Final Exam Review Innovation Management Time: 25 Nov 2006 Note: You will be allowed one A4 sized sheet of paper as a “ Cheat Sheet” for your reference during the Final Exam. You can fill out both sides, and there are no limits on handwriting, font, or techniques for the information you place on the page. No other materials will be allowed during the exam

Logical Structure of the Course

Classes of Things You have Learned Concepts: Things you need to know before you think about innovating. These include: Knowledge about previous successful and unsuccessful innovators (people and companies) Theories and frameworks Facts All of these underlie and motivate your activities. Activities and Tasks: Things you (as an entrepreneur or intrepreneur) need to do in developing innovative products. These occur on both sides of the equation: Innovation = Invention + Commercialization Activities can either ‘Invent’ or they can ‘Commercialize’ Tools: Used to make decisions about ‘Inventing’ or ‘Commercializing’ These are the tangible mental exercises, models, spreadsheets, documentation, etc. that support innovation activities and tasks.

Fundamentals

Definition: ‘Innovation’ An ‘Innovation’ is: Invention + Commercialization Freeman, The Economics of Industrial Innovation A new way of doing things that is commercialized Porter The new knowledge in an innovation can be either Technological, or Market related

Elements of Product Innovation

The Purpose of a Business is to Create a Customer -- Peter Drucker Even if you create marvelous inventions Your customers won’t care Unless that is exactly what they need Business customers are especially impatient With any product that doesn’t help them gain competitive advantage Yet your firm wants to build products that take advantage Of their Core Competences

What makes each of these companies Innovative?

Invention Generation The opportunity register (OR) should be seen as a repository of ideas that can be pulled up at any time. If a particular idea isn ’ t working, you have the option to switch to another OR Entry (i.e., another innovation) You can actually plan these milestones in advance Hedging your bets By running many innovation projects Simultaneously, or Sequentially

Sources of Innovation How innovation arises Functional: Innovations arise from thinking about the functional relationships between groups and individuals  e.g., customer or manufacturer Attribute Maps and Quizzing help identify Innovations arising functional relationships Circumstantial: Innovations arise from thinking about the circumstances in which a product (innovation) will be encountered  e.g., a cooking innovation when it is consumed in a restaurant Consumption Chain Analysis helps identify circumstantial Innovations Where innovations arise Internal R&D External Markets (Customers) Competitors & related industries University, government & private labs Other nations / regions The last two sources are strongly influenced by society and governments

Sources of Innovation 1. Internal R&D 2. External Markets (Customers) 3. Competitors & related industries 4. University, government & private labs 5. Other nations / regions The last two sources are strongly influenced by society and governments ‘Complementarity of several sources may amplify and accelerate innovation

Innovation at the National level Success in societies which: operate, manage and build instruments of production create, adapt and master new technologies impart expertise and knowledge to the young choose people for jobs by competence and relative merit promote and demote on basis of performance encourage initiative, competition and emulation let people to enjoy and employ the fruits of their labor, enterprise and creativity Success where government does the following: encourage saving and investment enforce rights of contract secure rights of personal liberty against tyranny and crime provide stable government, though not necessarily democratic provide responsive government provide no rents or favors for government position have governments that are moderate, efficient and ungreedy

Science & Technology What are they? How are they related?

Complementarity What other products are needed to complete your Commercialization? Most economically significant modern products have little value on their own They require complementary products from many firms to be of value Petroleum has little use without internal combustion engines Or Cars without Roads (US Road costs are around $5-10 per gallon of gasoline) Or Electricity without Electric Motors Or iPods without MP3s … you get the idea What are your ‘Killer Apps’? The complements that sell your product

Life cycle of an Innovation Development Determines Optimal Market Entry Strategy Fluid phase Mainly lab based or custom applications of technology Transitional phase Standardization of components, and consumer-producer interaction lead to dominant design Specific phase Products built around the dominant design proliferate; innovation is incremental

What sort of people are Innovators? Idea Generators Can sift through large quantities of technological and market data to identify ‘innovations’ Gatekeepers & Boundary Spanners Conduits for knowledge from other firms and labs Champions (Entrepreneurs, Evangelists) Sell the innovation to the firm Sponsors (Coach, Mentor) Senior level manager who provides behind the scenes support, access to resources, and protection from political foes Project Managers Planners with discipline; one-stop decision making shop

Market side innovation

The Opportunity ‘Register’ Concept: Always keep an inventory of possible opportunities so that you are unlikely to run out of ideas for making the next competitive move or capturing the next prospect for growth Fields: 1. Business concept 2. Relevant trends 3. Key industry data 4. Obstacles and barriers 5. Company position 6. Competition and Substitutes 7. Sources for your information 8. What type of opportunity is this? 9. Timing of proposed actions

Commercialization Defines your market Who is the target customer for the company’s product (age, income, medical history, and other demographics) Support this with Attribute Maps and Consumption Chains What will differentiate your innovation from competitors’ in the customer’s minds?

