Innovation Framework For Manufacturing (With Addendum)

1. A Framework for Manufacturing Innovation Draft 5.0, February, 2005 Prepared for The Right Place, Inc. Manufacturers Council by: John Cleveland, IRN, Inc.

2. Acknowledgements The Innovation Framework was produced for the Manufacturers Council of The Right Place, Inc. by IRN, Inc. The Right Place’s Michigan Manufacturing Technology office, in partnership with the Economic Development Administration, US Department of Commerce, supported the development of this report. Established in 1985, The Right Place is a private/public partnership for regional economic development dedicated to job retention and job creation in the greater Grand Rapids area. The Manufacturers Council consists of over 35 CEOs and executive leaders from area manufacturing companies. The mission of the Council is to promote, facilitate and enable implementation of “world class manufacturing” principles and practices among area companies. The Council carries out this mission by providing a forum for interaction between executives; facilitating peer learning between companies; defining emerging competitiveness issues and challenges; and supporting community systems and strategies that enable world class manufacturing. IRN is one of the country’s premier consulting firms providing strategy development, market research, and forecasting services to automotive suppliers and other mid-sized manufacturing firms. An electronic copy of updated versions of these materials is available on The Right Place web site at http://rightplace.org/Info_Center/library.shtml For additional information, contact: Michelle Cleveland The Manufacturers Council The Right Place, Inc. 161 Ottawa Ave. NW Grand Rapids, MI 49503 616-771-0326 [email_address]

3. Contents <ul><li>Background </li></ul><ul><li>World Class Manufacturing and Innovation </li></ul><ul><li>From Lean Manufacturing to Lean Enterprise </li></ul><ul><li>Innovation Practices and Frameworks </li></ul><ul><li>Innovation Strategies </li></ul><ul><ul><li>Creating an innovation vision </li></ul></ul><ul><ul><li>Creating the innovation culture </li></ul></ul><ul><ul><li>Creating the innovation processes </li></ul></ul><ul><ul><ul><li>Opportunity identification </li></ul></ul></ul><ul><ul><ul><li>Opportunity selection </li></ul></ul></ul><ul><ul><ul><li>Development and testing </li></ul></ul></ul><ul><ul><ul><li>Production and launch </li></ul></ul></ul><ul><ul><ul><li>Managing the R&D portfolio </li></ul></ul></ul><ul><ul><li>Creating the innovation structures and support systems </li></ul></ul><ul><ul><li>Measuring innovation results </li></ul></ul><ul><li>6. Perspectives on Innovation (separate document) </li></ul>

4. Purpose and Background <ul><li>Purpose: </li></ul><ul><li>The purpose of this document is to create a framework for thinking about innovation that can help guide the activities of the Manufacturer’s Council in support of The Right Place, Inc. 2004-2008 strategic plan goals for accelerating innovation in West Michigan’s manufacturing base. </li></ul><ul><li>Background: </li></ul><ul><li>This work is being undertaken in the following context: </li></ul><ul><li>The Manufacturer’s Council has been working with a definition of World Class Manufacturing that has three components – clarity of PURPOSE and strategic direction; continuous improvement of PROCESSES; and continuous development of PEOPLE. (See model on following pages.) </li></ul><ul><li>The work of the Council over the last decade has primarily focused on the PROCESS and PEOPLE dimensions of world class manufacturing, with an emphasis on lean manufacturing and workforce development. </li></ul><ul><li>The Council’s 2003 position paper: A Growth and Innovation Agenda for Manufacturing , emphasizes the critical role of innovation maintaining the competitiveness of our manufacturing base. Operational excellence is no longer sufficient to “stay ahead of the game.” Companies at every level of the value chain need to be continuously innovating in their processes and products to remain competitive in a global market place. The role of innovation in competitiveness has become even more important with the increase in low-cost competition from overseas. </li></ul><ul><li>While the Council has well-developed models for process improvement (e.g. continuous improvement and lean manufacturing) and the development of people to guide their investments in peer learning, policy advocacy and other initiatives, there is not a well developed framework for thinking about innovation in small and medium-sized manufacturing firms. </li></ul><ul><li>Innovation in the RPI Strategic Plan </li></ul><ul><li>Goal 3 : </li></ul><ul><li>Strengthen Manufacturing Leadership and Innovation </li></ul><ul><li>Objective 3.1 : </li></ul><ul><li>Develop and implement initiatives to support innovation in the regional manufacturing base, including support and development of collaborative R&D resources and opportunities. </li></ul><ul><li>Implementation Strategies : </li></ul><ul><li>Develop an integrated model of innovation for small and medium-sized manufacturing firms. </li></ul><ul><li>Identify the R&D capabilities of West Michigan manufacturers. </li></ul><ul><li>Accelerate the commercialization of relevant intellectual property. </li></ul><ul><li>Develop a strategy to attract federal manufacturing R&D investments to West Michigan. </li></ul>

5. Innovation Summary <ul><li>Part of World Class Performance. Innovation is a critical component of being a world class manufacturer. Operational excellence is not enough to survive long term in today’s markets. Operational excellence and innovation go hand in hand – it is a “both/and” not “either/or” choice. Innovation is part of the shift from a “lean manufacturing” to a “lean enterprise” focus. </li></ul><ul><li>Linked to Higher Growth and Profitability. Innovative companies consistently outperform their less innovative competitors in terms of sales growth and profitability. </li></ul><ul><li>Not Just Products and Technology. Innovation needs to be understood in a broad context – it is about innovation in all aspects of the business, including processes, services, methods, management practices, strategy and business design, not just products and technology. </li></ul><ul><li>Driven By Strategy. The role innovation plays in your company is driven by your strategic focus – what business you are in; desired positioning and differentiation; and targeted customer segments. </li></ul><ul><li>A Continuum. The “innovation continuum” runs from incremental process improvements to radically new business designs. Each company needs to make choices about how much resources it will focus on which part of the continuum. </li></ul><ul><li>Requires Process Discipline. Innovation is a skill, not an art. It requires the same level of rigorous process discipline as lean manufacturing. Process “stability and capability” is possible with innovation, just as it is possible in any other element of your business. It just requires focus, commitment and hard work. </li></ul><ul><li>Supported By Culture and Leadership. Innovation needs to be supported by a complementary organizational culture of creativity; communication; and risk taking. And it needs to be driven from the very top of the organization. </li></ul><ul><li>There Is No “Right Way.” Every company has to develop their own customized approach to innovation. There are many tools, but no “one size fits all” formula to follow. The “art” of innovation is the matching of the tools and processes to your company circumstances. </li></ul>

6. World Class Manufacturing & Innovation “ Suppliers that relentlessly improve their internal efficiency and consistently implement lean practices are able to protect their competitiveness even against low labor cost locations. This, combined with an aggressive focus on innovation, seems to be a viable strategy to combat the cost differential of emerging markets and a way to protect the domestic manufacturing base.” (“The Odyssey of the Auto Industry”, Roland Berger, June, 2004) The Manufacturers Council has been using a model of world class manufacturing to guide its vision and activities. (See graphics on the following pages.) Most of the work of the Council over the last decade has focused on operational excellence in manufacturing, and the building of a team-based continuous improvement culture within the firm. Success in the future, however, will require applying the same discipline of continuous improvement and even “discontinuous improvement” in other dimensions of the company, including the innovation strategy of the firm. “ Excellence in operations remains a necessary – but no longer sufficient – condition for profitable growth…Given the level of performance so widely attained today, operating excellence by itself no longer sets a company apart from its competitors…Our study identified three routes [to profitable growth]: expanding the supplier’s role by taking on a larger share of value added activities; by becoming more innovative ; and by globalizing.” (“Profitable Growth Strategies in the Automotive Supply Industry”, McKinsey and Company, 1999) “ The biggest single trend we’ve observed is the growing acknowledgement of innovation as a center piece of corporate strategies and initiatives. What’s more, we’ve noticed that the more senior the executive, the more likely they are to frame their companies’ needs in the context of innovation.” ( The Art of Innovation , Tom Kelly, 2001)

7. World Class Companies Strategic Focus (Purpose) World class firms have a clear strategic direction and well-articulated market differentiation. They understand their market segments and competitors and have the capacity for rapid adaptation and innovation. And they consistently seek market positioning where they are at the fore-front of best practice – they exploit the power of knowledge. Operational Excellence (Process) These firms also have the ability to continuously improve their key processes through the use of technology and quality improvement tools and processes. They relentlessly work on the elimination of waste using rigorous measurement tools to track performance. And they use state-of-the-art process and information technologies to interact with customers; manage their own operations; and manage their supply chains. Human Capital (People) World class companies continuously invest in the competence and creativity of their associates. They build cultures that attract and keep the best talent through strong, shared values; trusted leadership; and performance-based reward systems. And they design their organizations to maximize knowledge creation and management.

8. World Class Competencies <ul><li>Competence: Having a clear strategic direction; understanding your competencies and markets; capacity for rapid innovation. </li></ul><ul><li>Attributes: </li></ul><ul><li>Clear mission and vision </li></ul><ul><li>Focused market positioning and differentiation </li></ul><ul><li>Organization-wide goals and objectives </li></ul><ul><li>Well-defined financial goals </li></ul><ul><li>Competence: Building a culture that attracts people’s personal energy and supports their ability to understand themselves and work with each other as members of a team. </li></ul><ul><li>Attributes: </li></ul><ul><li>Strong shared values </li></ul><ul><li>Investment in people </li></ul><ul><li>Teamwork, problem-solving and communications </li></ul><ul><li>Performance-based rewards </li></ul><ul><li>Distributive organizational design </li></ul><ul><li>Knowledge management </li></ul>PURPOSE PEOPLE <ul><li>Competence: Having the ability to continuously improve key processes through the use of quality principles, practices and tools. </li></ul><ul><li>Attributes: </li></ul><ul><li>Systems thinking </li></ul><ul><li>Rigorous measurement </li></ul><ul><li>Continuous improvement practices for all business processes </li></ul><ul><li>State of the art process and information technologies </li></ul>PROCESS

9. World Class Practices <ul><li>Strategic Vision </li></ul><ul><li>Mission and Vision </li></ul><ul><li>Market segmentation and analysis </li></ul><ul><li>Customer selection </li></ul><ul><li>Competitor analysis </li></ul><ul><li>Market differentiation </li></ul><ul><li>Core competence development </li></ul><ul><li>Planning </li></ul><ul><li>Strategic planning (goals and objectives) </li></ul><ul><li>Strategic financial management </li></ul><ul><li>Human Capital </li></ul><ul><li>Leadership team development </li></ul><ul><li>Skills and knowledge development (technical and social) </li></ul><ul><li>Reward Systems </li></ul><ul><li>Organizational Capital </li></ul><ul><li>Developing shared values & culture </li></ul><ul><li>Organizational design </li></ul><ul><li>Facilities and work environment design </li></ul><ul><li>Knowledge management systems </li></ul>PURPOSE PEOPLE <ul><li>Lean and Continuous Improvement : </li></ul><ul><li>Organization-wide improvement processes </li></ul><ul><li>Quality practices & certifications (ISO, QS) </li></ul><ul><li>Lean enterprise processes (one piece flow; pull systems; set up reduction; in-process inspection; standardized work; preventive maintenance) </li></ul><ul><li>Visual Management; scoreboards and Indicators </li></ul><ul><li>Core Processes </li></ul><ul><li>Customer Management </li></ul><ul><li>Innovation </li></ul><ul><li>Operations; Supply Chain </li></ul><ul><li>Social and Regulatory </li></ul><ul><li>Support and Administration </li></ul><ul><li>Technology </li></ul><ul><li>Information technologies </li></ul><ul><li>Process technologies </li></ul>PROCESS Innovation processes need to be treated with the same level of discipline as other business processes.

