Strategic Perspectives on

1
Strategic Perspectives on New Product Development
Professor George Day
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Strategic Perspectives on New Product Development

• The Innovation Imperative
• Key Success Factors
• Developing the Growth Strategy
• Alignment with business strategy
• Strategic roles
• Growth path
• Entry mode
• Reliance on outsourcing and partners
• Balancing the portfolio
• Key result measures

3
The Turbulent Environment for Product Innovation
Two things drive this business technology and
paranoia. Intel VP
Focus on Shareholder Value
Innovation Imperative
Intensifying Competition
Accelerating Technological Change
Demanding Customers
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The Turbulent Environment for Product Innovation

• Intensifying Competition
• Globalizing markets
• Eroding advantages
• Technological Change and Diffusion
• Shorter life cycles
• Blurring market boundaries
• Demanding Customers
• Better
• Faster
• Closer
• Shareholder Value
• Investors expectations about level and growth in
  earnings market value/book value

5
Diffusion Rates for New Information Technology
Time it took or is taking for these
technologies to be adopted by 10 million customers
41 years 38 years 25 years 22 years 9 years 9
years 7 years 6 years 6 years (est)
Pager Telephone Cable TV Fax VCR Cellular
phone PC CD-ROM Wireless Data
Source Info Tech
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Growth and Shareholder Value
You cant save your way to prosperity. Wayne
Calloway CEO, PepsiCo
Absolute Market Value Growth (CAGR 1989-1993)
15
Revenue Growth
Profitable Growth
7
10
Unprofitable Growth
Above Average
Cost Cutting
Below Average
0
Profit Growth
Below Average
Above Average
7
New Product Development Process
Business Strategy Customer Value
Proposition Technology Plan New Product/
Growth Strategy Opportunity Identification
Market
Launch
Test/Deploy
Development
Definition
Concept
Business Analysis
Strategic Review
Screening
8
New Product Management Practice
Stage 1 (1970-1990) Functional Activities Elemen
ts Tasks Procedure Coordination and Control
(Efficiency)
Stage 2 (1985-2000) Multifunctional
Teams Product Project Process Redesign Team Au
tonomy (Speed)
Stage 3 (1995 ) Business Integration Platfor
m Portfolio Process Coordination Strategic
Impact (Growth/EVA)
Source Adapted from McGrath (PRTM)
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Management Involvement

• Consequences of lack of front-end attention
• Late cancellation of projects
• Frequent redefinition of project scope
• Project delays
• Resource problems hamper progress
• Pipeline overcommitment

10
Key Factors in SuccessfulNew Product Management

• Clear
• Strategic
• Direction
• search limited to areas of competency
• defined roles

• Pervasive
• Market
• Orientation
• compete with superior value
• encourage lead users

• Supportive and
• Committed
• Organization
• access to resources
• encourage champions
• strong culture

• Fast-Paced Adaptive Development Processes
• tough screening
• continuous learning

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Attributes of Product Definitions ofSuccessful
High-Technology Products(Comparison of 7
successes and 5 failures)

• 1. Product definition was closely aligned with
  business strategy and objectives
• project leveraged core competencies
• there was a clear, shared sense of purpose
• 2. Team was immersed in timely and reliable
  information on customer requirements and
  preferences
• 3. Product was positioning vis-B-vis competitors
  anticipated features and prices
• 4. Technologies were in hand or available off
  the shelf at project inception
• 5. There was extensive communication among
  members of multi-functional teams
• seniority and level of experience were critical
  sources of strength

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Obstacles to Improving Product Innovation
rating obstacles as very important

• Inadequate Management Guidance
• Poorly communicated vision and objectives
• Inability of individuals to understand process
• Insufficient planning to optimize use of
  resources
• Lack of market/customer/competitor understanding
• Insufficient attention to product specifications
  to meet customer requirements
• Unclear, cumbersome decision-making

• Lack of Resources/Infrastructure
• Lack of skilled leaders and managers
• Lack of appropriate staff
• Lack of systems/guidelines for product
  development
• Lack of funds
• Lack of know-how/technology

57
49
34
32
30
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Obstacles to Improving Product Innovation
(cont.) rating obstacles as very important

