Innovation Framework For Manufacturing (With Addendum)

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

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]

Contents Background World Class Manufacturing and Innovation From Lean Manufacturing to Lean Enterprise Innovation Practices and Frameworks Innovation Strategies Creating an innovation vision Creating the innovation culture Creating the innovation processes Opportunity identification Opportunity selection Development and testing Production and launch Managing the R&D portfolio Creating the innovation structures and support systems Measuring innovation results 6. Perspectives on Innovation (separate document)

Purpose and Background Purpose: The purpose of this document is to create a framework for thinking about innovation that can help guide the activities of the Manufacturer’s Council in support of The Right Place, Inc. 2004-2008 strategic plan goals for accelerating innovation in West Michigan’s manufacturing base. Background: This work is being undertaken in the following context: The Manufacturer’s Council has been working with a definition of World Class Manufacturing that has three components – clarity of PURPOSE and strategic direction; continuous improvement of PROCESSES; and continuous development of PEOPLE. (See model on following pages.) The work of the Council over the last decade has primarily focused on the PROCESS and PEOPLE dimensions of world class manufacturing, with an emphasis on lean manufacturing and workforce development. The Council’s 2003 position paper: A Growth and Innovation Agenda for Manufacturing , emphasizes the critical role of innovation maintaining the competitiveness of our manufacturing base. Operational excellence is no longer sufficient to “stay ahead of the game.” Companies at every level of the value chain need to be continuously innovating in their processes and products to remain competitive in a global market place. The role of innovation in competitiveness has become even more important with the increase in low-cost competition from overseas. While the Council has well-developed models for process improvement (e.g. continuous improvement and lean manufacturing) and the development of people to guide their investments in peer learning, policy advocacy and other initiatives, there is not a well developed framework for thinking about innovation in small and medium-sized manufacturing firms. Innovation in the RPI Strategic Plan Goal 3 : Strengthen Manufacturing Leadership and Innovation Objective 3.1 : Develop and implement initiatives to support innovation in the regional manufacturing base, including support and development of collaborative R&D resources and opportunities. Implementation Strategies : Develop an integrated model of innovation for small and medium-sized manufacturing firms. Identify the R&D capabilities of West Michigan manufacturers. Accelerate the commercialization of relevant intellectual property. Develop a strategy to attract federal manufacturing R&D investments to West Michigan.

Innovation Summary Part of World Class Performance. Innovation is a critical component of being a world class manufacturer. Operational excellence is not enough to survive long term in today’s markets. Operational excellence and innovation go hand in hand – it is a “both/and” not “either/or” choice. Innovation is part of the shift from a “lean manufacturing” to a “lean enterprise” focus. Linked to Higher Growth and Profitability. Innovative companies consistently outperform their less innovative competitors in terms of sales growth and profitability. Not Just Products and Technology. Innovation needs to be understood in a broad context – it is about innovation in all aspects of the business, including processes, services, methods, management practices, strategy and business design, not just products and technology. Driven By Strategy. The role innovation plays in your company is driven by your strategic focus – what business you are in; desired positioning and differentiation; and targeted customer segments. A Continuum. The “innovation continuum” runs from incremental process improvements to radically new business designs. Each company needs to make choices about how much resources it will focus on which part of the continuum. Requires Process Discipline. Innovation is a skill, not an art. It requires the same level of rigorous process discipline as lean manufacturing. Process “stability and capability” is possible with innovation, just as it is possible in any other element of your business. It just requires focus, commitment and hard work. Supported By Culture and Leadership. Innovation needs to be supported by a complementary organizational culture of creativity; communication; and risk taking. And it needs to be driven from the very top of the organization. There Is No “Right Way.” Every company has to develop their own customized approach to innovation. There are many tools, but no “one size fits all” formula to follow. The “art” of innovation is the matching of the tools and processes to your company circumstances.

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)

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.

World Class Competencies Competence: Having a clear strategic direction; understanding your competencies and markets; capacity for rapid innovation. Attributes: Clear mission and vision Focused market positioning and differentiation Organization-wide goals and objectives Well-defined financial goals Competence: Building a culture that attracts people’s personal energy and supports their ability to understand themselves and work with each other as members of a team. Attributes: Strong shared values Investment in people Teamwork, problem-solving and communications Performance-based rewards Distributive organizational design Knowledge management PURPOSE PEOPLE Competence: Having the ability to continuously improve key processes through the use of quality principles, practices and tools. Attributes: Systems thinking Rigorous measurement Continuous improvement practices for all business processes State of the art process and information technologies PROCESS

World Class Practices Strategic Vision Mission and Vision Market segmentation and analysis Customer selection Competitor analysis Market differentiation Core competence development Planning Strategic planning (goals and objectives) Strategic financial management Human Capital Leadership team development Skills and knowledge development (technical and social) Reward Systems Organizational Capital Developing shared values & culture Organizational design Facilities and work environment design Knowledge management systems PURPOSE PEOPLE Lean and Continuous Improvement : Organization-wide improvement processes Quality practices & certifications (ISO, QS) Lean enterprise processes (one piece flow; pull systems; set up reduction; in-process inspection; standardized work; preventive maintenance) Visual Management; scoreboards and Indicators Core Processes Customer Management Innovation Operations; Supply Chain Social and Regulatory Support and Administration Technology Information technologies Process technologies PROCESS Innovation processes need to be treated with the same level of discipline as other business processes.

