01 Jun 2009  Executive Education

The Challenges of Investing in Science-Based Innovation

Smart science-based businesses view today's economic turmoil as an opportunity to stoke up research and innovation for long-term competitive advantage, says professor Vicki L. Sato. How about your business? Key concepts include:

  • Companies with highly differentiated products will be able to weather this storm, and come out the other side stronger.
  • Innovation management challenges fall across several key areas, including strategy, organizational design, decision-making, and resource allocation.
  • Different situations will require different business decisions—investing in R&D isn't always the right path to take.

 

In economic downtimes, businesses are apt to cut R&D projects that don't promise a speedy return on investment. But take a cue from smart science-based businesses, which view the recession as an opportunity to stoke up research and innovation for long-term competitive advantage.

"Even as markets have tightened, it's the companies with highly differentiated products that will be able to not only weather this storm, but come out the other side" in a strong position, says Harvard Business School Professor of Management Practice Vicki L. Sato, who cochairs the HBS Executive Education program called Managing Breakthroughs—From Science to Enterprise.

"Wall Street has conventional and not always accurate measures of a company's value."

Take Bank of America, which just renewed a $25 million, five-year collaboration with the MIT Media Lab to rethink the future of banking.

"Bank of America is interested in accessing innovative digital technologies that will help it redefine how banking is done," Sato says. "The bank sees this as an opportunity to fuel its continued competitive presence in a marketplace where the rules of banking are changing profoundly."

Scientific innovation is moving into companies such as BofA that you wouldn't expect, she adds. "We think of automakers focusing primarily on design, but the growing emphasis on alternative fuels is causing some of them to invest in technology-based companies."

The lingering question: What are the best business management processes and practices needed by executives heading up companies that incorporate science-based innovation?

A different management strategy

Sato believes that the challenges particular to businesses and institutions that use scientific breakthroughs to advance their agendas fall across several key areas, including strategy, organizational design, decision-making, and resource allocation.

"The level of investment required to drive scientific innovation is greater, the time frame for its realization can be much longer, and the risk can be greater because you're talking about discovering something that's completely new," she says. "That requires a different kind of management strategy."

For example, the financial metrics used to make management decisions in innovation-centric businesses must encompass more than just improving efficiency and boosting profit. Managers need to consider how to create an environment that attracts people capable of doing the sort of work that leads to scientific breakthroughs and that fosters their work in a productive way. They may also need to translate their progress for investors.

"Wall Street has conventional and not always accurate measures of a company's value," Sato says. "How do you communicate to shareholders that an investment is on track or not on track when you still might be years away from that new product?"

Sato and other members of the Managing Breakthroughs faculty draw on a broad range of cases to address decisions faced by senior leaders of science-based organizations. Consider Kodak and the digital revolution.

"Kodak saw that film was going to be outmoded, but it wasn't quite able to execute on that shift. So what was missing?"

The program also touches on the practices used by academic labs to sustain productivity, drills down into organizational models, and reviews methods to help executives deal with the questions of project prioritization.

Managing for the long term

One problem facing decision-makers who invest in science-based research is something the heads of top biotech and pharmas learned long ago: There are few instant payoffs to please investors. Just ask Raymond Gilmartin, former chairman, president, and CEO of Merck & Co., who now teaches at Harvard Business School.

Gilmartin withstood heavy criticism when he made the decision to continue investing in longer-term research rather than short-term profit after Merck took its blockbuster drug Vioxx off the market in September 2004.

"He believed that the only way for Merck to recover was to invest in R&D," says Sato. "Is it a hard decision? Yes. Research by its nature is almost futuristic. So how do you have confidence that an investment is going to have an impact in the time frame that you need it, if ever?"

"The rules haven't been written yet in this field of study."

Gilmartin's bet has paid off to date for Merck, she adds, with the development of a vaccine against cervical cancer (Gardasil) and the launch of successful new drugs to combat diabetes and HIV/AIDS.

Sato acknowledges that different situations will require different business decisions—investing in R&D isn't always the right path to take. But it is not a decision to be made without considerable analysis and careful consideration.

"The rules haven't been written yet in this field of study," says Sato. "We're still defining what constitutes best practices and determining what kinds of leaders, governance, and organizational structures will emerge from today's science-based businesses."

A new offering of Managing Breakthroughs—From Science to Enterprise is currently being planned. The program, which Sato chairs with HBS professor Willy C. Shih, is designed for senior executives from science-based enterprises and university and foundation leaders.

About the author

Julia Hanna is associate editor of the HBS Alumni Bulletin.