CH-5 INNOVATION PROCESSES

SUSTAINING COMPETITIVE ADVANTAGE requires that organizations continually innovate to

create new products, services, and processes (see Figure 5-1). Successful innovation drives
customer acquisition and growth, margin enhancement, and customer loyalty. Without
innovation, a company’s value proposition can eventually be imitated, leading to competition
solely on price for its now commoditized products and services.
Companies create considerable competitive advantages when they have the capability to bring
innovative products—well-matched to targeted customers’ needs and expectations—to the
market fast and efficiently. Product innovation is a prerequisite for participation in some
dynamic, technologically based industries, such as pharmaceuticals, semiconductors, and
telecommunications. Exceptional innovation capabilities determine the industry leaders.
FOUR INNOVATION PROCESSES
Managing innovation includes four important processes:
1. Identify opportunities for new products and services
Some typical objectives and measures for the idea and opportunity innovation process include:

Identify Opportunities Objectives Measures

Anticipate future customer
Discover and develop new, more effective, or
safer products and services
 Time spent with key customers at
needs targeted accounts learning
about their future opportunities and
needs
 Number or percent of new projects
launched based on client input
 Number of new projects or concepts
presented for development
 Number of new value-added services
identified

2. Manage the research and development portfolio

The research and development portfolio should include a mix of different types of projects
drawn from the following categories:
1. Basic research and advanced development projects create new science and technology
knowledge that can subsequently be applied in commercial projects. Often such basic
research is done in a separate organization.
2. Breakthrough development projects create entirely new products, based on applying
science and technology in a new way. Typically, such projects establish a new product
category or a new line of business for the company. The development of a lightweight,
portable laptop computer in the late 1980s was a breakthrough product in the personal
computer industry. Breakthrough product development projects typically extend over
several years.
3. Platform development projects develop the next generation of products in a given
category. The new platform defines the basic architecture for an extended set of
products likely to be developed and launched for the next several years. Such projects
may incorporate many technological features of the previous generation, but they also
must introduce recent technological advances that offer significantly enhanced features
and functionality. Platform projects generally require considerable resources since they
deliver fundamental improvements in cost, quality, and performance over the previous
generation of products.
 4. Derivative development projects enhance particular features of the platform product to
deliver a product targeted at a specific market segment. The modifications can lower
the cost or enhance the functionality of an existing product. For example, a desktop
computer product can offer one model with a faster processor for high-end users who
require complex graphics or play interactive video games, as well as one with a slower
processor for people who use their computer just for e-mail, simple spreadsheets, and
word processing. Derivative development projects require far fewer resources than
platform or breakthrough development projects since they leverage existing product
and process capabilities.
5. Alliance projects enable a company to acquire a new product (or process) from another
firm, either through licensing or through subcontracting. Companies turn to alliance
projects when sufficient internal resources are not available for a desired project, when
in-house development efforts fail to deliver desired results, or when smaller firms have
already developed the basic capability for a new product or process, and purchasing this
capability is less expensive than duplicating the development effort internally.
Typical objectives and measures for managing the R&D portfolio process include the following:

Manage the R&D Portfolio Objectives Measures

Actively manage the product/offer portfolio
for superior innovation and customer
positioning, performance, and profitability
Extend current product platforms into new
and existing markets
Extend product portfolio through
collaboration
 Actual versus desired mix of projects
(advanced development, platform,
derivative, and outsourced)
 Actual versus desired spending on
projects of each type
 Technology ranking (independent
peer review of current technology
capabilities)
 Net present value of products in
project pipeline
 Reach (customer feedback and
revenue projections based on
prototypes of products in pipeline)
 Option value from project portfolio
 Number of projects leveraged from
existing platforms that are targeted at
new markets
 Number of life-cycle extension
projects
 Number of licensed products
 Number of joint projects in new or
emerging markets
 Number of technology or product
partners
 3. Design and develop the new products and services
The product development process is a complex set of activities that cut across multiple
functions of a business. The process typically consists of a series of stages:
1. Concept development: The project team studies market research, competitive products,
technology, and production capabilities to define the basic architecture for the new
product. This stage starts with a conceptual design, including product functionality and
attributes, and estimates of the target market, price, and production cost.
2. Product planning: The project team tests the product concept by model building, small
scale testing, and initial investment and financial planning.
3. Detailed product and process engineering: The project team designs and produces
working prototypes of the product. Simultaneously, the team undertakes the design of
tools and equipment that will be used in large-scale production. Several design-build-
test cycles can occur, in which the product design and the production process are
modified to achieve the desired performance characteristics of functionality, cost, and
quality.

Design and Development Measures

Objectives
Manage the project portfolio  Number of patents; number of patent
citations
 Project yield (percent of projects
advancing from stage to stage)

Reduce development cycle time
Manage development cycle cost
 Number of projects entering each
phase of product development
process
 Number of projects reviewed using
stage-gate analysis or other formal
development review process
 Number of projects delivered on time
 Average time spent by projects at the
development, test, and launch stages
of the development process
 Total time (concept to market)
 Actual versus budgeted spending on
projects at each development stage

4. Bring the new products and services to market

At the conclusion of the product development cycle, the project team releases the product
for initial ramp-up into commercial production. In this fourth process, the project team starts
pilot production to finalize the specifications for the production process. The team builds all the
components on the prototype production equipment and then assembles and tests the finished
product.

Product Launch Objectives Measures

Rapid launch of new products
Effective production of new products
 Time from start of pilot production
until full volume capability achieved
 Number of redesign cycles
 Number of new products launched or
commercialized
 Manufacturing cost of new products
(actual versus targeted)
 Manufacturing process yield for new
products
 Number of failures or returns from
customers
 Initial warranty and field service costs
 Consumer satisfaction or complaints
about new products launched
 Number of safety incidents from new
products
 Number of environmental incidents
from new processes
Effective marketing, distribution, and sales of  Six-month revenues from new
new products products (actual versus budgeted)
 Stockouts or backorders for new
products