ion and | ct Strategy «all organizations’ growth and performance jg ns including new goods and services, riantly, even when the critical role of th innovation opportunities to pursue of innovation and develop form ideas into new-product Innovat New-Produ tial {0 takes many for s models. Impo deciding whic st create a culture ortunities and trans and innovation are esset Creativity novation, the global marketplace. Ini organizational processes, and business innovation is recognized by managers, ig a demanding challenge. Companies mu effective processes to identify innovation OPP successes. Consider, for exampl process capability in new manu , fa powerful impact on manufacturing processes.! The innovation, ¢ : turing, enables producing a product by building i uP & layer ata time. The exciting aspect of the technology is that costs are reduced by eliminating production lines and waste is Or peantially redaced. Its not necessary to produce large quantile order to gain cost advantages. Product parts (eB, aircraft wings) can ‘be.made in configurations that exist: ing production techniques cannot produce. The technology. is very limited currently but the potential is exciting, Moreover, the technology is likely fo be disruptive wherever itis applied. It promises to significantly impact the economies of manufacturing rho economic pressures and market turbulence that impacted companies in 2 wide range or industries during the early years of the 21" century shifted many, executives’ strategic. priorities avay from the development of euting edge new products.? The innovation pro- eer ot companies like Boeing, Kodak, and Motorola were not mecting the challenges Gf aggressive development of new products, Instead, short-term, bottom-line performance vas the center of attention, These short-term cost initiatives may sometimes be necessary tar it is essential to also pursue long-term innovation strategies. Innovation creates com Felitive advantage for the organization dnd value for customers. Based on a survey of CEOs and government leaders on the topi Chairman Samuel J, Polmisano highlights the following innovation initiatives as impo} innovation. A potentially powerful s emerged which is forecast to have called additive manuféc- 12, the pervasive impact of this facturing technology ha ic of innovation, IBM tant success factors:? Tit Mea Sindivarius” The Economist, Februry 12,2011 ?Thomas D. Kuezmarski, Erica B. Se Kathy i a ! cx B Seamon, Kathryn W. Splotro, and Zachary T. Jonson, “The Breskhoush Me Magicing Menage March-April 2003, 38-43. oe _ incrton: The View fom he Top” Busines Week, Apri 3, 2006, 52 and 54Chapter 8 Innovation and New-Product Srategy 217 ‘amandatory avenue to successful business performance due to the intense Pressures of global competition and commoditization of products and processes. “Business model innovation playSa critical role in gaining a unique position in markets and Competitive space, Product differentiation is only a short-term Sompentive advantage, * Collaboration relationships within the organization and among value chain members, Competition, government, and other relevant groups are essential in achieving success- ful innovation results, * The Chief Executive Officer must personally lead the organization's innovation culture initiatives, In this chapter we consider the planning of new products beginning with a discussion of Innovation as a customer-driven process, Next, we discuss the steps in new-product plan- ning, including generating ideas, screening and evaluating the ideas, business analysis, product development and testing, designing the market entry strategy, market testing, and new-product introduction. The chapter concludes with a discussion of variations in the generic new-product planning process, Innovation as a Customer-Driven Process ‘New-product opportunities that offer superior value to customers range from totally new innovations to _in:emental improvements in existing products. We discuss the different vations, the importance of finding customer value opportunities, and essential successful innovations. Types of Innovations Innovations can be classified atcording to (1) newness to the market and (2) the extent of customer value created, resulting in the following types of innovations: + Transformational Innoyation: Products that are radically new and the value created is substantial. Examples include additive manufacturing, Google, and digital cameras, * Substantial Innovation: Products that are significantly new and ereate important value for customers. Examples include Kimberly Clark Huggies/Nappies and Diet Coke. + Ancremental Innovations: New products that provide improved performance or greater ~ perceived value (or lower cost), such as a new flavor Coca-Cola. ‘A company’s new-product initiatives may include innovation in one or more of the three categories. The reality is that many new products are extensions of existing product lines and incremental improvements of existing products rather than totally new products, These extensions and improvements account for as much as 70 to 80'percent of all innovations The new-product-planning process that ye discuss in this chapter applics to any of the threé categories and is used in planning new services as well as tangible goods, The INNOVATION APPLICATION describes several inleresting innovation initiatives pursued by Google, thé Intermme search leader. Google is an impressive success. story driven by inniovative people like Marissa Mayer. Not surprisingly, in 2010 Google was-No. 2 on Fortune magazine's list of The World's Most Admired Compéinies: and ranked 2" on Bloomberg Business Week's list of the 50 most innovative companies in the wold’> + : . “Suzanne Treville, “Improving the Tnnotation Poke MS Today, December 1994,29. *Gcofl Colvin, “The Worlds Most Aired Compares" Forte, March 31,2011, 39-82, Michael Arndt aul Bruce Einhori, "The 50 Most Innovative Companies Bloomberg BusinesscekAptil 2: 2010, 34.40Innovation Application Marissa Mayet joined Google in early 1999 as a programmer When thy *° 20. By 2007 Google had 5,700 employees and expected sales of $1 bi ‘Consumer Web Products Marissa is a'champion of innovation, an launches that are early and often. HOW GOOGLE INNOVATES » ‘The search lesser has earned a reputation as one of the most innovative cy world of technology. These are illustrative of the ways Google hatches nec’ iaeattng FREE (THINKING) TIME = Ratt * 7 7 Google gives all engineers one day a veek to develop their own pet projecyse how far these project are from the company’s central mission, If work gees 8 ay free days fora few weeks, they accumlate, Google News came out of tne at 5. THE IDEA LIST Anyone at Google can post thoughts for new technologies of businesses ing list, available company-wide for input and vetting. But beware: Ne familiar or poorly thought-out ideas can face ari intellectual pummeling OPEN OFFICE HOURS Think back to your professors’ office hours in college. That's pretty much what key ms efs, Including Mayer, do two or three times a week, to discuss new ideas. One suctesbe of this approach was Google's personalized home page. 3 BIG BRAINSTORMS Work illion, 1d she