Innovating Our Way Out of a Crisis

Can research on operations and innovation benefit (University of) California?

by Vish Krishnan, Sc.D. Lightbulb with California in the center

How quickly time flies. It was two years ago that Maria Shriver, California’s first lady, headlined a rally for soon-to-be President Barack Obama at UCLA with the following words, “If Barack Obama were a state, he’d be California. I mean think about it. Diverse. Open. Smart. Independent. Bucks tradition. Innovative. Inspiring Dreamer. Leader.”

That was a powerful endorsement of Obama’s candidacy and a nice pitch for California. The description resonated around the world because it is not far from the image of the state both its residents and outsiders hold. The Golden State blazed the trail in health, automotive safety and energy efficiency and has been a land of innovation and entrepreneurship. Its prominent University of California system has also been a source of important discoveries and recipient of prestigious awards including 57 Nobel Prizes.

The state and University of California system are learning, much like innovative firms in corporate America including AT&T, General Motors and Xerox, that inventions and Nobel Prizes do not sustain good times and prosperity. While Ma Bell invented the transistor, other firms such as Texas Instruments and Intel reaped most of the rewards from the invention through operational excellence and market acumen. General Motors invented the first car safety air bags, automatic transmissions, high-compression V8 engines and catalytic converters, but lost sight of product development and operational executionresulting in less appealing cars, declining market share and eventual bankruptcy.

Similarly, the inventions from Xerox’s labs such as graphical user interface have gone on to create hugely valuable firms such as Apple and Microsoft while Xerox itself did not benefit. Industrial organizations learned that profiting from their inventive output requires organizational and operational infrastructure that helps translate these inventions into socially and economically beneficial offerings.

As California faces a whopping deficit in the general fund, is there a lesson to be learned from companies such as AT&T and GM for the state and the UC system, even if these institutions differ along many dimensions from commercial for-profit organizations?

In many ways, the golden state and the UC system today look like General Motors in the 1970s (still a formidable force, but seeing early signs of trouble in declining market leadership), and must mend their ways if they do not want to go down the same path. Tough times can provide the impetus and organizational buy-in for change, so it is imperative that the leadership of the University of California system seize this crisis to make much-needed changes that strengthen its fiscal and strategic position in the global higher-education market.

Researchers in the field of management of innovation and operations study how some organizations translate technical success into product leadership to create societal and economic value. While it is a relatively young and growing discipline, it is useful to review the lessons from this literature and discuss the relevance of these recommendations for the state and the UC system.

The Field of Operations Management Overview

Productivity advances of the Industrial Revolution, 20th century mass production and the logistical demands of the two world wars spurred the growth of operations management. Its goal is to help organizations create the most value in a resource-constrained environment — deliver maximally effective output in a consistent, predictable and timely manner with the least required amount of inputs. A core precept of the field is that a scrupulous systems, process and value-addition perspective helps organizations minimize waste, achieve consistent quality, lower cost and meet or exceed customer expectations in the most demanding of circumstances. Operations management considers all inputs into an organization including materials, labor, energy, space and customer time.

Throughout the 20th century, the field of operations management developed hand in hand with modern manufacturing, which experienced a steady increase in productivity and growth. In the 1980s it became clear manufacturing was maturing and the next frontier for the application of operations management techniques was in services and knowledge-intensive activities such as research and development. Researchers study how the systems, process and value-addition approach can be applied to settings that involve more human interaction and knowledge creation.

Managing Organizations Focused on Invention and Innovation

In the popular lore, new breakthroughs emerge from the inspiration of a lone inventor tinkering in a garage. While this is true of a few high-profile discoveries, most useful products and practices are the fruits of a team’s perspiration and significant organizational investment in supporting design, development, procurement and testing that fit in the mold of classical manufacturing operations.

Inventions Require Innovation to Realize Social and Economic Value

Too often the meanings of the terms invention and innovation are mixed up in popular usage. Invention refers to the birth of an idea or technology (such as nylon or the transistor) and is largely the outcome of research activities. Innovation is the commercialization or transfer to practice of the invented idea, including appropriate functionality, quality and safety at the right price.1 For transistors, innovation required the design, development, production and marketing of radios and computers that incorporated these transistors and offered useful applications to customers. Companies that benefited from the transistor such as Intel and Texas Instruments were particularly adept at these innovative activities.

