Appunti di Strategic and Innovation Management

STRATEGY

3.2 CHOOSING INNOVATION PROJECTS

Since the resources are scarce (not only financial but also managerial and researchers),

how do you select the main projects?

There are many methods for choosing innovation projects that range from informal (=

Qualitative) to highly structured (= Quantitative).

Often firms use a combination of methods to more completely evaluate the potential

(and risk) of an innovation project.

Development budget:

Most firms face serious constraints in capital and other resources they can invest in

projects. Firms thus often use capital rationing: they set a fixed R&D budget and rank

order projects to support, so that:

- the R&D budget is often a percentage of previous year’s sales;

- percentage is typically determined through industry benchmarking, or historical

benchmarking of a firm's performance.

The typical indicator is the R&D Intensity (budget allocated to R&D/Sales) and from

empirical observation it varies considerably across and within industries; the industries

that have a higher value of this indicator are “drugs, biological products, and

diagnostics”, “special industry machinery” and “semiconductors and electronic

components”.

Methods for choosing innovation projects:

Quantitative

● The commonly used quantitative methods include Discounted Cash Flow (DCF)

methods:

- Net Present Value (NPV) = Present value of cash inflows - Present value of

cash outflows

Expected cash inflows are discounted and compared to outlays.

So you value the project worth considering given the expenditures, the

cash inflows and the discounted rate. 135

Another method that is derived from this one is the Discounted Payback

Period which measures the time required to break even on a project using

discounted cash flows.

- Internal Rate of Returns (IRR)

Is the discount rate that makes the net present value of investment zero

(NPV = 0). So you compare projects based on the return rate that the

projects yield.

This is a trial and error method; the higher the rate is the more promising is

the project.

Strenghts:

Provide concrete financial estimates.

➢ Explicitly consider timing of investment and time value of money.

➢

Weaknesses:

May be deceptive; only with accurate estimates of cash flows.

➢ May fail to capture strategic importance of project (risk to neglect impact

➢ of the project on the competences endowment).

You don’t assume the reinvestment of the cashflow.

➢

Qualitative

● Many factors in the choice of development projects are extremely difficult (or

misleading) to quantify. Almost all firms thus use some qualitative methods.

Screening Questions may be used to assess different dimensions of the project

decision including:

- Role of customer (market, use, compatibility and ease of use, distribution

and pricing, learning curve, switch cost).

- Role of capabilities (existing capabilities, competitors’ capabilities, future

capabilities; current gap).

- Project timing and cost (time to market, new plants, new facilities, new

employees).

One of the methods used to choose projects is the Aggregate Project Planning

Framework, which helps managers map their R&D projects according to levels of

risk, resource commitment and timing of cash flows. 136

In this framework considers two dimensions of change of innovation:

- product change

- process/technology change

that both range from an incremental innovation to the development of next

generation innovation.

Crossing the two dimensions we obtain 4 areas, different in innovation degree:

Derivative projects They are a potential subset of platform projects.

→

➔ Incremental improvements in terms of efficiency and variety in design

features;

Platform projects are characterized by additions to product families and

→

➔ single department upgrades. Not revolutionary, but offer fundamental

improvements over preceding generations of products;

Breakthrough projects next generation products or processes which are

→

➔ incorporated into a commercial application;

Advanced R&D projects are characterized by new core products and new

→

➔ core processes. Develop cutting-edge technologies; often no immediate

commercial application.

This map helps managers to balance the projects, for example because derivative

projects pay off the quickest, and help service the firm’s short-term cash flow

needs, while advanced R&D projects take a long time to pay off (or may not pay off

at all), but can position the firm to be a technological leader.

Managers then compare actual balance of projects with desired balance of

projects. 137

PART 4 - IMPLEMENTING TECHNOLOGICAL INNOVATION

STRATEGY

4.2 MANAGING THE NEW PRODUCT DEVELOPMENT PROCESS

Despite the intense attention paid to innovation, failure rates are still very high. More

than 95% of new product development projects fail to earn an economic return. The

following summarizes tools making new product development more effective and

efficient.

There is a different approach to project selection:

Before the mid-1990s, most companies used a sequential NPD process; now many use a

partly parallel process (but the sequential approach is still used).