favors a Sn ane ies Who ae As it has grown, Google has cut back on brainstorming sessions. Mayer still holds ter ight times a year, but limits hers to 100 engineers. Six concepts are pitched and dsait for ten minutes each. The goal: To build on the initial idea with at least one complemen idea per minute. #y % ACQUIRE GOOD IDEAS 5 Aithough Google strongly prefers to develop technology in-house, it has also been vil to snap up small companies with interesting initiatives. In 2004 it bought Keyhole, ic ing the technology that let Google offer sophisticated maps with satellite imagery.. Source: "Managing Google's Idea Factony” BusinessWeek, October 3, 2005, 88-90 7 ion New-product initiatives are guided by customer needs analysis. Even transform + _ innovations should have some relationship to needs that are not being met by existing ucts. However, as we discuss shortly, potential customers may not be good sounding] a for radically new innovations. Importantly, these transformational innovations my ™ disruptive impact on existing products. . inding Customer Value Opportunities a Cystomer value requirements provide important information for determining. se tunities exist to develop new products. Markel segment identification and 421% find segments that offer new-product opportunities to the organization. ee a of existing and potential customers and the competition are vital in guiding &! product planning. 220 4XHIBIT 8.1 Opportunities Chapter 8 novation and New-Produet Sirtegy 221 Customer Value Expectations» Now-Product Opportunities Product Use Experience Customer Value The objective of customer value analysis is to identify needs for (1) new products, C) improvements in existing products, (3) improvements inthe processes tha, produce the products, and (4) improvements in supporting services, The intent ig te fro aps (opportunities) between buyers’ value expectations and the extent to which they aré being met based on product use experience (see Exhibit 8.1). Everyone in the organiza- tion needs to be involved in this process. Google's innovation i This matkei-driven spproach to product planning helps to avoid a mismaich betweeg technologies and customer need: Finding New-Product Opportunities A difference between expectations and use experience may indicate a new product. For example, an alert US. Surgical Corporation (USS) salesperson saw an opportunity to satisfy a surgical need that was not being met with existing products, USS is a unit of ‘Tyco Healthcare Group L.P Its products include wound closuse products and advanced surgical devices. The close working relationship of USS sales'representatives with sut- geons in operating rooms, nurses, and administrators gives USS a critical ‘competitive advantage.” The salesperson identified the new-product opportunity by observing. sur. geons’ early use of self-developed instrufnenis to perform experiments in laparoscopy. Using this procedure, the surgeon inserts tiny TV camera into the body with very thin surgical instruments, USS responded quickly to this need by designing and introducing a laparoscopic stapler. The product is used in gall bladder removal and other internal surpi- cal applications. Matching Capabilities to Value Opportunities Each value opportunity should be considered in terms of whether the organization has the capabilities to deliver superior customer value. Organizations will normally have the Gelling Hol Ideas from Customers,” Fortune, May 18, 1992, 86-87.222. Pat ye Thee De di er briven Ses ons a” nsions Bm tic assessment of the organi siping Mar sin fo PE e807 uct are ory. Partnering ng the =e ation OF -new-product category: soncernl ‘capabilities is 3 i ations: Transformational OPN. tall) 2 aipod Customers may not DEB™ T ince they reeate new families © sas aC al replace ting product: ThE eee ee exampl new prow erence f0T 8 evolutionary new Pi uch ers, Federal EXPress ipate 2 fibers, video cassette recorders, a 2 rset weg nese Sa devel tt and be willing © make the tev manage pial ere © aed by aly LE to finding new-produ ties (see Exhibit pot very useful in eva hese transformational innovations “The familiar admonitio who the customer is—™4 nology a ), whereas ating Pot a tobe customer-driven 8 th cy. ike, any melons valuating new-product o tein ea in am ‘puch more app incremental than for discontinuows novation.” Radical innovations have the: potential of disrupting. exit and ereating negative impacts on the Teading firms that pursue ne existing technologies. ° Examples ‘of disruptive inovations inclu {Geirline), Salesforce.com (customer ‘management sofware), and ste fechnologies are often not considered 10 be threats by firms pursuiny Clayton Christensen ‘and Michael E. Raynor in The Innovator s So! analysis whthese threats and provisle important guidelines for. managing dis tions |! THE challenge for companies confronted with potential disruptive OPP‘ threats is recognizing that product planning processes differ for sustain ¥g 2! sdhives must mart tbe necessary 10 Po! rate organization independent fr ~ Commoditization and intense global competition are creating pre evolution of a creative company: toward anew corporate model mij steps shown in Exhibit 82.” When products become commodities, prot ‘and differentiated advantages arc difficult "Unless proactive iniiatves are taken, likely to dominate innovation activities, A good market/techni 1g successful with radical technologies. Priority should be given to market 1 jpportunities ( sruptive innovations. Exe disruptive technology in a sepa the existing technology ii “tid, 1. “Ibid, “Bruce Nussbaum, “How to Build Inno Fs . 0 i novatve Companies” Business eek, August 1, 2005, 62-63 rnoremental improvements; Develg aires Fe iin a company that has the need | juct ideas that may be called rai ff products and businegag? t understand how the vm is that customers MAY NOt an Ie, initial response from, and CNN was .s Corning In¢=did with ent’s vision may be fal ig customer value opportuni, jot opportunities ae olin value when its not at all clear features created bythe sting, (sustaining) technologies sw-product strategies using de Amazon.com. jeBhe - minimills. Disruplve 1 sustaining technologies | yon offer a compeling ortunities and nc sruptve age both processes. It may rom the core business. essures for change. The it logically follow the fit margins decline toachieve n the core business 8 | jology match is impor ization, ovation (C8. te for innove- nthe tin jches that he Probe ness School2 HIBIT 8. exten fhe creative Company few corporale model is aking ocusing ne aereay and ipotion eto “i ene Ser, Chapter 8 Innovation and New-Product Strategy 223 we shippe ing share of may oN ae ici Rae freon ma as a key organizi sera “vig Desion Strategy begin: %0 replace Six Sig oo Prinelple; Design’ plays key role it produc Persist wand understanding the consumer experience. enter S ECYSTEP. 