Invention and innovation are mutually valuable. They are also different in their risk profile and complexity. The nature of risk in invention is more technical, such as making technology work and making it safe. Market and operational risks dominate the innovative activity such as making a product cheap. They must be managed differently, with more room for exploration and experimentation in the domain of invention and greater focus on time, cost and volume in the case of innovation. New product and service development is crucial to the commercialization of inventions, and literature has emerged to improve the effectiveness and efficiency of new product development.2 Companies such as AT&T are not emphasizing the innovative activities that reap the benefits of the invention and are losing product leadership to competitors.

Many Products Adapt Existing Innovation

Studies show effective innovators and their organizations are not fixated on creating something from scratch and are good at repurposing old ideas, a phenomenon called recombinant innovation.3 Examples include Ford’s adaptation of a meatpacking assembly line in automotive manufacturing and Reebok Pump shoes adapted from intravenous bag technology. A growing trend in pharmaceutical drug development is trying to understand which FDA approved drugs could tackle unsolved disease categories or emerging strains of bacteria and virus.

Product and Technological Innovation is Not the Only Type of Innovation

While the term innovation evokes images of products that have changed the course of history, such as the first airplanes, telephones and medical devices, products are not the only route to creating enduring value. Dell Inc. carved out a strong niche through its direct marketing, ordering and distribution systems. Other examples of non-product innovation include the name-your-own-price model of Priceline, Internet distribution of entertainment with Netflix and the car-sharing concept of Zipcar. A term used to refer to this new category of innovation is business-model innovation, where an existing product is distributed and paid for through new means thereby increasing convenience and value.

Innovation is Not All Individual Inspiration

It is clear innovation entails a number of infrastructural and administrative activities that make it successfully adopted and useful — which differentiates it from inventions. These enabling activities include marketing, development, testing, production and distribution to help an organization scale up, expand market coverage and realize cost savings through greater volumes in procurement and manufacturing.4

Process and Organizational Innovation Make Innovation Affordable and Valuable

While new products unleash new functionality and capabilities, they are typically too expensive at the beginning and are targeted primarily at the high end of the market. Organizations that make innovation affordable and appealing to the mainstream marketplace improve the robustness of new innovation and expand market coverage, thereby increasing profit.

Organizations must evolve to the challenges of their marketplace. Complex industrial technologies and the lack of satisfactory communication technologies in the mid-20th century resulted in the emergence of a hierarchical organization to coordinate the activities of an enterprise.5 However, advances in information and communication technology are lowering coordination costs and offering the possibility of lean and virtual organizations with dramatic reduction in the administrative hierarchy and reporting structures.

Private organizations reported significant savings in administrative and transactional activities through business process redesign/re-engineering (BPR). BPR represents a fundamental rethinking of an organization’s structure, methods and systems to usher in completely new ways of doing business.6 Improvements in information technology allow for radical simplification of work flows, elimination of intermediate steps, integration of components and leveraging of organizational templates thereby speeding up processes, improving quality and enhancing the overall customer experience. BPR has enabled innovative organizations across many industry sectors, including products and services such as education, to streamline their workflows, reduce administrative overhead and lower the prices of their products and services — making them more affordable to the larger marketplace and unleashing a virtuous cycle of growth and profitability.

Implications for the University of California

The state and the University of California are facing challenging times. Even if the larger economy turns around quickly, it is inconceivable the UC system would be able to continue to operate as freely as they did in the past. While the cost of educating a student is rising and is now estimated to be over $25,000 per student, the state’s contribution to the University of California student is declining, students are asked to pay more and the universities are facing a growing shortfall in their day-to-day operations. What gives? The modern research university is a classic organization focused on generating and disseminating inventions, so let us see how the findings from the previous section on managing such organizations can benefit the university.

