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Innovation management

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Innovation management

  1. 1. INNOVATION MANAGEMENT Jiří Vacek vacekj @ kip.zcu.cz Department of Management, Innovations and Projects UWB, Faculty of Economics Summer semester 2009/10
  2. 2. Lesson 1 Introduction Basic concepts Importance of innovations
  3. 3. CHARACTERISTIC S OF SUCCESSFUL INNOVATING COMPANIES - 1 <ul><li>Systematic collection of all impulses that could lead to innovation </li></ul><ul><li>Creativity of employees </li></ul><ul><li>Ability to evaluate the possibility of the innovation idea </li></ul><ul><li>Good team work </li></ul><ul><li>Project-based approach and ability to manage projects </li></ul>
  4. 4. CHARACTERISTIC S OF SUCCESSFUL INNOVATING COMPANIES - 2 <ul><li>Cooperation with external experts (universities, research laboratories…) </li></ul><ul><li>Proper rate of risk-taking </li></ul><ul><li>Employees’ motivation (the employees are willing to improve the product and the operation of the whole company) </li></ul><ul><li>Continued education of employees </li></ul><ul><li>Ability to finance the innovation activities </li></ul>
  5. 5. Definition of innovation - 1 <ul><li>“ 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. </li></ul>
  6. 6. Definition of innovation - 2 <ul><li>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.„ </li></ul><ul><li>OECD, Frascati Manual 1992 </li></ul>
  7. 7. Oslo Manual <ul><li>Product innovation </li></ul><ul><ul><li>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. </li></ul></ul><ul><li>Process innovation </li></ul><ul><ul><li>A new or significantly improved production or delivery method. This includes significant changes in techniques, equipment and/or software. </li></ul></ul><ul><li>Marketing innovation </li></ul><ul><ul><li>A new marketing method involving significant changes in product design or packaging, product placement, product promotion or pricing. </li></ul></ul><ul><li>Organisational innovation </li></ul><ul><ul><li>A new organisational method in business practices, workplace organisation or external relations. </li></ul></ul>
  8. 8. <ul><li>Technological innovations – based on specific technology, invention, discovery, </li></ul><ul><li>Social innovations – in critical historic periods more important than technological ones (mail, educational systém, social systém, health care, …) </li></ul>
  9. 9. DEGREE OF NOVELTY <ul><li>Incremental innovations </li></ul><ul><li>Radical innovations </li></ul><ul><li>System ic innovations </li></ul>
  10. 10. 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 COMPONENT Improvement of components New components for existing systems Advanced materials improving component properties INCREMENTAL „ do better what we already do“ „ new for the company“ RADICAL „ new for the world“
  11. 11. INNOVATION PROCESS <ul><li>Research and development (R&D) </li></ul><ul><li>Pr oduction </li></ul><ul><li>Marketing </li></ul><ul><li>Innovation is an opportunity for something new, different . It is always based on change. </li></ul><ul><li>Innovators do not view any change as a threat but as an opportunity </li></ul>
  12. 12. FOCUS <ul><li>Use the limited resources in the most effective manner ; focus on one of the following: </li></ul><ul><ul><li>Operational output </li></ul></ul><ul><ul><li>Top-quality products </li></ul></ul><ul><ul><li>Perfect knowledge of customers </li></ul></ul>
  13. 13. RECOMMENDATIONS <ul><li>Solve the correct problem correctly – be effective and efficient </li></ul><ul><li>Manage innovation as a project </li></ul><ul><li>Analyze risks </li></ul><ul><li>Use models, scenarios, computer simulation </li></ul><ul><li>Study examples of succesful and unsuccesful innovation projects </li></ul>
  14. 14. WHAT TO DO <ul><li>S tart with analysis and study of opportunities. </li></ul><ul><li>G o among people, ask questions, listen </li></ul><ul><li>Effective innovations are surprisingly simple . They must be focused on specific needs and on specific final products. </li></ul><ul><li>Effective innovation start on a small scale. </li></ul><ul><li>A successful innovation always tries to win a leading position , other wise you create opportunities for your competitors. </li></ul>
  15. 15. WHAT TO AVOID <ul><li>Don’t try to be too “clever”. All that is too sophisticated will almost certainly go wrong. </li></ul><ul><li>Don’t try to do too many things at once. Focus on the core of the problem. </li></ul><ul><li>Don’t 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. </li></ul>
  16. 16. Three conditions for innovations <ul><li>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. </li></ul><ul><li>Successful innovations must build on your strong points. The innovation must be important to the innovator. </li></ul><ul><li>Innovation must focus on a market, must be controlled by the market (market-pull). </li></ul>
  17. 17. CASE STUDIES
  18. 18. Linet Želevčice <ul><li>Hospital products </li></ul><ul><li>Hospital beds, intensive care beds, medical furniture and other equipment increase the comfort of patients and help the nurses. </li></ul><ul><li>Nursing-care products </li></ul><ul><li>Nursing beds, bed accessories, bedside cabinets, mattresses and other furniture. </li></ul>
  19. 19. No comment … 1990 2005
  20. 20. TOSHULIN <ul><li>Development of new machines: </li></ul><ul><li>Customized – the machines developed for the specific customer according to its requirements – market pull </li></ul><ul><li>Prototypes – there is no specific customer – market push </li></ul>
  21. 22. Types of design engineers spouter of ideas suggests designs and problem solutions without detailed consideration of all possible results and consequences system designer examines all ideas and thoughts systematically 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 [1%] [5%] [54%] [30%] [10%]
  22. 23. Con nective ti ssue pro ducts RNDr. Vladimír Velebný, CSc . Contipro
  23. 24. <ul><li>167 employees </li></ul><ul><li>sales (2008) – 242 mil Kč </li></ul><ul><li>export – 98% of total sales one of the biggest produces of hyaluronanu inthe world </li></ul><ul><ul><li>30% of the world market </li></ul></ul><ul><ul><li>60% of the European market </li></ul></ul><ul><li>Customers in 43 countries </li></ul>Holding – current state
  24. 25. Sales in regions
  25. 26. <ul><li>Maximum attainable quality </li></ul><ul><li>Sharing expenses with customers </li></ul><ul><li>Development of original products </li></ul>3 pillars of success
  26. 27. 3M and post-it notes http://www.3m. com / us / office /postit/ pastpresent / history _ ws . html
  27. 28. More about 3M A Century of Innovation The 3M Story http:// solutions .3m. com / wps / portal /3M/en_US/ About /3M/
  28. 29. iGO – distribution of bateries <ul><li>Bateries and accessories for notebooks, mobiles, cameras and other equipment </li></ul><ul><li>Vision: to develop and sell simple and elegant solutions, facilitate the use of electronic devices </li></ul><ul><li>online catalogue, e-commerce, CRM </li></ul><ul><li>Customer - targeted marketing, flexibility </li></ul><ul><li>Growth of sales by 80% in the first year, by 100% in the following year </li></ul><ul><li>http://corporate.igo.com/about_us.aspx </li></ul>
  29. 30. Adaptors <ul><li>Patented technology iGo Technology , powering of mobile electronic devices using single (universal) adaptor; </li></ul><ul><li>Power Technology Patent Brochure (PDF) </li></ul>
  30. 31. Bang & Olufsen <ul><li>www. bang - olufsen . com </li></ul><ul><li>VISION : „ Courage to constantly question the ordinary in search of surprising, long-lasting experiences .“ </li></ul><ul><li>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, long-lasting 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. </li></ul><ul><li>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. </li></ul><ul><li>Production also in the Czech Republic </li></ul>
  31. 32. Bang & Olufsen – products
  32. 33. More case studies <ul><li>IBM Case Studies: http://www.ibm.com/search/?en=utf&v=14&lang=en&cc=us&lv=c&q=case+study+innovation&x=13&y=5 </li></ul><ul><li>Industry podcasts: Midsized clients and experts in seven industries share their insights - http://www-1.ibm.com/businesscenter/smb/us/en/mbpodcasts?&ca=smbIndustryPodcasts101706&tactic=&me=W&met=inli&re=smbibmcomTopPagesIndustriesPromo1usen101706 </li></ul>
  33. 34. More case studies <ul><li>Sustainable energy (hydrogen, fuel cells, biofuels, zero emission, … http:// ec . europa . eu / research / energy / nn / nn _ pu / article _1078_en. htm </li></ul><ul><li>http://www. zoner . com / </li></ul><ul><li>http://www. kerio . com / </li></ul>
  34. 35. The most important innovations in last 30 years <ul><li>http://www.pbs.org/nbr/site/features/special/subdir/top-30-innovations_slide-show/ </li></ul>
  35. 36. Lesson 2 Disruptive and open innovations
  36. 37. Innovation categories <ul><li>sustaining – better products that can be sold with higher margin to demanding customers; incumbents win </li></ul><ul><li>disruptive – commercialization of simpler, more user-friendly products, which are chepaer and targeted to new or less demanding customers; new entrants win </li></ul>
  37. 38. Key elements of disruption <ul><li>Customers at each market has limited absorption capacity </li></ul><ul><li>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. </li></ul>
  38. 39. Sustaining vs. disruptive <ul><li>Sustaining : focused on demanding customers; both incremental and radical. Incumbents have resources and motivation. </li></ul><ul><li>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. </li></ul>
  39. 40. Clayton M. Christensen: The Innovator´s Solution, Harvard Business Press, 2003
  40. 41. <ul><li>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. </li></ul>
  41. 42. Clayton M. Christensen: The Innovator´s Solution, Harvard Business Press, 2003
  42. 43. Clayton M. Christensen: The Innovator´s Solution, Harvard Business Press, 2003
  43. 44. Clayton M. Christensen: The Innovator´s Solution, Harvard Business Press, 2003
  44. 45. Clayton M. Christensen: The Innovator´s Solution, Harvard Business Press, 2003
  45. 46. Conditions of success - 1 <ul><li>Disruption is successful, as it is easier to defeat competition that tries to escape than the competition who fights </li></ul><ul><li>Innovation must be disruptive for all companies in the industry </li></ul><ul><li>Ex. Internet – for Dell sustaining, they sold computers formerly by mail, phone, etc. </li></ul>
  46. 47. Conditions of success - 2 <ul><li>Following the trajectory upwards to market tiers where it is possible to attain higher margins is what good manager is expected to do. </li></ul><ul><li>Each company therefore prepares its own disruption. This is the innovator´s dilemma, but also the start of innovator´s solution. </li></ul><ul><li>The advice to new, growing firms: focus on products and markets ignored or neglected ba incumbents. </li></ul>
  47. 48. Two types of disruption <ul><li>New markets: compete with non-consumption: simpler, more user frindly, can be used by less sophisticated customers (PC, transistor radio, desk copiers). </li></ul><ul><li>Low-end: focus on lower tiers of main markets (minimills, discount stores, Korean auto-makers); motivate incumbents to leave the market </li></ul>
  48. 53. OPEN INNOVATION <ul><li>Chesbrough, H., “ Open Innovation ”, Harvard Business School Publishing, Boston MA, 2003 </li></ul><ul><li>Closed innovation - requires control </li></ul><ul><li>Open innovation </li></ul><ul><ul><li>companies use external as well as internal ideas and both external and internal ways to market </li></ul></ul><ul><ul><li>internal ideas can be taken to the market through external channels to generate additional value </li></ul></ul>
  49. 54. Chesbrough H.W.: The Era of Open Innovation, MIT Sloan Management Review, Spring 203, p. 35 - 41
  50. 56. Closed innovation Open innovation All the best people are working for us Not all the best people are working for us . We must work with clever people within and outside our company. R & D creates profit only when we invent, develop and market everything ourselves. External R&D can create remarkable value; to employ it, we need absorption capacity, often as internal R&D. If we develop the product ourselves, we will be the first on the market. R & D can create profit even if we do not initialize an d perform it ourselves. Winner is who gets the innovation to the market first. To develop better business model is more important than to be the first in the market. We will win if we develop most of the ideas (an the best of them). We will win if we make best use of intern al and extern al ideas. We must have our intellectual property under control so that our competitors can make advantage of it. 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.
