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

PowerPoint by:Ray A. DeCormier, Ph.D.Central Connecticut State University

Chapter 8:

Managing Innovation and New Industrial Product Development

I. Strategic processes through which product innovations take shape

II. Characteristics of innovation winners in high-technology markets

III. Factors that drive a firm’s new product performance

IV. Determinants of new product success and timeliness

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 salesGenerate 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 cyclesAccelerating technological advances,

…Speed & Agility is central to success.

JAMES QUINN ASSERTS:

Innovation tends to be:

a. Individually motivatedb.Opportunisticc. Customer Responsived.Non-lineare. 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

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.

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.

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.

Autonomous Strategic Autonomous Strategic BehaviorBehavior

Product Champion

A product champion is an individual who:1. Takes on a central role in sensing a

marketing opportunity2. Mobilizes an informal network to assess

the opportunities via their:a. Technical feasibilityb. Financial opportunity

3. Is willing to take on risk (reputation) to bring the project to light

Entrepreneurial motivation can be nurtured and encouraged based on:

1.Availability of rewards2.Senior managements’ encouragement & support3.Resource availability including release time to work on entrepreneurial projects4.Organizational structure that promotes entrepreneurialism by providing an administrative mechanism that brings others into the innovative process when needed5.Two other influences are:

Intrinsic motivation Work design: availability of challenging projects

Activation of the Strategic Decision Processa. Induced: Manager defines the market that

is in line with the organization’s strategyb.Autonomous: Managers define a market

that diverges from the organization’s strategy

Nature of Screening Processa. Induced: Formal screeningb.Autonomous: Informal network that

assesses new ideas

Type of Innovationa. Induced: Incremental to present

productsb.Autonomous: Major – whole new product

lines

Nature of Communicationa. Induced: Consistent with organizational

work flowb.Autonomous: Departs from work flow in

early stages of the decision process

Major Actorsa. Induced: Formal as prescribed by the

organizationb.Autonomous: Informal network and

furthered by a so-called “Champion”

Decision Rolesa. Induced: Roles and responsibilities are well

definedb.Autonomous: Roles and responsibilities are

loosely defined in early stages but become more defined as the project progresses

Implications for Strategy:

a.Induced: Strategic alternatives are considered and a commitment to a particular strategy evolves

b.Autonomous: Commitment to a particular strategy emerges during the early stages as the project progresses through sponsorship of the “Product “Champion”

Table 12.1 7th ed

Induced vs. Autonomous Strategic Behavior: Selected Characteristics of Marketing Strategy Formulation Process

Developed by Cool Pictures and MultiMedia Presentations

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.”

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

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 Four Types: Development ProjectsProjects

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.

• 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

Per

form

ance

Time

DisruptiveInnovations

Sustaining InnovationsPace of Technological Progress

Performance that Customers Can Utilize or Absorb

Range ofPerformancethat CustomersCan Utilize

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 InnovationLooking 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

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Low End Disruption: There is a market who wants the new technology but not as much as is available.

Low End Strategy Test:a. There needs to be an adequate

number of customers who want a low version of the technology (product).

b. The company must be able to create a business model and discounted product to meet that need profitably.

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. A large number of customers are

unable to financially procure the product.

b. It is inconvenient for present customers to use.

New-Market Disruptions

Salesforce.comOne 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) computerEasy access by everyone worldwideEasy to use

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.

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Three Approaches to Creating New-Growth Businesses

Dimensions

Targeted perform-ance of productor service

Targeted customersor market application

Effect on required business model (processes and cost structure)

SustainingInnovations

Performance improvementin attributes most valued byindustry’s mostdemanding customers.

These improvements maybe incremental or break-through.

The most attractive (i.e.,profitable) customers in mainstream markets whowill pay for improvedperformance.

Improves or maintainsprofit margins by exploiting existing processes and cost structure and making better use of current competitiveadvantages.

Low-EndDisruptions

Performance goodenough along traditionalmetrics of performanceat low end ofmainstream market.

Over-served customers in low end of mainstreammarket.

Uses new operating orfinancial approach or both—different combination of lower gross profit margins and higher asset utilizationcan earn attractivereturns at discountprices required to winbusiness at low end ofmarket.

New-MarketDisruptions

Lower performance in“traditional” attributes,but improved performancein new attributes—typicallysimplicity and convenience.

Targets non-consumption:customers who historicallylacked money or skillto buy and use product.

Business model must makemoney at lower price perunit sold, and at unit production volumes that willinitially be small. Grossmargin dollars per unit soldwill be significantly lower.

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.

Table 8.2

How High-Tech Innovators WinTo win in the high tech game, which

experiences:1.Stiff competition2.Short life-cycled products3.High velocity industry

A high tech firm needs to:1.Stay aligned with the market2.Must continually innovate3.Be responsive (on schedule, on time & on

target’s needs)4.Anticipate customer needs

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 Patching - A New Strategy in Dynamic MarketsMarketsEisenhardt & 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.

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.

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 that drive a firm’s new product performance are:1.Quality of the new product development process2.Resource commitments to new product development3.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.

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 CommitmentsThree 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.

New products trigger reactions from competitors when the:

a. New product threatens their marketb. Product is in a rapid growth marketc. Selling firm communicates the new product too strongly

To quell competitive reaction to some degree, companies:

1. Put into action a strong “competitor orientation” before and during implementation2. Promote to niche markets instead of the whole market

Anticipating Competitive Reaction

Sources of New Product IdeasInternally from:

1.Salespeople2.Employees3.R&D4.Marketing Research5.Serendipity

Externally from:

1. Channel Members2. Competitive Moves3. Industrial

Customers4. Ultimate

Consumers

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 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.

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 A. “What do you want?” they ask B. “Where do you want to go?”

A.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.

B.Recognizing the customer’s ability to innovate, many companies have developed tool kits and have invited customers to design their own customized products.

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…

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.

Technical synergy comes from the fit between project needs and the firm’s R&D resources and competencies.

International orientation: New products designed and developed to meet foreign requirements and targeted at world or nearest-neighbor export markets.

ProficienciesProficiencies

In addition to a successful strategy, various proficiencies are important. They include:

1.Pre-Development2.Market Knowledge3.Technical Knowledge

Pre-development proficiency involves several tasks:

A.Initial screeningB.Preliminary market & technical assessmentC.Detailed market research studyD.Preliminary business/financial analysis

Marketing ProficiencyInvolves understanding about:1.What does the customer need, want and

prefer?2.What is customer’s buying behavior?3.What is customer’s sensitivity to price?4.What is the size of the market?5.What are the trends?6.Who and what is the competition?7.Know how to launch a well planned and

targeted campaign backed with appropriate resources.

Involves having the technical experience to bring a product from idea to reality by bringing the product through the various technical stages such as:a.Product developmentb.Prototype testingc.Pilot productiond.Production start-upe.Full production (including quality control)

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.

Developing products quickly contributes advantageously to product development success. Successful companies match the approach to the developmental task at hand. Successful strategies include: