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Innovate or Perish

What is the next big profit opportunity? And, perhaps more important, how do business leaders dedicate resources to finding it …

What is the next big profit opportunity? And, perhaps more important, how do business leaders dedicate resources to finding it during an economy in freefall?

CEOs who gathered in November to discuss the challenge of stimulating innovation in a down economy universally agreed that innovation is the primary engine of growth and value creation—the path to a higher growth, higher margin business. Yet, every company goes through periods where lean times make it tougher to find funding for the R&D initiatives crucial to advancing innovation. In today’s economic climate, more and more CEOs are feeling that pressure. But at the same time, each and every one must find ways to persevere, noted Ed Ludwig, CEO of Franklin Lakes, N.J.- based Becton, Dickinson and Company (BD). “There is no Plan B,” he says. “You’ve always got to continue to innovate. It’s not optional.”

For BD, a medical technology company that manufactures medical supplies, devices, lab equipment  and diagnostic products, the most recent pressure began with a run-up in raw materials prices over the past few years and continues today in part due to the effect of a strong dollar on revenues translated from oversees sales. But despite the financial challenges, the company remains committed to R&D, said Ludwig, who reported that BD has doubled the rate of R&D spending over the past six to eight years.

“We define R&D broadly. It’s not just what happens in our labs,” he explained. “Innovation occurs throughout the value chain. Operating efficiency and innovation are very much hand-in-glove. For example, in our biosciences division, we’re trying to get 5,000 stock-keeping units [SKUs] in front of 200,000 researchers using the Internet as a tool. In the medical supplies business we have a very sophisticated distribution powered by SAP to ship low-value products to hospitals with same-day delivery and 99.9 percent inventory accuracy rates.”

Mark Israelson, president of the Silicon Valley sales development company Salesgenie.com, looks to his customers to identify opportunities where his R&D dollars can make the biggest impact. “A lot of us have been at companies where engineering drove innovation and then, when they found an answer, went out and looked for a problem to solve,” he said. “We’ve been fortunate to have customers tell us what has the biggest return on investment [ROI] for them so that we can focus on those areas.” The company runs ROI projections to pinpoint customer issues with the most promise and allocates time and resources accordingly.

The Omaha, Neb.-based company’s rapid-fire development process—it rolls out new solutions and products every two weeks that immediately become available to its customer base—won favor with its 26,000 customers. But it also raises a corresponding concern, added Israelson. “The quality challenge becomes a real issue, because if you mess up even a very few times, you can lose your customer trust.”

Customer Customization

Deep insight into customer needs can be an invaluable source for ideas, agreed Ludwig, whose company rethought the standard design of hypodermic syringes after recognizing that accidental needle sticks were a common problem among healthcare workers. Since most accidental sticks occur when used needles were recapped, Becton Dickinson came up with a design that automatically retracted needles after use. The challenge was getting hospitals to recognize a problem the company already knew existed.

“If you walked into a hospital back then, which we did, and said, ‘We’re here to solve your accidental needle- stick problem,’ 80 percent would say, ‘We don’t have one,’” said Ludwig. Building momentum around a new twist on a 100-year-old product required still more innovative thinking—namely partnering with a University of Virginia professor to develop a way of monitoring accidental needle sticks in healthcare institutions. The effort proved worthwhile. “That is now a $1.5 billion business for us,” said Ludwig.

That tale of a hard-won advance is in stark contrast to the experience of Napoleon Barragan, who revolutionized sales at his Jamaica, New York-based mattress store by adopting the moniker 1-800-MATTRESS. “One day while riding the train I saw a New York Post ad that said ‘Dial a Steak,” said Barragan, the company’s chairman and CEO. “I changed the word ‘steak’ to ‘mattress,’ added a tagline about leaving off the last ‘S’ for ‘savings’ and that was how we started.”

Ironically, another innovation— one that’s taken telecommunications by storm—is jeopardizing the company’s stronghold. Try dialing 1-800 MATTRESS on a Blackberry and you’ll find the problem Barragan said is costing him significant sales: the device’s keyboard doesn’t provide for dialing by alphabet.

Innovation Bargain Hunting

For most companies, managing R&D expenditures to maximize innovation ROI is a big piece of the innovation puzzle. To ensure adequate ROI on its innovation dollars, Becton Dickinson went through a rigorous introspection of its process, auditing the innovation process of each of its business units. “It’s all about initiating discipline into the process,” said Ludwig, who noted that current government incentives mean that where innovation takes place can have a huge impact on that ROI. “We have very strong partnerships with countries like Singapore, whose government will match in multiples the money you spend on R&D.”

After all, the pursuit of innovation can be a risky endeavor. The dangers of overspending while chasing the potential of a game-changing technology or product are all too real. Witness Coca-Cola’s New Coke, Apple’s Newton, Sony’s Betamax. Some flawed attempts at developing and marketing innovative products can cost a company millions— never exactly acceptable, but downright survival-imperiling in a downturn. So how to go for the profit potential without putting the company coffers at risk?

“Innovation is not just what happens within the four walls of your business,” advised Ludwig. “It’s supplemented by acquisition—and, in many instances, acquisitions get less expensive during hard times.”

Licensing partnerships are another route, he added. For example, rather than pursue developing a reagent system— a method of genetic analysis— of its own, Becton Dickinson licensed access to an existing system offered by Luminex Corporation, an Austin, Texas-based company that develops, manufactures and markets innovative biological testing technologies. “It shortcutted a whole area of product development—plus their system had been proven tried-and-true in the market,” said Ludwig. “We would probably be as likely to license something as we are to invent it ourselves. That’s something indigenous to medical technology, but I bet it’s [applicable] to many industries.”

The partnership, in turn, enables Luminex to profit from Becton Dickinson’s experience bringing that innovation to market. In other cases, partnerships can help a company identify and reach a new market for an existing product, said Luminex’s president and CEO, Patrick Balthrop.

“I talk to my organization often about identifying new applications for technology we already have,” he explained. “For example, we’re collaborating with Tyson Foods to use a technology we have that detects multiple things in a sample of, say, blood or tissue, as a marketing tool for [food products]. Consumers are increasingly concerned about infectious diseases like avian flu and the food they’re eating. So inside the organization people identified that as an entirely new channel and application for which we didn’t have to innovate at all.”

About Jennifer Pellet

As editor-at-large at Chief Executive magazine, Jennifer Pellet writes feature stories and CEO roundtable coverage and also edits various sections of the publication.