60 minute guide to innovation - DTI

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SUCCEEDING THROUGH INNOVATION

www.dti.gov.uk/innovation

60 Minute Guide to Innovation

Turning Ideas Into Profit



60 Minute Guide to Innovation

Turning Ideas Into Proft

London: TSO



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Innovation is the success ul exploitation o newideas. A basic understanding o the subject isessential or all business leaders whatever theircurrent or intended product or service. Do notcon use innovation with technology. Innovationis the only way to stay ahead o the competition.Exploited properly it will improve businesssurvivability and lead to increased pro ts.

Throughout my 30 year career o leading success ul innovative companiesthere have been our requently asked questions:

How do you begin to innovate? Where do you get your ideas rom?How can you und it? Can you minimise the risks?

This guide is designed or busy people. In 60 minutes it will answer thoseour questions and many more. The author, John Beacham, is one o the

best strategists that I have met in my working li etime. I recommend thisguide to you.

Barry Dodd, Chairman o GSM Group and Regional Development Agency Board Member or Yorkshire Forward.Barry ounded his company as a two-person start-up. It is now the largest manu acturer in its sector in Europe.

Innovation is possible for every company

“The British Chambers o Commerce recognises that success ul businesses needcreativity and innovation to compete in today’s global market. Through it’s AccreditedNetwork, it strives to support and encourage all methods o innovation, both or it’smembers and the wider business community it serves and is only too pleased tosupport this Guide.”John Dunsmure, Managing Director, British Chambers o Commerce

“Innovation, in all its orms, is an essential business strategy or any up and coming

organisation and ‘The 60 Minute Guide to Innovation’ is a practical and readableguide to help businesses who are considering their growth potential. It is a must andshould be high on the reading list or all aspiring company directors.”Miles Templeton, Director General, Institute o Directors

“Innovation is important or SMEs - a massive 60% o innovations come rom thesmall and medium enterprise sector, and it is crucial that this total must not diminishagainst competing pressures in the modern market. The DTI guide is quick and easyto use, and shows that innovation doesn’t necessarily mean “hi-tech”. No businessshould be excluded rom innovating - it’s change or the better”Clive Davenport, Trade and Industry Chairman, Federation o Small Businesses

“Innovation is critical or the development o new products and services andimproved organisational processes and models, delivering competitive advantages

or companies and enhancing standards o living or consumers. The CBI supportsthis guide because the uture success o all UK businesses depends in large part ontheir capacity to innovate.”Tony McBride, Technology & Innovation Committee, CBI

DISCLAIMER: While every e ort has been made to ensure the accuracy o the acts and data contained in thispublication, the BCC, IoD, FSB and CBI can accept no responsibility or errors or emissions, or their consequences.The publication is written in general terms only. It is not intended to be a comprehensive statement o the issuesraised and should not be relied upon or any speci c purposes.



This guide is designed to help businesses who are keen to grow andthrive, in the modern climate o change and growing competition.

It ocuses on the key business process o innovation, the success ulexploitation o new ideas, and the actors most relevant to this.

It provides practical and readable advice and ideas on how to prepareor it, how to carry it out, the inherent risks and ways to reduce them.

The guide also covers innovation using the vehicle o a new companystart-up or spin-out.

This guide is relevant rom large companies down to very small ones,and also new ones.

It can be read sequentially or consulted by section as desired.

The “bullet point paragraphs”, the summary boxes and the contentspage acilitate quick navigation.

There are use ul re erences to urther in ormation.

“ This Guide represents a li etime’s experience o innovation.I hope it will motivate and help you to turn ideas into proft.”

Dr John Beacham, CBE, DSc, FRSC Author

How to Use the Guide

This publication is available online at www.dti.gov.uk/innovation.



Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

How to Use the Guide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

1. The Business Climate Today . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Change – Globalisation – Competition – Li e Cycles

2. A Responsive Business Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Value added – Per ormance and GrowthStrategy and Plans - Innovation

. The Tactics o Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Barriers – Innovation ApproachesR&D and Sources o Knowledge – Knowledge Trans er

. The Needs o the Customer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Market Place Success – Design – Consumer AppealCustomer Immersion

5. Leadership in Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Inspiration – Organisation – Change AgentsMotivation and Behaviour – Empowerment

6. Risk and Reward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Risk Measurement and Control – Risk and Reward BalanceRisk Reduction - Licensing

7. The Innovation Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Stagegate™ Model – Innovation Pipeline and CriteriaIdea Generation - Patents

8. An Innovation Start-up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Incorporation – Ownership – Raising FinanceManagement – Exit Events

9. Help and Encouragement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Networking – Pro essional Help – Local SupportExploitation Companies - Public Sector Support

10. Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Awareness – Ambition – Ability - Availability

The Author . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

5

Contents



The pace o change continues to increase. What was satis actoryyesterday is either no longer wanted or superseded by somethingbetter today.

• Globalisation, competition rom developing countries (low labourcosts), the easy access to knowledge and the speed o communication,the advance o technology and rapidly changing consumer tastes aredriving this change.

• Change brings both danger and opportunity. Changes must be sensed,

interpreted and then acted upon. Charles Darwin said “the species thatsurvived were not the most intelligent – they were the most adaptableto change” .

• Every business and every product/service is open to competitionand every activity’s value is open to challenge. Potential competitorscan come rom anywhere in the world and they are no longer easyto recognise. In many UK business sectors, oreign competitors aresystematically investing more in R&D, and Innovation

• Although size and global coverage make some companies verypower ul, fexibility, innovativeness, and speed to market are still verycompetitive responses.