Partly parallel processes shortens overall development time, and enables closer

coordination between stages.

In some situations, however, a parallel development process can increase risks.

- Sequential following stage starts after the

→

first stage is completed;

- Partly parallel the reduction of the time to

→

market and the shortening of the product life

cycle led to decrease the time dedicated to

the development process, and in fact in the

second exhibit a specific stage starts before

the completion of the previous stage ⇒

overlap of these stages.

It leads to a reduction of the time dedicated

to the production.

The last two stages of maintenance and

disposal are included in the product

development process.

The risks involve that if a change in one stage

is required, a feedback loop is necessary with

the other stages.

A new trend in the development process is the involvement of suppliers and customers

comakership and codesign of the product (usually met in the B2B markets since there

⇒

are involved high levels of resources):

Involvement of customers:

➢ Customers are often best able to identify the maximum performance capabilities

and minimum service requirements of a new product, so they may be involved on

the NPD team. 138

Some studies suggest that it is more valuable to use “lead users” than a random

sample of customers Lead users are customers who face the same general

⇒

needs of the marketplace but experience them earlier than the rest of the market

and benefit disproportionately from solutions.

The lead user method reduced the cost and time of the project by almost half.

E.g. First, customers with lead user characteristics were identified through phone

interviews, then lead users participated in a three-day product concept

generation workshop. At the end of the workshop, a single design was selected as

best.

Involvement of suppliers:

➢ Involving suppliers on the NPD team or consulting as an alliance partner can

improve product design and development efficiency.

Suppliers can suggest alternative inputs that reduce cost or improve functionality.

There are 3 main tools for improving the NPD process:

Stage-Gate Processes

● The product development process arises within different stages; this framework

utilizes tough go/kill decision points in the development process to help filter out

bad projects.

Stage specific step where managers assist the project and manage commercial

→

technical and financial info related to the product; 139

Gates questions that help managers decide if the project should be developed

→

by passing through the next steps or not;

In the post launch stage there is feedback on the project, if it went well or not.

Usually this tool plays as a final to decide which projects survive.

Empirical research demonstrates that the time and cost of projects escalates with

each stage, thus stage-gate processes only permit a project to proceed if all

assessments indicate success.

In the early stage there are low costs but later on they increase at an exponential

rate this tool reduces costs of new product development.

→

The Life Cycle Curve (LCC)

● The LCC estimates/detects all costs incurred by a product throughout its entire

life cycle.

- Blue curve % of costs determined in the production phases;

⇒

- Red curve % of costs incurred;

⇒ 140

In the first stage, R&D and design significantly affect the cost of production which

are not yet sustained, but will only later be sustained.

This tool is used for the budget forecasting or as a final report. It is also a

performance indicator of the team project (= Total Actual Cost - Expected Life

Cycle Cost).

It analyzes the performance of product development units in an integrated way;

implies a long term horizon.

Target costing

● It is an alternative approach with respect to the traditional design:

- In the traditional

approach the company

decides the product

features, they define the

design and the specific

engineering the

→

economic and market

values enter in the

analysis in the last steps,

this approach is far from

the market.

- The target costing

approach was introduced when Toyota decided to provide products that

have prices that the customers are able to sustain called allowable cost

which is the maximum cost admitted for the product (where profit rate is

the aim of the company and the price is defined accordingly); design and

engineering is the last step.

Allowable cost = price x (1 - profitability)

The allowable cost is then compared with the expected cost of the product:

if the allowable cost is lower than the expected cost, possible improvement

interventions are analyzed according to two different lines of action:

1. for in-house components the firm has to reduce the costs;

→

2. for outsourced components they have to share with partners and

→

suppliers the costs;

I.e. This is one of the approaches used by automotive companies; it creates an

economic responsibility of engineers over the realization of the products.

4.1 ORGANIZING FOR INNOVATION

A firm’s size and structure will impact its rate and likelihood of innovation. Some

structures may foster creativity and experimentation; others may enhance efficiency

and coherence across the firm’s development activities. There may also be structures 141

that enable both simultaneously. Some structural issues are even more significant for the

multinational firm.

Looking at the vari