Quizzing Detailed look at target customer usage and decision making regarding your product Looks at the customers “stream of consciousness” Through a series of questions Looks for ideas to Change the Customer’s Experience (i.e., redifferentiate your product) Remember: Experience is dynamic So are the questions in quizzing Over a time period prior to the first time customer is exposed to the product To a time well after the customer has stopped using it

Quizzing Who? … is with customers while hey use the product  How much influence do they have If we could arrange it, who would we want the customer to be with … What? … Do our customers experience when the use the product … needs provoked our offering What else? … might customers have on their minds When? … do our customers use this.. Where? … are our customers when they use this How? … do customers learn to use the product..

Toolsets Organize Answers with a Mind Map

Summarize your Quizzing by the Attributes of the Innovation that are important to the Customer BasicDiscriminatorEnergizer PositiveNonnegotiableDifferentiatorExciter NegativeTolerableDissatisfierEnrager NeutralSo What?Parallel This provides a heuristic for ‘Functional Innovation’ (Eric von Hippel)

Consumption Chain Analysis

Function of Consumption Chain Analysis A complement to quizzing … And (perhaps) quizzing done from a different (more graphical) perspective Consumption Chain Analysis Works from the premise that opportunities for redifferentiation lurk at every step and decision that your customers take From the time they first become aware of their need for your product or service To the time thy finally dispose of the remnants of the used up product Rather than ‘stream of consciousness’ It is time-sequential

Consumption Chain Analysis A complement to quizzing … And (perhaps) quizzing done from a different (more graphical) perspective Consumption Chain Analysis Works from the premise that opportunities for redifferentiation lurk at every step and decision that your customers take From the time they first become aware of their need for your product or service To the time thy finally dispose of the remnants of the used up product Rather than ‘stream of consciousness’ It is time-sequential It provides a Heuristic for ‘Circumstantial Innovation’ (Eric von Hippel)

Every Link in the Consumption Chain has its Own Attribute Map The Attribute Map compares your product to those of others BasicDiscriminatorEnergizer PositiveNonnegotiableDifferentiatorExciter NegativeTolerableDissatisfierEnrager NeutralSo What?Parallel

Toolsets Consumption Chain Analysis Determine the main steps in consumption Each step on the consumption chain has an attribute map You should only list the 3 or 4 most important steps These will determine whether the potential customer proceeds to the next step (good) Or leaves the consumption process (not good)

Toolsets Overview of Feature Set Prioritize and choose the major features of your innovation from the main branches of the Mind Map Review the main innovation features with a feature-attribute map for the entire innovation BasicDiscriminatorEnergizer PositiveNonnegotiableDifferentiatorExciter NegativeTolerableDissatisfierEnrager NeutralSo What?Parallel

Toolsets Feature-Attribute Map the 3-4 Key Steps in the Consumption and Manage those 3-4 Steps Identify Discriminators and Energizers Describe how you will manage each of these features of the consumption process BasicDiscriminatorEnergizer PositiveNonnegotiableDifferentiatorExciter NegativeTolerableDissatisfierEnrager NeutralSo What?Parallel

What To Do with the Opportunity Register When Competences start to matter Assuming you’ve been religiously adding to your Opportunity Register You should by this time have a lot of different ideas for new and marketable products Then the question becomes: Which projects should you take on; emphasize; continue? The answer depends on your competences This is the point where Demand and Supply side of Innovation Meet

Business Models Matter Telling a good story Part of selling your strategy / investment Tying Narrative to Numbers Strategy becomes less philosophy More performance and outcome When business models don’t work It’s because the fail either The ‘Narrative’ test Or the ‘Story’ test

Business Models Matter A business model is not strategy It doesn’t describe external forces: Competition Environment Scaling It only depicts the systems that will be put into place to achieve a strategic objective A good model is not enough The boxes on the value map need to be understood in depth In order to develop a good strategy

Framing the Challenge Targets and Goals If I were to do something in the next 3-5 years That I, my boss and my company’s investors would regard as a major win What would this performance record have to look like? If I were to do something in the next 3-5 years That my customers would regard as a major (disruptive) innovation How would I change their lives? How would my relation with customers affect my performance?

