Friday, May 16, 2008

Keys to realizing ROI from innovation through the lens of Iridium's failure

The following overview was written by Ted Chan in 2008 as part of my masters program at the MIT Sloan School of Management and was edited by Victoria Slingerland. If it is of use to you, I would appreciate a comment or e-mail. Please use all appropriate academic citations. I would enjoy a further dialog on the topic if you are interested.

Keys to realizing ROI from innovation through the lens of Iridium's failure
By Ted Chan

Introduction

Innovation is almost infinitely nuanced. The path that is taken from beginning to end must fit the industry, the customer and where the technology fits in the innovation cycle. This paper explores key attributes of successful project and organizational structures through the lens of a major failure. The case of Iridium is an interesting example to start from as it was a catastrophic failure. Iridium was an incredibly ambitious plan to put 66 satellites in orbit to create a global telecommunications effort. The effort failed in the end for a number of reasons. First off, Iridium didn’t create a product offering that made sense for its customers. Secondly, the Iridium organizational structure and board did not make it possible to be flexible enough or provide the right feedback for its customer. Third, Iridium was such a vast project and received so much capital early in its life that it never had the opportunity to fail fast – instead, it had such a long timeline that it became technically obsolete by the time it was completed. (MacCormack & Herman, 2001, Wikipedia)

Listening to the customer is a must

Ultimately, Iridium failed because it did not produce a viable product for the consumer market despite the massive amounts of money spent. The service they offered was expensive and did not work inside of buildings; the handset was oversized and clunky. During the nearly 10 years upon which the project was developed, technology improved substantially and Iridium failed to adjust. They got caught up in the “wow” factor of their global satellite network and failed to design a product that would be appealing to its customers.

Contrast what happened at Iridium with what happened at 3M and Bank of America, two organizations who have been extremely successful because of their ability to innovate. Bank of America has been systematic about designing services and processes for their customers using using research to verify their assumptions, and has been rewarded by substantial growth and lower operating costs. In the “Innovation at 3M” Harvard Business School case, we see 3M effectively use a lead-user technique to generate ideas for new products in the medical products industry. (MacCormack & Herman, 2001; Thomke & Nimgade, 2002; Thomke, 2003)

Generally, lead-user techniques are one of the most effective ways to identify innovations (although they tend to be incremental rather than disruptive). Talking to customers who are pushing the boundaries on the current use of your product or even modifying it to suit their needs helps identify real market requirements. (Urban and Von Hippel, 1988)

A customer advocate might be an alternative. In Malcolm Gladwell’s tale about a cookie bake-off, Barb Stuckey so intimately knows the needs of potential customers that she provides the necessary input to win the competition. In any case, it is absolutely essential to not get too focused on the elegance of a technology. Too often technology developed without a market in mind, when the reality is that companies should be looking for customer needs to satisfy. (Gladwell, 2005)

Creating a diverse advisory board is essential

Not only is input from customers important, but outside advice is essential. One of the areas in which good venture capitalists truly add value is in the structuring of the board, and bringing the right consultants and advisors to provide the proper feedback to an innovative venture. This must also be done in the right quantity. Iridium did not fail for lack of feedback – they had a massive board and many advisors. However, most of these were from partners of the project or professionals involved in the project. There was also too great a number for any real expert to make an impact, resulting in groupthink and lack of tactical flexibility in project planning. What they really needed was a smaller, more focused group able to provide outside perspective on the industry, customer needs and the direction of the venture. (MacCormack & Herman, 2001)

