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A Product Innovation Strategy for Your Business: What Markets ... Document Transcript

  • 1. Product Innovation Best Practices Series A Product Innovation Strategy for Your Business: What Markets, Products, and Technologies? An excerpt from the best-selling book— Product Leadership: Pathways to Profitable Innovation Second Edition, Chapter 3 Dr. Robert G. Cooper Reference Paper # 31 Compliments of: Stage-Gate Inc. and Product Development Institute Inc. For information call +1-905-304-8797 www.stage-gate.com © Product Development Institute Inc. 2000-2008
  • 2. A Product Innovation Strategy for Your Business: What Markets, Products, and Technologies? Dr. Robert G. Cooper The Author: Dr Robert G Cooper is Professor of Marketing, McMaster University, Canada; ISBM Distinguished Research Fellow, Penn Stage University, USA; and President of the Product Development Institute. He is also the developer of the popular Stage-Gate® system, used by hundreds of major firms globally. He is a prolific researcher and author in the field of new product management, and has published over 100 articles and six books on the topic. This excerpt is Chapter 3 from the best-selling book Win the Battle, Lose the War? “Product Leadership: Pathways to Profitable Innova- tion, Second Edition”, authored by Dr. Robert Cooper. This book is written for senior managers and execu- What if ... tives with a mandate to lead their businesses to profit- able growth through product innovation. It is the ad- you had implemented a world-class idea-to- vanced course – a comprehensive guide to how execu- launch framework to guide projects to market tives can use the four points of performance in the much like ExxonMobil Chemical did? Innovation Diamond™ to drive successful product innovation. It not only describes best practices, but you had a superb portfolio management system to outlines how to chart a competitive Product Innova- help select projects as EXFO Engineering has? tion and Technology Strategy. (www.stage-gate.com) you had created a very positive climate and cul- ture for innovation within your business, as Mega Bloks has? Would the result be high performing business? Not necessarily. One of the most important drivers of suc- cess in new product warfare is missing: one of the I find the great thing in this world is not so much where we four points of performance of the Innovation Diamond stand, as in which direction we are moving: To reach the from Chapter 2 (see Exhibit 3.1). And that driver port of heaven, we must sail sometimes with the wind and makes the difference between winning individual bat- sometimes against it but we must sail, and not drift, and not lie at anchor. tles and winning the entire product innovation war —Oliver Wendell Holmes, [1,2]. The Autocrat of the Breakfast Table, 1858 The missing success driver is your business’s product innovation and technology strategy (Exhibit 3.1). And it’s lacking in too many businesses I have studied. The product innovation strategy charts the strategy for the business’s entire new product effort. These pages contain copyright information of Product Development Institute and member company Stage-Gate Inc., including logos, tag lines, trademarks and the content of this article. Reproducing in whole or any part of this document is strictly forbid- den without written permission from Product Development Institute Inc. or Stage-Gate Inc. 2 © Product Development Institute Inc. 2000-2008
  • 3. A Product Innovation Strategy for Your Business: What Markets, Products, and Technologies? It is the master plan: It provides the direction for your What Is a Product Innovation Strategy? enterprise’s new product developments, and it is the essential link between your product development ef- A product innovation strategy is a strategic master fort and your total business strategy [3]. plan that guides your business’s new product war ef- forts. But how does one define or describe a product This chapter begins with a look at the hard evidence in innovation strategy? The term “strategy” is widely support of strategy – facts that make it imperative that used in business circles today. The word is derived you and your leadership team develop a product inno- from the ancient Greek word meaning “the art of the vation strategy for your business. The components of general.” Until comparatively recently, its use was an innovation strategy are then defined, followed by a confined to the military. In a business context, strat- glimpse into some of the broad strategic options that egy has been defined as “the schemes whereby a your business might elect in product innovation. Next, firm’s resources and advantages are managed approaches to developing a product innovation strat- (deployed) in order to surprise and surpass competi- egy are outlined – approaches where you define and tors or to exploit opportunities” [4]. More specifically, elect arenas of strategic thrust for your new product strategic change is defined as “a realignment of firm’s efforts and possible attack strategies. So let’s move product-market environment” [5]. Strategy is closely forward, and play the role of the general, looking at tied to product and market specification: Corey argues strategy and direction for the business’s entire new that strategy is about choosing your markets to target, product effort. Let’s go win the innovation war! and choosing the products to target them with [6]. 3 © Product Development Institute Inc. 2000-2008
  • 4. A Product Innovation Strategy for Your Business: What Markets, Products, and Technologies? Business strategy here refers to the business’s overall The question of spending commitments on new prod- strategy; and product innovation strategy is a compo- ucts is dealt with by defining the role and goals of the nent of that business strategy [7]. And by business and new product effort. Too often the R&D or new prod- product innovation strategy, I do not mean a vaguely uct budget is easy prey in hard economic times. De- worded statement of intent, one that approaches a vi- velopment and new product marketing spending tend sion or mission statement. Rather I mean operational, to be viewed as discretionary expenditures, something action-specific strategies that include defined goals, that can be slashed if need be. Establish product inno- arenas of strategic focus, deployment decisions and vation as a central facet of your business’s overall attack and entry plans. strategy, and firmly define the role and goals of prod- uct innovation, however, and cutting this R&D budget Why Have a Product Innovation Strategy At All? becomes much less arbitrary: There is a continuity of resource commitment to new products. Developing a product innovation strategy is hard work. It involves many people, especially top manage- The Strategic Arenas – Guiding the War Effort ment. Why, then, go to all the effort? Most of us can probably name countless companies that do not appear A second facet of the product innovation strategy, the to have a master plan for their new product effort. definition of arenas, is critical to guiding and focusing How do they get by? your new product efforts. The first step in your idea-to -launch new product process is idea generation. But Doing Business Without a Strategy where does one search for new product ideas? Unless the arenas are defined, the idea search is undirected, Running an innovation program without a strategy is unfocused, and ineffective. like running a war without a military strategy. There’s no rudder, there’s no direction, and the results are Your business’s product innovation strategy is also often highly unsatisfactory. You simply drift. On oc- fundamental to project selection and portfolio man- casion, such unplanned efforts do succeed, largely agement. That’s why I show strategy as the top box in owing to good luck or perhaps brilliant tactics. the portfolio management system of Exhibit 4.5: Strat- egy drives the entire project selection process. With- A new product effort without a strategy will inevitably out a definition of your playing fields – the arenas of lead to a number of ad hoc decisions made independ- strategic thrust – good luck in trying to make effective ently of one another. New product and R&D projects screening decisions! are initiated solely on their own merits and with little regard to their fit into the grander scheme (portfolio The definition of arenas also guides long term re- management is all but impossible, for example). The source and personnel planning. If certain markets are result is that the business finds itself in unrelated or designated top priority arenas, then the business can unwanted markets, products, and technologies: There acquire resources, people, skills, and knowledge to is no focus. enable it to attack those markets. Similarly, if certain technologies are singled out as arenas, the business Goals and Role – the Necessary Link to Your Overall can hire and acquire resources and technologies to Business Strategy bolster its abilities in those fields, or perhaps even seek alliances with other firms. Resources building What types of direction does a product innovation doesn’t happen overnight. One can’t buy a sales force strategy give a business’s new product efforts? First, on a moment’s notice, and one can’t acquire a critical the goals of your product innovation strategy tie your mass of key researchers or engineers in a certain tech- product development effort tightly to your overall nology at the local supermarket. business strategy. New product development, so often viewed in a “hands-off” fashion by senior manage- Putting the right people, resources, and skills in place ment, becomes a central part of the business strategy, takes both lead time and direction. a key plank in the business’s overall strategic plat- form. 4 © Product Development Institute Inc. 2000-2008
