2. Conceptual Background
2.1. Defining Innovation and Context
Figure
- Context and Definition of Innovation
Innovation can be described as the successful exploitation (usually in monetary terms) of new ideas (3). These ideas can broadly take the form of a new process, product, position 1 or paradigm 2
the so-called 4 Ps of innovation (4). Product innovation (NPI) is considered the most important aspect of innovation, although all 4 dimensions must be present (and in good form), for a company to innovation successfully (2). Interestingly, although the 4 Ps are not rigidly defined, nor are they mutually exclusive (4); innovative companies tend to align themselves strongly with a particular dimension. Examples include: Toyota, process innovation; Apple, product innovation; Lucozade, position innovation; and Nokia, paradigm innovation Furthermore, there are different degrees of innovation, varying from incremental to transformational. Using this degree of variation parameter, and the dimensions available; it is possible to form a framework to define the context of innovation Such a framework is shown in , where it is concluded that innovation to lies somewhere between business-as-usual (incremental improvements to the daily processes), and a revolution (transformation in the paradigm).
3. New Product Introduction
1 Position refers to market position.
2 Paradigm refers to the business model
Figure 1
1
Edited from: 4E4 Management of Technology, Session 1, 2011, University of Cambridge
Figure 2 - Combined Product life-cycle and Buyer types. Adapted from Moore (1998) and Vernon (1966)
New product introduction (NPI) is the full business process of bringing new products to market - it spans the entire product life-cycle as shown in Figure 2. The cycle starts at the identification stage where new market and technology opportunities are identified Next, the design, development and production stage followed by the market launch, enhancements, sales and support. Finally, the cycle terminates with product retirement as new products supersede the now "old" product (5). The business and product strategy underpins all the decisions made throughout this process as they provide the direction (6) Moreover, the strategy (particularly product strategy) can play an important role in gaining a competitive advantage against competitors through e.g. strategic manoeuvring (7) - a pivotal reasons why JVC's videocassette recorder standard VHS won market dominance over Sony's (technically more superior) Betamax in the late 1970s (8). This entire process is chaotic, requires substantial planning and poses challenges to the firm however there are management techniques available to help.
3.1. Challenges in New Product Introduction
3.1.1. Product Strategy
, but as mentioned before, a good strategy can create a competitive advantage for a firm In order to formulate a strategy, both internal and external factors (as shown in ) 4
A strategy is a plan based around a company's vision for the future (9). The topic is vast 3
must be identified (10). This is one of the challenges. Research shows that early strategy formulation focused more the external factors than the internal ones (undoubtedly influenced by Porter's very influential five forces model in the 1980s) It has
3 Strategy is an entire academic discipline, and the purpose of this report is not to provide a comprehensive view of this vast academic discipline, but instead to highlight the key challenges with regards to NPI.