  51. 57. Closed innovation Open innovation Examples : nuclear industry, mainframe computers Examples : PC, movies Mostly intern al ideas Many external ideas Low workforce mobility High workforce mobility Low role of the venture capital Active venture capital Few new businesses, weak ones Many new businesses Universities are not important as the sources of ideas Universities are not important as the sources of ideas and people
  52. 58. Business model <ul><li>Formulate value proposition , i.e. the value delivered to the customer by the product based on specific technology. </li></ul><ul><li>Identify market segment , ie. users to whom the technology brings value and performs the job to be done. </li></ul><ul><li>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: </li></ul><ul><ul><li>balance of forces among our business, suppliers and competitors </li></ul></ul><ul><ul><li>presence of complementary assets (e.g. in production, distribution, etc.) necessary for supporting the company position in the value chain. </li></ul></ul>
  53. 59. Business model– cont´d <ul><li>Specify the mechanism of profit creation and evaluate product cost structure and target margin </li></ul><ul><li>Describe the company position in the value network that connects suppliers and customers, including identification of potential alternative producers and competitors. </li></ul><ul><li>Formulate competitive strategy enabling to the innovative company to gain and keep competitive advantage. </li></ul>
  54. 60. Product architecture <ul><li>Hierarchy of connections between disparate functions within a system </li></ul>
  55. 61. Interdependent Architecture System Component A Component B Component C
  56. 62. Interdependent Architecture <ul><li>changing one component requires changes in all other parts of the system, because the relationships between the parts are not clearly understood </li></ul><ul><li>can be best managed through internal processes </li></ul>
  57. 63. Modular Architecture System Component A Component B Component C
  58. 64. Modular Architecture <ul><li>components could change without causing any change in other components </li></ul><ul><li>modular design enables to assemble system more easily, from “plug and play” components whose interfaces are well understood </li></ul><ul><li>modular architecture makes it easy for many companies to innovate components without worrying about possible impact on other parts of the system </li></ul>
  59. 65. IMPLICATIONS FOR NPD <ul><li>extended circle of company stakeholders - customers, NGOs, local and regional governments </li></ul><ul><li>not only superior quality, but also environmentally friendly, aesthetically appealing new products </li></ul><ul><li>designed for X , where X can be quite large and multi-faceted set </li></ul><ul><li>after-sale service plays an increasing role – and brings increased turnover and profit </li></ul>
  60. 66. Lesson 3 Assessment of company innovation potential
  61. 67. COMPANY INNOVATION POTENTIAL <ul><li>A company with high innovation potential </li></ul><ul><li>scores high in the following areas : </li></ul><ul><li>Strategy and planning </li></ul><ul><li>Marketing </li></ul><ul><li>Technological process </li></ul><ul><li>Quality management </li></ul><ul><li>Logistics </li></ul><ul><li>Human resources </li></ul>
  62. 68. INNOVATION POTENTIAL ASSESSMENT <ul><li>For a company, it is important to know its innovation potential. It can use the questionnaire </li></ul><ul><li>F or 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. </li></ul>
  63. 69. A . STRATEGY AND PLANNING <ul><li>Idea about the company future </li></ul><ul><li>Vision and employees </li></ul><ul><li>Company innovation programs </li></ul><ul><li>Plan modifications </li></ul><ul><li>Financial indicators of the plan </li></ul><ul><li>Project management </li></ul>
  64. 70. B . MARKETING <ul><li>Monitoring of current market trends </li></ul><ul><li>Evaluation of the market competition position </li></ul><ul><li>Customer-orientation </li></ul><ul><li>Monitoring of customers’ attitudes to the company product </li></ul><ul><li>Market information flow inside the company </li></ul><ul><li>Marketing and financial control </li></ul>
  65. 71. C . TECHNOLOGICAL PROCESS <ul><li>Future company’s competitiveness in the industry </li></ul><ul><li>Changes of technologies </li></ul><ul><li>Collection of impulses for implementation of technology changes </li></ul><ul><li>Evaluation of the return on investment </li></ul><ul><li>C alculation of p roduction costs and their monitoring </li></ul><ul><li>Creation of resources for development </li></ul>
  66. 72. D. QUALITY, ENVIRONMENT <ul><li>Monitoring of changes conditioning the quality management in the company </li></ul><ul><li>E mployees’ personal contribution to the quality system </li></ul><ul><li>External quality audit in the company </li></ul><ul><li>Monitoring of the environment al impact </li></ul><ul><li>Impact of quality monitoring on the company process es </li></ul><ul><li>Covering of costs resulting from modifications of standards, regulations and legislation in the sphere of quality and environment </li></ul>
  67. 73. E . LOGISTICS <ul><li>Organization of purchase and distribution channels in the company </li></ul><ul><li>Optimization of the company logistics </li></ul><ul><li>I nformation and communication flows between the company and it s partners </li></ul><ul><li>Flexibility of logistics processes </li></ul><ul><li>Introduction of innovations in logistics </li></ul><ul><li>Logistics and financial control </li></ul>
  68. 74. F . ORGANIZATION AND HUMAN RESOURCES <ul><li>Employees satisfaction </li></ul><ul><li>Employees motivation </li></ul><ul><li>Management and communication </li></ul><ul><li>Conflict resolution </li></ul><ul><li>Company information system </li></ul><ul><li>Company culture </li></ul>
  71. 79. The objectives of process models
  72. 80. Stage-gate process <ul><li>R. Cooper, 1960´s </li></ul><ul><li>phases with inputs and outputs specified beforehand </li></ul><ul><li>gates, in which the gatekeepers decide about the continuation of the process </li></ul><ul><li>Activities were standardized and the indicators of the process performance significantly improved. </li></ul>
  73. 81. 2-nd generation SG process
  74. 82. Evaluation criteria <ul><li>Operational, realistic, differentiating </li></ul><ul><li>Must meet : to kill not well proceeding projects as soon as possible </li></ul><ul><li>Should meet : prioritization, support of portfolio management </li></ul><ul><li>Strategic buckets : resources allocated to various strategic goals </li></ul>
  75. 83. I nterdisciplinary view
  76. 84. F uzzy F ront E nd (FFE, FEI) <ul><li>quality of pre-development phases significantly influence the product success </li></ul><ul><li>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 </li></ul><ul><li>highly dynamic, not strictly documented , creativity competes with systemization. </li></ul>
  77. 85. P hase 0 <ul><li>results in product concept, including preliminary identification of customer requirements, market segments, competitive position, business opportunity and compliance with strategy </li></ul>
  78. 86. Incremental vs. radical innovations <ul><li>Koen: systematic approaches using process models can be successful in the case of incremental innovations, where both business and technical uncertainty is rather low </li></ul><ul><li>whenever at least one of those uncertainties is high, we need more flexible approaches with iterations and parallelization of activities </li></ul><ul><li>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. </li></ul>
  79. 87. New concept development model <ul><li>in th e early phases it is not suitable to use the same approaches as in the later, more structured process phases </li></ul>
  80. 88. Difference Between FFE and NPD Milestone achievement. Strengthened concepts. Measures of Progress Multifunction product and/or process development team minimize risk and optimize potential Activity Predictable, with increasing certainty, analysis, and documentation as the product release date gets closer. Often uncertain, with a great deal of speculation. Revenue Expectations Budgeted. Variable Funding High degree of certainty. Unpredictable or uncertain. Commercialization Date Disciplined and goal-oriented with a project plan. Experimental, often chaotic. “ Eureka” moments. Can schedule work—but not invention. Nature of Work New Product Development (NPD) Fuzzy Front End (FFE)
  81. 89. N ew concept development model (NCD) Technology push Market pull
  82. 90. NCD components <ul><li>Engine : represents management support </li></ul><ul><li>Engine powers the five elements of the NCD model </li></ul><ul><li>The engine and the five elements are placed on top of the influencing factors. </li></ul>
  83. 91. Technology stage-gate process (TSG) <ul><li>Management of high-risk projects within and at the transition between the fuzzy front end and new product development </li></ul><ul><li>traditional SG : gates are transparent , t he product development team can &quot;see&quot; all the deliverables at the gates </li></ul><ul><li>TSG : gates are opaque , th e team can only &quot;see&quot; to the next gate and understands that the deliverable may change as the technology is developed </li></ul>
  84. 92. Traditional and technology stage-gate processes
  86. 94. 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
  87. 95. Project feasibility <ul><li>The stage-gate model divides the innovation process into five stages with gates, in which evaluators decide if to continue or kill the project. </li></ul><ul><li>Each phase has its cost, duration and probability of success. Usually only the last stage generate profits. </li></ul><ul><li>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. </li></ul>
  88. 96. DCF methods <ul><li>T he generally accepted method of evaluation of investment , is based on discounted cash flows (DCF). </li></ul><ul><li>The method is successfully used for investment projects with low level of uncertainty and duration from several months up to few years. </li></ul><ul><li>I n many cases it i s 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. </li></ul>
  89. 97. Weakness of DCF methods <ul><li>D o not take into account the typical nature of the NPD and R&D projects that can be divide d into stages separated by gates, deciding about project continuation or termination. </li></ul><ul><li>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. </li></ul>