  • 5. A Product Innovation Strategy for Your Business: What Markets, Products, and Technologies? The Evidence in Support of Strategy “A product innovation strategy links the new product process to company objectives, and The argument in favor of a product innovation strat- provides focus for idea or concept generation egy, although logical, may be somewhat theoretical. and for establishing appropriate screening crite- One can’t help but think of all those companies that ria. The outcome of this strategy analysis is a have made it without a grand strategy. Further, the set of strategic roles, used not to generate spe- notion of deciding what’s in versus out of bounds is cific new product ideas, but to help identify foreign to many businesses: After completing his large markets for which new products will be devel- sample study on innovation charters, Crawford notes oped. These market opportunities provide the that “the idea of putting definitive restrictions on new set of product and market requirements from product activity is not novel, but the use of it, espe- which new product ideas are generated. In addi- cially sophisticated use, is still not widespread”[8]. tion, strategic roles provide guidelines for new product performance measurement criteria. So where’s the evidence in support of having a prod- Performance thresholds tied to strategic roles uct innovation strategy? The studies that have looked provide a more precise means of screening new at businesses’ new product strategies have a clear and product ideas.” consistent message: A product innovation strategy at the business unit or company level is critical to suc- Our APQC benchmarking study also reveals that cess, and some strategies clearly work better than oth- having an articulated product innovation strategy ers. Consider these facts: for the business is one of the four important driv- ers of new product performance (Exhibit 3.1). Ten best practices were identified by management Businesses with a defined product innovation in a study of 79 leading R&D organizations [9]. strategy – one that specifies goals and the role of Near the top of the list is “use a formal develop- new products, defines arenas of strategic thrust ment process”, an endorsement of the use of stage and their priorities, outlines a product roadmap, -and-gate processes. Even higher on the list is and has a longer term orientation – achieve better “coordinate long-range business planning and new product results: These businesses meet their R&D plans” – a call for a new product or R&D new product sales and profit objectives more so; plan for the business that meshes with the busi- their new product effort has a much greater posi- ness plan. Although adoption of these best prac- tive impact on the business; and they achieve tices varies widely by company, the study re- higher success rates at launch. vealed that high performers tend to embrace these best practices more than do low performers. How various new product strategies are tied to performance was studied by Nystrom and Ed- Booz, Allen & Hamilton’s study of new product vardsson in a number of industrial product firms practices found that businesses that are most [11]. Strategies emphasizing the synergistic use likely to succeed in the development and launch of technology, a responsive R&D organization, of new products are those that implement a com- and an externally oriented R&D effort are gener- pany-specific approach, driven by business objec- ally more successful. While the study was lim- tives and strategies, with a well-defined product ited to a handful of strategy dimensions, the mes- innovation strategy at its core. The product inno- sage is clear that strategy and performance are vation strategy was viewed as instrumental to the closely linked. effective identification of market and product opportunities [10]. The authors of this study ex- The performance impact of product innovation plain why having a product innovation strategy is strategies in 120 businesses was investigated in tied to success: one of my own earlier studies [12]. This study is one of the first investigations undertaken on a large number of businesses that considers many strategy dimensions, and how the strategy of the business’s entire new product effort is tied to per- formance results. 5 © Product Development Institute Inc. 2000-2008
  • 6. A Product Innovation Strategy for Your Business: What Markets, Products, and Technologies? The overriding conclusion is that product inno- The Elements of a Product Innovation Strategy vation strategy and performance are strongly and Their Impacts linked. The types of markets, products, and tech- nologies that firms elect, and the orientation and Do you have a clearly articulated product innovation direction of their product innovation efforts, strategy for your business [14]? If so, you’re in the have a pronounced impact on success and profit- minority. But businesses that boast such a strategy do ability. Strategy really does count. Here are some better, according to the APQC benchmarking study strategy-types uncovered in this study: [15]. Six ingredients of a solid product innovation • The strategy yielding the best performance strategy strongly distinguish the top performing busi- results is labeled the differentiated strat- nesses in NPD (see Exhibit 3.2) [16]. egy: a technologically sophisticated and aggressive effort, very focused, and with a These strategy elements also provide insights into how strong market orientation. In this strategy, to go about developing a product innovation strategy the business targets attractive high-growth, for your business: They are the basis for the ideal logi- high-potential markets with premium- cal flow or “thought process” to guide your leadership priced, strongly differentiated, superior and team in developing an insightful product innovation high-quality products. This strategy leads strategy (see Exhibit 3.3 for the pathway or flow). So to the highest percentage of sales by new let’s look at each of these elements, what they are and products (47% versus 35% for the other why they are so critical: businesses); the highest success rates at launch; a higher profitability level; and 1. Goals and role: Begin with your goals! The busi- greater new product impact on the busi- ness’s product innovation strategy specifies the goals ness’s sales and profits. of the new product effort, and it indicates the role that product innovation will play in helping the business • The next best strategy is the low-budget achieve its business objectives. It answers the ques- conservative strategy – low relative R&D tion: How do new products and product innovation fit spending and featuring copy-cat, me too, into your business’s overall plan? A statement such as undifferentiated new products; but a highly “By the year 2007, 30% of our business’s sales will focused and a “stay-close-to-home” ap- come from new products” is a typical goal. Perform- proach, with new products matching the ance goals can also be stated, such as the desired num- business’s production and technological ber of major new product introductions, expected suc- skills and resources, fitting into the busi- cess rates, and desired financial returns from new ness’s existing product lines, and aimed at products. familiar and existing markets. Such a strat- egy achieves respectable results: The busi- This ingredient of strategy – having clear goals – ness’s new product effort is profitable rela- would seem to be fairly basic. What is surprising is tive to spending, but yields a low propor- how many businesses lack clear, written goals for tion of sales by new products and has a low their overall new product effort. Note the mediocre impact on the business’s sales and profits. scores in Exhibit 3.2: Only 38.1% of businesses profi- This conservative strategy results in an ciently define such NPD goals. By contrast, 51.7% of efficient, safe, and profitable new product best performers do spell out their NPD goals; and the effort, but one lacking a dramatic impact worst performers are quite weak here with only 34.6% on the business. defining goals. Having clearly articulated NPD goals for your business is thus a mandatory best practice. A number of companies do develop innovation strate- gies. For example, product innovation charters were Another key best practice is to ensure that the role of described by Crawford in his study of 125 firms [13]. new products in achieving the business’s goals is clear He notes that managements are now beginning to pull and communicated to all (also highlighted in Exhibit all the multi-functional elements together in one docu- 3.2). The whole point of having goals is so that every- ment, which specifies the types of markets, products, one involved in the activity has a common purpose... technologies, and orientation the company will pursue something to work toward. with its product innovation strategy. 6 © Product Development Institute Inc. 2000-2008
  • 7. A Product Innovation Strategy for Your Business: What Markets, Products, and Technologies? Yet, far too often, personnel who work on new prod- Here, businesses on average do a solid job, with uct projects are not aware of their business’s new 64.8% identifying and designating strategic arenas in product objectives, or the role that new products plays order to help focus their NPD efforts (Exhibit 3.2). in the total business objectives. What we witness here Best performers define strategic arenas more so than are very mediocre practices: Only 46.3% of busi- do worst performers: 69.0% versus 53.8%; and this nesses define and communicate the role of NPD in strategy element is again strongly correlated with achieving their business goals. However, 58.6% of NPD performance. best performers do define this role (versus only 30.8% of the worst performers), and this element of an inno- The specification of these arenas – what’s “in bounds” vation strategy is the most strongly correlated with and what’s “out of bounds” – is fundamental to spell- NPD performance. It’s clearly a best practice. ing out the direction or strategic thrust of the busi- ness’s product development effort. It is the result of 2. Arenas and strategic thrust: Focus is the key to identifying and assessing product innovation opportu- an effective NPD strategy. Your product innovation nities at the strategic level. Without arenas defined, strategy specifies where you’ll attack, or perhaps more the search for specific new product ideas or opportuni- important, where you won’t attack. Thus the concept ties is unfocused. Over time, the portfolio of new of strategic arenas is at the heart of a new product product projects is likely to contain a lot of unrelated strategy – the markets, industry sectors, applications, projects, in many different markets, technologies or product types or technologies on which your business product-types – a scatter-gun effort. And the results will focus its new product efforts. The battlefields are predicable: a not-so-profitable new product effort: must be defined! 7 © Product Development Institute Inc. 2000-2008
