Innovation Excellence
– from Idea to Launch –
Jersey,
September 16, 2005
Dr. Christian Weigel
Innovation Excellence – Why?
Improving innovative ability will increase profitability and growth1)
Levers to Increase Profitability and Growth
4,3
Enhance innovation ability
4,0
Focus on core competencies
3,9
Cost cutting
Organic growth
3,7
Capital efficiency
3,7
3,7
Internationalization
3,6
Active pricing
3,4
Acquisitions and alliances
2
3
Low importance
Source: Arthur D. Little Innovation Excellence Study 2005;
4
5
Very high importance
1) Same answer across all regions and industries
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Innovation Excellence – Definition of Innovation
Innovation turns knowledge into cash …
Product and service innovation
 Innovative problem solutions
 Substitutions of existing
products and services
 New markets
Process innovation
 Productively increase
Structural innovation
 New structures of R&D
organizations
 Value chain reengineering
Source: Degussa, Euroforum 2005
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Innovation Excellence – Definition of Innovation
… and is not limited to technologies and products
Over the next five years, how much value do you expect your
company to create through innovation in the following areas
Global Response
80
79
74
77
73
64
67
Supply
Chain
Manufacturing
65
60
40
20
Products
Service
Marketing
Distribution
Sales +
Customer
Support
Portion of Value Chain
Source: ADL Global Innovation Survey
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Innovation Excellence – Definition of Innovation
Innovation – is all about hard work
Art consists of 90% transpiration
and only 10% sudden inspiration
(Adolf von Menzel)
Innovation consists of 90% transpiration
and only 10% sudden inspiration
(Thomas Edision)
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Innovation Excellence – Survey Results
Chemical industry is a "low intensity innovator"
Share of sales
generated by
products
launched in the
last 5 years in %
Efficient Innovators
70%
Inter-industry
average
60%
Construction
and Equipment
40%
30%
20%
Electrical
engineering and
Electronics
Automotive OEMs
and Suppliers
50%
Telecommunication,
IT and Media
Consumer
goods and food
Logistics/
Services
10%
1%
Aerospace
Inter-industry
average
Financial
Institutions
Chemicals/
Resources
Engineering and
Manufacturing
Low Intensity Innovators
0%
Pharmaceuticals
Public and Professional Services
Utilities
0%
High Intensity Innovators
2%
3%
4%
Low Leverage Innovators
5%
6%
7%
8%
9%
10%
11%
Share of R&D budget in total sales in %
Source: Arthur D. Little Innovation Excellence Study 2005
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Innovation Excellence – Survey Results
No correlation between R&D expenditures and share of new products
Various Chemical companies (commodity and specialty focused); 2004 figures
Sales with products
younger than 5 years
Average = 2,8
45%
40%
35%
30%
25%
20%
Average= 19,1
15%
10%
5%
0%
0%
1%
2%
3%
4%
5%
6%
R&D expenditure
as % of sales
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Innovation Excellence – Survey Results
Innovation leader need less for more
R&D expenditures to generate 1 million sales with a new product
– Chemical industry –
'000 €
1360
860
430
% new products
younger 5 years
+50%
+50%
Best
Average
Worst
30%
21%
26%
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Innovation Excellence – Top Innovation Management
A well-balanced innovation approach is one key to success
Learning
from top
innovators
Learning
from best
practices
A well balanced approach
Learning
Customers
Idea Management
Business Vision
& Strategy
Business &
Technology
Intelligence
Product/Service
Portfolio Mgmt.
Development &
Launch
Technology
Management
PostLaunch
Customer &
Business
Results
Resource & Competence Management
Partners
Learning
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Innovation Excellence – Market Intelligence
Customer contact and excellent business intelligence form essential
components of Innovation Excellence
Gaining Market Intelligence
Direct customer contact
Systematic market and
technology screening
Source for
Innovation
Extrovert corporate
culture
Clear role allocation
2
3
Low importance
4
5
Very high importance
Source: Arthur D. Little Innovation Excellence Study 2005
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Innovation Excellence – Market Intelligence
Uncover unarticulated customer needs
What?
Clues
1. Ill-served needs
Frustrations with
current products
and services
How?
