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Innovation Excellence – from Idea to Launch –

Innovation Excellence – from Idea to Launch –. Jersey, September 16, 2005. Dr. Christian Weigel. Innovation Excellence – Why?. Improving innovative ability will increase profitability and growth 1). Levers to Increase Profitability and Growth . Enhance innovation ability. 4,3.

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Innovation Excellence – from Idea to Launch –

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  1. Innovation Excellence – from Idea to Launch – Jersey, September 16, 2005 Dr. Christian Weigel

  2. Innovation Excellence – Why? Improving innovative ability will increase profitability and growth1) Levers to Increase Profitability and Growth Enhance innovation ability 4,3 Focus on core competencies 4,0 Cost cutting 3,9 Organic growth 3,7 Capital efficiency 3,7 Internationalization 3,7 Active pricing 3,6 Acquisitions and alliances 3,4 2 3 4 5 Low importance Very high importance Source: Arthur D. Little Innovation Excellence Study 2005; 1) Same answer across all regions and industries

  3. Innovation Excellence – Definition of Innovation Innovation turns knowledge into cash … Product and service innovation • Innovative problem solutions • Substitutions of existing products and services • New markets Process innovation • Productively increase Structural innovation • New structures of R&D organizations • Value chain reengineering Source: Degussa, Euroforum 2005

  4. Products Service Supply Chain Manu- facturing Marke- ting Distri-bution Sales +CustomerSupport Innovation Excellence – Definition of Innovation … and is not limited to technologies and products Over the next five years, how much value do you expect your company to create through innovation in the following areas Global Response 79 77 74 73 80 67 65 64 60 40 20 Portion of Value Chain Source: ADL Global Innovation Survey

  5. Innovation Excellence – Definition of Innovation Innovation – is all about hard work Art consists of 90% transpirationand only 10% sudden inspiration(Adolf von Menzel) Innovation consists of 90% transpirationand only 10% sudden inspiration(Thomas Edision)

  6. Innovation Excellence – Survey Results Chemical industry is a "low intensity innovator" Share of sales generated by products launched in the last 5 years in % Efficient Innovators High Intensity Innovators Inter-industry average 70% 60% Electrical engineering and Electronics Automotive OEMsand Suppliers 50% Aero-space Pharma-ceuticals Construction and Equipment Telecommunication, IT and Media 40% Consumergoods and food Inter-industry average 30% Public and Professional Services Financial Institutions 20% Chemicals/ Resources Logistics/ Services Engineering and Manufacturing 10% Utilities Low Intensity Innovators Low Leverage Innovators 0% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% Share of R&D budget in total sales in % Source: Arthur D. Little Innovation Excellence Study 2005

  7. Innovation Excellence – Survey Results No correlation between R&D expenditures and share of new products Various Chemical companies (commodity and specialty focused); 2004 figures Sales with products younger than 5 years Average = 2,8 45% 40% 35% 30% 25% 20% Average= 19,1 15% 10% 5% R&D expenditure as % of sales 0% 0% 1% 2% 3% 4% 5% 6%

  8. Innovation Excellence – Survey Results Innovation leader need less for more R&D expenditures to generate 1 million sales with a new product – Chemical industry – '000 € 1360 +50% 860 +50% 430 Best Average Worst 30% 21% 26% % new productsyounger 5 years

  9. Innovation Excellence – Top Innovation Management A well-balanced innovation approach is one key to success Learning from top innovators Learning from best practices A well balanced approach Learning Customers Idea Management Product/Service Portfolio Mgmt. Customer & Business Results Business Vision & Strategy Business & Technology Intelligence Development & Launch Post-Launch Technology Management Resource & Competence Management Partners Learning

  10. Innovation Excellence – Market Intelligence Customer contact and excellent business intelligence form essential components of Innovation Excellence Gaining Market Intelligence Direct customer contact Source for Innovation Source for Innovation Systematic market andtechnology screening Extrovert corporate culture Clear role allocation 2 3 4 5 Very high importance Low importance Source: Arthur D. Little Innovation Excellence Study 2005

  11. Innovation Excellence – Market Intelligence Uncover unarticulated customer needs What? Clues How? Frustrations with current products and services Anticipating changes in customers' environment 1. Ill-served needs Listening tocustomers + Frustrationswith current activities 2. Un-served needs Watchingcustomers + "Blue-sky" dreams about ideal world 3. Un-conscious needs Speculating with customers

  12. Innovation Excellence – Market Intelligence Think of customers, broadly YourCompany Regional Internat’l Network Whole- saler Retailer/ Dealer Customer Customer’s Customers Service • Needs / wants ? • Satisfaction level ? • Future pressure / conditions of success ?