4 There are other frameworks such as the Johnson & Scholes' Strategy Framework
Figure 3 Product Strategy Formulation Mintzberg (1996)
Figure 3
since been recognised that successful strategies should look to better incorporate internal factors. The key to achieving this lies in maintaining good interdepartmental integration (11). This is particularly difficult as it requires a good understanding of individual department objectives but more importantly, the conflicting objectives such that appropriate trade-offs can be made, in order to achieve an optimal solution. Further down the strategy formulation sequence; evaluation and choice of strategy must be made; usually subject to issues such as incoherent product ranges, number of projects to be chosen, budget and time constraints. However, "a strategy is only of value if mechanisms for its implementation and renewal are in place" (12 p. 349)
The external factors affecting a company's strategy are constantly changing due to the technology, market and industry evolution (13) These changes can be fads, trends, megatrends and/or disruptive - each with different levels of impact (14) (15). The changes are often; (a) difficult to realise in the first place, and (b) difficult to keep up with in the second The internal factors, on the other hand, tend to change in response to the externals ones. A company's ability to adapt to these changes (dynamic capability) affects the strategy implementation procedure and its effectiveness. Dynamic capability is challenge for any firm, but a concept well understood by leading Japanese and US firms in the early 1990s (12)
3.1.2. Product Design
The initial product design process seeks to identify the customer and market 5 Figure 4
needs (both overt and covert), and finds ways in which these needs can be satisfied through a vision of a product (5). This step requires clear market identification (16), typically done through defining, segmenting and researching the prospective market. A few key questions have to be answered at every stage (as shown in ), but the difficulty is that most of the answers to these questions are subjective; making it difficult to draw robust conclusions with great certainty 6
But sadly, even if a company were to "perfectly" identify a market and draw all the "right" conclusions, this could still be wrong... The reason is simple - customers do not often know what they want In 1960, a $5m market survey conducted by ADL for GE concluded that there was no market for a portable solid-state television. A month later, Sony launched such a device and 4 million units were sold within a year (2). Bluntly put, uncertainty at every stage of customer and market and identification process is the single greatest challenge for the initial product design. This normally results in failure to understand the market, and therefore satisfy the needs. The actual designing part is relatively easy - frameworks exist that deal with this effectively (e.g. topological exploration).
5 The customer and the market are inherently linked - a market is the entire set of actual and potential customers for a product or service
6 Not subject to change if someone else was so redo the market research trying to assess the same need.
Figure 4 - Performing Market Research
Adapted from: 3E10, Marketing, Lecture 3, 2010 and IIB Manufacturing Elective, Lecture 2, 2009, University of Cambridge
Product development looks to convert the vision of the product into reality (5). The main challenge here is the technology aspect because it can be thought of as the bridge connecting the initial product design to the detailed design needed to manufacture a tangible product. Here, technology is meant in both the micro and macro environmental context. In the early 1980s, links between "micro" technology issues and the firm's needs were not well understood. Since then, the issues have been identified (as shown in Figure 5) and understood for their challenges (12); however the remaining challenge was to develop reliable management frameworks to help deal with these issues The "macro" technology issues revolve around technology evolution (13) - trying to deal with it, predict it and exploit it. Both micro and macro technology issues are strongly linked to a particular aspect of innovation
"Micro" technology management issues are particularly sensitive to whether the innovation is open or closed. Open innovation technology management is more challenging than closed innovation management (especially with regards to acquisition and protection issues) (17). This is a key consequence of an increased number of stakeholders; each with slightly different opinions and objectives that need to be balanced. Having said that, the generic frameworks used to manage open and closed innovation are the same. On the other hand, macro technology issues are more influenced by whether the innovation is sustaining or disruptive and the natural evolution Failure to anticipate or predict these changes in enough time can be particularly damaging to a firm.
3.1.3. Product Development
Adapted from: Kolter, Armstrong and Wong, (1996), Principles
of Marketing, Prentice Hall, Europe
In the short term, successfully capturing the value from a product often lies within the intellectual property (IP). Weak IP will almost always result in a failure to capture value (2), but strong IP is often difficult to attain. This is because IP comes down to strategy, and this can get very complicated and convoluted very quickly. A current example of this is the quasi deadlock situation Apple and Samsung have currently reached with regards to patents - both argue that one violated the other (18) Having said that, "Intellectual property will only protect you for so long. If at all." (2 p. 9)
The long term success in capturing value from product(s)
7 Figure 6
is heavily dependent on the meta product (as well as network and threshold effects). The meta product encompasses everything about the product, as shown in , making its build up rather challenging. Further to this, the ability to capture value is also related to the inner variables, product mix and brand strength. Issues surrounding the product mix are typically governed by the breath, depth and consistency of the product lines 8
, whereas brand concerns pivot around cannibalisation and dilution (19) Further still, once the product has been launched, even with a perfect brand and meta product, the diffuse rate into the market also plays a role in determining how much value can be captured. This can be easily realised by remembering that products have a finite life-cycle. If they do not diffuse quickly enough, they can get superseded by newer products before capturing all the value they had the potential for. This diffusion rate can be quite tricky to predict, however there exists models that help manage its characterisation.
