Innovation Excellence

1
Innovation Excellence from Idea to Launch
Dr. Christian Weigel
Jersey, September 16, 2005
2
Improving innovative ability will increase
profitability and growth1)
Innovation Excellence Why?
Levers to Increase Profitability and Growth
Enhance innovation ability
4,3
Focus on core competencies
4,0
Cost cutting
3,9
Organic growth
3,7
Capital efficiency
3,7
Internationalization
3,7
Active pricing
3,6
Acquisitions and alliances
3,4
2
3
4
5
Low importance
Very high importance
Source Arthur D. Little Innovation Excellence
Study 2005 1) Same answer across all
regions and industries
3
Innovation turns knowledge into cash
Innovation Excellence Definition of Innovation
Product and service innovation

• Innovative problem solutions
• Substitutions of existing products and services
• New markets

Process innovation

• Productively increase

Structural innovation

• New structures of RD organizations
• Value chain reengineering

Source Degussa, Euroforum 2005
4
and is not limited to technologies and products
Innovation Excellence Definition of Innovation
Over the next five years, how much value do you
expect your company to create through innovation
in the following areas
Global Response
79
77
80
74
73
67
65
64
60
40
20
Portion of Value Chain
Source ADL Global Innovation Survey
5
Innovation is all about hard work
Innovation Excellence Definition of Innovation
Art consists of 90 transpirationand only 10
sudden inspiration(Adolf von Menzel)
Innovation consists of 90 transpirationand only
10 sudden inspiration(Thomas Edision)
6
Chemical industry is a "low intensity innovator"
Innovation Excellence Survey Results
Share of sales generated by products launched in
the last 5 years in
Efficient Innovators
High Intensity Innovators
Inter-industry average
70
60
Electrical engineering and Electronics
Automotive OEMsand Suppliers
50
Aero-space
Pharma-ceuticals
Construction and Equipment
Telecommunication, IT and Media
40
Consumergoods and food
Inter-industry average
30
Public and Professional Services
Financial Institutions
20
Chemicals/ Resources
Logistics/ Services
Engineering and Manufacturing
10
Utilities
Low Intensity Innovators
Low Leverage Innovators
0
0
1
2
3
4
5
6
7
8
9
10
11
Share of RD budget in total sales in
Source Arthur D. Little Innovation Excellence
Study 2005
7
No correlation between RD expenditures and share
of new products
Innovation Excellence Survey Results
Various Chemical companies (commodity and
specialty focused) 2004 figures
Sales with products younger than 5 years
Average 2,8
45
40
35
30
25
20
Average 19,1
15
10
5
RD expenditure as of sales
0
0
1
2
3
4
5
6
8
Innovation leader need less for more
Innovation Excellence Survey Results
RD expenditures to generate 1 million sales with
a new product Chemical industry
'000
1360
50
860
50
430
Best
Average
Worst
30
21
26
new productsyounger 5 years
9
A well-balanced innovation approach is one key to
success
Innovation Excellence Top Innovation Management
Learning from best practices
Learning from top innovators
A well balanced approach
Learning
Customers
Idea Management
Product/Service Portfolio Mgmt.
Customer Business Results
Business Vision Strategy
Business Technology Intelligence
Development Launch
Post-Launch
Technology Management
Resource Competence Management
Partners
Learning
10
Customer contact and excellent business
intelligence form essential components of
Innovation Excellence
Innovation Excellence Market Intelligence
Gaining Market Intelligence
Direct customer contact
Source for Innovation
Source for Innovation
Systematic market andtechnology screening
Extrovert corporate culture
Clear role allocation
2
3
4
5
Very high importance
Low importance
Source Arthur D. Little Innovation Excellence
Study 2005
11
Uncover unarticulated customer needs
Innovation Excellence Market Intelligence
Clues
How?
What?
Frustrations with current products and services
Anticipating changes in customers' environment
Listening tocustomers
1. Ill-served needs

Frustrationswith current activities
Watchingcustomers
2. Un-served needs

"Blue-sky" dreams about ideal world
Speculating with customers
3. Un-conscious needs
12
Think of customers, broadly
Innovation Excellence Market Intelligence
YourCompany
Regional Internatl Network
Whole- saler
Retailer/ Dealer
Customer
Customers Customers
Service

• Needs / wants ?
• Satisfaction level ?
• Future pressure / conditions of success ?

