Innovation Presentation

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Innovation Presentation

• Regina McNally Roger Calantone
• The Eli Broad School of Business
• Michigan State University

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Topics

• Need to Innovate
• New Product Development (NPD) Processes and Best
  Practices
• Supplier Involvement
• New Product Portfolio Management
• How to Dominate Markets

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The Innovation Imperative
Peter Drucker once observed that the drive for
mergers and acquisitions comes less from sound
reasoning and more from the fact that doing deals
is a much more exciting way to spend your day
than doing actual work. Jim Collins (2001),
Good to Great, NY HarperBusiness, p.
180. There are no strategies for creating
wealth in the long term that are not driven by
innovation. The challenge increasingly is how
to use innovation to reinvent the core of your
company in a world where strategies die faster
than they used to and where any company thats
not constantly renewing itself is simply becoming
irrelevant. Gary Hamel, Fortune, 9/6/04
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Innovation Project Types
Market Impact
Research and Advanced Development
Create New Segment
Enter New Segment
New Customers/ Current Segment (grow share)
Existing Customers (preserve share)
Product Change
Radical Breakthroughs
New Core Product
Next Generation or Platform
Next Generation of Core Product
Enhancements, Hybrids, and Derivatives
Addition to Product Family
Derivatives and Incremental Changes
Adapted from Wheelwright and Clark,
Revolutionizing NPD, 1992
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Innovation Intensity Has Declined Recently
Percent of Projects in the Development Portfolio
APQC 2004 Study
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Innovation Decline Not from The Best
PDMA 2004 Study
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The Red Queen
Well, in our country, said Alice, panting a
little, you'd generally get somewhere else if
you ran very fast for a long time, as we've been
doing. A slow sort of country! said the
Queen. Now here, you see, it takes all the
running you can do to keep in the same place.

• From Lewis Carrolls Through the Looking Glass
  (1871).

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Units
2500
Gross Profit
Net Profit Margin
2950
Net Profit
0.305
1525
Total Expense
1425
This tool allows us to see whether we are
building the Top line (getting more competitive)
or just cutting costs for the bottom line
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(No Transcript)
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New Product Development (NPD) Process
This is how firms should make NPD decisions.
Discovery
Idea Screen
Gate1
Go toDevelopment
Go toTesting
Go toLaunch
Second Screen
Stage 3
Stage 1
Stage 2
Stage 4
Stage 5
Gate2
Gate3
Gate4
Gate5
BuildBusinessCase
Scoping
Testing Validation
Development
Launch

Post-LaunchReview
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The New Product Development ProcessGovernance By
Stages
New Product Development Process
Product Inception
Product Market Testing
Product Presentation
Product Evolution

• New Product Strategy
• Idea Generation
• Idea Screening
• Bus. Analysis
• Need, Commit, Explore

• Market
• Testing

• Commercialization
• Post-Development
• Major Introduction

Activities/ Characteristics

• Prototype
• Development
• Concept,
• Design, model
• Model and Marketing

• Full Analysis of all
• possible/feasible ideas
• Specific project
• ready for team tasking

• Prototype is
• finalized and
• ready for intro
• to end user

• Success of actual new product

• Prototype
• ready for
• marketing
• introduction

Goal at the end of each stage
Control System

• Outcome-Based
• Outcome
• Uncertainty reduced
• Information reduced as teams work alone
• Agent risk reduced
• Task prog. is
• reduced

• Hybrid- Based
• Outcome
• uncertainty
• mixed
• Information
• mixed
• Agent risk
• high

• Behavior-
• Based
• Outcome
• Uncertainty High
• Information
• high as teams
• work with mgnt
• Agent risk high
• Task prog. Is high

• Behavior-Based
• Outcome uncertainty high
• Information low as teams
• react to market
• Agent risk high
• Task prog. Is
• high

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Gates Are a Two-Part Decision
Go project is resourcedbecomes Active
Project.
Pass
Do NotPass
Placedon hold.
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NPD Decision Gate
Organization Structure Culture
Approval of Prior Stage Outcomes?
Approval of Next Stage Funding
Oppty
Portfolio
Resources Market Kn. Competence
KILL
KILL or Hold
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Decomposition of Decision Gate

