Lecture notes Management of Product Innovation 2013-2014

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Lecture 1: Introduction

 

What makes an organization innovative?

  • Characteristics: new products, customers like these products and the company makes money with this products.

  • Business success

 

The ten most innovative companies are ranked by their innovation premium. This is the difference between their market capitalization and a net present value of cash flow from existing businesses. The difference between them is the bonus given by equity investors on the educated hunch that the company will continue to come up with profitable new growth. By this measurement are shareholders involved.

 

A disruptive company is a business whose innovations force other businesses to alter their strategic course. They are changing the market.

 

In the figure of disruptive innovations, the time and performance are plotted. The customer’s demand for performance is slowly raising. This is because you got used to a performance and then you want more. Traditional technology can manage that, until a new technology is made. After some time, the disruptive innovation is able to easily meet the customer’s demand for performance.

 

Radical innovations replace existing products, technologies and markets.

 

Reasons for a company to do innovation:

  • A successful new product does more good to an organization than anything else that can happen.

  • Growth

  • Companies need always innovations to stay alive.

 

Innovation product life cycle:

  • Introduction

  • Growth

  • Maturity

  • Decline

 

The new things are happening before the introduction stage. But although it is on the beginning of the life cycle, the company should already know what is going to happen in the next stages.

 

Innovation is the process from idea to product. Innovation is depending on creativity of individuals, firm’s operating functions and activities and firm’s architecture and external linkages.

 

There are push and pull innovations. Push innovations are based on the latest science and technology advances in society. Pull innovations are based on the needs in society and the marketplace.

 

Invention: creation of a unique, hopefully patentable, device/configuration/process. An invention is only an innovation if it is marketable.

 

Innovation: transforming an invention into a commercial product that can be sold profitably.

 

Innovation management: the management of all activities involved in the process of idea generations, technology development, manufacturing and marketing of a new product or manufacturing process or equipment.

 

Product development/product design product planning: the complete process of transforming an opportunity into a new product and introducing it successfully in the market.

 

Product design: industrial design (art, science and technology)

 

There are some spectrums of design activities: engineering, product/use, fashion/trends, engineering solutions, form concepts and design trends.

 

There are two main business processes:

  • The process of repeatedly making a product/service and delivering that to the customer. It focuses on the buy-make-distribute-sell-service, the supply chain and on operational value stream.

  • The process of designing a new product/service that is profitable in the market. It focuses on design, development, innovation chain and development value stream.

 

The operational value stream consists of activities that converting raw material to products in the hand of the customers and activities that are value creating because customers pay for the changed materials.

 

The operational value stream has the following characteristics: material flow, it is repeated and there is process control.

 

The development value stream consists of activities that create profitable operational value streams and activities that create useable knowledge, which involves learning.

 

The development value stream has the following characteristics: information flow, it is a one time stream and there is a disciplined process.

 

The state has different roles in innovation:

  • Purchaser

  • Financing R&D

  • Educational and other societal effects

  • Competition regulator

  • Environment and safety regulator

  • Infrastructure

  • Macroeconomic conditions

  • Information and decision center, create political stability

 

The industry attractiveness can be determined by Porters model, which identifies five factors: threat of new entrants, bargaining power of suppliers, bargaining power of buyers, rivalry among existing firms and the threat of substitute products and services.

 

Innovativeness can be measured on different levels. On national/regional level a scoreboard can be used. On industry level the innovation index is a way to measure innovativeness. At the firm level, the percentage of sales of new products, the value of patents or the Net Promotor Score.

 

The Net Promotor Score is a measurement, which is based on the question if a costumer would recommend this product/service/organization to a friend or colleague. The Net Promotor Score is calculated by the percentage promotes minus the percentage detractors.

 

Frugal innovation is an innovation strategy of a large market, which implies that private companies can make significant profits by selling to the poor. By selling to the poor, private companies can bring prosperity to the poor and thus can help eradicate poverty.

