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INNOVATION MANAGEMENT

Ji Vacek vacekj@kip.zcu.cz Department of Management, Innovations and Projects UWB, Faculty of Economics Summer semester 2009/10

Lesson 1
Introduction Basic concepts Importance of innovations

CHARACTERISTICS OF SUCCESSFUL INNOVATING COMPANIES - 1


Systematic collection of all impulses that could lead to innovation Creativity of employees Ability to evaluate the possibility of the innovation idea Good team work Project-based approach and ability to manage projects

CHARACTERISTICS OF SUCCESSFUL INNOVATING COMPANIES - 2


Cooperation with external experts (universities, research laboratories) Proper rate of risk-taking Employees motivation (the employees are willing to improve the product and the operation of the whole company) Continued education of employees Ability to finance the innovation activities

Definition of innovation - 1
Technological innovations are defined as new products and processes and major technological modifications to products and processes. An innovation is considered performed if it is introduced to the market (product innovation) or implemented in the production process (process innovation). Innovation includes many research, technological, organizational, financial and commercial activities.

Definition of innovation - 2
R&D represents only one of these activities and can take place during various stages of the innovation process. It can play not only the role of the original source of the innovation ideas but also the role of problem solution framework, which can be turned to at any stage of the implementation. OECD, Frascati Manual 1992

Oslo Manual
Product innovation
A good or service that is new or significantly improved. This includes significant improvements in technical specifications, components and materials, software in the product, user friendliness or other functional characteristics.

Process innovation
A new or significantly improved production or delivery method. This includes significant changes in techniques, equipment and/or software.

Marketing innovation
A new marketing method involving significant changes in product design or packaging, product placement, product promotion or pricing.

Organisational innovation
A new organisational method in business practices, workplace organisation or external relations.

Technological innovations based on specific technology, invention, discovery, Social innovations in critical historic periods more important than technological ones (mail, educational systm, social systm, health care, )

DEGREE OF NOVELTY
Incremental innovations Radical innovations Systemic innovations

Classification of innovations
SYSTEM New series of cars, planes, computers, TV New generation (MP3 and download as substitution of CD) Steam engine, ICT, biotechnology, nanotechnology

Improvement of components COMPONENT

New Advanced components for materials existing systems improving component properties RADICAL new for the world

INCREMENTAL do better what new for the we already do company

INNOVATION PROCESS
Research and development (R&D) Production Marketing Innovation is an opportunity for something new, different. It is always based on change. Innovators do not view any change as a threat but as an opportunity

FOCUS
Use the limited resources in the most effective manner; focus on one of the following:
Operational output Top-quality products Perfect knowledge of customers

RECOMMENDATIONS
Solve the correct problem correctly be effective and efficient Manage innovation as a project Analyze risks Use models, scenarios, computer simulation Study examples of succesful and unsuccesful innovation projects

WHAT TO DO
1. Start with analysis and study of opportunities. 2. Go among people, ask questions, listen 3. Effective innovations are surprisingly simple. They must be focused on specific needs and on specific final products. 4. Effective innovation start on a small scale. 5. A successful innovation always tries to win a leading position, otherwise you create opportunities for your competitors.

WHAT TO AVOID
1. Dont try to be too clever. All that is too sophisticated will almost certainly go wrong. 2. Dont try to do too many things at once. Focus on the core of the problem. 3. Dont try to make innovations for the future but for today. An innovation can have a long-term impact but there must be an immediate need for it.

Three conditions for innovations


1. Innovation means work, hard, concentrated and thorough work. If these qualities are lacking then there is no use for the big talent, cleverness or knowledge. 2. Successful innovations must build on your strong points. The innovation must be important to the innovator. 3. Innovation must focus on a market, must be controlled by the market (market-pull).

CASE STUDIES

Linet elevice
Hospital products Hospital beds, intensive care beds, medical furniture and other equipment increase the comfort of patients and help the nurses. Nursing-care products Nursing beds, bed accessories, bedside cabinets, mattresses and other furniture.

No comment
1990

2005

TOSHULIN
Development of new machines: 1. Customized the machines developed for the specific customer according to its requirements market pull 2. Prototypes there is no specific customer market push

35 30 25 20 15 10 5 0 1998 2000 2002 2004 2006


8 ,5 6 ,8 8 ,8 6 ,9 1 4 ,9 12 1 0 ,7 1 0 ,8 9 ,6 2 5 ,7 2 2 ,7 2 8 ,8 3 0 ,2 2

ti me of del i v ery (i n months ) cus tomi zati on coeffi ci ent (%)

9 ,5

9 ,6

9 ,4

8 ,3

9 ,5

Types of design engineers

spouter of ideas
suggests designs and problem solutions without detailed consideration of all possible results and consequences

system designer

finisher of ideas
elaborates independently in details the ideas which he gets to elaborate

routine engineer
efficient and reliable engineer; however, without creative approach

attendance engineer
performs routine tasks

examines all ideas and thoughts systematically

[1%]

[5%]

[54%]

[30%]

[10%]

Contipro
Connective tissue

products
RNDr. Vladimr Velebn, CSc.

Holding current state


167 employees sales (2008) 242 mil K export 98% of total sales

one of the biggest produces of


hyaluronanu inthe world 30% of the world market 60% of the European market

Customers in 43 countries

Sales in regions

3 pillars of success

1. Maximum attainable quality 2. Sharing expenses with customers 3. Development of original products

3M and post-it notes

http://www.3m.com/us/office/postit/pastpresent/history_ws.html

More about 3M
A Century of Innovation The 3M Story
http://solutions.3m.com/wps/portal/3M/en_US/Ab out/3M/

iGO distribution of bateries


Bateries and accessories for notebooks, mobiles, cameras and other equipment Vision: to develop and sell simple and elegant solutions, facilitate the use of electronic devices online catalogue, e-commerce, CRM Customer - targeted marketing, flexibility Growth of sales by 80% in the first year, by 100% in the following year
http://corporate.igo.com/about_us.aspx

Adaptors
Patented technology iGo Technology, powering of mobile electronic devices using single (universal) adaptor; Power Technology Patent Brochure (PDF)

Bang & Olufsen


www.bang-olufsen.com VISION: Courage to constantly question the ordinary in search of surprising, long-lasting experiences. Founded in 1925 in Struer, Denmark, Bang & Olufsen a/s is world renowned for its distinctive range of quality audio, video and multimedia products that represent our vision: Courage to constantly question the ordinary in search of surprising, longlasting experiences. Bang & Olufsen employs over 2.550 staff members and had a turnover of DKK 4.092 million (EUR 548,6 million) in the 2007/2008 financial year. Bang & Olufsen manufactures a highly distinctive and exclusive range of televisions, music systems, loudspeakers, telephones, and multimedia products that combine technological excellence with emotional appeal. Bang & Olufsen products are sold by over 1.200 dealers in more than 100 countries in an extensive network of retail stores. Approximately 65% of these stores are B1-stores, which exclusively sell Bang & Olufsen products. The B1 stores account for 81% of the total turnover. Production also in the Czech Republic

Bang & Olufsen products

More case studies


IBM Case Studies:
http://www.ibm.com/search/?en=utf&v=14&lang=en&cc=u s&lv=c&q=case+study+innovation&x=13&y=5

Industry podcasts: Midsized clients and


experts in seven industries share their insights http://www1.ibm.com/businesscenter/smb/us/en/mbpodcasts?&ca=s mbIndustryPodcasts101706&tactic=&me=W&met=inli&re =smbibmcomTopPagesIndustriesPromo1usen101706

More case studies


Sustainable energy (hydrogen, fuel cells, biofuels, zero emission, http://ec.europa.eu/research/energy/nn/nn_pu/ar ticle_1078_en.htm http://www.zoner.com/ http://www.kerio.com/

The most important innovations in last 30 years


http://www.pbs.org/nbr/site/features/specia l/subdir/top-30-innovations_slide-show/

Lesson 2
Disruptive and open innovations

Innovation categories
sustaining better products that can be sold with higher margin to demanding customers; incumbents win disruptive commercialization of simpler, more user-friendly products, which are chepaer and targeted to new or less demanding customers; new entrants win

Key elements of disruption


Customers at each market has limited absorption capacity Technological progress usually is faster that the ability of the market to employ it. Companies focus on better products to be sold with higher margin to unsatisfied customers.

Sustaining vs. disruptive


Sustaining: focused on demanding customers; both incremental and radical. Incumbents have resources and motivation. Disruptive: introduce products and services not as advanced as existing ones, but offering other advantages (simpler, cheaper, more user friendly, ...) and focus on new or less demanding customers.

Clayton M. Christensen: The Innovators Solution, Harvard Business Press, 2003

Due to technological progress the trajectory of the disruptive innovation after some time crosses the trajectory of demands of more demanding customers and starts to replace incumbents who are not principally ready to react adequatelly, as they are motivated to suceed at better markets, not to defend themselves on inferior ones.

Clayton M. Christensen: The Innovators Solution,


Harvard Business Press, 2003

Clayton M. Christensen: The Innovators Solution,


Harvard Business Press, 2003

Clayton M. Christensen: The Innovators Solution,


Harvard Business Press, 2003

Clayton M. Christensen: The Innovators Solution, Harvard Business Press, 2003

Conditions of success - 1
Disruption is successful, as it is easier to defeat competition that tries to escape than the competition who fights Innovation must be disruptive for all companies in the industry Ex. Internet for Dell sustaining, they sold computers formerly by mail, phone, etc.

Conditions of success - 2
Following the trajectory upwards to market tiers where it is possible to attain higher margins is what good manager is expected to do. Each company therefore prepares its own disruption. This is the innovators dilemma, but also the start of innovators solution. The advice to new, growing firms: focus on products and markets ignored or neglected ba incumbents.

Two types of disruption


New markets: compete with nonconsumption: simpler, more user frindly, can be used by less sophisticated customers (PC, transistor radio, desk copiers). Low-end: focus on lower tiers of main markets (minimills, discount stores, Korean auto-makers); motivate incumbents to leave the market

OPEN INNOVATION
Chesbrough, H., Open Innovation, Harvard Business School Publishing, Boston MA, 2003 Closed innovation - requires control Open innovation
companies use external as well as internal ideas and both external and internal ways to market internal ideas can be taken to the market through external channels to generate additional value

Chesbrough H.W.: The Era of Open Innovation, MIT Sloan Management Review, Spring 203, p. 35 - 41

Closed innovation
All the best people are working for us

Open innovation
Not all the best people are working for us . We must work with clever people within and outside our company. External R&D can create remarkable value; to employ it, we need absorption capacity, often as internal R&D.

R&D creates profit only when we invent, develop and market everything ourselves.

If we develop the product ourselves, we will R&D can create profit even if we do not be the first on the market. initialize and perform it ourselves. Winner is who gets the innovation to the market first. We will win if we develop most of the ideas (an the best of them). We must have our intellectual property under control so that our competitors can make advantage of it. To develop better business model is more important than to be the first in the market. We will win if we make best use of internal and external ideas. We must be able to profit from others using our intellectual property and we must license the intellectual property if it supports our business model.

Closed innovation
Examples: nuclear industry, mainframe computers Mostly internal ideas Low workforce mobility Low role of the venture capital Few new businesses, weak ones Universities are not important as the sources of ideas

Open innovation
Examples : PC, movies

Many external ideas High workforce mobility Active venture capital Many new businesses Universities are not important as the sources of ideas and people

Business model
Formulate value proposition, i.e. the value delivered to the customer by the product based on specific technology. Identify market segment, ie. users to whom the technology brings value and performs the job to be done. Define structure of the value chain, required for the product creation and distribution. Value creation is necessary, however not sufficient condition of profitability; value creation is conditioned by:
balance of forces among our business, suppliers and competitors presence of complementary assets (e.g. in production, distribution, etc.) necessary for supporting the company position in the value chain.

Business model contd


Specify the mechanism of profit creation and evaluate product cost structure and target margin Describe the company position in the value network that connects suppliers and customers, including identification of potential alternative producers and competitors. Formulate competitive strategy enabling to the innovative company to gain and keep competitive advantage.

Product architecture
Hierarchy of connections between disparate functions within a system

Interdependent Architecture
System

Component A
Component C

Component B

Interdependent Architecture
changing one component requires changes in all other parts of the system, because the relationships between the parts are not clearly understood can be best managed through internal processes

Modular Architecture
System

Component A

Component B

Component C

Modular Architecture
components could change without causing any change in other components modular design enables to assemble system more easily, from plug and play components whose interfaces are well understood modular architecture makes it easy for many companies to innovate components without worrying about possible impact on other parts of the system

IMPLICATIONS FOR NPD


extended circle of company stakeholders customers, NGOs, local and regional governments not only superior quality, but also environmentally friendly, aesthetically appealing new products designed for X, where X can be quite large and multi-faceted set after-sale service plays an increasing role and brings increased turnover and profit

Lesson 3
Assessment of company innovation potential

COMPANY INNOVATION POTENTIAL


A company with high innovation potential scores high in the following areas: Strategy and planning Marketing Technological process Quality management Logistics Human resources

INNOVATION POTENTIAL ASSESSMENT


For a company, it is important to know its innovation potential. It can use the questionnaire For every of the six areas, there are six question, each with four possible answers. The answers are formulated so that they reflect the existing situation in the company.

A. STRATEGY AND PLANNING


1. 2. 3. 4. 5. 6. Idea about the company future Vision and employees Company innovation programs Plan modifications Financial indicators of the plan Project management

B. MARKETING
1. Monitoring of current market trends 2. Evaluation of the market competition position 3. Customer-orientation 4. Monitoring of customers attitudes to the company product 5. Market information flow inside the company 6. Marketing and financial control

C. TECHNOLOGICAL PROCESS
1. Future companys competitiveness in the industry 2. Changes of technologies 3. Collection of impulses for implementation of technology changes 4. Evaluation of the return on investment 5. Calculation of production costs and their monitoring 6. Creation of resources for development

D. QUALITY, ENVIRONMENT
1. Monitoring of changes conditioning the quality management in the company 2. Employees personal contribution to the quality system 3. External quality audit in the company 4. Monitoring of the environmental impact 5. Impact of quality monitoring on the company processes 6. Covering of costs resulting from modifications of standards, regulations and legislation in the sphere of quality and environment

E. LOGISTICS
1. Organization of purchase and distribution channels in the company 2. Optimization of the company logistics 3. Information and communication flows between the company and its partners 4. Flexibility of logistics processes 5. Introduction of innovations in logistics 6. Logistics and financial control

F. ORGANIZATION AND HUMAN RESOURCES 1. 2. 3. 4. 5. 6. Employees satisfaction Employees motivation Management and communication Conflict resolution Company information system Company culture

Innovation potential assessm ent A 4,0 3,5 3,0 2,5 2,0 1,5 1,0 B C D E F

St ra te gy M ar ke tin g Te ch no lo gy

Lo gi st ic s

Q ua lity

Pe op le

Innovation potential assessm ent Strategy 4,0 People 3,0 2,0 1,0 Logistics Quality Technology Marketing

A B C D E F

Lesson 4
STRUCTURING THE NEW PRODUCT DEVELOPMENT PROCESSES EVALUATION OF THE NEW PRODUCT DEVELOPMENT AND R&D PROJECTS

HOW TO SELECT THE PORTFOLIO OF NEW PRODUCT DEVELOPMENT PROJECTS

STRUCTURING THE NEW PRODUCT DEVELOPMENT PROCESSES

The objectives of process models

Stage-gate process
R. Cooper, 1960s phases with inputs and outputs specified beforehand gates, in which the gatekeepers decide about the continuation of the process Activities were standardized and the indicators of the process performance significantly improved.

2-nd generation SG process

Evaluation criteria
Operational, realistic, differentiating Must meet: to kill not well proceeding projects as soon as possible Should meet: prioritization, support of portfolio management Strategic buckets: resources allocated to various strategic goals

Interdisciplinary view

Fuzzy Front End (FFE, FEI)


quality of pre-development phases significantly influence the product success early phases to a large extent influence, which projects will be realized, why, what will be final costs, time, and in the end the final success in the market highly dynamic, not strictly documented, creativity competes with systemization.

Phase 0
results in product concept, including preliminary identification of customer requirements, market segments, competitive position, business opportunity and compliance with strategy

Incremental vs. radical innovations


Koen: systematic approaches using process models can be successful in the case of incremental innovations, where both business and technical uncertainty is rather low whenever at least one of those uncertainties is high, we need more flexible approaches with iterations and parallelization of activities successful radical innovations often use rapid or virtual prototyping even in the 0-th or 1-st phase, as it allows better visualization and communication of the product concept.

New concept development model


in the early phases it is not suitable to use the same approaches as in the later, more structured process phases

Difference Between FFE and NPD


Fuzzy Front End (FFE) New Product Development (NPD) Experimental, often chaotic. Eureka moments. Can schedule workbut not invention. Unpredictable or uncertain. Variable Disciplined and goal-oriented with a project plan.

Nature of Work

Commercialization Date Funding

High degree of certainty. Budgeted. Predictable, with increasing certainty, analysis, and documentation as the product release date gets closer. Multifunction product and/or process development team Milestone achievement.

Revenue Expectations Activity Measures of Progress

Often uncertain, with a great deal of speculation. minimize risk and optimize potential Strengthened concepts.

New concept development model (NCD)


Technology push

Market pull

NCD components
Engine: represents management support Engine powers the five elements of the NCD model The engine and the five elements are placed on top of the influencing factors.

