Managing Innovation and New Industrial Product Development Chapter 8: Managing Innovation and New Industrial Product Development PowerPoint by: Ray A. DeCormier, Ph.D. Central Connecticut State University

Chapter Topics Strategic processes through which product innovations take shape Characteristics of innovation winners in high-technology markets Factors that drive a firm’s new product performance Determinants of new product success and timeliness

Derivation of Sales & Profits Derivation of Sales & Profits Many firms derive their sales and profits from recently introduced products. From products commercialized within the last 5 years, best-practice firms: Generate 48% of sales Generate 45% of profits

Risk, Reward & Failure But, the risks of product innovation are high, significant investment is required, and the likelihood of failure is high. However, due to… Shorter product life cycles Accelerating technological advances, …Speed & Agility is central to success.

James Quinn asserts: Innovation tends to be: Individually motivated Innovation tends to be: Individually motivated Opportunistic Customer Responsive Non-linear Interactive Clearly though, some new-product-development is an outgrowth of deliberate strategies.

Innovations Start Out Chaotic Generally, innovations start out chaotic. As a project (product development) progresses and as the costs go up, more formal planning and controls come in. Still, flexibility must be inherent in the project. There are two broad categories of strategic behavior: Induced Autonomous

Induced Strategic Behavior Induced Strategic Behavior Most large companies employ induced strategic behavior. This is a planned form of influence upon the workforce to come up with innovative thinking around (say) their present product line for their customary markets.

Autonomous Strategic Behavior Large resource-rich companies employ autonomous strategic activities. This is a situation where employees are allow to think creatively about innovation outside of their present products. They can think about products that they’d like to create.

Autonomous Strategic Behavior This approach often employs a “product or project champion” who is also referred to as an “intrepreneur” or “entrepreneur.” Product Champion is one who… Creates, defines or adopts an idea for innovation Willingly assumes significant risk (loss of prestige & even their job) …to successfully implement the innovation.

Product Champion A product champion is an individual who: A product champion is an individual who: Takes on a central role in sensing a marketing opportunity Mobilizes an informal network to assess the opportunities via their: Technical feasibility Financial opportunity Is willing to take on risk (reputation) to bring the project to light

Entrepreneurial Motivation Entrepreneurial motivation can be nurtured and encouraged based on: Availability of rewards Senior managements’ encouragement & support Resource availability including release time to work on entrepreneurial projects Organizational structure that promotes entrepreneurialism by providing an administrative mechanism that brings others into the innovative process when needed Two other influences are: Intrinsic motivation Work design: availability of challenging projects

Induced vs. Autonomous Behavior Activation of the Strategic Decision Process Induced: Manager defines the market that is in line with the organization’s strategy Autonomous: Managers define a market that diverges from the organization’s strategy Nature of Screening Process Induced: Formal screening Autonomous: Informal network that assesses new ideas

Induced vs. Autonomous Behavior Type of Innovation Induced: Incremental to present products Autonomous: Major – whole new product lines Nature of Communication Induced: Consistent with organizational work flow Autonomous: Departs from work flow in early stages of the decision process

Induced vs. Autonomous Behavior Induced vs. Autonomous Behavior Major Actors Induced: Formal as prescribed by the organization Autonomous: Informal network and furthered by a so-called “Champion” Decision Roles Induced: Roles and responsibilities are well defined Autonomous: Roles and responsibilities are loosely defined in early stages but become more defined as the project progresses

Induced vs. Autonomous Behavior Implications for Strategy: Induced: Strategic alternatives are considered and a commitment to a particular strategy evolves Autonomous: Commitment to a particular strategy emerges during the early stages as the project progresses through sponsorship of the “Product “Champion”

Patterns of Strategic Behavior Induced vs. Autonomous Strategic Behavior: Selected Characteristics of Marketing Strategy Formulation Process Table 12.1 7th ed Developed by Cool Pictures and MultiMedia Presentations

Championing a Product Senior management at 3M Company will not commit to a project unless a “Product Champion” emerges and will not abandon the effort unless the champion “gets tired.”

Managing Technology According to Michael Porter: According to Michael Porter: Technological change is the great equalizer Can erode the competitive advantage of even the most established competitors Can propel even the smallest companies to the forefront

Managing Technology Many of the great companies we see today grew out of technological changes that they were able to exploit. Long run competitiveness depends upon how they: Manage, Increase, and Exploit their technology base. Let’s start by classifying development projects!

Four Types: Development Projects Derivative projects center on incremental product enhancements, incremental process improvements, or incremental changes on both dimensions. Platform projects create design and components shared by set of products. Breakthrough projects establish new core products and new core processes that differ fundamentally from previous generation of process and product. Research and development creates knowledge of new materials and technologies that eventually leads to commercial development—more like “pure” science.