4 122. Fei weld Fale Rpm pn i _ Creative innovation becomes the key driver of growth. Companies. | master new design thinking and metrics nd create products that | \ adaresf ca Seane ee ene ae logis that «The duccesstul Creative C “Innovation DNA. Winije the traditional technology does not serve well. Christensen and Raynor also propose that Products developed from disruptive technologies which are not currently valued bby cus- tomers may match future value requirements very well. The eventual strong preference for digital photography displayed by buyers is illustrative. Interestingly, one impact of the changing relationships with emerging markets like India and China and others is that they are perceived increasingly not simply as target markets for ‘new products, butas sources of innovation and new products with a global impact. The geog- raphy of innovation is changing from a time when the locus of leading-edge thinking was the United States and Europe to one where the rise of Asia is beginning to dominate innova tion.) The link between emerging markets and “reverse innovation’ (the faa ef innovation from emerging markets to the west) is highlighted in the GLOBAL APPLICATION, initiatives of Successful Innovators Certain companies seem to consistently excel over others in developing successful new Products. Imporlantly, successful innovators often pursue similar initiatives, Ereating an innovative culture is essential to generating successful new products, Research findings constantly point to the importance of an innovative organizational climate and culture."* This requires top management to position innovation as a distinct organizational priority and communicate the importance of innovation to all employees. Moreover, deciding the right innovation strategy involves ‘defining the product, market, and technology scope of the organization. This requires determining corporate purpose ati a0, danovation Nation How America Is Losing Its Innovation Edge, Why lt Mauers, and What He Con ‘Do to Ger it Back (New York: Free Press, 2007), i "Robert Cooper, “Benchmatking New Prodi Ufrfance;Resuls ofthe Best Pactizes Stuy” European { ‘Management Journal, February 1998, 1~7; “Producer Rover,” The Economist, March 4, 1995, 70; Kucemmrski etal. “The Breakthrough Mindset” joeGlobal Emerging Ma To Application and “Reverse aT En f, Bik Fc ee CrindVation {A’séveral ways)- Coun: ‘s ean iypseeinicraion (vera ways Eat Emerg rhe fen not Aly swith ster Geowth pros 2 reps these: 92s 1g methdds and business procetses 4 er in emerging matkels: makes thet an attractive: mara). The Unievet and Nese ae fast mowing their RED to emet Greater:‘spending :powe new products: Companiés ee eerie oe fake the view thal for yeas the chiipany sold inioded Wea, it ing a reverse Innovation oF "tr roduets to, emerging markets, but now it is pursuing @\re orn Fes taeecae veloping products in countries like China and India and Bie “them globally" *'* ore “The result is reverse flows of innovation from emerging merkets to the developed Bi * One example is Nestle’s Knory bouillon jellies. Research highlighted. the Chinese ge long-boiled, dense soups. Knorr’s conventional cubes and granules did not deliverden, ‘of taste or dissolve quickly enough, The solution was creating small pots of jelied logy lon. This led to the subsequent and successful launch of the bouillon jellies in Euroge and the rest of the world, - Gee . * Pulpy, a frujt-based drink, is Coca-Cola's first international product to be developed in thé emerging world and to make a significant impact on group-wide sales. Originated|y China by Coke's Minute Maid unit, it was then rolled out over Asia, Latin America, and eastern Europe. It is an unfamiliar Coke brand in London or New York, but all the rage n Shanghai, Jakarta, and Mexico City. * Siemens in India has developed a low-cost X-ray scanner that is being rolled out to the developed world because of its quality and low cost. + GE sells Indian-developed electrocardiograms and Chinese-devised ultrasound scanner around the world. The Indian electrocaidiogram device sells for $1,000 (a tenth of the Price of the original and bulkier U.S.-developed machine). The Chinese scanner sels fo $15,000, vastly cheaper than the model GE used to try and sell the Chinese market. *+ Nokia uses indian and Chinese software skills to develop smartphones. | * Vodaphone launched a mobile money transfer system called M-Pesa from its Kenyan affiliate, which'has reached the unbanked consumer in Africa and India—it may be offered to the 17 million unbanked individuals in the United States. Good ideas and new products from emerging markets are being plugged inte global systems of manufacture and marketing, impacting on a company’s competitiveness in emerging markets but also in the industrialized countries. Sources: Jeffrey R. Immelt, Viay Govindarajan, anc Chis Trimble, "How GE is Disrupting Itsell," Harvond Business Review, October 2009, 56-65, Louise Lucas, "New Aecent an Consumer Tastes,” Financial Times December 14, 2010, 16. Stefan Wagstyl, “Replicators No More,” Financial Times, Janiary 6, 2011, 11s and scope which set important guidelines and boundaries for new-product planning. High cuality new-product-planning processes are essential to operationalize the ‘organizatiot® iMovation. strategy. Importantly, achieving successful new-product outcomes requit® allocating adequate resources to new-procuct initiatives, Finally, the extent to which th) organization can leverage its capabilities into promising new product and market oppo ities enhances innovation performance (i the leveraging efforts are successful). ROE and Gamble“has been particularly effective in Belting its, different busi nesses to collabo in leveraging their capabilities o develop new products ee : haChapter 8 funnation and New-Product Sinutegy 225 ares Creoting a6 este Innovative : xe cunure : = eovetagng igh Innovation Capabities gy fimo saes AS Msuategy anova 79 ‘stRaTEIC INITIATIVES, Making Resource Developing and ‘Commitments. Implementing Etfecive New Product Processes ‘Apple is consistently ranked at or near the top of innovative companies. A key feature is easy 10 use software that will run on all ofits mobile devices." The strategic initiatives shown in Exhibit 8.3 have consistently been good predictors of successful innovative orga- nizations based on research studies, management judgment and experience, and analysis of specific companies’ innovation experience. Inriovation Through Collaboration In complex and fast-moving markets, many organizations are pursuing innovation through collaborative relationships with others (see Chapter 7). For example, Eli Lilly in pharma- ceulicals created the Innocentive online forum posting difficult chemical and molecular problems to a global, virtual -R&D talent pool, and paying for solutions, rather than relyng n in-house R&D expertise." JBM's performance is underpinned by a strategy of collabo- rating with cuistomers and rivals to creaté new technologies, with multiple collaborative projecis in all the company’s major segments and creating dozens of joint ventures for R&D called “collaboratorics:""” Innovation at P&G was led by a “connect and develop” strategy ‘of working with external partners, replacing its history of relying on in-housc R&D."