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Skip Rung Innovation Advisors

improving innovation performance for knowledge-based companies

Innovation Management in the "Knowledge Economy"
by Robert D. "Skip" Rung

Defining Characteristics of the "Knowledge Economy"

Contrary to a widespread perception, the "Knowledge Economy" is not synonymous with "high technology", but is best understood as a highly advanced state of economic development in a country or region such that a large majority of businesses and jobs - including virtually all of them that "export" to other countries and regions - require leading-edge intellectual assets in globally competitive fields. These intellectual assets include highly educated employees, patents, and trade secrets. Some defining characteristics of the Knowledge Economy are:

High-skilled, high-value-added, non-commoditized work by a large fraction of employees - typically 50% or higher.
High average income and standard of living.
Disappearance of commodity/routine manufacturing except in cases where shipping costs are high (e.g. high weight/value for products like paper, soft drinks, or building materials). Remaining production activities are closely associated with new product development and will in due course be "outsourced" to lower cost locations when technology and processes are stabilized. Because of their dual mission (production and development) and high-wage locations, these operations are often considered to be uncompetitive. But this misses the point, since their critical value is getting advanced new products to market.
Turbulent change, due to competitive advances in technology and increasingly sophisticated customer expectations.

The New Management Challenges

These new and inescapable conditions - greatly amplified, but not caused by the internet - result in challenges for managers and leaders in innovative organizations that were not fully anticipated by the management theories underlying 19th and 20th century industrial development in the advanced economies of North America, Europe, and the Far East. Five of these challenges, to be discussed in order, are:

The critical importance of intellectual property
Human resources as the most strategic corporate asset
Non-deterministic development methods and schedules for leading-edge products
Long and expensive fundamental technology lifecycles, but short product lifecycles
Short market cycles and the need for constant business "re-invention"

While these economic conditions and associated management challenges are new, human nature and needs have not changed to nearly the same extent. For this reason, the job of the innovation manager/leader is more interesting, to be sure, but it is also much more demanding, as the "soft" disciplines of communication, teamwork, and relationships require the same critical attention as do the "hard" disciplines of science and engineering, business model innovation, and finance. It is not a good solution to delegate all the people issues to HR or any centralized (or outsourced) group. Among other reasons, time and cost structure constraints won't allow it.

Now let's look a little more closely at the five management challenges:

The critical importance of intellectual property

In technology-based businesses, the most enduring and powerful source of long-term competitive advantage (which translates into profit) is intellectual property, both in the form of patents and trade secrets. Consider where the profit is made in the mature PC business - it is in the fundamental hardware and software value-adds controlled by a very small set of suppliers who zealously defend their IP-generated oligopolies. Others may eke out a small percentage profit by excelling at cost control or customer service, but these contributions are usually not as enduring as fundamental IP. Managers and leaders in innovation companies must be informed and skilled in the basics of IP generation and protection, and be able to train their staffs to follow sound IP practices. In my experience, this has proven to be more difficult and time-consuming than it sounds. Patents are expensive, particularly international ones. Unnecessarily allowing competitors to reap the reward of your R&D investment is far more expensive. Being on the losing side of an infringement action is ruinous.

Human resources as the most strategic corporate asset

Although accounting methods don't yet know how to quantitatively value it, an innovative company's most strategic asset walks out of the building every night and makes a voluntary decision to return (or go elsewhere) the following morning. This asset generates the firm's intellectual property, which is a key basis for competitive advantage or survival. It knows and practices all the trade secrets, and is more integrally involved than managers often appreciate in the smooth functioning of all aspects of the business - a realization that sometimes comes too late after a round of downsizing. Just as machinery and equipment must be upgraded and properly maintained, so must the people, which are complex and can be temperamental in the hands of unskilled operators. The best management advice I ever heard came in the late 70's from John Doyle, then VP of Personnel at Hewlett-Packard. He said a skilled manager had a hard head and a soft heart. Brilliance and decisiveness are essential for innovation leaders, but so are listening, openness, and emotional intelligence.

Non-deterministic development methods and schedules for leading-edge products

A construction project or other task using well-known materials and methods can be accurately scheduled and estimated using PERT or similar techniques. With a limited set of inputs, a single planner can create a dependable budget and schedule for such a deterministic project. To the extent that the product under development is not fully understood, i.e. to the extent that it is technologically innovative, these static techniques become exercises in self-delusion. Technical staff routinely protest that "invention cannot be scheduled" and they are partly right. Happily, non-deterministic planning alternatives - often referred to as "discovery-driven planning", after the famous 1985 Harvard Business Review article on this subject - do exist and should be rigorously used. These techniques are necessarily dynamic and will cause plan specifics - technical and business assumptions, product features and performance, price, and introduction schedule - to be adjusted and traded off according to business strategy and priorities. A crucial implication, however, is that this kind of planning can not be done well by a single person, but must rather be undertaken by a smoothly functioning network of project team members, management, partners, suppliers, and sometimes even customers. Needless to say, all of this makes the leader's job more interesting and challenging, and this is particularly true in large firms. On the upside, it can be a source of competitive advantage for an organization which learns to do this well.

Long and expensive fundamental technology lifecycles, but short product lifecycles

Breakthrough technology invention and commercialization is a big deal. It leads to enormous value and wealth, but it is also risky, costly, and time-consuming. However, the Knowledge Economy realities of accelerating technology change and shrinking product lifecycles stand in inconvenient contradiction to the escalating complexity of major technology development. There are two categories of solution to this dilemma:

Technology development execution must be crisp (cost, schedule), and high profits must be reaped over a short period of time. This is essentially the situation in quasi-mature but hypercompetitive technologies like semiconductor memory and rotating mass storage, where technology development costs billions and takes years, but the ROI window is measured in months.
Alternatively, major new technology must serve as a platform for multiple product types and/or multiple generations of products. Examples of this include software operating systems, microprocessor architectures, and inkjet printer families.

In either case, there has to be a deliberate, stable, clear, and well-communicated technology development strategy and program management process or all is lost. This strategy is sometimes called a "technology roadmap", but the essential requirements are that technology investment be linked to stable and wisely considered business objectives and that the entire organization have the resources and commitment to overcome the many obstacles that are certain to arise. This is not a job for the faint of heart.

Short "market" cycles and the need for constant business "re-invention"

Perhaps the most interesting - and troublesome - consequence of the Knowledge Economy is what I call "short market cycles". This means that an entire product line becomes commoditized over time. The first stage is an industry shakeout where only a few leaders survive, followed by a period of revenue decline and obsolescence. Examples include dot matrix impact printers, flexible disk drives, overhead transparency film. These certain eventualities impose on leaders the uncomfortable choice between going out of business in a few years and "re-purposing" the organization's assets and competencies for new lines of business. It is far better to face this issue when revenues and profits from the core business are increasing, since resources and investable cash flows will be much harder to find on the way down. So now the leader's other challenges are compounded by the necessity of clearly and deeply understanding the firm's competitive assets as well as the most promising new (and here "new" means mostly undiscovered!) markets in which to apply them. He or she must also have the discipline to apply and protect a core of "off-strategy" R&D investment - or reap severe consequences later.

Conclusion

These are daunting challenges, and that is why innovation leaders who can meet them are deservingly well compensated. Old-school or cookie cutter approaches to management obviously will not do, but the basics of the new skills and processes can be learned. Unless we are ready to take a drastic step back in standard of living (debatable - another short article someday), the Knowledge Economy gives us no alternative. So let's make the necessary preparations and enjoy the innovation adventure!

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