Innovation Management

1. Creating sustainable competitive advantage through innovation

Innovation“Innovations are qualitatively new products or processes that are significantly different

from the current status”

Only relevant if it creates value for customers “Great new ideas that are turned into hard cash” (3M)

Innovation vs. Invention

Innovation = new target market, blue ocean market driven (outside-in)Invention = old target market, red ocean technology driven (inside-out)

How “new” is an innovation?

1. New-to-the-world products and really-new products (Prius)2. New-to-the-firm products or new product lines (Samsung Galaxy)3. Additions to existing product lines (Dyson hand-hoover)4. Improvements and revisions to existing products (iPhone 4S)5. Repositionings (Starbucks)6. Cost reductions (Nespresso -> capsules)

Innovation Radar

Offering (WHAT) (Prius)o Platforms (3M)o Solution (Claas)

Customers (WHO) (Wii)o Customer Experience (Starbucks)o Value Capture (iPhone)

Process (HOW) (Southwest Airlines)o Organization (P&G)o Supply Chain (Dell)

Presence (WHERE) (Netflix)o Networking (Facebook)o Brand (BMW)

Five Sources of Innovation Strength (BCG 2013)

1. Top Management Commitment to Innovation2. Leveraging Intellectual Property3. Managing the Portfolio of Innovation Activities4. Strong Customer Focus

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5. Insisting on Strong ProcessesInnovation has an impact on company performance (Porter) Significant and sustainable competitive advantages Missed innovations life-threatening crises Decreasing product life cycles require continuous innovation Commoditization and downward pressure on profit margins avoided by

differentiation through innovationo “me-too” strategies unsuccessfulo Cost cutting, acquisitions, treasury: only short-termo Differentiation only through innovation

Disruptive Business Models come often from other industries or start-ups (e.g. Netflix, amazon.com)

SONY has missed major innovations other brands dominate the markets SONY once created

Strategic Gap

= evaluation of the difference between a desired outcome and an actual outcome. 

e.g. Intel Chip “Prescott” is 30% cheaper than the old chips; however, it’s not a major improvement in comparison to the old chip rather a process innovation

Customers might not buy these chips, but future chips are surely cheaper & better

Growth and Value Creating through Innovation – The Apple CaseHow Apple fills the Strategic Gap

Samsung: existing businesses will grow and their underlying capabilities are leveraged to expand into new areas

Sustainable differentiation through integrated R&D, Patenting and Branding R&D = engine for innovation Innovation = better for advertising create strong brand

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Successful differentiation through integrated R&D, patenting and branding Focus on USP with experienced customer value Protection by patents Focus of the “more efficient branding campaign”

Unique USP Experienced customer/user value Bases on core competences Protected by patents and know-how

Branded Market communication Positioning Recall Orientation towards target segments

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2. Disruptive technologies and resistance to innovation

Disruptive and Sustaining Technologies

Sustaining Technology Performance of established products improved along dimensions customers have

historically valued Performance dimensions derived from major customers

Current performance measures Current value network

Disruptive Underperform on performance dimensions of mainstream market Appeals to fringe customers (new customers) Potential to beat old technology (old performance measure)

New performance measures New value network (e.g. emerging market)

impact of disruptive technologies depends on performance improvement!

Christensen defines a disruptive innovation as a product or service designed for a new set of customers.

Why successful companies miss out on disruptive change

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Disruptive technologies underperform in comparison to current ones Major customers reject new technology Initially only small fraction of market addressed Disruptive technologies appear to be financially unattractive and risky Goals and incentive systems based on short-term financial goals

Don’t stay too close to your customers!