  • 8. A Product Innovation Strategy for Your Business: What Markets, Products, and Technologies? An example: One DuPont polymers business Additionally, entry plans should be outlined and can faced exactly this problem: much money spent on include internal product development, licensing, joint R&D, but no focus because there was no strategy venturing, and even acquisitions of other firms. or defined arenas. Senior management recognized the deficiency. Management first identified a 4. Deployment – spending commitments, priorities number of possible arenas (product-market- and strategic buckets: Strategy becomes real when technology areas) which might be “in bounds”; you start spending money! Your product innovation assessed each in terms of their market attractive- strategy must deal with how much to spend on product ness and the opportunity for leveraging the busi- innovation; and it should indicate the relative empha- ness’s core competencies; selected several arenas; sis, or strategic priorities, accorded each arena of stra- and then began to focus their new product initia- tegic focus. Thus an important facet of a product inno- tives within these chosen arenas. vation strategy is resource commitment and alloca- tion. And ear-marking buckets of resources (funds or 3. Attack strategy and entry strategy: The issue of person-days targeted at different strategic arenas or how to attack each strategic arena should also be part project types) helps to ensure the strategic alignment of your business’s product innovation strategy. For of NPD with your business goals [17]. example, the strategy may be to be the industry inno- vator, the first to the market with new products; or the Many best-in-class companies use the concept of stra- attack strategy may be to be a “fast follower”, rapidly tegic buckets to help in this deployment decision. But copying and improving upon competitive entries. the use of strategic buckets is a decidedly weak area Other strategies might focus on being low cost versus overall with only 26.9% of businesses doing this well. a differentiator versus a niche player; or on emphasiz- Strategic buckets is clearly a best practice, with 41.4% ing certain strengths, core competencies or product of best performers employing this strategic buckets attributes or advantages. approach (and only 15.4% of worst performers). More on how to develop strategic buckets in Chapter 4. 8 © Product Development Institute Inc. 2000-2008
  • 9. A Product Innovation Strategy for Your Business: What Markets, Products, and Technologies? 5. The strategic product roadmap – the major some longer term projects (as opposed to just short initiatives and platform developments: A strategic term, incremental projects). This is a fairly weak in- roadmap is an effective way to map out a series of ma- gredient of the six elements in Exhibit 3.2, with only jor initiatives in an attack plan. A roadmap is simply a 38.1% of businesses having a longer term new product management group’s view of how to get where they strategy. . Indeed this short time horizon of busi- want to go or to achieve their desired objective [18]. nesses’ new product efforts has been a widely-voiced criticism. Ironically, this one ingredient is the one of The product innovation strategy should map out the the most important of the six strategy elements: A planned assaults – major new product initiatives and longer term orientation separates top performers from their timing – that are required in order to succeed in a the worst, with 58.6% of the best (and only 23.1% of certain market or sector in the form of a strategic prod- the worst) adopting a longer term approach. uct roadmap*. This roadmap may also specify the plat- form developments required for these new products. Strategy items 1, 2 and 3 above – defining goals, se- Additionally the development or acquisition of new lecting strategic arenas and developing attack strate- technologies may be mapped out in the form of a tech- gies – are the topics of the rest of this chapter. Strat- nology roadmap. egy items 4 and 5 – resource commitment and deploy- ment, and the product roadmap – are strategic portfo- The use of roadmaps is a weak area generally, with lio management topics covered in the next chapter. only 27.6% of businesses developing product roadmaps Finally item 6, picking the right development projects, proficiently. About twice as many best performers is about tactical portfolio decisions, the topic of the (37.9%) use product roadmaps than do worst perform- Chapter 5. ers (19.2%). Roadmaps are also a topic of Chapter 4. ___________________________________________ Once these five strategy steps are completed, manage- Notes for Senior Management ment can then deal with the next level of decision mak- Doing business without a strategy is like a ship with- ing: translating strategy into reality, namely the tactical out a rudder. The APQC benchmarking study’s results decisions [19]. strongly support this adage. So do other investiga- tions. Clearly, those businesses that lack goals for 6. Tactical— Individual project selection: Tactical their total new product effort, where arenas of strate- decisions focus on individual projects, but obviously gic focus have not been defined, and where the strat- follow from the strategic decisions. They address the egy is little more than a short term list of projects (no strategic product roadmap) are at a decided disad- question: What specific new product projects should vantage. Do what the top performers do. Set goals you do? And what resources should be allocated to for your business’s product innovation effort (e.g., each: What are their relative priorities? Even when a percentage of sales from new products). Tie your strategic product roadmap has been sketched out strate- goals for product innovation firmly to your business’s gically (above), it tends to be conceptual and direc- goals. And make these goals clear to everyone in- tional; one still must look at each and every project and volved in your organization. to decide whether or not it is really a Go. And while Emulate the best performers by specifying strategic resource spending splits (buckets), decided above, are arenas: areas of strategic focus defined in terms of useful directional guides, Go decisions on specific pro- markets, technologies and product-types or catego- jects must still be made. ries. And map out your attack strategies: how you plan to enter and win in each arena. When selecting projects, an important best practice is to make sure that your new product effort has a long Then consider going several steps further. Move to- wards strategic buckets and decide priorities and term thrust and focus – that your portfolio includes spending splits across these arenas, and spending splits across other strategic dimensions: your deploy- ment decisions. And develop strategic product road- ____________________________________________ maps, laying out your major development initiatives over the next few years. *The term “product roadmap” has come to have many mean- ings in business. Here I mean a strategic roadmap, which lays In the rest of this chapter, we’ll see how to develop out the major initiatives and platforms envisioned into the some of these strategic ingredients, and how to craft future – as opposed to a tactical roadmap, which lists each them into a winning product innovation strategy for your business… so read on! 9 and every product, extension, modification, tweak, etc. © Product Development Institute Inc. 2000-2008
  • 10. A Product Innovation Strategy for Your Business: What Markets, Products, and Technologies? Setting Goals for Your New Product Effort Sales and profits objectives expressed as a per- centage of business growth. For example: 70% of A few years ago, I boarded an early morning flight on growth in your business’s sales over the next a major airline. The captain began his announcement: three years will come from new products intro- “Welcome aboard flight 123 en route to... ah... ah...”. duced in this period. There was a long pause. The pause was punctuated by laughter and wisecracks from the passengers; the cap- The strategic role, such as defending market tain didn’t know where the flight was going! Fortu- share, exploiting a new technology, establishing a nately, within 30 seconds, he remembered our destina- foothold in a new market, opening up a new tech- tion. If he hadn’t, the plane probably would have emp- nological or market window of opportunity, capi- tied. Who would stay on a plane where the captain talizing on a strength or resource, or diversifying didn’t know his destination? Many of us, however, into higher-growth areas. seem content to stay on board a new product effort that has no destination. The number of new products to be introduced. (There are problems with this type of objective, Defining goals for your product innovation strategy is however: products could be large-volume or essential. Most of us accept that premise. But my ear- small-volume ones, and the number of products lier strategy study and the APQC benchmarking inves- does not directly translate into sales and profits). tigation both reveal that many organizations lack writ- ten and measurable goals for their innovation effort. An example: One general manager of an ITT business has a very succinct NPD goal: “five in What types of goals should be included in an innova- five”, which translates into “five major new tion strategy? First, the goals should be measurable so product introductions in each of the next five that they can be used as benchmarks against which to years”. And this simply-stated goal has become measure performance. Second, the goals should tie the the battle cry of everyone within his business, business’s new product initiatives tightly to its busi- and has provided a very clear and measurable ness strategy. Finally, they must give you, your lead- purpose for the organization. ership team, as well as project teams, a sense of direc- tion and purpose and be criteria for project selection The specification of these goals gives a strong indica- and investment decision-making. tion of just how important new products are to the total business strategy. The question of resource allo- Goals That Describe the Role of New Products cation and spending on new product efforts can then be more objectively decided. One type of new product goals focuses on the role that the new product effort will play in achieving the busi- Performance Goals ness goals. Some examples: A second type of goals deals with the expected per- The percentage of your business’s sales in Year formance of the new product effort. Such goals are 3 that will be derived from new products intro- useful guides to managers within the new product duced in that three-year period. (Three years is a group. Examples include: generally accepted time span in which to define a product as “new,” although given today’s pace, • Success, failure, and kill rates of new products two years may be more appropriate for many developed businesses). Alternately, one can speak of abso- lute sales – dollars in Year 3 from new products • Number of new product ideas to be considered annually – rather than percentages. • Number of projects entering development (or in The percentage of your business’s profits in Year development) annually 3 that will be derived from new products intro- • Minimum acceptable financial returns for new duced in that time span. Again, absolute dollars product projects. can be used instead of percentages. 10 © Product Development Institute Inc. 2000-2008