* The underlying link is recognition of an “era of open innovation,” where searching for ideas + and developing strategic relationships outside the organization underpin success."” ‘As companies increasingly collaborate with outsiders to innovate, there are several forms of collaboration to consider: pe 2: + The elite cirele—in which a company chooses participants, defines the problem and chooses the solution. + The innovation mall—where a company posts a problem and anyone can propose a solution, Tergscin, “Tnventing New Technologies and Marke" echnology review, March-Apeit 2011, 36, "*pyniel Burns and John David Mann, "Rethink the Mode! for Innovation," Financia Times January 27,2011, 1. "David Kickpatiek, “IDM Shares Its Seresi" Fortune, September $, 2005, 60-67 chard Evans, "Reach Out in an Era of Open Innovation’ Financial Tames, June 21,2007, 14 "Deborah Ancona and Henrik Bresnan, X-Team: How to Build Teams That Lead, Inoyute, an Succeed (Boston: Harun Business Schoo! Press, 2007).226 Part Three Designing Marker Driven Sate : wybody can propose problems, offer soy, lu oy +. The innovation community—where 2" ide which solutions €0 Us, ; and decide private club with participants jointly slag, + The consortium—which operates like @ a To came et won tem and shoeing 1S” Different forms of collaboration ft with different sirwations faced by innovators, ang, is likely that needs will change over time. i jes of Product Cannibalization Coit ZSEn RENTS wien ne pect ctroes ules om ea SRI product, g, rae neaaet hesitant to develop improved products because of their successtil exiy products. Instead, proactive cannibalization 1s often a viable strategy. Proactive cani pation consists of the pursuit ofa deliberate, ongoing strateBy of developing and int ing new producté that atract the buyers of a company's exISne products. The stra logic of thi tter solution to anced currently being satis is concept is offering buyers a b Hanae resists tp cannibalization Sédriven by che bellef that is vaproduet gaa company to compete with its own products and services Nonetheless, the reality is hy changes in market requirement Jue opportunities will result in compet ts and customer val threats for existing products and technologies; race ae various examples of the negative consequences of avoiding cannibalization tiatives ia the communications, fiiancial services, retailing, and other sectors, [usta Sony's continued support ofits Trintron TVs even though it was apparere that consumes favored flat-panel TVs. Proactive cannibalization may be essential 1o many firms.to sustaing competitive advantage and achieve financial performance and growth objectives, In supportet ‘earch sponsored by the Marketing Science Insite the logic of proactive cannibalization, res inulicees that managers of successful firms proactively esist the instinct to retain the valu post investments in product development”! They pursue proactive cannibalization inialvs Recognizing the Realiti New-Product Planning ‘A new product does not have to be a high-technology breakthrough to be successful butit must deliver superior customer value. Post-it Notes became 2 big winner for 3M Company” The familiar notepaper pads come in various sizes and each page has a thin strip of adhesive Thich can be attached to repors, telephones, walls, and other places. The idea came ffom 23M researcher. He had used slips of paper to mark songs in his hymnbook, but the paper iminate the problem, the émployee applied an adhesive that had beet which, interestingly, failed to provide the adhesi® The adhesive worked fine for marking songs the book. Initially, office-supply vendors saw no market for the sticky-back notepaper. The 3M Company employed extensive sampling to show the value of the product. Over the: sigs nature of the CEOS aciministrative assistant, samples were sent to executive assistanis Fortune 500 companies. After using the supply of samples, the executive assistants more. Post-it-Notes quickly became indispensable in both offices and homes. kept falling out. To eli developed in 3M's research laboratory, strength needed in the original application. Gary bar and Robe Vergni, “Which Kind of Collaboration i Right for ou?* Harvard Busines RAS wt December 2008, 78-66 : reese Chandy and Geral Tells, “Orpnizing for Rodin! Product Innovation,” MSI Rept NE + al See a (Cambiidge, MA: Marketing Science Institue, 1998) Siiawrence ingress, “By lmproving Scratch Paper, 3M Gets New-Produet Winne ‘March 31, 1983, 27.2.Chapter 8 novation and New Product Srategy 227 Creating i tics (ee fecha eae og culture is an important foundation for successful innovation \so necessary to set some boundai i i = : ; ries concerning the types of new a fecacr ge sconsidered for possible development. We examine these issues followed by a ion of the activities that comprise the new-product-planning process. Developing a Culture and Strategy for Innovation Open communications throughout the organization and high levels of employee involve- ate Sees os cenranetie of innovative cultures. Recognizing the importance of to chceuraae (arate and innovation strategy, Google has pursued several actions intended Fine utage innovation initiatives (see earlier INNOVATION APPLICATION). Evidence Of innovative cultures may be found in corporate mission statements, adver Sagee, presentations by top executives, and case studies in business publications. novation Cultare Creating (and strengthening) an innovation culture can be encouraged by several interte- lated management initiatives: Plan and implement a two-day innovation workshop of top executives to develop an innovation plan. This would involve use of cross-functional teams, resource allocations, rewards, and innovation performance metrics, Develop an innovation statement highlighting the company’s objectives and senior man- agement’s roles and responsibilities Conduct innovation training programs for employees and managers to encourage com + Communicate the priority of innovation via articles, newsletters, and presentations to employees, shareholders, and customers. : * Schedule innovation speakers on a regular basis to expose employees to innovation authorities. Strategy for Inrtovation ‘The organization's innovation strategy spells out management's choice of the organization's ‘most promising opportunitics for rew products. This strategy should take into account the organization's distinctive capabilities, relevant technologies, and the market opportunities that provide a good customer value match with the organization's capabilities. ‘A major benchmarking study of 161 business units across a broad range of industries in the United States, Germany, Denmark, and Canada indicates that a carefully formulated and communicated new-product innovation strategy is a cornerstone of superior new-product performance. A successful new-product strategy includes: 1. Setting specific, written new-product objectives (sales, profit contribution, market, sbare, etc.) o 2. Communicating throughout the organization the role of new produicts in contributing to the goals of the business. - 3. Defining the areas of strategic focus for the corporatioi kets, and technologies, 4, Including longer-term, transformational projects in the portfolio along with incremental projects. terms of product scope, mar- ezmarski etal, “The Breakthrough Mindset,” 43 Cooper, “Benchmarking New Product