10. Robert Kaplan’s Strategy Maps <ul><li>Robert Kaplan is perhaps best known for his work on balanced scorecards. He has been one of the leading advocates of disciplined systems for developing, tracking and acting on a balanced set of Key Performance Indicators (KPIs) that reflect a company’s strategic priorities. </li></ul><ul><li>Kaplan’s most recent book, Strategy Maps , emphasizes two important points: </li></ul><ul><ul><li>Linking KPIs to a company’s desired end market positioning (strategy); and </li></ul></ul><ul><ul><li>Differentiating KPIs by which dimension of the enterprise they are designed to provide improvement data for. </li></ul></ul><ul><li>Kaplan differentiates between four different “perspectives” in a firm. Each perspective relates to one dimension of company success: </li></ul><ul><ul><li>The financial perspective that concerns itself with the long-term development of shareholder value. </li></ul></ul><ul><ul><li>The customer perspective that concerns itself with how the organization and its products and services are perceived by its customer segments. </li></ul></ul><ul><ul><li>The internal perspective that concerns itself with the performance of a company’s business processes. </li></ul></ul><ul><ul><li>The learning and growth perspective that concerns itself with the building of information, human and social capital. </li></ul></ul><ul><li>These four “perspectives” correlate closely to the Council’s world class model of Purpose (Financial and Customer perspectives); Process (Internal perspective); and People (Learning and Growth perspective). </li></ul><ul><li>Within the Internal Perspective, Kaplan identifies four different kinds of business processes, one of which is Innovation: </li></ul><ul><ul><li>Operations management (supply; production; distribution) </li></ul></ul><ul><ul><li>Customer management (selection; acquisition; retention; growth) </li></ul></ul><ul><ul><li>Innovation (opportunity identification; portfolio management; new product development; product launch) </li></ul></ul><ul><ul><li>Regulatory and social processes (environment; safety and health; employment; community) </li></ul></ul><ul><li>Graphic descriptions of Kaplan’s strategy maps, including the detail on Innovation processes, are provided on the following two pages. </li></ul>

11. Kaplan’s Strategy Maps Create Long Term Shareholder Value Enhance Customer Value Expand Revenue Opportunities Increase Asset Utilization Improve Cost Structure Growth Strategy Productivity Strategy Price Quality Availability Selection Functionality Service Partnership Brand Product and Service Attributes Relationships Image <ul><li>Operations Management Processes </li></ul><ul><li>Supply </li></ul><ul><li>Production </li></ul><ul><li>Distribution </li></ul><ul><li>Risk management </li></ul><ul><li>Customer Management Processes </li></ul><ul><li>Selection </li></ul><ul><li>Acquisition </li></ul><ul><li>Retention </li></ul><ul><li>Growth </li></ul><ul><li>Innovation Processes </li></ul><ul><li>Opportunity identification </li></ul><ul><li>R&D portfolio </li></ul><ul><li>New Product design and development </li></ul><ul><li>Launch </li></ul><ul><li>Regulatory and Social Processes </li></ul><ul><li>Environment </li></ul><ul><li>Safety and health </li></ul><ul><li>Employment </li></ul><ul><li>Community </li></ul>HUMAN CAPITAL INFORMATION CAPITAL ORGANIZATIONAL/SOCIAL CAPITAL FINANCIAL PERSPECTIVE (Purpose) CUSTOMER PERSPECTIVE (Purpose) INTERNAL PERSPECTIVE (Process) LEARNING & GROWTH PERSPECTIVE (People) Source: Strategy Maps – Converting Intangible Assets Into Tangible Outcomes , Robert Kaplan and David Norton, 2004

12. The Innovation Strategy Map Create Long Term Shareholder Value Improved Gross Margin on New Products Revenue from New Products Manage Total Life Cycle Production Costs Growth Strategy Productivity Strategy Speed to Market Unique Performance Features <ul><li>Identify the Opportunities </li></ul><ul><li>Meet current customer requirements </li></ul><ul><li>Anticipate unarticulated needs </li></ul><ul><li>Discover new opportunities </li></ul><ul><li>Manage the Portfolio </li></ul><ul><li>Select projects </li></ul><ul><li>Manage the mix of projects </li></ul><ul><li>Extend products to new applications </li></ul><ul><li>Collaborate </li></ul><ul><li>Design and Develop </li></ul><ul><li>Manage products through the development stages </li></ul><ul><li>Reduce the development time </li></ul><ul><li>Reduce development costs </li></ul><ul><li>Launch </li></ul><ul><li>Achieve ramp-up schedule </li></ul><ul><li>Attain production cost, quality, cycle time targets </li></ul><ul><li>Achieve initial sales gain </li></ul><ul><li>Human Capital </li></ul><ul><li>Multi-disciplinary skills </li></ul><ul><li>Key technical talent </li></ul><ul><li>Ability to work across disciplines </li></ul>FINANCIAL BENEFITS OF INNOVATION CUSTOMER VALUE PROPOSITION INNOVATION PROCESSES INNOVATION SUPPORT INFRASTRUCTURE Source: Strategy Maps – Converting Intangible Assets Into Tangible Outcomes , Robert Kaplan and David Norton, 2004 Extend Into New Markets <ul><li>Information Capital </li></ul><ul><li>Design and simulation technology </li></ul><ul><li>Knowledge management systems </li></ul><ul><li>Product lifecycle management (PLM) technology </li></ul><ul><li>Organizational Capital </li></ul><ul><li>Culture of innovation </li></ul><ul><li>Teamwork and networks </li></ul><ul><li>Strategic alliances </li></ul>

13. From Lean Manufacturing to Lean Enterprise

14. Different Levels of Lean Focus <ul><li>The lean philosophy is typically applied at progressively more inclusive levels of the company. These include: </li></ul><ul><li>Lean Manufacturing. This is often as far as many companies get. The focus is on the shop floor, from point of order entry to shipping of the product to the customer. </li></ul><ul><li>Lean Enterprise. A lean enterprise focus extends the lean philosophy to other functions within the company, including sales and marketing; product development and engineering; supplier development; finance and accounting (the focus of this study); human resources; etc. </li></ul><ul><li>Lean Extended Enterprise. The “extended lean enterprise” refers to the company’s full value chain, from raw material through the full lifecycle of the product (disposal and recycling). It typically looks beyond the part of the value chain currently controlled by the company for potential opportunities to grow share of the value chain through innovation and waste elimination. </li></ul><ul><li>As a company migrates from manufacturing to enterprise to extended enterprise, the focus of lean typically becomes less operational and more strategic. One way to think about the work of innovation in a company is as the extension of the lean philosophy of waste elimination to the full enterprise, and especially to the strategy, R&D, and Sales and Marketing functions . </li></ul>Lean Enterprise Extended Lean Enterprise Lean Manufacturing Shipping Sales & Marketing Customer Service R&D and Engineering Administrative Support Supply Chain Customers and Markets

15. The Extended Enterprise Tier 1 Tier 1 Tier 1 T2 T2 T2 T2 T2 T2 T2 T2 T2 T3 T3 T3 T3 T3 T3 T3 T3 T3 T3 T3 T3 T3 T3 T3 OEM Customer Retailer Web Site Warehouse Dealer Distributor Direct Customer Customer Customer The “lean enterprise” looks at improvement in every step of the value chain, from raw material to end consumer use and disposal.

16. The “Lean Enterprise” <ul><li>Companies that have been applying the lean philosophy to their manufacturing operations eventually find that the “root cause” of waste is often in non-manufacturing activities (see box at right) that are off the shop floor. </li></ul><ul><li>What is common about most of the “eight deadly wastes” is that they are all related to the making of physical objects. Many of these other processes involve knowledge work and the making of intellectual products that embody ideas . These processes create some different kinds of wastes; for instance, the wastes generated by: </li></ul><ul><ul><li>Not understanding customer requirements. </li></ul></ul><ul><ul><li>Targeting the wrong customers. </li></ul></ul><ul><ul><li>Not having the right information for decision-making. </li></ul></ul><ul><ul><li>Poor communications across the extended enterprise. </li></ul></ul><ul><ul><li>Unclear articulation of strategy. </li></ul></ul><ul><ul><li>Unclear company values. </li></ul></ul><ul><ul><li>Destroying trust. </li></ul></ul><ul><ul><li>Making product designs that are hard to build. </li></ul></ul><ul><ul><li>Not tapping the innovation and creativity of the supply base. </li></ul></ul><ul><li>In many instances, these are wastes of “omission” as well as “commission.” They involve missing out on opportunities, as opposed to executing an existing process inefficiently. </li></ul><ul><li>Potential Sources of Waste Outside of Manufacturing: </li></ul><ul><li>Market selection </li></ul><ul><li>Customer selection </li></ul><ul><li>Positioning and differentiation </li></ul><ul><li>Product line decisions </li></ul><ul><li>Product development </li></ul><ul><li>Product design and engineering </li></ul><ul><li>Sales and marketing </li></ul><ul><li>Customer relationship management </li></ul><ul><li>Customer service </li></ul><ul><li>Supplier selection and development </li></ul><ul><li>Support infrastructure </li></ul><ul><li>Finance and accounting </li></ul>