• Ineffective Organization and Process
• Poor communication between functional departments
• Loyalty to functions over company
• Compartmental/sequential process
• Lack of permanent integrating functions below top
  management
• Powerless program/project managers compared to
  functions
• Lack of delegated autonomy to teams for product
  trade-off decisions
• Performance evaluation based on functional
  performance only
• Lack of multifunctional mechanisms to handle
  trade-offs
• Lack of experience in teams/task forces

37
34
32
30
28
28
28
26
25
14
Obstacles to Improving Product Innovation
(cont.) rating obstacles as very important

• Incompatible Culture and Values
• Resistance to planning
• Lack of discipline
• No sense of urgency
• Lack of customer orientation
• Excessive reliance on developing/making
  everything in-house
• Inability of top management to work as a cohesive
  team
• Insufficient attention to quality
• Excessive risk taking, unrealistic goals

42
42
40
38
36
35
33
29
Source Arthur D. Little
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Developing the Growth Strategy

• Alignment with Business Strategy
• Growth objectives closing strategic gap
• Role of new products/services value leadership
• Leveraging competencies
• Growth Path
• Broadening the business definition
• Risk posture
• Development Portfolio
• Matching resources with project requirements
• Supporting Strategies
• Outsourcing and partnering
• Timing of entry
• Method of entry
• Key result measures

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Strategic Roles

• Inside-Out (capitalize on core competencies or
  shore up disadvantages
• Utilize proprietary technology
• Capitalize on superior distribution coverage
• Utilize excess capacity
• Off-set seasonal fluctuations
• Improve cost structure
• Outside-In (respond to customer or competitor
  developments/opportunities)
• Defend leadership
• Preempt competition in an emerging segment
• Gain foothold in new market
• Broaden market coverage by entering a new market
• Use the equity of a strong brand name
• Reinforce reputation as an innovator

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Competing with Superior Customer Value
The source, emphasis, and role of new products
depends on how competitive advantage will be
achieved
Operational
Excellence
"A great deal"
"Best price"
"Hassle free basic service"
Customer
Performance
Responsiveness
Superiority
"Always at cutting edge"
"Really understand my
business"
"High price but worth it"
"Exactly what I need"
"Constantly renewing
and creative"
"Business partner"
Adapted from Treacy and Wiersema/CSC Index
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Comparing Value Leadership Strategies

• Operational Excellence (best price)
• High reliability/consistency of quality
• Constrained variety
• Standardized service approach
• Customer Responsiveness (best total solution)
• Decisions made close to customer
• Tailored offering/expertise in catering to
  individual requirements
• Use dialogue with customers to build a learning
  relationship
• Fast follower on product innovations
• Performance Superiority (best product)
• Innovative product features that enhance
  customers use of application
• First movers/quick to market
• Technology or fashion leadership
• Aggressive market launches

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Value Leadership in Beverages
Operational Excellence

• megabrand focus high volume, long

runs

• "one brand for all"

• emphasis on standard procedures

• product development

• stringent screening criteria

• follower/ideation not critical

• use size to leverage introductions

• centralized process/small staff

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Value Leadership in Beverages (cont.)
Consumer Responsiveness

• proliferate offerings

• quick reactions to market shifts

• local resources for local promotions

• product development

• frequent rapid introduction

• decentralized

• invest in flexibility

• rapid changeovers crucial

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Value Leadership in Beverages (cont.)
Product Leadership

• Look for large-scale ideas/pioneer

• risk tolerant (failure a learning experience)

• anticipating trends is crucial

• cannibalization is accepted

• product development (most crucial process)

• more dedicated resources

• strong emphasis on ideation

• heavy senior management involvement

• time to market is crucial

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Core Competencies of Value Leaders

• They demonstrate superiority in
• process management
• x diffusion of learning
• x integration of knowledge
• superior customer value
• Difficult for competitors to understand and
  imitate
• SONY Miniaturization Capability
• superior integration of multiple technologies
• microprocessors
• power controls
• packaging
• superior understanding
• user-friendly design
• ergonomics
• customer needs and lifestyles
• quick-to-market development processes