• All products and services grow and mature in a manner generallydescribed by an S-shaped Li e cycle curve (Diagram A). Their positionon this curve dictates a characteristic response (e.g. investment andprocess improvement in the growth phase, cost reduction, economyo scale and minor novel variations in the mature phase, and an exitstrategy and replacement in the decline phase). The time betweeninnovation and maturation is becoming ever shorter.

• New and better quality business is an important sa eguard againstbusiness decline and ailure. Failure is most common at the end o arecession and small businesses are the most susceptible. The maincauses are, in order o importance: loss o market, lack o nance, baddebts and management shortcomings.

6

1. The Business Climate Today



7

A. Product / Service Life Cycle

Key Issues

Activities

Innovation Growth Maturation Decline

TIMELINE

VOLUME

EstablishCustomer Need

• Launch• Promotion / Marketing

• ModelImprovement

• Cash Using

• Standardisation• ProcessImprovement

• Reinvestment• Cash Neutral

• Cost Reduction• Economy ofScale

• Novel Variations• Cash Generating

• Declining Cash• Exit Plan

SupplyFeast/Famine

MarginErosion

Replacements



A business that is not growing through new product and serviceintroduction is likely to be in decline, as its existing sales port olioinexorably matures.

• The role o business is to create wealth (added value). This added valueis used to reward the stakeholders (employees, providers o capital andgovernment through corporation tax) and then to sustain and developthe business through investment or growth (R&D, capital expenditureand amortisation o acquisition goodwill). Failure to create enoughadded value will jeopardise growth.

A Guide To Value Added (or Added Value)Value added (VA) is a simple and good measure o how well a business isdoing - de ned as: sales - cost o bought in materials, components and servicesVA is easily calculated rom Annual Report gures as operating proft + employee costs + depreciation + amortisation VA per employee (labour productivity) and VA per employee cost plusdepreciation (value adding e ciency) can be used to compare with

other similar companies. Companies who consistently have a valueadding e ciency below 100%, are generally heading or di culties.Good strategic choices, operational excellence and wise and balancedinvestment are the precursors to VA growth, high productivity and goodvalue adding e ciency.Find out more about VA and compare your company to others in yoursector on the Value-Added Scoreboard at www.dti.gov.uk/innovation

• Every business needs strategic purpose and direction, as well as theability to respond quickly and fexibly to change and maturation. Thisshould be embodied in a business plan that should have at its heart anappropriate mix o improving per ormance (maintaining and improvingmargins) and growth (investing in new products and services).

• Michael Porter de nes strategy as “a combination o the ends or whichthe rm is striving and the means by which it is seeking to get there” .Gary Hamel believes that “the only thing that matters about a strategyis how di erent it is rom other strategies” . However a strategy has novalue unless it is combined with the commitment o those involved todeliver it.

• Growth can be organic (internal) or by acquisition. Evidence rom themarket place suggests that as many as two thirds o acquisitions resultin loss o value through overpayment, poor integration and loss o ocus.The assimilation o a di erent culture can be a slow and di cult process.8

2. A Responsive Business Strategy



• A good business plan will cover the aims o the business and thestrategy or accomplishing them, (Diagram B). It will include theprocurement and maintenance o key assets ( xed, people andintellectual capital) and the process or their exploitation, as well asthe risks, the necessary investment and its management. Milestones,targets and timings will also be key eatures o the plan. Above all agood plan will be fexible and responsive to the changes in the externalenvironment.

• The old model or business success o mastery o capital/labour andproduction is no longer relevant. The new emerging model or today’srapidly changing world involves:

The New Model or Business SuccessUnderstanding - market/customer needs rom customer intimacyAccess - knowledge/skills and ideas through networkingInnovation - turning ideas and creativity into success ul new business

• Investing in new and better products or services requires innovation“the success ul exploitation o new ideas” . No idea or innovation issuccess ul until its commercial mani estation is purchased in signi cantamounts.

• Innovation should not necessarily be con ned to products andprocesses. The most radical innovations or an organisation can o tenbe those o business processes and management. These are innovationsthat change the way things are done, with the bene ts indirectlyimproving the business. They usually involve applying new principleso management (e.g. outsourcing, collaboration, decentralisation andemployee empowerment).

• The evidence shows that innovative businesses deliver above averagesales growth and pro tability. Many success ul businesses operate withtargets such as 30% o sales rom new product/service introductionsmade in the last 3-5 years.

9



0

B. An Innovative Company Business Plan Template

1. Executive Summary • Simple, clear and memorable

2. The Business • History (where the business has come rom)

• Organisational structure

. Strategic Purpose • Vision and aims and Direction

. Current O erings

•Description o products and services

• The markets served and major customers.