Technology stage-gate process (TSG)


Management of high-risk projects within and at the transition between the fuzzy front end and new product development traditional SG: gates are transparent, the product development team can "see" all the deliverables at the gates TSG: gates are opaque, the team can only "see" to the next gate and understands that the deliverable may change as the technology is developed

Traditional and technology stage-gate processes

EVALUATION OF THE NEW PRODUCT DEVELOPMENT AND R&D PROJECTS

Stage-gate process
IDEA

Gate 1 Idea screening

Stage 1 Preliminary evaluation

Gate 2 Detailed evaluation

Stage 2 Product definition

Gate 3 Decision to develop

Stage 3 Development

Gate 4 Decision to test

Stage 4 Testing

Gate 5 Decision to commercialize

Stage 5 Commercialization

EVALUATION

Project feasibility
The stage-gate model divides the innovation process into five stages with gates, in which evaluators decide if to continue or kill the project. Each phase has its cost, duration and probability of success. Usually only the last stage generate profits. To justify the project development cost, we should prove at the very beginning its feasibility. Traditionally we have to show that the project net present value is greater than zero, i.e. that the whole project, taking into account the time value of the money, will generate net profit.

DCF methods
The generally accepted method of evaluation of investment, is based on discounted cash flows (DCF). The method is successfully used for investment projects with low level of uncertainty and duration from several months up to few years. In many cases it is not suited to long-term NPD and R&D projects, as it penalizes projects with high risk and potentially valuable projects can be rejected or terminated.

Weakness of DCF methods


Do not take into account the typical nature of the NPD and R&D projects that can be divided into stages separated by gates, deciding about project continuation or termination. Financial models assume that the decision about the project realization is done at its very beginning and is irreversible. However, investments into NPD or R&D projects are incremental and the evaluators at the gates decides about the project fate on the basis of changing situation.

Project Expected Commercial Value (ECV)


Takes into consideration all three important characteristics of each phase its cost, duration and probability of success The project is modeled by the probability tree. The stage duration, together with the discount rate, is reflected in the net present value calculation. Illustration: project with only two stages development and commercialization

Success pC

Success pd
YES Development

YES Commercialization

PV

C
NO

ECV

D
NO

Failure Failure

ECV pd pc D C PV

= project expected commercial value = probability of successful development = probability of successful commercialization = development costs = commercialization costs = net present value of expected project earnings

ECV = [(PV * pc C) * pd] D according to [Cooper 2001]

Example
The first stage (1 year): laboratory tests; success probability 50%. The second stage (2 years): field tests; success probability 75%. If tests are successful, the necessary investment into the technology is $5M, expected earnings $8M project net present value $3M. Financial data are discounted, assuming the weighted capital costs WACC = 12%, risk-free discount rate 5%. Development costs and specific project risk are high resulting ECV negative (-$109 000) according to this criterion, project should be rejected.

Probability tree in project evaluation


ECV = 0,265 - 0,150 - 0,223 = -0,109M
37,5% x (1,907-(0,356+0,399+0,446)) = = 37,5% x (1,907-1,201) = = 37,5% x 0,706M = 0,265M
Stage 3 Year 4 NPV = $3,0 M DCF = $1,907M

Stage 2 Year 2 Cost = $0,5 M DCF = -$0,399M


Stage 1 Year 1 Cost = $0,5 M DCF = -$0,446M

Stage 2 Year 3 Cost = $0,5 M DCF = -$0,356M

75% 12,5% x (-1,201M) = -0,150M 25%

50%

Stop

50%

Stop

50% x (-0,446M) = -0,223M

ccording to [Boer 2003]

Real options
The concept of real options is closely related to financial options that found their place in financial markets in recent decades. Real options relate to company opportunities and emphasize the basic idea that risk can bring the competitive advantage and as such it should be rewarded. The application of the real options theory is briefly described in [Boer 2003], the related website contains further information and references to more detailed resources. Here we will give only a brief account of basic concepts and terminology.

Two kinds of risks


specific risk market risk

Specific risk
Specific for the partial situation At lest partly under your control (e.g. risk of a fire or risk of project failure) Can be diversified - we can use insurance to share fire risk and maintain the diversified project portfolio to protect against the risk of project failure Therefore the market does not pay any premium for specific risks Specific risk can be often characterized by its probability. Better management of specific risk can help us to achieve the competitive advantage.

Market risk
Is not under your control Cannot be diversified. The pharmaceutical company, as a part of health care sector, can do little to diversify the market risk. Traditionally, market risk increases the capital expenses and therefore decreases the project value. However, the situation is different with options: here the higher market risk, expressed as volatility, increases the option value, which can be quantified using the Black-Scholes algorithm, well known from financial options.

Volatility
Quantifies the rate of change of market value of the underlying asset, i.e. the asset to its ownership we are entitled by buying the option (technology, database of customers ). Is usually specific for the industry and can be estimated on the basis of information available from e.g. stock market, industry statistics, etc. The higher the volatility, the more advantageous is to hold the respective option. The higher volatility means the higher potential of both the increase and decrease of the related asset price. As the option holder we can fully exploit the increase, while in the case of decrease we do not realize the option and the maximum loss is limited by the option cost.

Application
Boer [Boer 2003] applies the real option model (OPT) with volatility equal to 50% to the example from Fig. 3 He shows that using this method the project value is $0,171M, i.e. it is positive and the project is feasible. The difference in project value assessed by ECV and OPT models is $0,279M, what is enough to justify the project. The difference is caused by market volatility. Boer also proves that in case of the zero market risk, i.e. the zero volatility, both methods give the same result. The method of real options brings the most significant effect to projects with high level of risk having slightly negative net present value determined by ECV or other models based on the discounted cash flow.

Conclusion
Illustration of the often neglected side of the new product development and R&D projects. The researchers, engineers, designers must work together with investors to determine before the project launch and in the gates how efficiently the capital invested into the effort is used. It is not an easy task; however, we hope that we succeeded to persuade the auditorium that this important task cannot be avoided.

References
[Boer 2003] BOER F.P. Risk-adjusted Valuation of R&D Projects, online, http://www.tigerscientific.com [Cooper 2001] COOPER R.G., EDGET S.J., KLEINSCHMIDT E.J. Portfolio Management for New Products, Basic Books, 2001, ISBN 0-7382-0514-1 [Cooper 2005] COOPER R.G. Product Leadership, Basic Books, 2005, ISBN 0-465-01433-X [Vacek 2006] Vacek J. Structuring the new product development processes, in AEDS 2006 Proceedings, pp. xx, University of West Bohemia, Pilsen, 2006, ISBN

HOW TO SELECT THE PORTFOLIO OF NEW PRODUCT DEVELOPMENT PROJECTS

Outline
Portfolio management, consequences of its lack Portfolio management goals
Goal 1: Maximizing the portfolio value Goal 2: Balance Goal 3: Strategic alignment

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Portfolio management
Resources are always limited, it is neither possible nor effective to invest in every idea without due consideration. It is important to select from many possibilities those with the highest potential; todays innovation projects decide about the future profile of the company, its customers and market share. Goal: to create such portfolio of products that is rooted in the company strategy and optimizes the company performance. Portfolio management: dynamic decision-making process of evaluation, selection and prioritization of new projects; active project can be fostered, put on hold or even killed; their priorities and allocation of resources can change. The process is characterised by uncertainty, changing information, dynamics of opportunities and threats, links between projects. The whole process must be based on the long-term company strategy and must support it

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No portfolio management means

Immediate result

End result: poor new product performance

A reluctance to kill projects. Many projects added to the list A total lack of focus Weak decision points (broad gates) Poor Go/Kill decisions No rigorous selection criteria Project selected on emotion, politics No strategic criteria for project selection

Too many projects resources thinly spread. Projects in the queue. Quality of execution suffers. Too many low value projects Good projects are starved

Increased time to market Higher failure rates

Too few stellar product winners Many ho hum launches Many failures

Wrong projects are selected

Projects lack strategic direction Projects not strategically aligned


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Scatter gun effort Does not support strategy

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Portfolio management goals


1. 2. Maximization of value
long-term profitability, return on investment, probability of success, Long-term projects vs. short, fast ones; High risk projects with high potential vs. lower-risk sure bets (e.g. radical vs. incremental innovation); Focus on different market segments (dont pull all eggs into one basket); Different technologies; Different project types: new products, improvements, cost reductions, frontier research.

Balance

3.

Strategic alignment
portfolio is strategically aligned and reflects the businesss strategy.

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Goal 1 Maximizing the portfolio value


Net present value, bang for buck Expected commercial value Multi-criteria project valuation Scoring models

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Projects net present values and resource requirements


Remaining resource requirements 9,5 3,1 2,1 3,8 7,0 5,0 8,3 1,0 2,5 0,8 1,4 5,0
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Project A B C D E F G H I J K L
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NPV 52,0 30,0 8,6 42,0 48,5 43,8 37,5 3,0 9,5 6,2 4,5 55,0

Bang-forbuck index 5,5 9,7 4,1 11,1 6,9 8,8 4,5 3,0 3,8 7,8 3,2 11,0

Immediate resource requirements 3,2 0,3 1,4 2,5 1,3 1,5 3,8 0,7 0,5 0,8 1,2 5,0
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Rank-ordered list of projects


Remaining resource requireme nts
3,8 5,0 Bang-forbuck index 11,1 11,0

Project D L

NPV 42,0 55,0

Cumulative Immediate immediate resource resource requirements requirements


2,5 5,0 2,5 7,5

B
F J E A

30,0
43,8 6,2 48,5 52,0

3,1
5,0 0,8 7,0 9,5

9,7
8,8 7,8 6,9 5,5

0,3
1,5 0,8 1,3 3,2

7,8
9,3 10,1 11,4 14,6

G
C I K H

37,5
8,6 9,5 4,5 3,0

8,3
2,1 2,5 1,4 1,0

4,5
4,1 3,8 3,2 3,0

3,8
1,4 0,5 1,2 0,7

18,4
19,8 20,3 21,5 22,2
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Project expected value (ECV)


Probability of technical success Probability of commercial success Development cost* Commercializat ion cost*

Project

PV

ECV

A B C D E F

30,00 63,75 9,62 3,00 50,00 66,25

0,80 0,50 0,75 1,00 0,60 0,50

0,50 0,80 0,75 1,00 0,75 0,80

3,00 5,00 2,00 1,00 5,00 10,00

5,00

5,00

2,00 19,50 1,00 0,50 2,10 1,50

3,00 15,70 2,00 15,50

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Rank-ordered list according to ECV/D, resource constraint 15 mil


Project ECV ECV/D
Cumulative development costs Adjusted cumulative development costs

B E A F D C
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19,50 15,70 5,00 15,50 1,50 2,10

3,90 3,14 1,67 1,55 1,50 1,05

5,00 10,00 13,00 (23,00) 24,00 26,00

5,00 10,00 13,00

14,00 16,00
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Rank-ordered list according to ECV


Project
B E F A C D
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ECV
19,50 15,70 15,50 5,00 2,10 1,50

Cumulative development costs 5,00 10,00 20,00 23,00 25,00 26,00


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ECV model prioritizes more highly the projects with the following properties:
closer to launch (increase of PV and consequently of ECV), higher income streams after launch (increase of PV and consequently of ECV), less resources to be spent (decrease of D), higher probabilities of success (increase of ECV), utilize less of the constraining resource (its easier for them to be above the line).

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Multi-criteria project valuation input data


Project A B IRR 20% 15% NPV 10 2 SI 5 2 PTS 80% 70%

C
D E F
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10%
17% 12% 22%

5
12 20 6

3
2 4 1

90%
65% 90% 85%
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Project ranking
Project ranking procedure is the following
calculate adjusted values of IRR and NPV multiply them by PTS. rank projects according to adjusted values of IRR and NPV and according to SI. calculate the average value of those three rankings and use it for final ranking

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Multi-criteria project valuation, final project ranking


Project IRR * PTS
Ranking by IPR*PTS

NPV * PTS

Ranking by NPV*PT S

SI

Ranking by SI

Avg.

Final

A B

16,0% 10,5%

2 5

8 1,4

2 6

5 2

1 4

1,67 5,00

1 6

C
D E F

9,0%
11,1% 10,8% 18,7%

6
3 4 1

4,5
7,8 18 5,1

5
3 1 4

3
2 4 1

3
4 2 6

4,67
3,33 2,33 3,67

5
3 2 4

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Applicability of financial models


Main weakness: unreliability of input data, especially in the initial project stage they should be used only in later stages. Small errors in probabilities of success rapidly propagate and can result in significant differences. The complexity and sophistication of financial models fairly exceeds the quality of input data It does not mean that we should not pay proper attention to financial data in the initial project stages. However, we should not make decisions solely on their basis; they should be combined with non-financial models

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Scoring models
Give very good results. Important: selection of criteria that really separate the winners from the losers. Such criteria must be based on the analyses of your own company and other companies in the same industry. You must develop the expert base to be used in project valuation. One of the models described in [Cooper 2001] uses five main factors:
business strategy fit (2) strategic leverage (4) probability of technical success (4) probability of commercial success (6) reward to the company (project profitability) (3)

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Goal 2: Balance
In many cases, the project portfolio is not balanced; often it contains too many small projects and not enough of radical, visionary but highly risky projects necessary to maintain the company competitiveness. Suitable tools for creation of the balanced portfolio are bubble diagrams; most frequently used diagram is the risk reward bubble diagram, which is used by 44 % companies

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Risk-Reward bubble diagram


Reward vs. risk
70
OYSTERS
PEARLS

60 50

reward

40 30 20 10 0 0,00%
WHITE ELEPHANTS BREAD & BUTTER

10,00%

20,00%

30,00%

40,00%

50,00%

60,00%

70,00%

PTS

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Diagram quadrants
Pearls: potential star projects: high probability of success, high expected reward. We would like many of such projects. Oysters: highly speculative projects: low probability of success, high expected reward. Here the breakthroughs pave the way for solid payoffs. Bread and butter: simple projects, high probability of success, low expected reward. Often too many of them in the portfolio, consuming substantial ratio of resources. White elephants: low probability of success, low expected reward; projects that are difficult to kill, often from personal reasons.

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Goal 3: Strategic alignment


Strategy and allocation of resources are closely linked: until we start allocating resources to specific activities, strategy is only paperwork. In portfolio creation we will follow the following objectives:
Projects are aligned with business strategy; All projects contribute to achievement of strategic goals and objectives; Allocation of resources reflects specified strategic goals and objectives. In portfolio management we use three basic approaches: top-down, bottom-up and combined.
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Top-down approach
from the strategy formulation (using principles, methods and procedures of strategic management, see e.g. [Grant 2008]). Objectives for new products are often stated in terms of ratio or growth of turnover, profit, market share, etc. during several (usually 3-5) years.

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Technology roadmaps
Technology strategic roadmaps, results of technology foresight and other studies performed often on the macro-economic level. In the Czech Republic such studies are prepared e.g. by Technology centre AV R (http://www.strast.cz/) and CESES Centre for social and economic strategies (http://www.ceses.cuni.cz/), at the EU level the Institute for Prospective Technology Studies in Sevilla (http://ipts.jrc.ec.europa.eu/). Technology roadmaps are developed also within the framework of technology platforms of the 7-th EU Framework Programme for Research, Development and Demonstrations (http://cordis.europa.eu/fp7, http://cordis.europa.eu/technologyplatforms).

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Strategic buckets
The company management, on the basis of strategy, decides what resources will be allocated to basic categories of development projects (e.g. X % to platforms, Y % to new products, Z % to incremental innovations) and projects are then prioritized within those buckets. Resources originally allocated to one category may not sufficient, while there are still free resources in the other bucket. In such a case the resources can be redistributed. However, after the final allocation of resources to strategic buckets it should not be possible to reshuffle the resources between buckets. Especially it should be avoided to take resources originally allocated for strategic, long-term goals and use them for short-term, more urgent projects, often backed from political reasons. Such redistribution undermines long-term strategic goals and all the strategic planning

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Bottom-up and combined approaches


Bottom-up approach build strategic criteria into the model of project selection, usually to the scoring model. This approach guarantees that all projects are strategy aligned, however it cannot guarantee allocation of resources in compliance with strategic priorities. This weakness can be overcome by the use of combined approach: we first use the top-down approach to establish strategic buckets, and then we evaluate all active projects and projects on hold and prepare their ranked list. Finally we assign projects to corresponding categories (buckets) and study the exhaustion of resources. Usually this first iteration is not completely satisfactory and it is necessary to use more iterations to reach satisfactory results.

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References
[Cooper 2001] COOPER R.G., EDGET S.J., KLEINSCHMIDT E.J. Portfolio Management for New Products, 2nd edition, Basic Books, 2001, ISBN 0-7382-0514-1 [Grant 2008] GRANT R.M., Contemporary Strategy Analysis, 6th edition, 2008, Blackwell Publishing, ISBN 978-1-4051-6309-5 [Vacek 2007] Vacek, J. Evaluation of the new product development and R&D projects. In AEDS 2007. Pilsen : University of West Bohemia, 2007, p.83-87. ISBN 978-80-7043-600-4. [Vacek 2006] Vacek, J. Structuring the new product development process. In AEDS 2006. Pilsen : University of West Bohemia, 2006, p.111-118. ISBN 80-7043-490-2. [Vacek 2004] Vacek, J. New product development and current trends in innovation management. In AEDS 2004 Workshop. Plze : University of West Bohemia, 2004, p.35-36. ISBN 80-7043-331-0.

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Lesson 5
Innovation impulses

SOURCES OF INNOVATION IMPULSES


Internal environment Own R&D Technical divisions design, technology Production divisions (production, provision of services) Marketing and sales Logistics (purchase and supplies) Guarantee and post-guarantee service Owners

SOURCES OF INNOVATION IMPULSES


External environment
Customers Suppliers Competitors Consultants, R&D institutions Schools, universities Professional publications, Internet Exhibitions, fairs, specialized seminars and conferences Advertising agencies Investors Media Authorized testing laboratories, certification agencies State institutions, public sector Legislation Globalization

MARKET PULL - R&D PUSH


Market pull
looking for the best way of satisfying a newly emerging customer demand improvement of the existing products, extension of the existing offer or decrease of price impulses for continuous, incremental innovations or for process innovations

Research and development push


looking for commercial use of new impulses resulting from the R&D results generating of new markets for conceptually different products

7 SOURCES OF INNOVATION IMPULSES (Drucker)


INTERNAL
1. 2. 3. 4. unexpected event contradiction change of work process change in the structure of industry or market

EXTERNAL
5. Demographic changes 6. Changes in the world view 7. New knowledge

1. Unexpected event
Unexpected success
1. 2. 3. 4. What will the use of the offered opportunity mean to us? Where will its introduction take us? What do we need to do for its implementation? How can we achieve that?

