The Innovation Factor: Inside the Idea Mill

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Augustine is trying to follow Kydd's advice. "We're working on institutionalizing this so if I get hit by a bus, the company can keep on innovating," Augustine explains. The current plan is to enlist teams of three to five outside doctors, give them equity, and spirit them to Eden Prairie several times a year to work on various projects. "We don't want the experts in a given area because they would have too much of a vested interest in their way of doing things," says Augustine. "We want bright people who can think outside the box."

The doctors would be presented with a problem -- or asked to identify a problem they want a crack at solving -- and then would spend several days "brainstorming, game playing, and role-playing around it," says Augustine. A handful of rapid prototypers would observe the festivities. Every time the physicians came up with an idea, the design folks would sprint back to R&D to build it.

"Someone else can provide the flash that tells us generally the way to do things," says Augustine. "Most of the innovation happens after that. Think, build, test. Think, build, test."

Leigh Buchanan is a senior editor at Inc.

The Economics of Innovation

Expect to spend a lot of money if you want to develop innovative products. Just don't expect to spend it on product development.

Producing innovations is an expensive game, allows Scott Augustine, particularly in a market like health care that requires extensive experimentation, testing, and plowing of regulatory ground. By itself, research and development costs Augustine Medical about 8% of annual revenues, which is about average for the medical-device industry. The figure climbs to 11% when clinical research, regulatory work, and intellectual-property management are figured in. That kind of investment "presents a real challenge to would-be small- company innovators," acknowledges Augustine, the company's CEO and founder.

But prelaunch development is a bargain compared with the cost of selling an innovation. "Missionary selling" -- imposing an unprecedented product on uneducated customers -- is significantly more expensive than touting incremental improvements to something familiar, says Augustine. How much more expensive is selling innovation than innovating? The costs include a highly trained -- and highly compensated -- sales force, aggressive marketing, trade-show launches, educational sales calls, customer training, and product trials and samples. Consider Warm-Up, Augustine Medical's treatment for chronic wounds. The product cost $10 million to develop. By contrast, costs over three years for sales, marketing, clinical support, and Medicare-reimbursement approval have totaled nearly $40 million. "And the product is still not cash-flowing itself," says Augustine.

Oh, but it's worth it -- at least if your products, like Augustine Medical's, have long life cycles. "If your products are paradigm shifting, they create 'new shelves,' which presumably you will own," says the CEO. "You will reap the benefits for a very long time, typically at higher-than-average margins." For example, he explains, a company that devises surgical suture that dissolves more readily than existing materials might win market share. But the advantage wouldn't last -- there are simply too many similar materials out there that can do the job. However, Augustine muses, what if you created a substance from blood proteins that could actually be used to glue wounds shut? A company that successfully patents that innovation "may control the market for years to come," says Augustine, suddenly sounding like a guy in a garage. "The greater up-front cost will be richly rewarded."

The Innovation Factor

Built to Invent
Inside the Idea Mill
A Field Guide to Innovation
Time Travelers
The Innovation 50

Please E-mail your comments to editors@inc.com.

Discover how to strategically apply for and manage patents in this interview with Augustine Medical's director of intellectual property, John Rock.

Discover Scott Augustine's top business books for boosting creative thinking and sharpening business skills.

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Leigh Buchanan

Leigh Buchanan is an editor at large for Inc. Magazine. A former editor at Harvard Business Review and founding editor of WebMaster magazine, she writes regular columns on leadership and workplace culture, and she contributes Inc.'s capsule book reviews, "A Skimmer's Guide to the Latest Business Books."

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