17. Waste Elimination Opportunities <ul><li>PRODUCT DESIGN & DEVELOPMENT </li></ul><ul><li>VOC </li></ul><ul><li>Product functions </li></ul><ul><li>Engineering specs </li></ul><ul><li>Component design </li></ul><ul><li>Production and tooling engineering </li></ul><ul><li>Process design </li></ul><ul><li>PRODUCTION PLANNING </li></ul><ul><li>Set the schedule </li></ul><ul><li>Plan production </li></ul><ul><li>Monitor on-time </li></ul><ul><li>PURCHASING </li></ul><ul><li>Select suppliers </li></ul><ul><li>Negotiate volume & price </li></ul><ul><li>Issue POs </li></ul><ul><li>Inspect in-coming </li></ul><ul><li>Issue payment </li></ul><ul><li>MANUFACTURING </li></ul><ul><li>Maintenance </li></ul><ul><li>Manufacturing Engineering </li></ul><ul><li>Quality Control </li></ul><ul><li>Production processes </li></ul><ul><li>DELIVERY & PAYMENT </li></ul><ul><li>Shipping & logistics </li></ul><ul><li>Invoicing </li></ul><ul><li>Collections </li></ul><ul><li>Customer service </li></ul><ul><li>SALES AND MARKETING </li></ul><ul><li>Marketing </li></ul><ul><li>Leads and prospects </li></ul><ul><li>Key account management </li></ul><ul><li>Price negotiations </li></ul><ul><li>Order entry </li></ul>SUPPORT AND OVERHEAD <ul><li>HUMAN RESOURCES </li></ul><ul><li>Hiring </li></ul><ul><li>Evaluation </li></ul><ul><li>Development </li></ul><ul><li>FINANCE & ACCOUNTING </li></ul><ul><li>Transactions </li></ul><ul><li>Statements </li></ul><ul><li>Reporting </li></ul><ul><li>INFORMATION TECHNOLOGY </li></ul><ul><li>ERP Systems </li></ul><ul><li>Desktop </li></ul><ul><li>Web transactions </li></ul><ul><li>PLANNING & STRATEGY </li></ul><ul><li>Strategic planning </li></ul><ul><li>Market research </li></ul><ul><li>Mergers & acquisitions </li></ul><ul><li>OTHER </li></ul><ul><li>Legal & regulatory </li></ul><ul><li>Real estate </li></ul><ul><li>Shareholder relations </li></ul><ul><li>Public relations </li></ul>The vast majority of traditional lean activities are focused in these areas. Innovation emphasizes improvement in these areas. <ul><li>QUOTING & PROGRAM MGT </li></ul><ul><li>Product costing </li></ul><ul><li>BOM </li></ul><ul><li>Routing </li></ul><ul><li>Overhead allocations </li></ul><ul><li>Quote terms </li></ul><ul><li>Program management </li></ul><ul><li>Product launch </li></ul>

18. Innovation Practices and Frameworks

19. Innovation Drivers <ul><li>The “innovation imperative” is being driven by a number of broad changes in the business environment. The changes are accelerating change, resulting in a state of “continuous disequilibrium” in industries and markets. In this environment, innovation skills are becoming as much of a requirement for success as operational excellence. These trends include: </li></ul><ul><li>Knowledge Economy. Higher levels of education globally, and rapid advances in knowledge at all levels of the society and the economy result in “knowledge content” accounting for an increasingly larger percentage of GDP. </li></ul><ul><li>Connectivity. Higher levels of connectivity in the economy, largely due to information technology advances, create: </li></ul><ul><ul><li>More rapid diffusion of knowledge and ideas </li></ul></ul><ul><ul><li>More discriminating customers, who change their requirements more rapidly </li></ul></ul><ul><li>Flexibility. New business designs and communications systems create an ability to rapidly form novel combinations of all the elements of the value chain – people; capital; hard assets; and knowledge. </li></ul><ul><li>Globalization . The spreading of market economies both creates new opportunities to sell innovation and creates more competition, requiring higher levels of innovation to succeed. </li></ul>

20. What is Innovation? “ Innovation is the process whereby ideas for new (or improved) products, processes or services are developed and commercialized in the marketplace. The process of innovation affects the whole business – not just specific products, services or technologies.” (Industry Canada) “ Innovation – A new idea, method or device. The act of creating a new product or process. The act includes invention as well as the work required to bring a new idea or concept into final form.” (PDMA – Handbook of New Product Development) “ Innovation is the specific tool of entrepreneurs, the means by which they exploit change as an opportunity for a different business or a different service. It is capable of being presented as a discipline, capable of being learned, capable of being practiced.” (Peter Drucker, Innovation and Entrepreneurship , 1985, P. 20.)

21. A Broad Look at Innovation “ Innovation is not just about technology development. Innovation had to be in the way we did our financing, the way we did our marketing and marketing relationships, the way we created strategic partnerships, the way we dealt with government. The innovative nature of doing business for us had to be pervasive in the company, and had to look at more than just technology development .” (Firoz Rasul, Chairman of Ballard Power Systems, Inc., quoted in “The Practice of Innovation – Seven Canadian Firms in Profile”, Industry Canada, 2003) “ If you assume innovation is merely a synonym for new products, think again . What about strategy innovation, such as entering new markets with your existing products? What about supply chain innovations? What about value-adding service enhancements that allow real time responsiveness, make the customer’s life easier, and otherwise take on the customer’s problems in ways the competition is unable or unwilling to do? Such strategy innovations are a bold new frontier that many firms have never pursued. ” (“American Manufacturers – It’s Time to Innovate or Evaporate”, Robert Tucker, www.innovationtools.com , 2004)

22. Different Dimensions of Innovation <ul><li>The term “innovation” is often mistakenly associated primarily with new products or technology. The reality is, however, that innovation relates to a broad range of dimensions of a business, including: </li></ul><ul><li>Products. Innovations in products (especially consumer products) are the most visible, especially technology-related examples such as computers, cell phones, and other communications devices. </li></ul><ul><li>Basic production technology. These innovations relate to how things are made, and include new advances in materials, machining and forming, automation, etc. The fields of industrial bio-technology, (in which biological processes replace artificial processes), and nano and micro-technology (in which molecular and sub-molecular production processes are employed) are two prominent examples. </li></ul><ul><li>Services. Service innovation is obviously critical for companies that are in the service business. However, in many manufacturing environments, the services that surround the product are as important, or often more important than the product itself. </li></ul><ul><li>Customer experience. While it is closely related to both products and services, the total integrated customer service offers many opportunities for innovation. It is often how the customer experiences the full range of “touch points” with an organization that differentiate one company from another. </li></ul><ul><li>Business processes. Innovation in business processes that are not visible to the customer are often a source of significant market differentiation. Wal-Mart, for instance, relies primarily on its sophisticated logistics and communications systems to maintain its lower prices. </li></ul><ul><li>Business model or design. In some instances, innovation affects a broad enough range of business dimensions (supply chain management, product/service design, production, sales and marketing, distribution, pricing, etc.) that a company can be described as having created a fundamentally new business design for a sector. </li></ul>

23. Different Dimensions of Innovation These are all illustrations that are easy to name, but there are countless other instances where the creativity to execute a modest change in a design, process, etc., results in an incremental improvement that creates value: improved performance; lower cost; better quality; and so on. The right culture will yield an array of innovations on the spectrum from continuous improvement to breakthrough products. Category Opportunities for Innovation Examples of Successful Innovation Product and Services <ul><li>Design </li></ul><ul><li>Features </li></ul><ul><li>Technology </li></ul><ul><li>Quality </li></ul><ul><li>Price </li></ul><ul><li>Adjustable pedals </li></ul><ul><li>Electrochromic mirrors </li></ul><ul><li>Telematics </li></ul><ul><li>Tire pressure monitors </li></ul><ul><li>Fold-flat seats </li></ul>Manufacturing Processes <ul><li>Equipment </li></ul><ul><li>Technology </li></ul><ul><li>Hydroforming </li></ul><ul><li>Fineblanking </li></ul><ul><li>Laser welding </li></ul><ul><li>Digital prototyping </li></ul>Materials <ul><li>Composition </li></ul><ul><li>Properties </li></ul><ul><li>Powder metal </li></ul><ul><li>Quiet Steel </li></ul><ul><li>Nano structure plastics </li></ul>Business Practices <ul><li>Management Practices </li></ul><ul><li>Business Design </li></ul><ul><li>Lean manufacturing </li></ul><ul><li>Customer relationship management </li></ul><ul><li>Strategic alliances </li></ul><ul><li>Corporate development </li></ul><ul><li>Value chain realignment </li></ul>

24. Different Levels of Innovation <ul><li>More complexity </li></ul><ul><li>More strategic risk </li></ul><ul><li>Higher levels of management attention </li></ul><ul><li>Longer cycle times </li></ul>New Markets and Customers New Products and Processes Cross-Company Process Redesign Continuous Improvement within Processes Strategic Business Redesign In addition to being differentiated by what aspect of the business they affect, innovations can be differentiated by the breadth of their scope. Innovations can range everywhere from a significant improvement in a business process, to a radical redesign of the company’s entire business model. As the scope of the innovation increases, the level of complexity and risk associated with it also increases.

25. Another Way to View Innovation New Current Current New Markets & Customers Products & Services Emerging Emerging Advanced R&D Continuous Improvement New Business Designs <ul><li>More complexity </li></ul><ul><li>More strategic risk </li></ul><ul><li>Higher levels of management attention </li></ul><ul><li>Longer cycle times </li></ul>Innovations can also be looked at from the perspective of the interaction between products/services and markets/customers. At one end of the spectrum, continuous improvement is focused on improving the delivery of current services to current customers. At the other extreme, a new business design might be focused on delivering fundamentally new products and services to a new customer segment.

