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.

Final Exam ReviewInnovation 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

O p p o r tu n ityR eg is ter

Co

mm

ercial Op

po

rtun

ities

Innova tion

C ore C om petences:A ssessm ent & Investm ent

M arket E ntrance &C om petitive S tra tegy

A dap tiveE xecution

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

Ne w Pro du ct :

L o w c o s tI m p r o v ed q u alit iesN ew q u alit ies

C o m pe te n ce sa n d

A s s e t s

Ne wTe ch n o lo g ica l

k n o wle dg e

Ne w M a rk e tK n o wle dg e

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

Inv e s t

D o n 't In v e s t

G o o d N e w s

B ad N ew s

G o o d N e w s

B ad N ew s

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&D2. External Markets (Customers)3. Competitors & related industries4. University, government & private labs5. 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 & TechnologyWhat are they? How are they related?

S c ien c e

T ec h n o lo g y

I n f lu en c e / f eed b ac k

I n f lu en c e / f eed b ac k

Ver b allyE n c o d edI n f o r m atio n

Ver b allyE n c o d edI n f o r m atio n

Ver b ally E n c o d edI n f o r m atio n * p u b lic a tio n s * p a ten ts

P h y s ic a lly & Ver b ally E n c o d edI n f o r m atio n * p r o d u c ts & s er v ic es * d o c u m en ta tio m * p u b lic a tio n s * p a ten ts

ComplementarityWhat 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

In v en to ry o r p arty w ithb arg a in in g p ow er

In v en to r

H o ld er o fco m p lem en ta ry a ssets

P ro f it is D if f icu lt Hig h

L o w

F r ee o r Un im p o r tan t T ig h tly h e ld

C o m ple m e n ta ry A s s e t s

I m ita bility

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

N ear C erta in tyN on techn ica l f acto rs

m ay be igno red

L ittle U n certa in tyL o w in f luence o f

non techn ica l f acto rs

M ed ium U ncerta in tyH ig h in f luence o f

non techn ica l f acto rs

H ig h U ncerta in tyH ig h in f luence o f

non techn ica l f acto rs

Hig h

L o w

E r a o f F er m en t E r a o f I n c r em en ta l C h an g e

S ta te o f Ev o lu t io n o f Te ch

C o m ple x ity

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

O p p o r tu n ityR eg is ter

In v e ntio n s

Ide a

s

Com

mercial O

pportunities

Inno va tio n

C o re C o m p etences :A ssessm ent & Investm ent

M ark et E ntra nce &C o m p etitive S tra teg y

A d ap tiveE x ecutio n

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 concept2. Relevant trends3. Key industry data4. Obstacles and barriers5. Company position6. Competition and Substitutes7. Sources for your information 8. What type of opportunity is this?9. Timing of proposed actions

•CommercializationDefines 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

QuizzingWho?

… 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

Basic Discriminator Energizer

Positive Nonnegotiable Differentiator Exciter

Negative Tolerable Dissatisfier Enrager

Neutral So What? Parallel

This provides a heuristic for ‘Functional Innovation’ (Eric von Hippel)

Consumption Chain Analysis

Aw ar en es so f n eed

S to r ag e an dtr as p o r t

In s ta lla t io na n d A s s e mb ly

R ec eip t

F in an c in g

P ay m en t

D eliv er y

O r d er an dp u r c h as e

S e lec tio nS ear c h

F in a l d is p o s a l

R ep air s an dR etu r n s

S er v ic e

Us e

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

Basic Discriminator Energizer

Positive Nonnegotiable Differentiator Exciter

Negative Tolerable Dissatisfier Enrager

Neutral So 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)

Aw ar en es so f n eed

S to r ag e an dtr as p o r t

In s ta lla t io na n d A s s e mb ly

R ec eip t

F in an c in g

P ay m en t

D eliv er y

O r d er an dp u r c h as e

S elec tio nS ear c h

F in a l d is p o s a l

R ep air s an dR etu r n s

S er v ic e

Us e

C o n tin u e

Lea

ve

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

Basic Discriminator Energizer

Positive Nonnegotiable Differentiator Exciter

Negative Tolerable Dissatisfier Enrager

Neutral So 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

Basic Discriminator Energizer

Positive Nonnegotiable Differentiator Exciter

Negative Tolerable Dissatisfier Enrager

Neutral So What? Parallel

C o n tin u e

Lea

ve

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

R & D

C u s to m erR elat io n s h ipM an ag em en t

L ab o r C u s to m er s

F act o ry

W o r k

Production

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?

