Sources of innovation opportunities in the business environment Objectives. • Understand the role and place of opportunity recognition in the innovation process • Be able understand what a business opportunity is • Understand and identify the key elements of the business environment Introduction As new head of virtual services development of Worldwide Business Machines, the company CEO has sent you to the 25th annual Global Innovation Symposium held this year in Montréal. This year’s them : Innovation : Past, Present and Future. She has asked you to learn more about innovation and the challenges for the company. You’ve chosen to visit the conference workshop that addresses the recognition of innovation opportunities. Understanding the “fuzzy front end” of innovation is essential for WBM which must quickly identify opportunities to place into the innovation funnel. In addition, your CEO has clearly indicated that WBM must focus on radical innovation which requires a broad appreciation of opportunities vs. in depth understanding in specific areas often useful for incremental innovation. Welcome to the conference centre A short welcome Your interactive personal digital assistant will help you find your way. • Advance at your own pace • Zoom in for a deeper understanding • Listen to what others have to say Welcome to the live-community ! Listen to the instructions The live-community interface offers conference participants the best of self-paced discovery and learning from a community of practice. Learn more about a subject by cliking here. Click on the community links to learn more from colleagues and peers. Active Reading The first section of this course presents a short review of the fuzzy front end of innovation and opportunity recognition. The Fuzzy Front End of Innovation Listen and learn sales development planning invention prototyping The innovation funnel process, like most organisational processes, requires time and consumes valuable resources. It is in the best interest of the firm to make sure that some degree of opportunity screening is done up front. The Fuzzy Front End of Innovation Listen and learn $ $ $ $ $ The innovation funnel process, like most organisational processes, requires time and consumes valuable resources. It is in the best interest of the firm to make sure that some degree of opportunity screening is done up front. The Fuzzy Front End of Innovation Listen and learn Creativity and decision making skills are essential to the fuzzy front end ! The Fuzzy Front End of Innovation Key activities Development Idea Opportunity of the business Identification Genesis Selection Analysis case The Fuzzy Front End of Innovation So…what makes it fuzzy ? Environmental uncertainty Market uncertainty Technological uncertainty Click here to learn more about some tools to better manage the FFE Uncertainty about internal competencies What do businesses consider as fuzzy ? Organizations that best manage fuzzines will more easily identify innovation opportunities that others might not be able to see. Remarks from the community What is the innovative organization ? Pierre Moran Senior VP, Consumer Market Group Desjardins “Listen to clients and recognize the contribution of others” Patrick Pichette Chief Financial Officer Bell Canada “The need for clear direction” Jean-Paul Peauger Director, Social, Technical and Administrative Affairs ALCAN “There needs to be a clear vision and fast implementation” ZOOM ! Some ways to manage fuzziness close « De-fuzzing » the fuzz The more the Fuzzy Front End is properly aligned with the organization, the more efficient it will be. Here are two basic tools to align the front end. A Product Innovation Charter that authorizes an activity and reassures people that risk taking is tolerated but that the company expects to see concerted effort and leadership. Items for the PIC may include : new product purpose, concern for shareholders, statement of values, performance objectives, type of end-user activity, general new product goals… See « Product Innovation Charters: mission statements for new products » by Christopher Bart, R&D Management, 32:1, 2002. The Elevator Test – or the capacity to explain an idea in the time it takes to ride one way a short elevator (for example to a potential sponsor, etc.) Questions include : For whom? Who needs it? What is the product name and category? Why will people buy it? How is it different than its closest competitor? How is it different? The Fuzzy Front End of Innovation Clarification of inputs and outputs makes it less fuzzy ! INPUTS OUTPUTS Click on each element for clarification ! Cross-functional teams for development and evaluation are often critical for success ! Learning Mission Here’s a quick assignment for you to do on you own or with others. Please feel free to print off the assignment and do at your leisure. You may want to consider sharing your analysis. The Fuzzy Front End of Innovation How fuzzy is your front end ? 