Performance.”Balancing var and “Small:i”” eae n Tir Tete vZ Application “growth strategies |S {ooted in the beliet that potential rey, sa cy n omit an “The aversion to “Bi ; al ‘be dccrued too far in the future at too high ask. This belle i POSES costs that inderstgod. Even, though tie actual, rewatds may ‘be Lealizedt far-in the future, the «lt ‘Markets’ account fot them in thelr, expectations of, (suitably, discounted) earnings Fim is viewed 8 mired in slow-growth markets, vulnerable to emerging technologist Tacking a éompelling story about its (thre growth thrust the Bock price wil surely galt 2 Balancing Risk and Reward along the Growth Path >) | 'New.t6 company * : Adjacent Ray Present Present company. Eran ably a alure + “As the risk matrix shows, it is far less risky for a business'to laulich a new productortedy nology into a familiar served market than to adapt a current product to a‘new end-use mar ket. Market risks are much greater than product risks because there are more dimension of uncertainty, including competitors, chaninéls, and consumers. If the market is enti | unfamiliar, the firm doesn’t even know what it doesn’t know and the knowledge is had | to. acquire, Market risks also tend to arise much later in the product development prove and are-harder to resolve. A further complication is that an existing brand name may fi ‘no meaning in a.tnew to.the company” market, Because prospective buyers lack any expe tence, they-view the new entrant as tsky, and nea special inducerents tt the ne product. Some firms have been able to overcome, the centripetal, pull of innovation resol toward cautious, Ic wer-yield ‘small i” growth initiatives and improve their organic 9 ih rate. This: requires visible and vocal top management: Commitment, supporte’ fi Fesources and incentives. A disciplined organic growth, process is also needed 19 oe erately shift, the balance of the portfolio of growth initiatives toward opportunities higher risk-adjusted returns on Many steps were taken to encourage fresh thinking at General Electric including i | sifying the top ranks with outsiders (in a’ break from their “promote-from-within” Mi ie y Keeping executives in their positions longer so they become deeply immersed It ig industries, and tying executive compensation to new'ideas, improved custome! ai tion, and top-line growth, The leaders of each GL business were required to SYD tas SAGO Break-Through" proposals per year promising at least $100 » epott Nove, Mati Sane ae eno a8 BS noraChapter 8 Ianovusion and New-Product Srategy 229 Adopting these strategy guidelines should assist management in selecting the right innovation strategy ‘The STRATEGY APPLICATION on balancing innovation initiatives discusses the importance of considering innovation projects that include search into three domains for organic growth: deeper market penetration, expansion into adjacent markets, and explora~ tion beyond adjaceneies as shown by the risk matrix. Support for the matrix logic is pro- vided by many sources. Developing Effective New-Product-Planning Processes Creating the right culture and selecting the right innovation strategy are essential but not sufficient initiatives in pursuing successful innovation initiatives (see Exhibit 8.3). Innova tion is achieved through the processes put in place by the organization. The previously discussed benchmarking study found that having a high-quality new-product development process in place is the most important cornerstone of new-product-planning performance. Developing snccessfial new products requires systematic planning to coordinate the many decisions, activities, and functions necessary to identify and move anew-product idea to commercial success. A basic (gencric) planning process can be used in planning a wide range of now products. There may be necessary modifications in the process in certain situ ations and these issues are discussed in the last scction of the chapter. The major stages in the planning process are shown in Exhibit 8.4. Later in the chapter we examine each stage to sce what activities are involved, how the stages depend on each other, and why cross- functional participation and coordination 6f new-product planning are very important. Nf Bnecessfl new-product planning requires (1) generating a continuing steam of new- Vroduct ideas that will satisfy the organization's requirements for new products and (2) putting in place people, processes, and methods conducting activities and evaluating, i new,product ideas as they move through each of the planning stages. EXHIBIT 8.4 Nov-Prodic-Planning Process he following initiatives are important in effectively applying the planning process to Yevelop and introduce new products. First, the process involves different business functions, 50 it is necessary to develop ways of coordinating and integrating cross-functiqhal acti ties in the planning process, Second, compressing the time span for product development creates an importint competitive advantage. For example, US. Surgical’s quick response ‘Customer needs analysis ‘Screening and iat - te generaion | | “Cettsien Business analy Marketing strategy | | _development th Testing eae Vy ‘Commercializalion4 230 Port Three Designing Market-Driven Sires z enabled the company to establish fj to laparoscopy equipment d 7 ities require reso St Dost etn duct planning activities req urces and must he in the market. Third the prove oh levels of customer satisfaction at accept « ¢ aged so that the results deliver hie! alt the planning process can be used for new service development as well "Pay Products, : Responsibility for New-Product Planning involves different business functions such ince new-product development involves wed ing, finance, operations, human resources, and research and development (R&D), tke, encouraging cross-functional interaction and coordination are essential. Various ways | tional designs may be employed to coordinate interfunctional meractions that are neg sary in developing successful new products, including: = Coordination of new-product activities by a high-level business manager. “+ Cross-functional coordination by a new-product-planning team. + Creation of a cross-functional project task force responsible for new-produet Plannin + Designation ofa tiew-products manager to coordinate planning among department + Formation of a matrix organizational structure for integrating new-product plang with business functions. + Creation of.a design center which is similar in concept to a new-product team, excay ‘the center isa permanent part of the organization. ‘The design team and design center are more recent new-product coordination mechs nisms. Though cross-functional teams are widely cited as promising new-product planking levelopment EXHIBIT 8.5 Attributes or Dittewnt Products wnd Their Avsotiuted Development Efforts* Source: Karl. Ulich and Stephen B.Eppngs, Product Design ai Development 3 (But Rg, lwiV McGraw-Hill, 2008). porary Maer ae nDeskJet _"., New Beetle . Boxing 7, -rinter ‘Automobile: Airplane ah © 100,006 2-4 ition SS units/yeae “Minis pear" Unity $300.2. Annual volume Sales price = | Number of unique’ 7200 parts. 2 ‘par (oart number) ogre oe “Development time. . 