Product Families Products that share common platform but have different specific features and enhancements required for different consumer sets. Strategists argue that firms should move away from planning emphases that center on single products and focus on a family of products that share a common platform. The move toward product family perspective requires close inter-functional working relationships, long-term technology strategy view, and multiple-year resource commitment.

Disruptive Innovation Disruptive innovation occurs when a totally new innovative product is developed that interrupts the way business and society does things. Examples: Train, automobile, telephone, birth control pill, plastics, and computers. Usually disruptive products start out small but grow to overshoot the market.

The Disruptive Innovation Model Performance Pace of Technological Progress Sustaining Innovations Range of Performance that Customers Can Utilize Performance that Customers Can Utilize or Absorb Disruptive Innovations Time Source: Clayton M. Christensen and Michael E. Raynor, The Innovator’s Solution: Creating and Sustaining Successful Growth (Boston: Harvard Business School Press, 2003), p. 33.

Disruptive vs. Sustaining Innovation Looking at the Disruptive Innovations model, we see that sustaining product innovation often leads to product developments that offer much more capacity than the “mainstream” market needs. Sustaining innovation is designed for the heavy user. In computer technology, we see heavy use by the government. Disruptive innovation is usually simpler, but still changes the world as we know it. Ex: We once used pens to write until typewriters disrupted that, then computers disrupted typewriters.

Low End Disruptive Situation Low End Disruption: There is a market who wants the new technology but not as much as is available. Low End Strategy Test: There needs to be an adequate number of customers who want a low version of the technology (product). The company must be able to create a business model and discounted product to meet that need profitably.

New-Market Disruptions New-Market Disruptions New-market disruptions are new products that change the way people do business but the market historically lacked the resources to procure it (non-consumption). New-market strategy test: A large number of customers are unable to financially procure the product. It is inconvenient for present customers to use.

Salesforce.com One way to find a disruptive idea is: “to do what competitors want.” A new-market disruption is a situation where there is non-consumption. Customers wanted a sophisticated CRM program but they were too expensive or too difficult for most customer’s to pursue. Salesforce.com provided a Web based, relatively inexpensive, CRM program for businesses to use. It resides on a centralized (virtual) computer Easy access by everyone worldwide Easy to use

Disruptive Innovation Litmus Test The final test of innovation is how disruptive the product is and how it affects competitors. If it is truly a new innovation, and there are no competitive players pursing the strategy, then we truly have a DISRUPTIVE INNOVATION.

Three Approaches to Creating New-Growth Businesses Table 8.2 Sustaining Innovations Performance improvement in attributes most valued by industry’s most demanding customers. These improvements may be incremental or break- through. The most attractive (i.e., profitable) customers in mainstream markets who will pay for improved performance. Improves or maintains profit margins by exploiting existing processes and cost structure and making better use of current competitive advantages. Low-End Disruptions Performance good enough along traditional metrics of performance at low end of mainstream market. Over-served customers in low end of mainstream market. Uses new operating or financial approach or both— different combination of lower gross profit margins and higher asset utilization can earn attractive returns at discount prices required to win business at low end of New-Market Disruptions Lower performance in “traditional” attributes, but improved performance in new attributes—typically simplicity and convenience. Targets non-consumption: customers who historically lacked money or skill to buy and use product. Business model must make money at lower price per unit sold, and at unit production volumes that will initially be small. Gross margin dollars per unit sold will be significantly lower. Dimensions Targeted perform- ance of product or service Targeted customers or market application Effect on required business model (processes and cost structure) Source: Clayton M. Christensen and Michael E. Raynor, The Innovator’s Solution: Creating and Sustaining Successful Growth (Boston: Harvard Business School Press, 2003), p. 51.

How High-Tech Innovators Win To win in the high tech game, which experiences: Stiff competition Short life-cycled products High velocity industry A high tech firm needs to: Stay aligned with the market Must continually innovate Be responsive (on schedule, on time & on target’s needs) Anticipate customer needs

Successful High-Tech Companies Win Because: 1. Limited Structure: Creating successful products to meet changing customer needs requires flexibility, but successful product innovators combine this flexibility with a few rules that are never broken. 2. Real Time Communication and Improvisation: Improvisation involves design and execution of actions that converge with each other in time. 3. Experimentation – Probing into the Future: Successful product portfolio creators did not invest in any one version of a future product but instead used a variety of low-cost probes to create options for the future. 4. Time Pacing: Product innovators carefully manage transitions between current and future projects, while less successful innovators let each project unfold according to its own schedule.

Patching - A New Strategy in Dynamic Markets Eisenhardt & Brown contend that traditional corporate planning and resource allocation are not effective in volatile markets. Clear-cut partitioning of business into neat squares on the organizational chart is obsolete. Instead, the organization needs to manage change and quickly realign itself (patching) to capture market opportunities faster than the competition. Patching is the strategic process of quickly realigning or remapping businesses by adding, dividing, transferring, exiting or combining pieces to take advantage of opportunities as they emerge in new markets.