  90. 98. Project Expected Commercial Value (ECV) <ul><li>Takes into consideration all three important characteristics of each phase – its cost, duration and probability of success </li></ul><ul><li>The project is modeled by the probability tree. </li></ul><ul><li>The stage duration, together with the discount rate, is reflected in the net present value calculation. </li></ul><ul><li>Illustration: project with only two stages – development and commercialization </li></ul>
  91. 99. Development D ECV YES NO Success p d Failure Commercialization C YES NO Success p C Failure P V ECV = project expected commercial value p d = probability of successful development p c = probability of successful commercialization D = development costs C = commercialization costs PV = net present value of expected project earnings ECV = [(PV * p c – C) * p d ] – D according to [Cooper 2001]
  92. 100. Example <ul><li>The first stage (1 year): laboratory tests; success probability 50%. </li></ul><ul><li>The second stage (2 years): field tests; success probability 75%. </li></ul><ul><li>If tests are successful, the necessary investment into the technology is $5M, expected earnings $8M  project net present value $3M. </li></ul><ul><li>Financial data are discounted, assuming the weighted capital costs WACC = 12%, risk-free discount rate 5%. </li></ul><ul><li>Development costs and specific project risk are high  resulting ECV negative (-$109 000) </li></ul><ul><li>according to this criterion, project should be rejected. </li></ul>
  93. 101. Probability tree in project evaluation Stage 1 – Year 1 Cost = $0,5 M DCF = - $ 0,446M Stage 2 – Year 2 Cost = $0,5 M DCF = - $ 0,399M Stage 2 – Year 3 Cost = $0,5 M DCF = - $ 0,356M Stage 3 – Year 4 NPV = $3,0 M DCF = $1,907 M 50% 50% 25% 75% Stop Stop 50% x (-0,446M) = -0,223M 12,5% x (-1,201M) = -0,150M 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 ECV = 0,265 - 0,150 - 0,223 = -0,109M <ul><ul><li>áccording to [ Boer 2003 ] </li></ul></ul>
  94. 102. Real options <ul><li>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. </li></ul><ul><li>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. </li></ul>
  95. 103. Two kinds of risks <ul><li>specific risk </li></ul><ul><li>market risk </li></ul>
  96. 104. Specific risk <ul><li>Specific for the partial situation </li></ul><ul><li>At lest partly under your control (e.g. risk of a fire or risk of project failure) </li></ul><ul><li>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 </li></ul><ul><li>Therefore the market does not pay any premium for specific risks </li></ul><ul><li>Specific risk can be often characterized by its probability. </li></ul><ul><li>Better management of specific risk can help us to achieve the competitive advantage. </li></ul>
  97. 105. Market risk <ul><li>I s not under your control </li></ul><ul><li>C annot be diversified. The pharmaceutical company, as a part of health care sector, can do little to diversify the market risk. </li></ul><ul><li>Traditionally, market risk increases the capital expenses and therefore decreases the project value. </li></ul><ul><li>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. </li></ul>
  98. 106. Volatility <ul><li>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 …). </li></ul><ul><li>Is usually specific for the industry and can be estimated on the basis of information available from e.g. stock market, industry statistics, etc. </li></ul><ul><li>The higher the volatility, the more advantageous is to hold the respective option. </li></ul><ul><li>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. </li></ul>
  99. 107. Application <ul><li>Boer [Boer 2003] applies the real option model (OPT) with volatility equal to 50% to the example from Fig. 3 </li></ul><ul><li>H e shows that using this method the project value is $0,171M, i.e. it is positive and the project is feasible . </li></ul><ul><li>The difference in project value assessed by ECV and OPT models is $0,279M, w hat is enough to justify the project. The difference is caused by market volatility. </li></ul><ul><li>Boer also proves that in case of the zero market risk, i.e. the zero volatility, both methods give the same result. </li></ul><ul><li>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. </li></ul>
  100. 108. Conclusion <ul><li>Illustration of the often neglected side of the new product development and R&D projects. </li></ul><ul><li>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. </li></ul><ul><li>It is not an easy task; however, we hope that we succeeded to persuade the auditorium that this important task cannot be avoided. </li></ul>
  101. 109. References <ul><li>[Boer 2003] BOER F.P. Risk-adjusted Valuation of R&D Projects , online, http:// www.tigerscientific.com </li></ul><ul><li>[Cooper 2001] COOPER R.G., EDGET S.J., KLEINSCHMIDT E.J. Portfolio Management for New Products , Basic Books, 2001, ISBN 0-7382-0514-1 </li></ul><ul><li>[Cooper 2005] COOPER R.G. Product Leadership , Basic Books, 2005, ISBN 0-465-01433-X </li></ul><ul><li>[Vacek 2006] Vacek J. “Structuring the new product development processes”, in AEDS 2006 Proceedings , pp. xx, University of West Bohemia, Pilsen, 2006, ISBN </li></ul>
  103. 111. O utline <ul><li>Portfolio management, consequences of its lack </li></ul><ul><li>Portfolio management goals </li></ul><ul><ul><li>Goal 1: Maximizing the portfolio value </li></ul></ul><ul><ul><li>Goal 2: Balance </li></ul></ul><ul><ul><li>Goal 3: Strategic alignment </li></ul></ul>31.10.-1.11.2008 AEDS 2008 - Jiří Vacek, KIP FEK UWB
  104. 112. Portfolio management <ul><li>Resources are always limited, it is neither possible nor effective to invest in every idea without due consideration. </li></ul><ul><li>It is important to select from many possibilities those with the highest potential ; today’s innovation projects decide about the future profile of the company, its customers and market share. </li></ul><ul><li>G oal: to create such portfolio of products that is rooted in the company strategy and optimizes the company performance. </li></ul><ul><li>Portfolio management: dynamic decision-making process of evaluation, selection and prioritization of new project s ; active project can be fostered, put on hold or even killed; their priorities and allocation of resources can change. </li></ul><ul><li>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 </li></ul>31.10.-1.11.2008 AEDS 2008 - Jiří Vacek, KIP FEK UWB
  105. 113. 31.10.-1.11.2008 AEDS 2008 - Jiří Vacek, KIP FEK UWB A reluctance to kill projects. Many projects added to the list A total lack of focus Too many projects – resources thinly spread. Projects in the queue. Quality of execution suffers. Increased time to market Higher failure rates Weak decision points (broad gates) Poor Go/Kill decisions Too many low value projects Good projects are starved Too few stellar product winners Many ho hum launches No rigorous selection criteria Project selected on emotion, politics W r ong projects are selected Many failures No strategic criteria for project selection Projects lack strategic direction Projects not strategically aligned Scatter gun effort Does not support strategy No portfolio management means … Immediate result End result: poor new product performance
  106. 114. Portfolio management goals <ul><li>Maximization of value </li></ul><ul><ul><ul><li>long-term profitability, return on investment, probability of success , … </li></ul></ul></ul><ul><li>Balance </li></ul><ul><ul><ul><li>Long-term projects vs. short, fast ones; </li></ul></ul></ul><ul><ul><ul><li>High risk projects with high potential vs. lower-risk sure bets (e.g. radical vs. incremental innovation); </li></ul></ul></ul><ul><ul><ul><li>Focus on different market segments (don’t pull all eggs into one basket); </li></ul></ul></ul><ul><ul><ul><li>Different technologies; </li></ul></ul></ul><ul><ul><ul><li>Different project types: new products, improvements, cost reductions, frontier research. </li></ul></ul></ul><ul><li>Strategic alignment </li></ul><ul><ul><ul><li>portfolio is strategically aligned and reflects the business’s strategy. </li></ul></ul></ul>31.10.-1.11.2008 AEDS 2008 - Jiří Vacek, KIP FEK UWB
  107. 115. Goal 1 Maximizing the portfolio value <ul><li>Net present value, bang for buck </li></ul><ul><li>Expected commercial value </li></ul><ul><li>Multi-criteria project valuation </li></ul><ul><li>Scoring models </li></ul>31.10.-1.11.2008 AEDS 2008 - Jiří Vacek, KIP FEK UWB
  108. 116. 31.10.-1.11.2008 AEDS 2008 - Jiří Vacek, KIP FEK UWB Projects net present values and resource requirements Project NPV Remaining resource requirements Bang-for-buck index Immediate resource requirements A 52,0 9,5 5,5 3,2 B 30,0 3,1 9,7 0,3 C 8,6 2,1 4,1 1,4 D 42,0 3,8 11,1 2,5 E 48,5 7,0 6,9 1,3 F 43,8 5,0 8,8 1,5 G 37,5 8,3 4,5 3,8 H 3,0 1,0 3,0 0,7 I 9,5 2,5 3,8 0,5 J 6,2 0,8 7,8 0,8 K 4,5 1,4 3,2 1,2 L 55,0 5,0 11,0 5,0
  109. 117. Rank-ordered list of projects 31.10.-1.11.2008 AEDS 2008 - Jiří Vacek, KIP FEK UWB Project NPV Remaining resource requirements Bang-for-buck index Immediate resource requirements Cumulative immediate resource requirements D 42,0 3,8 11,1 2,5 2,5 L 55,0 5,0 11,0 5,0 7,5 B 30,0 3,1 9,7 0,3 7,8 F 43,8 5,0 8,8 1,5 9,3 J 6,2 0,8 7,8 0,8 10,1 E 48,5 7,0 6,9 1,3 11,4 A 52,0 9,5 5,5 3,2 14,6 G 37,5 8,3 4,5 3,8 18,4 C 8,6 2,1 4,1 1,4 19,8 I 9,5 2,5 3,8 0,5 20,3 K 4,5 1,4 3,2 1,2 21,5 H 3,0 1,0 3,0 0,7 22,2
  110. 118. Project expected value (ECV) 31.10.-1.11.2008 AEDS 2008 - Jiří Vacek, KIP FEK UWB Project PV Probability of technical success Probability of commercial success Development cost* Commercialization cost* ECV A 30,00 0,80 0,50 3,00 5,00 5,00 B 63,75 0,50 0,80 5,00 2,00 19,50 C 9,62 0,75 0,75 2,00 1,00 2,10 D 3,00 1,00 1,00 1,00 0,50 1,50 E 50,00 0,60 0,75 5,00 3,00 15,70 F 66,25 0,50 0,80 10,00 2,00 15,50
  111. 119. Rank-ordered list according to ECV/D, resource constraint 15 mil 31.10.-1.11.2008 AEDS 2008 - Jiří Vacek, KIP FEK UWB Project ECV ECV/D Cumulative development costs Adjusted cumulative development costs B 19,50 3,90 5,00 5,00 E 15,70 3,14 10,00 10,00 A 5,00 1,67 13,00 13,00 F 15,50 1,55 (23,00)   D 1,50 1,50 24,00 14,00 C 2,10 1,05 26,00 16,00
  112. 120. Rank-ordered list according to ECV 31.10.-1.11.2008 AEDS 2008 - Jiří Vacek, KIP FEK UWB Project ECV Cumulative development costs B 19,50 5,00 E 15,70 10,00 F 15,50 20,00 A 5,00 23,00 C 2,10 25,00 D 1,50 26,00
  113. 121. <ul><li>ECV model prioritizes more highly the projects with the following properties: </li></ul><ul><ul><li>closer to launch (increase of PV and consequently of ECV), </li></ul></ul><ul><ul><li>higher income streams after launch (increase of PV and consequently of ECV), </li></ul></ul><ul><ul><li>less resources to be spent (decrease of D), </li></ul></ul><ul><ul><li>higher probabilities of success (increase of ECV), </li></ul></ul><ul><ul><li>utilize less of the constraining resource (it’s easier for them to be above the line). </li></ul></ul>31.10.-1.11.2008 AEDS 2008 - Jiří Vacek, KIP FEK UWB