Robert Kaplan’s Strategy Maps Robert Kaplan is perhaps best known for his work on balanced scorecards. He has been one of the leading advocates of disciplined systems for developing, tracking and acting on a balanced set of Key Performance Indicators (KPIs) that reflect a company’s strategic priorities. Kaplan’s most recent book, Strategy Maps , emphasizes two important points: Linking KPIs to a company’s desired end market positioning (strategy); and Differentiating KPIs by which dimension of the enterprise they are designed to provide improvement data for. Kaplan differentiates between four different “perspectives” in a firm. Each perspective relates to one dimension of company success: The financial perspective that concerns itself with the long-term development of shareholder value. The customer perspective that concerns itself with how the organization and its products and services are perceived by its customer segments. The internal perspective that concerns itself with the performance of a company’s business processes. The learning and growth perspective that concerns itself with the building of information, human and social capital. These four “perspectives” correlate closely to the Council’s world class model of Purpose (Financial and Customer perspectives); Process (Internal perspective); and People (Learning and Growth perspective). Within the Internal Perspective, Kaplan identifies four different kinds of business processes, one of which is Innovation: Operations management (supply; production; distribution) Customer management (selection; acquisition; retention; growth) Innovation (opportunity identification; portfolio management; new product development; product launch) Regulatory and social processes (environment; safety and health; employment; community) Graphic descriptions of Kaplan’s strategy maps, including the detail on Innovation processes, are provided on the following two pages.

Kaplan’s Strategy Maps Create Long Term Shareholder Value Enhance Customer Value Expand Revenue Opportunities Increase Asset Utilization Improve Cost Structure Growth Strategy Productivity Strategy Price Quality Availability Selection Functionality Service Partnership Brand Product and Service Attributes Relationships Image Operations Management Processes Supply Production Distribution Risk management Customer Management Processes Selection Acquisition Retention Growth Innovation Processes Opportunity identification R&D portfolio New Product design and development Launch Regulatory and Social Processes Environment Safety and health Employment Community HUMAN CAPITAL INFORMATION CAPITAL ORGANIZATIONAL/SOCIAL CAPITAL FINANCIAL PERSPECTIVE (Purpose) CUSTOMER PERSPECTIVE (Purpose) INTERNAL PERSPECTIVE (Process) LEARNING & GROWTH PERSPECTIVE (People) Source: Strategy Maps – Converting Intangible Assets Into Tangible Outcomes , Robert Kaplan and David Norton, 2004

The Innovation Strategy Map Create Long Term Shareholder Value Improved Gross Margin on New Products Revenue from New Products Manage Total Life Cycle Production Costs Growth Strategy Productivity Strategy Speed to Market Unique Performance Features Identify the Opportunities Meet current customer requirements Anticipate unarticulated needs Discover new opportunities Manage the Portfolio Select projects Manage the mix of projects Extend products to new applications Collaborate Design and Develop Manage products through the development stages Reduce the development time Reduce development costs Launch Achieve ramp-up schedule Attain production cost, quality, cycle time targets Achieve initial sales gain Human Capital Multi-disciplinary skills Key technical talent Ability to work across disciplines FINANCIAL BENEFITS OF INNOVATION CUSTOMER VALUE PROPOSITION INNOVATION PROCESSES INNOVATION SUPPORT INFRASTRUCTURE Source: Strategy Maps – Converting Intangible Assets Into Tangible Outcomes , Robert Kaplan and David Norton, 2004 Extend Into New Markets Information Capital Design and simulation technology Knowledge management systems Product lifecycle management (PLM) technology Organizational Capital Culture of innovation Teamwork and networks Strategic alliances

From Lean Manufacturing to Lean Enterprise

Different Levels of Lean Focus The lean philosophy is typically applied at progressively more inclusive levels of the company. These include: Lean Manufacturing. This is often as far as many companies get. The focus is on the shop floor, from point of order entry to shipping of the product to the customer. Lean Enterprise. A lean enterprise focus extends the lean philosophy to other functions within the company, including sales and marketing; product development and engineering; supplier development; finance and accounting (the focus of this study); human resources; etc. Lean Extended Enterprise. The “extended lean enterprise” refers to the company’s full value chain, from raw material through the full lifecycle of the product (disposal and recycling). It typically looks beyond the part of the value chain currently controlled by the company for potential opportunities to grow share of the value chain through innovation and waste elimination. As a company migrates from manufacturing to enterprise to extended enterprise, the focus of lean typically becomes less operational and more strategic. One way to think about the work of innovation in a company is as the extension of the lean philosophy of waste elimination to the full enterprise, and especially to the strategy, R&D, and Sales and Marketing functions . Lean Enterprise Extended Lean Enterprise Lean Manufacturing Shipping Sales & Marketing Customer Service R&D and Engineering Administrative Support Supply Chain Customers and Markets

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.

The “Lean Enterprise” Companies that have been applying the lean philosophy to their manufacturing operations eventually find that the “root cause” of waste is often in non-manufacturing activities (see box at right) that are off the shop floor. What is common about most of the “eight deadly wastes” is that they are all related to the making of physical objects. Many of these other processes involve knowledge work and the making of intellectual products that embody ideas . These processes create some different kinds of wastes; for instance, the wastes generated by: Not understanding customer requirements. Targeting the wrong customers. Not having the right information for decision-making. Poor communications across the extended enterprise. Unclear articulation of strategy. Unclear company values. Destroying trust. Making product designs that are hard to build. Not tapping the innovation and creativity of the supply base. In many instances, these are wastes of “omission” as well as “commission.” They involve missing out on opportunities, as opposed to executing an existing process inefficiently. Potential Sources of Waste Outside of Manufacturing: Market selection Customer selection Positioning and differentiation Product line decisions Product development Product design and engineering Sales and marketing Customer relationship management Customer service Supplier selection and development Support infrastructure Finance and accounting