  • 11. A Product Innovation Strategy for Your Business: What Markets, Products, and Technologies? Many of these performance goals flow logically from The gap must be filled by new markets, new prod- the role goals. For example, if the business wants 70% ucts or new businesses. From this, a set of new of sales growth to come from new products, how does product goals are determined. that figure translate into number of successful prod- ucts; number of development projects; success, fail- Another example: Lucent Technologies goes ure, and kill rates; and number of ideas to be consid- through a process similar to Guinness’s, mapping ered annually? out sales projections from current products and product categories (see Exhibit 3.4). From this How to Set The Goals exercise, Lucent’s management is able to spot shortfalls, which leads to the need for new prod- Setting these goals is no easy task. The first time ucts to fill the gaps, and hence their goals for new through, the exercise is often a frustrating experience. products for the business [20]. Yet these goals are fundamental to developing an in- novation strategy, not to mention a logically deter- Goals by type of business: Here are the types of goals mined R&D spending figure. most often used by various types of businesses for their new product efforts, and which might prove a New product goal-setting usually begins with a strate- useful guide in setting your new product goals [21]. gic planning exercise for the entire business. The busi- ness’s growth and profit goals are decided, along with Innovator businesses most often use: the business’s overall strategy. These business goals • percentage of profits from new products and thrusts then are translated into new product goals, often via gap analysis. • percentage of sales from new products, and • ability to open up new windows of opportunity. In gap analysis, one creates two plots: Fast follower enterprises look to: What you desire your business’s sales (or profits) • ROI (return-on-investment) from development to be over the next 3-5 years, based on your over- efforts all business goals • whether the innovation effort fits or supports the business’s overall strategy What the expected sales (or profits) will likely be, assuming the current product lines and status quo • percentage of profits from new products, and strategy. This amount to making forecasts of cur- • success/failure rates. rent products and lines, and their life cycle curves. Defender organizations have goals such as: • ROI from development efforts, and Usually there is a gap between the two projections. • fit with or support of the business’s strategy. And this gap must be filled: by new products, new markets, new businesses, market development, or Reactor businesses rely on: market share increases. In such a way, the goals are decided for each of these efforts, including product • ROI from development efforts development. • success/failure rates, and • fit with or support of the business’s strategy. An example: Senior management at Guinness (Ireland) developed a strategic plan for their brew- Defining Target Arenas for Your Business ing business. Ambitious growth and profit goals were decided. A review of current products and The specification of strategic arenas or battlefields markets revealed that a gap would exist between provides an important guide to your product innova- projected sales and the goals. That is, current prod- tion efforts. As Day notes, “what is needed is a strat- ucts and markets were projected into the future, egy statement that specifies those areas where devel- and expected revenues and profits were compared opment is to proceed and identifies (perhaps by exclu- to the desired level of sales and profits (the busi- sion) those areas that are off limits.”[22]. ness goals). 11 © Product Development Institute Inc. 2000-2008
  • 12. A Product Innovation Strategy for Your Business: What Markets, Products, and Technologies? The arenas provide direction for resource commitment Further, significant new product breakthroughs out- and deployment. They guide the search for new prod- side the bounds of the new-product strategy statement uct ideas and help in idea screening and project selec- can usually be readily accommodated in an ongoing tion. Finally, delineation of where the business wishes project screening process, or via free-time or scouting to focus its new product efforts is critical to long-term projects. Finally, inevitably there will be products that planning, particularly for resource and skills acquisi- “got away” in any new product effort, just as there tion. will be the proverbial “fish that got away”. But there will continue to exist ample opportunities within the Defining the target arenas answers the question: On defined arenas for the business to exploit, provided what business, product, market, or technology areas senior management has done a credible job at arena should your business focus its new product efforts? delineation. Conceptually, the task is one of opportunity identifica- tion followed by opportunity assessment. There are three steps to defining the target arenas. The first is strategic analysis – assessing your marketplace Two issues immediately arise. First, one may question as well as your own company. The second is develop- the need for focus at all. Note, however, that new ing a comprehensive list of possible arenas: opportu- product focus has been found to be an important in- nity identification. The third is paring the list down – gredient of successful innovation strategies [23]. Fo- assessing the opportunities to yield a choice of the cus provides direction for idea generation, criteria for target arenas. project selection, and targets for resource acquisition. A second criticism is that focus will inhibit creativity: Strategic Analysis Some of the best ideas, that may lie outside the target arenas, might be rejected. The counter-argument is The purpose here is to identify possible “hot” or inter- that focus improves creativity by targeting energies on esting arenas – markets, technologies or product areas those areas where the payoff is likely to be the great- – which might become candidate arenas for you to est [24]. focus your NPD efforts. Key actions include: 12 © Product Development Institute Inc. 2000-2008
  • 13. A Product Innovation Strategy for Your Business: What Markets, Products, and Technologies? Assess your industry and market: Analysis begins For example, develop profit pool maps and mar- with an assessment of your marketplace and your cus- ket maps that illustrate who makes the money in tomers’ industry. Some approaches: your industry, market or value chain (Exhibit 3.5 provides an illustration of a market map for the Map your value chain, identifying the key play- financial services sector [25]). ers, including rivals. Assess their futures and pos- sible changing roles. Who is gaining and who An example: A major manufacturer of high-end might be dis-intermediated (cut out)? And why? synthetic kitchen countertops undertook an analysis of its downstream value chain. Numer- Look at your industry structure – your direct and ous players are involved in the installation of indirect competitors. Who is winning and who is countertops: the manufacturer, the fabrication losing? And why? Are there opportunities here shop, the kitchen designer, the retailer and the for you? installer. To its surprise, the manufacturer dis- covered that the bulk of the profits was going to Identify your customers’ industry drivers and any other members of the value chain. For example, shifts in these drivers. Assess what factors make the fabricator not only cuts the countertop to your customers profitable and successful. Look at size, but often adds edging in the form of multi- how these factors and drivers are changing, and in ple layers, which is then machined to a con- a way that might open up opportunities for you? toured edge – a highly desired feature for high- Are there opportunities for you to provide new end installations, but also very pricey. Strategi- solutions here to help your customers? cally the manufacturer made a commitment to get control of the distribution channel, obtain its Assess where the profits are to be found in your fair share of the profit pool, and also introduce industry and in your value chain (and why your new molded products to move some of the fabri- business may be missing its fair share of profits). cator value-add to the manufacturer. 13 © Product Development Institute Inc. 2000-2008
  • 14. A Product Innovation Strategy for Your Business: What Markets, Products, and Technologies? Undertake a market and industry trend analysis. For example, the first digital cameras actually Analyze historical trends and estimate future produced a poorer picture (lower resolution) than trends; and forecast market size and shifts. Look traditional 35 mm film cameras, and were considered at qualitative trends that are occurring: Spell out a inferior products by most camera users. But for a scenario (or alternate scenarios) of where your handful of users – most notably those who wanted the market and industry are headed. Look for possible picture in digital format so that they could modify or disruptions in your industry and in your cus- electronically transmit the photo, such as real estate tomer’s industry. And look for opportunities (or agents – there was new value in the digital camera. threats) that can be exploited. In your industry and market analysis, be sure to Look for niches or holes in the marketplace: areas identify potential disruptive technologies and radical or that may be underserved or have been missed step-change innovations. Assess the probability and altogether. Use Porter’s Five Forces model to timing of each, the potential impact, and whether or not assess the attractiveness of these areas [26], this represents an opportunity (or a threat) for your checking… business. And most important, ask “so what?” – what • the strength of suppliers can and should you do about this technology? • the strength and intensity of potential competi- Identify your core competencies: The next component tors (rivals) of this strategic analysis is an internal assessment, • the power of the customers namely looking at your own business. The old adage • the ease that players can enter and exit the “attack from a position of strength” rings true in area, and product development. Many studies repeat the • the threat of substitutes. message: Leveraging your strengths and competencies increases success rates and new product profitability This strategic analysis should not only identify possi- [29]. So take a hard look at your business, and ble new opportunities – arenas that are emerging and undertake a core competencies assessment. This means on which your business might focus – it also provides looking at strengths and weaknesses in all facets of quality data so important to evaluating and selecting your business, and relative to your competitors: the right arenas. Your marketing and sales force strengths Assess the impact of disruptive technologies: Disrup- Your products and their technology tive technologies present difficult challenges in terms Your operations or production capabilities, of industry trend analysis [27]. The one thing that is capacities and technology. certain in forecasting the size of such markets or im- pact of the technology: the forecast will be wrong, and Assess yourself on each item, especially relative to often by orders of magnitude. your direct and indirect competitors. Use the list of items in Exhibit 3.6 as a guide. Or use a chart like the What is a disruptive technology? Most new technolo- example in Exhibit 3.7 from Lucent Technologies to gies result in improved performance, which can come plot your position versus competitors [30]. Then from incremental innovations, or from those that are identify areas where you are better than the rest: your more radical in character. Most technological ad- core or distinctive competencies. These are your vances in industry are sustaining; but: “Occasionally strengths, so look for arenas that can leverage these to disruptive technologies emerge: innovations that result advantage. in worse performance, at least in the near term” [28]. These innovations may be inferior to the existing tech- Defining the Arenas… But What Is a New Product nology when measured on traditional performance Arena? metrics, but they bring a new performance dimension or a new value proposition to the market. How does one define a new product opportunity or arena? Corey proposes building two-dimensional matrices, with the dimensions labeled “products” and “markets” in order to identify new business arenas [31]. 14 © Product Development Institute Inc. 2000-2008