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Identifying Competencies

• Competencies are bundles of know-how
• based on training and experience
• built into systems and routines
• guided by values and norms
• enabling superior coordination of activities

• Technology
• Explicit knowledge
• Narrowly held
• Easily copied/acquired
• Inventive capability

• Competency
• Tacit knowledge
• Deeply embedded
• Time consuming to develop/hard to unbundle
• Integrative capability

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Sources of Operational Excellence
McDonald's ability to manage an operating system
that produces speed and
consistency of service across thousands of
locations

• Core processes are standardized, highly
  automated, and integrated

across organizational boundaries
Transaction Processing
Order Fulfillment
Core Competencies
Supply Chain Management
Distribution
Service Delivery

• Intermediate processing steps and overhead are
  minimized

• Economies of scale/scope enhance bargaining
  power with suppliers

• Top-down management systems and operating
  procedures

employees are more directed than enabled
Adapted from CSC Index
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Sources of Customer Responsiveness
Pitney-Bowes ability to solve diverse and unusual
mail-handling problems

• Core processes are flexible and facilitate
  multiple modes of

producing and delivering products/services
Market Segmentation (micro marketing) and
Customer Needs Analysis
Client Acquisition and Retention
Core Competencies
Service Delivery
Customization of pricing, features, and
service levels

• Decisions are based on fine-grained information
  on customers and

channel partners

• Front-line sales and service people can make
  decisions close to the

customer

• A "have it your way" mindset prevails

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Sources of Performance Leadership
Hewlett-Packard's domination of the computer
printer market with technology
advances, sustained by a rapid fire of product
variations, price cuts, and
willingness to attack competitors

• Core processes emphasize continuous innovation
  and

time-to-market
Market Sensing
Product Development
Core Competencies
Technology Integration
Flexible Manufacturing

• Decentralized, team-oriented, loose-knit
  organization

structurerecognizing individual heroes/champions

• Receptiveness to new ideas willingness to
  experiment and

obsolete current products

• High tolerance for risk

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Strategic Roles and Risk Posture
Financial Exposure
Size of investment Follow-on commitments
Risk
Fit of KSF in new opportunity with
competencies Attractiveness of market Prospects
for sustainable competitive advantage
Relative Probability of Failure
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Balancing Risk and Reward Along the Growth Path
P(S) Probabilities of success
New Product Development P(S) .45
Diversification a) Internal P(S) .05 - .15 b)
Acquisition P(S) .35 - .45
New to Company
Line extensions
Product
Market Penetration P(S) .75
Market Development a) Internal P(S) .25 b)
Joint venture P(S) .45
Present
Market Expansion
Present
New to Company
End-Use Market
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Choosing a Growth Path

• Purpose
• Focus attention on functions provided, needs
  satisfied, and customer groups served
• Establish direction of growth and boundaries of
  search
• Process
• 1. Specify growth directions
• WHAT - functions/applications
• WHO - customer groups
• WHAT - technologies
• 2. Identify alternatives along each dimension
• 3. Select feasible combinations as arenas to
  explore
• 4. Screen these arenas for
• market attractiveness
• ability of business to compete
• acceptability of risks

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Growth Paths for Acuson Corp.
Customer Needs/ Requirements
Materials testing
Lithotrypcy market
Materials testing
Lithotrypcy
Cardiology
Related Arena
Non-invasive Diagnostic Exams
Home Base

• Materials manufacturers
• Fabricators
• Test agencies

Radiologists
Kidney specialists
Customer Segments
Cardio-vascular specialists
High definition ultrasound
Color Doppler imaging ultrasound
Lithotrypcy
Technologies
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Screening Criteria

• Market Attractiveness
• Market size
• Market growth/cyclicality
• Intensity of competition
• direct rivalry
• supplier power
• customer power
• substitutes
• potential entrants
• Degree of segmentation
• Availability of channels
• Social/regulatory constraints

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Screening Criteria (cont.)

• Business Strengths
• Familiarity with market and technology
• Fit with competencies
• Shared resources (manufacturing facilities, RD,
  sales force, distribution)
• Prospects for advantages
• Availability of partners

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The Arena Dimensions for ChemPro
Y
Applications
Home Base (Mechanical agitators for pulp and
paper market)
Customer Groups
X
Chemical processors Petroleum
refiners Hydro-metallurgical refining
Food processors
Magneto-hydrodynamics Bio-oxidation etc.