  114. 122. Multi-criteria project valuation input data 31.10.-1.11.2008 AEDS 2008 - Jiří Vacek, KIP FEK UWB Project IRR NPV SI PTS A 20% 10 5 80% B 15% 2 2 70% C 10% 5 3 90% D 17% 12 2 65% E 12% 20 4 90% F 22% 6 1 85%
  115. 123. Project ranking <ul><li>Project ranking procedure is the following </li></ul><ul><ul><li>calculate adjusted values of IRR and NPV – multiply them by PTS. </li></ul></ul><ul><ul><li>rank projects according to adjusted values of IRR and NPV and according to SI. </li></ul></ul><ul><ul><li>calculate the average value of those three rankings and use it for final ranking </li></ul></ul>31.10.-1.11.2008 AEDS 2008 - Jiří Vacek, KIP FEK UWB
  116. 124. Multi-criteria project valuation, final project ranking 31.10.-1.11.2008 AEDS 2008 - Jiří Vacek, KIP FEK UWB Project IRR * PTS Ranking by IPR*PTS NPV * PTS Ranking by NPV*PTS SI Ranking by SI Avg . Final A 16,0% 2 8 2 5 1 1,67 1 B 10,5% 5 1,4 6 2 4 5,00 6 C 9,0% 6 4,5 5 3 3 4,67 5 D 11,1% 3 7,8 3 2 4 3,33 3 E 10,8% 4 18 1 4 2 2,33 2 F 18,7% 1 5,1 4 1 6 3,67 4
  117. 125. Applicability of financial models <ul><li>M ain weakness : unreliability of input data, especially in the initial project stage t hey should be used only in later stages. </li></ul><ul><li>Small errors in probabilities of success rapidly propagate and can result in significant differences. </li></ul><ul><li>T he complexity and sophistication of financial models fairly exceeds the quality of input data </li></ul><ul><li>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 </li></ul>31.10.-1.11.2008 AEDS 2008 - Jiří Vacek, KIP FEK UWB
  118. 126. Scoring models <ul><li>G ive very good results. </li></ul><ul><li>I mportant : 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. </li></ul><ul><li>One of the models described in [Cooper 2001] uses five main factors: </li></ul><ul><ul><li>business strategy fit (2) </li></ul></ul><ul><ul><li>strategic leverage (4) </li></ul></ul><ul><ul><li>probability of technical success (4) </li></ul></ul><ul><ul><li>probability of commercial success (6) </li></ul></ul><ul><ul><li>reward to the company (project profitability) (3) </li></ul></ul>31.10.-1.11.2008 AEDS 2008 - Jiří Vacek, KIP FEK UWB
  119. 127. Goal 2: Balance <ul><li>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. </li></ul><ul><li>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 </li></ul>31.10.-1.11.2008 AEDS 2008 - Jiří Vacek, KIP FEK UWB
  120. 128. Risk-Reward bubble diagram 31.10.-1.11.2008 AEDS 2008 - Jiří Vacek, KIP FEK UWB PEARLS OYSTERS BREAD & BUTTER WHITE ELEPHANTS
  121. 129. Diagram quadrants <ul><li>Pearls : potential „star“ projects: high probability of success, high expected reward. We would like many of such projects. </li></ul><ul><li>Oysters : highly speculative projects: low probability of success, high expected reward. Here the breakthroughs pave the way for solid payoffs. </li></ul><ul><li>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. </li></ul><ul><li>White elephants : low probability of success, low expected reward; projects that are difficult to kill, often from personal reasons. </li></ul>31.10.-1.11.2008 AEDS 2008 - Jiří Vacek, KIP FEK UWB
  122. 130. Goal 3: Strategic alignment <ul><li>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: </li></ul><ul><ul><li>Projects are aligned with business strategy; </li></ul></ul><ul><ul><li>All projects contribute to achievement of strategic goals and objectives; </li></ul></ul><ul><ul><li>Allocation of resources reflects specified strategic goals and objectives. </li></ul></ul><ul><ul><li>In portfolio management we use three basic approaches: top-down, bottom-up and combined. </li></ul></ul>31.10.-1.11.2008 AEDS 2008 - Jiří Vacek, KIP FEK UWB
  123. 131. Top-down approach <ul><li>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. </li></ul>31.10.-1.11.2008 AEDS 2008 - Jiří Vacek, KIP FEK UWB
  124. 132. Technology roadmaps <ul><li>Technology strategic roadmaps, results of technology foresight and other studies performed often on the macro-economic level. </li></ul><ul><li>In the Czech Republic such studies are prepared e.g. by Technology centre AV ČR ( http:// www.strast.cz / ) and CESES – Centre for social and economic strategies ( http:// www.ceses.cuni.cz / ), </li></ul><ul><li>at the EU level the Institute for Prospective Technology Studies in Sevilla ( http:// ipts.jrc.ec.europa.eu / ). </li></ul><ul><li>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 /technology-platforms ). </li></ul>31.10.-1.11.2008 AEDS 2008 - Jiří Vacek, KIP FEK UWB
  125. 133. Strategic buckets <ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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 </li></ul>31.10.-1.11.2008 AEDS 2008 - Jiří Vacek, KIP FEK UWB
  126. 134. Bottom-up and combined approaches <ul><li>Bottom-up approach build strategic criteria into the model of project selection, usually to the scoring model . </li></ul><ul><li>This approach guarantees that all projects are strategy aligned, however it cannot guarantee allocation of resources in compliance with strategic priorities. </li></ul><ul><li>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 project s on hold and prepare their ranked list. Finally we assign projects to corresponding categories (buckets) and study the exhaustion of resources. </li></ul><ul><li>Usually this first iteration is not completely satisfactory and it is necessary to use more iterations to reach satisfactory results. </li></ul>31.10.-1.11.2008 AEDS 2008 - Jiří Vacek, KIP FEK UWB
  127. 135. References <ul><li>[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 </li></ul><ul><li>[Grant 2008] GRANT R.M., Contemporary Strategy Analysis , 6th edition, 2008, Blackwell Publishing, ISBN 978-1-4051-6309-5 </li></ul><ul><li>[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. </li></ul><ul><li>[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. </li></ul><ul><li>[Vacek 2004] Vacek, J. New product development and current trends in innovation management. In AEDS 2004 Workshop. Plzeň : University of West Bohemia, 2004, p .35-36. ISBN 80-7043-331-0. </li></ul>31.10.-1.11.2008 AEDS 2008 - Jiří Vacek, KIP FEK UWB
  128. 136. Lesson 5 Innovation impulses
  129. 137. SOURCES OF INNOVATION IMPULSES In ternal environment <ul><li>Own R&D </li></ul><ul><li>Technical divisions – design, technology </li></ul><ul><li>Production divisions (production, provision of services) </li></ul><ul><li>Marketing and sales </li></ul><ul><li>Logistics (purchase and supplies) </li></ul><ul><li>Guarantee and post-guarantee service </li></ul><ul><li>Owners </li></ul>
  130. 138. SOURCES OF INNOVATION IMPULSES External environment <ul><li>Customers </li></ul><ul><li>Suppliers </li></ul><ul><li>Competitors </li></ul><ul><li>Consultants, R&D institutions </li></ul><ul><li>Schools, universities </li></ul><ul><li>Professional publications, Internet </li></ul><ul><li>Exhibitions, fairs, specialized seminars and conferences </li></ul><ul><li>Advertising agencies </li></ul><ul><li>Investors </li></ul><ul><li>Media </li></ul><ul><li>Authorized testing laboratories, certification agencies </li></ul><ul><li>State institutions, public sector </li></ul><ul><li>Legislation </li></ul><ul><li>Globalization </li></ul>
  131. 139. MARKET PULL - R&D PUSH <ul><li>Market pull </li></ul><ul><ul><li>looking for the best way of satisfying a newly emerging customer demand </li></ul></ul><ul><ul><li>i mprovement of the existing products, extension of the existing offer or decrease of price </li></ul></ul><ul><ul><li>i mpulses for continuous, incremental innovations or for process innovations </li></ul></ul><ul><li>Research and development push </li></ul><ul><ul><li>looking for commercial use of new impulses resulting from the R&D results </li></ul></ul><ul><ul><li>generating of new markets for conceptually different products </li></ul></ul>
  132. 140. 7 SOURCES OF INNOVATION IMPULSES (Drucker) <ul><li>INTERNAL </li></ul><ul><ul><li>un expected event </li></ul></ul><ul><ul><li>c ontradiction </li></ul></ul><ul><ul><li>change of work process </li></ul></ul><ul><ul><li>c hange in the structure of industry or market </li></ul></ul><ul><li>EXTERNAL </li></ul><ul><ul><li>Demographic changes </li></ul></ul><ul><ul><li>Changes in the world view </li></ul></ul><ul><ul><li>New knowledge </li></ul></ul>
  133. 141. 1. Unexpected event <ul><li>Unexpected success </li></ul><ul><li>1.       What will the use of the offered opportunity mean to us? </li></ul><ul><li>2.       Where will its introduction take us? </li></ul><ul><li>3.       What do we need to do for its implementation? </li></ul><ul><li>4.       How can we achieve that? </li></ul><ul><li>Unexpected failure </li></ul><ul><li>Unexpected external event </li></ul>
  134. 142. 2. Contradiction <ul><li>Non-compliance with economic reality </li></ul><ul><li>Contradiction between reality and anticipations about it </li></ul><ul><li>Contradiction between the anticipated and real behavior of customers and their values </li></ul>
  135. 143. 3. Change of process <ul><li>realize the necessity of change, identify the weak point of the chain </li></ul><ul><li>be convinced that if something does not work the way it should, then it is necessary to attempt a change </li></ul><ul><li>t he solution must be convenient for those who will implement it. It must place moderate and feasible requirements </li></ul>
  136. 144. 4 . Change in the structure of industry and market <ul><li>Rapid growth of the industry </li></ul><ul><li>Identification of new market segments </li></ul><ul><li>Convergence of technologies (e.g. use of computers in telecommunications) </li></ul><ul><li>Rapid change of the industry and resulting need of a structural change </li></ul>
  137. 145. 5. Demography <ul><li>easiest to describe and to predict </li></ul><ul><li>influence what will be bought, who and in which amounts will purchase </li></ul>
  138. 146. 6 . Change of attitudes <ul><li>c hange in the approach to health : health-care, food, spending the leisure time </li></ul><ul><li>“ upper-middle class” : a chance to offer non-standard services at non-standard prices </li></ul><ul><li>increasing migration , feminism, regionalism etc </li></ul><ul><li>Timing is essential - to be the first </li></ul>
  139. 147. 7 . New knowledge <ul><li>B ased on convergence or synergy of various kinds of knowledge , their success requires , high rate of risk </li></ul><ul><ul><li>Thorough analysis of all factors. identify the “missing elements” of the chain and possibilities of their supplementing or substitution; </li></ul></ul><ul><ul><li>Focus on winning the strategic position at the market. the second chance usually does not come ; </li></ul></ul><ul><ul><li>Entrepreneurial management style. Quality is not what is technically perfect but what adds the product its value for the end user </li></ul></ul>