  • 15. A Product Innovation Strategy for Your Business: What Markets, Products, and Technologies? 15 © Product Development Institute Inc. 2000-2008
  • 16. A Product Innovation Strategy for Your Business: What Markets, Products, and Technologies? He notes that markets, together with the products that 1. Customer groups served. For a computer manufac- can be developed in response to needs in these mar- turer, customer groups might include banks, manu- kets, define the opportunities for exploitation: the are- facturers, universities, hospitals, retailers, etc. nas. 2. Customer functions served. These might include hardware applications, support and services, soft- An example: Telenor, the Norwegian telephone ware, data storage, etc. system, uses a product-market matrix to help visu- 3. Technologies utilized. For data storage, several alize strategic choices, and to define arenas on existing and new technologies might have applica- which to focus its new product efforts. One dimen- tion. sion of the matrix is market segments: Home Of- fice; Small Business; Residential; and so on The result is a three-dimensional diagram, with new (Exhibit 3.8). The other dimension is the product product arenas defined in this three-dimensional offering or product categories: voice, data, Inter- space. net, wireless, etc. The roughly 10 by 10 matrix identifies 100 cells or possible arenas; some are Finally, Crawford’s study of innovation charters ruled out immediately as non feasible. The remain- points to several ways in which managers define new ing cells are evaluated, and priorities are estab- product arenas in practice [33]. Arenas are specified lished. The top priority or “star” arenas are singled by (illustrations are for a pump manufacturer): out for more intensive product development ef- • product-type (for example, high pressure indus- forts. trial pumps) In Defining the Business, Abell takes this matrix ap- • end-user activity (plants or factories that process chemicals or liquids) proach one step further by proposing that a business be defined in terms of three dimensions [32]: • type of technology employed (rotary hydraulic; centrifugal) • by end-user group (oil refineries). 16 © Product Development Institute Inc. 2000-2008
  • 17. A Product Innovation Strategy for Your Business: What Markets, Products, and Technologies? On its own, each of these arena definition schemes has Defining Arenas: A Blow by Blow Illustration its problems. For example, a product-type definition is limiting: Product-classes or product-types die. Simi- Let’s look more closely at some of the details of this larly, an end-user group definition could lead the busi- process of searching for and prioritizing arenas. A two ness into a number of unrelated technologies, prod- - or three-dimensional diagram can be used for this ucts, and production systems. search and evaluation. You might also use the product -market matrix of Exhibit 3.8, or any other convenient A review of these and other schemes for defining a dimensions that define arenas for your business. Here business arena reveals that a single-dimension ap- I use the three dimensions of customer groups, appli- proach is likely too narrow. A two- or three- cations, and technologies, which are shown as the X, dimensional approach, variants of Corey’s or Abell’s, Y, and Z axes of the diagram (Exhibit 3.9). Home probably will suit most business contexts [34]. For base is located, and then other opportunities are identi- example, a new product arena can be defined in terms fied by moving away from home base in terms of of: other (but related) customer groups, applications, and 1. Who: the customer group to be served (markets or technologies. market segments) 2. What: the application (or customer need to be An illustration: Chempro is a medium-sized manu- satisfied) facturer of blending and agitation process equip- 3. How: the technology required to design, develop, ment for the pulp and paper industry. The com- and produce products for the arena. pany’s major strength is its ability to design and manufacture rotary hydraulic equipment. The mar- These three dimensions – who, what, and how – pro- ket served is the pulp and paper industry. The ap- vide a useful starting point to describe new product plication is agitation and blending of liquids and arenas. Sometimes, the last two dimensions – what slurries. The company’s current or home base is and how – can be simply combined into a single di- shown as the cube in Exhibit 3.9. mension, product type. 17 © Product Development Institute Inc. 2000-2008
  • 18. A Product Innovation Strategy for Your Business: What Markets, Products, and Technologies? What new product arenas exist for the company? For example, Chempro can develop blending and agi- Clearly, the home base is one of these, and indeed the tation equipment (same application) aimed at the firm is active in seeking new product ideas for agita- chemical or petroleum industries (new customer tion equipment in the pulp and paper field. Most of groups). Alternatively, the business can develop aera- these opportunities, however, are limited to modifica- tion devices (new application) targeted at its current tions and improvements. customers, namely pulp and paper companies. Each of these possibilities represents a new arena for Chem- One direction that senior management can take is to pro. develop new products aimed at alternative customer groups. These customer groups include the chemical, Chempro might also be able to change its third dimen- food-processing, petroleum-refining, and hydro- sion by moving from its home base of rotary hydraulic metallurgical fields. The options are shown on the X technology to other technologies. If the alternatives or horizontal axis of Exhibit 3.9. are superimposed along the third dimension atop the matrix, the result is a much larger number of possible Similarly, new products in related applications can be arenas. (This third dimension expansion is not shown sought. These related applications include the pump- in Exhibit 3.10, as it’s a little hard on the eyes!) Possi- ing of fluids, fluid aeration, and refining and grinding, ble alternative arenas along the “new technologies” as shown on the vertical or Y axis of the arena matrix. axis include magneto-hydrodynamic pumps and agita- tors for a variety of end-user groups, bio-oxidation Considering these two dimensions – different applica- reactors for the food industry, and many others. tions and different customer groups – management now proceeds to define a number of new arenas. Selecting the Right Arenas Working with a two-dimensional grid (Exhibit 3.10), recognize that, besides the home-base arena, there are The task now is to narrow down the many possible 12 other arenas that the company can consider for its arenas to a target set that will become the focus of the new product focus. business’s innovation strategy. 18 © Product Development Institute Inc. 2000-2008
  • 19. A Product Innovation Strategy for Your Business: What Markets, Products, and Technologies? To a certain extent, a pre-screening of these arenas has • Technological opportunities: the degree to which already occurred: the arenas have been identified as technological and new product opportunities exist being related to the base business on at least one of the within the arena. three dimensions. In practice, arena attractiveness is a composite index The choice of the right arenas is based on a single constructed by rating the arena on a number of de- “must-meet” criterion, and two “should-meet” criteria. tailed criteria that capture market growth, size and the The must-meet criterion is an obvious one: Does the potential for new products in that arena. Typically, the arena fit within the business’s mission, vision and leadership team of the business scores each arena on overall strategy? The other two criteria were identified these criteria; and scores are added to yield an index of in my studies of successful new product strategies. arena attractiveness. Arenas that feature large, grow- These criteria are arena attractiveness and business ing, and high-potential markets, that are characterized strength (Exhibit 3.11). by technological elasticity (large bang for R&D buck spent*), dynamic technologies, and many new product Arena attractiveness: This strategic dimension cap- introductions score high on the arena attractiveness tures how attractive the external opportunities are dimension. within that arena. Is this strategic arena an oasis – lush and fertile with ample opportunities for profitable new *Technological elasticity captures the slope of the products? Or is it a sterile desert, offering few oppor- technology S-curve: the curve that plots product per- tunities for innovation and growth? This dimension, formance versus development money spent to achieve arena attractiveness, consists of: this. Technology elasticity answers the question: will a dollar spent on product development in this arena • Market attractiveness: the size, growth, and po- yield products with significant performance advan- tential of market opportunities within the arena tage? 19 © Product Development Institute Inc. 2000-2008
