Profitability from New Product Development: why or why not? Parry M. Norling Visiting Fellow Chemical Heritage Foundation It’s a great little product,

Profitability from New Product Profitability from New Product Development: why or why not?Development: why or why not?

Parry M. NorlingParry M. NorlingVisiting FellowVisiting Fellow

Chemical Heritage Chemical Heritage FoundationFoundation

It’s a great little product, but we’re still working onpackaging and handling

The MessagesThe Messages New Product Development is risky New Product Development is risky

business; often avoided by well business; often avoided by well established firmsestablished firms

A New Product Development Strategy A New Product Development Strategy can improve the odds of successcan improve the odds of success

New Product Development can be the New Product Development can be the first step in a series of profitable first step in a series of profitable innovative efforts for a firminnovative efforts for a firm

Tetra Pak took the risks, has taken the Tetra Pak took the risks, has taken the early steps in a series of innovative early steps in a series of innovative efforts, and appears to have improved efforts, and appears to have improved the odds for success in new product the odds for success in new product development thanks to the inventors of development thanks to the inventors of Tetra Recart.Tetra Recart.

Barriers to InnovationBarriers to Innovation

Machiavelli: Machiavelli: The Prince, The Prince, Chapter VIChapter VI

15151515

… there is nothing more difficult…, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things. Because the innovator has for enemies all those who have done well under the old conditions, and lukewarm defenders in those who may do well under the new. This coolness arises partly from fear of opponents who have the laws on their side, and partly from the incredulity of men, who do not readily believe in new things until they have had a long experience of them.

Research has told us that large and resource rich companies over time reduce their capacity for generating innovations, especially new product development.

New Product Development New Product Development is risky businessis risky business

1638: the Kalmar Nyckel arrives in New Sweden – now Wilmington Delaware

New Product Development New Product Development is risky businessis risky business

Anders Olsson and Lisa Olsdotter emigrated from Nora August 25, 1854 to the United States and Bishop Hill, Illinois

Success Rate Entirely New ProductsSuccess Rate Entirely New Products

3000 rawideas.03%

300 submittedideas.3%

125 beginningprojects

.8%

9 largedevelopments

11%

4 majordevelopments

25%

1.7 launches60%

1 commercialsuccess

Stevens and Burley, RTM May-June 1997

The chances for failure are greatestThe chances for failure are greatestwhen you know the least about the technology being when you know the least about the technology being

developed and/or the target marketdeveloped and/or the target market

The “Familiarity Matrix” allows mapping ofThe “Familiarity Matrix” allows mapping of

R&D projects based on the extent of knowledge R&D projects based on the extent of knowledge about technologies and marketsabout technologies and markets

Edward B. Roberts and Charles A. Berry, “Entering New Businesses: Selecting Strategies for Success” Sloan Management Review, Spring 1985 pp 3-17

Familiarity Matrix: A Guide Familiarity Matrix: A Guide Place Your Project in One of the Place Your Project in One of the

Nine BoxesNine Boxes

Decreasing knowledge of the technology

De

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Increasing risk of fa

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Familiar New , familiar New , unfamiliarFam

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Familiarity Matrix: A Guide Familiarity Matrix: A Guide Place Your Project in One of the Place Your Project in One of the

Nine BoxesNine Boxes

Decreasing knowledge of the technologyDe

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Market Penetration

Market Extension

Market Expansion

Product Extension

BusinessExtension

BusinessExpansion

New BusinessModel

BusinessExpansion

ProductExpansion

Familiarity Matrix: A Guide Familiarity Matrix: A Guide Place Your Project in One of the Nine Place Your Project in One of the Nine

BoxesBoxes

Market Penetration

Market Extension

Market Expansion

Product Extension

BusinessExtension

BusinessExpansion

New BusinessModel

BusinessExpansion

ProductExpansion

Probability of Success

New Product with unrelated technology in existing market: 50%

Familiarity Matrix: A Guide Familiarity Matrix: A Guide Place Your Project in One of the Nine Place Your Project in One of the Nine