Risk-averse managers Tunnel view, mental barriers (e.g. PS3 vs. Wii or Walkman vs. iPod) Attempt to react to disr. technologies in a way that worked already in the past Risk-averse, hierarchical and inflexible company culture

Don’t be afraid to change! (ignorance, psychological barriers)

Ten ways to inhibit innovation

1. Focus on short-term results2. Fear of cannibalizing current business3. Most of resources devoted to day-to-day business4. Innovation not part of everyone’s responsibilities5. Efficiency focus eliminates free time for fresh thinking6. No standard procedure to foster new ideas7. Incentives are geared towards maximizing today’s business8. Managers not trained to be innovation leaders9. Managers immediately look for flaws in new ideas rather than tease out their

potential10. Internal opportunities rather than starting with customers’ needs and problems

“Individuals and organizations give preferred treatment to alternatives that represent continuation of present programs over those that represent change”

3. Creating a Corporate Mindset for Innovation

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Innovation Management to overcome barriers to Innovation

1. Improving early warning systems (technology and competitor monitoring)2. Improving forecasting activities (technology, market)3. Supporting champions of innovation4. Measures to overcome interface problems5. Supporting an innovation-enhancing culture6. Establishing appropriate incentive systems7. Improving the NPD-process8. Organizational separation of routine and innovative tasks (Corporate VC; Task-Force

Project Management)

Important challenges

Lengthy development times Lack of coordination Risk-averse culture Limited customer insight Poor idea selection Inadequate measurement tools Lack of ideas Marketing or communication failure

Assessing Corporate Culture in the organization:

Innovation as shared core value?

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Core element in corporate strategy? Short-term or long-term thinking? Innovation-related goals? Management fully committed to support innovation? Intrapreneurship and risk-taking encouraged? Explicit room for creativity and thinking “out-of-the-box”? Handling of failures (project terminations and flops)? Incentives to encourage innovation?

CEO = CIO: leadership created mindset for innovation!

Innovation as core element of strategy: P&G

Consumer Understanding Innovation Brand-Building Go-To-Market Capabilities Scale

Company success of hidden champions: Culture & Leadership matter most!

1. Entrepreneurship / Leadership2. Employee qualification and loyalty3. Professional management

Characteristics of Champions“A champion is an individual who informally emerges in an organization and makes a decisive contribution to the innovation by promoting its progress through the critical

organizational stages”

Commitment: willingness to sink with the innovative project Creativity: a vision for the innovation Leadership: fill others with enthusiasm Technological competence: expert knowledge in critical questions Managerial competence: organization, planning, steering Social competence: recognition and handling of conflicts Organizational competence: power of enforcement and persuasion

Interaction between Champions for Innovation

Executive Champion: strongest impact on innovation due to hierarchical power Product Champion:

o Personality (entrepreneurial qualities, responsibility, risk taker)o Leadership qualities (charisma, enthusiasm)o Influence (competence in networking, negotiating skill)

Technical Champion: engineers4. Market orientation, customer integration and cross-functional integration

Relative product advantage

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The relative product advantage (value proposition) of the innovation over competing products as perceived by the customer is the most important success factor of innovations.

Implications of relative product advantage (value proposition)

“Me-too” as unsuccessful business model Innovator can be successfully challenged (fast second) Identification of relative product advantage a.s.a.p. in NPD-process Customer / market feedback required Superior technology does not necessarily translate into a successful product

(engineer’s or scientist’s view) = most important aspect of any business plan

high amount of failures no real value proposition!

Microsoft’s move from technology-push to customer-driven new product development

Before: Windows Vista Development driven by engineering Most complex software of all times, slow and unrealiable

After: Windows 7 Development driven by customer needs Development in cross-disciplinary way Development in teams

Market Orientation

“It’s not about data and reports. It’s about understanding your consumer and putting that understanding at the heart of everything your business does.”

1. Generation - tools, methods, resources, competencies, include customer! Collection of customers’ needs and preferences Analysis of exogenous (outside) factors that influence those needs

2. Dissemination – cross-functional integration, NPD process, knowledge flows Providing of market intelligence to the organization Participation of virtually all departments required

3. Responsiveness - cross-functional integration, NPD process, organization, marketing Organization’s response to market needs Promotion of end products in a way favourable to the end-customer

Customer Centric CultureHigher performance can only be achieved by improving all 3 dimensions of market orientation

Improving Dissemination and Responsiveness: Fostering Collaboration in the Triangle of Sales, Marketing and R&D

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Significant positive influence of sales integration on NPD success Sales needs to be integrated in early stages of NPD process Sales is important partner of R&D – brings voice of customer into NPD process

