A Deloitte triumvirate of industry observers—Tim Hanley, Duane Dickson and John Ofori—combined their perceptions about how a collaborative process paves the path for manufacturing growth. The result is this exclusive article, a collaboration of three minds that meet with a message that can’t be easily dismissed.
Manufacturers say they need to innovate to grow. But in the past 10 years, manufacturing growth, by innovation or other means, has been more wish than reality. This isn’t a generalization. Deloitte studied more than 400 chemical and industrial product manufacturers. Subsequent data analysis returned surprising insights, especially about research and development.
The traditional path to innovation—internal R&D efforts—is not likely to turn things around. Studies show that increasing R&D spending rarely boosts revenue growth, profitability or shareholder return in chemical and industrial products companies. For instance, the Cooper and Kleinscmidt benchmarking study (“Winning Business in Product Development: The Critical Success Factor,” May-June 2007) which included 161 businesses representing a broad range of industrial products, showed no correlation between R&D spending and profitability.
Also, the traditional R&D model often results in lengthy time-to-profitability, high development costs, and too few commercially viable ideas generated (according the Henry Chesbrough’s “Productivity Crisis in R&D” report published by Forbes in 2007).
Consider the Alternatives
Such factors indicate that companies should identify other paths to innovation. We believe that one such path is collaborative innovation – that is, an approach for co-development of products and services.
Already, companies work with one or more partners (and these could be customers, suppliers, external individual innovators, university researchers, etc.) to share development and marketing responsibilities, as well as benefits and risks. Collaborative innovation often counters many of the problems associated with traditional R&D models and may give companies access to vital technologies and know-how without having to build them in house.
Let’s see how it works in the real world.
Transforming Ideas into Action
Like other business endeavors, collaborative innovation benefits from following a structured approach to create the business case, form the appropriate partnerships, and make the necessary investments in people, processes and technology. We see this as involving five steps:
Step 1: Analyze the Current State of Innovation
Such an assessment helps companies understand weak process links and determine the need and scope for collaboration. In addition, the assessment should include targeting new opportunities based on megatrends. For example, the assessment might show that many ideas get generated, but the products launched are usually late to market. The next step is to determine the root causes of any weaknesses. Organizations next analyze their current product portfolio and pipeline and identify gaps and identify opportunistic targets based on megatrends. An understanding of megatrends—and these trends include environmental protection, urbanization, resource scarcity, aging population—creates new opportunities for innovation to help organizations address unmet customer needs.
Step 2: Evaluate options for closing gaps
With the weak links of the current innovation process identified, and the portfolio gaps and new opportunities analyzed, we believe the next step is to explore opportunities for improvement. Weak links and new opportunities might be addressed by improving internal processes or collaborating with suppliers, customers, or external specialists. This analysis must be done for each specific product, service, or technology to understand if makes sense to deploy some or all of the possible collaboration options.
Step 3: Create a business case for collaboration with shared value across partners
One potential challenge with collaborative innovation can be the misalignment of business objectives. An organization exploring options for collaborative innovation should prepare a preliminary business case by analyzing the critical levers that drive enterprise value, such as revenue growth, operating margin, asset efficiency and expectations. The organization should create a preliminary business case with a clearly identified value proposition and benefits for all prospective partners.
Step 4: Determine collaboration models
An analysis of collaborative intent and scope can guide the organization in deciding which type of collaborative innovation and investment mechanisms to pursue. It can also help in determining the value to be contributed and captured by each partner. The intent of the collaboration might be:
- Process enhancing – gaining process expertise
- Performance enhancing – seeking enhanced performance in existing or new products
- Market seeking – entering untapped markets through new products and services
- Technology seeking – gaining technology to develop products across markets
We have found that the scope of innovation can have two extremes: first, single discipline, with clearly defined expertise within a specific scientific and technical domain; and, second, multidisciplinary, with capabilities across different scientific and technological disciplines.
Step 5: Form collaborative partnerships
Once an organization decides to team up and attach itself to the appropriate model, it should focus on selecting the right partners, which would lead it into an effective engagement process. Once the collaborative relationship is established, and the appropriate collaboration model finalized, the partners should jointly create a final business case with clearly identified mutual benefits agreeable to all. After all, strategic goal alignment is a prerequisite for effective collaboration. Partners should spend time understanding one another’s motivation: Why have they chosen to participate in a collaborative process.
Technological capabilities, complementary technical and market knowledge, and the potential value to be generated by each partner form the next level of criteria that will help cement the partnership. Cultural compatibility, the financial strength of each partner, and sophistication of internal processes are the other important enablers. The importance of each depends on the intent of collaboration and the amount of support the partner expects from the other.
Also, collaborating partners should confirm that their agreement clearly spells out the potential benefits and the sharing of development risks if the collaboration turns out to be unsuccessful. Different types of collaborations require different types of IP sharing, investments and cost-sharing agreements. If the collaboration is successful, operating agreements, such as joint marketing agreements and various types of licenses, may call for specified constraints as appropriate.
Step 6: Execute on collaborative innovation
The organization needs to create the appropriate enablers for people, technology, and processes. Leadership must be involved with the entire program, communicating the need for and the value of collaboration. Further, it must monitor partners’ progress and commitment. Corporate culture has always emphasized teamwork and network building; as companies move forward, they must underscore this emphasis both within and outside the organization. Employees need to understand how it will enrich their jobs, help them to innovate, and in turn allow the organization to grow.
Information technology is a significant enabler of intra- and inter-organization collaboration. Collaboration mechanisms such as access controls should be developed for sharing and exchanging information electronically with outside partners. Finance, too, has a very important role to play. Financial performance is a key consideration when evaluating different proposals for collaborative innovation, keeping in mind the company’s existing portfolio and current pipeline of products and services.
The finance and legal teams will also need to work with the R&D group to create appropriate contracts with the collaborators, wherever required, considering IP rights and other legal issues.
The success of collaborative innovation depends on alignment and effort integration: working to make every aspect—from the company’s own R&D systems, technology platforms, and employees to those of the external partner(s)—work together to realize the innovative vision. Given the stagnation in manufacturing growth and the current challenging climate, whether or not to pursue collaboration isn’t the question manufacturers need to ponder. The question should be, “How can we pursue it and when can we get started?”
Tim Hanley is vice chairman and U.S. Process & Industrial Products leader, Deloitte, LLP. Duane Dickson is a principal with Deloitte Consulting LLP. John Ofori is senior manager with Deloitte Consulting LLP. For more information about Deloitte LLP, visit www.deloitte.com. To request a copy of “Collaboration by Innovation: A Blueprint for Success,” email email@example.com.
This article contains general information and is based on the experiences and research of Deloitte practitioners. It is not meant to render business, financial, investment or other professional advice. Nor is it meant to serve as a substitute for professional advice or services. Deloitte recommends consultation with a professional advisor before making decisions or taking action that impacts your business.