Necessity, goes the adage, is the mother of invention. Alas, mere invention is not good enough these days. Far more important is converting inventions into innovations: namely, products and services that improve consumers’ lives and firms’ performance. Just ask Steve Jobs and all those who rush to buy every new fruit which falls from the Apple tree. How then can entrepreneurs and firms improve their ability to convert inventions into innovations? Professor Jaideep Prabhu, Jawaharlal Nehru Professor of Indian Business & Enterprise at Cambridge Judge Business School, gives his views.
The quest to convert ideas (or inventions) into launched products (or innovations) is a key element in technological change and financial success. Firms, whether they work out of garages or sprawling labs, invest scare capital and labour into developing inventions and then commercialising them as quickly as possible. Every stage of product development and launch adds significantly and cumulatively to costs. These costs, in turn, have huge consequences for firms, governments and consumers.
For example, some have estimated that the average cost within the US pharmaceutical industry of identifying, testing and launching a new drug is in the vicinity of $800 million. Such estimates, while large and controversial, are frequently used in policy debates about intellectual property and anti-competitive or socially irresponsible corporate behaviour. But a major reason why these estimates are large and controversial is that they must take into account the cost of drug ideas that failed and never made it to market. The odds of a promising idea making it past various stages of drug development to eventual product launch are, on average, less than one in five.
Nevertheless, these odds can vary substantially across firms, and therein hangs a tale. If the odds of conversion vary, then estimates of development costs per launched product will also vary substantially across firms. Moreover, efficiency in product development due to higher conversion rates would yield savings that can be reallocated in other ways, such as in lower prices, higher profits, or greater investment in future innovation. Despite this, differences in conversion rates are rarely discussed in policy debates. The implicit assumption seems to be that firms have little control over such rates, and all firms are subject to the same odds of conversion. The drivers of conversion ability remain a mystery, and research on the issue is rare.
In practice, however, firms are hungry for knowledge on how to improve their ability to convert ideas into successful products. Given the huge pressures to innovate, many firms have gravitated toward generating larger numbers of promising ideas, and increasing the speed with which they take these ideas to market. Not unsurprisingly, the popular press too highlights the importance of speed and increased idea generation in the race to gain an innovative edge. But is a focus on speed and generating many ideas really a good thing? Could speed and working on more ideas actually hurt firms, by lowering their conversion ability? There are simply no systematic answers to this question.
To address this gap, Rajesh Chandy, Brigitte Hopstaken, Om Narasimhan and I embarked on a study of conversion ability in the pharmaceutical industry. Specifically, we asked the question: Why are some firms better at converting ideas to launched products than others?
To address this question, we analysed over 40 years of data on new product development in a cross-national sample of pharmaceutical firms. As we suspected, we found that firms vary widely in their ability to convert promising drug ideas to launched drugs. Furthermore, the firms with the highest conversion ability were actually those that focus on a moderate number of important ideas in their areas of expertise and deliberate on converting these ideas by adopting a moderate level of speed in the development process. Reflecting on our findings, we concluded that:
First, speed can kill and that more ideas can yield less: Specifically, we found that the optimal speed is around nine years from idea patenting to drug approval. Any speed targets that are set too far below or above this level can be detrimental to a firm’s drug development program. Similarly, in contrast to the prevailing beliefs and practice, we found that working on too many ideas simultaneously was counter-productive for firms. Firms that seek conversion ability may be better off focusing on a moderate number of promising ideas.
Second, experience counts: Firms that focus on ideas in technical fields in which they have expertise are better at converting these ideas into approved drugs than firms that don’t. These results imply that conversion is greater when firms stick to their knitting when it comes to new product development.
Finally, importance is important: Firms that focus on important ideas have higher conversion ability than firms that don’t. The implication of this finding is that managers should, when selecting ideas to pursue, focus on ideas that have important technical and commercial implications. One would expect, of course, that this would be their objective in any case. However, it is not uncommon for firms to pursue ideas that might be incremental and therefore perceived as low risk. Our findings suggest that doing so diminishes the firm’s likelihood of converting ideas. Important ideas, in contrast to incremental ones, have the advantage of galvanising employees and motivating them to see the idea fructify into a finished product. Firms that focus on important ideas, we find, enjoy high conversion ability.
Thus, as managers and entrepreneurs enter the New Year, they may consider making the following resolution. Rather than rushing to work on innumerable ideas in the hope that one or other might work, they would be wiser to focus on a few promising ideas and pursue them with deliberation rather than haste. Therein, they will find, lies the secret of converting promising ideas into successful products that improve lives as well as bottom lines.
– This opinion piece by Professor Jaideep Prabhu was first printed in The Financial Express, India, 25 December 2008.