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Payback: Reaping the Rewards of Innovation (Hardcover)
Authors: James P. Andrew, Harold L. Sirkin, John Butman
Amazon info

Another in the "Molly Review" series - this time we start with the chapter summary and I provide my overall opinion at the end.

Chapter 1 - Overview - A good, well organized overview. The book starts with the distinction between innovation (cool new stuff) and payback (cash!). Of course, there are also indirect benefits and the brand focuses on four - knowledge, brand, ecosystem, organization. Knowledge is the basic store of intellectual resources that can be applied to other products; Brand is the enhancement of the company's brand name in the marketplace; Ecosystem refers to the benefits that the innovation will bring to partners and suppliers; and Organization is the benefits to the company - more motivated employees, easier hiring and retention. The three phases of activity are described: Idea Generation, Commercialization, and Realization. Commercialization is the process of actually building it - and is sometimes referred to as the "execution. Realization is the time that your product is in the market, starting with launch. Then the authors show "the cash curve" which is really the core idea of the book. Finally, three models of innovation are discussed: Integrator (which refers to doing it all yourself - think "vertically integrated" NOT "systems integrator"); Orchestration (utilizing partners and other people's innovations) and Licensing (you build the innovation, someone else markets/sells it). The overview closes with seven factors for creating corporate alignment behind Payback and then the seven decisions that leaders must make to ensure a successful payback strategy.

As you can see the overview covers a lot of ground, but in some sense, you can profitably read this chapter and the first chapter on the Cash Curve and skip the remainder of the book, as the following chapters flesh out ideas and concepts that are relatively self-explanatory.

Part One, "What is Payback" comprises Chapters 2 and 3.

Chapter 2 - Cash and Cash Traps - Here is where we go into the heart of the book (and, I am guessing, what was once a well-received journal article that caused the authors to think that there was a book's worth of material here). The cash curve is a graph of the cumulative amount of cash brought in by the product, graphed against time. Time is broken into the three phases of activity - Idea Generation, Commercialization, and Realization. During those phases, four "S-factors" impact the cumulative costs. These S factors are:
* Startup - pre-launch costs
* Speed - time to market costs
* Scale - time to volume costs
* Support - ongoing support and reinvestment costs

The Cash Curve allows businesses to adopt a common vocabulary when discussing the tradeoffs that they want to make and the author's then go through some sample Cash Curves for Motorola's Iridium, TiVo, Microsoft Xbox 360, and several others (note: these curves are all qualitative, not quantitative). A picture is useful. From the cash curve, we move to assessing risk - which the authors split into three types:
* Executional - Will it be on time (occurs during commercialization, realization)
* Technical - Will it actually work (determined during commercialization)
* Market - Will anyone buy it (during realization)

The chapter continues with "cash traps" - products that will never generate a cumulative return, usually because they went too far south on the cash curve to ever make it up. And then the chapter closes with the ideal curve - Apple's iPod.

As I was reading this chapter, what came home to me was the critical importance of time to market in reducing costs (enabling a shallower risk curve) - and I believe that there are books on that topic that are wiser investments than this particular book. Chapter 2 left me with a "this all seems right, but it is also pretty vague".

Chapter 3 - The Indirect Benefits of Innovation - I will present this chapter (and subsequent ones) in outline form since the book follows a fairly rigid outline structure (which is fine) and because most of the ideas are fairly self-explanatory. In addition to the direct benefit of cash, as measured by the cash curve, innovation has four indirect benefits.
I. Knowledge Acquisition
1. Product Specific Knowledge - learning more about this product line
2. Product Applicable Knowledge - learnings that apply to all existing products
3. Greenfield Knowledge - information for starting new products
4. Knowledge as Product - bowleg that could be licensed
II. Brand Enhancement
1. Premium Prices - companies that are seen as innovative can charge more
2. Higher Volumes - innovative brands can scale quickly
3. Greater Acceptance - customers follow innovative brands into new worlds
III. Ecosystem Strength
1. Preference - innovative companies preferred by partners
2. Exclusivity - sometimes preferred exclusively
3. Standards - innovative companies may be able to create standards
IV. Organizational Vitality
1. Confidence - innovative companies have confidence
2. Attractiveness - good people want to work there
The chapter closes with a discussion of achieving balance between cash and indirect benefits. This is like answering the question of how to make short/long term trade-offs or the the balance between increasing the output of products or increasing your productive capacity. No important insights. E.g. "If the company can invest in "noncash" projects, it's important to be as sure as possible that the new product or service really will create an indirect benefit, of the type expected, and that it will ultimately prove to be valuable."

Part Two, "Choosing the Optimal Model", covers the three business models, each in its own chapter.