Technologies
Z
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Screening Growth Paths
excellent
HIGH RISK BETS
GOOD BETS

• Aerators for chemical waste

Arena Attractiveness

• Aerators for flotation cells (hydrometallurgy)

• Aerators for PP waste

• Chemical mixers

• Aerators for petroleum

weak
strong

• Petroleum blenders

Business Strength

• Hydrometallurgical agitators

• High density paper stock pumps

• Slurry pumps (hydrometallurgical)

• Home agitators for pulp and paper industry

• Refiners and repulpers for PP industry

• Specialty chemical pumps

• Specialty petroleum pumps

NO BETS
CONSERVATIVE BETS
poor
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Balancing the Development Portfolio

• 1. What is the right portfolio of projects?
• Use customer value stategy to guide choices,
  e.g., emphasis on variety in a customer
  responsiveness strategy
• Balance investments in platforms with short run
  spending on extensions and derivatives
• 2. How should the portfolio evolve?
• Rate of technological change
• Ability of customers to make transition
• Competitive moves
• 3. Does the portfolio match our capacity?
• Will key resources be diffused/overcommitted
  across too many projects?

36
Analysing Project Portfoliosvia the
Customer/Technology Matrix
Customer Value
Extent of Enabling Technology Change
New Core Product
New Benefits
Improve-ment
Variant
Breakthroughs
Radical
Next Generation or Platform
Next Generation
Incremental

• Gel toothpaste

Extensions Updates Enhancements
Base
37
Analysing Project Portfolios Illustrative
Examples
Customer Value
Extent of Enabling Technology Change
New Core Product
New Benefits
Improve-ment
Variant

• 1st instant tea
• 1st zero- fat spread
• 1st hair mousse
• Plax rinse

Radical

• Zeolite softeners

Next Generation or Platform
Next Generation

• Bic dispos-able razor
• 2 in 1 shampoo/ conditioner

Incremental
Derivative (extension of previous platform)
Extensions Updates Enhancements
Base
38
INTEL Product Platforms
Pentium Pro
Pentium
80486
80386
80286
8086/8088
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
Source McGrath, Intel
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Deployment of INTEL 486 Platform to Attack
Segments
35 30 25 20 15 10 5
DX1 - 66 MHz
Overdrive Processor
50 MHz
486 Units (Millions)
30 MHz
25 MHz
20 MHz
SL
1989
1990
1991
1992
1993
High Performance Workstations
Servers Multi-user Systems
High Performance Mid-range
Segment
Mid Performance Mid-range
Entry Level Business Computing
Mobile Computing
Upgradability
Source McGrath, Intel
40
Resource Utilization Template
41
Outsourcing Development Activities

• Benefits
• increased flexibility
• reduced design-cycle time (suppliers have greater
  experience)
• access to broader innovative activities
• reduced overhead and short-run costs
• Risks
• loss of critical skills and strategic
  flexibility, e.g., reliance on Canon for
  laser-printer engines
• loss of cross-functional skills
• supplier shares expertise with competitor or uses
  it to enter market
• searching, contract, and controlling costs exceed
  savings

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Which Activities to Oursource?
Key questions for any actIvity 1. Potential for
sustainable advantage if performed internally? 2.
Potential vulnerability if outsourced? 3. Can
arrangements be structured to reduce
vulnerability?
High
Strategic Control (produce internally)
Moderate Control (special venture or contract
arrangements)
Potential for Sustainable Advantage
Low Control (buy on open market)
Low
Low
High
Degree of Strategic Vulnerability
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Key Result Measures

• Potential KRMs
• Worldwide revenue from products less than 2 years
  old ( of sales)
• Average development cycle time from project
  incpetion through manufacturing approval
• Customer satisfaction with new products
• Development productivity
• Criteria for Selecting KRMs
• Will the desired behavior result?
• Will it be easily understood at all levels?
• Will it motivate people to action?
• Will value be created as a result of improving
  the measure?