Waste Elimination Opportunities PRODUCT DESIGN & DEVELOPMENT VOC Product functions Engineering specs Component design Production and tooling engineering Process design PRODUCTION PLANNING Set the schedule Plan production Monitor on-time PURCHASING Select suppliers Negotiate volume & price Issue POs Inspect in-coming Issue payment MANUFACTURING Maintenance Manufacturing Engineering Quality Control Production processes DELIVERY & PAYMENT Shipping & logistics Invoicing Collections Customer service SALES AND MARKETING Marketing Leads and prospects Key account management Price negotiations Order entry SUPPORT AND OVERHEAD HUMAN RESOURCES Hiring Evaluation Development FINANCE & ACCOUNTING Transactions Statements Reporting INFORMATION TECHNOLOGY ERP Systems Desktop Web transactions PLANNING & STRATEGY Strategic planning Market research Mergers & acquisitions OTHER Legal & regulatory Real estate Shareholder relations Public relations The vast majority of traditional lean activities are focused in these areas. Innovation emphasizes improvement in these areas. QUOTING & PROGRAM MGT Product costing BOM Routing Overhead allocations Quote terms Program management Product launch

Innovation Practices and Frameworks

Innovation Drivers The “innovation imperative” is being driven by a number of broad changes in the business environment. The changes are accelerating change, resulting in a state of “continuous disequilibrium” in industries and markets. In this environment, innovation skills are becoming as much of a requirement for success as operational excellence. These trends include: Knowledge Economy. Higher levels of education globally, and rapid advances in knowledge at all levels of the society and the economy result in “knowledge content” accounting for an increasingly larger percentage of GDP. Connectivity. Higher levels of connectivity in the economy, largely due to information technology advances, create: More rapid diffusion of knowledge and ideas More discriminating customers, who change their requirements more rapidly Flexibility. New business designs and communications systems create an ability to rapidly form novel combinations of all the elements of the value chain – people; capital; hard assets; and knowledge. Globalization . The spreading of market economies both creates new opportunities to sell innovation and creates more competition, requiring higher levels of innovation to succeed.

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.)

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)

Different Dimensions of Innovation The term “innovation” is often mistakenly associated primarily with new products or technology. The reality is, however, that innovation relates to a broad range of dimensions of a business, including: Products. Innovations in products (especially consumer products) are the most visible, especially technology-related examples such as computers, cell phones, and other communications devices. Basic production technology. These innovations relate to how things are made, and include new advances in materials, machining and forming, automation, etc. The fields of industrial bio-technology, (in which biological processes replace artificial processes), and nano and micro-technology (in which molecular and sub-molecular production processes are employed) are two prominent examples. Services. Service innovation is obviously critical for companies that are in the service business. However, in many manufacturing environments, the services that surround the product are as important, or often more important than the product itself. Customer experience. While it is closely related to both products and services, the total integrated customer service offers many opportunities for innovation. It is often how the customer experiences the full range of “touch points” with an organization that differentiate one company from another. Business processes. Innovation in business processes that are not visible to the customer are often a source of significant market differentiation. Wal-Mart, for instance, relies primarily on its sophisticated logistics and communications systems to maintain its lower prices. Business model or design. In some instances, innovation affects a broad enough range of business dimensions (supply chain management, product/service design, production, sales and marketing, distribution, pricing, etc.) that a company can be described as having created a fundamentally new business design for a sector.

Different Dimensions of Innovation These are all illustrations that are easy to name, but there are countless other instances where the creativity to execute a modest change in a design, process, etc., results in an incremental improvement that creates value: improved performance; lower cost; better quality; and so on. The right culture will yield an array of innovations on the spectrum from continuous improvement to breakthrough products. Category Opportunities for Innovation Examples of Successful Innovation Product and Services Design Features Technology Quality Price Adjustable pedals Electrochromic mirrors Telematics Tire pressure monitors Fold-flat seats Manufacturing Processes Equipment Technology Hydroforming Fineblanking Laser welding Digital prototyping Materials Composition Properties Powder metal Quiet Steel Nano structure plastics Business Practices Management Practices Business Design Lean manufacturing Customer relationship management Strategic alliances Corporate development Value chain realignment

Different Levels of Innovation More complexity More strategic risk Higher levels of management attention Longer cycle times New Markets and Customers New Products and Processes Cross-Company Process Redesign Continuous Improvement within Processes Strategic Business Redesign In addition to being differentiated by what aspect of the business they affect, innovations can be differentiated by the breadth of their scope. Innovations can range everywhere from a significant improvement in a business process, to a radical redesign of the company’s entire business model. As the scope of the innovation increases, the level of complexity and risk associated with it also increases.

Another Way to View Innovation New Current Current New Markets & Customers Products & Services Emerging Emerging Advanced R&D Continuous Improvement New Business Designs More complexity More strategic risk Higher levels of management attention Longer cycle times Innovations can also be looked at from the perspective of the interaction between products/services and markets/customers. At one end of the spectrum, continuous improvement is focused on improving the delivery of current services to current customers. At the other extreme, a new business design might be focused on delivering fundamentally new products and services to a new customer segment.

