy to maintain its health, entrepreneurial rewards should flow primarily to product, not paper.

Yet paper entrepreneurialism is on the rise. It dominates the leadership of our largest corporations. It guides government departments and agencies. It stimulates platoons of lawyers and financiers. It preoccupies some of our best minds, attracts some of our most talented graduates, embodies some of our most creative and original thinking, spurs some of our most energetic wheeling and dealing.

Our focus is on exploiting technological opportunities for organizing design and production activities, and for encouraging innovation in design, creation, and delivery of products and services. The object may be making potato chips or microchips, package delivery or management consulting, sorting checks or producing toasters. A central theme of this book is that profiting from innovation requires management preoccupation with running the heart of the business, a preoccupation with the business, operational, and technical matters that allow a company to make a better product or provide better service less expensively.

Strategies that are primarily financial -- acquisitions, mergers, divestitures, and strictly tax-motivated investments -- are important aspects of business, but they are not our focus, except as they affect the ability of a firm to develop and deploy technology for business growth. Instead, Profiting from Innovation has a great deal to do with technology and engineering management in industrial settings.

The central message of this book is that commercialization is a complex process. There are no simple prescriptions to enhance effectiveness. Management's goals and techniques must vary with the characteristics of the technology, the maturity of the technology, the requirements of production, and the parameters of competition in each industry. This diversity forces flexibility in management approaches, techniques, and strategies. Obvious truths, perhaps, but ones often lost in cookie-cutter approaches to business management that tend to treat industrial biomedical research, process innovation in financial institution back offices, and new materials use in automobiles as simply "innovation." For a manager to select appropriate methods, organizations, expectations, and even tools for tracking progress, he or she must understand the true nature and complexity of the activities involved. A superficial understanding will not do.

It is important to acknowledge at the outset that this book draws very heavily on the experiences of the study committee and those who joined the committee for two workshops (August 1988 and January 1989) and on scholarly work in the area of the management of technology and the economics of technical and industrial development. This book would not have been possible without individual contributions of managers and engineers from a wide variety of industries and earlier scholarship on innovation management. The references in text are meant to convey the depth and breadth of the existing and emerging literature in the areas treated in this volume and to acknowledge the debt that this manuscript owes to a large and growing community of researchers and practitioners in this field.

Finally, a word about the intended audience for this book. The six chapters of this book cover many basic concepts and examples in relatively few pages. That approach was dictated by a desire (1) to demonstrate a few fundamental insights about the parallel processes of technical change and business development; and (2) to launch managers, engineers, entrepreneurs, and students in directions leading to profit from technological innovation. Experienced managers and technical professionals reading this book -- on their own or as part of management training courses -- should find enough "real world" experience to convince them that many of the ideas and suggested approaches can be of immediate practical value. They may recognize many of the points from their own professional experience. Faculty and students in business and engineering schools should regard this book as the starting gun for a longer race, an overview, teaser, and perhaps framework for what might be covered in a comprehensive first-year graduate course in the management of technology in business. At a reading time that clocks between five and ten hours (depending on reading speed and coffee breaks), the book is designed to be read in a couple of sittings -- one transcontinental flight if you are fast and two afternoons at the campus library if you are inclined to savor your assigned reading.

Copyright © 1992 by National Academy of Sciences