13
Pivotal factors in idea management include
creative employees and business partner
Innovation Excellence Idea Management
Idea Management
Creative employees/ business partner
Methodology to evaluate and select new ideas
Systematic process to generate new ideas
Available time to generate ideas
2
3
4
5
Very high importance
Low importance
Source Arthur D. Little Innovation Excellence
Study 2005
14
Idea does not necessarily mean market success
Innovation Excellence Idea Management
1,919
369
176
32
11
Success
Market
Products
Projects
Ideas
Invention
Innovation
Source University St. Gallen, Prof. Gassmann
15
Are those companies more successful that involve
their customers into the development of new
products and services?
Innovation Excellence Idea Management
"If I had asked my clients what they wanted they
would have answered 'A faster horse'!" Henry
Ford, 1863 1947
"It seems that just about every industry on
mapright now is being reinvented from the
customer backwards" Gary Hamel, 2002
"... users rather than manufacturers are
typically the initial developersof what later
become commercially significant new products and
processes" Eric von Hippel, MIT, 2002
16
Remember innovation has many sources (1)
Innovation Excellence Idea Management
Thermoplastics-using
Industrial gas-using
Plastics additives
Engineering plastics
Semiconductor and printed circuit board process
Scientific instruments
0
20
40
60
80
100
Innovation Developed by
User
Manufacturer
Supplier
Other
Source Evon Hippel
17
Remember innovation has many sources (2)
Innovation Excellence Idea Management
Innovation Sources
Chemical Industry
Industry in general
0
20
40
60
80
100
Customer
Supplier
Science
Competitors
RD, othersinternal
Source ZEW Mannheimer Innovationspanel
(Erhebung 1999)
18
In order to meet the challenges new approaches
and methods are required
Innovation Excellence Idea Management
Ideageneration
Conceptdevelopment
Implementation
Launch
Involvelead-user
Analyze emotional needs
Focus groups
Quality Function Deployment
Conjoint analyses
Rapid Prototyping
Toolkits
Product clinics
Next Generation Road mapping
Empathic design
Communities
Positioning models

19
In many markets decisions are made emotionally
ratio provides only the reasons
Innovation Excellence Idea Management
Decision hierarchy product purchase
2. Objective reasons for product use
Ratio
Emotion

• Security
• Wishes
• Dreams

1. Decision based on emotional use
20
For the analysis of emotional factors in case of
purchase decision new methods are required
Innovation Excellence Idea Management

• Non-verbal communication prevails"people think
  in pictures, not in words"

• Better assimilation in the brain and easier
  activation of the brain through non-verbal signals

• Traditional analysis methods (focus groups,
  questionnaires etc.) strongly "verbo-centric"

• New methods with approaches to non-verbal
  articulation of needs linkage between
  psychoanalysis, arts, literature and neurobiology

21
"Zaltman Methaphor-Eliciation Technique"
Innovation Excellence Idea Management
Example ZMET

• Object of investigation
• 12 30 participants

Project definition
"Good tasting energy provider"

• Pictures with strong association to product
• Pictures press clippings, picture books,
  brochures etc.

"Picture"-collection
Digital collages

• In-depth interviews
• Point out metaphors

"Symbol of good old times"
Further examples

• Translate collages into idea landscapes
• Interpretation

Idea landscape

• Arthritis drugs
• Buick
• Motorola security system

22
For each market there are lead-users having today
already needs they can articulate but which are
developed only tomorrow by the broad market
Innovation Excellence Idea Management

• Early and intensive customer involvement leads to
  innovation success(Arthur D. Little Studies
  2004)
• Well-known methods for the analysis of customer
  needs focus on broad customer groups in
  well-known markets
• Despite great efforts hardly any impulses for
  real innovations

"Our clients want all the same thing more
service, better quality and low prices at the
same time"

• Lead users have today already needs that the
  total market will develop only tomorrow
• Lead-user strongly profit from the development of
  new products or services