Deloitte’s Study of the “Innovation Paradox” Based on research from 650 leading manufacturers worldwide. Manufacturers cite launching new products and services as the No. 1 driver of growth. They expect new product revenue to increase to 35% of sales by 2006, from 21% in 1998. By 2010, products representing more than 70 percent of their sales today will be obsolete due to changing customer demands and competitor offerings. Despite these facts, they view supporting product innovation as one of the least important priorities in their company. Most manufacturers have not developed reliable systems for bringing new products and services to market. 50% to 70% of all new product introductions fail. Failures to successfully launch new products are due to: Insufficient information on customer needs Insufficient supplier capabilities A reluctance to allocate additional spending on R&D Uncoordinated approaches to innovation across product, customer and supply chain operations. Source: “Mastering the Innovation Paradox”, Deloitte, 2004, www.deloitte.com/globalbenchmarking

Innovation In the Auto Supply Base Based on a survey of over 80 automotive suppliers on a global basis, McKinsey & Company analyzed the strategies that led to “profitable growth” in the industry. They found the companies that were able to achieve both growth and profits pursued three kinds of strategies – expanding their role with the OEMs; innovating ; and creating global research, production and sales networks. The characteristics of the innovators included: More profitable. The more innovative companies averaged twice the return on sales of their less innovative competitors. Value-focused. Innovators focus on value-based competition, not pure price plays. Growth oriented. They establish very aggressive growth targets, and grew at rates four times higher than the non-innovators. Focus on new products. They have a bias for new products and big innovations. Innovators spend far more on new products (vs. product improvements) compared to their competitors (40% vs. less than 25%). Disciplined business processes. Innovators have business processes to support the innovation process that are designed for rapid information flows, including: Disciplined selection of ideas based on deep knowledge of customers Rigorous implementation of selected ideas Systemic use of development tools, such as FMEA, design reviews, CAE, etc. Full-time staffing assignments over the life of the project Use of cross-functional teams More joint development projects with customers and suppliers Greater use of parallel product development processes, and the use of program management systems; rapid prototyping and simultaneous engineering Training and reward systems. Innovators invest in training for those doing development, and use reward systems that incentivize innovation. (Source: “Profitable Growth Strategies in the Automotive Supply Industry”, McKinsey & Co,, 1999)

Innovation Examples In West Michigan Company Innovation Examples Rapid Engineering Bio-fuel from waste kitchen grease Building pressurization for HVAC systems Cascade Engineering Nanocomposite plastic High-pressure injection molding with in-mold vinyl DeWitt Barrel Advanced technology barrel reconditioning and ultrasonic leak testing Custom-designed wastewater treatment system Gentex Automatic dimming mirrors Mirrors that combine telecommunications and information systems (telematic mirrors) The Holland Group No-lube fifth wheel that eliminates the need for lubrication Jedco Alternative to chemical milling for lightweight aerospace materials Exterior Technologies New lightweight exterior wall panel system

Gentex Case Study Gentex Corporation in Zeeland, Michigan stands out in the automotive sector as a high growth company that has achieved extraordinary levels of profitability due to its product innovation and technology leadership. Gentex produces mirrors and related telematics and lighting systems for the automotive market. In 2001, the Center for Automotive Research conducted an assessment of Gentex’s innovation systems. They found that there were four “core values” that contributed to their innovation capabilities: Continuous business improvement . Gentex has deeply internalized the continuous improvement business philosophy and rigorously applies it to all business processes, not just manufacturing. Product and process innovation . The core values of the founder – an inventor with practical business sense – permeate the organization. The urgency of being the innovation leader is palpable throughout the company. And Gentex focuses its innovation as much on business processes, as on products and technology. Entrepreneurship . Gentex has developed an entrepreneurial culture that rewards risk taking, and rewards product outcomes and knowledge transfer. Customer focus . Gentex is obsessed with understanding customer needs and opportunities, but are able to distinguish genuine need from every request the comes down the pike. Numbers You Can Be Proud Of: $470 million in sales 22.7% Net Profit 16.2% five year average growth rate (Source: “Gentex Corporation – Leveraging Intangible Assets Through Relationships”, Center for Automotive Research, Sept., 2001) Gentex’s Core Values Are Reflected in its Key Innovation Support Systems: Reward systems that provide generous financial and social reinforcement for innovation. Communication systems that emphasize personal communication through a wide variety of formal and informal systems. Information technology systems that are kept modest and are designed to support, not replace personal communication. “ After conducting 13 interviews across nine functions, we have concluded that what Gentex is particularly good at is ‘information transparency.’”

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.”

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.”

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.

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.

Summary of Innovation Strategies 1. Define the role of innovation in your company 2. Create the innovation culture 3. Create the innovation processes 4. Create the innovation structures and support systems. 5. Measure the innovation results. Clear “theory of the business” Clear differentiation and positioning Theory about which customers will drive growth Ideas about opportunities for innovation Clear screens and criteria Reward risk taking and creativity Celebrate innovation Open communication Look outside the company Clear management leadership Corporate champion Product managers Product champions Innovation teams Technology brokers Outside partnerships Skill development Reward systems Technology infrastructure & tools Intellectual property management systems Define the measures Develop measurement plans Display the measures Review as part of management review Link to performance evaluation and rewards Opportunity identification Opportunity selection Development & testing Production & launch Portfolio management

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

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

1. Creating an Innovation Vision

Defining The Role of Innovation in Your Company Your approach to innovation needs to be driven by your “theory of the business.” You need a clear theory about where the best opportunities are for innovation in your markets (product; process; business design). Based on your theory about your business, you need to create clear screens and criteria for your innovation efforts (communicable visions and action plans). Elements of A “Theory of Your Business” What business are you in? What is your desired market positioning? What is your basis for differentiation? Which customers will drive your growth? How are their priorities changing? Who are your competitors? And how do you best defeat them?