Unexpected failure Unexpected external event

2. Contradiction
Non-compliance with economic reality Contradiction between reality and anticipations about it Contradiction between the anticipated and real behavior of customers and their values

3. Change of process
realize the necessity of change, identify the weak point of the chain be convinced that if something does not work the way it should, then it is necessary to attempt a change the solution must be convenient for those who will implement it. It must place moderate and feasible requirements

4. Change in the structure of industry and market


Rapid growth of the industry Identification of new market segments Convergence of technologies (e.g. use of computers in telecommunications) Rapid change of the industry and resulting need of a structural change

5. Demography
easiest to describe and to predict influence what will be bought, who and in which amounts will purchase

6. Change of attitudes
change in the approach to health: healthcare, food, spending the leisure time upper-middle class: a chance to offer non-standard services at non-standard prices increasing migration, feminism, regionalism etc Timing is essential - to be the first

7. New knowledge
Based on convergence or synergy of various kinds of knowledge, their success requires, high rate of risk
Thorough analysis of all factors. identify the missing elements of the chain and possibilities of their supplementing or substitution; Focus on winning the strategic position at the market. the second chance usually does not come; Entrepreneurial management style. Quality is not what is technically perfect but what adds the product its value for the end user

IMPULSES FROM THE MARKET


ENVIRONMENT

Customers
product presentation realistic simple, demonstrative and precise moderate representative sample of customers

Suppliers Competitors

INNOVATION IMPULSES OF THE R&D


identification research: to monitor the scientific, technical and economic information and identify innovation impulses applicable in the company basic research applied research: acquire knowledge and means applicable for the meeting of specific, beforehanddefined goals development: systemic use of knowledge and means acquired in the applied research for the creation of a new or improvement of the existing product or for the creation or modification of processes

INTERNAL IMPULSES
usually combined with external sources supported by
creative techniques innovation tools

REGISTER OF IMPULSES

Lesson 6
Innovation management tools

INNOMAT http://www.inno-pro.com/aainn0.htm

General Innovation Tools

BENCHMARKING

BRAINSTORMING

REENGINEERING

CHANGE MANAGEMENT

Specific techniques useful at the different change management process steps.


CHANGE MANAGEMENT STEP
Making time

SPECIFIC TECHNIQUE
time management techniques

Preparing a vision statement


Identify what factors will hinder change Selling the change Developing a plan Learning Monitoring effectiveness

SWOT analysis
force field analysis internal marketing techniques strategic planning techniques

INNOVATION MANAGEMENT TOOLS http://www.wiley.co.uk/innovate/website/pages/atoz/atoz.htm

TECHNOLOGY AUDIT

TECHNOLOGY FORECAST

VALUE ANALYSIS

Product Innovation Tools

DESIGN FOR X

<>

X - examples
Design for Manufacturing Design for Environment and Assembly (DFMA) (DFE) Design for Dimensional Control (DDC) Design for Storability Design for Electromagnetic Compatibility Design for Inspectability Design for Reliability (DFR) Design for Disassembly (DFD)

QUALITY FUNCTION DEPLOYMENT

House of Quality
Interrelationships

Technical Features
Voice of the Customer Relationship between Customer Desired Traits and Technical Features

Importance Assessment of Traits to of Customer Competition

Importance of Technical Features

House of Quality: Steps for Generation


1. Identify Customer Attributes
2. Identify Supporting Technical Characteristics 3. Correlate Customer Attributes with Supporting Technical Features 4. Assign Priorities to Customer Requirements and Technical Features 5. Evaluate Competitors Stances and Products 6. Identify Technical Characteristics to Deploy in the Final Product Design

Managerial Innovation Tools

FAILURE MODE AND EFFECT ANALYSIS (FMEA)

INNOVATION MANAGEMENT TOOLS http://www.wiley.co.uk/innovate/website/pages/atoz/atoz.htm

INNOVATION MANAGEMENT TOOLS http://www.wiley.co.uk/innovate/website/pages/atoz/atoz.htm

PEER EVALUATION

TEAM BUILDING

ISO 9000

ISO14000
refers to procedures for ensuring sustainable and environmentally friendly operations EIA Environmental Impact Assessment

TOTAL PRODUCTIVE MAINTENANCE

Process Innovation Tools

DESIGN FOR MANUFACTURING AND ASSEMBLY (DFMA)

LEAN THINKING

CONTINUOUS IMPROVEMENT

CONCURRENT ENGINEERING

JUST IN TIME (JIT)

INNOSKILLS

FASTER

Lesson 7
CREATIVITY BASICS & TECHNIQUES

Innovation and creativity


creativity is manifested in the production of a creative work (for example, a new work of art or a scientific hypothesis) that is both original and useful innovation begins with creative ideas,
creativity by individuals and teams is a starting point for innovation; the first is a necessary but not sufficient condition for the second

creativity results:
in producing or bringing about something partly or wholly new; in investing an existing object with new properties or characteristics; in imagining new possibilities that were not conceived of before; and in seeing or performing something in a manner different from what was thought possible or normal previously.

Many creative ideas are generated when somebody discards preconceived assumptions and decides on a new approach or method that might seem to others unthinkable Serendipity - effect by which one accidentally discovers something fortunate, especially while looking for something else entirely

Quotations on serendipity
"In the field of observation, chance favors only the prepared mind." Louis Pasteur "Serendipity. Look for something, find something else, and realize that what you've found is more suited to your needs than what you thought you were looking for." Lawrence Block "The most exciting phrase to hear in science, the one that heralds new discoveries, is not 'Eureka!', but 'That's funny '" Isaac Asimov "In reality, serendipity accounts for one percent of the blessings we receive in life, work and love. The other 99 percent is due to our efforts." Peter McWilliams "Serendipity is looking in a haystack for a needle and discovering a farmer's daughter." Julius Comroe Jr. "Serendipity is putting a quarter in the gumball machine and having three pieces come rattling out instead of oneall red." Peter H. Reynolds "--- you don't reach Serendib by plotting a course for it. You have to set out in good faith for elsewhere and lose your bearings ... serendipitously." John Barth, The Last Voyage of Somebody the Sailor "Serendipity is the art of making an unsought finding." Pek van Andel (1994) source: wikipedia

BASIC CONCEPTS
Creative thinking represents a combination of logic and intuitive approaches Being creative means dealing with the aspects and possibilities of today and tomorrow That requires a person to be open to everything new, do not stick to things that we are all used to, do not adhere to yesterday so much Creativity does not mean dreaming, it means productive managing of specific tasks. Only a creative approach to the problem solution can be successful.

Creativity in organizations
Amabile: to enhance creativity in business, three components are needed:
Expertise (technical, procedural & intellectual knowledge), Creative thinking skills (how flexibly and imaginatively people approach problems), and Motivation (especially intrinsic motivation).

Nonaka: creativity and knowledge creation are important to the success of organizations. In particular, he emphasized the role that tacit knowledge has to play in the creative process.

Creativity and economics


Joseph Schumpeter: creative destruction - the way in which old ways of doing things are endogenously destroyed and replaced by the new. Paul Romer: the recombination of elements to produce new technologies and products and, consequently, economic growth. Creativity leads to capital, creative products are protected by intellectual property laws. The creative class as important driver of modern economies. Richard Florida in The Rise of the Creative Class, 2002 popularized the notion that regions with "3 T's of economic development: Technology, Talent and Tolerance" also have high concentrations of creative professionals and tend to have a higher level of economic development. Important aspect to understanding Entrepreneurship.

Stages of creative process


Orientation: Need identification, intention to create Preparation: Information collection, problem formulation Incubation: seeking solution, evaluation of variants, unconscious thinking Illumination (Eureka!): synthesis, creation of ideas Realization: transformation of the idea into reality Verification: evaluation, learning, improvement

Barriers to creativity - 1
The value of getting things right time can induce a fear of mistakes and experimentation. So can a blame culture where people become afraid of making mistakes. Managers who are not as secure as they should be can resist or block ideas that are not their own or which they see as threatening. A culture that over emphasizes cost containment, processes, consistency or efficiency. A reward system that too exclusively celebrates getting things done fast with no mistakes. A general fear of risk taking, wanting to analyze everything to death, to wait and see what others do in the market before acting.

Barriers to creativity - 2
A lack of explicit funding for experimentation. A strict requirement to demonstrate the value of an idea before it has a chance to prove itself. A tendency to shoot down novel ideas as a way of scoring points. An over allegiance to past successes, proven experience and tried and tested methods. A suspicion of novelty, a fear of the unproven. A resistance to learning from mistakes or trial and error, a tendency to blame external factors or other people for failures rather than to learn from them. Short termism - a drive to meet short term financial goals rather than to invest in the future.