• The competition

• Sales/pro t/contribution o each product or service

• Per ormance enhancement plans

• Li e cycle positions and projections or market growth

5. Capabilities • Key suppliers and relationships

and Strengths • Production acilities and technologies (technologyplat orms)

• Market and customer knowledge and intimacy

• Competitive technical and other skills

6. Future O erings • Growth strategy (organic/collaboration/acquisition)

• Signi cant/step change (growth) innovation plan,with timings

• Desired new product/service goals (e.g. 30% salesrom launches in the last 3 years)

• The generation o ideas and management o aninnovation pipeline

• Priorities

7. Finance • Historical results (Pro t/Loss, Balance Sheet andValue Added accounts)

• Strategic projections o investment, sales, cash fowand added value

• Development milestones

• Risk analysis

• Sources o nance (internal/external, debt/equityand gearing)

8. Investment • Investor attractiveness and return requirements

• Covenants and restrictions

• Investor exit strategies

• Key players and managers and their retention / incentivisation



Many companies who want to innovate fnd that they must frst increasetheir motivation and improve their profciency.

• Based on surveys o why companies don’t regularly innovate, sixbarriers to product and service innovation have been recognised; threerelating to the motivation to innovate, and three to the di culties oactually doing it. Each o these is addressed in a chapter in this guide.

Motivation:Failure to recognise change/threats/opportunities (Chapters 1 and 2)Lack o ambition and vision (Chapter 5)Risk aversion (Chapter 6)

Profciency:Lack o market understanding (Chapter 4)Lack o expertise in the process (Chapter 3, 5 and 7)Lack o nance (Chapter 6 and 8)

Pro ciency can be airly easily improved, but motivation, which is the key

to innovation, is much harder.

The Six Approaches To InnovationThe choice o approach depends on the business strategic purposes anddirection, its capability, its market understanding and the size o the riskinvestment available. They are, in order o increasing investment:

1. Incremental - Continuous product and processimprovement.

2. New design - Using design and customisation to add value.. New business model - Embedding the product inside a service. Increasing unctionality - e.g. Adding so tware technology

5. Applying technology - Fusing di erent technologies to add value6. Breakthrough - Exploiting new technology

The rst three can be loosely categorised as market pull and the latterthree as technology push.

11

3. The Tactics of Innovation



• Research and Development (R&D) is o ten an important part oinnovation, and there is a well-established correlation between R&Dinvestment and sales growth, value-adding e ciency and also marketvalue. Involvement in R&D can provide technology, knowledge andexpertise, but this can also be obtained rom elsewhere. An importantpre-requisite is to have the necessary skill to recognise, translate andapply the technology, wherever it comes rom.

• “Research is the trans ormation o money into knowledge, whilstinnovation is the trans ormation o knowledge into money.” Publicsector R&D is mostly Research (the creation o explicit knowledge whichis published and available to all) whilst private sector R&D is mostlyDevelopment (the application o one or more technologies to produce adesired and saleable outcome).

• The ability to create new ideas, to evaluate them and to access anduse knowledge and skill to develop them is undamental to businessinnovative success. Business networks, whether local, sector ortechnology based are excellent sources o ideas, knowledge, supportand encouragement, and possible collaborators or partners.

• Universities are very good sources or gateways to speci c technologicalknowledge. Most Universities have Technology Trans er, BusinessService or Outreach o ces sta ed to help the interaction withappropriate academic sta . It has been shown that 17% o businessesdirectly use the university science base, whilst 55% make indirect use.

• A University may be used as a source o tacit knowledge (consultancy),a gateway to leading edge explicit knowledge (consultancy) or a placeto generate new required knowledge (collaborative research). The bestand most productive interactions are built up over time, with trust andrespect or each other’s needs. Other use ul and valued interactions thatlead to good quality knowledge trans er are placements, recruitment,and licensing or spin-outs o intellectual property.

• Knowledge trans er is mainly a tacit (person to person) process.Tacit knowledge o ers potential competitive advantage since it is notnormally available to others and is tailored to the interacting parties.It has been shown that three quarters o the most importantcontributions o academic research to technology development are tacit.

2



Innovation is o ten seen as a technical activity, but ultimate success ismeasured by acceptance in the market place.

• Signi cant investment is needed to understand potential customerneeds, the dynamics o the market, and the possible role o brandingand marketing.

• Function (what it does) and orm (how it is presented) are the keycomponents o the design o a new product or service. Design can playa very important part in the attractiveness o a new product and its value

is o ten considerably underestimated.

• The design or presentation must also be geared to speci cally appealnot only to the user, but also to those (i these are di erent) who willmake the actual purchasing decision and the criteria which they willapply e.g.:

Person making purchasing decision CriteriaPurchasing Manager Price and volumeTechnical user Speci cation and per ormance

Consumer Perceived value and emotionalresponse

Designing Consumer ProductsThe needs o a consumer, can be considered using Maslow’s hierarchyo needs, where the most basic needs must be ul lled be ore the higherones come into play:

5. Personal Development Freedom, knowledge and personalisation

. Sel esteem Feel good actor

. Esteem o others Brand recognition

2. Belonging Form and acceptance

1. Survival Function and utility

In the developed world, whilst unction and orm remain undamental,some satis action o the higher needs is also now a pre-requisite orsuccess; or example brand recognition (e.g. ashion, designer productsetc.), eel good (e.g. entertainment, cosmetics, health, etc.) and personal

reedom (e.g. personal transport, high unctionality, customisation,

service, etc.)

1

4. The Needs of the Customer



• A good potential new product must have a customer perceived value(price) very signi cantly in excess o the estimated costs o providing it,since there will inevitably be some unexpected additional costs duringthe innovation process and later price erosion through competition.

• Customers, or consumers, are seldom able to consciously express theirlatent needs, although they will usually recognise the solution whenshown it. Listening to customers is there ore not su cient to understandwhat they might want. Customer and market immersion involves closely

observing what they do with current products or services, and creativelyidenti ying what is either missing, not satis actory or could be improved.From this a potential product/service idea can be envisaged.