5 years f internal develo (00 people 578 people i "$50 million. > $40 $150,000 $1 million ~ ©$25 million. $500, + Development cost. | Production investment. a “Al ges are nprorim, based on pbly waite fran nd arpa sues Ede M, Olsen, Orie C. Walker, I, and Rober W. Ruckert, “Organizing for Elfetive New- Produ DE ‘ment: The Moderating Role of Produc nnovaveness Journal af Marketing Manary 1995, 48-92.Chapter 8 Innovation andl New-Product Strategy 231 mesh esach figs sge ht hey maybe met apoprite for oning saa et Hei priest ‘Thelmore cad Seana stasis (ce, Tae Be) may be eter in planing line exesionsand product improvements. nie atte te tional structure is failing to identify new-product opportunities outside ope of existing new-prodt planning, and ot identifying potential disrptive threats. fe and scope of new-product projects may influence how the responsibilities are allocated, Illustrative characteristi arora one ae ics of various new-product development efforts are Idea Generatior. EXHIBIT 8.6 ‘An Tanovation Champion in Action at GE Sv Be Hsu, tv ald Creve Comps si fcc, Auge Guided by the new-product innovation strategy, finding promising new ideas is the starting point in the now-product development process (sce Exhibit 8.4). Idea generation ranges fiom incremental improvements of existing products to transformational products. As dis- cussed earlier encouraging commitment to innovation throughout the organization is an important catalyst for new idea generation. Exhibit 8.6 describes how General Blectric’s innovation champion pursues this objective. Sources of Ideas 7 New-product ideas come from many sources. Limiting the search for ideas to those gener- ated by internal research and development activities is far too narrow an approach for most AG PF EE PR ra IN oe a See aes Beth Comstock calls herself “alittle bit of the crazy, wacky one” at corporate hea quarters. And it’s an apt description when you realize she works at General Electric Co. Comstock, 44, is charged with transforming GE's culture, famously devoted to process, * engineering, and financial controls, to one that’s more agile and creative. Chairman and CEO Jeffrey R. Immelt tapped the forrier communications chief to become GE's first-ever chief marketing officer almost three years ago. The job came with a critical twist: the goal of driving innovation through the company’s 300,000-plus ranks. *Creatviy is stil a word we're wrestling with,” Comstock concedes, “It seems 2 bit undisciplined, a bit chaotic for a place lke GE.” More comfortable territory isthe term ‘“maginative problem-solving” —encouraging people to think "what i—yet always with the aim of driving growth, One of Comstock's first moves was to bring in anthro- pologists to aualt GE's culture, They came back with prise for GE's famous work ethic Pose cd thot employees wanted more "wow"—more discoveries from the company founded by Thomas Edison. : CCemétock has a role whose importance is spreading throughout Big Business—that of innovation champion. she began by studying the best praciices at companies such Ss Procter & Gamble, FedEx, and 3M. She brought in a raft of creativity consultants, Fonts, and desigh gurus to lead sessions wth diferent operations. Their names were 7 jotting for G€ types Play @ Richmond (VA) group that heps execs think diferénly, and» Jump based in San Mateo, CA,, which researches how people use things. E's expand: < tng ts army of designers to bring businesses closer to custome. And Cormstockis Staging "dreaming sessions" where Immelt senior execs, and customers debate future sale trends, Comstock concedes some managers view the workshops as a waste of, Tne, "We have a long way to go,” she says. But for GE, there's no turning back. By Diane Brady in New York Oe see od ,AR LOLOL) on " S ive a worldwide rese labal game. Itcan involve a wor a Innovation is anincreasnay 203 ga Conter outside Bejing and q ment operation ike Microsoft's Advanced Te or rae in China, Israel, Switzerland, |apan, an + morphous structure—; r innovation can be the roduct of a much more amorp! ‘Global j ton heen rs ogame soe engender da | en nian sent na tecnlogy pe fr pata projec | ease Soe mest ea he erat pga Leacomins ands anesin tree design stare, the location of Re a matters far less than who controls these networks and wh ere the ene fits accrue, Mobi, ing catre RaD teams, companies can sped develope ed maya | ae eogcieate wide opps pd nemproet aon roe, ound» profesor gga | aly, wo Rad invented an ret method for printing edible images on cakes. PRG ya method to crest Pringles potato chips wth okes and pictures printed on them boos product’ growth. The new product came out in one yea rather than the usual te ong Fea SuSE acai ioecui cone minds tate asus ons erpoye amy membes oss tne wena a Salhi ecgbay ie tat ea of NeW a Ocenia we ey acces sos firms, Sources of new-product ideas include R&D laboratories, employces, customes competitors, outside inventors, acquisition, and value chain members. Both solicitedand spontaneous icleas may emerge from these sources. Increasingly, companies are devs oping “open-market innovation” approaches to generating ideas using licensing, joi ventures, and strategic alliances.”” By opening their boundaries to suppliers, customers, outside researchers, even competitors, businesses are increasing the import and expartof new ideas to improve the speed, cost, and qualily of innovation. For example, when Pitney: Bowes was challenged with protecting constimers and postal workers from envelopes tainted with anthrax spores by terrorists, they had no in-house respanse-—their expertise 18 in Secure metering systems'to protect postal revenues. They collected ideas from fields as diverse as food handling and military security, before’ working with outside inventors ‘9 (0 introduce new produtcts and services to secure mail against bioterrorism-—specialized ahh eeannets and imaging systems to identify suspicious letters and packages Importantly, generating new-product ideas and developing, them into new proxies involves many companies in developing international collaborations and networks. The ae . CLOBAL APPLICATION illustrates this globalization of innovation efforts. he Search Piocess 1 is essential to establish a pronetive'idea-generation and evaluation process that mee the needs of the enterprise. Answering these questions is helpful in developing the Mt™ » ‘generation program: * Should idea search activities be targeted or open-ended? Should the scarch fOr rot Product ideas be restricied to idcas that correspond to the firm's new-product sales)? “Darrell Righy and Chr Zook, “Qpen-Market Imoiaon” Harr Busineds Revaen; October 2002, KO 2Chapter 8 tunmaiion and New: Pronlct Steve 233 fo extensive and aggressive should new-produet idea search activities be? hat specific sources are best for gencrating a regular low of new-product ideas? How can new ideas be obtained from customers? + Where will responsibility for new-product idea search be placed? How will new-product idea generation activities be directed and coordinated? What are potential threats from disruptive technologies that may satisfy customers better than our products? For most