  140. 148. IMPULSES FROM THE MARKET ENVIRONMENT <ul><li>Customers </li></ul><ul><ul><li>product presentation </li></ul></ul><ul><ul><li>realistic </li></ul></ul><ul><ul><li>simple, demonstrative and precise </li></ul></ul><ul><ul><li>moderate </li></ul></ul><ul><ul><li>representative sample of customers </li></ul></ul><ul><li>Suppliers </li></ul><ul><li>Competitors </li></ul>
  141. 149. INNOVATION IMPULSES OF THE R&D <ul><li>identification research : to monitor the scientific, technical and economic information and identify innovation impulses applicable in the company </li></ul><ul><li>basic research </li></ul><ul><li>applied research : acquire knowledge and means applicable for the meeting of specific, beforehand-defined goals </li></ul><ul><li>d evelopment : 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 </li></ul>
  142. 150. INTERNAL IMPULSES <ul><li>usually combined with external sources </li></ul><ul><li>supported by </li></ul><ul><ul><li>c reative techniques </li></ul></ul><ul><ul><li>innovation tools </li></ul></ul><ul><li>REGISTER OF IMPULSES </li></ul>
  143. 151. Lesson 6 Innovation management tools INNOMAT http://www.inno-pro.com/aainn0.htm
  144. 153. General Innovation Tools
  145. 154. BENCHMARKING
  149. 158. Specific techniques useful at the different change management process steps. INNOVATION MANAGEMENT TOOLS http://www. wiley.co.uk/innovate/website/pages/atoz/atoz.htm CHANGE MANAGEMENT STEP SPECIFIC TECHNIQUE Making time time management techniques Preparing a vision statement SWOT analysis Identify what factors will hinder change force field analysis Selling the change internal marketing techniques Developing a plan strategic planning techniques Learning  Monitoring effectiveness 
  152. 161. VALUE ANALYSIS
  153. 162. Product Innovation Tools
  154. 163. DESIGN FOR X                                                                                       <>
  155. 164. „ X“ - examples Design for Manufacturing and Assembly (DFMA) Design for Environment (DFE) Design for Dimensional Control (DDC) Design for Inspectability Design for Storability Design for Reliability (DFR) Design for Electromagnetic Compatibility Design for Disassembly (DFD)
  157. 166. House of Quality Interrelationships Technical Features Relationship between Customer Desired Traits and Technical Features Importance of Technical Features Importance of Traits to Customer Assessment of Competition Voice of the Customer
  158. 167. House of Quality: Steps for Generation <ul><li>1 . Identify Customer Attributes </li></ul><ul><li>2. Identify Supporting Technical Characteristics </li></ul><ul><li>3. Correlate Customer Attributes with Supporting Technical Features </li></ul><ul><li>4. Assign Priorities to Customer Requirements and Technical Features </li></ul><ul><li>5. Evaluate Competitors’ Stances and Products </li></ul><ul><li>6. Identify Technical Characteristics to Deploy in the Final Product Design </li></ul>
  159. 168. Managerial Innovation Tools
  161. 170. INNOVATION MANAGEMENT TOOLS http://www. wiley.co.uk/innovate/website/pages/atoz/atoz.htm
  162. 171. INNOVATION MANAGEMENT TOOLS http://www. wiley.co.uk/innovate/website/pages/atoz/atoz.htm
  164. 173. TEAM BUILDING
  165. 174. ISO 9000 <ul><li>ISO14000 </li></ul><ul><li>refers to procedures for ensuring sustainable and environmentally friendly operations </li></ul><ul><li>EIA – Environmental Impact Assessment </li></ul>
  167. 176. Process Innovation Tools
  169. 178. LEAN THINKING
  172. 181. JUST IN TIME (JIT)
  173. 182. INNOSKILLS
  174. 183. FASTER
  176. 185. Innovation and creativity <ul><li>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 </li></ul><ul><li>innovation begins with creative ideas, </li></ul><ul><ul><li>creativity by individuals and teams is a starting point for innovation ; the first is a necessary but not sufficient condition for the second </li></ul></ul>
  177. 186. <ul><li>creativity results: </li></ul><ul><ul><li>in producing or bringing about something partly or wholly new; </li></ul></ul><ul><ul><li>in investing an existing object with new properties or characteristics; </li></ul></ul><ul><ul><li>in imagining new possibilities that were not conceived of before; </li></ul></ul><ul><ul><li>and in seeing or performing something in a manner different from what was thought possible or normal previously. </li></ul></ul>
  178. 187. <ul><li>Many creative ideas are generated when somebody discards preconceived assumptions and decides on a new approach or method that might seem to others unthinkable </li></ul><ul><li>Serendipity - effect by which one accidentally discovers something fortunate, especially while looking for something else entirely </li></ul>
  179. 188. Quotations on serendipity <ul><li>&quot;In the field of observation, chance favors only the prepared mind.&quot; Louis Pasteur </li></ul><ul><li>&quot;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.&quot; Lawrence Block </li></ul><ul><li>&quot;The most exciting phrase to hear in science, the one that heralds new discoveries, is not 'Eureka!', but 'That's funny …'&quot; Isaac Asimov </li></ul><ul><li>&quot;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.&quot; Peter McWilliams </li></ul><ul><li>&quot;Serendipity is looking in a haystack for a needle and discovering a farmer's daughter.&quot; Julius Comroe Jr . </li></ul><ul><li>&quot;Serendipity is putting a quarter in the gumball machine and having three pieces come rattling out instead of one—all red.&quot; Peter H. Reynolds </li></ul><ul><li>&quot;--- 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.&quot; John Barth , The Last Voyage of Somebody the Sailor </li></ul><ul><li>&quot;Serendipity is the art of making an unsought finding.&quot; Pek van Andel (1994) </li></ul><ul><li>source: wikipedia </li></ul>
  180. 189. BASIC CONCEPTS <ul><li>Creative thinking represents a combination of logic and intuitive approaches </li></ul><ul><li>Being creative means dealing with the aspects and possibilities of today and tomorrow </li></ul><ul><li>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 </li></ul><ul><li>Creativity does not mean dreaming, it means productive managing of specific tasks. </li></ul><ul><li>Only a creative approach to the problem solution can be successful. </li></ul>
  181. 190. Creativity in organizations <ul><li>Amabile : to enhance creativity in business, three components are needed: </li></ul><ul><ul><li>Expertise (technical, procedural & intellectual knowledge), </li></ul></ul><ul><ul><li>Creative thinking skills (how flexibly and imaginatively people approach problems), </li></ul></ul><ul><ul><li>and Motivation (especially intrinsic motivation). </li></ul></ul><ul><li>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. </li></ul>
  182. 191. Creativity and economics <ul><li>Joseph Schumpeter: creative destruction - the way in which old ways of doing things are endogenously destroyed and replaced by the new. </li></ul><ul><li>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. </li></ul><ul><li>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 &quot;3 T's of economic development: Technology, Talent and Tolerance&quot; also have high concentrations of creative professionals and tend to have a higher level of economic development. </li></ul><ul><li>I mportant aspect to understanding Entrepreneurship . </li></ul>
  183. 192. Stages of creative process <ul><li>Orientation : Need identification, intention to create </li></ul><ul><li>Preparation: Information collection, problem formulation </li></ul><ul><li>Incubation : seeking solution, evaluation of variants, unconscious thinking </li></ul><ul><li>Illumination (Eureka!) : synthesis, creation of ideas </li></ul><ul><li>Realization: transformation of the idea into reality </li></ul><ul><li>Verification: evaluation, learning, improvement </li></ul>
  184. 193. Barriers to creativity - 1 <ul><li>The value of getting things right time can induce a fear of mistakes and experimentation. </li></ul><ul><li>So can a blame culture where people become afraid of making mistakes. </li></ul><ul><li>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. </li></ul><ul><li>A culture that over emphasizes cost containment, processes, consistency or efficiency. </li></ul><ul><li>A reward system that too exclusively celebrates getting things done fast with no mistakes. </li></ul><ul><li>A general fear of risk taking, wanting to analyze everything to death, to wait and see what others do in the market before acting. </li></ul>
  185. 194. Barriers to creativity - 2 <ul><li>A lack of explicit funding for experimentation. </li></ul><ul><li>A strict requirement to demonstrate the value of an idea before it has a chance to prove itself. </li></ul><ul><li>A tendency to shoot down novel ideas as a way of scoring points. </li></ul><ul><li>An over allegiance to past successes, proven experience and tried and tested methods. </li></ul><ul><li>A suspicion of novelty, a fear of the unproven. </li></ul><ul><li>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. </li></ul><ul><li>Short termism - a drive to meet short term financial goals rather than to invest in the future. </li></ul>
  186. 195. Barriers to creativity - 3 <ul><li>http:// members . optusnet . com .au/~charles57/ Creative / Basics / obstacles . htm </li></ul>
  187. 196. CREATIVITY STIMULATION <ul><li>Keep in touch with creative people </li></ul><ul><li>Accommodate the effort to the targets </li></ul><ul><li>Evaluate and appreciate the effort </li></ul><ul><li>Protect creative employees </li></ul><ul><li>Leave them peace and time </li></ul><ul><li>Provide them with security </li></ul><ul><li>Tolerate failures </li></ul><ul><li>Maintain creative atmosphere </li></ul><ul><li>Evaluate the creative ideas quickly </li></ul><ul><li>Be persistent - nothing comes for free </li></ul>
  188. 197. Fostering creativity <ul><li>Establishing purpose and intention </li></ul><ul><li>Building basic skills </li></ul><ul><li>Encouraging acquisitions of domain-specific knowledge </li></ul><ul><li>Stimulating and rewarding curiosity and exploration </li></ul><ul><li>Building motivation, especially internal motivation </li></ul><ul><li>Encouraging confidence and a willingness to take risks </li></ul><ul><li>Focusing on mastery and self-competition </li></ul><ul><li>Promoting supportable beliefs about creativity </li></ul><ul><li>Providing opportunities for choice and discovery </li></ul><ul><li>Developing self-management (metacognitive skills) </li></ul><ul><li>Teaching techniques and strategies for facilitating creative performance </li></ul><ul><li>Providing balance </li></ul>