7 In reality, a company aims to design a product range, and not just a standalone product.
8 Breath: How many different types of products are there? Depth: How many products are in that category type? Consistency: How closely related are the different types of products? For example, toothpaste and mouthwash are different types of products, but they are closely related therefore consistent. If there is only one type of toothpaste being offered, then the depth is that category is low.
3.1.4. Product Launch
Figure 6 - Product Levels
3.2. Management Techniques
3.2.1. Product Strategy
Appears linear and rational, but it is in fact complex, iterative & emergent.
The strategic planning for a firm should always look to roadmaps and scenario planning hich identify and take into account the internal and external factors. The importance of product roadmaps is widely understood. "About twice as many best performers (35%) use product roadmaps than do worst performers (19%)" (Cooper & Edgett, 2009 (20)). Furthermore, in terms of evaluating, selecting and implementing strategies, a generic models, such as the one shown in Figure 7, can be used to help guide the process - alternatives also include stage-gate approaches. Internally, management techniques used to implement the strategy should be bottom-up and not top-down (12). This because management of a strategy ultimately depends on the day-to-day operations. This also helps increase the firm's dynamic capability, which is an important asset as discussed in Section 3.1.1. Furthermore, to minimise conflicting objectives, cross-functional teams must be sought for (2)
3.2.2. Product Design Process
By benefits delivered
By user/consumer
By product attributes By usage Market definition
Figure 8 - Identifying A Market
Edited from: IIB Manufacturing Elective, Lecture 2, 2009, University of Cambridge
Understanding and identifying market and customer needs are an important challenge to be managed during the product design process stage. Several methods can be used to identify a customers' overt and covert needs. The former can make use of surveys, interviews, focus groups, panel studies and many more. All of these techniques have varying degrees of effectiveness, and some results are more qualitative than
?
to be analysed.
Product
others (21) Generally, methods which indirectly assess what the customers' needs are better than those that assess needs directly because customers do not always know what they want. Investigations of THE covert needs tend to use more elaborate techniques such as hypnosis, observational studies and personas An example of one of these practices in use comes from MTV. In 2000, Tom Freston, CEO MTV Networks stated in Wall Street Journal that, "We do hundreds of different types of research... We actually in some cases put people under hypnosis..." On the other hand, in order to help clearly define the market, frameworks such as the one shown in Figure 8 can be used. Segmentation of the market can then chose any of the parameters suggested to devise perception maps, in order to gain further insight into the market (22). All the processes above also help define the product. This is desirable because a poorly defined product is unlikely to be successful (2).
3.2.3. Product Development Process
Sourced
Figure 9 - Technology S-curve
from: 4E4 Management of Technology, Session 1, 2011, University of Cambridge
The firm's view to technology management: "The process is complex, but not mysterious; it can be planned, implemented, and exploited" (6 p. 35). The identifying the issues (as done in Figure 5) can be used as a framework itself. Currently a range of frameworks now exist, that can adequately manage this process. Moreover, these frameworks tend to be tailored to a particular theme the company is trying to achieve e.g. a technology management framework with strong emphasis on dynamic capability (23) On the macro-scale, technology can be modelled by the using "technology s-curves" as shown in Figure 9. These can be used to identify technology discontinuities, as well as zones of turbulence and stabilisation This will help the firm predict likely changes and adjust to them. This is particularly important, because as mentioned in Section 3.1.3, failure recognise these changes effectively can be detrimental to the company.