• There is considerable evidence that in depth immersion leads to intuitionand ideas, which can be turned into the oundations o innovation. It isimportant to turn any promising idea into a prototype that can be lookedat, played with and commented upon by the customer, as soon as ispracticable.



Inspirational top leadership is critical to success ul innovation.

• Top leadership must develop and communicate a clear and simplevision, and the strategy or achieving it. It also needs to provide thepeople and resources needed, monitor the external environment andadjust the direction as necessary.

The Key Qualities o an Inspirational Leader

Personal make up Ambitious, committed, demanding, con dent, and

courageous

Novel outlook Lateral, rule benders, risk takers, customerobsessed and visionary

Turn on capability Listen, involve, trust, care and have un

• Top leadership must also be mind ul that the more power isconcentrated, the less easy it will be or the organisation to adapt toexternal changes. There ore distributing power within the organisationis important, to increase its resilience to change.

• An organisation that is serious about innovation Connects with customers, users and markets Creates success ul new ideas Inspires its people to innovate

• These desired behaviours require a lot o promotion; “Without crediblecommunication, and a lot o it, the hearts and minds o others are never

captured” – John P Kotter, Harvard Business School. To bring aboutchange the message needs to be consistent and relate to “what’s in itor me” . An organisation capable o success ully harvesting its peoples’

potential, and their ideas and can be thought o as an “UnlimitedCompany” with a culture where “ordinary people can achieveextraordinary things” .

• An organisation that promotes innovation as a key output must couplecreativity, calculated risk, and entrepreneurial spirit with business andproject delivery disciplines. An innovative organisation is, there orealways a subtle and shi ting balance between the two di erent cultureso creativity/ reedom (inspiration) and control/delivery (perspiration).This is the art o innovation leadership.

15

5. Leadership in Innovation



• Innovation leaders are change agents. They must be catalytic in bothproducing and adopting innovations. They must create the right climate,

nd supporters and backers, and recruit, manage and develop thedelivery team. They must also create stretch goals and inspire theirachievement through empowerment; provide encouragement and helpto overcome problems and di culties; and understand and react to theexternal world.

• Individuals are potentially susceptible to our key motivators, namely

achievement and success, personal development o their skills andabilities, recognition by their peers and reward. The last is the leastimportant. An innovative organisation will seek to ensure that as manyo these are satis ed as possible.

• People cannot be given empowerment; they must be encouragedto actively take it. They will take it when they accept the goals andrecognise that both reedom and support are available. “People cannotdiscover new oceans until they have the courage to lose sight o theshore” .

• Empowerment engenders personal leadership. This personal leadershipis about understanding onesel and hence others, controlling emotions,seeking to create one’s uture (the entrepreneurial mindset), buildingrelationships, and communicating.

The Entrepreneurial Mindset

Change creates opportunity

Knowledge is power

Innovation is the keyRisk is acceptable

Failure is not an option

• It is very important to ensure that the creative and problem solving stahave meaning ul interaction with customers in their environment, sothat they can recognise potential needs and develop novel solutions.

6



Innovation is a risky business, but not innovating is even riskier.

• Risk is the product o the probability and impact o a negative outcome.Understanding, evaluating and managing this is an essential part o theInnovation process.

Risks From InnovationOperational Failure to meet speci cation, costs or launch date

Damage to company reputation and brandCommercial Consumer resistance

Competition

Financial Investment yield is less than planned

Debt/equity investors become dissatis ed

All o these are inter-related and a negative outcome in one area is likely tocontribute to negative outcomes in the others, particularly nancial.

• Potential risks should be considered in terms o

- Impact (size o nancial loss)

- Likelihood o occurrence (% chance o happening)

- Ways to reduce them

The rst two are multiplied together to give an indication o signi cance.It is obviously not wise to take a large risk whose negative outcomecould severely damage the uture o the company.

• Operational risks can usually be controlled. Commercial risks aremore problematical and can only be reduced by good intelligence,test marketing and intellectual property protection through patents orsecrecy and speed to market. Building in large margins and reasonablecontingency costs can alleviate some nancial risk.

• Ultimately the up ront investment o money in innovation, throughknowledge, prototypes and marketing, represents most o the risk. Thismay be small i the innovation is incremental (e.g. product or serviceimprovement), or larger i the novelty is greater.

17

6. Risk and Reward



• The size and the period over which the investment is planned shouldbe determined in advance and an appropriate commitment made. I theinnovation investment involves R&D, then it may be eligible or a taxcredit – see www.hmrc.gov.uk/randd

• All opportunities or innovation should have the balance betweentheir risk and reward assessed, to determine their attractiveness. ”Riskand reward travel side by side. Avoid one and the other will also pass

you by.”

• A projected risk-reward cash fow over time relationship (Diagram C)illustrates the investment risk and the time to reach payback and reward.Slippage at any stage can have signi cant multiplying e ects on thetime to reach reward.

• This investment risk (the cost o innovation) can be nanced internally(through use o retained earnings) or externally through debt or equity.The latter, however, brings detailed external scrutiny (due diligence) andthere ore less reedom.

Risk Reduction Strategies

Advice Mentors, Banks, Pro essionals, Consultants, etc.