10 Full Integration ( ) There is a clear vision of product lines and platforms for specific markets. ( ) R&D and product development have matching agendas and 8 Integration of Activities Partial Integration Little Integration 4 3 3 Intuitive According to the authors, companies scoring at least 8 on each list can be considered as « world class ». If a company scores less than three on either list are likley to have problems with product development. Adapted from « Integrating the Fuzzy Front End of New Product Development t » Khurana & Rosenthal, Sloan Management Review, 1997. 4 8 Explicit in Part 10 Explicit Formality of Process ( ) Customer and market information is used early on to set scope for product (target markets, customer segments, features, price) ( ) Core team jointly reviews product Short Quiz We have seen that opportunity recognition starts with effective management of the fuzzy front end. Companies that can recognize innovation opportunities and get them going through the funnel faster than the others will have the advantage. Much of the recognition process deals with getting people to think differently and effectively see innovation opportunities. In many cases people are not prepared to see opportunities. Are you? While another course will address specific aspects of creativity, here are three quick concepts to consider. Opportunity Recognition Are you ready to see them? 1 True False Business ideas usually just « appear » Opportunity Recognition Are you ready to see them? 1 True False Business ideas usually just « appear » Research suggests that opportunity identification or recognition is composed of several learning steps over time and requires immersion into the industry or marketplace. Opportunity Recognition Are you ready to see them? 2 True False To recognize opportunites, you must be concentrated Opportunity Recognition Are you ready to see them? 2 True False To recognize opportunites, you must be concentrated Research suggests that opportunity recognition does not require deliberate action. In fact many successful entrepreneurs think of new business ideas when they are totally relaxed, doing something unrelated to business. So, while information gathering is active, the capacity to bring the information together and think creatively may be much less deliberate. What does this suggest about managing creativity ? Opportunity Recognition Are you ready to see them? 3 Left Brain Thinking Right Brain Thinking randomness holistic think about parts think about whole focus on logic analytical The creative thinking process requires strong « right brain » thinking. What characterizes this way of thinking? Case Study As you have seen, opportunity recognition is based primarily on process that deal with information gathering and information analysis. Information gathering is a well structured process that helps identify potential areas of business opportunities. The following case study helps to illustrate the importance of this process. Case Study : Hybrid Automobiles They “never saw it coming” … or did they ? Toyota and GM stock performance Toyota A recent key innovation has been the emergence of hybrid automobiles. With growing sales, hybrids have successfully gone from the drawing board to the garage. GM May 2005 December 2005 The « lowdown » on « motown » ZOOM ! Was Detroit ready for hybrids? close The « lowdown » on « motown » In 2004, Forbes magazine suggested that GM (along with Chrysler) needed a hybrid strategy option and that even though gas prices were at $2 a gallon, higher prices might encourage their use. GM seemed to be looking in other directions for investment – rather than going down the road well traveled – hybrid. A recent key innovation has been the emergence of hybrid automobiles. With growing sales, hybrids have successfully gone from the drawing board to the garage. While the paradiGM hybrid system was anounced as early as 2001, by 2005 GM still had no commercial strategy for the system. Case Study : Hybrid Automobiles Did Toyota just “get lucky” ? Technological feasbility Organizational capabilities Some might suggest that Toyota is just lucky and that gas prices are increased because of random events. Political support Emerging values Organizational Capabilities Consumer trends Environment Economic forces and Market Coherence Supply of oil In fact, the hybrid innovation is an excellent example of the importance of analyzing the business environment in seeking and exploiting opportunities. Case Study : Hybrid Automobiles To what extent are consumers ready to pay for them? Lets come back to the case of hybrid cars. Price of gas The hybrid canThebe hybrid « buy » zone considered an innovation as people are increasingly buying them. Perceived value of hybrid cars To what extent has