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

Do it now, or do it later… The value of a rigorous annual strategic planning process will show up in multiple elements of the new product/service planning process. In essence, each new product or service project will require its own “mini strategic plan” for effective implementation. These plans can draw on the following resources developed during the strategic planning process: Strategic positioning. A robust and on-going dialogue about the company’s positioning in the market, and the current strengths and weaknesses, will surface a set of hypotheses about where the opportunities are for extending core competencies into new domains, or creating whole new markets and categories of competition. This will help define the “hunting grounds” for the innovation strategy. Market and segment analysis. A strong strategic planning process will have developed a good set of macro-level market and segment analyses (size; growth; risks; opportunities; barriers to entry and exit; lifecycle stage; competitive drives; external trends; etc.) that can inform the more micro-level analysis that will need to be done for each new product/service project. Customer analysis. Work done to better understand your key customers (whether by segment; by product; or by key account) creates a jumping off point for the understanding of customer requirements that is needed to drive innovation. For companies whose customer base follows the 80/20 rule – the key account plans you develop for your lead customers should be a rich source of inspiration for innovation ideas. Competitor analysis. A sound understanding of your competitors and how you stack up against them will help you decide where you need to innovate for defensive vs. offensive reasons; where your competitors are vulnerable; and what the possible sources of unexpected competition might be. Core competencies. A deep understanding of your core competencies (and especially a shared “mental model” about this within the leadership team) enables you to think creatively about how you might migrate within your value chain, or across it to another value chain. It also helps to keep your innovations focused “close enough to home” so that they leverage knowledge and investments you have already made. If you have not done your strategy work up front, you will likely find that this becomes apparent as you try to make choices about your innovation portfolio. Many companies find themselves driven back into deeper strategic thinking by the need to have more clarity in their innovation agenda.

Strategy Innovation (Adapted from: Johnson and Bate, The Power of Strategy Innovation , 2003) Strategy innovation means: Shifting a corporation’s business strategy in order to create new value for both the customer and the corporation. Applying innovative thinking to the entire business model of a company, not just to its products or inventions. Finding a way to “change the rules of the game” so that your company’s products, competencies and assets provide you with a competitive advantage in the marketplace. Managing the future; it is not a simple extension of past business strategies. Strategy innovation is the “fuzzy front end” of a robust strategic planning process. Unfortunately, most strategic planning processes are not well structured to support dialogue and exploration about strategic innovation. Instead, they tend to be focused on extending the companying historical approaches and practices into the future. The strategy innovation process should precede the strategic planning process. “ The strategic planning process in most companies is rarely an exercise in creating new and effective strategies for the future of the company. Instead, the strategic planning process is more often one that perpetuates, and at best revises, the current strategy every year.” (p. 29) Traditional Strategic Planning Strategy Innovation Analytical Creative Numbers-driven Insight driven Company-centric Market-centric Logical/linear Heuristic/iterative Today to tomorrow Tomorrow to today Extend current value Create new value Fit the business model Create a new business model

Ten Strategic Questions to Ask Mission. What business are we in? Vision. Where do we want to be in 5-10 years? Values. What principles do we want to guide our behavior? Customers. Which customers do we want to serve? Which ones will drive value growth? How are their priorities changing? Product and Service Scope. What products or services do we want to offer? What core competencies do we need? Differentiation. What is our basis for market differentiation? Who are our key competitors? Are we really different? Profits. What is our profit model? What areas of our business are our customers willing to let us make money? Processes. What are our core processes? What needs transforming? Scoreboards. What indicators will we use to measure success? Goals, Objectives and Action Plans. How will we incrementally move towards our vision? (Source: IRN, Inc., “Strategic Planning Essentials”)

Putting the Strategic Plan Pieces Together Product Dev. Production Purchasing Capital goods Go-To-Market Org. Design Market position/ differentiation Core competence Core products Product line Profit model Market segmentation Market analysis Customer selection Competitor analysis SCOREBOARD: Cost, Quality, Delivery, Morale Purpose: Mission, Values, Beliefs VISION (Desired future -- 10 years +) GOALS (3-5 years) OBJECTIVES (2-3 years) ACTION PLANS (1 year) CUSTOMERS & COMPETITORS VALUE ADDED CORE PROCESSES PEOPLE SUPPLIERS Who What When (Source: IRN, Inc., “Strategic Planning Essentials”)

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

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)

The Specific Elements of An Innovation Strategy Innovation Vision The overall role of innovation in your market positioning. Amount of resources dedicated to innovation (R&D and innovation processes). How your innovation strategy will change your market positioning over time. Arenas to Play In The customer segments you are targeting. A technology road-map of how you envision your technological competence evolving. An applications/product map of how you envision your overall product offerings evolving. This area defines what are referred to as your “hunting grounds” for innovation opportunities. Entry Strategies Different ways you plan to acquire or develop new technology, products, or customer segments. These can include internal development; acquisitions; joint ventures; licensing agreements; venture investments; etc. A vision of how these strategies might differ, depending on the niche being pursued. An limitations on when you will use which of these strategies (e.g. conditions under which you will consider an acquisition). An Innovation Strategy needs to be concrete enough to provide guidance to the company’s direction. As is often said of a strategic plan, it is “a compass, not a roadmap” in the sense that it defines the direction, but not the specific steps to be taken. The details are fleshed out in the management of the product development portfolio itself – specific technologies, products and services, platforms, etc. that the company invests in. The three kinds of areas that the Innovation Strategy should provide some guidance in are described below. Your Innovation Strategy

Market Positioning – An Example Price Innovation/Uniqueness/Speed to Market The Lo-Boys Buy primarily on price Main consideration is no hassle service Very transactional Best options are products at the commodity stage of their lifecycles Own the Customer Relationship Price is still an issue, but not the overarching concern Looking for customized approach Responsiveness and customer service critical Flexibility Expect you to think like them Determining which products and technologies fit is a customer by customer process “ Innovate” “ Get Intimate” “ Reduce Costs” Source: The Discipline of Market Leaders , Treacy & Wiersma, 1997 Where you position your company in the market will drive your innovation focus The Innovators Speed to market is critical Seeking products and technologies that differentiate them Want the latest technology Product lifespan is short (2-4 years) Looking for products on the front end of their lifecycle