Listening to
customers
+
2. Un-served
needs
Frustrations
with current
activities
Watching
customers
+
3. Un-conscious
needs
"Blue-sky"
dreams about
ideal world
Anticipating
changes
in
customers'
environment
Speculating with
customers
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Innovation Excellence – Market Intelligence
Think of customers, broadly
Your
Company
Regional
Internat’l
Network
Wholesaler
Retailer/
Dealer
Customer
Customer’s
Customers
Service
 Needs / wants ?
 Satisfaction level ?
 Future pressure / conditions of success ?
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Innovation Excellence – Idea Management
Pivotal factors in idea management include creative employees and
business partner
Idea Management
Creative employees/
business partner
Methodology to evaluate
and select new ideas
Systematic process to
generate new ideas
Available time to generate
ideas
2
3
Low importance
4
5
Very high importance
Source: Arthur D. Little Innovation Excellence Study 2005
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Innovation Excellence – Idea Management
Idea does not necessarily mean market success
1,919
Ideas
369
Projects
Invention
176
Products
32
Market
11
Success
Innovation
Source: University St. Gallen, Prof. Gassmann
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Innovation Excellence – Idea Management
Are those companies more successful that involve their customers into the
development of new products and services?
"If I had asked my clients what they wanted they would have
answered 'A faster horse'!"
Henry Ford, 1863 – 1947
"It seems that just about every industry on map
right now is being reinvented from the customer backwards"
Gary Hamel, 2002
"... users rather than manufacturers are typically the initial developers
of what later become commercially significant new products and processes"
Eric von Hippel, MIT, 2002
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Innovation Excellence – Idea Management
Remember innovation has many sources (1)
Thermoplastics-using
Industrial gas-using
Plastics additives
Engineering plastics
Semiconductor and printed
circuit board process
Scientific instruments
0%
20%
40%
60%
80%
100%
Innovation Developed by:
User
Manufacturer
Supplier
Other
Source: Evon Hippel
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Innovation Excellence – Idea Management
Remember innovation has many sources (2)
Innovation Sources
Chemical Industry
Industry in general
0%
20%
Customer
40%
Supplier
60%
Science
80%
Competitors
100%
R&D, others
internal
Source: ZEW: Mannheimer Innovationspanel (Erhebung 1999)
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Innovation Excellence – Idea Management
In order to meet the challenges new approaches and methods are required
Idea
generation
Concept
development
Analyze
emotional needs
Conjoint
analyses
Focus groups
Implementation
Launch
Involve
lead-user
Quality Function
Deployment
Rapid Prototyping
Toolkits
Product clinics
Next Generation
Empathic design
Road mapping
Positioning models Communities
…
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Innovation Excellence – Idea Management
In many markets decisions are made emotionally – ratio provides only the
reasons
Decision hierarchy product purchase
Ratio
2. Objective reasons
for product use
Emotion
 Security
 Wishes
1. Decision based on
emotional use
 Dreams
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Innovation Excellence – Idea Management
For the analysis of emotional factors in case of purchase decision new
methods are required
 Non-verbal communication prevails;
"people think in pictures, not in words"
 Better assimilation in the brain and easier activation
of the brain through non-verbal signals
 Traditional analysis methods (focus groups,
questionnaires etc.) strongly "verbo-centric"
 New methods with approaches to non-verbal articulation
of needs; linkage between psychoanalysis, arts,
literature and neurobiology
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Innovation Excellence – Idea Management
"Zaltman Methaphor-Eliciation Technique"
Example ZMET
Project
definition
"Picture"collection
Digital
collages
Idea
landscape
 Object of investigation
 12 – 30 participants
"Good tasting
energy provider"
 Pictures with strong
association to product
 Pictures: press clippings,
picture books, brochures etc.