  13. Innovation Excellence – Idea Management Pivotal factors in idea management include creative employees and business partner Idea Management Creative employees/ business partner Methodology to evaluate and select new ideas Systematic process to generate new ideas Available time to generate ideas 2 3 4 5 Very high importance Low importance Source: Arthur D. Little Innovation Excellence Study 2005

  14. Innovation Excellence – Idea Management Idea does not necessarily mean market success 1,919 369 176 32 11 Success Market Products Projects Ideas Invention Innovation Source: University St. Gallen, Prof. Gassmann

  15. Innovation Excellence – Idea Management Are those companies more successful that involve their customers into the development of new products and services? "If I had asked my clients what they wanted they would have answered 'A faster horse'!" Henry Ford, 1863 – 1947 "It seems that just about every industry on mapright now is being reinvented from the customer backwards" Gary Hamel, 2002 "... users rather than manufacturers are typically the initial developersof what later become commercially significant new products and processes" Eric von Hippel, MIT, 2002

  16. Innovation Excellence – Idea Management Remember innovation has many sources (1) Thermoplastics-using Industrial gas-using Plastics additives Engineering plastics Semiconductor and printed circuit board process Scientific instruments 0% 20% 40% 60% 80% 100% Innovation Developed by: User Manufacturer Supplier Other Source: Evon Hippel

  17. Innovation Excellence – Idea Management Remember innovation has many sources (2) Innovation Sources Chemical Industry Industry in general 0% 20% 40% 60% 80% 100% Customer Supplier Science Competitors R&D, othersinternal Source: ZEW: Mannheimer Innovationspanel (Erhebung 1999)

  18. Innovation Excellence – Idea Management In order to meet the challenges new approaches and methods are required Ideageneration Conceptdevelopment Implementation Launch Analyze emotional needs Involvelead-user Focus groups Quality Function Deployment Conjoint analyses Rapid Prototyping Toolkits Product clinics Next Generation Road mapping Empathic design Communities Positioning models …

  19. Innovation Excellence – Idea Management In many markets decisions are made emotionally – ratio provides only the reasons Decision hierarchy product purchase 2. Objective reasons for product use Ratio Emotion • Security • Wishes • Dreams 1. Decision based on emotional use

  20. Innovation Excellence – Idea Management For the analysis of emotional factors in case of purchase decision new methods are required • Non-verbal communication prevails;"people think in pictures, not in words" • Better assimilation in the brain and easier activation of the brain through non-verbal signals • Traditional analysis methods (focus groups, questionnaires etc.) strongly "verbo-centric" • New methods with approaches to non-verbal articulation of needs; linkage between psychoanalysis, arts, literature and neurobiology

  21. Innovation Excellence – Idea Management "Zaltman Methaphor-Eliciation Technique" Example ZMET Project definition • Object of investigation • 12 – 30 participants "Good tasting energy provider" • Pictures with strong association to product • Pictures: press clippings, picture books, brochures etc. "Picture"-collection Digital collages • In-depth interviews • Point out metaphors "Symbol of good old times" Further examples: • Translate collages into idea landscapes • Interpretation Idea landscape • Arthritis drugs • Buick • Motorola security system

  22. Innovation Excellence – Idea Management For each market there are lead-users having today already needs they can articulate but which are developed only tomorrow by the broad market • Early and intensive customer involvement leads to innovation success(Arthur D. Little Studies 2004) • Well-known methods for the analysis of customer needs focus on broad customer groups in well-known markets • Despite great efforts hardly any impulses for real innovations "Our clients want all the same thing: more service, better quality and low prices at the same time" • Lead users have today already needs that the total market will develop only tomorrow • Lead-user strongly profit from the development of new products or services Conclusion: Identify lead-users and involve them closely into the product-/ service development