Innovation Strategy By Market Position Market positioning is a good example of where different kinds of business strategies will lead to somewhat different approaches to innovation. their book The Discipline of Market Leaders , Treacy and WeirsmaIn suggest that there are three basic approaches companies can take to market differentiation: 1) be the absolute low price player; 2) specialize in knowing the customer and customizing your offerings to their needs; and 3) be the the first to market with leading edge innovations. Companies typically cannot maintain leadership in all three of these positions – they have to choose one and specialize. Each positioning leads to a slightly different emphasis in how you approach innovation. Some of these possible differences are noted in the table below. This Positioning… Might Lead You to Focus on These Kinds of Innovations Low-Boys Process improvements that reduce costs Supply chain management strategies Customer Intimacy Customer service interfaces Customer engineering support and “solutions selling” Voice of the customer processes Innovators Leading edge technology Innovative product design Focus on “lead users”

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

2. Creating the Innovation Culture

Creating the Innovation Culture Create a company culture that rewards creativity and risk taking. Celebrate innovation processes and results. Facilitate communications across business units. Honor and value ideas that come from outside the company. Provide clear management leadership, direction and support. Make sure leadership models the innovation focus. “ The organizational culture must emphasize innovation, disruption, and change as core values. The culture should foster the acquisition of knowledge from outside the company and overcome the natural tendency, called the not-invented-here (NIH) syndrome, to derogate advances made by scientists and engineers outside the company, even if they work for competitive companies .” (Kaplan and Norton, Strategy Maps ) “ The biggest single thing we can do is provide a culture where there is freedom to fail. We have to embrace that .” (Steve Parker, President, Rapid Engineering) “ 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.” (Fred Bauer, President, Gentex)

Culture Factors That Differentiate Innovative Companies (Source: Zien and Buckler, “Crafting a Culture of Innovation”, Journal of Product Innovation Management, 1997) LEADERSHIP EXAMPLE. Leaders demonstrating by their actions that innovation is important. INNOVATION PRIORITY. Engaging the full organization in an understanding about why innovation in critical to company success. INNOVATION ENCOURAGEMENT. Encouraging employees to take risks and try new things; and providing financial incentives for individual innovation. CROSS-FUNCTIONAL INTEGRATION. Creating robust relationships between technical staff and marketing/sales staff. CUSTOMER INTIMACY. Encouraging and incentivizing a broad range of employees to interact closely with customers. STORY TELLING. Telling powerful stories that reinforce the principles and practices of innovation. The work of building a culture in your company to support innovation is basically no different than building a culture to support any other business strategy. It requires consistency, integrity, robust communications and reward systems. One study of innovation leaders found that the following cultural factors consistently differentiated the innovators from the non-innovators.

3. Creating the Innovation Processes

Creating the Innovation Processes There are five basic kinds of processes that are needed to support a company’s innovation system. They include: 1. Opportunity identification and voice of the customer. These processes are directed at generating a robust repertoire of innovation opportunities for the company to explore. These opportunities need to be connected to the firm’s core business strategy. 2. Opportunity selection. These processes are used to narrow down the list of potential opportunities to a limited set of projects that the company invests in, through the use of disciplined opportunity screening criteria. 3. Product/service design and development. Within each individual project, a disciplined process needs to be used to advance projects from one stage to another, and to conduct the work that occurs within each stage. The company also needs a robust set of design tools and capabilities to bring to bear on this work (CAD; CAE; FEA; DfE; DfM; etc.). 4. New product/service launch. Once a new product or service makes it through the design and development stage, attention focuses on the launch of the product/service (in manufacturing or other business units), and the execution of related sales, marketing, pricing, distribution, services support and other activities. 5. Managing the R&D portfolio. The set of projects that is selected for more detailed investigation, development and prototyping needs to be rigorously managed. Choices need to be made about how many projects the company can manage at one time; how much resources to invest in each project; how to spread the projects across different categories and scope of innovation; and how to make decisions on each project.

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.

Characteristics of Successful New Product & Service Processes DIFFERENTIATION. The new product or service is differentiated and delivers unique benefits and superior value to the customer. MARKET-DRIVEN. The process for developing new products/services is driven by deep knowledge of customer needs and requirements, and supported by customer contact and market research. INVEST IN THE FRONT END. The work in the steps before development are done well – screening; market research; technological feasibility; design; and business case development. CLEAR PRODUCT/PROCESS DEFINITION. All the elements of “design” (in its broadest definition) are well-defined and articulated, including the project scope; definition of the market; customer value proposition; positioning strategy; and product/service features and specifications. DISCIPLINED LAUNCH PROCESS. The launch is rigorously managed, and is based on a well thought-out marketing plan. RIGHT STRUCTURE. There is a cross-functional team structure, with clear accountability and strong leadership. Source: Robert Cooper, Product Development Institute Presentation, 2002 MANAGEMENT SUPPORT. Management is committed to innovation as a business strategy; provides support; facilitates the process; and does not meddle on a day-to-day basis. LEVERAGE CORE COMPETENCIES. The new products/services build on the core competencies of the organization, including technical knowledge; design capability; manufacturing; customer relationships and sales channels. MARKET ATTRACTIVENESS. Markets targeted are attractive in terms of size; growth; and competitive situation. DISCIPLINED PROJECT SELECTION. Clear and strong criteria are used to narrow down and focus the number of development projects that are invested in. ADEQUATE RESOURCES. The resources are designed to meet the portfolio requirements, either by increasing resources, or reducing the number of projects. SPEED OF EXECUTION. Cycle time is reduced through disciplined processes; parallel processing; focused set of projects; and “doing it right the first time.” Robert Cooper, the inventor of the “stage-gate” model for product development, has identified 12 different characteristics of successful new product and service development processes:

The Concept of “Stage-Gates” Robert Cooper pioneered the concept of “stage-gates” in the new product/service development process. A stage is a phase or step in the product development process that projects migrate through from idea to full commercialization. A gate is a screen or set of criteria that the project has to meet before it moves from one stage to another. Cooper developed a seven stage process with five gates (see diagram below). We have simplified this process into four basic stages for purposes of this presentation. Stage 1: Preliminary Investigation Stage 2: Detailed Investigation Stage 3: Prototype Development Stage 4: Testing & Validation Stage 5: Production & Launch Idea Gate 1 Initial Screen Gate 2 Gate 3 Gate 4 Gate 5 Second Screen Decision on the Business Case Post-Development Review Pre-Launch Analysis PIR Post-Implementation Review Source: Winning at New Products , Robert G. Cooper, 1993 1) Opportunity Identification 2) Opportunity Selection 3) Development & Testing 4) Production & Launch

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

Generic Stage-Gate Criteria At each gate in the stage-gate process, an innovation project has to pass another set of review criteria. The level of detail and specificity required increases with each step in the process, as the company’s financial investment and level of risk also increases. The justification require for a project constitutes a “business plan” for the new product or service effort. Not surprisingly, the issues that have to be addressed by the plan are pretty much the same as those that need to be addressed in an overall company strategy or business plan. Some of the typical generic stage-gate criteria are listed below. Strategic Fit Overall, is the project aligned with the company’s strategic direction, including its mission; vision; values; and market positioning? How will the project help advance this strategic direction? In what ways might it distract from it? How will this project affect other dimensions of the business strategy, including other projects in the new product development portfolio? Product Features What kind of project is it – a product extension; new platform; breakthrough technology; basic R&D; etc. What is the product or service being proposed? What does it do? What are the key features and benefits? What are the components? Is it a stand-alone product or part of a family? Customers and Markets What is the definition of the target market (segment; geography; types of customers)? How large is the market? Is it growing or shrinking? What are the barriers to entry & exit? What customer need does the project address? What is the current solution to those needs? How is this solution superior? Competitors Who is the competition for this project? How are they likely to respond? How does this project compare to the competition? How is it superior? Inferior? Financial Aspects What is the total estimates revenue potential? How long to commercial start-up? What is the profitability model? What are the likely development costs? Technical Feasibility What is the technological base for the project? Is this technology new to the company, or does the company already have expertise in it? What kinds of technical or engineering hurdles need to be overcome to make it feasible? Is new manufacturing technology required? Are new processes required? Will new suppliers be required? Operations How will the product/service be produced? What distribution system and sales channel will be used? What kind of marketing will be required? What customer support will be needed?

How To Effectively Use a Stage-Gate Process As with any other business process, a staged product development process is a tool to help you do your work – it can add value or create waste, depending on how it is used. Here are some of the “lessons learned” with this kind of system. Keep it as streamlined as possible. Start with as simple a process as you can. Build up the detail over time, based on your experience of its actual use, and where the gates and criteria actually add value and where they do not. Many companies start with an excessively complex and cumbersome process that makes product development into a bureaucratic nightmare that actually slows down the pace of innovation. Make the complexity of the process match the complexity of the project. You should create some different categories of projects, from most simple (e.g. a modification of an existing product) to most complex (e.g. creation of a new technology platform), and adapt the process to the project’s complexity. More complex, long-term and high-risk projects require a more detailed stage-gate system. The simple, short-term, low-risk projects should be subject to modest reviews. Favor rapid iteration. One of the core principles of the world-famous design firm, IDEO* is to “have a bias for action.” By this they mean moving to build working prototypes as rapidly as possible in order to shorten the time frame between feedback loops on the process. This helps you avoid “analysis paralysis” – the endless consideration of too many options and too much unconfirmed information. When in doubt, get out and try it. Adopt an attitude of “disciplined flexibility.” One of the virtues of the stage-gate process is that it forces a standardized and thorough review of new product ideas and projects. Strict adherence to the basic process is a must if you want to achieve “stability and capability” in your innovation process. Deviations from the process need to be made deliberately and consciously, using the decision-making structure of the process itself. Support the process with appropriate technology tools. Within the last decade, there has been a surge in the availability of information technology tools to help manage the new product development process. These tools (e.g. Product Lifecycle Management (PLM) software) automate much of information sharing and even the management of the gates themselves. They allow real-time visibility of the entire portfolio, and enable virtual teams that can span geographies, organizational divisions and time zones. (*For more background on IDEO, see the supplement to this report entitled Perspectives on Innovation .)

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

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)

Right Brain vs. Left Brain Thinking Research on the human brain has demonstrated that the two different sides of the brain (“hemispheres”) are responsible for different modes of thinking. Both of these modes of thinking are required at different phases of the innovation process. While most individuals have a preference for one style or another, the real key is build the capacity for “whole brain” thinking in the organization, where people are comfortable in one style or another, depending on the need of the situation. Building this capacity is a key part of the human capital strategy for innovative companies. “ Culture in the FFE [Fuzzy Front End] fundamentally differs from that in the New Product Development and operational parts of the organization. The FFE is experimental, ambiguous, and often chaotic, with a great deal of uncertainty. In contrast, an efficient NPD or Stage-Gate ™ part of the innovation process is disciplined and goal-oriented, following a clearly defined process.” (PDMA Toolbook for New Product Development, P. 13) Left Brain Thinking Right Brain Thinking Logical Sequential Rational Analytical Objective Focus on Parts Random Intuitive Holistic Synthesizing Subjective Focus on Wholes