 In-depth interviews
 Point out metaphors
 Translate collages into idea
landscapes
 Interpretation
"Symbol of good old times"
Further examples:
 Arthritis drugs
 Buick
 Motorola security system
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Innovation Excellence – Idea Management
For each market there are lead-users having today already needs they can
articulate but which are developed only tomorrow by the broad market
 Early and intensive customer involvement leads to innovation success
(Arthur D. Little Studies 2004)
 Well-known methods for the analysis of customer needs focus on broad
customer groups in well-known markets
 Despite great efforts hardly any impulses for real innovations
"Our clients want all the same thing: more service, better quality and
low prices at the same time"
 Lead users have today already needs that the total market will develop only
tomorrow
 Lead-user strongly profit from the development of new products or services
Conclusion:
Identify lead-users and involve them closely into the product-/
service development
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Innovation Excellence – Idea Management
The lead-user approach can be applied in markets of industrial- and
consumer goods
+
Pilots on wet
roads
ABSSystem
+
Bikers in the
mountains
Mountainbike
+
Customers
with sensitive
hair
Protein
shampoo
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Innovation Excellence – Idea Management
A critical success factor is a structured search process
Real-life
example
Infection protection
in operating room
 Search field
Project
start
Trend
analysis
Lead-user
search
 Project targets and
team
 Most significant
trends in search field
 Lead-user criteria
Cost
pressure
Hygiene
requirements
Antibiotics
resistance
Minimal
budgets
External
stress
…
Surgeons in
devel. countries
MASH
units
Make-up
artist
 Screening or
networking search
 Lead-user workshop
Concept
development
 Concept
development and
assessment
 2 new products
Result
 Radically new approach
for infection control
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Innovation Excellence – Innovation Strategy
Top innovators explicitly link strategy and clear innovation objectives
Strategic Planning of Product / Technology Development
Clear product or service
strategy
Tight relation between
innovation objectives and
business strategy
Defined core
competencies
Distinct product and/or
technology platforms
Strategic make-or-buy
decisions
2
3
Low importance
4
5
Very high importance
Source: Arthur D. Little Innovation Excellence Study 2005
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Innovation Excellence – Innovation Strategy
Innovation objectives have to be defined
Project examples
Share on technology
development
SBU A (40%)
breakthrough
SBU E (30%)
Type of
Innovation
incremental
Share on product
development
SBU D (10%)
SBU (xy = % of sales
with products younger
than 5 years in 2008)
SBU C (20%)
SBU B (10%)
short
Investment Cycle of Market
long
Size of bullet is
proportional to sales
of SBU
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Innovation Excellence – Innovation Strategy
Canon’s high-speed digital copier business is a good example of successful
platforms/growth engines
Consumer
Electronics
Business
Electronics
Office
Automation
Markets
Products
Platforms/
Growth
Engines
Technologies,
Competencies
Cameras
Precision
Machining
Material
Science
Copiers
Microoptics
Finite
Element
Analysis
Fax
Printers
Imaging
Digital
Copiers
Laser
Sensing
HighPrecision
Measurement
Document
Systems
Networking &
Connectivity
Fourier
Analysis
Digital
Electronics
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Innovation Excellence – Product Selection and Development
Top Innovators focus on good cross-functional teams and a milestone-based
development process
Product Development Process and Project Management
Prioritization of limited
resources
Milestone-based product
development process
Management of
development partners
Methodology of risk
management
Collocation of
development teams in
critical project phases
2
3
Low importance
4
5
Very high importance
Source: Arthur D. Little Innovation Excellence Study 2005
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Innovation Excellence – Product Selection and Development
We will jointly select the appropriate portfolio criterias
Project examples
1,0
1,0
ideal
0,8
1
0,8
ideal
6
3
1
10
0,6
Technology
life cycle 0,4
0,6
2
9
Market
skills
3 4
75
6
8
0,2
8
2
0,4
10
9
0,2
fatal
fatal
0
0
0
0,2
0,4
0,6
0,8
1,0
0
Technology Position
ideal
1
0,8
7
0,6
6
0,4
4
3
10 9
2
5
8
0,2
fatal
0
0
0,2
0,4
0,6
0,2
0,4
0,6
0,8
1,0
Technology Position
1,0
Strategic
benefit
7 4
5
0,8
Risk (technological, commercial)
1,0
 Customer needs
 Access to clients
 Knowledge of competitors




Potential profit
Fit for the business
Sustainability of competitiveness
Strategic role of technology
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Innovation Excellence – Product Selection and Development
A Portfolio Management based on ECV (Expected commercial value of
projects) can lead to a significant increase of the R&D pipeline value
Project examples
Before
After
high
high
Attractiveness
NPV
low
low
low
high
low
high
Probability of commercial/
technical success
Risks
Mainly qualitative criteria for selection
+40%
Selection based on NPV/probability (ECV)
Pipeline Value ~ 3,5 bn $1)
Pipeline Value ~ 5,0 bn $