• Gate screen (Leftmost part) is a weighted
  decision. Can be modeled as an AHP or simple
  weights.
• The criteria values are the increase in knowledge
  against a lowered probability of failure
  (increase in success).
• The weights are a function of individual project
  characteristics based on innovation charter,
  strategic importance, size of innovation,
  environmental risk (turbulence ambiguity)

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NPD Best PracticesWinning Strategies

• A Unique, Superior product (in the eyes of the
  customer)
• Customer Knowledge and Marketing Proficiency
• Technological Fit Proficiency
• Effective Cross Functional Integration

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The Cult of Innovation

• Insights need to be derived from the unmet needs
  and desires of people, not simply the companys
  feeling that it needs to innovate.
• The reason we covet certain objects has little to
  do with how innovative they are. Instead, we
  favor certain products because they meet our
  needs, even if they are needs we didnt know we
  had.
• Dan Saffer (3/5/07), BusinessWeek, p. 89.

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Product Superiority

• Impact
• Lowest 20 ? 28 success rate.
• Middle 60 ? 50 success rate.
• Top 20 ? 82 success rate.
• Whats needed?
• Meet customers needs better than competition.
• Provides unique features
• Provides higher quality
• Reduces customers costs
• Meet customers needs in a new to market, highly
  innovative product.

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What Is a Product?
Product includes physical goods, services,
experiences, events, persons, places, properties,
organizations, information, and ideas.
Product Levels

• F F B
• Core benefit fundamental feature or service that
  customer wants.
• Basic product specific format in which core
  benefit is delivered.
• Expected product set of attributes normally
  expected.
• Augmented product additional attributes not
  typically expected.
• Potential product all possible augmentations.

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Customer Knowledge Competency

• Impact
• Lowest 20 ? 28 success rate.
• Middle 60 ? 51 success rate.
• Top 20 ? 79.5 success rate.
• Whats needed?
• Proficient Marketing Research (cross-functional).
• Proficient preliminary marketing assessment
• Knowing the real market size attainable likely
• Understanding the competitive situation
• Knowing customers price sensitivity
• Proficiently undertaking test market or trial
  sell.
• Well-integrated sales distribution launch
  effort.
• A strong sales force distribution effort at
  launch.

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The Customer Metaphor

• Metaphor representation of one thing in terms
  of another (e.g., see what I mean over the top).
• Central to thought help us perceive and
  interpret what we perceive.
• So basic, we are often unaware of them.
• A powerful tool to unearth hidden thoughts and
  feelings that influence decision-making.
• Communicate product usage and benefits.
• Identify unmet needs.
• Evaluate the likelihood of really new product
  adoption.
• Tricky to apply

Gerald Zaltman (2003), How Customers Think,
Boston Harvard Business School Press.
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Stories and Drawings about Roaches
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Ethnography

• A description and interpretation of a cultural or
  social group or system.
• Focus understanding the meaning of behavior,
  language, and interactions among group members.
• Do It Right (BusinessWeek, 6/5/06, p. 100)
• Think Big Thoughts
• Start Early
• Due Diligence
• Sell, Sell, Sell
• Build a Culture
• and Reap the Rewards

Citigroup PayPass
OXO Hammer
Motorola A732
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Technology Proficiency

• Impact
• Lowest 20 ? 31 success rate.
• Middle 60 ? 56 success rate.
• Top 20 ? 65 success rate.
• Whats needed?
• Bugs driven out of design prior to start-up.
• Close coupling upstream (e.g., RD w/ Operations)
• Understanding production processes technology.
• Executing start-up well (in cost low rejects).
• Executing trial or pilot production well.
• Synergy between roll-out logistics
  capabilities.
• Excellent coupling between specific forecasts
  logistics deployment.

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Where Do New Product Ideas Come From?
Competitors
P3
P1
Leading Edge Customers
P2
Acquisitions and equity investments
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Performance Improvements Achieved Through
Supplier Integration
Compared to similar projects in which a supplier
was not integrated.
Handfield et al. (1999)
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Integrating Suppliers at Different Stages

• Later involvement
• Suppliers of simpler items
• Suppliers of single components
• Suppliers of less critical items or technologies
• Non-allied suppliers
• White box suppliers

Discovery
Idea Screen
Gate1
Second Screen
Go toDevelopment
Go toTesting
Go toLaunch
Stage 2
Stage 3
Stage 1
Stage 4
Stage 5
Gate3
Gate2
Gate4
Gate5
BuildBusinessCase
Scoping
Testing Validation
Development
Launch