 

The diffusion of innovations is divided into five categories: the innovators, early adopters, early majority, late majority and the laggards.

 

Factors that are influencing adoption:

  • Relative advantage: the degree to which an innovation is perceived as being better than its precursors

  • Compatibility: the degree to which an innovation is perceived as being consistent with the existing values, needs, and past experiences of potential adopters.

  • Complexity: the degree to which an innovation is perceived as being difficult to use.

  • Observability: the degree to which the results of an innovation are observable to others.

  • Trialability: the degree to which an innovation may be experimented with before adoption.

 

Lecture 2: Exploration and Exploitation

 

The dilemma of innovation management is managing the tension between the need for creativity and the need for efficiency. Efficiency gains is that the efficient day-to-day operations within an organization require stable routines. This is usually achieved in stable and controlled environments. The creativity gains are involved with the fact that the development of new products and services requires creativity and room to try out new ideas. This is usually achieved in a loose and flexible environment.

 

Ambidexterity is the art of simultaneously and consists of:

  • Exploit: efficiency, productivity, control, reduce variance, certainty.

  • Explore: search, discovery, innovation, autonomy.

 

Exploration vs. Exploitation

Exploitation: use and development of things that are already known. Refinement, choice, production, efficiency, selection, implementation and execution.

Exploration: is the pursuit of new knowledge. Search, variation, risk-taking, experimentation, play, flexibility and discovery.

 

There is often a tension between exploration and exploitation, because they are often in competition for the same scarce resources, there is a self re-enforcing nature of activities and both activities require radically different mindsets and routines.

 

Organizational structure and innovation is designed in the diagram of Perrow. He distinguishes four types of tasks, based on analyzability and variety:

  • Craft: low analyzability and low variety. To implement this design, an organic structure is desired, in which low formalization, low centralization, training, moderate to narrow span and horizontal communication are characteristics.

  • Non routine: low analyzability and high variety

  • Engineering: high analyzability and high variety

  • Routine: High analyzability and low variety.

 

If you have to deal with these different circumstances, an organization should be designed in a particular way.

 

Exploration is more interdependent than exploitation. To synchronize, you need more face-to-face contact in exploration situations.

 

A portfolio approach can manage uncertainty. The balance of the portfolio is essential. To make this balance, the extent of production process changes and the extent of product changes should be taken into consideration. The Pearson Matrix also distinguishes these factors by plotting the uncertainty about the process to the uncertainty about the output. Portfolio management is using the different risks of several projects, to be able to deal with the overall risks of an organization.

 

 

 

Innovations and operations management

The development value stream consists of activities that create profitable operational value streams and activities that create useable knowledge, which involves learning. It has the following characteristics:

 

Eaton-Holec designed a decision-gates model, which gives an overview of the process steps in the different process phases. Activities are grouped in phases and there are Milestones in between, which are go or no-go decisions.

 

Firms should use different techniques to coordinate their different processes.

 

The innovator’s dilemma: should you stay by the profitable sustaining innovations or go for a new technology, which has more risks but can also be more profitable? The development of a disruptive innovation is going so fast, that it can compete in despite of the high costs.

 

Triggers for innovation:

1) Market/ business opportunities: these can be radical and incremental

2) Internal analysis: gap analysis, process improvement teams and total quality management. Probably only incremental.

 

Gap Analysis- service gaps: how is it possible that services are never what you expect them to be. This gap is not easy to understand, because the gap is built on smaller gaps.

 

Customer needs are translated by the design process, so that the company can facilitate a robust production, which can be described as the same production among any circumstances. Steps that happened in the process design: design specification, critical to quality specs and robust design. There are many types of analyses to analyze these different steps.

 

 

Quality function deployment is the translation between the needs and the desires of the customer, into specifications of the products, which is done in all stages of design, manufacturing, delivery and support of products. Using Quality Function Deployment leads to fewer costs.