  • 20. A Product Innovation Strategy for Your Business: What Markets, Products, and Technologies? Business strength: The other strategic dimension fo- The “high-risk bets” are in the north-east (upper cuses on the business’s ability to successfully exploit right) sector. They represent high-opportunity the arena. In other words, what does your business arenas where the business has no exploitable bring to the table that suggests that you will be suc- strengths. cessful in this arena? The ability to leverage your business’s resources and skills to advantage in the Finally, the south-east (lower left) sector houses new arena is a key concept here. Business strength is the “conservative bets” – arenas where the busi- again a composite dimension or index, consisting of ness can utilize its strengths to advantage, but three factors: where the external opportunity is not so attractive. These opportunities can be pursued at little risk, • ability to leverage the business’s technological but offer limited returns. (development and operations) competencies Using such a map, senior management can eliminate certain arenas outright (those in the “no bet” sector), • ability to leverage its marketing and sales compe- and select a reasonable balance of arenas from the tencies other three sectors. The “good bets” in the north-west sector are usually the top-priority ones. • strategic leverage: the potential to achieve prod- uct advantage and product differentiation. Assessing the arenas at Chempro: At Chempro, strategic arena assessment is simplified by recog- Arenas that build on the business’s core and distinc- nizing the company’s technological and financial tive competencies, that fit well the business’s market- resource limitations. Chempro’s main asset is its ing and technological strengths and resources, and that ability to design and engineer rotary hydraulic offer the business a solid opportunity to gain product equipment. Embarking on new and expensive advantage or achieve product differentiation, are the technologies, such as bio-oxidation, is deemed ones that score high on the business strength dimen- out of bounds. Moreover, having identified its sion. current technology as a field of particular strength, and recognizing that there are many Mapping the Strategic Arenas opportunities that can build on this strength, sen- ior management elects to stay with its current How the various arenas score on the two criteria can technology. Management chooses to attack from be shown pictorially in the arena assessment map of a position of strength, and so the third dimension, Exhibit 3.11. Arena attractiveness is shown as the alternative technologies, is deleted. The result is vertical or north-south dimension, and business the two-dimensional grid in Exhibit 3.10. strength as the horizontal or east-west axis. The result is a four-sector diagram, not unlike traditional busi- Next, the 12 new arenas plus the home base are ness portfolio models, but with different dimensions rated by senior management on the two key di- and different components to each dimension. mensions of arena attractiveness and business strength. A list of rating questions is employed, Each sector represents a different type of opportunity: with each arena rated on each question. The rat- ings are added, and both a business strength and The arenas shown in the north-west sector (the arena attractiveness index are computed for each upper-left), that feature high arena attractiveness of the 13 possible arenas. Using these two in- and business strength, are clearly the most desir- dexes for each arena, the 13 arenas are plotted as able. These are called the “good bets”. bubbles on an X-Y grid. The results for Chempro are shown in Exhibit 3.11. Diagonally opposite, in the south-east (lower right) sector, are the “low-low” arenas – those Selecting the Arenas arenas that neither build on the business’s strengths nor offer attractive external opportuni- The choice of arenas depends on the risk-return values ties. These are the “no bets”. of management. Selecting only those arenas in the top half of the arena assessment diagram – the good bets 20 © Product Development Institute Inc. 2000-2008
  • 21. A Product Innovation Strategy for Your Business: What Markets, Products, and Technologies? and the high-risk bets – emphasizes the attractiveness Strategy Types Based on Innovativeness of the external opportunity. This choice places no weight at all on the business-strength dimension: It is One way of looking at strategy is via a typology based a high return, but a higher-risk strategy. The other upon the way that an organization responds to chang- extreme is selecting only those arenas on the left of ing market and external conditions. There are four the vertical, the good bets and conservative bets. This strategy types, according to Miles and Snow [35], and is a low-risk, low-return strategy: selection of only you may wish to elect one as the strategy or vision for those arenas in which the company possesses a good your own business. Which one are you? And which business position. Ideally, one looks for a combination one should you be [36]? of the two: Innovators: These businesses are the industry Arenas in which the market attractiveness and the innovators or prospectors. They value being first business strength both are rated high – the good in with new products and are first to adopt new bets in the north-west sector of Exhibit 3.11 technologies, even though there are risks, and not all such efforts are profitable. Innovators respond Some balance of arenas: some attractive but risk- __________________________________ ier arenas, some lower risk but less attractive ones. Notes for Senior Management For Chempro, six arenas are rated positively on both The place to begin is with the strategy of your business, and flowing from it, your product inno- dimensions. In order to quantify or rank order the are- vation and technology strategy. After defining the nas, a cutoff or 45-degree line is drawn on Exhibit overall goals for your business, spell out your new 3.11 (not shown). Arenas to the left of and above this product goals: For example, what percentage of line are positive; those to the right and below are sales or profit or growth new products will contrib- negative. The distance of each arena from that line is ute. Use gap analysis as Guinness and Lucent do. measured: the greater the distance, the more desirable the arena. Based on this exercise, three good bets and Then move to mapping your battlefields: that is, one conservative bet are defined as target arenas for identify arenas of strategic focus. Undertake a Chempro: strategic analysis—first on your industry, market- place, and your customers’ industry; next on your- self—then search for strengths and core compe- • aerators for the chemical industry (waste water tencies that you hope to leverage. treatment) • blenders for the petroleum industry Next draw an arena diagram for your business. Use two dimensions (products and markets, as • agitators and mixers for the chemical industry does Telenor) or perhaps three dimensions • surface aerators for the pulp and paper industry. (customer groups, applications, and technologies, like Chempro). Locate your home base, and then move out on each of the three axes, identifying Management decides to continue seeking new prod- other customer groups, applications, and technolo- ucts in the home-base arena as well. gies. This exercise should help you display a num- ber of new but related possible arenas, as in Ex- Developing the Attack Strategies hibit 3.10. The goals have been decided, and the strategic arenas Now that you’ve identified a list of possible arenas, mapped out and prioritized. Now it’s time to deter- rate each on the two key dimensions of arena at- mine the new product attack strategy – that is, how tractiveness and business strength. Develop a list you plan to win on these selected battlefields or are- of rating questions for each dimension, and score each arena on these questions. Draw an arena nas. These attack strategies tend to be fairly industry assessment map (similar to Exhibit 3.11) to see and company specific. However there exist a number where your arenas lie. And then select and priori- of frameworks that help guide this effort. tize these arenas, looking for those in the desir- able north-west sector (upper left), but perhaps seeking a balance by including some from the sure -bets and the high-risk bets sectors. You now have decided your areas of focus for NPD! 21 © Product Development Institute Inc. 2000-2008
  • 22. A Product Innovation Strategy for Your Business: What Markets, Products, and Technologies? rapidly to early signals that point to emerging or The differentiator: This approach builds on the new opportunities. In the automobile business, very successful strategy identified in my strategy Honda and Chrysler are considered to be innova- study, outlined earlier in the chapter. The goal is tors. to develop unique, superior products – ones that meet customer needs better than competitive Fast Followers: These businesses are the analyz- products and deliver real value to the customer. A ers. By carefully monitoring the actions of major combination of a strong market orientation competitors, and by moving quickly, they often (spotting market trends, listening to the voice-of- are able to bring a superior product to market – the-customer) and technological prowess are keys more cost-efficient or with better features and to success here. benefits – than the innovator’s product. But ana- lyzers are rarely first to market. Toyota and Ford An example: Black and Decker power tools are analyzer companies. aimed at the consumer market are the result of this strategy. The business has had a steady Defenders: Defenders attempt to locate and main- stream of differentiated new products from the tain a secure position or niche in a relatively sta- early days with its WorkmateTM bench through ble product or market area. They protect their to more recent combination tools, always domain by offering higher quality, superior ser- boasting new features, functionality and de- vice or lower prices. These businesses ignore sign, and always in tune with consumer wants industry changes that have no direct influence on and needs. their current operations. General Motors, Nissan and Mazda are defenders. The customer friendly strategy: Here your busi- ness is highly reactive to customer desires, but in Reactors: These firms are not as aggressive in a positive way. You respond to specific requests maintaining established products and markets as from customers, handling them quickly and effec- competitors. They respond only when forced to tively. A proficient sales force, solid relationships by strong external or market pressures. with key customers, and a fast-paced, responsive development organization and process are funda- These four strategy types are useful descriptors when mental to success here. your leadership team is trying to envision which type of product developer you aspire to be. There are pros An example: One major consumer paper com- and cons to each strategic approach above. You must pany (toilet paper, facial tissues) operates this weigh your own situation – your marketplace’s dy- way, catering closely to the needs and wishes namics, your competition, and your own capabilities of its major retailer customers. Most of its and competencies – and decide. But do make a choice: product developments are in fact responses to Don’t just let it happen by default! major retailer requests. And the company has designed an organizational structure and a new Other Ways of Visualizing Strategy Types product process that enables handling these retailer request in an effective and fast man- Numerous ways to describe and portray your attack ner. strategy (or how you plan to win) exist. Some options you might wish to consider, perhaps in combinations The niche player: The idea here is to focus on one [37]: segment or type of user in the marketplace. And you orient your entire product development effort The low cost provider: This strategy emphasizes (and your marketing effort) to satisfying that tar- your low manufacturing and delivery costs, which get user’s needs and desires. Market knowledge are reflected in lower pricing to achieve market and customer intimacy are keys to success here, share. This strategy can often be combined effec- along with technological capability. tively with the analyzer or fast-follower strategy above: waiting and watching for competitors to launch a new product, and then rapidly copying the product but more cost effectively. 22 © Product Development Institute Inc. 2000-2008