Chapter 4 - The Integrator - One example company is BMW, in particular, their approach to the engine. While BMW will partner and outsource other elements of the car design and manufacturing process, everything about the engine is done in-house. Other examples are Intel, Ecco, Seagate, and Polaroid (the upside and downside). The integrator approach yields the highest benefits and greatest costs. Use when:
* Control is necessary
* Company has world-class capabilities
* Risks are manageable
* The company can do it all
* Knowledge assets need to be protected
* When there is no better choice
Requirements for success in integration are:
* Ability to change
* Coordination of multiple activities
* Management of relationships with others.

Chapter 5 - The Orchestrator - Companies that innovate with the help of others. Sample companies are: Microsoft, Boeing, Whirlpool (upside and downside), and SonyEriccson. A distinction is made between Orchestrating (working with partners as equals/near-equals) and Outsourcing (working with partners as order-takers, they just do what you ask).
Use when:
* A capability is missing
* Entering unfamiliar territory
* You don't want to invest in building capabilities
* You trust others
* You want to share the risk
There is also a section on "Orchestration being the riskiest model" although the previous chapter said that integrators face the largest financial risk due to large cost outlays in the early periods. Two risks are described in detail - Breakdowns in Execution and Hollowing Out (losing your capabilities to partners).

Chapter 6 - The Licensor - Allowing other companies to handle the commercialization and/or realization of your product idea. Some licensors are very brand conscious and greatly restrict how their products can be marketed, others allow far more freedom. Example companies are: Rambus, Dolby (one of the better case studies in the book), Bosch, P&G, Motorola, Degussa, Qualcomm
Use when:
* You don't have the capabilities to commercialize and you can't or don't want to acquire those capabilities
* The invention can create critical mass or lead to the adoption of a beneficial standard
* Competition can be transformed into a royalty source
Risks:
* Requires constant management of intellectual assets through the process
* Reverse engineering
* Losing touch with end users

Part Three, "Aligning and Leading for Payback" discusses what the organization must do to align themselves around innovation and payback. It comprises Chapters 7-9.

Chapter 7 - Aligning - Many different organizational structures can accomplish innovation and payback, but the lack of alignment is usually caused by one of more of the following factors:
* Innovation strategy is at odds with business strategy
* Innovation is all talk and no support
* Innovation is an island
* The process is fragmented
* Dynasties (long lived products that are "kings") monopolize innovation resources
* Metrics confound the goal of innovation
Citigroup is provided as a rather in-depth case study, but alignment is said to look very different in each company and therefore hard to describe. The most important innovation factors are:
* Individual responsibility (including a "chief innovator" or "innovation facilitator")
* Unit responsibility (groups that support innovation)
* Companywide responsibility (it can't be someone else's job)
* Conducive Conditions
- Time to think
- Space to explore
- Deep domain knowledge
- Stimulation
- Challenging environment
- Motivation
* Openness
* Measurements (although there were no particularly clear metrics proposed - especially for the key piece of indirect benefits)

Chapter 8 - Leading - This chapter covers the decisions that must be made by the leader. I liked the title quote: "If you can make decisions by the numbers, then you don't need a leader" (Peter Ottenbruch, member of the management board, ZF Sachs). After a good case study on Danaher (which, to my mind, lacked a little credibility) we have the key areas where the CEO can have a fundamental impact on the success or failure of the innovation effort:
* Convincing the organization that innovation matters
* Allocating resources
* Choosing the innovation business model
* Focusing on the right things
* Reshaping dynasties (those products that suck all the resources from a company, perhaps after their useful life has ended)
* Assigning the right people to the right place
* Encouraging and modeling risk taking

The Afterword is titled "Taking Actions" - and it lists the following six things to do:
* Draw a cash curve for an upcoming project - evaluate the four S-factors (Start-up costs, Speed to Market, Scalability, Support costs).
* Understand what is in your innovation portfolio
* Appoint a leader or take leadership yourself
* Rethink the innovation models you typically use
* Hunt for cash traps
* Rethink your perspective on risk - too little risk may be the really big risk

Overall, I was not very impressed with this book. The cash curve is a good idea, especially if you can accurate analyze the costs. The four S-factors are a fine way to break the problem down into smaller components. Every methodology seeks to provide a common vocabulary and this one wasn't that compelling. The real sin is that it appears a good article was turned into a book. There simply isn't enough material. Parts Two and Three (7 of the 9 chapters) consisted of short corporate anecdotes, followed by a list of items, followed by 1-3 paragraphs describing the fairly obvious items on the list. Finally, as the jacket cover says - "You won't find pat answers in Payback". That is quite accurate - no pat answers and not very much in the way of useful analytic frameworks, beyond the cash curve itself.

Recommended: Chapters 1-2 are applicable to all, Chapters 3-9 only to CEOs looking to implement innovation. Instead I would recommend
"Developing Products in Half the Time: New Rules, New Tools", 2nd Edition by Preston G. Smith and Donald G. Reinertsen. This focuses on reducing the risk in the cost curve (although they don't call it that) by getting products to market faster.