  189. 198. METHODS OF CREATIVE ACTIVITY <ul><li>increasing the individual’s or team’s creative potential </li></ul><ul><li>contributing to the improvement of the creative work conditions </li></ul><ul><li>facilitating the problem solution </li></ul>
  190. 199. Creative Process <ul><li>Problem Definition - including problem analysis, redefinition, and all aspects associated with defining the problem clearly. </li></ul><ul><li>Idea Generation - The divergent process of coming up with ideas. </li></ul><ul><li>Idea Selection - The convergent process of reducing all the many ideas into realistic solutions </li></ul><ul><li>Idea Implementation - Turning the refined ideas in reality. </li></ul><ul><li>Processes - Schemes and techniques which look at the overall process from start to finish (or at least 3 of the above 4 areas).. </li></ul><ul><li>http:// www.mycoted.com/Category:Creativity_Techniques </li></ul>
  191. 200. Brain hemispheres Left brain functions Right brain functions sequential simultaneous analytical holistic verbal imagistic logical intuitive linear algorithmic processing holistical algorithmic processing mathematics: perception of counting/measurement mathematics: perception of shapes/motions present and past present and future language: grammar/words, pattern perception, literal language: intonation/emphasis, prosody, pragmatic, contextual
  192. 201. Convergent vs. divergent thinking <ul><li>Convergent thinking involves aiming for a single, correct solution to a problem </li></ul><ul><li>Divergent thinking involves creative generation of multiple answers to a set problem. </li></ul>
  193. 202. CREATIVITY TECHNIQUES <ul><li>trial and error </li></ul><ul><li>brainstorming </li></ul><ul><li>Inspirational questions </li></ul><ul><li>psychological-cognitive, such as: </li></ul><ul><ul><li>Osborn-Parnes Creative problem solving (CPS) </li></ul></ul><ul><ul><li>Synectics; </li></ul></ul><ul><ul><li>Lateral thinking (courtesy of Edward de Bono), </li></ul></ul><ul><li>the highly-structured, such as: </li></ul><ul><ul><li>TRIZ (the Theory of Inventive Problem-Solving); </li></ul></ul><ul><ul><li>ARIZ (the Algorithm of Inventive Problem-Solving), both developed by the Russian scientist Genrich Altshuller; and </li></ul></ul><ul><ul><li>Computer-Aided Morphological analysis. </li></ul></ul>
  194. 203. Trial and error <ul><li>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. </li></ul><ul><li>more successful with simple problems, often resorted to when no apparent rule applies. </li></ul><ul><li>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 </li></ul>
  195. 204. Trial and error - features <ul><li>solution-oriented: trial and error makes no attempt to discover why a solution works, merely that it is a solution. </li></ul><ul><li>problem-specific: trial and error makes no attempt to generalise a solution to other problems. </li></ul><ul><li>non-optimal: trial and error is an attempt to find a solution, not all solutions, and not the best solution. </li></ul><ul><li>needs little knowledge: trials and error can proceed where there is little or no knowledge of the subject. </li></ul>
  196. 205. Inspirational questions - 1 <ul><li>What can I substitute to make an improvement? </li></ul><ul><li>What if I swap this for that and see what happens? </li></ul><ul><li>How can I substitute the place, time, materials or people? </li></ul><ul><li>What materials, features, processes, people, products or components can I combine? </li></ul><ul><li>Where can I build synergy? </li></ul><ul><li>What part of the product could I change? And in exchange for what? </li></ul><ul><li>What if I were to change the characteristics of a component? </li></ul><ul><li>What happens if I warp or exaggerate a feature or component? </li></ul><ul><li>What will happen if I modify the process in some way? </li></ul><ul><li>What other market could I use this product in? </li></ul><ul><li>Who or what else might be able to use it? </li></ul><ul><li>What if I did it the other way round? </li></ul><ul><li>What if I reverse the order it is done or the way it is used? </li></ul><ul><li>How would I achieve the opposite effect? </li></ul>
  197. 206. Inspirational questions - 2 <ul><li>Who else has solved this problem? </li></ul><ul><li>What similar area of expertise might have solved this problem? </li></ul><ul><li>Is there anyone else in the company who knows how to solve this? </li></ul><ul><li>What else could we use to solve the problem? </li></ul><ul><li>Where else might this problem have been solved? </li></ul><ul><li>What other companies might know how to solve this? </li></ul><ul><li>What similar problems have been solved, and how? </li></ul><ul><li>What other industries face the same problem and what do they do about it? </li></ul>
  198. 207. Inspirational questions - 3 <ul><li>How would they think? </li></ul><ul><li>What objects and items would they be using? </li></ul><ul><li>Where would they be doing it? </li></ul><ul><li>How would they see the problem? </li></ul><ul><li>What action would they take? </li></ul><ul><li>How would they explain the problem? </li></ul><ul><li>How would they solve the problem? </li></ul><ul><li>What does your situation or your problem remind you of? </li></ul><ul><li>What other areas of life/work experience similar situations? </li></ul><ul><li>Who does similar things but not in your area of expertise? </li></ul>
  199. 208. Inspirational questions - 4 <ul><li>What would my perfect solution be? </li></ul><ul><li>What effect would my ideal solution have? </li></ul><ul><li>What if money/morals/laws did not matter at all? </li></ul><ul><li>What would I do if I had unlimited power and resources? </li></ul><ul><li>What would my ideal solution look like? </li></ul><ul><li>Source:Wikipedia </li></ul>
  200. 209. CPS (OFPISA) <ul><li>six stage process, each with a divergent and a convergent phase. </li></ul><ul><ul><li>Objective Finding (or Mess Finding): Sensitise yourself for issues that need to be tackled. </li></ul></ul><ul><ul><li>Fact Finding: Gather information about the problem. </li></ul></ul><ul><ul><li>Problem Finding: convert a fuzzy statement of the problem into a broad statement more suitable for idea finding. </li></ul></ul><ul><ul><li>Idea Finding: generate as many ideas as possible </li></ul></ul><ul><ul><li>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 </li></ul></ul><ul><ul><li>Acceptance finding: How can the suggestion you have just selected be made up to standard and put into practice? </li></ul></ul>
  201. 210. Synectics <ul><li>problem solving approach that stimulates thought processes of which the subject is generally unaware. </li></ul><ul><li>developed by William Gordon, </li></ul><ul><li>central principle: &quot;Trust things that are alien, and alienate things that are trusted.&quot; </li></ul><ul><li>Encourages </li></ul><ul><li>fundamental problem-analysis and, on the other hand, </li></ul><ul><li>the alienation of the original problem through the creation of analogies </li></ul><ul><li>It is thus possible for new and surprising solutions to emerge. </li></ul><ul><li>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 . </li></ul>
  202. 211. Synectics - steps <ul><li>Analysis and definition of the problem </li></ul><ul><li>Spontaneous solutions </li></ul><ul><li>Reformulation of the problem </li></ul><ul><li>Creation of direct analogies </li></ul><ul><li>Personal analogies (identification) </li></ul><ul><li>Symbolic analogies (contradictions) </li></ul><ul><li>Direct analogies </li></ul><ul><li>Analysis of the direct analogies </li></ul><ul><li>Application to the problem </li></ul><ul><li>Development of possible solutions </li></ul>
  203. 212. Lateral thinking <ul><li>de Bono </li></ul><ul><li>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 </li></ul><ul><li>shifting of thinking patterns, away from entrenched or predictable thinking to new or unexpected ideas. </li></ul><ul><li>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 </li></ul><ul><li>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 </li></ul><ul><li>http:// en.wikipedia.org/wiki/Lateral_thinking </li></ul>
  204. 213. Lateral thinking vs. critical thinking <ul><li>Critical thinking is primarily concerned with judging the truth value of statements and seeking errors. </li></ul><ul><li>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. </li></ul><ul><li>Critical thinking is like a post-mortem while lateral thinking is like diagnosis. </li></ul>
  205. 214. Lateral thinking - inspiration <ul><li>Random Entry : Choose an object at random, or a noun from a dictionary, and associate that with the area you are thinking about. </li></ul><ul><li>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&quot; to signal that the provocation is not a valid idea put up for judgement but a stimulus for new perception. </li></ul><ul><li>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. </li></ul>
  206. 215. Six de Bono hats <ul><li>White hat (Blank sheet): Information & reports, facts and figures ( objective ) </li></ul><ul><li>Red hat (Fire): Intuition, opinion & emotion, feelings ( subjective ) </li></ul><ul><li>Yellow hat (Sun): Praise, positive aspects, why it will work ( objective ) </li></ul><ul><li>Black hat (Judge's robe): Criticism, judgment, negative aspects, modus tollens ( objective ) </li></ul><ul><li>Green hat (Plant): Creativeness, Alternatives, new approaches & 'everything goes', idea generation & provocations ( speculative/creative ) </li></ul><ul><li>Blue hat (Sky): &quot;Big Picture,&quot; &quot;Conductor hat,&quot; &quot;Meta hat,&quot; &quot;thinking about thinking&quot;, overall process ( overview ) </li></ul>
  207. 217. Example - meeting <ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>Next the discussion may move to the ( Yellow then) Green hat in order to generate ideas and possible solutions. </li></ul><ul><li>Next the discussion may move between White hat thinking as part of developing information and </li></ul><ul><li>Black hat thinking to develop criticisms of the solution set. </li></ul>
  208. 218. TRIZ, ARIZ <ul><li>Теория решения изобретательских задач ” ( T eoriya R esheniya I zobretatelskikh Z adatch ) = Theory of inventive problem solving </li></ul><ul><li>Inventing is the removal of a technical contradiction with the help of certain principles </li></ul>
  209. 219. TRIZ process for creative problem solving
  210. 220. Contradictions <ul><li>Inventive problems stem from contradictions (one of the basic TRIZ concepts) between two or more elements, such as, &quot;If we want more acceleration, we need a larger engine; but that will increase the cost of the car,&quot; 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. </li></ul><ul><li>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. </li></ul>
