Nokia consistently outspent Apple on mobile phone R&D research in the decade leading up to the launch of Apple’s iPhone. In fact, from 2004 to 2007, before the iPhone was released, Nokia spent the equivalent of $22 billion on R&D, whereas Apple spent a paltry $2.5 billion by comparison.
“Despite outgunning Apple Inc. on research and development spending, struggling handset maker Nokia Corp. was unable to head off the threat of the iPhone back in 2007, a comparison of R&D expenditures at Apple and Nokia shows.” (Grundberg, 2014)
We all now know what happened, but why?
Today the Apple brand is synonymous with innovation. Innovation funds their incredible marketing strategy to boost sales. A revenue loop. If the mobile market war has taught us anything, it’s this:
1) Innovation → 2) Marketing → 3) Sales
Lots of companies are at a loss about how to successfully fund innovation, or rather where. This article takes a closer look at this business defect.
Nokia’s demise demonstrates the common struggle that firms grapple with to get innovation investments right. All too often companies concentrate on financing what’s worked in the past rather than looking to the future. Think of Polaroid and Kodak for example.
“Insanity is doing the same thing over and over again and expecting different results.”
Start-ups are the polar opposite. They’re purely focused on innovation despite being beholden and battered by VC impatience, which accelerates boom-and-bust cycles faster than any economic event.
So what is the solution to these inherent problems in corporate funding?
Josh Lerner, from Harvard Business School, believes the key to success may lie in a hybrid model. A model that merges elements of the corporate research labs and Start-ups.
“When you look carefully at the nature of corporate labs and venture capital-backed firms, you see that there are both very real strengths and some serious limitations.” (Lerner, 2012)
Lerner’s book entitled The Architecture of Innovation: The Economics of Creative Organizations offers tremendous insight into innovation funding strategies.
Government funding in scientific research increased after WWII. Large corporates soon followed suit. Companies like Ford and IBM established dedicated R&D labs with few constraints, restrictions, or deadlines within.
As the years progressed, companies experienced a lower return on investment. The value of these labs was obscured. They lost their appeal.
Lerner said that “this was a slow-moving train wreck. There was a sense that the key innovations developed during the war, like radar and the atomic bomb, came from a very scientific-driven process. So corporations made enormous investments to create ivory towers where scientists would think great thoughts. At first, it seemed very appealing, but as the fifties moved into the sixties and the sixties moved into the seventies, disillusion set in. In many cases, companies spent enormous sums, but without getting significant commercial returns.” (Lerner, 2012)
Today, corporate funding makes up more than half of private R&D expenditure. But when results decline, many slash their R&D budget to focus on core markets.
“Often with dreadful consequences.” (Lerner, 2012)
I mentioned Kodak above, whose R&D spending “fell from $1.6 billion in 1992 to $859 million in 1994” (Lerner, 2012). The CEO at the time, George Fisher, opted to focus on film. He expanded, approving new facilities. The impact was severe as Kodak arrived late to the digital imaging party.
In 2012, Kodak filed for bankruptcy.
Nokia was not that different from Kadak. Leadership was fixated on maintaining its grip on the low-end space in the mobile phone market. The Finnish firm failed to anticipate the smartphone revolution.
“They decided that they were getting the most sales from the traditional phones, so they focused on that, and the opportunity came and went.” (Lerner, 2012)
VC backed Startups know all about funding innovation. Both parties are clear about the risks. VC's success in recent years has poured in from information technologies. But Lerner highlighted VC’s shortcomings: “a narrow focus” on specific “industries and geographies” (Lerner, 2012).
VC’s churn volatile waters, a feast-or-famine funding cycle is their mantra. Dependent on public markets for cash, VC’s want and expect quick returns. They’re ruthless, culling Startups too soon if they can’t deliver on time.
“Venture capital has been a very powerful driver of innovation and has had a lot of bang for the buck. But it’s necessary to understand that while the venture model works very well in certain industries in certain places at certain times, it is not a one-size-fits-all model.” (Lerner, 2012)
According to Lerner, innovation architecture implies that the solution to successful private R&D funding lies in marrying the best of both worlds. “If you combine the scale and resources of the corporate lab with some of the intensity and urgency associated with the venture capital model, you have something that can be very, very strong.” (Lerner, 2012)
Lerner proposed that corporate-led VC programs are the way to finance external Startups who develop projects that complement their vision. Google does this often. The iFund, a joint venture between Apple and Kleiner Perkins, drove investment to develop iPhone apps. The impact is clear to see today in the App Store today. A masterstroke.
Lerner advocates innovation incentive programs. A model that focuses on recognition as well as financial rewards. He recommended that firms host innovation contests, rewarding teams, or individuals who create new products or solve problems. Hackathons are one such example.
“I don’t present these approaches as cure-alls, saying if you just run a contest or a corporate venture program everything’s going to be wonderful. But there’s a lot of promise and potential in this tool kit.” (Lerner, 2012)
There are four takeaways that Lerner conveyed in his book which I’d like to share with you, summarised as follows:
- Executives must rethink their R&D innovation funding strategy
- A Hybrid model is the best approach
- Innovation, Marketing, and Sales are co-dependent
- Governments must craft policies to fund and fuel innovation.
On policy, Lerner said: “you see this in Washington, in Europe, and in many developing nations. Their natural instinct is to throw money at innovation. But before they do that, they need to get the environment right.” Apple had an environment that Nokia lacked (Lerner, 2012).
Corporate leaders and Startups must lobby policymakers relentlessly, as if their future depends on it, because it does!
Innovation precedes Marketing. Ultimately, the success and failure of innovation are owned by each business, but we all need to support environments where innovators can operate, for marketing to flourish, to deliver sales for future innovation — A trifecta of interdependence.
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