BoxesBoxes

Market Penetration

Market Extension

Market Expansion

Product Extension

BusinessExtension

BusinessExpansion

New BusinessModel

BusinessExpansion

ProductExpansion

Probability of Success

Existing product in a new market: 15%

Familiarity Matrix: A Guide Familiarity Matrix: A Guide Place Your Project in One of the Nine Place Your Project in One of the Nine

BoxesBoxes

Market Penetration

Market Extension

Market Expansion

Product Extension

BusinessExtension

BusinessExpansion

New BusinessModel

BusinessExpansion

ProductExpansion

Probability of Success

Improved product in existing market: 75%

“Suicide Square”.03%

Familiarity Matrix: A Guide Familiarity Matrix: A Guide Place Your Project in One of the Place Your Project in One of the

Nine BoxesNine Boxes

Market Penetration

Market Extension

Market Expansion

Product Extension

BusinessExtension

BusinessExpansion

New BusinessModel

BusinessExpansion

ProductExpansion

Probability of Success

New Product in a New Market: 5%

Time

Pro

fita

bili

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DisruptiveInnovation

ApplicationInnovation

Product Innovation

ProcessInnovation

MarketingInnovation Business

ModelInnovation Structural

Innovation

Different types of Innovation give greater profitability at different points in the life cycle of a product family

Geoffrey A. Moore “Darwin and the Demon: Innovating Within Established Enterprises” HBR July-August 2004 pp.87-92

New product invention, tailoring, and development

Different types of InnovationDifferent types of Innovation

Disruptive Innovation – an Disruptive Innovation – an invention that can displace invention that can displace the present market leader the present market leader or create an entirely new or create an entirely new marketmarket

DuPont Diamond Award Winners 2002Tetra Pak, Inc., Sweden / USANestlé Purina PetCare, ItalyFirst Retortable Carton System for Nestlé Dog Food.This represents the first retortable carton packaging system on the market.

Different types of InnovationDifferent types of Innovation

Application Innovation: Takes Application Innovation: Takes existing technologies into new existing technologies into new markets to serve new purposesmarkets to serve new purposes

Different types of InnovationDifferent types of Innovation

Product Innovation: Takes an Product Innovation: Takes an established product to the next level established product to the next level – reduced cost, improved quality, – reduced cost, improved quality, greater functionality greater functionality

Different types of InnovationDifferent types of Innovation

Process Innovation: Makes processes Process Innovation: Makes processes for established products in for established products in established markets more effective established markets more effective and more efficientand more efficient

Different types of InnovationDifferent types of Innovation

Experiential Innovation: Makes some Experiential Innovation: Makes some superficial changes in the product that superficial changes in the product that improve the customer’s experience with improve the customer’s experience with the product – adding delight, greater the product – adding delight, greater satisfaction, or reassurancesatisfaction, or reassurance

Different types of InnovationDifferent types of Innovation

Marketing Innovation: Improves the Marketing Innovation: Improves the interaction with customersinteraction with customers

Different types of InnovationDifferent types of Innovation

Business Model Innovation: Reframes Business Model Innovation: Reframes the role of the company in the value the role of the company in the value chain or the way in which the chain or the way in which the company meets customer needscompany meets customer needs

Different types of InnovationDifferent types of Innovation

Structural Innovation: Capitalizes on Structural Innovation: Capitalizes on disruption and changes in the disruption and changes in the industry to restructure industry industry to restructure industry relationshipsrelationships

It all starts with New It all starts with New Product DevelopmentProduct Development

ButButNew types of New types of

innovation need to be innovation need to be introduced with new introduced with new innovation skills to innovation skills to sustain profitabilitysustain profitability

A company cannot rest on its laurels; many product class winners have fallen victim to their successUS Steel (steel)

ICI (chemicals)

Kodak (photography)

Goodyear (tires)

Polaroid (instant photography)

Zenith (TVs)

IBM (PCs)

Smith-Corona (typewriters)

Research has told us that large and resource rich companies over time reduce their capacity for generating innovations, especially new product development.