companiey, the idea search process should be targeted within a range of product and market involvement that is consistent with corporate mission and objec tives and business unit strategies. While sow... far-out new-product idea may occasi0n ally change the future of a company, more often open-ended idea search dissipates resources and misdirecs efforts, However, management should be proactive in moniior, ing potentially disruptive innovations and opportunities beyond the core product and market focus. Idea Sources Identifying the best sourees of leas depend on many factors inching the size and type oF firm, technologies involved, new. product needs, resources, management preferences, and the organization's capabilities, Manageinent needs to consider these factors and develop 2 proactive strategy for idea generation that wll ality the firm's requirements, Creating 2 Tunovative culture should encourage generating new-product ideas. The innovation siat- egy provides idea gencration guidelines. : Many new-product ideas originate from the users of products and services, Lead user analyses offer promising potential for the development ‘of new products.* The objective is to identify the Companies and product users that pioneer new applica- Clang and to study their requirerients fo guide new-product development in producl- vroricete thavehange rapidly. Lead users Kentify gaps between their valuc expectations eid available products and then pursuc initiatives to meet their needs. Implementing this approach to idea generation Fequifes major internal and external initiatives. The benchte ean be signifieant for an organization's idea generating activities, The intent ts salisly the Tead users? needs; thus accelerating new-prodact adoption by oles companies i Websearch inquifies tepreseni('a flatively n€W soutee of information concerning biy- ers" product preferences: For example, analysis ‘of Search terms may indicate product char- fctérislics and’ features (hat arc of intciest to buyers. Search research may be useful in jicheraling ideas and providing néw-product design information, Involving customers in the innovation process goes! beyond obtaining direct customer feedback. Some companies have gone (6 the extent of equipping customers. cise he toals to develop and design their own protets——ranging from minor mod, we one to major innovations. For example, Bush Boake Allen (BBA) is a global supplier of specialty flavors to food companies like Nestlé.” BBA has developed a Tonikit witich enables customers 10 ‘ereate (heir ‘own flavors, which BBA then manufactures. s FGitaa Thome, Manaying Prt an Service Desefment (Burt Rigs, Li MeGraw Mw, 2007, Tage Ere won Hippel, Democriing Inox (Combridge, MA; THe MIT Tress, 2005) Mpid,, 399-381”riven Srteies 234 Part Three Designing MaryfDr Search es may be helpful in identifying new-p Scapa od pet espe, EW tchgy invocenli See ee a beech nanices Mewar ef commercial and epee /-product activities of competitors. Many trade Publication 4 een pare anh ee =e oe eli be weactioaanindivital or at, Marketing Research lp to identify needs that can be satisfied by ney Rea et teas Ste ad cca et aa and this research method can be used for both consumer and industrial progges te a focus proup consists of 8 to 12 people invited to mect with an experienced moderator discuss a product use situation. Idea generation may occur in the focu: of user requirements fora particular product use situation. Group members ane asked, febest new: product ideas. Later, focus group sessions may be used to evaluate alters tive product concepts intended to satisfy the needs identified in the initial session, than one focus group ean be used at each stage in the process. Ethnographic tes ‘spproaches are als relevant othe search for unsatisfied customer needs (see Chapters), Another esearch technique that is used to generate new-product ideas isthe adhis parel The panel members are selested to represen the firm's target market, Fer cxampl, fethods of Generating Ideas There are several ways of abating eas multiple options in generating produc such a panel fora producer of mechanics’ hand tools w in various industries, including telecommunications, customer advisory groups, Internal and External ! Development —« Research and development laboratories continue to ge Ei United si for promising innovatio Pharmaceutical, Smiconductor, software, and biotech companies spend significanl) n prospects, ReaD ee etee-wise on R&D than other industries, R&D was 21 percent o $7,779 million on R&D in 2004, A\ ated to longer-term projects sales compared to 3 percont Io relevant is the ities in new-pr fast foods, and pharmaceuticals ue am (ex¢lopment efforts outside the firm. Soute® Private laboratories, and small high-technology ee ay sulin identifying new-product ideas, as Wl for new products. Typically, a companye —_ oduct {0 sell or n is availay Ces may a 'S BrOUp discussing ould include mechanics. Compan: *° For example, in 2004 Molly by General Motors. Microsoft pt amount of R&D expenditures alle ‘oduct development.Chapter 8 Innovation and New-Product Strategy 235 Other Idea-Generation Methods Incentives may be useful to get new-product ideas from employees, marketing partners, ‘and customers. Management should also guard against employees leaving the company and developing a promising idea elsewhere. For this reason many firms require employees to sign secrecy agreements. ee Finally, acquiring another firm offers a way to obtain new-product ideas. This strategy may be more cost-effective than internal development and can substantially reduce the lead-time required for developing new products, Procter and Gamble’s purchase of the battery powered Crest SpinBrush from the inventor and Glide dental floss from the Gore Company are examples. 2 Idea-generation identifies one or more new-product opportunities that are screened and. evaluated. Before comprehensive evaluation, the idea must be transformed into a defined concept, which states what the product will do (anticipated attributes) and the benefits . that are superior to available products.”' The product concept expresses the idea in opera- tional terms so that it can be evaluated as a potential candidate for development ito a new product. Interestingly; there is an emerging view thatthe corporate social responsibility and ethi- cal initiatives (which we discussed in Chapter 4) have a direct link to innovation in prod- ucts, value chains, and processes, particularly in identifying new ideas and ways of doing business. The relationship between social responsibility initiatives gnd new-product inno- vation is illustrated in the ETHICS APPLICATION. . Screening, Evaluating, and Business Analysis Management necds-a screening and evaluation process that will climinate unpromising ideas as soon as possible while keeping the risks of rejecting good ideas at acceptable tevels. Moving too many ideas through too many stages in the new-product planning pro- oss is expénsive. Costs build up from the idea stage to the commercialization stage, whereas the risks of developing a bad new product decline as information accumulates about product performance and market accepianee. The objective isto climinate the least promising ideas before too much time and money are invested in them. However, the fighter the screening procedure, the higher the risk of rejecting a good idea. Basedion the specific factors involved, itis nemessary'to establish a level of risk tha is acceptable to management. 