  • 23. A Product Innovation Strategy for Your Business: What Markets, Products, and Technologies? An example: Kenworth trucks, a U.S. manu- And each of these mechanisms makes different de- facturer of heavy-duty highway trucks, has mands upon your business [39]. traditionally elected this niche or focused strategy. From the beginning, Kenworth has Roberts and Berry propose an entry‑strategy selection focused on the owner-operator, the independ- framework based on their popular market and techno- ent truck driver who owns and drives his own logical newness and familiarity dimensions (see Ex- rig. Everything, from the traditional and ma- hibit 3.12) [40]: cho truck exterior through to the ability to custom-design and custom-outfit a truck for 1. Technology Newness: how new that technology the discriminating owner, is done to serve this is to the company – the degree to which the tech- type of buyer. nology is different from that found in the prod- ucts that the company currently produces. The low budget conservative strategy: Here, you develop copy-cat, me too, undifferentiated new 2. Market Newness: how new that market is to the products, remain highly focused on one or a few company – the degree to which the company’s product-market areas, and stay close-to-home (not products are not sold to that particular market. venturing into new areas). You make sure your new products match your business’s production 3. Technology Familiarity: the degree to which and technological skills and resources, fit into knowledge of the technology exists within the your business’s existing product lines, and are company, but is not necessarily found in its cur- aimed at familiar and existing markets for you. rent products. R&D spending is usually quite low relative to competitors. 4. Market Familiarity: the degree to which a mar- ket is known by the company, but not necessar- Chempro’s attack strategy: Chempro’s manage- ily as a result of selling into that market. ment elects a general attack strategy that is the same across all arenas, namely: a differentiated If a business in which the firm currently competes is approach, focusing on delivering superior products defined as its base business, then market factors asso- with unique product features and improved per- ciated with the new business may be characterized as formance for customers. This strategy requires a base, new familiar or new unfamiliar. The same is true marriage of Chempro’s core technology compe- for technological factors. tency (prowess in the field of rotary hydraulic equipment design) coupled with a customer- The thesis underlying this framework is that the newer orientated, market-driven approach to defining or more unrelated an arena is to the base business, the product requirements. Thus the strategy is really a poorer the results to the firm. This leads to the logical combination of the Fast Follower Strategy and the conclusion that entry strategies requiring high corpo- Differentiated Strategy. rate involvement should be reserved for new arenas with familiar market and technological characteris- Deciding Your Entry Strategies tics. Similarly, entry mechanisms requiring low corpo- rate input seem best for unfamiliar arenas. This chapter so far has dealt with the questions: Which new product arenas should your business focus Various entry strategies are shown in the matrix in on, and how? Another equally important question is: Exhibit 3.12 for different degrees of market and tech- By what mechanism should you enter these arenas to nological newness and unfamiliarity. Roberts and avoid failure and maximize gain? Although these Berry support their matrix approach with actual case questions are fundamentally different, note that they histories, showing the success-failure patterns across should not be answered independently of one another the matrix. Various entry strategies and their appropri- [38]. Entering a new business arena may be achieved ateness are outlined below, and the advantages of each by a variety of mechanisms, such as internal develop- are summarized in Exhibit 3.13. ment, joint ventures, and minority investments of ven- ture capital. 23 © Product Development Institute Inc. 2000-2008
  • 24. A Product Innovation Strategy for Your Business: What Markets, Products, and Technologies? Internal development: Internal development exploits Licensing avoids the risk of product development by internal resources as a basis for establishing a new exploiting the experience of firms which have already business or entering a new arena for the company: a developed and marketed the product [42]. Licensing is “do it yourself” approach. Lack of familiarity with particularly appropriate when entering new but famil- markets and technologies in the new business arena iar technology arenas. often leads to major errors, and is one reason for poor performance [41]. Internal developments are recom- Internal ventures: Many companies adopt new ven- mended only for base business arenas and those in- ture strategies in order to meet ambitious plans for volving new but familiar markets using base technolo- diversification and growth [43]. In this strategy, a firm gies, or new but familiar technologies targeted at base attempts to enter different markets or attempts to de- markets (bottom left part of Exhibit 3.12). velop substantially different products from its base businesses by setting up a separate entity within the Acquisitions: Acquisitions may be attractive not only existing corporate body. The concept is to establish because of speed of execution, but also because they small businesses – entrepreneurial, venture businesses might offer a much lower cost of entry into a new – within the large corporation, taking advantage of the arena. Acquisi-tions are appropriate for new but famil- corporation's resources, but freeing the venture team iar arenas, as shown in Exhibits 3.12 and 3.13. But from the usual corporate barriers to entrepreneurial words of warning: Not all acquisitions end up as prof- behavior. itable as initially projected; and many prove difficult and costly to integrate into the culture and operations Joint ventures or alliances: When projects get larger, of the acquiring company. technology too expensive, and the cost of failure too large to be borne alone, joint venturing becomes in- Licensing: Acquiring technology through licensing creasingly viable [44]. Often the joint venture occurs represents an alternative to acquiring a complete where a large and a small company join forces to cre- company. ate a new entry in the marketplace (upper left cell in Exhibit 3.12). 24 © Product Development Institute Inc. 2000-2008
  • 25. A Product Innovation Strategy for Your Business: What Markets, Products, and Technologies? In these efforts of “mutual pursuit”, usually without This nurturing strategy appears a more sensible entry the formality of a joint venture company, the small in achieving diversification objectives as opposed to firm provides the technology, the large enterprise pro- simple provision of funds, but it also needs to be tied vides the marketing capability, and the venture is syn- to other company diversification efforts [46]. ergistic for both parties. Large-company, small- company alliances, called strategic partnering, often Educational acquisitions: Targeted small acquisitions involve the creative use of corporate venture capital can fulfill a role similar to that of a venture capital [45]. minority investment and, in some circumstances, offer significant advantages. In such an acquisition, the Venture capital and nurturing: The venture strategy large firm acquires a small firm, usually with an that permits some degree of entry, but the lowest level “interesting technology” at the early stage of develop- of corporate commitment, is that associated with ex- ment. The acquisition is made, but not so much for ternal venture capital investment. Major corporations financial return reasons, but to acquire know‑how and invest venture capital in developing or start‑up firms familiarity at minimal cost. The acquiring firm imme- in order to become involved in the growth and devel- diately obtains people familiar with the new technol- opment of such firms, and may eventually acquire ogy area, whereas in a minority investment, the parent them outright. The motivation is to secure a “window company relies on its existing staff to build familiarity on technology” by making minority investments in by interacting with the investee. Acquisitions made young, growing, high‑technology enterprises. When for educational purposes may therefore represent a the investing company provides managerial assistance faster route to familiarity than the venture capital as well as venture capital to the small firm, the strat- “window” approach, and are recommended as one egy is classed as “venture nurturing” rather then pure possible entry strategy for new, unfamiliar arenas (top venture capital. right cell in Exhibit 3.12). 25 © Product Development Institute Inc. 2000-2008