Limited customer insight and marketing failures often caused by lack of cross-functional coordination

Virtual Customer Integration – Characteristics

1. Efficiency Efficient information provision (time and money) Increased number of options Richness of media

2. Direct and interactive communication Active and passive information gathering Firm-to-customer and customer-to-customer interaction

3. Customization Customized information (e.g. products) to individual consumers Segmentation of customers (for NPD purposes; e.g. lead users)

1. Idea generation New product ideas contests Customer suggestions for product improvement

2. Idea screening / project definition Product concept testing (e.g. conjoint analysis or online focus groups)

3. Development

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Large scale market research (e.g. assessment of market potential or optimal pricing strategy)

Rapid prototyping with customers4. Product testing

Prototype testing Virtual test-markets

5. Market launch Pre-announcement of new products

Stimulation, support, and use of customer innovation communities (CIC) Continuous market research and iterative customization of productsTechniques of Virtual New Product Development with Customers1. User Design2. Web-based CA3. Information Pump4. Securities Trading of Concepts (trading game)

Virtual Customer Integration (VCI) in Multiple Stages of NPD

1. Idea Generation and Assessment

Key Idea: Customers as “idea generators” and “consultants” for idea assessment and selection

Customer input:o Ideas for new productso Assessment of ideaso Suggestions for improving existing productso Complaints about existing products

Key benefits:o Increased number of ideaso Use of customers’ creativityo Early customer feedback for idea assessmento Identification of valuable customers for new product development (e.g. “lead

user”)

2. Concept Definition and Project Selection

Key idea: Customers as “consultants” for concept assessment and selection and “co-creators” for concept refinement

Customer input:o Refinement of product conceptso Assessment of product concepts

Key benefits:o Identification of relative product advantage (value proposition)o Mass customizationo Increased number of testing optionso Reduced market riskso Customer feedback in the most critical stage of new product developmento Better market information for early termination decisions

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Examples of Co-Creation

Audi Virtual Lab McDonald’s “My Burger”

Advantages of VCI for the company

Alignment of new product development with customer requirements Continuous update of customer preferences along entire NPD process External creativity potential Efficiency gains (time and money) Lower market risks (decreased flop rates) Image: innovation leader Brand loyalty Market-pull effects

Lead user curve

Lead users face needs that will be general in a marketplace months or years before the bulk

LUs benefit significantly by obtaining a solution to these needs

important source for NPD:

1. Provide insights in future markets2. Develop own innovations3. Richest and most valuable information regarding the solutions responsive to these

needs; the higher the expected benefit the higher the commitment

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Improve integration between R&D and marketing/sales:

1. Strengthen corporate culture of innovation and cross-functional collaboration (align incentives)

2. Functional process-driven organizational structure3. Balanced leadership approach: R&D marketing / sales4. Support information sharing processes between R&D, sales and marketing

(application of knowledge management tools5. Increase physical proximity6. Proficient execution of NPD7. Cross-functional teams8. Joint incentives9. Sponsor from business units for technology-push10. Job rotation

Job Rotation, Training, Recruiting, Staffing (of projects)

“Coordinate and collaborate”: Building creative companies takes synchronisation from the centre, cross-boundary collaboration and structural changes to the org chart

Balanced Leadership on Technology and Market

CMO position (in each hidden champion’s top-management team, dual leadership Functional divisional organizational structure (smaller business teams) Decentralize R&D to get closer to customer / market requirement Key-account management to drive innovation with important customers Cross-functional strategic planning & steering committees

Cross-Functional Teams

Joint team responsibility Trust and understanding among team members Decrease functional differences Information exchange and collaboration Joint vision and aims, joint culture Joint concrete result

Summary: Customer and Market Orientation

Integrate customers (early!) lower flop rates Active participants: co-creation Qualified people with market understanding Find trendsetters – only they perceive the need or understand the USP Commitment of significant customers reduces internal resistance to change Foster communication, tools like QFD Avoid niche solutions, update market information along NPD process Enhance integration of R&D, sales and marketing Leverage internet and social media Customers = partners (incentives, information) brand ambassadors

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4. Key drivers of innovation success (best practices)