this innovation interplayed with a coherent and supportive environment ? Case Study : Hybrid Automobiles But oil prices are only part of the puzzle ! The hybrid is consistent with the evolution of family structures, values and demographics Government policies support the purchase of hybrid automobiles But the environment is much more than consumer behaviour. How have other parts of the business environment played a role in this innovation? The required technologies (more than one) evolved and finally converged to make it possible The long road to « hybrid » ZOOM ! Hybrid history The long road to « hybrid » The first hybrid was developed by Porsche in 1898! During the gas crunch in the 70’s, many car makers invested into hybrid and electric cars. However as prices decreased, do did the enthusiasm of these solutions. In 1992, Toyota announced the “Earth Charter” – a mission of developing low emission vehicles and in 1997 the Prius went on sale in Japan. Case Study : Hybrid Automobiles Bringing it all together Technological feasbility Organizational capabilities Political support Emerging values Economic forces Consumer trends Supply of oil This simple example shows how the Political, Economic, Socio-Cultural and Technological components of the environment have come together to support the hybrid innovation. Case Study : Hybrid Automobiles Bringing it all together Tax policy Energy policy Tax policy Energy policy Global warming Global warming This simple example shows how the Political, Economic, Socio-Cultural and Technological components of the environment have come together to support the hybrid innovation. Case Study : Hybrid Automobiles Bringing it all together High cost of city housing Dismantling of railways Tax policy Energy policy Dismantling of railways High cost of city housing Suburban life Suburban life Global warming This simple example shows how the Political, Economic, Socio-Cultural and Technological components of the environment have come together to support the hybrid innovation. Case Study : Hybrid Automobiles Bringing it all together Tax policy Energy policy Dismantling of railways High cost of city housing Suburban life Increased elderly Increased elderly Global warming This simple example shows how the Political, Economic, Socio-Cultural and Technological components of the environment have come together to support the hybrid innovation. Case Study : Hybrid Automobiles Bringing it all together Tax policy Energy policy Dismantling of railways High cost of city housing Suburban life Increased elderly Peak oil Peak oil Global warming This simple example shows how the Political, Economic, Socio-Cultural and Technological components of the environment have come together to support the hybrid innovation. Case Study : Hybrid Automobiles Bringing it all together Tax policy Energy policy Dismantling of railways High cost of city housing Technology convergence Suburban life Increased elderly Technology convergence Peak oil Global warming This simple example shows how the Political, Economic, Socio-Cultural and Technological components of the environment have come together to support the hybrid innovation. Case Study : Hybrid Automobiles Bringing it all together : PEST Tax policy Energy policy P Political - Legal E Economic High cost of city housing S Socio-cultural Demographic Suburban life Increased elderly T Dismantling of railways Technological Technology convergence Peak oil Global warming This simple example shows how the Political, Economic, Socio-Cultural and Technological components of the environment have come together to support the hybrid innovation. Detecting Patterns The environmental changes may create recognizable patterns P E S T Detecting Patterns The environmental changes may create recognizable patterns P T PESTPESPESTPESTPESTPEST PESTPESPESTPESTPESTPEST PESTPESPESTPESTPESTPEST PESTPESPESTPESTPESTPEST PESTPESPESTPESTPESTPEST PESTPESPESTPESTPESTPEST PESTPESPESTPESTPESTPEST PESTPESPESTPESTPESTPEST PESTPESPESTPESTPESTPEST PESTPESPESTPESTPESTPEST PESTPESPESTPESTPESTPEST PESTPESPESTPESTPESTPEST PESTPESPESTPESTPESTPEST PESTPESPESTPESTPESTPEST PESTPESPESTPESTPESTPEST PESTPESPESTPESTPESTPEST PESTPESPESTPESTPESTPEST PESTPESPESTPESTPESTPEST PESTPESPESTPESTPESTPEST PESTPESPESTPESTPESTPEST PESTPESPESTPESTPESTPEST PESTPESPESTPESTPESTPEST $ E S Understanding the PEST environment Remarks from the community The PEST environment Pierre Moran Senior VP, Consumer Market Group Desjardins “Social and demographic changes and their impact on financial services Patrick Pichette Chief Financial Officer Bell Canada “Focus on the technology agenda and the regulatory environment” Jean-Paul Peauger Director, Social, Technical and Administrative Affairs ALCAN “The importance of regulations and social responsibility” Listen and Learn What defines a potential opportunity for innovation? Where can organizations