 

Design principles include usefulness, ease of use and simplicity. Process, price, layout and architecture are no design principles.

 

Managing Intellectual Property

Serendipity: prepare yourself for big adventures. Prepared minds might find changes for new things. Appropriability is earning money on your Intellectual property: the degree to which a firm can capitalize on its innovation. This depends on how quickly and easy competitors can intimate the innovation. A product is difficult to imitate when innovation is not evident from the product or innovation is based on tactic knowledge or on unique capabilities of R&D teams.

 

Ways to protect your innovation:

  • A patent protects an invention, which can be a product, process, machine or design of manufacturing item. A invention is protected for 20 years.

  • A trade mark protects distinctive words or symbols for as long as they are in use.

  • A copyright protects an original artistic work for the duration of the author’s life plus 50 or 70 year.

  • A trade secret is protecting from use by others.

 

The conditions of a patent: it should be useful, novel and not obvious. They are not patentable, which means that you can’t change material or size, substituting parts or altering shape. The costs of patents are involved with the filing, issuing and maintaining costs. Furthermore the fight infringements which can occur are costly for an organization. A patent should be manufactured with 3 years: the working requirement.

 

Service companies have more difficulties by protecting their intellectual properties. Software is not easily patentable. Although the availability of legal protection for software has increased rapidly around the world over the past fifteen years, the scope and the feasibility of enforcement of that protection continues to vary significantly by country. Services are generally not patentable, except in the USA.

 

Prepare for a disclosure:

  1. Formulate a strategy and a plan

  2. Study prior inventions

  3. Outline claims: a claim that you product can do something, which other products could not.

  4. Write description of the invention

  5. Refine claims

  6. Pursue application

 

Trademarks: any sign capable of distinguishing the source of goods from another source. It can be close to, but is always different from brand names.

 

Copyrights protect works of arts, whether or not published. The doctrines of fair use is using others’ works, but inform who is the author.

 

Trade secrets is information that is not generally known or to be found through legitimate means. It has economic value when it is being kept secret.

 

Alternatives to protection:

  • Open source : get faster adoption

  • Open source with architectural control: determine structure and operation of technology.

  • Licensing

  • Keep secret

  • Publish

 

Lecture 3: Competitive advantage

 

Radical innovations when it comes to a new technology with new market demand. Incremental innovations provide new features, benefits and improvements to the existing technologies in the existing markets. Everything in between is called really new.

 

Trott makes an extensive classification of new products:

  • New to the world: radical, with high risk

  • New product line: really new, with a new market.

  • Additions to existing product line: really new, with a new product.

  • Improvements/revisions to existing products: Incremental new.

 

A product portfolio of a company doesn’t involved only risky innovations.

 

Paradigm: a framework in which evaluation of a technology occurs. Paradigm shift are the radical innovations that change the rules of the game.

 

Total quality management methodologies are based on continuously improving your current processes. Mostly within the same paradigm.

 

A patent thicket is a dense web of overlapping intellectual property rights that a company must hack its way through in order to actually commercialize new technology. Or an overlapping set of patent rights, which require innovators to reach licensing deals for multiple patents from multiple sources.

 

The Outside-in perspective: supra-normal performance due to factors outside the firm. Why you are better, does not originate from the company itself, but from the environment in which the company is dealing with. There is a focus on the environment, the non firm-specific issues. Firms within an industry are identical in terms of their resources. Heterogeneity is only temporary, resources are highly mobile.

 

The dynamics of an industry are determined by substitutes, suppliers, buyers, potential entrants and industry competitors.

 

The Inside-out perspective: the resource based perspective. Supra-normal performance due to firm-specific issues, not by the environment or industry. Resource based view states that there are differences between firms based upon the way they manage resources and how they exploit them. These differences are relatively stable. So here, resources provide a sustainable competitive advantages, and not the industry.

 

Resources offer a competitive advantage if they are(VRIN):

  • Valuable

  • Rare

  • Imperfectly imitable: very difficult to copy

  • Non-substitutable: there should be no substitutes.