GoalsInnovation Year +1 + 2 + 3 +4 + 5 + 6

Profits 200 220.00 242.00 266.20 292.82 322.10 354.31 10% annual increaseReturn on Sales 10% 10% 10% 10% 10% 10% 10%Return on Assets 15% 15% 15% 15% 15% 15% 15%Assets 1333 1466.667 1613.333 1774.667 1952.133 2147.347 2362.081New asset investment at current utilization 133.67 280.33 441.67 619.13 814.35 1029.08Sales 2000 2200 2420 2662 2928.2 3221.02 3543.122New Sales 200.00 420.00 662.00 928.20 1221.02 1543.12

Projections

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%

E n tr ep r en eu r ia lAc tiv ity

P er f o r m an c e( c u s to m er s , in v es to r s ,

e tc . )D r iv es

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

O p p o r tu n ityR eg is ter

In v e ntio n s

Ide a

s

Com

mercial O

pportunities

Inno va tio n

C o re C o m p etences :A ssessm ent & Investm ent

M ark et E ntra nce &C o m p etitive S tra teg y

A d ap tiveE x ecutio n

Resource-based view (RBV) of firmsDominant 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.

E n v ir o n m en t 'sR es o u r c e S u p p ly C u r v e

& C o n s tr a in ts

O w n er o fS tr a teg y

( R - P - V S o u r c eo f C o m p etit iv e

Ad v an tag e )

E n v ir o n m en t 's D em an dC u r v e & C o n s tr a in ts

Valu eF lo w

{ v alu e t , v o lu m e t}

Valu eF lo w

{ v alu e t , v o lu m e t}

Valu e Ad d ed b y S tr a teg y( d if f e r en c e b e tw een tw o v a lu e f lo w s )

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

Y o u rC o m p eten ces

P ro d u ct M a rk etO p p o r tu n ities

C o m pe ti to r A'sC o m pe te nc e s

C o m pe ti to r B 'sC o m pe te nc e s

C o m pe ti to r C 'sC o m pe te nc e s

Yo u r C o m p eten c e

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

W h e r e to u s e F in a n c ia l D y n a m ic s(a n d w ha t k in d s of corp ora te a ssets or serv i ces g en era te v a lu e)

P roperty,M ortg ages,M in in g & E x tractiveIn du stries

U tilities &V oice T eleph on y

In su ran ce,E lectron ic M arkets& R isk M an agem en t

S of tw are,V ideo gam es,C in em a , M u sic,N ew s

D ata T eleph on y,G loba l N etw orkS ervices (e.g . , sh ipp in g )

C om m odityM an u factu rin g(e.g . , paper)

C om p lexM an u factu rin g(e.g . , ca rs, ch ip s)

L oca l S ervices(e.g . , L ega l,G overn m en t)

R eta ilin g ,E du ca tion &P u re R & D

B ran ded-L u xu ryM erch an d ise

M a in ly Ta n g ible A s s e t s M a in ly K n o wle dg e - I n ta n g ible A s s e t s

D C F & Tra dit io n a lV a lu a t io n M e th o ds a re A ccu ra te

Fin a n cia l D y n a m ics is Ne ce s s a ryfo r A ccu ra te V a lu a t io n

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)

R & D

C u s to m erR elat io n s h ipM an ag em en t

Lab o r C u s to m er s

F act o ry

W o r k

Production

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.