search for these opportunities? The following section looks at these two questions in detail. Analysing the environment for opportunities Search and Rescue SOS A B WHERE ? WHAT ? HOW ? Analysing the environment for opportunities Key questions to consider After you know what to look for, you have to narrow the scope of the search to be efficient. Identifying an opportunity should not be like finding a needle in a haystack. Companies need to look in the relevant environment and across pertinent segments. WHERE ? Analysing the environment for opportunities Key questions to consider Searching for potential opportunities for innovation requires that we know WHAT we are searching for ! What characterizes potential opportunities? WHAT ? WHERE ? Analysing the environment for opportunities Key questions to consider How the search process takes place must be clear and efficient. OPPORTUNITY HOW ? WHAT ? WHERE ? How can the search process vary across businesses and sectors? What active and passive searching activities can be undertaken? WHERE should we look ? Patterns that signal opportunities WHERE? Key concepts Some key definitions to read the “map” Weather Forecasting Winds, Temperatures Barometric pressure, Wind speed Business Environment Segments Politics, Economics, Demogrpahy,.. Indicators Interest rates, confidence surveys Falling temperatures Increased wind speeds Trends Winter storm possible Patterns Rising interest rates Decreasing confidence Risk of decrease in sales Key concepts Analysing change • Absolute analysis is not revealing look at change ! • Analysis of change is essential to business decision making Key concepts The goal Trends P indicator indicator indicator E indicator indicator indicator falling S indicator indicator indicator falling T indicator indicator indicator rising rising pattern falling Using historic analysis and our understanding of the links between segments, the emerging patterns act as a signal of other potential changes to come and their potential impact. The goal is to pick out important change before it is underway. The environment Where is the business environment? General Environment Task Environment Competitive Environment Firm Relevant Environment The environment Characteristics of the business environment Homogeneity Heterogeneity This considers the degree of similarity across elements or entities in the environment (how similar are products, competitors, etc.) Stability Instability To what extent are the elements or entities changing (rate of failure of companies, growth of the market, etc.) Connectedness How many different interconnections exist among the entities (how many suppliers for a buyer, distributors for a producer, lobbyists to politicians). Also looks at links across segments. Scarcity How rare are required resources by the organization Concentration Are required resources spread out or concentrated ? Are the clients concentrated by region? Be age? Turbulence To what extent are entities and linkages between them disturbed by increasing connectedness and rate of connectedness. Looks at the increase in causal connections that may obscure things. The environment Looking for change Political Milieu P E S T Regulatory Milieu Lobbyists Interest groups Parties Political structures Policies Bureacracies Branches of government Local, National, Supranational Laws Regulations Institutions Local, National, Supranational Polls Opinion statments Books by politicians Emergence of interest groups Election results Proposed laws and policies New standards and rates Changes in information disclosure rules Tax benefits/penalties Deregulation Supranational harmonisations Other segments The environment Looking for change Economic Environment P E S T Government Agencies Federal Banks Supranational Agencies and Governing Bodies Policy Makers Unions and Interest Groups Capital Market Actors Financial Institutions National Income and Product Savings Investment, Inventories Housing Starts Price and Wage Indices Labor Statistics Government Budgets International Transactions The environment Looking for change Polls Opinion statments ooks by politicians ence of interest groups Election results osed laws and policies Lifestyles P E S T Fast change here Hard to predict so concetrate on discovery of emerging lifestyles is important pay attention to primary data sources Government agencies Consumer reports Fashion trend experts Focus groups The concept of a family Composition of household Typical « basket of goods » Fashions and Fads Job security Two income families Age of workers Mobility Level of education Health concerns Demographics Values Statistical Agencies Secondary Sources Consultancies Research Organisations Census Bureaus Population Size Value changes are tracked by looking at Population Composition indicators of the other segments Age Structures Ethnic Mix Geographic Distribtuion