Conclusion Identify lead-users and involve them
closely into the product-/ service development
23
The lead-user approach can be applied in markets
of industrial- and consumer goods
Innovation Excellence Idea Management

Pilots on wet roads
ABS-System

Bikers in the mountains
Mountain-bike
Customerswith sensitive hair

Proteinshampoo
24
A critical success factor is a structured search
process
Innovation Excellence Idea Management
Real-life example
Infection protection in operating room

• Search field
• Project targets and team

Project start
Cost pressure
Hygienerequirements
Antibiotics resistance

• Most significant trends in search field
• Lead-user criteria

Trend analysis
Minimal budgets
External stress

• Screening or networking search

Lead-user search
Surgeons in devel. countries
MASH units
Make-upartist

• Lead-user workshop
• Concept development and assessment

• 2 new products
• Radically new approach for infection control

Conceptdevelopment
Result
25
Top innovators explicitly link strategy and clear
innovation objectives
Innovation Excellence Innovation Strategy
Strategic Planning of Product / Technology
Development
Clear product or service strategy
Tight relation between innovation objectives and
business strategy
Defined core competencies
Distinct product and/or technology platforms
Strategic make-or-buy decisions
2
3
4
5
Very high importance
Low importance
Source Arthur D. Little Innovation Excellence
Study 2005
26
Innovation objectives have to be defined
Innovation Excellence Innovation Strategy
Project examples
Share on technology development
SBU A (40)
breakthrough
SBU E (30)
Share on product development
Type ofInnovation
SBU D (10)
SBU (xy of saleswith products youngerthan 5
years in 2008)
SBU C (20)
incremental
Size of bullet is proportional to sales of SBU
SBU B (10)
short
long
Investment Cycle of Market
27
Canons high-speed digital copier business is a
good example of successful platforms/growth
engines
Innovation Excellence Innovation Strategy
Consumer Electronics
Business Electronics
Markets
Office Automation
Products
Cameras
Copiers
Fax
Printers
DigitalCopiers
DocumentSystems
Precision Machining
Micro-optics
Imaging
Laser Sensing
Networking Connectivity
Platforms/ Growth Engines
Technologies,Competencies
Material Science
Finite Element Analysis
High- Precision Measurement
Fourier Analysis
DigitalElectronics
28
Top Innovators focus on good cross-functional
teams and a milestone-based development process
Innovation Excellence Product Selection and
Development
Product Development Process and Project Management
Prioritization of limited resources
Milestone-based product development process
Management of development partners
Methodology of risk management
Collocation of development teams in critical
project phases
2
3
4
5
Very high importance
Low importance
Source Arthur D. Little Innovation Excellence
Study 2005
29
We will jointly select the appropriate portfolio
criterias
Innovation Excellence Product Selection and
Development
Project examples
1,0
1,0
1
ideal
ideal
6
3
0,8
0,8
1
7
4
5
8
10
0,6
0,6
2
2
Technology life cycle
9
Market skills
3
10
0,4
4
0,4
5
9
6
7
0,2
8
0,2
fatal
fatal
0
0
0
0,2
0,4
0,6
0,8
1,0
0
0,2
0,4
0,6
0,8
1,0
Technology Position
Technology Position

• Customer needs
• Access to clients
• Knowledge of competitors

1,0
1
ideal
0,8
7
4
3
0,6
5
6
10
9
2
Strategic benefit
0,4
8

• Potential profit
• Fit for the business
• Sustainability of competitiveness
• Strategic role of technology

0,2
fatal
0
0
0,2
0,4
0,6
0,8
1,0
Risk (technological, commercial)
30
A Portfolio Management based on ECV (Expected
commercial value of projects) can lead to a
significant increase of the RD pipeline value
Innovation Excellence Product Selection and
Development
Project examples
Before
After
high
high
Attrac-tiveness
NPV
low
low
low
high
low
high
Probability of commercial/technical success
Risks
Mainly qualitative criteria for selection
Selection based on NPV/probability (ECV)
40
Pipeline Value 3,5 bn 1)
Pipeline Value 5,0 bn
1) ECV based Expected Commercial Value
Size of bubble ECV in mio
31
Value Management starts at the Money Gate of the
Stage Gate process
Innovation Excellence Product Selection and
Development
Stage Gate and Portfolio Management
"new" product
Idea/ Proof of concept
Kick-off Gate
Go to testing Gate
Business Case
Develop-ment
Testing validation
Money Gate
Launch Gate
Launch
Evaluation of single projectbased on NPV and risk
Portfolio review