Joint Venturing Sharing development ( nancial or knowledgepartnership) or a share o the reward

Licensing Giving permission to someone else to develop anduse the patented idea in return or a modest eeand royalties on the success ul product

Public Sector Support Advice, grants and tax credits

• The returns rom licensing are relatively small, since the licensor takesmost o the risk. However, licensing is the best route or exploitation onon-core inventions and technology.

8



19

C. Risk Reward Cash Flow and Timeline

Cash Flow

TIMELINE

Spend Launch

Risk Reward

Break Even Pay Back

Positive

Negative



Innovation is a key business process and is essential or both improvingper ormance and growth.

• Most businesses innovate without necessarily realising that they aredoing it. Like all business processes, it is best carried out in a reasonablysystematic ashion.

• The process starts with an idea and ends with success ul and pro tablesales. It is easiest to describe in a linear ashion, but in practice manyactivities o ten take place together, or in a di erent order, and may

require recycling. In general, the ront end is more chaotic and the backend more de ned.

• The “Stagegate”™ model breaks activity down into discrete linearunits. Progression only occurs a ter satis ying certain criteria, designedto ensure that the investment is minimised in the early stages and inecessary the project abandoned sooner rather than later. In this way aport olio o projects in an “innovation pipeline” (sometimes called theinnovation unnel because many initial ideas are re ned down to only a

ew market entry projects), can be created, with their progress matchedto suit the available unding, resources and desired entry time into themarket place. (Diagram D). ™ Robert Cooper

• Typical stages in the pipeline are Concept, Feasibility, Developmentand Implementation. Between each stage are notional gates where theidea/project is assessed against selected criteria to determine whether toprogress it.

A Simple Stagegate Model

Concept Idea Generation

A very large number o ideas are considered against strategic t, marketneed, impact on the company and the chances o technical success, todecide which are worth exploring urther.

Feasibility Proo o Concept/PrincipleProjects to go into development are selected on the basis o marketacceptability, achievability o technical requirements, risk/reward criteria,and the availability o the required resources (people, acilities and money).

Development Development, Prototyping and TestingProgress to market is dependent on satis actory eedback on the

prototype, an assessment o the competitive response, and deliverablestrategies on sourcing, marketing and pricing/ margins.

Implementation Marketing and Launch0

7. The Innovation Process



• Ideally a business should always have a living pipeline o innovationprojects with some redundancy, so that a project that ails to meet thedesired criteria can quickly be replaced by another that potentially does.It is also important to prevent pipeline constipation, by taking decisionsas early as possible.

• When a project reaches the Development stage, it should be managedormally by a project manager, against a project plan that extends to

market entry to ensure that it success ully meets its technical, time and

cost expectations.• Good idea generation is essential to create a healthy pipeline and is

o ten a much-neglected area. Albert Einstein said, “Imagination is moreimportant than knowledge” .

Sources O IdeasIdeas arise mainly rom:

- Customer intimacy, immersion, and interaction,- Employee involvement, in an open and receptive organisation- Networking, with exposure to other businesses, and technologies- Research and technology development.

It has been estimated that about 60% o good ideas arise rom the rst twoareas. Idea generation is acilitated by inspirational leadership and an openlistening culture, with good eedback.

• Using an “Innovation Ideas Team” is a good process or developing andexploiting ideas. Typical characteristics o the team are:

1. Small and diverse, with a mix o expertise and creativity 2. Semi-autonomous, time-limited and operating to given rules oengagement, with a trained acilitator

. Focused on solving problems, exploiting technology, or creating newmarket opportunities

. Starts in open mode (idea generation) and then closes down (ideaselection, evaluation and improvement) to only a ew developed ideas,which can then be tested

21



• A new idea that is proved by example is an invention, and may beprotected by ling as a patent. A patent is the granting o a legalmonopoly position in return or ull disclosure. Alternatively, it may bebetter to keep the invention secret, i policing the monopoly would bedi cult. A patent is the right to prevent unauthorised use o an inventionwithin a particular territory or a limited time. To quali y or a patent,the invention must be novel, not obvious and not publicly disclosedanywhere in the world.

• The ling and granting o a sound patent is a somewhat complexprocess involving de nitions, priority dates, territories covered, etc.Pro essional help rom an Intellectual Property lawyer should alwaysbe sought, both or the application process and or advice on practicalimprovement to the invention and uture protection. The Patent O ceprovides in ormation and advice on patents, copyrights, designs andtrademarks.

2

D. Innovation Pipeline (Funnel) - Stagegate Model

Ideas

Drivers• Technology• MarketNeeds

• BusinessStrategy

• Competition

GATENeeds

PrioritiesMarket Size

Customer BenefitAvailability of PoC Funds

GATEMarketing / USP / LaunchSourcing / Growth Rate

Price / Benefit

GATEIP Position

Exploitation RouteInvestment Risk / Reward

Chances of SuccessAvailability of Finances / Resources

Proof of Concept Development /Prototype / Testing

Implementation



An idea can be exploited by creating a dedicated new company to carryit out.

• Incorporation allows the raising o equity or investment in the businessthrough the issuance o shares. The company is called “a start-up” or, ithe idea originates in an existing company or another organisation like aUniversity, it is termed a “spin-out”.

• Usually the company is started by an entrepreneur, an inventor with“personal ownership” o the idea and a single-minded vision or its

exploitation.