Companies with resilient cultures grew in value between 1926 and 1999 16 times more than the market average and six times more than comparison companies of similar size in similar industries.

Resilient organizations:

1. Deliver continuous innovation – new products

2. Inspire trust

The Laggards:The Laggards:

Took few risksTook few risks Relied on mature productsRelied on mature products Continued to do things in the ways Continued to do things in the ways

that brought success in the past (core that brought success in the past (core rigidities)rigidities)

Maintained an inward focusMaintained an inward focus Felt safe near termFelt safe near term Eventually lost out Eventually lost out

A Lesson for the Paper Industry?A Lesson for the Paper Industry?

Tetra Pak has shown that opportunities can be sought beyond a reliance on mature products

The MessagesThe Messages

New Product Development is risky.New Product Development is risky.

Odds of success can be understood & improvedOdds of success can be understood & improved

New Product Development is only the first step New Product Development is only the first step toward sustained profitabilitytoward sustained profitability

Tetra Pak took risks, has taken the early steps in Tetra Pak took risks, has taken the early steps in innovative efforts and isinnovative efforts and is

A demonstration of a resilient company in the A demonstration of a resilient company in the paper industrypaper industry

Additional slides for Additional slides for discussiondiscussion

1802 1830 1850 1900 1925 1945 1990 2000 2050 2090

Birth

Growth

Maturity

Birth

Growth

Maturity

Birth

Growth

Maturity

ExplosivesExplosives

Chemicals,Chemicals,EnergyEnergy

Chemistry, Chemistry, Biology. . .Biology. . .Knowledge - Knowledge - Intensive Intensive SolutionsSolutions

Familiarity Matrix: Optimum Strategies forFamiliarity Matrix: Optimum Strategies forTechnological Innovation: Finding others Technological Innovation: Finding others who know more about the markets or the who know more about the markets or the

technologytechnology

Decreasing knowledge of the technologyDe

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Internal Development, Acquisition, or Joint Venture

Joint Venture

Internal Development

Venture Capital or Educational Acquisition

Internal Venture or Acquisition or License

Internal project, or Acquisition, or License

Venture capital, or Educational Acquisition, or University Relationship

Venture Capital or Educational Acquisition

Joint Venture, Strategic Alliance or University Relationship

The Inquisition

It’s good to be inquisitive –Bad to hold an inquisition

Innovation : Not a Innovation : Not a

Linear ProcessLinear Process

Market knowledge

Technologydevelopments Changes in

the externalenvironment

Knowledge of customer

needs

Company strategies

Scientific advances

IDEAS

OPPORTUNITYIDENTIFICATION

CONCEPT/TECHNOLOGY

DEVELOPMENT

SCREENING ANDBUSINESS ANALYSIS DEVELOPMENT

ANDCOMMERCIALIZATION

MARKETPENETRATION

AND DEVELOPMENT

So what makes creative people creative? If we could look into the minds of creative geniuses, what would we see?

Joy of discovery

Questioning

Desire to interrelate

Tolerance of ambiguity

CuriositySense of challenge

Playfulness

Inquisitiveness

Willingness to take risks

Positive discontent

Desire to see things differently

Desire to learn Willingness toexperiment

Wonder

Some thoughts on Creativity and Some thoughts on Creativity and InnovationInnovation

““It is the duty of private men to It is the duty of private men to obey, and not make innovation obey, and not make innovation of states after their own will” of states after their own will” 15971597

Some thoughts on Creativity and Some thoughts on Creativity and InnovationInnovation

““It is a revolt of innovation; and It is a revolt of innovation; and thereby the very elements of society thereby the very elements of society have been confounded and have been confounded and dissipated” 1844dissipated” 1844

To them antiquity is synonymous To them antiquity is synonymous with wisdom and every with wisdom and every improvement is a dangerous improvement is a dangerous innovation” 1862innovation” 1862