• Prioritization
• Resource allocation

Budget planning
Strategy
Responsible Gatekeeper
32
A properly implemented Stage Gate Process can
free up significant resources and improve
productivity
Innovation Excellence Product Selection and
Development
Project examples
ADL Project example
Benefits
Number of Projects
Status

• Innovation closer to market needs, due to market
  justification (business case) in early project
  phase
• Resources will be increased in the more cost
  efficient early phases
• Projects will be terminated earlier if required

Target
100
50
0
Time
Stage 1 Idea- Gener-ation
Stage 2 Business Case
Stage 3 Lab-phase
Stage 4 Pilot-phase
Stage 5 Launch
Gate 4
Gate 5
Gate 2
Gate 3
Source Arthur D. Little
33
The secrets of success are good project
management and technology partnerships
Innovation Excellence Technology and Resources
Management
Management of Technology and Resources
Systematic improvement of project management
skills
Technology partnerships with other companies
Collaboration with federal research institutes
Active license management
Clear separation between product and technology
development
2
3
4
5
Very high importance
Low importance
Source Arthur D. Little Innovation Excellence
Study 2005
34
Degussa's routes to new business involve project
houses and internal start-ups
Innovation Excellence Technology and Resources
Management
New Business Development
Science Society Markets
NewBusiness
Exploration Validation
Internal Start-ups
High Risk
Business Technology
Corporate Venture
Project House
Business Unit
Medium Risk
New Technology Platforms
Source Degussa, Euroforum 2005
35
Due to the global innovation competition the
early stages of the innovation process become
increasingly important
Innovation Excellence Delocalization of
Innovation

• Trend to shift concept- and implementation phase
  to foreign countries
• To benefit from efficiency advantages
• To increase proximity to customers
• Challenge Keep proprietary Know How

Today
Ideageneration
Tomorrow?
Concept development
Ideageneration
Implementation
Concept development

• Example China
• With more than 10,000 research institutes
• Pool of trained scientists (800,000 science and
  engineering degrees)
• Repatriation of US educated scientists (over
  110,000 scientists since 1994)

Implementation
Europe
Asia
Innovation performance in
36
Good performance indicators help companies to set
the baseline and support improvement in
innovation excellence
Innovation Excellence Measurement of Innovation
Key Innovation Metrics
Sales/results of new products
36
17
Number of new products
Impact on sales, EBIT, and/or costs
11
11
Number of patents
4
Time to market
Project management measures
3
2
Innovation rate
16
Others
0
10
30
40
20
Frequency
Source Arthur D. Little Innovation Excellence
Study 2005
37
Good performance indicators help companies to set
the baseline and support improvement in
innovation excellence
Innovation Excellence Measurement of Innovation
Key Innovation Metrics
General metrics, indirectly related to
innovation, e.g.
Metrics directly related to innovation
53
47

• Customer satisfaction
• Total sales
• Market share
• EBIT

Source Arthur D. Little Innovation Excellence
Study 2005
38
Possible Innovation Balanced Scorecard
Innovation Excellence Measurement of Innovation
illustrativ
3. Portfolio und Pipeline Health
Erwartungswert der FE-Projekte
1. Umsatz aus neuen Produkten
Mio.