Assets o a New Company

These are likely to be

1. Intellectual property (rights based on explicit knowledge e.g. patents,copyright, design rights and trade marks).

2. The knowledge, energy and vision o the inventor or entrepreneur.

The company’s name, logo and website will also become it’s intellectualproperty.

• It is essential to ensure that the company owns the relevant intellectualproperty (I.P.), that this covers all that needs to be protected, that thereare no restrictions on the company’s reedom to operate and that anyspecial resources required or development can be easily acquired.This process is called Due Diligence. It is also important to ensure thatthe entrepreneur/inventor is motivated to achieve success, by having asigni cant stake in the outcome.

• The venture should be incorporated as a private company limited byshares (liability limited to share cost) and registered at CompaniesHouse (CH). It is not di cult, but it should always be done usingpro essional advice and help. There are our key documents required toproperly launch a company:

2

8. An Innovation Start-up



Incorporation Documents

Memorandum o Objects and powersAssociation Authorised share capital ( led at CH)

Articles o Association Classes o shares, pre erential rights, andinvestor rights. Internal management ( led at CH)

Shareholders Agreement Number o shares, their price and allocation. Shareholder rights, warranties and participation

Business plan The Opportunity, prospects, strategy andoperational plansFinance/ re nance and exit strategy

• The Business plan or exploitation, which also acts as a prospectus orpotential investors, must show convincingly:

1. How the idea/invention will be developed and success ully exploited

2. The capability and experience o the team responsible . How the cost o this will be nanced, including second and urtherrounds o nance

. The proposed exit mechanism and timing, and the expected realisationvalue or the shareholders

• Other key questions that need to be addressed by the Business plan are:

- what is unique about the innovation and is it protected (e.g. patents) ?

- who will buy it and why ?- what price will it sell at and what will it cost to deliver ?

- what will be the competition and how will it be resisted ?

- when will the company start receiving income and when will itbreak even ?

• The value o an idea/invention grows at each stage o its developmentin the innovation pipeline (Diagram D) e.g. development o I.P., proo oprinciple, prototype, test marketing, and success ul launch. These cost

money, and must be nanced by the ounding and uture shareholders.Banks are very reluctant to lend to start-up ventures with no signi cantassets or security, but they can become involved at a later stage.



• Shares or units o ownership in the company (the equity) should beallocated to the ounders to represent the agreed perceived value o theircontribution. This may be capital, knowledge/Intellectual Property, orskills (technical, market and management). Spin-outs rom Universitieswill normally assign a signi cant quantity o shares to the institution aswell as the inventor, in recognition o its host role in the creation o theintellectual property.

• Capital rom the initial investors is required to rst secure and i

necessary expand the ounding I.P. and then to go through the Proo oPrinciple stage o the Innovation Pipeline. A second round o investmentwill probably be needed or the Development stage and sometimes athird round or the Launch. Failure to adequately und, at any stage, maycause the venture and company to ail.

• Cash is the li eblood o an Innovation Start-up company. Constantattention is required to make it available, to maximise its e ect and toprovide new trans usions at critical stages.

• Raising nance takes a considerable time. There are our potential

sources:

Start-up Finance

Equity Investors The major source is cash or shares (3-7yrs investortime horizon). Founding and later stage investors.

Borrowings Unsecured loans rom amily or riends are o ten usedas seed unding be ore company ormation and laterconverted to equity.

Grants Modest Public sector grants to help start up businessese.g. University Proo o Concept unds, DTI andDevolved Administration/Regional DevelopmentAgency awards are available but demand alwaysoutstrips supply.

Earnings Sales o services, based on existing company assets.There are limited opportunities and they divertattention rom the new venture.

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Equity Investors

Small/Medium Sums

Business Angels Private wealthy individuals, operating singlyor in groups. They o ten help with contacts,strategy and management.

Corporate Venturers Big companies interested in the technologydevelopment. They can provide both moneyand help.

Regional and UniversitySeed Corn Venture Funds Locally based unds o ten linked with regional

strategies. Publicly and privately nanced

Larger Sums (£1M+)

Venture Capital rms Financed by parents or institutions. More likelyat 2nd and 3rd round o nancing.

Venture Capital trusts Quoted vehicles o ering tax incentives toinvestors. Prepared or risk.

• There are three requirements or an equity investor to consider, be oreinvesting.

1. Belie in the innovation and the entrepreneur’s commitment to makeit success ul

2. The business plan to achieve success must be credible (Duediligence)

. The reward, the investor’s nal share o the potential valuation at exit,must be commensurate with the risks

• The ounder investors usually ask or a substantial initial share (25-40%),as they bear the highest risk and their share o the reward will be dilutedby second and third round investors. Inventors and entrepreneursneed to remember that a smaller share o something, ully nanced orsuccess, is more valuable than complete ownership o an unproven un-

nanced idea.

• It is important to have a clear investment story (prospectus), thatremains consistent and also to regularly communicate progress withthe shareholders.

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• A Board o Directors granted their powers by the Articles o Associationgoverns the Company. The Directors duties are to act with skill, care andgood aith in running the company, in the interests o the shareholdersand creditors. Start-ups usually have one or two executive directors(employees; one being the Chie Executive) and several non-executivedirectors (including the Chairman). The non-executive directors arechosen or their knowledge and contacts o ten relating to the area obusiness. Sometimes the major investor appoints a nominee non-executive director. However, all directors are equal and must act

corporately and not represent any special interests.