Although a university is not a company in all dimensions, there are a number of parallels between a strong research university like those of the University of California system and research and development (R&D) intensive companies such as Apple, Intel or Qualcomm. These companies attract highly sought-after knowledge workers and leverage their heavy investments in R&D by expanding the market for their products and services and selling millions (if not billions) of their devices and chips. Key to their success is the ability to attain significant returns on their investments in R&D by successfully scaling up their development, production and distribution operations. As they grow, they realize economies of scale in procurement, production and distribution operations, lowering their costs and increasing their margins, setting them apart from their smaller competitors. When they grow they also risk becoming more bureaucratic, but competitive pressures and demands of investors force them to continually improve efficiency and effectiveness.

Universities are established institutions as old as other highly traditional institutions like the Catholic Church, with an equally noble mission of generating and disseminating knowledge. U.S. universities continue to be the world’s best, especially in generating new knowledge. As nonprofit institutions they do not face the demands of investors and stockholders, which allow them to think long term and build functional excellence. However, the lack of market exposure results in less pressure and motivation to change.

Managing an enterprise involved in inventive and innovative activity requires sensitivity to the diversity of tasks these organizations pursue. Clearly researchers should be offered the resources and freedom to pursue exploration, experimentation and discussion. However, activities that enable inventive researchers, including teaching and administrative services, offer substantial opportunities for improvement.

One study at the University of North Carolina conducted by Bain & Company showed more than half the administrative managers had three or fewer people reporting directly to them. Changing this could save as much as $12 million.7 Similar targets for improvement have been observed at UC Berkeley and Cornell University. The 10-campus University of California system can do a lot more to realize economies of scale and scope by aggregating, leveraging and appropriately designing activities. Examples include money spent on travel, information technology and lab supplies. The Operational Excellence (OE) project at Berkeley provides evidence of such opportunities to achieve cost savings by leveraging the size and “taking advantage of system-wide contracts that could offer substantial discounts.” Administrative functions like procurement are highly fragmented at Berkeley and use too many vendors compared to peer institutions. Opportunities abound in applying BPR techniques to human resources (HR), finance, information technology support and other administrative areas. At Berkeley, the OE project found 75 percent of IT staff and more than 85 percent of HR and finance staff do not have a formal relationship with the central functional office resulting in replication and redundancy across the campus.

Educational delivery and student service areas must evolve in response to improvements in technology. Advanced classes should complement each other in different campuses and students should be allowed to participate in classes over the Internet. This will result in cost savings, provide more course choices and teach students remote collaboration and team work, skills increasingly valuable in the workplace.

A crisis helped some organizations re-examine their practices and emerge stronger. In the 1980s, faced with rising Asian competition, the semiconductor company Intel had to do such soul searching, resulting in its exit from the memory chip market and painful changes to its organization as it sharpened focus on the core microprocessor business.8 Similarly, faced with the recession of the 1990s, Stanford University consolidated departments to achieve operational savings. To borrow a phrase from the policy arena — a crisis shouldn’t be allowed to go to waste. The leadership of the University of California system would do well to tap into its intellectual reserves and usher in much needed change that will renew and strengthen the prestigious institution.

ENDNOTES

1Gomory, R , “From the Ladder of Science to the Product Development Cycle,” Harvard Business Review, November-December, 1989

2Krishnan, V. and K. Ulrich, “Product Development Decisions: A Review of the Literature,” Management Science 47, 2001, 1-21

3Hargadon, A. “How Breakthroughs Happen: The Surprising Truth about How Companies Innovate,” Harvard Business School Press, Boston, 2003

4Teece, D; “Economies of Scope and the Scope of the Enterprise,” Journal of Economic Behaviour & Organization, Vol 3, pp. 223-247, 1980

5Chandler, A. “Scale and Scope: The Dynamics of Industrial Capitalism,” Harvard University Press, 1994

6Hammer, M and J Champy, “Reengineering the Corporation: A Manifesto for Business Revolution,” Harper Paperbacks; Revised edition, 2003. Davenport, T; Process Innovation: reengineering work through information technology, Harvard Business School Press, Boston, 1993

7Lewin, T. “Universities Turn to Consultants to Trim Budgets,” New York Times, November 15, 2009

8Burgelman, R. A. “Fading Memories: A Process Theory of Strategic Business Exit in Dynamic Environments,” Administrative Science Quarterly, Vol. 39, No. 1 (Mar., 1994), pp. 24-56

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