  • 26. A Product Innovation Strategy for Your Business: What Markets, Products, and Technologies? Notes for Senior Management Strategic arenas – the target battlefields or arenas of strategic thrust – are identified and pared down to a You have selected one or more strategic arenas set of top priority fields for exploitation. These arenas as a target. Now, how are you going to win in give the new product effort direction and focus, ingre- that arena? Develop the outline of your attack dients that are critical to a successful innovation strat- strategies: egy. Attack strategies are then defined for the arenas: how you plan to enter and win in each. Your strategic stance: innovator, fast fol- lower, defender, low cost provider, differ- These arenas are also prioritized, and from these pri- entiator, customer friendly, niche player, or orities, spending splits – the strategic buckets – must low budget conservative strategy. be decided, as the business’s new product strategy How you plan to enter the arena, perhaps alone, or via an acquisition, licensing, or begins to drive portfolio management (in the next with alliance partners or a joint venture. chapter). Strategic product roadmaps are developed to yield a map showing the major initiatives. And so the With arenas defined and with attack strategies product innovation strategy evolves to guide your in place, it’s time to turn to the challenging is- business’s product innovation war effort. sue of resources. Translating your strategy into ___________________________________________ reality means deployment of resources: how many resources, and where to allocate them. Notes for Senior Management And that’s the topic of the next chapter on Reflect on Chempro’s strategic exercise outlined in strategy. this chapter for a moment. There are several positive ___________________________________________ facets to note: Some Thoughts on Your Product Innovation 1. First, senior management leads the way here. It Strategy is the senior people of the business who took up the challenge and mapped out this business’s new product strategy. This task is not left to a With the increasing importance of new product war- Marketing or R&D group to do: This is not the fare also comes a desire to effectively manage product time or place for “hands-off” management! innovation, hence the wish to develop product innova- 2. This strategy goes beyond vision and mission and tion strategies. Developing a such a strategy for your nice-sounding words. It is translated into goals business is not easy. In spite of the challenge, how- and prioritized arenas (for Chempro, defined by ever, a product innovation strategy is a must for all application and customer groups). And an attack businesses that are serious about building new prod- plan is developed: how management intends to ucts into their long range plans. Many businesses op- win on these battlefields. In Chempro’s case, it is to adopt a fast-follower-with-better-products and erate without such a strategy, and the senior manage- differentiator strategic stance, coupled with inter- ments know the problems only too well. There is no nal development; for your business, there exist direction to the Discovery stage or to idea search, or many other options (outlined in this chapter). there is no discovery at all. Much time is wasted in 3. Next, strategy becomes real when you start screening proposed projects and agonizing over the spending money, so strategy must be translated same question: Should we be in this business? Portfo- into spending decisions, the topic of the next lio management is almost impossible, and there are chapter. Decisions must be made on resource difficulties in making a long-term, sustained budget commitment (how much is enough?), on deploy- commitment for new products. And personnel, re- ment (strategic buckets), and on major develop- ment initiatives (the strategic product roadmap). source and technology acquisition planning is hit-and- miss. 4. This strategic exercise – for example, selecting arenas, deciding resource commitments, and determining the split in resources across arenas Methods for developing your product innovation strat- – although top down and strategically driven, egy have been outlined in this chapter. I began in this also considers opportunities within each arena. chapter with a recognition of the need for and pay-offs This is not a sterile strategic exercise, but rather of having such a strategy. Goals are defined that give an iterative one between a top down, strategic the business’s new product effort a sense of purpose, approach, and a bottom up approach which takes into account active and as well as proposed and tie it firmly to the business’s overall objectives. projects and opportunities. 26 © Product Development Institute Inc. 2000-2008
  • 27. A Product Innovation Strategy for Your Business: What Markets, Products, and Technologies? Endnotes 19. Parts of this section are taken from an article by the author: Cooper, R.G., “Maximizing the value of your new product portfolio: Methods, metrics and scorecards, Current Issues in 1. APQC benchmarking study: see endnote [29] in Chapter 1. Technology Management, published by Stevens Alliance for Available as: Best Practices in Product Development: What Technology Management, Vol. 7, Issue 1, Winter 2003, p. 1. Distinguishes Top Performers, at www.prod-dev.com. 20. Source: Albright, R.E., “Roadmaps and roadmapping: linking 2. Parts of this chapter appeared in: Cooper, R.G. “Product Inno- business strategy and technology planning,” Proceedings, vation & Technology Strategy”, reprinted in Succeeding in Portfolio Management for New Product Development, Insti- Technological Innovation, Washington: Industrial Research tute for International Research and Product Development & Institute, May 2001, pp. 14-17; and parts are taken from: Coo- Management Association, Ft. Lauderdale, FL, January 2001. per, R.G., Winning at New Products: Accelerating the Process 21. Griffin, A. and Page, A.L., “PDMA success measurement from Idea to Launch, 3rd edition. Reading, Mass: Perseus project: recommended measures for product development Books, 2001. success and failure”, Journal of Product Innovation Manage- 3. APQC benchmarking study: see endnote [1]. ment, 13, 6, Nov 1996, pp. 478-495. 4. Luck, D.J. & Prell, A.E., Market Strategy. Englewood Cliffs, 22. Day, G.S., “A strategic perspective on product planning,” N.J.: Prentice Hall, 1968, p. 2. Journal of Contemporary Business, Spring 1975, pp. 1-34. 5. Ansoff, I.H., Corporate Strategy, New York: McGraw-Hill, 23. Strategy studies: see endnote [12]. 1965. 24. Day: see endnote [22]. 6. Corey, R.E. “Key options in market selection and product plan- 25. Based on maps in: Gadiesh, O. and Gilbert, J.L., “How to map ning,” Harvard Business Review, Sept.-Oct. 1978, pp. 119-128. your industry’s profit pool”, Harvard Business Review, pp. 3- 7. Some sections in this chapter are taken from a recent book, 11, May-June 1998. where the author was one of the co-authors: Cooper, R.G., 26. Porter, M.E., Competitive Advantage: Creating and Sustain- Edgett, S.J. & Kleinschmidt, E.J., Portfolio Management for ing Superior Performance. New York: Free Press, 1985. New Products, 2nd edition. Reading, Mass: Perseus Books, 27. See: Christensen, C.M., The Innovator’s Dilemma, New York: 2002. Harper Collins, 2000 8. Crawford, C.M., “Protocol: new tool for product innovation”, 28. See Christensen; endnote [27]. Journal of Product Innovation Management, 2, 1984, pp. 85- 29. See success drivers in, for example: Montoya-Weiss, M.M. & 91. Calantone, R.J., “Determinants of new product performance: a 9. Menke, M.M., “Essentials of R&D strategic excellence,” Re- review and meta analysis”, Journal of Product Innovation search-Technology Management, 40, 5, Sept-Oct 1997, pp. 42- Management 11, 5, Nov. 1994, 397-417; and: Cooper, R. G., 47. Chapter 1 “New products: What separates the winners from 10. Booz-Allen & Hamilton. New Product Management for the the losers” in: The PDMA Handbook of New Product Devel- 1980s. New York: Booz-Allen & Hamilton Inc., 1982. opment, 2nd Edition, New York, NY: John Wiley & Sons, 11. See: Nystrom, H., “Company strategies for research and devel- 2004; also the NewProd® studies: see endnote [31 in Chapter opment,” in Industrial Innovation, edited by N. Baker, New 1. York: MacMillan, 1979; Nystrom, H., Company Strategies for 30. Source: Albright: see endnote [20]. Research and Development, Institute for Economics and Statis- 31. Corey: see endnote [6]. tics, Uppsala, Sweden, Report S-750 07, 1977; Nystrom, H.& 32. Abell, D.F., Defining the Business. Englewood Cliffs, N.J.: Edvardsson, B. Research and Development Strategies for Prentice Hall, 1980. Swedish Companies in the Farm Machinery Industry, Institute 33. Crawford: see endnote [8]. for Economics and Statistics, Uppsala, Sweden, 1978; and: 34. Based on: Cooper, R.G., “Defining the new product strategy,” Nystrom, H. & Edvardsson, B. Research and Development IEEE Trans. on Engineering Management, EM-34, 3, 1987, Strategies for Four Swedish Farm Machine Companies, Insti- pp. 184-193; Cooper, “Identifying and evaluating new product tute for Economics and Statistics, Uppsala, Sweden, 1980. opportunities,” in: Day, G.S., Weitz, B. & Wensley, R., The 12. The Cooper strategy studies: Cooper, R.G., “Industrial firms’ Interface of Marketing and Strategy, vol. 4 of the series: Stra- new product strategies,” Journal of Business Research 13, April tegic Management Policy and Planning: A Multivolume Trea- 1985, pp. 107-121; and: Cooper, R.G., Overall corporate strate- tise. Greenwich, CT: JAI Press Inc, 1990. See also: Cooper, gies for new product programs,” Industrial Marketing Manage- R.G. “Product Innovation & Technology Strategy”, reprinted ment 14, 1985, pp. 179-183. in Succeeding in Technological Innovation, Washington: 13. Crawford, C.M., “Defining the charter for product innovation,” Industrial Research Institute, May 2001, pp. 14-17. Sloan Management Review, 1980, pp. 3-12. 35. Miles, R.E. & Snow, C.C., Organizational Strategy, Structure 14. Paragraph taken from: Cooper, R.G., “Benchmarking new and Process. New York: McGraw-Hill, 1978. product performance: results of the best practices study”, Euro- 36. These definitions are taken from an article by Griffin and pean Management Journal, 16, 1, 1998, pp. 1-7. Page, who provide a breakdown of project types by strategy 15. APQC benchmarking study: see endnote [1]. elected: see endnote [21]. 16. APQC benchmarking study: see endnote [1]. 37. These strategy types are based on concepts from several 17. See: Cooper, Edgett & Kleinschmidt, endnote [7]; also: Coo- sources: Porter, M.E., endnote [26]; and Cooper, R.G., end- per, R.G., Edgett, S.J. and Kleinschmidt, E.J., “Optimizing the note [12]. Stage-Gateâ Process: What Best Practice Companies Are 38. Roberts, E.B. & Berry, C.A., “Entering new businesses: se- Doing – Part II”, Research-Technology Management, 45, 6, lecting strategies for success”, Sloan Management Review, Nov-Dec 2002. Spring 1983, pp. 3-17. 18. See: Albright, R.E. & Kappel, T.A., “Roadmapping in the 39. Roberts, E.B., “New ventures for corporate growth,” Harvard Corporation”, Research-Technology Management, 46, 2, Business Review, 1980, pp. 3-17. March-April, 2003, pp. 31-40; also: McMillan, A., 40. Roberts, E.B. & Berry, C.A.: see endnote [38]. “Roadmapping – Agent of Change”, Research-Technology 41. See success factors: endnote [29]. Management, 46, 2, March-April, 2003, pp. 40-47; and: Myer, 42. Killing, J.P., “Diversification through licensing,” R&D Man- M.H. and Lehnerd, A.P. The Power of Product Platforms. agement 1978, pp. 159-163. New York: Free Press, 1997. 43. Roberts, E.B.: see endnote [39]. 44. Killing, J.P.: see endnote [42]. 27 45. Roberts, E.B.: see endnote [39]. 46. Roberts, E.B.: see endnote [39]. © Product Development Institute Inc. 2000-2008
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