• Entrepreneurs, by de nition, will try to see their idea right through tosuccess ul exploitation, as the Chie Executive. Inventors, however,o ten do not possess all the skills necessary or success ul innovationand although they may take the role o Chie Executive at the proo oprinciple stage, where technical knowledge is the key, they will need tobe replaced by someone with a broader business skill set to guide theventure through development and the company to success. This can bea di cult and pain ul transition.

• Newly started businesses can bene t considerably rom being located inan incubator. Incubators provide cheap accommodation, and a range oappropriate skills and services, as well as advice. Statistics show that thesurvival rate or new businesses in incubators is typically between 80-90%.

• Investors in start-up ventures normally operate in a time rame o 5-7 yearsor realisation o their added value. This is achieved by an “exit event”.

Exit Events

Trade Sale Sale o all shares to a trading company

Re-fnancing Sale o all shares to a Venture Capitalcompany (who may restrict the exit o the keymanagement shareholders)

Initial Public O ering Listing or foating on the London Stock(IPO) Exchange or Alternative Investment Market

(AIM)

Management Buyout Sale to the existing management, usually(MBO) involving signi cant bank loans

• The timing o such an event depends on the success o the venture, theneed or more nance, the needs o the investors, and market conditions.

27



There is a lot o encouragement, advice and help available.

• The simplest and best orm o help and encouragement is that rom businessriends and colleagues, who understand what you want to achieve and the

kind o problems involved. Similarly, support rom acquaintances in ormalbusiness networks is o ten available.

• Belonging to and contributing to at least one business network is veryworthwhile. It keeps you in touch with what others are thinking orexperiencing and allows you to meet people who may be able to o er advice

or mutual help, and o ten provides a gateway to tried and tested publicsector help. Suitable business networks can be locally based (e.g. Chambero Commerce or University), sector or technologically ocussed (e.g. tradeor knowledge trans er organisations) or national (e.g. Con ederation oBritish Industry, Institute o Directors, EEF – the Manu acturers Organisation,Federation o Small Businesses)

• Good organisations also encourage and sometimes subsidise their stato belong to their appropriate pro essional bodies (e.g. management,marketing, scienti c, engineering, etc.), which provide regular sources oin ormation, run events o relevance and sometimes provide training and

accreditation.

• Pro essional advice and help is essential or legal matters (agreements,contracts and intellectual property), nancial matters (loans, solvency andtax) and registration with Companies House.

• Exploitation companies can provide invaluable support or the exploitationo inventions and intellectual property. They provide intellectual propertyadvice, access to Proo o Concept unding, due diligence, research contracts,business plan development, company ormation, licensing agreements,management skills, incubation services and access to investment.

They usually provide their value adding help in return or an appropriatemodest share o either the company equity or it’s uture licensing income.These companies are mainly ound at some Universities, at some otherpublic sector research establishments, and also at the NHS regionalinnovation hubs.

• Incubators, Science Parks and University Outreach o ces can also providevarying degrees o help to clients.

• Advice and help is available rom local public sector support organisationseither ree or at low cost, or example rom Business Link or the Manu acturingAdvisory Service. Public sector grants or R&D, Knowledge Trans er andCollaborations are available rom the DTI and export services rom UK Tradeand Investment (UKTI). The rst two can now be accessed locally throughRegional Development Agencies (RDAs) or the devolved administrations.There is also an R&D Tax Credit available rom the Inland Revenue.

8

9. Help and Encouragement



29

Public Sector

DTI Global Watch

R&D Tax Credits

• Companies can deduct up to150% o expenditure on R&Dactivities when calculating

pro t or tax purposes• In some circumstances

SME’s can claim cash

• Full details o eligibility andhow to apply available at:

www.hmrc.gov.uk/randd/

• Helps businesses to identi yand access technologies andpractices rom overseas.

• International TechnologyPromoters

www.globalwatchservice.com

UK Trade and Investment

• Network o TradeDevelopment O cersbased at British Embassies,Consulates and HighCommissions provide accessto overseas markets

• Impartial, expert advice romInternational Trade Advisors

• Tailored practical supportservices help businessestrade internationally

• Con dential service helpscompanies locate the UK’sR&D Centres o Excellence

www.uktradeinvest.gov.uk

Technology Programme

Patent O fce

• Commercial services to helpyou explore and assess yourideas.

• Searchable databases andin ormation on how patents,designs, trademarks andcopyright can protect you.

www.patent.gov.uk

Aims to stimulate innovationin the UK economy throughhigher levels o R&D andknowledge trans er. Providessupport or:

• Collaborative Research &Development

• Knowledge Trans er Networkswww.dti.gov.uk/technologyprogramme

Manu acturingAdvisory Service

• Practical advice romexperienced manu acturingadvisors and specialists

• Flexible service tailored tomeet regional priorities andneeds

• Constructive opportunitiesor learning, networking and

sharing best practice

www.mas.dti.gov.uk

DTI Innovation

Design Council

• Helps UK businesses usedesign to innovate, developnew products and open up

new markets.• Website with evidence, best

practice case studies andguidance about how designgenerates competitiveadvantage.

www.design-council.co.uk

• Benchmarking againstleading companies in theR&D and Value-Addedscoreboards.

• Innovation sel -assessment

• Knowledge trans erpartnerships

• This guide on linewww.dti.gov.uk/innovation

Business Link

• Provides in ormation,advice and support to helpbusinesses start up andgrow.

