Medical Device Link.

Originally Published MX September/October 2005

BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT

Medical device innovation comes through methodical process rather than inspiration.

Andrew Diston

Product innovation is the lifeblood of the burgeoning medical device industry. Device companies in many cases need to keep a constant stream of innovative technologies and developmental products in their pipelines, both to sustain long-term growth and to remove the market risk of being too heavily concentrated in one area.

The great ideas that result in market-leading devices don't usually come about by accident, however. Innovation among medical device companies large and small is spurred by stiff competition, the emergence of new market trends, and, occasionally, the individual efforts of inventors visionary enough to create their own new markets. Ultimately, device industry executives can drive their organizations' engines of innovation by creating a culture of innovation within the company. These leaders encourage imagination and the suggestion of new product ideas at every level of the company, and they frame a process for testing the viability of suggestions.

Medtronic Inc. is a prime example of a medical device company with a strong innovation culture. Despite being a huge international enterprise, Medtronic regularly and successfully brings to market new products that stem from a mix of internally developed and externally acquired technologies.

Something New Is Good

Because medical device customers are hospitals and healthcare networks with defined reimbursement schedules, medical device companies always have to balance their investment in continual innovation against a recognition of what the market will pay. Medical devices additionally face regulatory hurdles, and dealing with those takes time and money. Companies that can differentiate their products successfully or offer unique value with them have an improved chance of attracting and retaining customers and thus thriving despite those challenges.

Major medical device companies such as Boston Scientific, Medtronic, Guidant, and Johnson & Johnson diversify because they need to maintain stable revenue streams and want to become bigger hospital suppliers. The large companies may have the resources to innovate in ways that smaller companies do not; however, ironically, or perhaps understandably, some do not want to take a risk on innovation (see Table I).

Building a strong innovation culture can work for a company of any size. Intel managed the launch of new computer chips in conjunction with the development of the market that Microsoft provided. Both companies grew from tiny to huge and may change further. But they wouldn't continue to succeed if innovation didn't bring benefits. These firms embody the type of culture that is characterized by a top-down philosophy that doing something new is good. They also give their employees the opportunity to do blue-sky research.

The current trend for large companies is to grow their businesses and intellectual property portfolio by acquiring innovative technologies generated by small companies. For a company to be able to absorb properly newly acquired technologies and obtain the maximum benefit from them, an innovation culture, along with good communications, is essential. To make acquisitions work, companies generally must either merge cultures or keep the acquired company operationally independent. Another option is to set up new business units to shelter nascent technologies; that way, rather than just exploring whether a new technology works, a large company has the luxury of finding out whether a new business idea works. Telemedicine, as both a new technology and a new business area, is a ready example.

R&D budgets tend to fluctuate with the economy. The U.S. economy has been growing lately, and this year has seen a slight overall increase in corporate research budgets. However, last year there were major cutbacks at some companies.

The allocation of resources may reflect the circumstances of the moment. It makes sense for a medical technology executive to direct the budget toward marketing and sales at the expense of R&D if short-term gain on the balance sheet is the objective. Usually, the return on investment (ROI) with medical device R&D is a long-term proposition. The ROI for developing an implantable device could be 10 years or more, for example. But in such areas as interventional cardiology, where rapid innovation is a market imperative, ROI has to be realized in a year or so.

A product embodying a technology with a long innovation cycle may not have to be modified much over the years to satisfy the needs of end-users. But the manufacturer may find itself competing against slightly improved or even merely different ways of solving the same problem. It will have to do something to answer the competitive challenge. A company that works in an industry with a typically long product life cycle may not find it worthwhile to change core technology frequently, but it should seek to innovate in other ways in order to differentiate itself and its products.

Even superficial changes in a product can demonstrate to the company's employees that there is always room for new ideas, of whatever size and nature. The culture of innovation is a comprehensive environment.

For a company in a slow-moving market, innovation might mean not new technology but rather a way of marketing a product, perhaps repackaging it differently every few years. Executives could let their industrial designers have a go at restyling the product without changing its core. The important thing is to maintain a culture that allows product managers, engineering teams, and regulatory people the leeway to try something a little different now and then.

Any company, regardless of size, can build a successful culture of innovation as long as it takes care to pursue three key activities: it should invest in employee innovation, it should raise innovation to an executive-level concern, and it should establish a sort of checks-and-balances process to keep the idea-development program dynamic (see Table II).

Investment in Employee Innovation

Medtech executives should focus on creating a corporate culture in which employees are rewarded for conceiving and suggesting new ideas, whether or not those ideas succeed. A company committed to growth should reward those employees who contribute to the business by introducing new concepts, devising new processes, or inventing new products. Good examples can be seen at the Web sites of enterprises such as 3M Co., Hewlett-Packard, and Phillips Medical, companies that have implemented a pervasive innovation culture. These companies constantly send new streams of innovative products to market.

The institution of an innovation culture can deliver all sorts of benefits to company staff that ultimately pay off for the company. It encourages employees to be creative and take ownership of their projects and ideas. Thus, it makes work less routine. The internal generation of new ideas can energize a business. This is a good reason for employers to select people for their innovative potential and then nurture that potential.

Communication among departments and absorption of ideas that originated outside the company are essential. Executives can engineer a culture that promotes free information flow throughout the company. If an employee has a knowledge background that is not germane to his or her current job, that employee may be able to contribute something based on that knowledge to colleagues working in other disciplines within the company. Publicizing areas of active innovation within the company, and what people are doing in those areas, requires a culture of openness, not just the dissemination of information on a need-to-know basis.

Several tactics for encouraging energizing internal communication and information flow might be suggested. First, mechanisms for internal communications and feedback should be created. Company policy should be to respond quickly to inquiries and to funnel information to appropriate decision makers, whether in customer service, engineering, or marketing.