Framing the Challenge: Strategy Drivers E.g., Lucent’s Performance Targets Sales from 1% growth to the high teens R&D from 8% to 11% if Sales Reduce SGA from 27% to 19% Reduce tax rate 4% points Lift ROA from 0% to 1%

New Life from Old Competences Redifferentiating and resegmenting

Redifferentiating Products The Dialectic Innovation involves a dialectic: On the one-side are arguments about what the customer wants (demand-side) Remember that the customer doesn’t care about us or our products We have to make them care On the other-side are arguments about what we can do (supply-side) These are determined by our core competences Which are to some extent determined by Mission and Vision statements, and our Business Models

Resegmenting and Reconfiguring Resegmenting Focusing on and better serving existing market segment Reconfiguring Completely changing the existing basis for segmentations By reconfiguring existing value maps Or introducing entirely new kinds of solutions

Reconfiguring your Market Reconfiguration is about Breaking down the Barriers (technological, regulatory or organizational) That set limits on the Attributes you can offer Or on the way that Consumption Chains can be configured It builds on your insights from the Consumption Chain Analysis and Attribute Map Looking to remove the Limitations imposed by your existing Core Competences

How to Resegment Resegmentation addresses the Dynamics of Customer Usage of a Product It builds on your insights from the Consumption Chain Analysis and Attribute Map Looking for new Segments to market to Observe behavior To Uncover existing Customer’s Needs To find new Customer Groups within your existing customers Keep them from moving to competitors’ products

Production Side of Innovation Resource based perspective of Strategy

Resource-based view (RBV) of firms Dominant approach to business strategy today Basis for Core Competences The resource-based view suggests that a firm's unique resources and capabilities provide the basis for a strategy. The strategy chosen should allow the firm to best exploit its core competencies relative to opportunities in the external environment.

Core Competences These are the things that the firm does That they do better than other firms That are the source of their competitive advantage Firms establish their core competences by: Investing in people Investing in assets, plant and land Identifying and focusing their mission The Firm’s core competences are often those of its CEO and management

Competences You best (perhaps your only) opportunities to compete are Where Product Market Needs Cross with Competences

Delivering on 7-10 critical ‘Key Ratios’ This is what Investors and Venture Capitalists will look for The particular accounting statement measures That indicate whether your strategy is succeeding or not The exact set of measures depends on your business model and your strategy

Competences: Hyper-efficient supply chain Dell is relentless in negotiating the best prices from suppliers, and driving those savings through the supply-chain. To do that, Dell replaces inventory with information.

Competences: The FedEx Way Compete for customers Using new technologies i.e., the increasing size and speed of jets That restructure the geography of space time money

Competences: Overnight Delivery Smith reasoned that he could turn Post Office economics upside-down Post Office delivery optimized distance traveled time was not a critical value, package handling was cheap. Smith saw that new air technology could let him ignore distance traveled … and instead, optimize speed and handling to create new market value

What is an Innovation Worth?

Value ‘Happens’ in the Future Your ‘Vision’ of the Innovation Firm is the best source of information about this future value From the ‘Vision’ you derive your ‘Business Plan’ From your ‘Business Plan’ you derive your ‘Strategies’ ‘Strategies’ comprise ‘Real Options’ which are conditional particular ‘Events’ occurring in the future The feasibility of each ‘Event’ is ultimately ‘Discovered’ at some point in the future Finance and accounting are geared towards measuring the past Strategy is designed to plan and control the future To select the correct innovations from our opportunity register We need to assess how good our strategy will be This is why Strategy Drivers The basis of our key ratios Are the basis of value as well

Easy and Difficult Industries Deciding on investments in core competences for the future is easy as you move to the  left on the line below It is nearly impossible as you move to the right 

Business Models: Tying Narrative to Numbers What activities, operations and products are within the ‘scope’ of the valuation analysis? (Bubbles: depends on audience) What are the significant environmental influences? (Boxes: major competitive forces outside management control) How does value flow through the relevant scope of the analysis? (Arrows: value metric)

Market Entry Strategy Model What are the major competitive forces molding managerial strategy which add to, or take away from ‘Value’? What ‘levers’ (strategy drivers) can management pull to influence value added? What is the functional relationship between value and the strategy drivers? (Define the ‘Strategy Model’)

Technology Choice Technology is shared across all competitors. It offers: Efficiency (improved performance at the same cost) Quality Novelty Substitutes What are the major technologies relevant to managerial strategy which add to, or take away from ‘Value’? What ‘levers’ (strategy drivers) can management pull to incorporate technology or react to the threat of technology? What is the functional relationship over time of technological trends on value? (Define the ‘Technology Choice Model’) Technology Choice Models will be implemented in the same manner as strategy models.