  23. Innovation Excellence – Idea Management The lead-user approach can be applied in markets of industrial- and consumer goods + Pilots on wet roads ABS-System + Bikers in the mountains Mountain-bike Customerswith sensitive hair + Proteinshampoo

  24. Innovation Excellence – Idea Management A critical success factor is a structured search process Real-life example Infection protection in operating room • Search field • Project targets and team Project start Cost pressure Hygienerequirements Antibiotics resistance • Most significant trends in search field • Lead-user criteria Trend analysis Minimal budgets External stress … • Screening or networking search Lead-user search Surgeons in devel. countries MASH units Make-upartist • Lead-user workshop • Concept development and assessment • 2 new products • Radically new approach for infection control Conceptdevelopment Result

  25. Innovation Excellence – Innovation Strategy Top innovators explicitly link strategy and clear innovation objectives Strategic Planning of Product / Technology Development Clear product or service strategy Tight relation between innovation objectives and business strategy Defined core competencies Distinct product and/or technology platforms Strategic make-or-buy decisions 2 3 4 5 Very high importance Low importance Source: Arthur D. Little Innovation Excellence Study 2005

  26. Innovation Excellence – Innovation Strategy Innovation objectives have to be defined Project examples Share on technology development SBU A (40%) breakthrough SBU E (30%) Share on product development Type ofInnovation SBU D (10%) SBU (xy = % of saleswith products youngerthan 5 years in 2008) SBU C (20%) incremental Size of bullet is proportional to sales of SBU SBU B (10%) short long Investment Cycle of Market

  27. Innovation Excellence – Innovation Strategy Canon’s high-speed digital copier business is a good example of successful platforms/growth engines Consumer Electronics Business Electronics Markets Office Automation Products Cameras Copiers Fax Printers DigitalCopiers DocumentSystems Platforms/ Growth Engines Precision Machining Micro-optics Imaging Laser Sensing Networking & Connectivity Technologies,Competencies Material Science Finite Element Analysis High- Precision Measurement Fourier Analysis DigitalElectronics

  28. Innovation Excellence – Product Selection and Development Top Innovators focus on good cross-functional teams and a milestone-based development process Product Development Process and Project Management Prioritization of limited resources Milestone-based product development process Management of development partners Methodology of risk management Collocation of development teams in critical project phases 2 3 4 5 Very high importance Low importance Source: Arthur D. Little Innovation Excellence Study 2005

  29. Innovation Excellence – Product Selection and Development We will jointly select the appropriate portfolio criterias Project examples 1,0 1,0 1 ideal ideal 6 3 0,8 0,8 7 1 4 5 8 10 0,6 0,6 2 2 Technology life cycle 9 Market skills 3 10 0,4 0,4 4 5 9 6 7 0,2 8 0,2 fatal fatal 0 0 0 0,2 0,4 0,6 0,8 1,0 0 0,2 0,4 0,6 0,8 1,0 Technology Position Technology Position • Customer needs • Access to clients • Knowledge of competitors 1,0 1 ideal 0,8 7 4 3 0,6 6 5 10 9 2 Strategic benefit 0,4 8 • Potential profit • Fit for the business • Sustainability of competitiveness • Strategic role of technology 0,2 fatal 0 0 0,2 0,4 0,6 0,8 1,0 Risk (technological, commercial)

  30. Innovation Excellence – Product Selection and Development A Portfolio Management based on ECV (Expected commercial value of projects) can lead to a significant increase of the R&D pipeline value Project examples Before After high high NPV Attrac-tiveness low low low high low high Risks Probability of commercial/technical success Mainly qualitative criteria for selection Selection based on NPV/probability (ECV) +40% Pipeline Value ~ 3,5 bn $1) Pipeline Value ~ 5,0 bn $ 1) ECV based: Expected Commercial Value Size of bubble = ECV in mio $

