A strategy for innovation in manufacturing, including an appendix with overviews of key innovation thinkers.

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

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

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

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

13. From Lean Manufacturing to Lean Enterprise

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

18. Innovation Practices and Frameworks

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

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

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

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

32. Innovation Strategies

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

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

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

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

38. 1. Creating an Innovation Vision

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

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

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

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

51. 2. Creating the Innovation Culture

54. 3. Creating the Innovation Processes

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

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

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

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

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