3.2.4. Product Launch
Although strong IP may be difficult to obtain, depending on the industry; it is not an impossible task. There are specialist companies that can be consulted when help with this need. However, as mentioned in Section 3.1.4, a complete meta product is needed to capture value in the long run. A good example of a company that fell victim to this is Eli Lilly. The company made $5 million per day in profit from 4 patents. These patents expired in 2001, and they lost their IP protection in 2003. From then, $36.8 billion in equity was wiped out as the selling price for a 20mg capsule dropped from $2.50 to 25c (24). So, in summary, it is important to have a good meta product. The trouble is, there is no easy way for obtaining one; however, the details given in the Figure 6 can be used as a guideline to help manage the process. With regards to product mix and brand strength, open innovation is particularly strong here. This is because it can use techniques such as co-branding to protect their main brand, just in case the new product does not fit well with their current product mix (19). In addition to this, to help determine the positioning of the product, the perception maps mentioned in Section 3.2.2 can be used. Finally, to determine the rate of diffusion of a product into the market, Rogers' 5 factors (complexity, compatibility, relative advantage, observability and triability) can also be used.
Performance
4. Open and Closed Innovation
Whether open innovation is "old wine in new bottles" is a topic of recent public interest, but not the focus of this report. Instead, the historical background between open and closed innovation will be bypassed, and the two modes will be discussed for their similarities and differences. Their key attributes shown in Figures 10 and 11. At this stage, it is worth noting that there are more differences than similarities because, although they look to do the same thing as mentioned in Section 1; they do this two completely different ways. A hint is even in the names. For the sake of brevity, in this section, open innovation shall be referred to as OI and closed innovation as CI.
Both the figures above are adapted from: Pentathlon Framework, Goffin + Mitchell 2005 and 4E4 Management of Technology - L6 - Open Innovation
Figure 10 - Closed Innovation
Figure 11 - Open Innovation
4.1. Innovation Strategy
The innovation strategy for OI and CI can be classified into four broad ideas. First, CI strategy upholds the opinion that, to be successful, all the clever people must work for them; however OI is quite happy to work with them. Secondly, CI takes the view that they must profit from research they discover, while OI is happy to profit research others conduct. Thirdly, CI essentially believes that getting to market first wins, whereas OI believes building a better business model is more important. Finally, CI looks to generate ideas internally in order to win, however OI believe that they can still win by sourcing ideas internally and externally (25).
4.2. Research (Ideas)
Under CI, ideas come from in-house research. Fundamentally the research looks to explore new frontiers, which are accompanied by flashes of genius that lead to ingenious discoveries. These ingenious ideas can then be exploited to reap financial rewards. The problem: Flashes of genius cannot be predicted or scheduled in advance. This is in contrast to OI, that still works largely on the flashes of genius principle, except that the pool of ideas in the so-called "landscape of knowledge", is much greater (26). In particular, innovation explorers in OI replace the function of CI's research labs; with their sole being to scout the landscape for bright ideas (25). In addition to this, the research environment in CI generally abides by a "sky blue" concept - not governed by much, except keeping to the budget (26). This is different to OI where, characters such as innovation merchant, always look to explore with commercialisation in mind. Having said that, the previously mentioned innovation explorers, hold a similar mindset to CI's research labs, in that they explore for the sake of exploration -- commercialisation is an afterthought (25). Further to this, CI is less adaptable than OI, in terms of research breath due to the employment structure. This is because CI employs researchers who are experts in a narrow field to conduct the work. Although good, problems arise if the paradigm changes In such a case, the company would then be tasked with retraining their workforce which is undesirable. Having said that, the constant inflow of new researchers and outflow of the mature ones offer some flexibility for changing the research direction (26). In contrast, OI generally does not really have this problem, since they do not normally have initial direct contact with the sources generating the research.