30
900
Neue Produkte
20
600
Neue Varianten
300
10
AlteProdukte
0
0
2003
2004
2005
2003
2004
2005
2. Rentabilität der FE
4. Innovationsklima
40
Verhältnis FE-Aufwand/ Deckungs-beitrag neuer
Produkte
Innovations-klima Index
1,10
Bester Wett-bewerber
30
1,00
20
Wir
0,90
10
0
0,80
2003
2004
2005
2003
2004
2005
39
In der Post-Reengineering-Welt wird Innovation
zum Schlüsselerfolgsfaktor
Innovation Excellence Innovation and Stock
Markets
Average Shareholder Return vs. Innovativeness
Rating
80 Zustimmung zu der Feststellung
60
50
"Top management's commitment to and focus on
increasing its organization's innovative ability
could lead to significant bottom line results
over and above typical costcutting and
re-engineering initiatives" Source ADL
innovation survey
40
30
20
10
Average Annual Shareholder Return 1986-96
0
-10
-20
3,00
4,00
5,00
6,00
7,00
8,00
9,00
Innovativeness Rating
Innovativeness Rating Based on Americas Most
Admired Corporations, Fortune Magazine ranking of
578 U.S. companies based on executive peer
ratings and investment analyst evaluations.
40
Impact of innovation on chemical stocks' value
drivers?
Innovation Excellence Innovation and Stock
Markets
Portfolio Focus
Long-term sales growth
Earnings Predictability
Capital Structure
Scale
Profitability/ROIC
Source CSFB
41
Innovative enterprises
Innovation Excellence Innovation and Company
Climate
Build an innovative culture
Time and budgets for ideas/exploration
Open up communication, build flat hierarchies
Establish errortolerance
Set enterprise target innovation
Break down think barriers
Question thestatus quo
Destroy status-quo-mentality and cemented
structures
Increase speed of change
Source Degussa, Euroforum 2005
42
and
Innovation Excellence Innovation and Company
Climate
Source Degussa, Euroforum 2005
43
Achieving Innovation Excellence can boost the
EBIT-margin
Innovation Excellence Survey Results
Improvement Potential
Shorten time to market
65.0
24.8
Top line
Increase rate of innovation1)
80.0
23.6
Increase sales
55.8
13.5
Reduction of product cost
Bottom line
43.3
15.4
Reduction of develop-ment cost2)
46.3
15.0
Absolute increasein EBIT margin
ø all companies
11.4
3.6
ø of Top Performer(Top 5)
1) Number of successful new product launches per
year 2) Project specific development
costs Source Arthur D. Little Innovation
Excellence Study 2005
44
As a number one priority, companies worldwide are
targeting the huge untapped potential to improve
profit growth through innovation management
Innovation Excellence Summary
1

• Innovation-based profit growth tops the corporate
  agenda again
• Innovation excellence can boost EBIT-margins by
  4
• Top innovators have 2.5 times higher sales of new
  products and get more than 10 times higher
  returns from their innovation investments
• A well-balanced innovation approach is the key to
  success
• Good business intelligence
• Clear innovation objectives linked to strategy
• Milestone-based idea generation and
  implementation process
• Measurement of/feedback on innovation performance
• Wise use of partnerships
• Right innovation climate

2
3
4
45
Innovation-related processes
Appendix

• Informal
• Ration resources
• Analysis
• Formal
• Extensive
• Elaborate/formal
• Isolated
• Removed from Mkt
• Underestimated/used
• Excluded

• Defined/clear
• Identify opportunities
• Action
• Informal
• Minimum
• Short/informal
• Exposed to market
• Attuned to market
• Well understood/used
• Participate

Innovation strategy Planning focus Planning
emphasis Communications Staff involvement Decision
process RD Product managers Technology Outsiders
46
Innovation-related attitudes
Appendix

• Not explicit
• Short-term
• Not tolerated
• Not accepted
• Buried
• Little emphasis
• Rigid/enforced
• Disliked
• Low/unrealistic
• Corporate interests

• Explicit
• Long-term
• Tolerated
• Accepted
• Extracted/shared
• Strong emphasis
• Not enforced
• Accepted
• High/reasonable
• Personal development

Interest in innovation Payback horizon Mavericks F
ailure Lessons from failure Interpersonal
skills Corporate norms Uncertainty Mgmt.
expectations Staff emphasis
47
Innovation related policies
Appendix
Partnerships/ acquisition Careers for
innovators Rewards for innovators Structure Innova
tion resources Product champions Work
groups Decision mode RD budgets Innovation
success

• Closed
• Inexistent
• Not Available
• Centralized
• Scarce
• Individuals
• Discouraged
• Autocratic
• Below average
• Ignored

• Open
• Dual ladder
• Available
• Decentralized
• Available
• Teams
• Encouraged
• Participative
• Above average
• Publicized