26. Deloitte’s Study of the “Innovation Paradox” <ul><li>Based on research from 650 leading manufacturers worldwide. </li></ul><ul><li>Manufacturers cite launching new products and services as the No. 1 driver of growth. </li></ul><ul><li>They expect new product revenue to increase to 35% of sales by 2006, from 21% in 1998. </li></ul><ul><li>By 2010, products representing more than 70 percent of their sales today will be obsolete due to changing customer demands and competitor offerings. </li></ul><ul><li>Despite these facts, they view supporting product innovation as one of the least important priorities in their company. </li></ul><ul><li>Most manufacturers have not developed reliable systems for bringing new products and services to market. </li></ul><ul><li>50% to 70% of all new product introductions fail. </li></ul><ul><li>Failures to successfully launch new products are due to: </li></ul><ul><ul><li>Insufficient information on customer needs </li></ul></ul><ul><ul><li>Insufficient supplier capabilities </li></ul></ul><ul><ul><li>A reluctance to allocate additional spending on R&D </li></ul></ul><ul><ul><li>Uncoordinated approaches to innovation across product, customer and supply chain operations. </li></ul></ul>Source: “Mastering the Innovation Paradox”, Deloitte, 2004, www.deloitte.com/globalbenchmarking

27. Innovation In the Auto Supply Base <ul><li>Based on a survey of over 80 automotive suppliers on a global basis, McKinsey & Company analyzed the strategies that led to “profitable growth” in the industry. They found the companies that were able to achieve both growth and profits pursued three kinds of strategies – expanding their role with the OEMs; innovating ; and creating global research, production and sales networks. The characteristics of the innovators included: </li></ul><ul><li>More profitable. The more innovative companies averaged twice the return on sales of their less innovative competitors. </li></ul><ul><li>Value-focused. Innovators focus on value-based competition, not pure price plays. </li></ul><ul><li>Growth oriented. They establish very aggressive growth targets, and grew at rates four times higher than the non-innovators. </li></ul><ul><li>Focus on new products. They have a bias for new products and big innovations. Innovators spend far more on new products (vs. product improvements) compared to their competitors (40% vs. less than 25%). </li></ul><ul><li>Disciplined business processes. Innovators have business processes to support the innovation process that are designed for rapid information flows, including: </li></ul><ul><ul><li>Disciplined selection of ideas based on deep knowledge of customers </li></ul></ul><ul><ul><li>Rigorous implementation of selected ideas </li></ul></ul><ul><ul><li>Systemic use of development tools, such as FMEA, design reviews, CAE, etc. </li></ul></ul><ul><ul><li>Full-time staffing assignments over the life of the project </li></ul></ul><ul><ul><li>Use of cross-functional teams </li></ul></ul><ul><ul><li>More joint development projects with customers and suppliers </li></ul></ul><ul><ul><li>Greater use of parallel product development processes, and the use of program management systems; rapid prototyping and simultaneous engineering </li></ul></ul><ul><li>Training and reward systems. Innovators invest in training for those doing development, and use reward systems that incentivize innovation. </li></ul>(Source: “Profitable Growth Strategies in the Automotive Supply Industry”, McKinsey & Co,, 1999)

28. Innovation Examples In West Michigan Company Innovation Examples Rapid Engineering <ul><li>Bio-fuel from waste kitchen grease </li></ul><ul><li>Building pressurization for HVAC systems </li></ul>Cascade Engineering <ul><li>Nanocomposite plastic </li></ul><ul><li>High-pressure injection molding with in-mold vinyl </li></ul>DeWitt Barrel <ul><li>Advanced technology barrel reconditioning and ultrasonic leak testing </li></ul><ul><li>Custom-designed wastewater treatment system </li></ul>Gentex <ul><li>Automatic dimming mirrors </li></ul><ul><li>Mirrors that combine telecommunications and information systems (telematic mirrors) </li></ul>The Holland Group <ul><li>No-lube fifth wheel that eliminates the need for lubrication </li></ul>Jedco <ul><li>Alternative to chemical milling for lightweight aerospace materials </li></ul>Exterior Technologies <ul><li>New lightweight exterior wall panel system </li></ul>

29. Gentex Case Study <ul><li>Gentex Corporation in Zeeland, Michigan stands out in the automotive sector as a high growth company that has achieved extraordinary levels of profitability due to its product innovation and technology leadership. Gentex produces mirrors and related telematics and lighting systems for the automotive market. </li></ul><ul><li>In 2001, the Center for Automotive Research conducted an assessment of Gentex’s innovation systems. They found that there were four “core values” that contributed to their innovation capabilities: </li></ul><ul><li>Continuous business improvement . Gentex has deeply internalized the continuous improvement business philosophy and rigorously applies it to all business processes, not just manufacturing. </li></ul><ul><li>Product and process innovation . The core values of the founder – an inventor with practical business sense – permeate the organization. The urgency of being the innovation leader is palpable throughout the company. And Gentex focuses its innovation as much on business processes, as on products and technology. </li></ul><ul><li>Entrepreneurship . Gentex has developed an entrepreneurial culture that rewards risk taking, and rewards product outcomes and knowledge transfer. </li></ul><ul><li>Customer focus . Gentex is obsessed with understanding customer needs and opportunities, but are able to distinguish genuine need from every request the comes down the pike. </li></ul><ul><li>Numbers You Can Be Proud Of: </li></ul><ul><li>$470 million in sales </li></ul><ul><li>22.7% Net Profit </li></ul><ul><li>16.2% five year average growth rate </li></ul>(Source: “Gentex Corporation – Leveraging Intangible Assets Through Relationships”, Center for Automotive Research, Sept., 2001) <ul><li>Gentex’s Core Values Are Reflected in its Key Innovation Support Systems: </li></ul><ul><li>Reward systems that provide generous financial and social reinforcement for innovation. </li></ul><ul><li>Communication systems that emphasize personal communication through a wide variety of formal and informal systems. </li></ul><ul><li>Information technology systems that are kept modest and are designed to support, not replace personal communication. </li></ul><ul><li>“ After conducting 13 interviews across nine functions, we have concluded that what Gentex is particularly good at is ‘information transparency.’” </li></ul>

30. Gentex Quotes from the CAR Study Focus on Financial Success “ The link of entrepreneurship to commercialization and commercialization to cash is communicated and consistently acted upon from the CEO through the entire management ranks and onto the production floor.” Walking the Talk “ It is not uncommon for a company’s stated core values to be very different from the actions practiced by management. This is not the case at Gentex. The company, through an effective incentive and reward structure and strong leadership, has established a set of values that is clear to all employees and practiced as a normal course of events.” A Clear Innovation Imperative “ The drive to constantly innovate product and process technology is strongly evident throughout the company. All managers understand the direct connection between the company’s position as a technology leader and the ability to maintain their business model. ‘A sense of urgency’ and ‘wolves nipping at our heel’ are phrases used to describe the business environment.” Support for Risk Taking “ The Gentex environment nurtures rebels – individuals that stand up and take calculated risks.” Support for Collaboration “ Since the Gentex culture thrives on collaboration, persons are quickly put ‘in the out’ if they appear to be hording information, human resources, or capital.” Reward for Innovation “ Gentex is known for making its reward systems as generous as possible to recognize achievement and employee contribution. While economic rewards are usually the most effective and visible type of employee motivation, Gentex has also developed a culture that rewards in non-economic ways.” Building Relationships “ Building relationships is a company strength…Two critical attributes support relationship building and collaboration: a flat organizational structure and extremely low employee turnover.” Investing in R&D “ Gentex invests between five percent and six percent of net sales in research and development. This investment is generally fixed – communicating the importance of an R&D flow.” Protecting Core Competencies “ Innovation activity takes place within Gentex – outsourcing is used sparingly in temporary overflow or narrowly defined expertise needs. For example, process innovation is so important and so core to its competitive strengths that Gentex designs all of its own testing equipment in-house.” Integrating R&D and Production Knowledge “ The combination of research functions with current production activities is the second driver of innovation. R&D claims ‘they all do double duty,’ split between research overhead accounts and current production accounts. This provides an important bridge between the labs and the factories allowing for the rapid infusion of research developments into production.”

31. From the Founder Himself (Presentation by Fred Bauer, founder and President of Gentex, to the Original Equipment Suppliers Association annual automotive conference, November 8, 2004, Dearborn, Michigan.) On the Attitude Required for Success: “ I always feel we are going to win; I just don’t know how. I am a very optimistic person.” On the Core Role of Manufacturing: “ We succeed because Gentex is passionate about manufacturing. We love manufacturing. Our proprietary manufacturing processes are as important as our proprietary products. We build all our own production equipment and testing equipment, and our production lines are based on flexible generic automation that can be easily reconfigured. We emphasize high levels of automation (which makes us less subject to low wage competition); very quick changeovers; and software-drive configurations. We have over 1000 process-related trade secrets current in use.” On Hiring the Right People: “ We make room in our organization for really smart people. We tend to hire them when and where we find them, whether or not we have a job for them. And we build the organization around their strengths, which sometimes means we have to tolerate some unorthodox organizational designs.” On Combining Collaboration and Independence: “ An irreverent yet cooperative culture lets spirits soar. We encourage out of the box thinking that pushes the boundaries, but we also expect people to be team players.”

32. Innovation Strategies

33. The Macro-Level Innovation “Pipeline” It is generally at the applied R&D stage that the risk/reward ratio improves to the point that private companies are willing to begin to make R&D investments in the hope of translating them into commercial advantage. This is where the the innovation pipeline intersects with the product development process of companies. Basic Research Generic Technology Research Applied Research Development Commercialization New ideas that form the basis for widespread market innovations go through several typical phases, including: Original experimental and theoretical investigations that advance knowledge in specific fields Research that develops generic technologies that are not specific to a product or process Research designed to develop knowledge relevant to existing or planned commercial products, processes, systems, or services The translation of research into specific product/process/ service designs including prototypes The process of introducing an innovation to the market place, and investing in its on-going improvement Typical Company Product Development Process These stages of innovation typically take place in public and private R&D labs, and in universities.

34. Five Strategies for Innovation The elements of an innovation system for a company can be implemented through five basic innovation strategies. These include: 1. Creating an innovation vision. The first step is to create a vision for innovation in your company that is directly linked to your overall business strategy. It requires being clear about the role of innovation in your company and how innovation supports your desired long-term market positioning and growth. 2. Creating the innovation culture. The work of creating an innovation culture is no different than the work of creating any other kind of culture in a company (for instance, lean thinking). It requires a clear set of principles; modeling by leadership; communication and reward systems. 3. Creating the innovation processes. This is the “guts” of your innovation system – the development of disciplined business processes whose intent is to create a reliable stream of innovations for your company. These processes have to be treated with the same level of expectations for process discipline that you apply to your operations processes. The four core processes include: identifying innovation opportunities; managing the portfolio of innovation projects; designing and developing new products and services; and launching new products and services. 4. Creating innovation structures. Your innovation processes need to be supported by organizational structures and other support systems (for instance, information technology; training; team structures). These systems need to be tailored to the unique needs of the work of innovation. 5. Measuring innovation results. The adage that: “You get what you measure” applies as much in innovation as in other business processes. Your balanced scoreboard needs to be supplemented with both process and end result measurements, and these measures need to be integrated into ongoing management review processes.