1) ECV based: Expected Commercial Value
Size of bubble = ECV in mio $
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Innovation Excellence – Product Selection and Development
Value Management starts at the Money Gate of the Stage Gate process
Stage Gate and Portfolio Management
"new" product
Idea/
Proof of
concept
Kickoff
Gate
Business
Case
Money
Gate
Development
Go to
testing
Gate
Testing &
validation
Launch
Gate
Launch
Evaluation of single project
based on NPV and risk
Budget planning
Portfolio review:  Prioritization
 Resource allocation
Strategy
Responsible: Gatekeeper
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Innovation Excellence – Product Selection and Development
A properly implemented Stage Gate Process can free up significant
resources and improve productivity
Project examples
ADL Project example
Benefits
Number of Projects
Status
Target
100%
 Innovation closer to
market needs, due to
market justification
(business case) in early
project phase
 Resources will be
increased in the more
cost efficient early phases
50%
 Projects will be terminated
earlier – if required
0%
Stage 4
Pilotphase
Gate 5
Stage 3
Labphase
Gate 4
Stage 2
Business
Case
Gate 3
Gate 2
Stage 1
IdeaGeneration
Time
Stage 5
Launch
Source: Arthur D. Little
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Innovation Excellence – Technology and Resources Management
The secrets of success are good project management and technology
partnerships
Management of Technology and Resources
Systematic improvement
of project management
skills
Technology partnerships
with other companies
Collaboration with federal
research institutes
Active license
management
Clear separation between
product and technology
development
2
3
Low importance
4
5
Very high importance
Source: Arthur D. Little Innovation Excellence Study 2005
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Innovation Excellence – Technology and Resources Management
Degussa's routes to new business involve project houses and internal startups
New Business Development
High
Risk
Science
Society
Markets
Business
Technology
Medium
Risk
Exploration
& Validation
Internal
Start-ups
New
Business
Corporate
Venture
Project
House
Business
Unit
New Technology Platforms
Source: Degussa, Euroforum 2005
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Innovation Excellence – Delocalization of Innovation
Due to the global innovation competition the early stages of the innovation
process become increasingly important
Today
Idea
generation
Tomorrow?
Concept
development
Idea
generation
Implementation
Concept
development
Implementation
Innovation performance in
Europe
Asia
Trend to shift concept- and
implementation phase to foreign
countries
 To benefit from efficiency
advantages
 To increase proximity to
customers
 Challenge: Keep proprietary
Know How
Example China
 With more than 10,000
research institutes
 Pool of trained scientists
(800,000 science and
engineering degrees)
 Repatriation of US educated
scientists (over 110,000
scientists since 1994)
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Innovation Excellence – Measurement of Innovation
Good performance indicators help companies to set the baseline and
support improvement in innovation excellence
Key Innovation Metrics
Sales/results of new
products
36%
17%
Number of new products
Impact on sales, EBIT,
and/or costs
11%
Number of patents
11%
Time to market
4%
Project management
measures
3%
2%
Innovation rate
16%
Others
0%
10%
20%
30%
40%
Frequency
Source: Arthur D. Little Innovation Excellence Study 2005
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Innovation Excellence – Measurement of Innovation
Good performance indicators help companies to set the baseline and
support improvement in innovation excellence
Key Innovation Metrics
General metrics,
indirectly related to
innovation, e.g.
 Customer
satisfaction
 Total sales
 Market share
 EBIT
Metrics directly
related to
innovation
47%
53%
Source: Arthur D. Little Innovation Excellence Study 2005
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Innovation Excellence – Measurement of Innovation
Possible Innovation Balanced Scorecard
illustrativ
3. Portfolio und Pipeline Health
– Erwartungswert der F&E-Projekte
1. Umsatz aus neuen Produkten
%
Mio. €
30
Neue
Produkte
20
Neue
Varianten
600
10
Alte
Produkte
300
0
900
0
2003
2004
2005
2003
2. Rentabilität der F&E
Verhältnis
F&EAufwand/
Deckungsbeitrag
neuer
Produkte
2005
4. Innovationsklima
Innovationsklima Index
1,10
2004
40
Bester Wettbewerber
30
1,00
20
0,90
Wir
10
0,80
0
2003
2004
2005
2003
2004
2005
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Innovation Excellence – Innovation and Stock Markets
In der Post-Reengineering-Welt wird Innovation zum Schlüsselerfolgsfaktor
Average Shareholder Return vs. Innovativeness Rating
80% Zustimmung zu der
60% Feststellung
50%
"Top management's commitment to and
focus on increasing its organization's
40%to significant
innovative ability could lead
bottom line results over and above typical
30% initiatives"
costcutting and re-engineering
Source: ADL innovation survey
20%
Average Annual
Shareholder
Return 1986-96
10%
0%
-10%
-20%
3,00
4,00
5,00
6,00
7,00
8,00
9,00
Innovativeness Rating
Innovativeness Rating: Based on America’s Most Admired Corporations, Fortune Magazine ranking of 578 U.S. companies based on executive peer
ratings and investment analyst evaluations.