Measuring innovation performance

Overall revenue growth Percentage of sales from new products or services Customer satisfaction Return on investment in innovation Number of new products or services New product success ration Higher prices

The Top 10 Success Factors of Innovations

1. Relative product advantage (USP)2. Corporate culture3. Innovation champions4. Adequate human and financial resources5. Market orientation6. Cross-functional collaboration (especially R&D M&S)7. Effective project management (teams)

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8. Proficiency of the NPD process management (idea to launch)9. NPD portfolio management (monitoring, assessment, decision)10. Alliances and partnerships (“Open Innovation”)

Decision Process at Gates during NPD process

1. Discovery Idea Screen

2. Stage 1 – Scoping Second idea screen

3. Stage 2 – Build Business Case Go to Development (if it is prioritized, otherwise kill or place on hold)

4. Stage 3 – Development Go to testing

5. Stage 4 – Testing and validation Go to launch

6. Stage 5 – Launch Post-Launch Review: Target $

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Important aspects of NPD-process

Fuzzy-front end (FFE – concept development stage) Idea management Portfolio management

The Fuzzy Front End (FFE) is the messy "getting started" period of new product engineering development processes. It is in the front end where the organization formulates a concept of the product to be developed and decides whether or not to invest resources in the further development of an idea.

FFE – Key organizational issues

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Early classification of projects / ideas (newness; potential) Strong project management Multifunctional Team Core Team Members Sufficient resources, relatively more corporate funds Top Management Involvement at Milestones (Steering) Involve Champions early (high level of the organization)

Strengthening of the FFE and improving T2M in the early stages

FFE Phase vs. Development Phase

The Innovation Funnel

Quantity of ideas is important for the generation of a sufficient amount of innovations Fixed idea raw projects board projects launched projects, of which

o Flopso Loserso Middle of the roado Success products

Workflow: The 3M ESPE approach

Strengths Intelligent IT implementation Incentives for ideas Commitment and corresponding corporate culture Integration into workflows / NPD process Evaluation criteria & responsibilities are clear

Results Ideas are taken out of the heads and are discussed

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Knowledge does not get lost Good ideas are implemented fast – avg. T2M (technology to market) reduced by 6

months in FFE

Drivers of T2M Reduction

Project organization Up-front homework Market attractiveness

The importance of portfolio management

1. Financial – achieve goals, maximize returns2. Maintain competitive position3. Allocate scarce resources4. Link between project selection and business strategy5. Focus – not too many projects6. Balance between long- and short-term projects / high- and low-risk ones7. Communicate priorities vertically and horizontally8. Better objectivity in project selection

Strong impact on NPD success

Terminate unpromising innovation projects is important for performance, but difficult to execute

Senior management even holds on innovation projects where financial market data clearly shows that they will be unsuccessful

Dedicated project organization

Progress of innovation project not negatively effected by daily routines Members have to be assigned to innovation team Existence of cross-functional innovation teams

Autonomous team structure (Task Force)

Main characteristics Project team completely independent from both divisional and functional units Professional and disciplinary sphere Project manager has project and bottom-line responsibility Multifunctional composition (compensation for lower degree of specialization) Importance of lead times

Main advantages and disadvantages+ Clear focus on the goals of the project+ Efficient project management

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+ Minimization of interfaces+ Separation from daily business+ Motivation of the team members- Deviation from the goals of the company- Emergence of independent product areas (low synergies)- Re-integration of teams after completion (problem of project-focused career paths)

Matrix team structure

Main characteristics Not independent from functional or divisional structures Responsibility shared between line and project managers Project manager has no disciplinary authority Division of decision-making process: PM (What? When?), FM (Who? How?)

Main advantages and disadvantages+ Improved inter-functional coordination and communication+ More influential project manager+ Stronger focus on the project+ Access to specialized know how in the functional units- Decision making process slower- Potential for conflicts increased- Fuzzy hierarchical position

Corporate Venture Capital (CVC)/Corporate Venturing

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Best practices in new product development read slides 47-521. Strategy2. Portfolio Management3. Process4. Market Research5. People6. Metrics and Performance Evaluation

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