 

What do you need to have competitive advantage:

  • Rents: the difference between raw costs of a good or service and its price. So, you need to earn something. This is only possible when you have heterogenic resources.

  • Rents sustained: Ex post limits to competitions are needed. No huge investments are needed to stay profitable.

  • Rents sustained within the firm: imperfectly mobile: the resources should not easily be moved to the competitors.

  • Rents not offset by costs: ex ante limits to competitions.

 

The resource based perspectives gets a lot critique:

  • It is an over-inclusive definition of resources

  • Limited prescriptive implications

  • Tautological, self-verifying circular reasoning

  • Both external and internal environments change.

 

Dynamic competence-based perspective: outside-in and inside out, so it is co-evolutionary. Both companies and environments constantly change. There are dynamic capabilities, which are the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments. A company needs absorptive capacity, which is the firm’s ability to recognize the value of new information, assimilate it, and apply it to commercial ends. Furthermore, it needs mutual learning between members of an organization and an organizational code: exploration and exploitation.

 

Closed model of innovation: Research and development are not connected with the outside world. A firm is totally focused on intern processes.

 

In open innovation other firm’s market, new markets and current markets are used and exported. Open innovation is the purposive use of inflows and outflows of knowledge to accelerate internal innovation and expand the markets for external use of innovation. Open innovation is inbound/outside-in by the practice of leveraging the discoveries of others and outbound/inside-out by firms looking for external organizations with business models that are better suited to commercialize a given technology.

 

In both open innovation and technology transfer, information technology flowing out from your internal model, and information technology is coming in from the outside world.

 

Knudsen and Mortensen state that open innovation leads to worse time to market, slower product development projects and more costly product development projects than the closed innovation model. So open innovation is not always the best way to innovate.

 

Dynamics of alliance can be explained from a game theory perspective or a social exchange perspective. But it can also explained from a resource-based perspective, transaction cost perspective and a learning and knowledge perspective.

 

Strategic compatibility involves the question: should we cooperate? It has an exploitation intent (elaboration of existing competencies) or an exploration intent( establishing new competencies).

Operational compatibility involves the question: can we make it work? This is influenced by the capabilities of the partner, the commitment of the partner regarding trust and fair dealing and the profitability of the alliance.

 

Special type of alliance:

Co-operation: simultaneous pursuit of collaboration and competition between a pair of firms.

 

There are many forms of alliances and all these alliances have advantages and disadvantages. These trade-off is between speed, cost, control, potential for leveraging existing companies, potential for developing new competencies and potential for accessing other firms competencies.

 

Lecture 4: R&D Management

 

Open innovation is not the same as unprotected or without engagement. It means that information flows from external sources into the innovation process of an organization. In an open innovation environment, there is a need for changed R&D competencies.

 

Two types of open innovation partnerships:

  • Science-based: with universities and knowledge institutes.

  • Market-based: with suppliers and customers.

 

R&D projects with open innovation partnerships are associated with better financial performance, providing that they are managed in the most suitable way. This is different in several situations:

  • Market-based partnerships are positively correlated with project performance if a formal project management process is used.

  • Market-based partnerships are associated with a lower performance for loosely managed projects.

  • Science-based partnerships are associated with higher project revenues for loosely managed projects only.

 

Contracts and trust are both needed for a successful alliance. In initial contracts conditions for cooperation are drawn. By knowing the rules of the game, mutual expectations are clear, which lead to more trust.

 

How to secure knowledge:

  • Respect tacit and explicit knowledge

  • Stimulate knowledge sharing, especially in consulting area

  • Knowledge systems based on finding the right persons are quite successful

 

Developing R&D strategies

A possible corporate strategy of a company can be to achieve competitive advantage. Competitive advantage is defined as delivering superior value to customers and in doing so earning an above average return for the company and its stakeholders. Factors which determine if a company has success or not are:

  • Environmental and industry conditions, which can be analyzed by 5 forces model or DESTEP

  • Internal resources, competences and capabilities, which can be analyzed by VRIN

  • Dynamic capabilities, absorptive capacity and learning.