• Earlier involvement
• Suppliers of complex items
• Suppliers of systems or subsystems
• Suppliers of critical items or technologies
• Strategic alliance suppliers
• Black box suppliers

Post-LaunchReview
Handfield et al. (1999)
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New Product Portfolio Management (NPPM)
Performance Perceptions
NPPM also known as new product project selection
Responses from managers at 205 firms implementing
portfolio management by top performers (top 20),
average performers, poor performers (bottom 20).
1 poor, 5 excellent.
Robert G. Cooper, Scott J. Edgett, and Elko J.
Kleinschmidt (2001), Portfolio Management for
New Products, 2nd Ed., Perseus Publishing
Cambridge, MA.
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Three Main NPPM Goals

• 1. Maximize portfolio value
• Choose projects with highest value for company
  objective (e.g., ROI)
• 2. Balance various parameters
• Examples development time, risk, technologies,
  markets
• 3. Link to the firms strategy
• Top-down.
• Strategic Buckets identify budget allocations,
  prioritize within buckets, allocate budget until
  depleted.
• Roadmap decide which projects are needed over
  time.
• Bottom-up Fund best projects (use stringent,
  consistent criteria at each gate).

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Composite Best-Practices Criteria for Scorecards
Rating Scale
0
4
7
10
Rating
Key Items
Supports business strategy important good impact
Product aligns well with our business strategy pr
oduct very important to strategy high impact
Somewhat supports business strategy not
too important modest impact
Product not in alignment with or important
to our business strategy low impact KILL

• 1. Strategic Alignment Importance
• strategic fit and importance
• fits our strategy
• important to do
• high impact on our business

Some new benefits somewhat superior, good
value positive feedback
Limited marginally superior fairly
neutral feedback OK value
Major new benefits very positive customer feedbac
k great value
None negative or neutral customer feedback
poor value

• 2. Product Competitive Advantage
• unique customer benefits
• value for money
• customer feedback in Stage 2

Small or non- existent market low growth
low margins tough competition KILL
Large, growing, attractive market
good margins weaker competition
Significant market good growth
good margins, modest competition
Modest market limited growth fair margins compe
titive

• 3. Market Attractiveness
• market size growth
• margins
• competitive situation

Continued on next slide
Cooper et al. (2001), p. 54.
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Best-Practices Scorecard Criteria
Rating Scale
0
4
7
Key Items
10
Rating
Excellent leverage of our strengths
competencies excellent fit between project
needs, our skills, experience, resources
No opportunities to leverage competencies require
d skills/ experience/ resources strengths
are weak KILL
Considerable leverage possible skills/ experience
needed for projects are within Company
Some opportunities to leverage our competencies o
ur skills/ experience/ resources are modest

• 4. Leverages Core Competencies
• technology
• production
• marketing distribution/sales

Straight- forward largely engineering repackage
we have technology in house have demonstrated tec
hnical feasibility
Modest fairly large gap quite a few hurdles but
do-able technology fairly new to Company limited
evidence to support technical feasibility

• 5.Technical Feasibility
• small technical gap
• not too complex technically
• uses our in-house technology
• demonstrated technical feasibility

Low big gap new science technology new
to Company have not been able to
demonstrate technical feasibility KILL
Good small gap some hurdles, but attainable hav
e some evidence of technical feasibility
Fairly good opportunity NPV positive good
payback 2 yrs probably can make money modest
risk difficulty
Poor, limited opportunity NPV negative, Payback
gt5 yrs difficult to make money here risky
tough to do KILL
Excellent opportunity NPV positive
high payback lt 1 yr not too risky difficult
to do
Modest opportunity NPV positive payback 4
yrs fairly difficult to make money fairly risky
tough to do

• 6. Financial Reward vs. Risk
• sizeable, excellent opportunity
• Payback, NPV IRR OK
• certainty of estimates
• not too risky difficult to do

continued from previous slide
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How to Dominate Markets
Enduring Market Leadership
Most important factors for (1) New firms (2)
Established firms in established market (3)
Established firms in new, related markets
Gerard J. Tellis Peter N. Golder (2002), Will
and Vision How Latecomers Grow to Dominate
Markets, NY McGraw-Hill.