Every firm we speak with talks about strategy, and yet for all the attention lavished upon the idea, few companies are able to craft a strategy that provides a clear path forward for the R&D organization. Why is it so hard? There are a wide range of statements that are interesting, useful, difficult to conceive, yet still fall far short of being considered a strategy. I cover a few of these below, and briefly outline a method we’ve seen capable of creating actionable strategies.
Mission and Vision Statements are Not a Strategy
“We will hire the best, qualified staff and reward them richly”
“We will provide a fun place to work and solve challenging problems”
“We will leave the world a better place and have fun doing it”
“We will lead the industry in mobile social networking platforms”
When written with care, mission and vision statements can set the tone for a subsequent definition of a strategy, but they are just the beginning. Statements like these make people feel good and have the illusion of bringing clarity to their jobs, but they don’t qualify as actionable strategy. Even the last one, stating a desire to dominate a product category, falls short of being actionable.
Growth is Not a Strategy
“We will have 15% year-on-year revenue growth”
“We will have 5% quarterly profit growth”
“We will launch ten new products within five years”
Goals for growth are an important part of a strategy, but they are not yet actionable. Is the growth targeted for new or existing markets? Will the product launches piggyback on an existing product line, or will they be novel additions to our portfolio? There is also a danger in asking for specific productivity targets in the R&D pipeline: When the strategy sets a hurdle for the number of ideas, drug candidates, or prototypes that must be identified within a specified time period, you’ll get the number you asked for, but quality will suffer. A small biotech called Abgenix found this out the hard way in the middle of the last decade, when they publicly set a goal for the number of compounds they would promote into the clinic for patient testing. They made their number, but the compounds promoted were not promising, and they spent millions running trials that were largely unnecessary because the compounds should have failed sooner.
Products are Not a Strategy
“We will build version 4.1 of our product platform”
“We will launch a customer portal next quarter”
“We will deploy self-service kiosks in five metropolitan areas”
These statements shot beyond strategy and straight down into roadmap territory. It is important to eventually describe the specific services and widgets you want to build and sell, but these need to be prioritized and understood in the context of your strategic goals.
Building an Actionable Strategy
The statements above are not awful, but rather incomplete. A product innovation strategy requires three related sets of statements to be actionable:
- Define new product/innovation goals for the company
- Name the strategic arenas where you’ll be competing
- Explain the course of action for winning in each arena
Step 1: Define New Product Goals
We start with clients by defining new product goals. These goals might include the percentage of revenues that will come from new products, or the number of new products or technology platforms that should be developed, accounting for attrition due to technical and commercial uncertainties. In some cases, a goal of creating a new product category, or value chain may be appropriate. Below are three examples, similar to some goals we have seen used by R&D teams.
In five years, 30% of revenues will come from products that do not exist today
In ten years, 20% of revenues will come from product lines that do not exist today
In three years, 90% of revenues will come from technology platform X
Step 2: Define the Strategic Arenas
Once the goals are defined, we move on to the strategic arenas where those goals will be realized. These might be technology platforms, market segments, or product categories. (If you can’t define the arenas then it is time to roll up your sleeves and sit with your customers and prospects to better understand their world.) For each arena, it is also important to distinguish between those activities that are centered around your current business (core or maintenance), adjacent to your current business (extending), and novel/disruptive relative to your current business activities.
The arenas are sometimes best expressed with a two-dimensional grid, where the dimensions could be any of the following:
- Project Type (core/extending/disruptive)
- Technology platforms
- Market segments
- Regions
Current and planned projects can then be represented graphically, with the magnitude of future spending for each project represented by the size of each bubble. In the figure below, a 2×2 illustrates the mix of projects between technology platform and project type. The percentages represent the current % of R&D spend committed within each box.
Sample 2×2 grid with current spending (as a percentage of total R&D spending) in each category.
The spending breakdown across the columns in the example above is not unlike what many firms encounter today: Core and maintenance activities are the squeaky wheel that ends up with a majority of the funding, while product line extensions and disruptive product initiatives are starved or ignored completely.
Step 3: Explain the Course of Action within each Arena
Within each arena, we now define the course of action and specific tasks that will enable us to meet our goals. Are we providing a superior customer experience compared to the competition, or are we competing on value? Are we going it alone, or will we need the help of a partner or acquired know-how?
At this point we can also begin to place some bets, estimating the amount of funding required to meet goals within each strategic arena. Is there enough money to go around to support core, extending, and novel activities? Is the R&D budget appropriately sized? Is the aspirational spending distribution too far from the current spending distribution we identified above? Have we taken on too many arenas?
In the example below, we show the 2×2 from above with the aspirational spending breakdown necessary to reach the stated strategic goals, together with the tasks or specific projects, where already defined, that will enable us to reach those goals.
Sample 2×2 grid with tasks in each arena required to meet strategic goals. Percentages are spending allocations necessary to fund all tasks.
Finally, we need to balance the aspirations of the top-down strategy with the reality of the current business. We accomplish this by overlaying a bottom-up analysis of ongoing and already-planned initiatives against the arenas we have just defined. Are there funds remaining for non-core activities, or for arenas not currently addressed? Addressing the gap between the top-down strategy and bottom-up reality is where the rubber hits the road. It is an iterative activity where executives assess current spending splits, aspirational spending splits, and the proposed tasks in the context of strategic goals. The result is an on-strategy path forward that is realistic about what can be achieved in the near and medium term.
Good News and Bad News
In crafting an actionable strategy, there is good news and bad news: The bad news is that it cannot be distilled into a single, catchy phrase suitable for a discussion on an elevator between floors. The good news is that the process can be broken down into a discrete number of steps. Each step adds value and insight to the activity, and provides an opportunity for all stakeholders to both contribute and hone their understanding of the company’s challenges and prospects.