New Product Development Process To sustain new product success companies: Make new product development a top priority Directly involve managers and employees to make decisions and speed up action Because of substantial risks and/or incredible opportunities, companies employ systematic thinking about new product development.

40% of Industrial Products Fail 40% of Industrial Products Fail Although definitions of “failure” is somewhat elusive, research suggests that 40% of industrial products fail to meet successful objectives. Yet, new products are the life blood for companies. Without new (or updated) products, eventually a company will fail!

Critical Success Factors Critical success factors that drive a firm’s new product performance are: Quality of the new product development process Resource commitments to new product development New product strategy

New Product Strategy Top companies have a clear and visible new product strategy. They set aggressive new product performance goals as their basic corporate goal and communicate them to all employees.

Major Drivers of Firm’s New Product Performance Major Drivers of Firm’s New Product Performance

New Product Development Process Successful companies that employ a high-quality new product development process give careful attention to execution of activities and decision points. Benchmarking characteristics include: Firm’s emphasis on upfront market and technical assessments before starting the development process. Process featuring complete descriptions of product concepts, product benefits and positioning to target markets before starting the development process. Process includes tough project go/kill decision points. New product process is flexible.

Resource Commitments Three main ingredients: Resource Commitments Three main ingredients: 1. Top management commits resources necessary to meet firm’s objectives for total product effort. 2. R&D budgets are adequate and aligned with stated new product objectives. 3. Necessary personnel are relieved from other duties and assigned specifically to the new product effort.

Anticipating Competitive Reaction Anticipating Competitive Reaction New products trigger reactions from competitors when the: New product threatens their market Product is in a rapid growth market Selling firm communicates the new product too strongly To quell competitive reaction to some degree, companies: Put into action a strong “competitor orientation” before and during implementation Promote to niche markets instead of the whole market

Sources of New Product Ideas Sources of New Product Ideas Internally from: Salespeople Employees R&D Marketing Research Serendipity Externally from: Channel Members Competitive Moves Industrial Customers Ultimate Consumers

Lead Users Since many industrial markets consist of a small number of high volume firms, special attention must be given to the needs of lead users. Lead Users are small, highly influential buying organizations that consistently adopt new technologies earlier than most users. Example: If an auto manufacturer wanted a new breaking system, they might ask a racing team to help them develop the product.

Lead User Projects Lead user projects are conducted by a cross-functional team that includes four to six managers from marketing and technical departments. One member serves as the project leader. Team members typically spend 12 to 15 hours per week on projects.

Lead User Method

Staying Ahead of Customers Visit with the customer Cross-functional teams actually go out, watch and ask buying influentials what they are doing so as to uncover: User problems Needs Desires Instead of asking customers “What do you want?” they ask “Where do you want to go?”

Staying Ahead of Customers Since a marketer job is to know their customers’ situation better than they know it themselves, progressive companies figure out where customers might (should) want to go (what are the possibilities) and develop products accordingly. Recognizing the customer’s ability to innovate, many companies have developed tool kits and have invited customers to design their own customized products.

Determinants of Success Determinants of Success For a successful product development strategy to occur, a company has to employ proper strategic factors and be proficient at executing them. The 4 strategic factors are…

Four Strategic Factors for New Product Success Product advantage refers to customers’ perceptions of product superiority with respect to quality, cost-performance ratio, or function relative to competitors’ products. Marketing synergy represents the degree of fit between project needs and the firm’s resources and marketing skills. Four Strategic Factors for New Product Success International orientation: New products designed and developed to meet foreign requirements and targeted at world or nearest-neighbor export markets. Technical synergy comes from the fit between project needs and the firm’s R&D resources and competencies.

Proficiencies In addition to a successful strategy, various proficiencies are important. They include: Pre-Development Market Knowledge Technical Knowledge

Pre-Development Proficiency Pre-development proficiency involves several tasks: Initial screening Preliminary market & technical assessment Detailed market research study Preliminary business/financial analysis

Marketing Proficiency Marketing Proficiency Involves understanding about: What does the customer need, want and prefer? What is customer’s buying behavior? What is customer’s sensitivity to price? What is the size of the market? What are the trends? Who and what is the competition? Know how to launch a well planned and targeted campaign backed with appropriate resources.

Technical Proficiency Involves having the technical experience to bring a product from idea to reality by bringing the product through the various technical stages such as: Product development Prototype testing Pilot production Production start-up Full production (including quality control)

Fast-Paced Development Developing products quickly contributes advantageously to product development success. Successful companies match the approach to the developmental task at hand. Successful strategies include: Compression Strategy This strategy views development as a predictable number of steps (approach) that can be compressed (task). Experiential Strategy This strategy acknowledges that developing a new product is foggy at best. Therefore, use intuition, learn quickly, and be flexible to shift depending upon the environment.