35. Summary of Innovation Strategies 1. Define the role of innovation in your company 2. Create the innovation culture 3. Create the innovation processes 4. Create the innovation structures and support systems. 5. Measure the innovation results. <ul><li>Clear “theory of the business” </li></ul><ul><li>Clear differentiation and positioning </li></ul><ul><li>Theory about which customers will drive growth </li></ul><ul><li>Ideas about opportunities for innovation </li></ul><ul><li>Clear screens and criteria </li></ul><ul><li>Reward risk taking and creativity </li></ul><ul><li>Celebrate innovation </li></ul><ul><li>Open communication </li></ul><ul><li>Look outside the company </li></ul><ul><li>Clear management leadership </li></ul><ul><li>Corporate champion </li></ul><ul><li>Product managers </li></ul><ul><li>Product champions </li></ul><ul><li>Innovation teams </li></ul><ul><li>Technology brokers </li></ul><ul><li>Outside partnerships </li></ul><ul><li>Skill development </li></ul><ul><li>Reward systems </li></ul><ul><li>Technology infrastructure & tools </li></ul><ul><li>Intellectual property management systems </li></ul><ul><li>Define the measures </li></ul><ul><li>Develop measurement plans </li></ul><ul><li>Display the measures </li></ul><ul><li>Review as part of management review </li></ul><ul><li>Link to performance evaluation and rewards </li></ul><ul><li>Opportunity identification </li></ul><ul><li>Opportunity selection </li></ul><ul><li>Development & testing </li></ul><ul><li>Production & launch </li></ul><ul><li>Portfolio management </li></ul>

36. All the Elements of the Innovation System Basic, Generic and Applied Research YOUR INNOVATION VISION INNOVATION PROCESSES 1. Opportunity Identification 2. Opportunity Selection 3. Development & Testing 4. Production & Launch 5. Managing the R&D Portfolio Innovation Culture Innovation Structures Innovation Measurements INNOVATION SUPPORT SYSTEMS

37. Innovation Strategies & The World Class Model Innovation Strategy Purpose Process People 1. Creating an innovation vision. X 2. Creating the innovation culture. X 3. Creating the innovation processes. X 4. Creating the innovation structures. X 5. Measuring innovation results. X

38. 1. Creating an Innovation Vision

39. Defining The Role of Innovation in Your Company <ul><li>Your approach to innovation needs to be driven by your “theory of the business.” </li></ul><ul><li>You need a clear theory about where the best opportunities are for innovation in your markets (product; process; business design). </li></ul><ul><li>Based on your theory about your business, you need to create clear screens and criteria for your innovation efforts (communicable visions and action plans). </li></ul><ul><li>Elements of A “Theory of Your Business” </li></ul><ul><li>What business are you in? </li></ul><ul><li>What is your desired market positioning? </li></ul><ul><li>What is your basis for differentiation? </li></ul><ul><li>Which customers will drive your growth? How are their priorities changing? </li></ul><ul><li>Who are your competitors? And how do you best defeat them? </li></ul>

40. Good Strategic Planning Accelerates Innovation A robust and disciplined strategic planning process creates the context for your innovation strategy. It describes the “strategic territory” that your company occupies now, and intends to occupy in the future. Business Description Products, Customers, Competitors, Capabilities Industry Environment Scale and Scope of the market, Trends, Competitive Environment, Regulatory Issues, etc . Existing and Potential Customers Based on Product, Process, Management and Buying Criteria Market Segmentation Development of Strategies Overall and within Targeted Market Segments Positioning Mission Statement Values Goals Objectives Action Plans Performance Measurements Faster and more effective decisions about where to focus your innovation strategies Strategic Plan Elements Situation Analysis

41. Do it now, or do it later… <ul><li>The value of a rigorous annual strategic planning process will show up in multiple elements of the new product/service planning process. In essence, each new product or service project will require its own “mini strategic plan” for effective implementation. These plans can draw on the following resources developed during the strategic planning process: </li></ul><ul><ul><li>Strategic positioning. A robust and on-going dialogue about the company’s positioning in the market, and the current strengths and weaknesses, will surface a set of hypotheses about where the opportunities are for extending core competencies into new domains, or creating whole new markets and categories of competition. This will help define the “hunting grounds” for the innovation strategy. </li></ul></ul><ul><ul><li>Market and segment analysis. A strong strategic planning process will have developed a good set of macro-level market and segment analyses (size; growth; risks; opportunities; barriers to entry and exit; lifecycle stage; competitive drives; external trends; etc.) that can inform the more micro-level analysis that will need to be done for each new product/service project. </li></ul></ul><ul><ul><li>Customer analysis. Work done to better understand your key customers (whether by segment; by product; or by key account) creates a jumping off point for the understanding of customer requirements that is needed to drive innovation. For companies whose customer base follows the 80/20 rule – the key account plans you develop for your lead customers should be a rich source of inspiration for innovation ideas. </li></ul></ul><ul><ul><li>Competitor analysis. A sound understanding of your competitors and how you stack up against them will help you decide where you need to innovate for defensive vs. offensive reasons; where your competitors are vulnerable; and what the possible sources of unexpected competition might be. </li></ul></ul><ul><ul><li>Core competencies. A deep understanding of your core competencies (and especially a shared “mental model” about this within the leadership team) enables you to think creatively about how you might migrate within your value chain, or across it to another value chain. It also helps to keep your innovations focused “close enough to home” so that they leverage knowledge and investments you have already made. </li></ul></ul><ul><li>If you have not done your strategy work up front, you will likely find that this becomes apparent as you try to make choices about your innovation portfolio. Many companies find themselves driven back into deeper strategic thinking by the need to have more clarity in their innovation agenda. </li></ul>

42. Strategy Innovation (Adapted from: Johnson and Bate, The Power of Strategy Innovation , 2003) <ul><li>Strategy innovation means: </li></ul><ul><ul><li>Shifting a corporation’s business strategy in order to create new value for both the customer and the corporation. </li></ul></ul><ul><ul><li>Applying innovative thinking to the entire business model of a company, not just to its products or inventions. </li></ul></ul><ul><ul><li>Finding a way to “change the rules of the game” so that your company’s products, competencies and assets provide you with a competitive advantage in the marketplace. </li></ul></ul><ul><ul><li>Managing the future; it is not a simple extension of past business strategies. </li></ul></ul><ul><li>Strategy innovation is the “fuzzy front end” of a robust strategic planning process. Unfortunately, most strategic planning processes are not well structured to support dialogue and exploration about strategic innovation. Instead, they tend to be focused on extending the companying historical approaches and practices into the future. </li></ul><ul><li>The strategy innovation process should precede the strategic planning process. </li></ul>“ The strategic planning process in most companies is rarely an exercise in creating new and effective strategies for the future of the company. Instead, the strategic planning process is more often one that perpetuates, and at best revises, the current strategy every year.” (p. 29) Traditional Strategic Planning Strategy Innovation Analytical Creative Numbers-driven Insight driven Company-centric Market-centric Logical/linear Heuristic/iterative Today to tomorrow Tomorrow to today Extend current value Create new value Fit the business model Create a new business model

43. Ten Strategic Questions to Ask <ul><li>Mission. What business are we in? </li></ul><ul><li>Vision. Where do we want to be in 5-10 years? </li></ul><ul><li>Values. What principles do we want to guide our behavior? </li></ul><ul><li>Customers. Which customers do we want to serve? Which ones will drive value growth? How are their priorities changing? </li></ul><ul><li>Product and Service Scope. What products or services do we want to offer? What core competencies do we need? </li></ul><ul><li>Differentiation. What is our basis for market differentiation? Who are our key competitors? Are we really different? </li></ul><ul><li>Profits. What is our profit model? What areas of our business are our customers willing to let us make money? </li></ul><ul><li>Processes. What are our core processes? What needs transforming? </li></ul><ul><li>Scoreboards. What indicators will we use to measure success? </li></ul><ul><li>Goals, Objectives and Action Plans. How will we incrementally move towards our vision? </li></ul>(Source: IRN, Inc., “Strategic Planning Essentials”)

44. Putting the Strategic Plan Pieces Together <ul><li>Product Dev. </li></ul><ul><li>Production </li></ul><ul><li>Purchasing </li></ul><ul><li>Capital goods </li></ul><ul><li>Go-To-Market </li></ul><ul><li>Org. Design </li></ul><ul><li>Market position/ differentiation </li></ul><ul><li>Core competence </li></ul><ul><li>Core products </li></ul><ul><li>Product line </li></ul><ul><li>Profit model </li></ul><ul><li>Market segmentation </li></ul><ul><li>Market analysis </li></ul><ul><li>Customer selection </li></ul><ul><li>Competitor analysis </li></ul>SCOREBOARD: Cost, Quality, Delivery, Morale Purpose: Mission, Values, Beliefs VISION (Desired future -- 10 years +) GOALS (3-5 years) OBJECTIVES (2-3 years) ACTION PLANS (1 year) CUSTOMERS & COMPETITORS VALUE ADDED CORE PROCESSES PEOPLE SUPPLIERS Who What When (Source: IRN, Inc., “Strategic Planning Essentials”)

45. The Multiple Strategy Inputs to Innovation Innovation Vision & Strategy Internal Factors Mission & Vision Differentiation & Positioning Core Competencies Target Markets & Customers External Factors Market Trends Competitive Landscape Scientific Research Profit Model Sources of Change There is a combination of both internal and external factors that will affect the development of a company’s innovation vision. The external factors are related to the dynamics of the market you operate in. The internal factors are related to your mission and vision; your market differentiation; your core competencies (current and desired); and your model of profitability. All of these internal and external factors need to be taken into consideration in the development of your innovation vision. This means that there is no one “right” answer on innovation for manufacturing companies. Each company needs to fashion their own unique approach to this element of their business. Societal Changes

46. Robert Cooper’s Idea of a “Product Innovation Charter” Robert Cooper addresses the idea of an Innovation Vision in his concept of a “Product Innovation Charter” (PIC). The following quotes from his book, Winning At New Products , define more specifically what role the PIC should play in a company. “ The key ingredient is the new product strategy or the product innovation charter . The new product strategy charts the strategy for the firm’s entire new product initiative. It is the master plan; it provides the direction for your company’s new product efforts, and it is the essential link between your product development effort and your firm’s corporate strategy.” (p. 287) “ The product innovation strategy specifies the objectives of the new product effort, and it indicates the role that product innovation will play in helping the firm achieve its corporate objectives. It answers the question: how do new products and product innovation fit into the company’s overall plan?” (p. 290) “ [An innovation strategy] defines the types of markets, applications, technologies and products on which the firm’s new product efforts will focus. The specification of these arenas – what’s ‘in bounds’ and what’s ‘out of bounds’ is fundamental to spelling out the direction or the strategic thrust of the firm’s innovation effort.” (p. 290) “ Running an innovation program without a PIC or strategy is like running a war without a military strategy. There’s no rudder, there’s no direction, and the results are often highly unsatisfactory. We simply drift. On occasion, such unplanned efforts do succeed, largely owing to good luck or perhaps brilliant tactics.” (p. 290) “ The objectives of a strategy tie the product development effort tightly to the firm’s corporate strategy. New product development, so often taken as a given, becomes a central part of the corporate strategy, a key plank in the company’s overall strategic platform.” (p. 291) “ Frankly, there isn’t much in the traditional literature about how to develop a solid new product strategy for your company. For example, few guidelines have been developed to assist you in the choice of arenas and the direction for your new product efforts. That is, there exist few conceptual frameworks or proven methodologies for formulating a new product strategy.” (p. 302)