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Innovation Excellence – Innovation and Stock Markets
Impact of innovation on chemical stocks' value drivers?
Portfolio Focus
Earnings Predictability
Long-term sales growth
Scale
Capital Structure
Profitability/ROIC
Source: CSFB
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Innovation Excellence – Innovation and Company Climate
Innovative enterprises …
Build an
innovative culture
Time and budgets for
ideas/exploration
Open up communication,
build flat hierarchies
Establish error
tolerance
Set enterprise target
innovation
Break down think
barriers
Question the
status quo
Destroy status-quomentality and cemented
structures
Increase speed of
change
Source: Degussa, Euroforum 2005
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Innovation Excellence – Innovation and Company Climate
… and …
Turn employees
into entrepreneurs
Offer incentives to build
new business, share
success instead of
jealousy
Establish fast decision
process
Install and use tools
Implement
professional
knowledge
management
Build cooperations with
knowledge institutions
globally
Give access to external
and internal knowledge
for everybody
Source: Degussa, Euroforum 2005
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Innovation Excellence – Survey Results
Achieving Innovation Excellence can boost the EBIT-margin
Improvement Potential
Top
line
Shorten time to market …
24.8%
Increase rate of
innovation1) …
23.6%
Increase sales…
Bottom
line
80.0%
13.5%
Reduction of product
cost …
15.4%
Reduction of development cost2) …
15.0%
Absolute increase
in EBIT margin
65.0%
3.6%
55.8%
43.3%
46.3%
11.4%
ø all companies
ø of Top Performer
(Top 5%)
1) Number of successful new product launches per year; 2) Project specific development costs
Source: Arthur D. Little Innovation Excellence Study 2005
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Innovation Excellence – Summary
As a number one priority, companies worldwide are targeting the huge
untapped potential to improve profit growth through innovation management
1
Innovation-based profit growth tops the corporate agenda again
2
Innovation excellence can boost EBIT-margins by 4%
3
Top innovators have 2.5 times higher sales of new products and get more than
10 times higher returns from their innovation investments
4
A well-balanced innovation approach is the key to success:
 Good business intelligence
 Clear innovation objectives linked to strategy
 Milestone-based idea generation and implementation process
 Measurement of/feedback on innovation performance
 Wise use of partnerships
 Right innovation climate
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Appendix
Innovation-related processes










Informal
Ration resources
Analysis
Formal
Extensive
Elaborate/formal
Isolated
Removed from Mkt
Underestimated/used
Excluded
Innovation strategy
Planning focus
Planning emphasis
Communications
Staff involvement
Decision process
R&D
Product managers
Technology
Outsiders










Defined/clear
Identify opportunities
Action
Informal
Minimum
Short/informal
Exposed to market
Attuned to market
Well understood/used
Participate
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Appendix
Innovation-related attitudes










Not explicit
Short-term
Not tolerated
Not accepted
Buried
Little emphasis
Rigid/enforced
Disliked
Low/unrealistic
Corporate interests
Interest in innovation
Payback horizon
Mavericks
Failure
Lessons from failure
Interpersonal skills
Corporate norms
Uncertainty
Mgmt. expectations
Staff emphasis










Explicit
Long-term
Tolerated
Accepted
Extracted/shared
Strong emphasis
Not enforced
Accepted
High/reasonable
Personal development
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Appendix
Innovation – related policies
 Closed
 Inexistent
 Not Available
 Centralized
 Scarce
 Individuals
 Discouraged
 Autocratic
 Below average
 Ignored
Partnerships/
acquisition
Careers for innovators
Rewards for innovators
Structure
Innovation resources
Product champions
Work groups
Decision mode
R&D budgets
Innovation success










Open
Dual ladder
Available
Decentralized
Available
Teams
Encouraged
Participative
Above average
Publicized
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