Barriers to creativity - 3
http://members.optusnet.com.au/~charles5 7/Creative/Basics/obstacles.htm

CREATIVITY STIMULATION
Keep in touch with creative people Accommodate the effort to the targets Evaluate and appreciate the effort Protect creative employees Leave them peace and time Provide them with security Tolerate failures Maintain creative atmosphere Evaluate the creative ideas quickly Be persistent - nothing comes for free

Fostering creativity
Establishing purpose and intention Building basic skills Encouraging acquisitions of domain-specific knowledge Stimulating and rewarding curiosity and exploration Building motivation, especially internal motivation Encouraging confidence and a willingness to take risks Focusing on mastery and self-competition Promoting supportable beliefs about creativity Providing opportunities for choice and discovery Developing self-management (metacognitive skills) Teaching techniques and strategies for facilitating creative performance Providing balance

METHODS OF CREATIVE ACTIVITY


increasing the individuals or teams creative potential contributing to the improvement of the creative work conditions facilitating the problem solution

Creative Process
Problem Definition - including problem analysis, redefinition, and all aspects associated with defining the problem clearly. Idea Generation - The divergent process of coming up with ideas. Idea Selection - The convergent process of reducing all the many ideas into realistic solutions Idea Implementation - Turning the refined ideas in reality. Processes - Schemes and techniques which look at the overall process from start to finish (or at least 3 of the above 4 areas)..
http://www.mycoted.com/Category:Creativity_Techniques

Brain hemispheres
Left brain functions sequential Right brain functions simultaneous

analytical verbal
logical linear algorithmic processing mathematics: perception of counting/measurement present and past language: grammar/words, pattern perception, literal

holistic imagistic
intuitive holistical algorithmic processing mathematics: perception of shapes/motions present and future language: intonation/emphasis, prosody, pragmatic, contextual

Convergent vs. divergent thinking


Convergent thinking involves aiming for a single, correct solution to a problem Divergent thinking involves creative generation of multiple answers to a set problem.

CREATIVITY TECHNIQUES
trial and error brainstorming Inspirational questions psychological-cognitive, such as:
Osborn-Parnes Creative problem solving (CPS) Synectics; Lateral thinking (courtesy of Edward de Bono),

the highly-structured, such as:


TRIZ (the Theory of Inventive Problem-Solving); ARIZ (the Algorithm of Inventive Problem-Solving), both developed by the Russian scientist Genrich Altshuller; and Computer-Aided Morphological analysis.

Trial and error


select a possible answer, apply it to the problem and, if not successful, select (or generate) another possibility that is subsequently tried. The process ends when a possibility yields a solution. more successful with simple problems, often resorted to when no apparent rule applies. the approach need not be careless, for an individual can be methodical in manipulating the variables in an attempt to sort through possibilities that may result in success. Nevertheless, this method is often used by people who have little knowledge in the problem area

Trial and error - features


solution-oriented: trial and error makes no attempt to discover why a solution works, merely that it is a solution. problem-specific: trial and error makes no attempt to generalise a solution to other problems. non-optimal: trial and error is an attempt to find a solution, not all solutions, and not the best solution. needs little knowledge: trials and error can proceed where there is little or no knowledge of the subject.

Inspirational questions - 1
What can I substitute to make an improvement? What if I swap this for that and see what happens? How can I substitute the place, time, materials or people? What materials, features, processes, people, products or components can I combine? Where can I build synergy? What part of the product could I change? And in exchange for what? What if I were to change the characteristics of a component? What happens if I warp or exaggerate a feature or component? What will happen if I modify the process in some way? What other market could I use this product in? Who or what else might be able to use it? What if I did it the other way round? What if I reverse the order it is done or the way it is used? How would I achieve the opposite effect?

Inspirational questions - 2
Who else has solved this problem? What similar area of expertise might have solved this problem? Is there anyone else in the company who knows how to solve this? What else could we use to solve the problem? Where else might this problem have been solved? What other companies might know how to solve this? What similar problems have been solved, and how? What other industries face the same problem and what do they do about it?

Inspirational questions - 3
How would they think? What objects and items would they be using? Where would they be doing it? How would they see the problem? What action would they take? How would they explain the problem? How would they solve the problem? What does your situation or your problem remind you of? What other areas of life/work experience similar situations? Who does similar things but not in your area of expertise?

Inspirational questions - 4
What would my perfect solution be? What effect would my ideal solution have? What if money/morals/laws did not matter at all? What would I do if I had unlimited power and resources? What would my ideal solution look like? Source:Wikipedia

CPS (OFPISA)
six stage process, each with a divergent and a convergent phase.
1. Objective Finding (or Mess Finding): Sensitise yourself for issues that need to be tackled. 2. Fact Finding: Gather information about the problem. 3. Problem Finding: convert a fuzzy statement of the problem into a broad statement more suitable for idea finding. 4. Idea Finding: generate as many ideas as possible 5. Solution finding: Generate and select obvious evaluation criteria and develop the short-listed ideas from Idea Finding as much as possible in the light of these criteria. Then choose the best of these improved ideas for further development 6. Acceptance finding: How can the suggestion you have just selected be made up to standard and put into practice?

Synectics
problem solving approach that stimulates thought processes of which the subject is generally unaware. developed by William Gordon, central principle: "Trust things that are alien, and alienate things that are trusted." Encourages fundamental problem-analysis and, on the other hand, the alienation of the original problem through the creation of analogies It is thus possible for new and surprising solutions to emerge. Synectics is more demanding of the subject than brainstorming, as the many steps involved mean that the process is more complicated and requires more time and effort.

Synectics - steps
Analysis and definition of the problem Spontaneous solutions Reformulation of the problem Creation of direct analogies Personal analogies (identification) Symbolic analogies (contradictions) Direct analogies Analysis of the direct analogies Application to the problem Development of possible solutions

Lateral thinking
de Bono methods of thinking concerned with changing concepts and perception; reasoning that is not immediately obvious, ideas that may not be obtainable by using only traditional step-by-step logic shifting of thinking patterns, away from entrenched or predictable thinking to new or unexpected ideas. A new idea that is the result of lateral thinking is not always a helpful one, but when a good idea is discovered in this way it is usually obvious in hindsight, which is a feature lateral thinking shares with a joke We may need to solve some problems not by removing the cause but by designing the way forward even if the cause remains in place http://en.wikipedia.org/wiki/Lateral_thinking

Lateral thinking vs. critical thinking


Critical thinking is primarily concerned with judging the truth value of statements and seeking errors. Lateral thinking is more concerned with the movement value of statements and ideas. A person would use lateral thinking when they want to move from one known idea to creating new ideas. Critical thinking is like a post-mortem while lateral thinking is like diagnosis.

Lateral thinking - inspiration


Random Entry: Choose an object at random, or a noun from a dictionary, and associate that with the area you are thinking about. Provocation: Declare the usual perception out of bounds, or provide some provocative alternative to the usual situation under consideration. Prefix the provocation with the term 'Po" to signal that the provocation is not a valid idea put up for judgement but a stimulus for new perception. Challenge: Simply challenge the way things have always been done or seen, or the way they are. This is done not to show there is anything wrong with the existing situation but simply to direct your perceptions to exploring outside the current area.

Six de Bono hats


White hat (Blank sheet): Information & reports, facts and figures (objective) Red hat (Fire): Intuition, opinion & emotion, feelings (subjective) Yellow hat (Sun): Praise, positive aspects, why it will work (objective) Black hat (Judge's robe): Criticism, judgment, negative aspects, modus tollens (objective) Green hat (Plant): Creativeness, Alternatives, new approaches & 'everything goes', idea generation & provocations (speculative/creative) Blue hat (Sky): "Big Picture," "Conductor hat," "Meta hat," "thinking about thinking", overall process (overview)

Example - meeting
The meeting may start with everyone assuming the Blue hat to discuss how the meeting will be conducted and to develop the goals and objectives. The discussion may then move to Red hat thinking in order to collect opinions and reactions to the problem. This phase may also be used to develop constraints for the actual solution such as who will be affected by the problem and/or solutions. Next the discussion may move to the (Yellow then) Green hat in order to generate ideas and possible solutions. Next the discussion may move between White hat thinking as part of developing information and Black hat thinking to develop criticisms of the solution set.

TRIZ, ARIZ
(Teoriya Resheniya Izobretatelskikh Zadatch) = Theory of inventive problem solving Inventing is the removal of a technical contradiction with the help of certain principles

TRIZ process for creative problem solving

Contradictions
Inventive problems stem from contradictions (one of the basic TRIZ concepts) between two or more elements, such as, "If we want more acceleration, we need a larger engine; but that will increase the cost of the car," that is, more of something desirable also brings more of something less desirable, or less of something else also desirable. These are called Technical Contradictions. Physical or inherent contradictions: More of one thing and less of another may be needed. For instance, a higher temperature may be needed to melt a compound more rapidly, but a lower temperature may be needed to achieve a homogeneous mixture.