5 : valuation should occur regulasly as afvidea moves through the new-proditct planning ~ stages.Since the objective isto eliminate the poor risks as early as possible, evaluation is eeessary at cach stage in the planning process. We discuss several evaluation{échniques ‘Typically, evaluation begins by screenjrig.new:product ideas to idenify those thst are con- ered tp be most promising. Thesp.idogé become concepis and are subjectéd.to more comprehensive evaluation. Finally, business analysis determines whether to mavesthe con- cept into the new-produet development stoge.(see Exhibit 8.4). Screening : ‘A new-product idea receives an initial screening to determine its strategic fitjn the com- “ paty o” business unit. Two quéstions need tobe answered: (1) is the idea compatible with the organization's mission and objectives and (2) is the product initiative, commercially Te Mate Crawfonkand C Anny DiBenedoto, Ney Products Managenient, 10% ei.¢New York: McGraw il 3 Irvin, 2011), Chater fEthics Application Social Responsibility Initia, in and New-Product Inp, ; cade jatives and the growing emphasis on susie; Sociol reaps nites andthe growing emphasis on sustanay rat ical nce ome weed yeas public policy makers and for c yanic r r a: "Behind the dive or sonal ter I BFng opinion tht envan Socal projects not only improve corporate reputations but also foster innovation, “ito | and open up new markets: i ~ : 5 | ‘limite change and greene! consumers mea organizations an lun usin ie innovation’s new frontier: “Suoinabily lado envenmenly fehl pole that on revenues and should be the touchstone for innovation... : | © Companies making sustainability 4 goal may tap new areas of competitive advantaged Fethinking business models as well as products, technologies and processes The pursuit of sustainability involves five stages: * Mgwing compliance with environmental regulation as opportunity—usng cn | bllance a5 the chance to experient. with sustainable technologies, mater ant Processes * Making value chains sustainable—developing sustainable sources of ravi ater, [Reteasing the use of clean energy finding innovative uses for returned produee * Designing sustainable products and services—for example, in product development and packaging. + Developing new business morlels— diiferently. rar cag practice platforms—question through the sustainably lens the donk ant logic ofthe business er Costs and inca finding novel ways to capture value and compe Fareed chad Spine, “rive reward? Companies Mae the business Cae for Ethical intinves* ie noadl Times Apel 28, 2008, 9. kam Nidurals, C1: Prahalad, sna i Rangaswami, “Why Sustanaily is Now he Key Driver of Imevalion” HarvordBisss Rene Sept oe 2009, 56-64 feasible? The compatifiility of the idea considers factors such as internal capabilities (8, evelopment prodvetén, and marketing), financial needs ana competitive factors: Con ‘mercial feasibility corisiders market attractiveness, (echnical feasibility, finaricial allrac- ple, managers from two similar fring ay have Very different missions and objectives 18 well as different propensilies toward sk, so ay idea could be stratégically compatible it one firm and not in ancihr. Also, newsprodct strategies and priorities may be revised when top management changes. For example, when Vice-Chairman Robert A. Lutz joined nel Metin 2001 wa ptmary thangs eo collaborative relationships will design and engineering managers with the Objective of developing exciting new siyliNB Concepts.”? Collaboration initiatives were departure fron past practices at GM. GM's Design Push 1 A UPSpeel* usiestek Say 1 2008, 4-4Chapter 8 anoration and New-Produet Srategy 237 eee a screening criteria, scoring and importance-weighting tech- niques may be ted make a ons evaluation fhe factors considered in the screen- ne oe eae ‘weighted scores, an evaluation is obtained for each idea being sereened, Management can st rages foc passing and sjeting. The effectiveness hods is highly dependent on including all of the relevant criteria and gaining agreement on the relative importance of the screening factors from the people involved in the evaluation process. Concept Evaluation The boundaries concerning idea sereening, concept evaluation, and business analysis are often not clearly drawn. These evaluation stages may be combined, particularly when only a few ideas are involved. After completing initial screening, each idea that survives becomes a new-product concept and reccives a more comprchensive evaluation. Several of the same factors used in screening may be evaluated in greater depth, including buycts’ reactions to the proposed concept. A team representing different business functions shoul participate in concept evaluation Importance of Concept Evaluation Extensive research on companies’ new-product-planning activities highlights the erit- cal role of extensive market and technical assessments Lefore beginning the develop- ment ofa new-product concept? These “up-front” evaluations sliould result in a clearly defined new-product concept indicating its market target(s), customer value offering, and positioning strategy. Research concerning product failures strongly suggests that many companies do not devote enough altention to up-front evaluation of product concepts, ‘The failure of the handheld CueCat scanner offers compelling evidence of the value and importance of concept evaluation. The purpose of CueCat was to read a bar code dand when attached to a personal computer, provide a direct access to a Web page for the product. The founder of Digital Convergence Corp. raised $185 million from investors Pe commercially Innnch CueCal2* Large investors included Belo Corp, ($37.5 million), Radio Shack ($30 million), and Young & Rubicam ($28 million), The business plan w: to give away 50 million CucCals ($6.50 cost) and oblain Fevenues from advertisers and Ticensing fees. Four million CueCats were distributed but few were used. People did not want to earty the scanner around and could quickly access Web sites by typing the adress CucCatdid not filla consumer need. Importantly, this weakness could have been identified by concept evaluation before large expenditures were mate to produce and distribute the product i Several concept evaluation issue’ more than concept tests. For example, ryses, market forecasts, and technical Exhibit 8.7 are helpful in deciding how (0 evalu: are highlighted. in Exhibit 8.7. Evaluation inclades the newproduct team may perform competitor anal 1 feasibility evaluations. The questions indicated in te the new-produét concept Concept Tests Concept tests are usefitl ine new products. The purpose o| concept from a sample of potential srivation and refinement of the characteristics of proposed concept testing is 1o obtain a reaction'to the nev-product I buyers before the product is developed. More than one Pooper, “Benchmarking New Product.Performance.”