• Website helps businessescomply with regulation andimprove, using online toolsand in ormation rom acrossGovernment.

www.businesslink.gov.uk



Networks

Federation o Small Businesses (FSB)

“The Federation o Small Businesses (FSB) is the UK’s leading non-partypolitical lobby organisation existing to promote and protect the interestso all who own and/or manage their own businesses in the UK. With195,000 members, the FSB is also the largest group representing theinterests o UK small businesses and the sel -employed.”

http://www. sb.org.uk

British Chambers o Commerce (BCC)

“The BCC is one o the leading business organisations in the UK, combiningunique geographical spread with extensive multi sectoral, multi sizedbusiness representation. At the heart o their local business community,Chambers o Commerce ocus upon: Policy, Representation & MediaPro le, International Trade, Skills Development, and Business Services.”

http://www.britishchambers.org.uk

Institute o Directors (IOD)

“The IoD is a pro essional network spanning the spectrum o businessleadership, rom the largest public companies to the smallest private

rms. Core activities are based on the IoD mission to support, representand set standards or directors, and range rom the provision o practicalbusiness tools to pro essional development training and brie ngs onpolicy issues.”

http://wwww.iod.com/

Con ederation o British Industry (CBI)

“Aims to help create and sustain the conditions or businesses in theUnited Kingdom to compete and prosper or the bene t o all. The onlybusiness lobbying organisation with o ces in Washington, Brussels andBeijing, the CBI represents some 240,000 businesses employing a thirdo the private sector work orce.”

http://www.cbi.org.uk/

0



EEF: The Manu acturers Association

Provides advice and a wide range o business services or manu acturerson a regional basis.

http://www.ee .org.uk/

Trade Association Forum (TAF)

Directory o trade associations, ederations and guilds.

http://www.ta orum.org/

1



Specialist Advice

Finance

Institute o Chartered Accountants England and Wales http://www.icaew.co.uk/

Institute o Chartered Accountants Scotland http://www.icas.org.uk

Institute o Chartered Accountants N Ireland and Ireland http://www.icai.ie/

British Venture Capital Association http://www.bvca.co.uk/

British Business Angels Association http://www.bbaa.org.uk/portal/

Legal

Law Society England and Wales

http://www.lawsociety.org.uk/ Law Society Scotland

http://www.lawscot.org.uk/

Law Society N Ireland http://www.lawsoc-ni.org /

Institute o Intellectual Property http://www.ip-institute.org.uk/

Other Business ServicesChartered Institute o Marketing

http://www.cim.co.uk/

Chartered Institute o Purchasing and Supply http://www.cips.org/

Chartered Institute o Personnel Development http://www.cipd.co.uk

The British Quality Foundation

http://www.bq .org.uk

2



Also Use ul

English Development Agencies http://www.englandsrdas.com/

Details o each region, and can put you in touch with business supportand advice.

Devolved Administrations

Wales http://www.wales.gov.uk/

Scotland http://www.scotland.gov.uk/

Northern Ireland http://www.nics.gov.uk/

UK Science Park Association (UKSPA) http://www.ukspa.org.uk

Advice on starting a business and accessing nance. Finding anappropriate science park.

UK Business Incubation (UKBI) http://www.ukbi.co.uk

Directory o business incubators by region

Applied Industrial Research Trading Organisations (AIRTO) http://www.airto.co.uk

Directory o sector technology organisations o ering help.

Universities UK (UUK) http://www.universitiesuk.ac.uk

A directory o Universities in the UK.

DTI is not responsible or the content o external Internet sites.



• Businesses must be highly aware o the environment in which theyoperate and the wider changes taking place.

• Innovation is an essential business strategy to add value, and cantake many orms. It is the only way to meet and stay ahead o thecompetition.

• Innovation will not take place without inspirational leadership andpower ul motivation.

• An innovative organisation will have awareness o customeropportunities, ambitious and entrepreneurial leadership, the ability togenerate and develop new ideas, and the availability o the necessaryresources to achieve success.

• Innovation is a key business process and can be managed using apipeline/ unnel model, encompassing our basic stages. Movementdown the pipeline is governed by evaluation at each inter ace or gate.

• There are risks to innovation, and these must be evaluated andconsidered against the potential reward. However, there are ways to

manage and reduce them. There are also signi cant amounts o adviceand help available, to those who seek it.

• Innovations using the vehicle o a new company “start-up”, requireconsiderable additional e ort to raise the risk nance through equity,probably with several rounds o re nancing, and then to provide anappropriate exit event or shareholders to realise the added value,resulting rom a success ul exploitation.

10. Summary



His experience and expertise are in new productinnovation, Science and Technology strategy,R&D, Business-Higher Education partnerships andNetworks. He has spent 35 years in the Chemicaland Pharmaceutical Industry where his last post wasResearch Manager and Chief Scientist for ICI plc. Hewas awarded a CBE in the 2000 New Year’s HonoursList “for services to the Chemical Industry”.

He has been an Industrialist Advisor to the DTI, for the last seven years,where his special interests are in Innovation, Networks, Business-HigherEducation partnerships, the Chemical industry and regional business/ science policy.

He is Chairman of several exploitation companies, a Director of theBioscience for Business Knowledge Transfer Network, and has strong linksto several Universities. He has also served on a number of National Panelsrelated to research.

Author

Dr John Beacham, CBE, DSc, FRSC



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60 minute guide to innovation - DTI

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