  211. 221. Matrix of Contradictions <ul><li>40 inventive principles </li></ul><ul><li>rows: 39 system features that one typically wants to improve, such as speed, weight, accuracy of measurement and so on. </li></ul><ul><li>columns: typical undesired results. </li></ul><ul><li>matrix cell: points to principles that have been most frequently used in patents in order to resolve the contradiction. </li></ul>
  212. 223. Morphological analysis <ul><li>designed for multi-dimensional, non-quantifiable problems where causal modeling and simulation do not function well or at all </li></ul><ul><li>Fritz Zwicky (1967, 1969) - exploring all the possible solutions to a multi-dimensional, non-quantified problem complex </li></ul>
  213. 224. Morphological analysis - steps <ul><li>The problem to be solved must be very concisely formulated. </li></ul><ul><li>All of the parameters that might be of importance for the solution of the given problem must be localized and analyzed. </li></ul><ul><li>The morphological box or multidimensional matrix, which contains all of the potential solutions of the given problem, is constructed </li></ul><ul><li>All the solutions contained in the morphological box are closely scrutinized and evaluated with respect to the purposes that are to be achieved. </li></ul><ul><li>The optimally suitable solutions are selected and are practically applied, provided the necessary means are available. </li></ul>
  214. 225. Example 1 - energy conversion initial transmission final storage kinetic – K kinetic – K kinetic – K electrical – E electrical – E electrical – E chemical – C chemical – C chemical – C thermal – T thermal – T thermal – T nuclear - N nuclear - N nuclear - N
  215. 226. Example 1 - continued <ul><li>K->E->C: hydroelectric generation which is then stored in a battery. </li></ul><ul><li>C->T->K: internal combustion engine (chemical energy transformed into thermal energy) leading to energy being stored in a flywheel.  </li></ul><ul><li>E->C->T: common refrigerator </li></ul>
  216. 227. Example 2 – cardboard packaging solution: throwaway beverage packaging Parameter Parameter values separated media solid / solid solid / fluid solid / gas fluid / fluid fluid / gas gas / gas level of separation total partial protection against gravitation mechanical forces heat radiation sound combination with paper plastic wood paint nothing
  217. 228. Think outside the box
  218. 230. 16 dots, 6 lines http://www. sciencenewsforkids . org / articles /20041027/ PuzzleZone . asp
  219. 232. Dots and lines - generalization <ul><li>a three-dot-by-three-dot puzzle requires four lines. </li></ul><ul><li>a four-dot-by-four-dot puzzle requires six lines, </li></ul><ul><li>a five-dot-by-five-dot puzzle requires eight lines, and </li></ul><ul><li>an n -dot-by- n -dot puzzle requires 2( n – 1) dots. </li></ul>
  220. 233. Puzzle Archive <ul><li>http://www.sciencenewsforkids.org/pages/zonearchive.asp?type=1 </li></ul>
  221. 234. Lesson 8 TEAM WORK
  222. 235. TEAM DEFINITION <ul><li>group of people whose individual members share a common goal </li></ul><ul><li>their expert skills and personal abilities are complementary </li></ul><ul><li>its members work activities and skills are purposefully and smoothly linked together. </li></ul>
  223. 236. TEAM EFFECTIVENESS <ul><li>dynamic balance among </li></ul><ul><ul><li>Necessity to perform a joint task </li></ul></ul><ul><ul><li>Individual needs of team members </li></ul></ul><ul><ul><li>Necessity to maintain a team </li></ul></ul><ul><li>synergic effect : e very member </li></ul><ul><ul><li>contributes to performance of the mutual task </li></ul></ul><ul><ul><li>adopts specific roles necessary for the effective team functioning. </li></ul></ul><ul><ul><li>contribute s to the satisfaction of the individual needs of other team members </li></ul></ul>
  224. 237. Successful team characteristics <ul><li>Team members identify themselves with the team </li></ul><ul><li>There is relaxed, non-bureaucratic atmosphere , i nterest in achieving joint goals, optimistic work mood. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>Team management is of participative, eventually consulting, character. Rules are clearly defined. </li></ul>
  225. 238. Unsuccessful team characteristics <ul><li>Team members do not identify themselves with team. </li></ul><ul><li>Strained atmosphere, blocked communication is. Team members hide their real feelings and opinions. </li></ul><ul><li>Autocratic supervision, discussion about goals and tasks not allowed. </li></ul><ul><li>Diversity of opinions leads to conflicts. Disagreement is not openly expressed; the decision is undermined. </li></ul><ul><li>Personal issues are settled by means of criticism. People gossip. </li></ul><ul><li>The rules are not clearly defined. </li></ul>
  226. 239. Team structure and organization <ul><li>Formal : clearly visible, represents distribution of work among the team members in order to ensure performance of certain functions. </li></ul><ul><li>Informal : influences procedures, in which things are actually done – prestige of people, their influence, power, seniority, ability to convince others play roles there. </li></ul>
  227. 240. TEAM DEVELOPMENT <ul><li>Forming </li></ul><ul><li>Storming </li></ul><ul><li>Norming </li></ul><ul><li>Performing </li></ul><ul><li>Dissolving </li></ul>
  228. 241. ROLES IN THE TEAM <ul><li>Initiator </li></ul><ul><li>Company employee </li></ul><ul><li>Chairman </li></ul><ul><li>Forming person </li></ul><ul><li>Operational employee </li></ul><ul><li>Coordinato r </li></ul><ul><li>Resource researcher </li></ul><ul><li>Observer </li></ul><ul><li>Team worker </li></ul><ul><li>Finisher </li></ul><ul><li>Orienting member </li></ul><ul><li>Energy supplier </li></ul><ul><li>Recorder </li></ul><ul><li>Harmonizer </li></ul>
  229. 242. Advantages and disadvantages of team work <ul><li>(+) Mutual cooperation and support </li></ul><ul><li>(?) teams often accept more risk than individuals </li></ul><ul><li>(+) can produce high quality ideas by accepting the conflict and exploring differences in the individual members’ opinions </li></ul>
  230. 243. Group cohesion <ul><li>(+) larger degree of cooperation, better communication, higher resistance against frustration, lower fluctuation and absences, lower level of tolerance towards lazy people </li></ul><ul><li>(-) difficult for new members, limited possibility to enforce new ideas, opposition against changes in work procedures , often overprotective against outsiders </li></ul>
  231. 244. Team forming by a manager Manager On the way to rigidity On the way to teamwork Defines Everything if possible Vision Prefers Conformity Individuality, mutuality Believes in Plan, task, control Trust, motivation climate Views the problem solving by the team As denial of his/ her authority, waste of time As natural and necessary Communicates with team members When they require it or need it As much as possible Conflicts inside or outside the team Ignores them or solves them him- or herself Opens them for team solving before they become destructive Understands group unity As a potential threat to his/ her position As necessity Anticipates People’s worries of responsibility Independence and responsibility of people
  232. 245. Lesson 9 DECISION MAKING
  233. 246. DECISION PROCESS <ul><li>Identify the problem </li></ul><ul><li>Specify objectives and decision criteria </li></ul><ul><li>Develop alternatives </li></ul><ul><li>Analyze and compare alternatives </li></ul><ul><li>Select the best alternative </li></ul><ul><li>Implement the chosen alternative </li></ul><ul><li>Monitor the results </li></ul>
  234. 247. REASONS FOR POOR DECISIONS <ul><li>Mistakes in the decision process </li></ul><ul><ul><li>quick decisions </li></ul></ul><ul><ul><li>failure to recognize consequences </li></ul></ul><ul><ul><li>manager´s ego – unwillingness to admit mistake, unability to make a decision </li></ul></ul><ul><li>Bounded rationality </li></ul><ul><ul><li>limits – not optimum, but satisfactory solution </li></ul></ul><ul><li>Suboptimization </li></ul><ul><ul><li>departmentalization </li></ul></ul>
  235. 248. MODELS <ul><li>Model: abstraction of reality, adequately portrays real-life phenomena </li></ul><ul><ul><ul><li>Physical </li></ul></ul></ul><ul><ul><ul><li>Schematic </li></ul></ul></ul><ul><ul><ul><li>Mathematical </li></ul></ul></ul><ul><ul><ul><li>Computer </li></ul></ul></ul>
  236. 249. USE OF MODELS <ul><li>The purpose of the model </li></ul><ul><li>How to use model to generate results </li></ul><ul><li>How results are interpreted and used </li></ul><ul><li>What assumptions and limitations apply </li></ul>Be aware of the assumptions and limitations of each model
  237. 250. BENEFITS OF THE USE OF MODELS <ul><li>Easy to use, less expensive </li></ul><ul><li>Require to organize and quantify information, indicate need of additional information </li></ul><ul><li>Provide a systematic approach to problem solving </li></ul><ul><li>Increase understanding of the problem </li></ul><ul><li>Enable to ask „what if …?“ </li></ul><ul><li>Require users to be very specific about objectives </li></ul><ul><li>Serve as a consistent tool for evaluation </li></ul><ul><li>Enable to bring power of mathematics </li></ul><ul><li>Provide standardized format for problem analysis </li></ul>
  238. 251. LIMITATIONS OF MODELS <ul><li>Overemphasis of quantitative over qualitative information </li></ul><ul><li>Incorrect application, misinterpretation of results </li></ul><ul><li>Highly sophisticated models in hands of users who cannot fully comprehend the conditions and limitations of the model use </li></ul><ul><li>Model building as an e nd to itself </li></ul>
  239. 252. QUANTITATIVE APPROACHES <ul><li>Linear programming </li></ul><ul><li>Queing techniques </li></ul><ul><li>Inventory models </li></ul><ul><li>Project models (PERT, CPM, TOC) </li></ul><ul><li>Forecasting models </li></ul><ul><li>Statistical models </li></ul><ul><li>Quantitative methods are typically more difficult to understand without a fair amount of explanation and demonstration </li></ul>
  240. 253. TRADE-OFFS <ul><li>List advantages and and disadvantages of opposing courses of action to gain better understanding of the consequences of potential decisions. </li></ul><ul><li>Example – quality control </li></ul>advantages disadvantages Fewer defectives slipping through by increasing inspections Increase in costs
  241. 254. SENSITIVITY ANALYSIS <ul><li>How sensitive the solution is to a change in one or more parameters </li></ul><ul><li>Example:  = (A 2 – A 1 ) / 0,5 * (A 2 + A 1 ) </li></ul>x = 5 k = 1 k = 2  A = kx + 4000 4005 4010 0,03% B = kx + 4 9 4 10,87%