Household Characteristics The environment Looking for change P E S T Demographics Life-styles Social values Political milieu Regulatory Economic environment Technology The environment Looking for change P E S T Demographics Life-styles Social values Political milieu Regulatory Economic environment Technology Remarks from the community Characterizing the business environment Pierre Moran Senior VP, Consumer Market Group Desjardins “An environment in evolution” Patrick Pichette Chief Financial Officer Bell Canada Jean-Paul Peauger Director, Social, Technical and Administrative Affairs ALCAN “A complex and unstable environment with numerous actors and increased concentration. WHAT are we looking for ? Patterns that signal opportunities Potential Opportunities WHAT? Opportunities Potential opportunities Drucker’s seven sources of innovation 1 2 The unexpected 3 Process needs 4 Structural changes 5 Demographics 6 Changes in perception, mood and meaning 7 New knowledge The incongruity Require a focused analysis. Symptoms of change underway Potential opportunities Drucker’s seven sources of innovation 1 The unexpected unexpected success What SHOULD be bad is good What SHOULD be good is bad The response of organizations to the unexpected success is more than often affected by the current strategy. Organizations tend to be too concerned about the relative failure - or their incapacity to predict success ! Potential opportunities Drucker’s seven sources of innovation 1 The unexpected unexpected failure Like the unexpected success, the unexpected failure suggests that the way companies analyze their environment and subsequently make decisions may be flawed. By using a failure to motivate changing the way things are done, new opportunities that were not visible, will be. In the case of Ford, they replaced socio-economic segmentation with lifestyle segmentation a real innovation ! Potential opportunities Drucker’s seven sources of innovation 1 The unexpected unexpected outside events The emergence of new technologies, behaviours or other changes that are unexpected often provides potential entrants a way to enter the market through innovation. Again, existing companies tend to discount the change or misunderstand its importance – retrenching activities and beliefs. Fear of change may blind organizations to opportunities ! Potential opportunities Drucker’s seven sources of innovation 1 The unexpected Two concerns : 1) Prolonged success and arrogance can result in changes not being expected ! 2) Defensive behavior in face of the unexpected may not be beneficial - change may provide opportunities ! Potential opportunities Drucker’s seven sources of innovation 2 The incongruity persistence of discrepancies The way it is or has been The way it should or can be Potential opportunities Drucker’s seven sources of innovation 2 The incongruity persistence of discrepancies Why don’t companies do it differently? Economic Realities Why doesn’t someone provide this service? We can’t make money like that …or can we? Realities vs. Assumptions of Reality The buyer wants fast, speedy service…not quality Perceived vs. True Client Value I don’t understand why they are not happy ! I know the process – and I know we can do it differently ! Process incongruities Why can’t they get it right for once ! Listen AND ACT upon client feedback. Clients won’t put up with incongruities for a long time ! Potential opportunities Drucker’s seven sources of innovation 2 The incongruity persistence of discrepancies Why do I have to give my credit card number again? Why don’t they give me the phone numbers I need to confirm my flight? Potential opportunities Drucker’s seven sources of innovation 3 Process needs Task focused innovations Perfect a process Incongruities Demographic change Replace weak links in a process Modify old processes Potential opportunities Drucker’s seven sources of innovation 3 Process needs Task focused innovations The problem is understood We have the knowledge The solution « fits » behaviors Self-containment Only one link to improve A clear process objective Solutions can be clearly defined Users open to improvement Potential opportunities Drucker’s seven sources of innovation 4 Structural changes New competitors Adoption of new technologies Fast growth More sophisticated buyers Change in supplier markets New distribution channels De-regulation Potential opportunities Drucker’s seven sources of innovation 4 Structural changes 4 indicators of structural change 1. Rapid Growth Periods of rapid growth open the door to potential new players. Potential opportunities Drucker’s seven sources of innovation 4 Structural changes 4 indicators of structural change 1. Rapid Growth 2. Out of synch supply The emergence of new users who seek different value from a product or service may signal that change is around the corner Potential