Matrix of Contradictions
40 inventive principles rows: 39 system features that one typically wants to improve, such as speed, weight, accuracy of measurement and so on. columns: typical undesired results. matrix cell: points to principles that have been most frequently used in patents in order to resolve the contradiction.

Morphological analysis
designed for multi-dimensional, nonquantifiable problems where causal modeling and simulation do not function well or at all Fritz Zwicky (1967, 1969) - exploring all the possible solutions to a multidimensional, non-quantified problem complex

Morphological analysis - steps


1. The problem to be solved must be very concisely formulated. 2. All of the parameters that might be of importance for the solution of the given problem must be localized and analyzed. 3. The morphological box or multidimensional matrix, which contains all of the potential solutions of the given problem, is constructed 4. All the solutions contained in the morphological box are closely scrutinized and evaluated with respect to the purposes that are to be achieved. 5. The optimally suitable solutions are selected and are practically applied, provided the necessary means are available.

Example 1 - energy conversion


initial kinetic K transmission kinetic K final storage kinetic K

electrical E chemical C thermal nuclear T N

electrical E chemical C thermal nuclear T N

electrical E chemical C thermal nuclear T N

Example 1 - continued
K->E->C: hydroelectric generation which is then stored in a battery. C->T->K: internal combustion engine (chemical energy transformed into thermal energy) leading to energy being stored in a flywheel. E->C->T: common refrigerator

Example 2 cardboard packaging


Parameter separated media level of separation solid / solid total solid / fluid partial Parameter values solid / gas fluid / fluid fluid / gas gas / gas

protection against
combination with

gravitation
paper

mechanical forces
plastic

heat
wood

radiation
paint

sound
nothing

solution: throwaway beverage packaging

Think outside the box

16 dots, 6 lines

http://www.sciencenewsforkids.org/articles/20041027/PuzzleZone.asp

Dots and lines - generalization


a three-dot-by-three-dot puzzle requires four lines. a four-dot-by-four-dot puzzle requires six lines, a five-dot-by-five-dot puzzle requires eight lines, and an n-dot-by-n-dot puzzle requires 2(n 1) dots.

Puzzle Archive
http://www.sciencenewsforkids.org/pages/ zonearchive.asp?type=1

Lesson 8
TEAM WORK

TEAM DEFINITION
group of people whose individual members share a common goal their expert skills and personal abilities are complementary its members work activities and skills are purposefully and smoothly linked together.

TEAM EFFECTIVENESS
dynamic balance among
Necessity to perform a joint task Individual needs of team members Necessity to maintain a team

synergic effect: every member


contributes to performance of the mutual task adopts specific roles necessary for the effective team functioning. contributes to the satisfaction of the individual needs of other team members

Successful team characteristics


Team members identify themselves with the team There is relaxed, non-bureaucratic atmosphere, interest in achieving joint goals, optimistic work mood. Tasks and goals are clear to all members and all identify themselves with them. Differences in opinions are accepted. Disputable points are discussed and a solution is looked for. Communication is open, spontaneous, and fluent. Team members are sincere to each other, listen to each other. Criticism is constructive and it is not taken personally. Team management is of participative, eventually consulting, character. Rules are clearly defined.

Unsuccessful team characteristics


Team members do not identify themselves with team. Strained atmosphere, blocked communication is. Team members hide their real feelings and opinions. Autocratic supervision, discussion about goals and tasks not allowed. Diversity of opinions leads to conflicts. Disagreement is not openly expressed; the decision is undermined. Personal issues are settled by means of criticism. People gossip. The rules are not clearly defined.

Team structure and organization


Formal: clearly visible, represents distribution of work among the team members in order to ensure performance of certain functions. Informal: influences procedures, in which things are actually done prestige of people, their influence, power, seniority, ability to convince others play roles there.

TEAM DEVELOPMENT
Forming Storming Norming Performing Dissolving

ROLES IN THE TEAM


Initiator Company employee Chairman Forming person Operational employee Coordinator Resource researcher Observer Team worker Finisher Orienting member Energy supplier Recorder Harmonizer

Advantages and disadvantages of team work


(+) Mutual cooperation and support (?) teams often accept more risk than individuals (+) can produce high quality ideas by accepting the conflict and exploring differences in the individual members opinions

Group cohesion
(+) larger degree of cooperation, better communication, higher resistance against frustration, lower fluctuation and absences, lower level of tolerance towards lazy people (-) difficult for new members, limited possibility to enforce new ideas, opposition against changes in work procedures, often overprotective against outsiders

Team forming by a manager


Manager Defines Prefers Believes in Views the problem solving by the team Communicates with team members On the way to rigidity Everything if possible Conformity Plan, task, control As denial of his/ her authority, waste of time When they require it or need it On the way to teamwork Vision Individuality, mutuality Trust, motivation climate As natural and necessary As much as possible Opens them for team solving before they become destructive As necessity Independence and responsibility of people

Conflicts inside or outside Ignores them or solves them the team him- or herself Understands group unity Anticipates As a potential threat to his/ her position Peoples worries of responsibility

Lesson 9
DECISION MAKING

DECISION PROCESS
1. 2. 3. 4. 5. 6. 7. Identify the problem Specify objectives and decision criteria Develop alternatives Analyze and compare alternatives Select the best alternative Implement the chosen alternative Monitor the results

REASONS FOR POOR DECISIONS


Mistakes in the decision process
quick decisions failure to recognize consequences managers ego unwillingness to admit mistake, unability to make a decision

Bounded rationality
limits not optimum, but satisfactory solution

Suboptimization
departmentalization

MODELS
Model: abstraction of reality, adequately portrays real-life phenomena
Physical Schematic Mathematical Computer

USE OF MODELS
1. 2. 3. 4. The purpose of the model How to use model to generate results How results are interpreted and used What assumptions and limitations apply
Be aware of the assumptions and limitations of each model

BENEFITS OF THE USE OF MODELS


1. 2. 3. 4. 5. 6. 7. 8. 9. Easy to use, less expensive Require to organize and quantify information, indicate need of additional information Provide a systematic approach to problem solving Increase understanding of the problem Enable to ask what if ? Require users to be very specific about objectives Serve as a consistent tool for evaluation Enable to bring power of mathematics Provide standardized format for problem analysis

LIMITATIONS OF MODELS
1. Overemphasis of quantitative over qualitative information 2. Incorrect application, misinterpretation of results 3. Highly sophisticated models in hands of users who cannot fully comprehend the conditions and limitations of the model use 4. Model building as an end to itself

QUANTITATIVE APPROACHES
Linear programming Queing techniques Inventory models Project models (PERT, CPM, TOC) Forecasting models Statistical models Quantitative methods are typically more difficult to understand without a fair amount of explanation and demonstration

TRADE-OFFS
List advantages and and disadvantages of opposing courses of action to gain better understanding of the consequences of potential decisions.
Example quality control advantages disadvantages

Fewer defectives slipping through by increasing inspections

Increase in costs

SENSITIVITY ANALYSIS
How sensitive the solution is to a change in one or more parameters
Example: = (A2 A1) / 0,5*(A2 + A1) x=5 A = kx + 4000 B = kx + 4 k=1 4005 9 k=2 4010 4 0,03% 10,87%

THE SYSTEM APPROACH


interrelations among subsystems and/or elements system boundary environment Feedback The whole is greater than the sum of its individual parts

Consequence: evaluate optimal solutions in terms of larger framework

DECISION ENVIRONMNENTS
CERTAINTY relevant parameters have known values RISK certain parameters have probabilistic outcomes UNCERTAINTY it is impossible to assess the likelihood of various possible outcomes

DECISION THEORY
1. Identify possible future conditions states of nature 2. Develop a list of possible alternatives 3. Determine or estimate payoff associated with each alternative for every possible state of nature 4. Estimate the likelihood of every possible state of nature (if possible) 5. Evaluate alternatives according to decision criterion and select best alternative

PAYOFF TABLE
Possible future demand
Alternatives facility size Small Medium Large low 10 7 -4 moderate 10 12 2 high 10 12 16

Decision making under certainty


Choose the alternative with the highest payoff
Demand Highest payoff Best alternative

Low
Moderate High

10
12 16

small
medium large

Decision making under uncertainty


Maximin determine the worst possible payoff for each alternative, and than choose the alternative with the best worst Maximax determine the best possible payoff, and choose the alternative with this payoff Laplace - determine the average payoff for each alternative, and choose the alternative with the best average Minimax regret - determine the worst regret for each alternative, and than choose the alternative with the best worst

Maximin: worst payoffs are


Alternative Payoff small 10 medium 7 large -4

the best is 10 - choose small facility Maximax: the best overall payoff is 16 choose large Laplace:
Alternative Average payoff small 10 medium 10,33 large 4,67

The best average is 10,33 - choose medium

Minimax regret:
Opportunity loss, regret: subtract every payoff in a column from the largest positive payoff in that column

regrets Alternative low moderate high worst

Small
Medium

0
3

2
0

6
4

6
4

Large

14

10

14

The lowest regret is 4 choose medium

Decision making under risk


Expexted monetary value (EMV) criterion: calculate expected value (EV) for each alternative and select one with the highest EV
Alternative probability EV