Ongoing discussions, both virtual and actual, should be instigated. Loose groups can communicate via notice boards or through chat boards established on the corporate intranet. Even notepads placed in employee rest areas could be useful, encouraging people to scribble when they come up with ideas.

Opportunities for interesting projects or events that foster cross-functional communications should not be overlooked. Social events can be planned around innovations. One such event that was successful involved creating paper airplanes as an engineering challenge; participants could use only materials procured at a stationery store. People from different areas of the company teamed up in original ways and shared ideas for meeting the challenge.

Finally, to elaborate on the idea with which this section began, employees should be rewarded for trying new ideas. Rewards for good ideas could be as concrete as cash bonuses. Or, innovative employees could be placed in their own business units.

Being able to build strong teams to develop and carry out ideas is important. This means that executives have to have a thorough understanding of employee strengths and weaknesses. A creative employee might be someone not skilled at implementation or management, but that person could be teamed with others who are implementers or managers.

For some people, recognition and status can be as important as, or more important than, cash. That should be considered. Employees of that type could be encouraged to write for publication or to make presentations at conferences to build their personal prestige. Recognition of this sort could induce them to generate even more new ideas.

The Role of the Executive

Building a successful innovation culture is fundamentally a matter of management, companywide communication, and business style. It requires creating an atmosphere that promotes innovation and that pervades all levels of the company. This process of nurturing imagination and inspiration within the company of necessity is driven from the top.

The culture is fueled by distributed idea generation and steered by a rigorous editing process that involves selecting the best ideas, reviewing them, and determining their market potential as early as possible. Learning from failures may, over the long term, be as essential as learning from successes. But, if executives implement the innovation culture properly, they will have something that can transform the company's bottom line.

There are practical ways to do this. One is to make the company's innovation track part of the annual business plan. Another is to devolve authority to levels below the board so that decisions about short investigative projects can be made quickly. Because they can be so important, internal innovation projects should be held to the same high standards of quality in management and execution as customer-related development projects.

Evaluation of New Ideas

A portfolio approach to investing in new ideas is recommended. High-risk, high-return ideas should be mixed in with lower-risk, lower-return ideas. To determine the financial risks in a company's innovation portfolio, its top managers should first try to understand how much of total business revenue is being invested back into the generation of new business. Clearly, someone wanting to develop a new hundred-million-dollar business will see that investing $1 million in new development ideas is not enough.

An innovation culture is likelier to be effectively fostered by a formalized process in which executives are consistent in their treatment of milestones. Company leaders should devise a recursive business algorithm to determine the real potential of ideas as soon as possible in the development process. In doing failure analysis, the company should review how and why things went wrong and figure out how to make the process better. Reducing the failure rate is not the point. Analysis is always a matter of asking why.

Idea analysis and development is an iterative process with defined milestones. A company has to put ideas through this sort of process or else risk losing a lot of money. Most important, executives can't be sentimental. They shouldn't fall so deeply in love with an idea that they are reluctant to terminate the idea should it show signs of failure.

The first thing to do is to look at the business potential of the idea. An outlined business plan should be produced for each project. People may be left to do preliminary research on their own or with colleagues, but then they should submit their ideas to a formal vetting process in which the initial step is evaluation of the business potential (see sidebar).

If an idea isn't working, the question is ‘why not.' If no viable or economically sensible technological solution is available, the proposal should be relegated to the idea drawer. Sometimes the current technology is too expensive for the innovation to be marketable, but in five years, say, emerging circumstances may make the idea worth bringing forth again. It doesn't hurt to review old ideas from the idea drawer periodically to see if their time has come.

A side note here: A seemingly brilliant new idea may be something that somebody somewhere has thought of before. The necessary due diligence should be conducted to determine that the idea, or at least the company's approach, is original and viable. Perhaps the technology available to the original conceiver for implementing the idea was too expensive to justify developing it. Or perhaps a different approach is simply more practical. Promising ideas should be sent to laboratory development as a second step. Project planners should differentiate the stages of development and decide what resources should be allocated to each stage.

Next, a schedule of regular milestone meetings should be established. Projects should be reviewed by both technical and business officers in these meetings. The review process has to be timely and conducted at a high level of priority, and it should incorporate market trend information. An assembly of people from different disciplines should meet regularly to vet ideas.

Independent assessment of good ideas is an imperative. Someone independent who has the technical knowledge and business savvy necessary to review the entire idea portfolio should be appointed to coordinate the process. This will prevent the languishing of good ideas whose creators have opponents or the perpetuation of politically connected pet projects that do not have strategic merit.

Finally, a culture of innovation will thrive best when there is a focus on core business and the rest is outsourced (see sidebar). Innovative companies don't do everything themselves. Instead, they strategically designate some areas as noncore, and selectively outsource these peripheral technologies. For example, a medical device manufacturer might contract out for the wireless interaction module that interfaces its device with hospital computer systems. Such peripheral expertise that is already highly developed elsewhere does not have to be replicated internally.

Conclusion

The term innovation culture has a deliberately comprehensive ring because everybody in the company ought to be a part of it, from the receptionist to the chief executive, and should make the contribution they can to the whole. A culture of innovation means an environment in which people are not afraid to take risks. But it should be more than that. The program of fostering innovation will be more likely to succeed when clear, formal mechanisms for issuing idea-generating incentives, supporting research, and selecting ideas for full development are in place. Such a structure forms the backbone of the truly creative organization.

Andrew Diston is a senior vice president and U.S. managing director of Cambridge Consultants (Boston), an international product development and design firm.

Copyright ©2005 MX