  31. Innovation Excellence – Product Selection and Development Value Management starts at the Money Gate of the Stage Gate process Stage Gate and Portfolio Management "new" product Idea/ Proof of concept Kick-off Gate Go to testing Gate Business Case Develop-ment Testing & validation Money Gate Launch Gate Launch Evaluation of single projectbased on NPV and risk Portfolio review: • Prioritization • Resource allocation Budget planning Strategy Responsible: Gatekeeper

  32. Innovation Excellence – Product Selection and Development A properly implemented Stage Gate Process can free up significant resources and improve productivity Project examples ADL Project example Benefits Number of Projects Status • Innovation closer to market needs, due to market justification (business case) in early project phase • Resources will be increased in the more cost efficient early phases • Projects will be terminated earlier – if required Target 100% 50% 0% Time Stage 1 Idea- Gener-ation Stage 2 Business Case Stage 3 Lab-phase Stage 4 Pilot-phase Stage 5 Launch Gate 4 Gate 5 Gate 3 Gate 2 Source: Arthur D. Little

  33. Innovation Excellence – Technology and Resources Management The secrets of success are good project management and technology partnerships Management of Technology and Resources Systematic improvement of project management skills Technology partnerships with other companies Collaboration with federal research institutes Active license management Clear separation between product and technology development 2 3 4 5 Very high importance Low importance Source: Arthur D. Little Innovation Excellence Study 2005

  34. Innovation Excellence – Technology and Resources Management Degussa's routes to new business involve project houses and internal start-ups New Business Development Science Society Markets High Risk Exploration & Validation Internal Start-ups NewBusiness Business Technology Corporate Venture Project House Business Unit Medium Risk New Technology Platforms Source: Degussa, Euroforum 2005

  35. Innovation Excellence – Delocalization of Innovation Due to the global innovation competition the early stages of the innovation process become increasingly important Today Trend to shift concept- and implementation phase to foreign countries • To benefit from efficiency advantages • To increase proximity to customers • Challenge: Keep proprietary Know How Ideageneration Tomorrow? Concept development Ideageneration Implementation Concept development Example China • With more than 10,000 research institutes • Pool of trained scientists (800,000 science and engineering degrees) • Repatriation of US educated scientists (over 110,000 scientists since 1994) Implementation Innovation performance in Europe Asia

  36. Innovation Excellence – Measurement of Innovation Good performance indicators help companies to set the baseline and support improvement in innovation excellence Key Innovation Metrics Sales/results of new products 36% 17% Number of new products Impact on sales, EBIT, and/or costs 11% 11% Number of patents Time to market 4% Project management measures 3% 2% Innovation rate 16% Others 0% 10% 30% 40% 20% Frequency Source: Arthur D. Little Innovation Excellence Study 2005

  37. Innovation Excellence – Measurement of Innovation Good performance indicators help companies to set the baseline and support improvement in innovation excellence Key Innovation Metrics General metrics, indirectly related to innovation, e.g. Metrics directlyrelated to innovation 47% 53% • Customer satisfaction • Total sales • Market share • EBIT Source: Arthur D. Little Innovation Excellence Study 2005

  38. Innovation Excellence – Measurement of Innovation Possible Innovation Balanced Scorecard illustrativ 3. Portfolio und Pipeline Health – Erwartungswert der F&E-Projekte 1. Umsatz aus neuen Produkten % Mio. € 30 900 Neue Produkte 20 600 Neue Varianten 300 10 AlteProdukte 0 0 2003 2004 2005 2003 2004 2005 2. Rentabilität der F&E 4. Innovationsklima 40 Verhältnis F&E-Aufwand/ Deckungs-beitrag neuer Produkte Innovations-klima Index 1,10 Bester Wett-bewerber 30 1,00 20 Wir 0,90 10 0 0,80 2003 2004 2005 2003 2004 2005

  39. Innovation Excellence – Innovation and Stock Markets In der Post-Reengineering-Welt wird Innovation zum Schlüsselerfolgsfaktor Average Shareholder Return vs. Innovativeness Rating 80% Zustimmung zu der Feststellung 60% 50% "Top management's commitment to and focus on increasing its organization's innovative ability could lead to significant bottom line results over and above typical costcutting and re-engineering initiatives" Source: ADL innovation survey 40% 30% 20% 10% Average Annual Shareholder Return 1986-96 0% -10% -20% 3,00 4,00 5,00 6,00 7,00 8,00 9,00 Innovativeness Rating Innovativeness Rating: Based on America’s Most Admired Corporations, Fortune Magazine ranking of 578 U.S. companies based on executive peer ratings and investment analyst evaluations.