It was interesting to look at some models of innovation used by large companies, past and present. Xerox (now gone) is famous for having blown the opportunity to commercialize things such as the graphical user interface. As seen in the Inxight case, Xerox’s model of primarily internal advisors from the various business units was problematic. Much of the long-term vision and overall view of the potential marketplace was seen from the perspective of this internal staff, some of whom very well could have lacked a real vision of the future. Often, outside sources are needed to both be optimistic and realistic about the potential of a market and the technology offering. In this Inxight case, Xerox had a number of markets sized off by several orders of magnitude. For instance, Business Intelligence visualization was measured to be by Xerox a $15 to $25 million market in 2000. This is a major mistake that an outside advisor who understood the evolving enterprise software market may not have made. In 2006, this was a $6.25 billion market growing at 11.5% per year. If Xerox had understood these markets, it would not have struggled to tap their large pool of capital or resources to go after it. However, large, internally managed ventures often fail to see beyond the scope of their existing product and service offerings. (Chesbrough, 2001; IDC, 2007)

These two cases (Iridium and Xerox) illustrate the balance of outside expert perspectives. Once these experts are obtained, an organizational structure must be designed where their feedback can be acted upon. That means a manageable board of directors. Industry leading venture capitalists are experts at creating this chemistry and it is a substantial part of the value that they create (and reap).

Organizations must be flexible enough to change course or admit failure

Iridium was a project that got big quick and died slowly. These projects are the absolute worst for corporations, investors and entrepreneurs. Creating processes that change or kill projects that in their present incarnation cannot succeed can save stakeholders a great deal of money and frustration. In innovation and entrepreneurship, risk is inherent. Managing that risk upfront, or at least as early as possible, is key. This is why iterative project development methodologies are effective in high risk projects in rapidly evolving industries. They allow for tactical change and the greatest risks to be addressed first. In some cases, the risks may not be possible to overcome. In this event, at least a manager can find out the project will fail sooner rather than later and save money.

The pharmaceutical industry is one where knowing and acknowledging what is likely to fail early is especially important. Professor Ernst Berndt of MIT often compares pharmaceuticals to movies – high upfront cost and low marginal cost to make another pill (or put another person in the seats) once the product is made. However, the cost of failure is massive if the movie or drug was not a good idea to be pursuing in the first place. It is essential to identify which drugs may not have a substantial enough market to pursue, and to understand which drugs may have a greater chance of failing in the much more expensive Phase II and III clinical trials. GlaxoKlineSmith pursued the reorganization of its R&D group in order to better screen which projects it made the most sense to pursue, by using a stage-gate process with functional expertise to make those decisions. (Huckman, 2006)

Conclusion

Innovation is not easy. Iridium started off as a great idea, but it needed to evolve. Unfortunately, the organizational structure put in place to execute the project did not allow for it. Projects must meet the needs of customers. In order to do that, they must first listen to the customer, along with their experts, be they scientific advisors, industry experts or top managers. Even then, projects must be flexible enough to change direction or fail quickly. After all, a small failure is better than an astronomically expensive one. Only when these parameters are all in place can firms maximize the return on investment from innovation.


Bibliography:

MacCormack, Alan, Kerry Herman (2001): “The Rise and Fall of Iridium” Harvard Business School Case 9-601-040.

Gladwell, Malcolm (2005): “The Bakeoff: Project Delta aims to create the perfect cookie.” The New Yorker, September 5, 2005.

Thomke, S. and Ashok Nimgade (2002) “Innovation at 3M Corp.” Harvard Business School Case 9-699-012

Thomke, S. (2003). R&D Comes to Services: Bank of America’s Pathbreaking Experiments, Harvard Business Review.

Chesbrough, Henry (2001): “Inxight: Incubating a Xerox Technology Spinout” Harvard School of Business Case 9-699-019.

Huckman, Robert (2006): “Glaxo-Smith Kline: Reorganizing Drug Discovery.” Harvard School of Business Case 9-605-074

Urban, Glen L., and Eric von Hippel (1988), "Lead User Analyses for the Development of New Industrial Products," Management Science 34, no. 5:569-82.

Iridium (satellite). (2008, May 13). In Wikipedia, The Free Encyclopedia. Retrieved 14:45, May 15, 2008, from http://en.wikipedia.org/w/index.php?title=Iridium_%28satellite%29&oldid=212235433

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