47. The Specific Elements of An Innovation Strategy <ul><li>Innovation Vision </li></ul><ul><li>The overall role of innovation in your market positioning. </li></ul><ul><li>Amount of resources dedicated to innovation (R&D and innovation processes). </li></ul><ul><li>How your innovation strategy will change your market positioning over time. </li></ul><ul><li>Arenas to Play In </li></ul><ul><li>The customer segments you are targeting. </li></ul><ul><li>A technology road-map of how you envision your technological competence evolving. </li></ul><ul><li>An applications/product map of how you envision your overall product offerings evolving. </li></ul><ul><li>This area defines what are referred to as your “hunting grounds” for innovation opportunities. </li></ul><ul><li>Entry Strategies </li></ul><ul><li>Different ways you plan to acquire or develop new technology, products, or customer segments. </li></ul><ul><li>These can include internal development; acquisitions; joint ventures; licensing agreements; venture investments; etc. </li></ul><ul><li>A vision of how these strategies might differ, depending on the niche being pursued. </li></ul><ul><li>An limitations on when you will use which of these strategies (e.g. conditions under which you will consider an acquisition). </li></ul>An Innovation Strategy needs to be concrete enough to provide guidance to the company’s direction. As is often said of a strategic plan, it is “a compass, not a roadmap” in the sense that it defines the direction, but not the specific steps to be taken. The details are fleshed out in the management of the product development portfolio itself – specific technologies, products and services, platforms, etc. that the company invests in. The three kinds of areas that the Innovation Strategy should provide some guidance in are described below. Your Innovation Strategy

48. Market Positioning – An Example Price Innovation/Uniqueness/Speed to Market The Lo-Boys <ul><li>Buy primarily on price </li></ul><ul><li>Main consideration is no hassle service </li></ul><ul><li>Very transactional </li></ul><ul><li>Best options are products at the commodity stage of their lifecycles </li></ul>Own the Customer Relationship <ul><li>Price is still an issue, but not the overarching concern </li></ul><ul><li>Looking for customized approach </li></ul><ul><li>Responsiveness and customer service critical </li></ul><ul><li>Flexibility </li></ul><ul><li>Expect you to think like them </li></ul><ul><li>Determining which products and technologies fit is a customer by customer process </li></ul>“ Innovate” “ Get Intimate” “ Reduce Costs” Source: The Discipline of Market Leaders , Treacy & Wiersma, 1997 Where you position your company in the market will drive your innovation focus The Innovators <ul><li>Speed to market is critical </li></ul><ul><li>Seeking products and technologies that differentiate them </li></ul><ul><li>Want the latest technology </li></ul><ul><li>Product lifespan is short (2-4 years) </li></ul><ul><li>Looking for products on the front end of their lifecycle </li></ul>

49. Innovation Strategy By Market Position Market positioning is a good example of where different kinds of business strategies will lead to somewhat different approaches to innovation. their book The Discipline of Market Leaders , Treacy and WeirsmaIn suggest that there are three basic approaches companies can take to market differentiation: 1) be the absolute low price player; 2) specialize in knowing the customer and customizing your offerings to their needs; and 3) be the the first to market with leading edge innovations. Companies typically cannot maintain leadership in all three of these positions – they have to choose one and specialize. Each positioning leads to a slightly different emphasis in how you approach innovation. Some of these possible differences are noted in the table below. This Positioning… Might Lead You to Focus on These Kinds of Innovations Low-Boys <ul><li>Process improvements that reduce costs </li></ul><ul><li>Supply chain management strategies </li></ul>Customer Intimacy <ul><li>Customer service interfaces </li></ul><ul><li>Customer engineering support and “solutions selling” </li></ul><ul><li>Voice of the customer processes </li></ul>Innovators <ul><li>Leading edge technology </li></ul><ul><li>Innovative product design </li></ul><ul><li>Focus on “lead users” </li></ul>

50. Both/And; Not Either/Or PROTECT YOUR EXISTING BUSINESS FIRST PENETRATE FURTHER INTO EXISTING MARKET SEGMENTS EXTEND THE BUSINESS BY CREATING NEW PRODUCTS FOR EXISTING SEGMENTS OR BY ENTERING NEW SEGMENTS WITH EXISTING PRODUCTS DIVERSIFY INTO NEW MARKETS WITH NEW PRODUCTS Innovation is not an alternative to operational excellence. Instead, it is an example of operational excellence in another area of your business. Companies need to be on the path to operational excellence at the business-unit level before they try to extend into new markets. Too many companies think of innovation as a way out of the hard work of operational excellence. Quite the contrary – innovating is as much or more work than achieving excellence in your manufacturing operations. Excellence in both domains is required for long term success. If you do not take care of the “basics” first, your innovation strategy will not have a sound foundation from which to launch. “ If a company’s existing business doesn’t have a firm foundation of operational excellence, any initiatives to protect that business, to further penetrate existing markets, and to extend and diversify the business are likely to prove mediocre at best and disastrous at worst. Time and again, we have seen companies that haven’t achieved the operational excellence needed to allow their existing businesses to hum along without undivided management attention. Consequently, when the companies start venturing into new areas, their core generators of revenue begin to sputter.” “ Uncovering Hidden Value in a Midsize Manufacturing Company” (Ashton, Cook, Schmitz, Harvard Business Review, June 2003) The Strategic Pathway

51. 2. Creating the Innovation Culture

52. Creating the Innovation Culture <ul><li>Create a company culture that rewards creativity and risk taking. </li></ul><ul><li>Celebrate innovation processes and results. </li></ul><ul><li>Facilitate communications across business units. </li></ul><ul><li>Honor and value ideas that come from outside the company. </li></ul><ul><li>Provide clear management leadership, direction and support. </li></ul><ul><li>Make sure leadership models the innovation focus. </li></ul>“ The organizational culture must emphasize innovation, disruption, and change as core values. The culture should foster the acquisition of knowledge from outside the company and overcome the natural tendency, called the not-invented-here (NIH) syndrome, to derogate advances made by scientists and engineers outside the company, even if they work for competitive companies .” (Kaplan and Norton, Strategy Maps ) “ The biggest single thing we can do is provide a culture where there is freedom to fail. We have to embrace that .” (Steve Parker, President, Rapid Engineering) “ An irreverent yet cooperative culture lets spirits soar. We encourage out of the box thinking that pushes the boundaries, but we also expect people to be team players.” (Fred Bauer, President, Gentex)

53. Culture Factors That Differentiate Innovative Companies (Source: Zien and Buckler, “Crafting a Culture of Innovation”, Journal of Product Innovation Management, 1997) <ul><li>LEADERSHIP EXAMPLE. Leaders demonstrating by their actions that innovation is important. </li></ul><ul><li>INNOVATION PRIORITY. Engaging the full organization in an understanding about why innovation in critical to company success. </li></ul><ul><li>INNOVATION ENCOURAGEMENT. Encouraging employees to take risks and try new things; and providing financial incentives for individual innovation. </li></ul><ul><li>CROSS-FUNCTIONAL INTEGRATION. Creating robust relationships between technical staff and marketing/sales staff. </li></ul><ul><li>CUSTOMER INTIMACY. Encouraging and incentivizing a broad range of employees to interact closely with customers. </li></ul><ul><li>STORY TELLING. Telling powerful stories that reinforce the principles and practices of innovation. </li></ul>The work of building a culture in your company to support innovation is basically no different than building a culture to support any other business strategy. It requires consistency, integrity, robust communications and reward systems. One study of innovation leaders found that the following cultural factors consistently differentiated the innovators from the non-innovators.

54. 3. Creating the Innovation Processes

55. Creating the Innovation Processes <ul><li>There are five basic kinds of processes that are needed to support a company’s innovation system. They include: </li></ul><ul><ul><li>1. Opportunity identification and voice of the customer. These processes are directed at generating a robust repertoire of innovation opportunities for the company to explore. These opportunities need to be connected to the firm’s core business strategy. </li></ul></ul><ul><ul><li>2. Opportunity selection. These processes are used to narrow down the list of potential opportunities to a limited set of projects that the company invests in, through the use of disciplined opportunity screening criteria. </li></ul></ul><ul><ul><li>3. Product/service design and development. Within each individual project, a disciplined process needs to be used to advance projects from one stage to another, and to conduct the work that occurs within each stage. The company also needs a robust set of design tools and capabilities to bring to bear on this work (CAD; CAE; FEA; DfE; DfM; etc.). </li></ul></ul><ul><ul><li>4. New product/service launch. Once a new product or service makes it through the design and development stage, attention focuses on the launch of the product/service (in manufacturing or other business units), and the execution of related sales, marketing, pricing, distribution, services support and other activities. </li></ul></ul><ul><ul><li>5. Managing the R&D portfolio. The set of projects that is selected for more detailed investigation, development and prototyping needs to be rigorously managed. Choices need to be made about how many projects the company can manage at one time; how much resources to invest in each project; how to spread the projects across different categories and scope of innovation; and how to make decisions on each project. </li></ul></ul>

56. The Innovation “Funnel” 1. Opportunity Identification 2. Opportunity Selection 3. Development & Testing 4. Production & Launch 5. Managing the R&D Portfolio The five different innovation processes relate to different stages of the “innovation funnel” – the progression from a broad set of innovation ideas to actual implementation and commercialization.

57. Characteristics of Successful New Product & Service Processes <ul><li>DIFFERENTIATION. The new product or service is differentiated and delivers unique benefits and superior value to the customer. </li></ul><ul><li>MARKET-DRIVEN. The process for developing new products/services is driven by deep knowledge of customer needs and requirements, and supported by customer contact and market research. </li></ul><ul><li>INVEST IN THE FRONT END. The work in the steps before development are done well – screening; market research; technological feasibility; design; and business case development. </li></ul><ul><li>CLEAR PRODUCT/PROCESS DEFINITION. All the elements of “design” (in its broadest definition) are well-defined and articulated, including the project scope; definition of the market; customer value proposition; positioning strategy; and product/service features and specifications. </li></ul><ul><li>DISCIPLINED LAUNCH PROCESS. The launch is rigorously managed, and is based on a well thought-out marketing plan. </li></ul><ul><li>RIGHT STRUCTURE. There is a cross-functional team structure, with clear accountability and strong leadership. </li></ul>Source: Robert Cooper, Product Development Institute Presentation, 2002 <ul><li>MANAGEMENT SUPPORT. Management is committed to innovation as a business strategy; provides support; facilitates the process; and does not meddle on a day-to-day basis. </li></ul><ul><li>LEVERAGE CORE COMPETENCIES. The new products/services build on the core competencies of the organization, including technical knowledge; design capability; manufacturing; customer relationships and sales channels. </li></ul><ul><li>MARKET ATTRACTIVENESS. Markets targeted are attractive in terms of size; growth; and competitive situation. </li></ul><ul><li>DISCIPLINED PROJECT SELECTION. Clear and strong criteria are used to narrow down and focus the number of development projects that are invested in. </li></ul><ul><li>ADEQUATE RESOURCES. The resources are designed to meet the portfolio requirements, either by increasing resources, or reducing the number of projects. </li></ul><ul><li>SPEED OF EXECUTION. Cycle time is reduced through disciplined processes; parallel processing; focused set of projects; and “doing it right the first time.” </li></ul>Robert Cooper, the inventor of the “stage-gate” model for product development, has identified 12 different characteristics of successful new product and service development processes:

58. The Concept of “Stage-Gates” <ul><li>Robert Cooper pioneered the concept of “stage-gates” in the new product/service development process. </li></ul><ul><ul><li>A stage is a phase or step in the product development process that projects migrate through from idea to full commercialization. </li></ul></ul><ul><ul><li>A gate is a screen or set of criteria that the project has to meet before it moves from one stage to another. </li></ul></ul><ul><li>Cooper developed a seven stage process with five gates (see diagram below). We have simplified this process into four basic stages for purposes of this presentation. </li></ul>Stage 1: Preliminary Investigation Stage 2: Detailed Investigation Stage 3: Prototype Development Stage 4: Testing & Validation Stage 5: Production & Launch Idea Gate 1 Initial Screen Gate 2 Gate 3 Gate 4 Gate 5 Second Screen Decision on the Business Case Post-Development Review Pre-Launch Analysis PIR Post-Implementation Review Source: Winning at New Products , Robert G. Cooper, 1993 1) Opportunity Identification 2) Opportunity Selection 3) Development & Testing 4) Production & Launch

59. The Deliverables From Each Stage The purpose of the gates is to create as rigorous and objective as possible criteria for making decisions about what level of investment of time and resources is appropriate for a project. The gates are to the product development process what critical engineering specifications are to a manufacturing process. The stage-gate process is designed to be a form of in-process checking or “process poka-yoke” or fool-proofing to make sure that “defective” projects don’t move from one stage to another. Of course, given the nature of a product development project, the criteria and the measurement/checking process will never be as clear and as objective as measuring a physical attribute of a product. Good judgment and qualitative factors will always play a large role in the process. Gates have three elements: deliverables (reports, analyses; prototypes and other information products); criteria (factors used to make decisions); and decisions (choices to continue, stop, or modify). The core deliverables at different stages of the process are described below. 1. Opportunity Identification 2. Opportunity Selection 3. Development & Testing 4. Production & Launch An defined innovation concept, with a written and visual description of the idea, including its primary features and customer benefits, as well as a broad understanding of the technology required to make it a reality. A solid business case for the project, including strategic, customer, market, technical, and financial analyses. A working prototype of the product or service, with performance characteristics verified by users. Finished products and/or services, with established pricing; marketing plan; distribution system; and customer support services. PRODUCT DEVELOPMENT PROCESS DELIVERABLES AT EACH STAGE

60. Generic Stage-Gate Criteria At each gate in the stage-gate process, an innovation project has to pass another set of review criteria. The level of detail and specificity required increases with each step in the process, as the company’s financial investment and level of risk also increases. The justification require for a project constitutes a “business plan” for the new product or service effort. Not surprisingly, the issues that have to be addressed by the plan are pretty much the same as those that need to be addressed in an overall company strategy or business plan. Some of the typical generic stage-gate criteria are listed below. <ul><li>Strategic Fit </li></ul><ul><li>Overall, is the project aligned with the company’s strategic direction, including its mission; vision; values; and market positioning? </li></ul><ul><li>How will the project help advance this strategic direction? In what ways might it distract from it? </li></ul><ul><li>How will this project affect other dimensions of the business strategy, including other projects in the new product development portfolio? </li></ul><ul><li>Product Features </li></ul><ul><li>What kind of project is it – a product extension; new platform; breakthrough technology; basic R&D; etc. </li></ul><ul><li>What is the product or service being proposed? What does it do? </li></ul><ul><li>What are the key features and benefits? </li></ul><ul><li>What are the components? Is it a stand-alone product or part of a family? </li></ul><ul><li>Customers and Markets </li></ul><ul><li>What is the definition of the target market (segment; geography; types of customers)? </li></ul><ul><li>How large is the market? Is it growing or shrinking? What are the barriers to entry & exit? </li></ul><ul><li>What customer need does the project address? What is the current solution to those needs? How is this solution superior? </li></ul><ul><li>Competitors </li></ul><ul><li>Who is the competition for this project? How are they likely to respond? </li></ul><ul><li>How does this project compare to the competition? How is it superior? Inferior? </li></ul><ul><li>Financial Aspects </li></ul><ul><li>What is the total estimates revenue potential? </li></ul><ul><li>How long to commercial start-up? </li></ul><ul><li>What is the profitability model? </li></ul><ul><li>What are the likely development costs? </li></ul><ul><li>Technical Feasibility </li></ul><ul><li>What is the technological base for the project? Is this technology new to the company, or does the company already have expertise in it? </li></ul><ul><li>What kinds of technical or engineering hurdles need to be overcome to make it feasible? </li></ul><ul><li>Is new manufacturing technology required? Are new processes required? </li></ul><ul><li>Will new suppliers be required? </li></ul><ul><li>Operations </li></ul><ul><li>How will the product/service be produced? </li></ul><ul><li>What distribution system and sales channel will be used? </li></ul><ul><li>What kind of marketing will be required? </li></ul><ul><li>What customer support will be needed? </li></ul>

61. How To Effectively Use a Stage-Gate Process <ul><li>As with any other business process, a staged product development process is a tool to help you do your work – it can add value or create waste, depending on how it is used. Here are some of the “lessons learned” with this kind of system. </li></ul><ul><li>Keep it as streamlined as possible. Start with as simple a process as you can. Build up the detail over time, based on your experience of its actual use, and where the gates and criteria actually add value and where they do not. Many companies start with an excessively complex and cumbersome process that makes product development into a bureaucratic nightmare that actually slows down the pace of innovation. </li></ul><ul><li>Make the complexity of the process match the complexity of the project. You should create some different categories of projects, from most simple (e.g. a modification of an existing product) to most complex (e.g. creation of a new technology platform), and adapt the process to the project’s complexity. More complex, long-term and high-risk projects require a more detailed stage-gate system. The simple, short-term, low-risk projects should be subject to modest reviews. </li></ul><ul><li>Favor rapid iteration. One of the core principles of the world-famous design firm, IDEO* is to “have a bias for action.” By this they mean moving to build working prototypes as rapidly as possible in order to shorten the time frame between feedback loops on the process. This helps you avoid “analysis paralysis” – the endless consideration of too many options and too much unconfirmed information. When in doubt, get out and try it. </li></ul><ul><li>Adopt an attitude of “disciplined flexibility.” One of the virtues of the stage-gate process is that it forces a standardized and thorough review of new product ideas and projects. Strict adherence to the basic process is a must if you want to achieve “stability and capability” in your innovation process. Deviations from the process need to be made deliberately and consciously, using the decision-making structure of the process itself. </li></ul><ul><li>Support the process with appropriate technology tools. Within the last decade, there has been a surge in the availability of information technology tools to help manage the new product development process. These tools (e.g. Product Lifecycle Management (PLM) software) automate much of information sharing and even the management of the gates themselves. They allow real-time visibility of the entire portfolio, and enable virtual teams that can span geographies, organizational divisions and time zones. </li></ul>(*For more background on IDEO, see the supplement to this report entitled Perspectives on Innovation .)

62. Opportunity Identification 1. Opportunity Identification 2. Opportunity Selection 3. Development & Testing 4. Production & Launch 5. Managing the R&D Portfolio

63. Opportunity Identification Opportunity identification is the broad set of activities a company undertakes to surface innovation ideas. Sometimes referred to as the “Fuzzy Front End” (FFE) of the innovation process, it is the stage of the process where the “right brain” characteristics of creativity, divergent thinking, brainstorming, unpredictability, ambiguity, thinking outside the box, and questioning the status quo dominate over the “left brain” activities of analysis, convergent thinking, clear differentiation, process discipline, and goal orientation. The process of selecting innovation opportunities for more detailed investigation can be thought of as having three stages of activity – identifying the opportunity; developing the innovation idea; and creating the innovation concept.* Each stage has a slightly more detailed conception of what the innovation project might look like. The last stage – innovation concept – should have enough information to decide whether to take it to the stage of formal assessment and researching of the opportunity. Innovation Opportunities Situations where there is a business or technology gap between customer needs/wants and what is available in the market, that could potentially be captured by the company. Innovation Ideas A high-level view of the solution envisioned for the problem identified in the opportunity. Innovation Concepts A written and visual description of the idea, including its primary features and customer benefits, as well as a broad understanding of the technology required to make it a reality. Opportunity Identification (* Adapted from “Fuzzy Front End: Effective Methods, Tools and Techniques”; The PDMA Toolbook For New Product Development , Chapter 1)

64. Right Brain vs. Left Brain Thinking Research on the human brain has demonstrated that the two different sides of the brain (“hemispheres”) are responsible for different modes of thinking. Both of these modes of thinking are required at different phases of the innovation process. While most individuals have a preference for one style or another, the real key is build the capacity for “whole brain” thinking in the organization, where people are comfortable in one style or another, depending on the need of the situation. Building this capacity is a key part of the human capital strategy for innovative companies. “ Culture in the FFE [Fuzzy Front End] fundamentally differs from that in the New Product Development and operational parts of the organization. The FFE is experimental, ambiguous, and often chaotic, with a great deal of uncertainty. In contrast, an efficient NPD or Stage-Gate ™ part of the innovation process is disciplined and goal-oriented, following a clearly defined process.” (PDMA Toolbook for New Product Development, P. 13) Left Brain Thinking Right Brain Thinking <ul><li>Logical </li></ul><ul><li>Sequential </li></ul><ul><li>Rational </li></ul><ul><li>Analytical </li></ul><ul><li>Objective </li></ul><ul><li>Focus on Parts </li></ul><ul><li>Random </li></ul><ul><li>Intuitive </li></ul><ul><li>Holistic </li></ul><ul><li>Synthesizing </li></ul><ul><li>Subjective </li></ul><ul><li>Focus on Wholes </li></ul>