  40. Innovation Excellence – Innovation and Stock Markets Impact of innovation on chemical stocks' value drivers? Portfolio Focus Earnings Predictability Long-term sales growth Scale Capital Structure Profitability/ROIC Source: CSFB

  41. Innovation Excellence – Innovation and Company Climate Innovative enterprises … Build an innovative culture Time and budgets for ideas/exploration Open up communication, build flat hierarchies Establish errortolerance Set enterprise target innovation Break down think barriers Question thestatus quo Destroy status-quo-mentality and cemented structures Increase speed of change Source: Degussa, Euroforum 2005

  42. Turn employees into entrepreneurs Offer incentives to build new business, share success instead of jealousy Establish fast decision process Install and use tools Implement professional knowledge management Build cooperations with knowledge institutions globally Give access to external and internal knowledge for everybody Innovation Excellence – Innovation and Company Climate … and … Source: Degussa, Euroforum 2005

  43. Innovation Excellence – Survey Results Achieving Innovation Excellence can boost the EBIT-margin Improvement Potential Shorten time to market… 24.8% 65.0% Top line Increase rate of innovation1) … 23.6% 80.0% Increase sales… 13.5% 55.8% Reduction of product cost … Bottom line 15.4% 43.3% Reduction of develop-ment cost2) … 15.0% 46.3% Absolute increasein EBIT margin ø all companies 3.6% 11.4% ø of Top Performer(Top 5%) 1) Number of successful new product launches per year; 2) Project specific development costs Source: Arthur D. Little Innovation Excellence Study 2005

  44. Innovation Excellence – Summary As a number one priority, companies worldwide are targeting the huge untapped potential to improve profit growth through innovation management 1 Innovation-based profit growth tops the corporate agenda again Innovation excellence can boost EBIT-margins by 4% Top innovators have 2.5 times higher sales of new products and get more than 10 times higher returns from their innovation investments A well-balanced innovation approach is the key to success: • Good business intelligence • Clear innovation objectives linked to strategy • Milestone-based idea generation and implementation process • Measurement of/feedback on innovation performance • Wise use of partnerships • Right innovation climate 2 3 4

  45. Appendix Innovation-related processes • Informal • Ration resources • Analysis • Formal • Extensive • Elaborate/formal • Isolated • Removed from Mkt • Underestimated/used • Excluded Innovation strategy Planning focus Planning emphasis Communications Staff involvement Decision process R&D Product managers Technology Outsiders • Defined/clear • Identify opportunities • Action • Informal • Minimum • Short/informal • Exposed to market • Attuned to market • Well understood/used • Participate

  46. Appendix Innovation-related attitudes • Not explicit • Short-term • Not tolerated • Not accepted • Buried • Little emphasis • Rigid/enforced • Disliked • Low/unrealistic • Corporate interests Interest in innovation Payback horizon Mavericks Failure Lessons from failure Interpersonal skills Corporate norms Uncertainty Mgmt. expectations Staff emphasis • Explicit • Long-term • Tolerated • Accepted • Extracted/shared • Strong emphasis • Not enforced • Accepted • High/reasonable • Personal development

  47. Appendix Innovation – related policies Partnerships/ acquisition Careers for innovators Rewards for innovators Structure Innovation resources Product champions Work groups Decision mode R&D budgets Innovation success • Closed • Inexistent • Not Available • Centralized • Scarce • Individuals • Discouraged • Autocratic • Below average • Ignored • Open • Dual ladder • Available • Decentralized • Available • Teams • Encouraged • Participative • Above average • Publicized

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