Innovation and Design Strategy

R&D has long been perceived as the holy grail of the pharmaceuticals, diagnostics, and medical devices industries, and rightly so. While improvements in processes such as distribution and customer service can create incremental value for companies, it is the "quantum leap" innovations in products and technologies that yield the huge growth and profitability improvements demanded by shareholders. And while many factors are necessary for success, the companies who best manage their innovation process tend to enjoy differential returns: Pfizer, who has invested heavily in innovation and is renowned to have one of the strongest R&D pipelines in the industry, outperformed the Dow Jones pharmaceuticals index by 48% over the period 1991 to 1997, even before the introduction of Viagra.

But the hurdle is rising for companies seeking to develop new products. Despite the adoption of new techniques like combinatorial chemistry and high through-put screening that have greatly improved the productivity of drug discovery, the average R&D investment required to bring a new drug to market has more than doubled in the past decade, rising from $230MM to $500MM or more. In the medical devices industry, the cost to develop just one product can exceed $100MM. Furthermore, R&D investments are still extremely risky, with only 2-7% of all pharmaceutical innovation projects ever making it to market.

A number of factors are to blame for these spiraling innovation costs. First, the "low hanging fruit" of the health care industry has in many cases been harvested. Advances in treatment and technology have brought under control many of the better understood diseases and conditions, and companies are now focusing on indications that are increasingly complex, some of them targeting even narrower patient populations.

Innovation as Strategy: The Importance of Process
Corporate strategy, innovation strategy, and R&D need to be explicitly connected, and in the best-run organizations they are indeed tightly linked. The enormous sums invested in R&D, the lengthy time- to-market for pharmaceutical, medical devices and diagnostics products, and the high risk of development failure make it critical that innovation strategy, resource allocation, and ultimately, the activities of the R&D department are carried out with the broader corporate strategy in mind.

Managing the Innovation Process
The goal of the innovation framework presented here is to create a structured approach to the innovation process, ensuring that the most promising research projects are invested in and eventually brought to market, and that the innovation strategy is carried out in concert with the broader corporate strategy.