What’s the ideal innovation organization?

The GE Global innovation barometer reports that business leaders, growing uneasy with the continuing changing dynamics of today’s business landscape and uncertain about the path forward, are looking at innovation to secure growth. Recently, I was talking to William Taranto, President of Merck’s Global Health Innovation Fund. Among the many topics we discussed, we wondered what would be the ideal innovation organization: what roles and responsibilities?

Before getting into the content of the conversation, I’ll briefly expose what changes the pharmaceutical industry has to face in the near future. In the past, the pharmaceutical industry was getting most of its revenue from blockbusters. Bain and Company, a consultancy, showed in 2003 that the “blockbuster business model” had created approximately $1 trillion in shareholder value. However, toughening FDA regulations, rising R&D costs, increasing payor influence and rising costs of commercialization has stymied R&D productivity, thereby reducing revenues. The “blockbuster business model” has gone bust; the pharmaceutical industry needs to look at new market spaces to secure growth.

 

I find this situation fascinating. I am not aware, at the present moment, of any industry facing changes of comparable magnitude. Innovating in the pharmaceutical industry is not a question of branding but of survival.

 

In any case, as our conversation developed, we realized that a firm that wants to set up innovation capabilities needs to be doing three different things:

 

First of all, a firm needs to set up a Corporate Venture Capital (CVC) fund dedicated to core business. Ideally, CVCs should be able to invest independently; that is without having to involve other parts of the company. In some companies, CVCs need to be backed up by an operating business unit in order to go ahead with its investments.

 

The second thing to do is to set up a corporate venture capital fund dedicated to non-core assets. In the case of many pharmaceutical companies such as Pfizer, Merck and Sanofi, which have been, for the most part, focused on molecules and drugs, non-core business may involve healthcare services and solutions rather than compounds.

 

Finally, the last thing of firm needs to do is to set up an innovation team. And there is much talk about how the innovation team should be structured and what it should do. In my opinion, the innovation team should do 3 things:

 

First of all, the innovation team should be providing a coherent and scenario-based vision of the future in each of the firm’s major markets. This involves looking at macro-trends as well as looking at micro-trends. There ought to be some kind scenario-based customer need analysis and five force analysis. Understanding how value will be created in the markets of the future and who will be capturing that value is crucial: will it be suppliers, new entrants, substitutes, incumbents, or clients?

 

Second of all, the innovation team should be scouting for new technologies is key. One of the questions that technology scouting poses is: how do you identify technological areas in which you will perform technology scouting? This is a huge question and it could certainly be the subject of an entire book. But, to keep it brief, I would say that basically, a firm doing technology scouting, should perform a thorough value chain analysis and identify all the technologies that are involved in every value activity the firm is performing and identify those technologies that are playing the most important role in creating competitive advantage, whether it is cost leadership or differentiation. Obviously there’s much more to say but I’ll leave it at that for now.

 

Third of all, the innovation team should be working on is testing prototypes. One of the big problems that corporate venture capital organizations have to deal with is that they are meant to invest in a company and in a technology based on limited knowledge and experience. The innovation team should have testers which could test prototypes and report back to the CVC organization. As a consequence, the CVC organization could make more informed investment decisions.

 

So basically, any company that want to get serious about innovation should set up three different organizations:

• a corporate venture organization dedicated to core assets
• a corporate venture capital organization dedicated to non-core assets,
• and finally on innovation team in charge of testing prototypes, conducting prospective analysis and technology scouting

 

How would you suggest to organize innovation? How is innovation organized in your company?

 

Further readings:

 

• For a discussion on the human side of innovation, please refer to this interview of Matt Kingdon, co-founder of ?WhatIf!, an innovation consultancy and author of The Science of Serendipity: How to Unlock the Promise of Innovation in Large Organizations
• For a discussion on why understanding a firm’s value chain is critical to formulating a technological strategy, please refer to Michael Porter’s Competitive Advantage, chapter 5
• For a presentation of CVC and innovation, please refer to my friend Fred Van Ommen’s presentation of Philipp’s open innovation program
• For a discussion of what leaders are looking for in innovation, please refer to this summary of GE global innovation barometer’s findings