4.3. Development (Selection)
OI and CI are similar in that they both look to take research an input to development. The key difference is the approaches used when taking in this research. In the past, there has existed conflict between the Research and Development entities in CI, as a result of conflicting objectives; ultimately due to budgetary disconnect. The solution in the early 20th century was to create a buffer between the two departments - a shelf. This solution meant that when Research was done with an idea, they put it on a shelf. Development then picked up the ideas they wanted from this shelf. This works, and the principle is still in practice in CI today, particularly in industries heavily protected by intellectual property. The downside to this approach is that sometimes good ideas are on the shelf for a long time, making them susceptible to external use; if IP cannot shield them from the outside world. In such a case, this shelf then forms part of the pool of ideas accessible to OI practice, making OI even more advantageous (26). This is because, not only does OI have more ideas to choose from in the first place, they can also choose from the same ideas as CI, even if they get second pick. Another comparison and contrast in the approaches taken arises when considering the riskiness of an idea. The similarity is that both look to discard the bad ideas, but commercialise the good. The difference is that OI looks to rescue the "false positives" - ideas that initially look bad but actually turn out to be valuable. CI generally discards these (25). The classic example is Xerox. Here, researchers developed Ethernet and GUI, however, they did not see its potential (false positive) and therefore they did not commercialise it. On the other hand, Apple and Windows did see its potential, and took it all the way to market, reaping plenty of rewards along the way (26). Having said that, sometimes the technologies identified do not have immediate potential. Instead, they may require other external factors to unlock their potential. This opportunity is often missed out by CI, but can be taken full advantage of by OI (25). Furthermore, the integration of research inputs can be rather difficult and complicated for CI's
development team to cope with. Under OI, this problem is less apparent when innovation architects are used. These specialise only in the integration of complex systems (not the full details of the technologies themselves). Boeing company is a good example of this (26). And although innovation architecture does have its faults, namely by how they capture profits from the value they create; the complexity of some systems they implement simply would not be possible under CI.
4.4. Commercialisation (Implementation)
Going back to the Xerox example, even if the company had realised the potential of the technology, it would have been outside its business model. In such cases, CI is still fearful of commercialisation due to issues of brand cannibalisation or dilution (19). However, under OI, these issues can be bypassed by exploiting the technology in other ways - namely licensing, partnerships and alliances; although this gives rise to greater ownership and IP problems compared to CI (1). Hence, in contrast to CI, OI offers more routes for commercialisation therefore possibly more profits to be generated. In an similar vein, the routes for the late stage funding needed to commercialise an idea, are greater under OI. Sources include; business angels, venture capitalists, private equity investors and small business investment companies (25). Again, this probably increases the profits generated for a company. Having said that, both OI and CI, have dedicated teams whose key attribute is to look at market profitability. Here the teams look at the ideas that, if commercialised, would sell well in the market. The only difference being that OI has a wider range of ideas to pull from. In addition to this, both OI and CI can work under the one-stop innovation center paradigm. These look to take the best ideas, and deliver these to the customer at competitive prices. The bonds they make with their customers sustains their particular advantage. This is because they can constantly tailor their offerings to best suit the needs of the customer. Good examples include, Yahoo! for consumer markets and IBM for business markets (25).
4.5. People and Organisation
The cultures underlying OI and CI are very different, and the opposing names really take effect here sometimes OI even means doing things that are in direct contradiction of allowable behaviour CI e.g. sharing ideas externally (17). In particular, OI culture for implementation requires stronger interdepartmental integration to work compared to CI (although this behaviour is still desirable in CI). The "over-the-wall" communication approach often found in CI would simply not work under OI (2). So, inherently, if OI is implemented correctly, good interdepartmental integration is attained, leading to better strategies, which can gain a competitive advantage as discussed in Section 3.1.1.
5. Conclusion
In conclusion, the fundamental challenges associated with implementing innovation - particularly product innovation - have been identified and management techniques which can be used to help manage the process have also been discussed. It was recognised that successful NPI demands good integration of the product design and development processes with the company's strategy. Finally the differences between open and closed innovation were investigated. Results showed that there are more differences than similarities between the two modes of innovation even though they both look to do the same key thing: take ideas to market.
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