65. Where Ideas Can Come From Idea generation for the Fuzzy Front End can come from a wide variety of sources. Within each of these areas, there is also a wide variety of techniques a company can use to identify innovation opportunities and narrow them down to more concrete ideas and concepts. <ul><li>Voice of the Customer </li></ul><ul><li>Customer focus groups </li></ul><ul><li>User panels </li></ul><ul><li>Customer surveys </li></ul><ul><li>Lead user research </li></ul><ul><li>Direct observation of users </li></ul><ul><li>Immersion in a customer’s experience </li></ul><ul><li>Voice of the Organization </li></ul><ul><li>Use your innovation strategy to focus your opportunity investigation </li></ul><ul><li>Operational capabilities audit </li></ul><ul><li>Internal brainstorming with both functional and cross-functional groups </li></ul><ul><li>Sales staff interviews & brainstorming </li></ul><ul><li>Employees as users </li></ul><ul><li>New product idea suggestion systems and contests </li></ul><ul><li>Company idea bank </li></ul><ul><li>Secondary Research </li></ul><ul><li>Internet searches </li></ul><ul><li>Trade articles and white papers </li></ul><ul><li>Competitor analysis </li></ul><ul><li>Patent scans </li></ul><ul><li>Trade press clipping </li></ul><ul><li>Voice of the Experts </li></ul><ul><li>Interviews and/or focus groups with industry experts </li></ul><ul><li>On-going contacts and relationships with universities and individual faculty </li></ul><ul><li>Research by market research companies and consultants </li></ul><ul><li>Contacts with venture and equity funds </li></ul><ul><li>Relationships with government labs and private R&D labs </li></ul><ul><li>Voice of the Industry </li></ul><ul><li>Attending trade shows </li></ul><ul><li>Professional association technical conferences </li></ul><ul><li>Participation in standards committees </li></ul><ul><li>Voice of the Value Chain </li></ul><ul><li>Visits with suppliers and their engineering & product development staff </li></ul><ul><li>Cooperative technology agreements with suppliers </li></ul><ul><li>Discussions with players in the distribution system (distributors; wholesalers; retailers) </li></ul><ul><li>Look at all stages of the value chain for opportunities </li></ul>

66. The Customer Consumption Chain (*HBR on Innovation, “Discovering New Points of Differentiation,” by Ian MacMillan and Rita Gunther McGrath, pages 134 to 145) Many opportunities for innovation can come from looking at the full product or service life-cycle (what McMillan and Gunther call the “consumption chain”*). For each link in the chain, ask the simple questions of what, where, who, when and how? Dimension of the Consumption Chain What? Where? Who? When? How? 1. How do people become aware of their need for your product or service? 2. How do consumers find your offerings? 3. How do consumers make their final selections? 4. How do customers order and purchase your product or service? 5. How is your product or service delivered? 6. What happens when your product or service is delivered? 7. How is your product installed? 8. How is your product or service paid for? 9. How is your product stored? 10. How is your product moved around? 11. What is the customer really using the product for? 12. What do customers need help with when they use your product? 13. What about returns or exchanges? 14. How is your product repaired or serviced? 15. What happens when your product is disposed of or no longer used?

67. What Creates Innovation Opportunities (Adapted from: PDMA Toolbook for New Product Development , P. 42-44) <ul><li>Some Conditions That Create Innovation Opportunities: </li></ul><ul><li>Discontinuities. Evidence that some traditional pattern and relationships are shifting and reforming (e.g. new supply chain management strategies; virtual design technologies; etc.). </li></ul><ul><li>Dis-equilibrium. Signs of imbalance in a system, where one player or another dominates and appears to have “lock-in”. </li></ul><ul><li>Dis-intermediation. Opportunities to eliminate steps in a value chain. </li></ul><ul><li>Compensatory behavior. Examples where system members are experimenting with “makeshift” solutions, because the right innovation hasn’t emerged yet. </li></ul><ul><li>OPPORTUNITY SCANNING TECHNIQUES: </li></ul><ul><li>Secondary research (company records; trade reports; internet searches; article searches; trade associations; etc.) </li></ul><ul><li>Technology scanning (brainstorming with members of the technical community surrounding your company) </li></ul><ul><li>Core competency audit (brainstorm alternative market or product applications of your current competencies) </li></ul><ul><li>Future trends tracking (use trade journals like The Futurist and Technology Review to make a list of potentially relevant macro trends) </li></ul><ul><li>Demographic research (analysis of population trends that might create opportunities) </li></ul><ul><li>Delphi interviews (formal or informal interactions with thought leaders) </li></ul><ul><li>Focus groups (can be of non-competitive peers; channel partners; or customers) </li></ul><ul><li>Customer ethnography (detailed interviews with customers about how they use your products/services, especially with lead users </li></ul><ul><li>Immersion (immerse yourself in the users world – do their actual work and experience their reality first hand) </li></ul>

68. The Experts’ Ideas About Innovation Opportunities <ul><li>DRUKER’S SEVEN SOURCES OF INNOVATION: </li></ul><ul><li>Sources From Within Industries and Sectors : </li></ul><ul><li>Unexpected successes, failures or events. </li></ul><ul><li>Incongruities between what is and what “should be.” </li></ul><ul><li>New process needs. </li></ul><ul><li>Changes in industry or market structure. </li></ul><ul><li>Sources From External Factors : </li></ul><ul><li>Demographics </li></ul><ul><li>6. Changes in perception, mood and meaning. </li></ul><ul><li>7. New knowledge, scientific and non-scientific. </li></ul><ul><li>KIM & MAUBORGNE’S SIX VIEWS OF NEW MARKET SPACE </li></ul><ul><li>Looking across substitute industries </li></ul><ul><li>Looking across strategic groups within industries </li></ul><ul><li>Looking across the chain of buyers </li></ul><ul><li>Looking across complementary products or services </li></ul><ul><li>Looking across functional or emotional appeal to buyers </li></ul><ul><li>Looking across time </li></ul><ul><li>CHRISTENSEN’S IDENTIFIERS OF DISRUPTIVE OPPORTUNITIES </li></ul><ul><li>There are untapped new market opportunities </li></ul><ul><li>There are untapped low-end market opportunities </li></ul><ul><li>None of the existing players will have an incentive to compete </li></ul>Many of the leading thinkers on innovation have developed their own ideas about where innovation opportunities are most likely to be found. Several of these are summarized below. (More detail on each of these innovation thinkers can be found in the supplement to this report entitled Perspectives on Innovation .)

69. Voice of the Customer It is critical that the voice of the customer (VOC) pervades the innovation process. While this statement may seem self-evident, it continues to be true that most companies have ineffective means for developing detailed understandings of customer needs and requirements. Customers need to be involved in each stage of the innovation process. 1. Opportunity Identification 2. Opportunity Selection 3. Development & Testing 4. Production & Launch Voice of the Customer <ul><li>Customers describe needs and wants and suggest desired features. Data is collected from customers through: </li></ul><ul><ul><li>Focus groups & user panels </li></ul></ul><ul><ul><li>Customer surveys </li></ul></ul><ul><ul><li>Lead user research </li></ul></ul><ul><ul><li>Direct observation of users </li></ul></ul><ul><ul><li>Immersion in a customer’s experience </li></ul></ul><ul><ul><li>User needs and wants study </li></ul></ul><ul><li>Customers define specific performance requirements </li></ul><ul><li>Translate requirements into specifications & concepts </li></ul><ul><li>Customers review the concept(s) and compare with competitor offerings </li></ul><ul><li>Customers provide feedback on prototypes </li></ul><ul><li>Customers may join a product development team </li></ul><ul><li>Customers try out the working prototypes </li></ul><ul><li>Customers validate actual performance </li></ul><ul><li>Data collected from customers through initial quality surveys and warranty & service claims </li></ul><ul><li>Customers provide word-of-mouth marketing </li></ul><ul><li>Customers help refine packaging and provide feedback on price points </li></ul>Making the customer integral to the design process requires changes to the traditional product development process for most manufacturing companies. Customer research is time-consuming; it requires additional resources; and it slows down the front end of the process. However, it also significantly reduces the risks of investments; it builds relationships with important constituencies; and it helps uncover new opportunities for innovation.

70. IDEO’s Lessons on the Art of Observing Customers <ul><li>Don’t ask your customers to do your work for you. Your customers often are incapable of articulating what they need or why they like or don’t like a product. Instead of asking them to tell you, go and experience life with them. </li></ul><ul><li>Keep track of the things that bug you and others. These “bug lists” are a great sign that there is room for innovation. </li></ul><ul><li>Get into the middle of it. Immerse your senses in the environment of the product or service. Don’t depend on second-hand information. </li></ul><ul><li>Stay humble. Know what you don’t know. Live in the ignorance so you can see things with fresh eyes. </li></ul><ul><li>Embrace the crazy users. They are often working on the fringes and the edges where interesting stuff happens. Find the people who are breaking the rules – it is often out of frustration with the idiocy of current products and services. </li></ul><ul><li>Exercise your “observation muscles.” Practice the art of watching and recording. Observe patterns of behavior and look for glitches and anomalies. </li></ul>“ We’re not big fans of focus groups. We don’t much care for traditional market research either. We go to the source. Not the ‘experts’ inside a company, but the actual people who use the product or something similar to what we’re hoping to create.” (Source: Tom Kelly, The Art of Innovation , P. 6-7) <ul><li>IDEO OBSERVATION TECHNIQUES: </li></ul><ul><li>Shadowing – observing people as they use products. </li></ul><ul><li>Behavioral mapping – documenting behaviors in a specific space over a 2-3 day period. </li></ul><ul><li>Consumer Journey – recording all the interactions a consumer has with a product, service or space. </li></ul><ul><li>Camera Journals – asking consumers to keep visual diaries of their experiences and impressions related to a product. </li></ul><ul><li>Extreme User Interviews -- Talking to people who really know—or know nothing—about a product or service, and evaluating their experience using it. </li></ul><ul><li>Storytelling – prompting people to tell personal stories about their consumer experiences. </li></ul><ul><li>Un-Focus Groups – interviewing a widely diverse group of potential users. </li></ul><ul><li>(Source: Business Week, 10.11.04) </li></ul>In his book on the IDEO design firm that he and his brother founded, Tom Kelly describes the three core innovation processes of brainstorming, observation and prototyping. Of these, the art of closely observing customers and learning about their unmet needs is paramount to the design process.

71. Voice of the Customer – Quality Function Deployment (QFD) <ul><li>Quality Function Deployment (QFD) is design methodology that seeks to build a rigorous connection between customer requirements, product features, product specifications, and process specifications and measurements. Often referred to as the “house of quality” (because of the resemblance of the graphic to an actual house), QFD organizes in one graphic many critical elements of the design process, including: </li></ul><ul><li>A summary of customer needs, organized hierarchically into primary, secondary and tertiary needs. </li></ul><ul><li>Rating of competitors products in their ability to meet customer needs. </li></ul><ul><li>Product design attributes. </li></ul><ul><li>Engineering specifications for design attributes. </li></ul><ul><li>The relationship between design attributes and customers needs. </li></ul><ul><li>Interrelationships between the design attributes. </li></ul><ul><li>The advantage of QFD is its ability to organize the design process in a very disciplined way. Its disadvantage is that it can become very complex and unw

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