opportunities Drucker’s seven sources of innovation 4 Structural changes 4 indicators of structural change 1. Rapid Growth 2. Out of synch supply 3. Technology convergence Potential opportunities Drucker’s seven sources of innovation 4 Structural changes 4 indicators of structural change 1. Rapid Growth 2. Out of synch supply 3. Technology convergence Change Change in A in B 4. Changes in how things are done Change in C Potential opportunities Drucker’s seven sources of innovation 1 2 The unexpected 3 Process needs 4 Structural changes 5 Demographics 6 Changes in perception, mood and meaning The incongruity Require a focused analysis. Symptoms of change underway A broad vision is required External 7 New knowledge Potential opportunities Drucker’s seven sources of innovation 5 Demographics Size Age distribution Mobility Gender Employment Sub-groups Education Lead times Potential opportunities Drucker’s seven sources of innovation 5 Demographics Source : Canada ‘s Aging Population; Minister of Public Works and Government Services Canada 2002 Potential opportunities Drucker’s seven sources of innovation 5 Demographics Source : Canada ‘s Aging Population; Minister of Public Works and Government Services Canada 2002 Potential opportunities Drucker’s seven sources of innovation 5 Demographics PIN Number : ???? Potential opportunities Drucker’s seven sources of innovation 5 Changes in Perception fads or lasting change ? play it safe ! On-going and recent changes Perception of security Perception of the family Perception of health Perception of work vs. leisure Perception of women leaders Perception of social classes Even if the content stays the same, perceptions can change ! Potential opportunities Drucker’s seven sources of innovation 5 New Knowledge Long lead time from knowledge to application Convergence of knowledge often required nanotubes Potential opportunities Drucker’s seven sources of innovation 5 New Knowledge 1. Do ALL of the analysis 2. Have a clear strategic position 3. Be entrepreneurial managers Short Quiz In the following example try to match the examples with the generic sources of innovation. QUIZ : Source of Innovation Drag the examples from the right into the appropriate box on the left Change in perception In home elevators New Knowledge On-line Training in China Structural Change Increase in on-line purchasing Feedback The Unexpected P2P cell phones Demographics Unexpected fall in 4x4 sales The Incongruity High rate of cheating on public transportation Comprehension Exercise Respond to the following 10 multiple choice questions. Comprehension Exercise 1 Which of the following innovation funnel stages is NOT part of the fuzzy front end ? Development Invention Planning Comprehension Exercise 2 Which of the following is should clearly be provided as an input by companies when properly managing the fuzzy front end? Stage gate criteria The implementation plan The innovation definition Comprehension Exercise 3 Scanning only the companies task environment may limit the search for radical innovations. True False Comprehension Exercise 4 Analyzing the trends in industry regulation is a key element of which environmental segment? Political Economic Social Comprehension Exercise 5 Operational measures of variables under analysis are called… Patterns Indicators Segments Comprehension Exercise 6 An incongruity is a one-time discrepancy between the way things are and the way they should or can be. True False Comprehension Exercise 7 Which of he following is NOT a key criteria for effective process innovation? Self containment Behaviors can be easily modified to fit the solution The problem is well understood Comprehension Exercise 8 Rapid and not slow growth is an indicator of structural change. True False Comprehension Exercise 9 Change in the connections between environmental entities is referred to as : Connectedness Turbulence Instability Comprehension Exercise 9 Change in the connections between environmental entities is referred to as : Connectedness Turbulence Instability Comprehension Exercise 10 The criteria that innovations must meet as they go through the innovation funnel are referred to as : Cross-impact criteria Investment hurdles Stage gates Comprehension Exercise 10 The criteria that innovations must meet as they go through the innovation funnel are referred to as : Cross-impact criteria Investment hurdles Stage gates Author and Scenarist : Daniel S. Evans About the Author Daniel S. Evans Ph.D. is Director of the LifeLong learning Research Centre at EM LYON, France. He holds a Doctorate from The Ohio State University and is professor of Entrepreneurship. In addition to extensive experience in teaching at the graduate level, Doctor Evans has designed and implemented training programmes for companies in the areas of innovation, intrapreneurship and the business impact of technological change.