  242. 255. THE S Y STEM APPROACH <ul><li>interrelations among subsystems and/or elements </li></ul><ul><li>system boundary – environment </li></ul><ul><li>Feedback </li></ul><ul><li>Consequence: evaluate „optimal“ solutions in terms of larger framework </li></ul>T he whole is greater than the sum of its individual parts
  243. 256. DECISION ENVIRONMNENTS <ul><li>CERTAINTY – relevant parameters have known values </li></ul><ul><li>RISK – certain parameters have probabilistic outcomes </li></ul><ul><li>UNCERTAINTY – it is impossible to assess the likelihood of various possible outcomes </li></ul>
  244. 257. DECISION THEORY <ul><li>Identify possible future conditions – states of nature </li></ul><ul><li>Develop a list of possible alternatives </li></ul><ul><li>Determine or estimate payoff associated with each alternative for every possible state of nature </li></ul><ul><li>Estimate the likelihood of every possible state of nature (if possible) </li></ul><ul><li>Evaluate alternatives according to decision criterion and select best alternative </li></ul>
  245. 258. PAYOFF TABLE Alternatives – facility size Possible future demand low moderate high Small 10 10 10 Medium 7 12 12 Large -4 2 16
  246. 259. Decision making under certainty <ul><li>Choose the alternative with the highest payoff </li></ul>Demand Highest payoff Best alternative Low 10 small Moderate 12 medium High 16 large
  247. 260. Decision making under uncertainty <ul><li>Maximin – determine the worst possible payoff for each alternative, and than choose the alternative with the „best worst“ </li></ul><ul><li>Maximax – determine the best possible payoff, and choose the alternative with this payoff </li></ul><ul><li>Laplace - determine the average payoff for each alternative, and choose the alternative with the best average </li></ul><ul><li>Minimax regret - determine the worst regret for each alternative, and than choose the alternative with the „best worst“ </li></ul>
  248. 261. <ul><li>Maximin: worst payoffs are </li></ul><ul><li>the best is 10 - choose small facility </li></ul><ul><li>Maximax: the best overall payoff is 16 – choose large </li></ul><ul><li>Laplace: </li></ul><ul><li>The best average is 10,33 - choose medium </li></ul>Alternative small medium large Payoff 10 7 -4 Alternative small medium large Average payoff 10 10,33 4,67
  249. 262. <ul><li>Minimax regret: </li></ul><ul><li>Opportunity loss, regret : subtract every payoff in a column from the largest positive payoff in that column </li></ul><ul><li>The lowest regret is 4 – choose medium </li></ul>Alternative regrets worst low moderate high Small 0 2 6 6 Medium 3 0 4 4 Large 14 10 0 14
  250. 263. Decision making under risk <ul><li>Expexted monetary value (EMV) criterion: calculate expected value (EV) for each alternative and select one with the highest EV </li></ul><ul><li>Appropriate when decision maker is risk - neutral </li></ul>Alternative probability EV Small 0,30 10 Medium 0,50 10.5 Large 0,20 3
  251. 264. DECISION TREES
  252. 265. DECISION TREES <ul><li>Particularly useful for situations that involve sequential decisions </li></ul><ul><li>Nodes: </li></ul><ul><ul><li>decision points  </li></ul></ul><ul><ul><li>chance events  </li></ul></ul><ul><li>Branches leaving </li></ul><ul><ul><li> alternatives </li></ul></ul><ul><ul><li> states of nature </li></ul></ul>
  253. 266. DECISION TREES - Example
  254. 267. EXPECTED VALUE OF PERFECT INFORMATION (EVPI) <ul><li>Option: postpone a decision, purchase additional information </li></ul><ul><li>Question: is the cost of the option less than the expected gain? </li></ul><ul><li>upper limit decision maker should be willing to spend to obtain perfect information </li></ul>EVPI = expected payoff under certainty - expected payoff under risk
  255. 268. EVPI - example <ul><li>expected payoff under certainty = 0,30 *10 + 0, 5 0 *12 + 0, 2 0 *16 = 12,2 </li></ul><ul><li>EVPI = 12,2 – 10,5 = 1,7 </li></ul>Demand Best payoff probability Low 10 0,30 Moderate 12 0,50 High 16 0,20
  256. 269. SENSITIVITY ANALYSIS State of nature Alternative #1 #2 A 4 12 B 16 2 C 12 8
  257. 270. Sensitivity Analysis
  258. 271. LINEAR PROGRAMMING (LP) <ul><li>Objective function – maximization or minimization </li></ul><ul><li>Decision variables </li></ul><ul><li>Constraints – feasible solution space </li></ul><ul><li>Parameters – fixed values </li></ul>
  259. 272. LP - ASSUMPTIONS <ul><li>Linearity (objective function & constraints) </li></ul><ul><li>Divisibility (non-integer values of variables acceptable) </li></ul><ul><li>Certainty (values of parameters known, constatnt </li></ul><ul><li>Non-negativity (negative values of variables unacceptable) </li></ul>
  260. 273. LP – EXAMPLE 1 <ul><li>Decision variables: x 1 , x 2 , x 3 – quantities of products to produce </li></ul><ul><li>Maximize profit 5 x 1 + 8 x 2 + 4 x 3 </li></ul><ul><li>Subject to constraints: </li></ul><ul><ul><li>Labor 2 x 1 + 4 x 2 + 3 x 3  250 hours </li></ul></ul><ul><ul><li>Material 7 x 1 + 6 x 2 + 5 x 3  100 pounds </li></ul></ul><ul><ul><li>Product 1 x 1  10 units </li></ul></ul><ul><ul><li>Non-negativity x 1 , x 2 , x 3  0 </li></ul></ul>
  261. 274. LP – solution 1 decision variables X1 10 X2 5 X3 0 objective function P 90 constraints 1 40 250 2 100 100 3 10 10
  262. 275. LP – Graphical method <ul><li>For two-variable problem, graphical method can be used </li></ul><ul><ul><li>Example: </li></ul></ul><ul><ul><li>Minimize P = 8x + 12y </li></ul></ul><ul><ul><li>Subject to 5x + 2y ≥ 20 </li></ul></ul><ul><ul><li>4 x + 3y ≥ 24 </li></ul></ul><ul><ul><li> y ≥ 2 </li></ul></ul><ul><ul><li> x, y ≥ 0 </li></ul></ul><ul><ul><li>Solution: x = 4,5, y = 2, P = 60 </li></ul></ul>
  263. 276. LP – Graphical method
  264. 277. Lesson 10 CONFLICT RESOLUTION
  265. 278. Conflict management <ul><li>Conflict cannot always be avoided, but it can be managed </li></ul><ul><li>Sources of conflicts: </li></ul><ul><ul><li>Aggressive or conflict-prone personality </li></ul></ul><ul><ul><li>Ambiguous or conflicting roles, interdependence </li></ul></ul><ul><ul><li>Difference in objectives, values, perceptions </li></ul></ul><ul><ul><li>Inadequate authority, oppressive management </li></ul></ul><ul><ul><li>Inadequate resources </li></ul></ul><ul><ul><li>Unsatisfactory communication </li></ul></ul>
  266. 279. Conflict consequences <ul><li>Positive: </li></ul><ul><ul><li>Competition tends to enhance the general welfare, if the conflict level is not too high </li></ul></ul><ul><ul><li>Loyalty increases when people unite against a common foe </li></ul></ul><ul><ul><li>If problems are recognized, solutions may be forthcoming </li></ul></ul><ul><li>Negative: </li></ul><ul><ul><li>Activities, not results, become important </li></ul></ul><ul><ul><li>Attack individual rather than problem </li></ul></ul><ul><ul><li>Blocked communication </li></ul></ul><ul><ul><li>Need of strong leaders </li></ul></ul>
  267. 280. Two-dimensional model of a conflict
  268. 281. Conflict resolution styles - 1 <ul><li>Avoidance: no assertiveness, no cooperation – problem solution postponed </li></ul><ul><li>Accommodation: no assertiveness, cooperation – give in </li></ul><ul><li>Collaboration: assertiveness and cooperation -problem solving, win-win </li></ul><ul><li>Competition: assertiveness, no cooperation -win-lose, adhere to rules, do not seek to harm the other ’ s self-image, impulse to change and improve the organization </li></ul><ul><li>Authoritarianism: aggression, no cooperation </li></ul>
  269. 282. Conflict resolution styles - 2 <ul><li>Smoothing: low assertion, low cooperation – focus on similarities, seeks resolution, move parties to a common goal </li></ul><ul><li>Superordinate goals: increasing assertiveness, increasing cooperation – attempt to find a common set of objectives, forget the differences </li></ul><ul><li>Bargaining (compromise): moderate assertion, moderate cooperation – give-and-také, both parties satisfy some of their needs </li></ul>
  270. 283. Lesson 11 COMPANY INNOVATION CULTURE „ Successful companies address the human needs and give them priority“ Thomas J. Peters, Robert H.Waterman
  271. 284. COMPANY CULTURE <ul><li>Organization culture : a pattern of ideas, opinions and attitudes that majority of people in the company understands, respects, acknowledges, adopts and relates to them. </li></ul><ul><li>I nfluence s the company’s economic success and competitiveness </li></ul>
  272. 285. Main elements of the company culture <ul><li>Behavior standards </li></ul><ul><li>Key values </li></ul><ul><li>Management and leadership style </li></ul><ul><li>Roles </li></ul><ul><li>Organizational structure and diversification </li></ul><ul><li>I nfluenced by: </li></ul><ul><li>Organization’s strategy </li></ul><ul><li>Organization’s system </li></ul><ul><li>Level of cooperation between the individual organization structures </li></ul><ul><li>Employees’ abilities </li></ul>
  273. 286. F our types of company orientation <ul><li>Organizations preferring </li></ul><ul><li>power </li></ul><ul><li>roles </li></ul><ul><li>tasks </li></ul><ul><li>human side of their processes and people </li></ul>
  274. 287. MANAGEMENT STYLES <ul><li>shift from directive to participative style of management </li></ul><ul><li>4 basic management styles : </li></ul><ul><li>Exploiting authoritative </li></ul><ul><li>Benevolent authoritative </li></ul><ul><li>Consultative </li></ul><ul><li>Participative </li></ul>
  275. 288. Motivation / performance cycle (MPC)
  276. 289. M otivation / performance cycle (MPC) <ul><li>Are the individuals´s needs satisfied? / Need creation </li></ul><ul><li>Are organization and manager aware of needs? Are they willing and able to offer need satisfiers? </li></ul><ul><li>Organization and manager offer extrinsic and intrinsic need satisfiers and rewards </li></ul><ul><li>The individual searches for alternatives, evaluate the consequences of possible actions, makes a decision </li></ul>
  277. 290. MPC- continued <ul><li>The individual is motivated to expend effort and does so </li></ul><ul><li>Does the individual have appropriate training, abilities, and tools, and know the objective? </li></ul><ul><li>Performance </li></ul><ul><li>Does the individual receive need satisfier? Do the organization and manager provide need satisfier? </li></ul>
  278. 291. MPC- continued <ul><li>Does the individual reassess the situation? </li></ul><ul><li>Will the individual be motivated in the same way? </li></ul><ul><li>Note: </li></ul><ul><li>normal – individual </li></ul><ul><li>italic – organization and manager </li></ul>
  279. 292. Hierarchy of needs (A. Maslow) <ul><li>Physiological