Small
Medium Large

0,30
0,50 0,20

10
10.5 3

Appropriate when decision maker is risk-neutral

DECISION TREES

DECISION TREES
Particularly useful for situations that involve sequential decisions Nodes:
decision points chance events

Branches leaving
alternatives states of nature

DECISION TREES - Example

EXPECTED VALUE OF PERFECT INFORMATION (EVPI)


Option: postpone a decision, purchase additional information Question: is the cost of the option less than the expected gain? EVPI = expected payoff under certainty expected payoff under risk
upper limit decision maker should be willing to spend to obtain perfect information

EVPI - example
Demand
Low Moderate High

Best payoff
10 12 16

probability
0,30 0,50 0,20

expected payoff under certainty = 0,30*10 + 0,50*12 + 0,20*16 = 12,2 EVPI = 12,2 10,5 = 1,7

SENSITIVITY ANALYSIS
State of nature Alternative A #1 4 #2 12

B C

16 12

2 8

Sensitivity Analysis

LINEAR PROGRAMMING (LP)


Objective function maximization or minimization Decision variables Constraints feasible solution space Parameters fixed values

LP - ASSUMPTIONS
Linearity (objective function &constraints) Divisibility (non-integer values of variables acceptable) Certainty (values of parameters known, constatnt Non-negativity (negative values of variables unacceptable)

LP EXAMPLE 1
Decision variables: x1, x2, x3 quantities of products to produce Maximize profit 5 x 1 + 8 x2 + 4 x 3 Subject to constraints:
Labor Material Product 1 Non-negativity 2 x1 + 4 x2 + 3 x3 250 hours 7 x1 + 6 x2 + 5 x3 100 pounds x1 10 units x1, x2, x3 0

LP solution 1
decision variables X1 X2 X3 10 5 0 90 40 100 10 250 100 10

objective function
P

constraints
1 2 3

LP Graphical method
For two-variable problem, graphical method can be used
Example: Minimize Subject to P = 8x + 12y 5x + 2y 20 4x + 3y 24 y2 x, y 0 x = 4,5, y = 2, P = 60

Solution:

LP Graphical method
12 10 8 6 4 2 0 0 1 2 3 4 5 6 7 8 9 1 1 1 y1 y2 y3 P

Lesson 10
CONFLICT RESOLUTION

Conflict management
Conflict cannot always be avoided, but it can be managed Sources of conflicts:
Aggressive or conflict-prone personality Ambiguous or conflicting roles, interdependence Difference in objectives, values, perceptions Inadequate authority, oppressive management Inadequate resources Unsatisfactory communication

Conflict consequences
Positive:
Competition tends to enhance the general welfare, if the conflict level is not too high Loyalty increases when people unite against a common foe If problems are recognized, solutions may be forthcoming

Negative:
Activities, not results, become important Attack individual rather than problem Blocked communication Need of strong leaders

Two-dimensional model of a conflict

Conflict resolution styles - 1


Avoidance: no assertiveness, no cooperation problem solution postponed Accommodation: no assertiveness, cooperation give in Collaboration: assertiveness and cooperation problem solving, win-win Competition: assertiveness, no cooperation win-lose, adhere to rules, do not seek to harm the others self-image, impulse to change and improve the organization Authoritarianism: aggression, no cooperation

Conflict resolution styles - 2


Smoothing: low assertion, low cooperation focus on similarities, seeks resolution, move parties to a common goal Superordinate goals: increasing assertiveness, increasing cooperation attempt to find a common set of objectives, forget the differences Bargaining (compromise): moderate assertion, moderate cooperation give-and-tak, both parties satisfy some of their needs

Lesson 11
COMPANY INNOVATION CULTURE
Successful companies address the human needs and give them priority Thomas J. Peters, Robert H.Waterman

COMPANY CULTURE
Organization culture: a pattern of ideas, opinions and attitudes that majority of people in the company understands, respects, acknowledges, adopts and relates to them. Influences the companys economic success and competitiveness

Main elements of the company culture


Behavior standards Key values Management and leadership style Roles Organizational structure and diversification

Influenced by:
Organizations strategy Organizations system Level of cooperation between the individual organization structures Employees abilities

Four types of company orientation


Organizations preferring power roles tasks human side of their processes and people

MANAGEMENT STYLES
shift from directive to participative style of management 4 basic management styles:
Exploiting authoritative Benevolent authoritative Consultative Participative

Motivation / performance cycle (MPC)

Motivation / performance cycle (MPC)


1. Are the individualss needs satisfied? / Need creation 2. Are organization and manager aware of needs? Are they willing and able to offer need satisfiers? 3. Organization and manager offer extrinsic and intrinsic need satisfiers and rewards 4. The individual searches for alternatives, evaluate the consequences of possible actions, makes a decision

MPC- continued
5. The individual is motivated to expend effort and does so
6. Does the individual have appropriate training, abilities, and tools, and know the objective? 7. Performance

8. Does the individual receive need satisfier? Do the organization and manager
provide need satisfier?

MPC- continued
9. Does the individual reassess the situation? 10. Will the individual be motivated in the same way?

Note: normal individual

italic organization and manager

Hierarchy of needs (A. Maslow)


1. Physiological needs immediate survival, food, shelter, clothing, bodily needs 2. Security needs stability, protection, freedom from fear, provisions for the future 3. Social needs acceptance, affection, affiliation, love, interaction 4. Esteem needs self-esteem, esteem of others, status, power, autonomy, competence, prestige, recognition 5. Self actualization achieving ones full potential, personal growth, creative fulfillment

Characteristics of peak performers


1. Vision and the ability to plan strategically 2. The drive to surpass previous level of performance 3. High levels of self-confidence and selfesteem 4. A high need for responsibility and control 5. Strong communication and salesmanship skills

Characteristics of peak performers - 2


6. The habit of mentally rehearsing before critical events 7. Little need for outside praise or recognition 8. A willingness to take risks 9. The ability to accept feedback and make self-corrections 10. An ownership attitude toward their ideas and products

Need satisfiers
Frederick A. Herzberg Hygiene factors dissatisfiers, extrinsic (pay, supervision) Motivators satisfiers, intrinsic (achievement, recognition for performance)

Maslow

Herzberg

Self-actualization

Esteem Social

Work itself, achievement, possibility of growth, responsibility Advancement, recognition, status Interpersonal relations Company policy, job security
Working conditions, salary, personal life

Safety and security


Physiological

The management challenges


1. Recognizing needs 2. The changing nature of individual needs, expectations 3. The impact of cultural diversity on a managers ability to recognize needs 4. Being able to choose the right satisfiers and then being able to obtain and offer them 5. Managing the process aspects of the cycle

Lesson 12
INNOVATION PROGRAMS AND EDUCATION

Paradigm shifts
Information and knowledge society Lifelong learning Lean companies, networking Information and communication technologies (ICT)
e-business, e-commerce, e-learning, egovernment, e-, m-

Learning organization
The education that does not follow the specific objective and does not improve the results is a luxury the company cannot afford. Learning has been effective if a person knows something he has not known earlier and he can do something what he has not been able to do earlier The mission of the managerial education is the development of the competencies and performance of managers Learn by doing - follow what your more experienced colleagues (but experiment as well)

KEY COMPETENCIES
technical qualification - technical knowledge, skill, talent and attitudes related technologic, economic, financial, structural and procedural aspects of work Soft skills, behavior and acting - related to work with people, influencing the communication and dealing with individuals and groups both within and outside the company.

Company training programs


1. Training programs content, methods and goals must take into account the basics of the managerial work in real situations; 2. Attention should be paid to the improvement of behavior and motivation and not only to acquisition of technical skills; 3. The active training methods should be preferred before passive ones. The abstract concepts should be rooted in the practical experience of companies.

Design of training programs


Define before the start of the training: What we want to achieve (goals) How we want to achieve the goals (methodology) How the progress will be monitored (monitoring) How the results will be evaluated (evaluation)

Lesson 13
COURSE CONCLUSION TERM PAPER PRESENTATIONS

Adapt the knowledge to your culture, local conditions, But at the same time, do not over-adapt, try also to affect your environment

Good luck

COMPANY INNOVATION SYSTEM


Company strategy Collection of innovation impulses Setting of priorities Looking for innovation ideas and their discussion Feasibility study Decision about project preparation Project preparation Project implementation Monitoring of innovation performance

PROCESS MAP
Communication with customer

MARKET

Idea Development

CUSTOMER

Production

Strategy Strategy development development

Product Product development development

Design Design modification modification according + according + customers customers requirements requirements

Product Product delivery delivery

Development of production capacities

REGULAR INNOVATION MEETINGS


Sort collected impulses according to their topics Select the technique for development of innovation proposals Present generated innovation proposals and prepare their preliminary evaluation Submit results to the management for the decision about the feasibility study performance for selected proposals Report the feasibility study results to the management for the decision about the project development Report on
the state of the projects under development the state of the currently implemented projects the monitoring of already implemented projects