 

The strategic role of R&D is related to its link with businesses and can be categorized into three factors:

  1. R&D for existing businesses: This will ensure the businesses are able to compete and to exploit all opportunities available to it.

  2. Drive new businesses: business opportunities will continually arise. R&D will ensure that these can be exploited.

  3. Exploratory research: this helps to develop understanding of technology that the business is using or may use.

 

The strategic customer value orientation is the competitive advantage a company chooses by offering superior customer value. There are three types of strategic customer value orientation.

  1. Product leadership: offering customers leading-edge products and services that consistently enhance the customer’s use of the product, making rivals’ goods obsolete. This orientation requires creativity, quick commercialization of ideas en relentless pursuit of new solutions to problems that our own products just solved. (leader)

  2. Operational excellence: Providing customers with reliable products at competitive prices and delivered with minimal difficulty and inconvenience. It minimize overhead and transaction costs and optimize business processes. (cost minimalisation)

  3. Customer intimacy: Segmenting and targeting markets precisely and tailoring offerings to match exactly the demands of those niches. It continually shapes products and services to fit an increasingly fine definition of the customer. (market segmentation)

 

Dominant design

Dominant design is a single architecture that establishes dominance in a product category.

The disadvantage of a dominant design is that the existing dominant technology often does not recognize emerging technology that might become dominant. This can be dangerous because of underestimating the competitors.

 

In the fluid phase a pioneering firm gets the ball rolling with its initial or breakthrough product or technology. A growing market begins to take shape around that product. New competitors are inspired to enter the market and either expand the market further or take a chunk of it with their own product versions. The market and industry are now in a fluid stage of development in which everyone is learning and experimenting. There are no standards yet. To enable a fluid phase, there are some conditions which are necessary:

  • No existing lock on the market

  • No one’s product is really perfected

  • No single firm has mastered the processes of manufacturing or achieved unassailable control of the distributions channels.

  • Customers have not yet developed their own sense of the ideal product design or what they want in terms of features or functions.

 

When a dominant design emerges, the basis of competition changes radically. Before the dominant design there were many firms with many unique designs, after the dominant design there are few firms with similar product designs. Firms only focus on efficiency and market penetration.

 

Dominant designs are selected on the learning effects, since it increases the performance and decreases the cost. Furthermore network externalities are also helping by installing base and complementary goods.

 

The dominant design is not always the best design for everyone.

 

 

Acquisition of technology

Trott plotted the acquisition of external knowledge and technology by the level of understanding of the technology by the acquiring business and the level of understanding of the technology by external parties. There are four categories:

  • Purchase existing products or manufacturing process

  • Seek possible R&D strategic alliances and purchase or license a patent.

  • Conduct internal R&D

  • Purchase know-how embodied within people and processes and explore external R&D contract possibilities.

 

Event pacing versus time pacing

Event pacing means that development processes are synchronized to the virtual clock. If fits to a linear stage gate model and technology leaders want to be present. Time pacing is used when event pacing dos not work yet. It consists of the initial stages of innovation. By time pacing there is tried to manage transitions between phases of discovery, incubation and acceleration.

 

There are three broad screening methods:

  1. Benefit measure models, which are subjective assessments of projects by well-informed and experienced managers on several evaluation criteria.

  2. Economic models: Net present value can be used. The net present value of a project worth today, given a particular level of expenditure, particular levels and rate of cash inflows and a discount rate.

  3. Portfolio selection models: these models are searching for the dimension of balance in the product/project portfolio of an organization. The PLC-model shows the different categories according to their market growth rate and relative market share. A star, question mark, dog or cash cos can be distinguished. A strategy is to reinvest cash surplus of cash cows in question marks and stars to ensure future success.

 

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