Where Ideas Can Come From Idea generation for the Fuzzy Front End can come from a wide variety of sources. Within each of these areas, there is also a wide variety of techniques a company can use to identify innovation opportunities and narrow them down to more concrete ideas and concepts. Voice of the Customer Customer focus groups User panels Customer surveys Lead user research Direct observation of users Immersion in a customer’s experience Voice of the Organization Use your innovation strategy to focus your opportunity investigation Operational capabilities audit Internal brainstorming with both functional and cross-functional groups Sales staff interviews & brainstorming Employees as users New product idea suggestion systems and contests Company idea bank Secondary Research Internet searches Trade articles and white papers Competitor analysis Patent scans Trade press clipping Voice of the Experts Interviews and/or focus groups with industry experts On-going contacts and relationships with universities and individual faculty Research by market research companies and consultants Contacts with venture and equity funds Relationships with government labs and private R&D labs Voice of the Industry Attending trade shows Professional association technical conferences Participation in standards committees Voice of the Value Chain Visits with suppliers and their engineering & product development staff Cooperative technology agreements with suppliers Discussions with players in the distribution system (distributors; wholesalers; retailers) Look at all stages of the value chain for opportunities

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?

What Creates Innovation Opportunities (Adapted from: PDMA Toolbook for New Product Development , P. 42-44) Some Conditions That Create Innovation Opportunities: Discontinuities. Evidence that some traditional pattern and relationships are shifting and reforming (e.g. new supply chain management strategies; virtual design technologies; etc.). Dis-equilibrium. Signs of imbalance in a system, where one player or another dominates and appears to have “lock-in”. Dis-intermediation. Opportunities to eliminate steps in a value chain. Compensatory behavior. Examples where system members are experimenting with “makeshift” solutions, because the right innovation hasn’t emerged yet. OPPORTUNITY SCANNING TECHNIQUES: Secondary research (company records; trade reports; internet searches; article searches; trade associations; etc.) Technology scanning (brainstorming with members of the technical community surrounding your company) Core competency audit (brainstorm alternative market or product applications of your current competencies) Future trends tracking (use trade journals like The Futurist and Technology Review to make a list of potentially relevant macro trends) Demographic research (analysis of population trends that might create opportunities) Delphi interviews (formal or informal interactions with thought leaders) Focus groups (can be of non-competitive peers; channel partners; or customers) Customer ethnography (detailed interviews with customers about how they use your products/services, especially with lead users Immersion (immerse yourself in the users world – do their actual work and experience their reality first hand)

The Experts’ Ideas About Innovation Opportunities DRUKER’S SEVEN SOURCES OF INNOVATION: Sources From Within Industries and Sectors : Unexpected successes, failures or events. Incongruities between what is and what “should be.” New process needs. Changes in industry or market structure. Sources From External Factors : Demographics 6. Changes in perception, mood and meaning. 7. New knowledge, scientific and non-scientific. KIM & MAUBORGNE’S SIX VIEWS OF NEW MARKET SPACE Looking across substitute industries Looking across strategic groups within industries Looking across the chain of buyers Looking across complementary products or services Looking across functional or emotional appeal to buyers Looking across time CHRISTENSEN’S IDENTIFIERS OF DISRUPTIVE OPPORTUNITIES There are untapped new market opportunities There are untapped low-end market opportunities None of the existing players will have an incentive to compete Many of the leading thinkers on innovation have developed their own ideas about where innovation opportunities are most likely to be found. Several of these are summarized below. (More detail on each of these innovation thinkers can be found in the supplement to this report entitled Perspectives on Innovation .)

Voice of the Customer It is critical that the voice of the customer (VOC) pervades the innovation process. While this statement may seem self-evident, it continues to be true that most companies have ineffective means for developing detailed understandings of customer needs and requirements. Customers need to be involved in each stage of the innovation process. 1. Opportunity Identification 2. Opportunity Selection 3. Development & Testing 4. Production & Launch Voice of the Customer Customers describe needs and wants and suggest desired features. Data is collected from customers through: Focus groups & user panels Customer surveys Lead user research Direct observation of users Immersion in a customer’s experience User needs and wants study Customers define specific performance requirements Translate requirements into specifications & concepts Customers review the concept(s) and compare with competitor offerings Customers provide feedback on prototypes Customers may join a product development team Customers try out the working prototypes Customers validate actual performance Data collected from customers through initial quality surveys and warranty & service claims Customers provide word-of-mouth marketing Customers help refine packaging and provide feedback on price points Making the customer integral to the design process requires changes to the traditional product development process for most manufacturing companies. Customer research is time-consuming; it requires additional resources; and it slows down the front end of the process. However, it also significantly reduces the risks of investments; it builds relationships with important constituencies; and it helps uncover new opportunities for innovation.

IDEO’s Lessons on the Art of Observing Customers Don’t ask your customers to do your work for you. Your customers often are incapable of articulating what they need or why they like or don’t like a product. Instead of asking them to tell you, go and experience life with them. Keep track of the things that bug you and others. These “bug lists” are a great sign that there is room for innovation. Get into the middle of it. Immerse your senses in the environment of the product or service. Don’t depend on second-hand information. Stay humble. Know what you don’t know. Live in the ignorance so you can see things with fresh eyes. Embrace the crazy users. They are often working on the fringes and the edges where interesting stuff happens. Find the people who are breaking the rules – it is often out of frustration with the idiocy of current products and services. Exercise your “observation muscles.” Practice the art of watching and recording. Observe patterns of behavior and look for glitches and anomalies. “ We’re not big fans of focus groups. We don’t much care for traditional market research either. We go to the source. Not the ‘experts’ inside a company, but the actual people who use the product or something similar to what we’re hoping to create.” (Source: Tom Kelly, The Art of Innovation , P. 6-7) IDEO OBSERVATION TECHNIQUES: Shadowing – observing people as they use products. Behavioral mapping – documenting behaviors in a specific space over a 2-3 day period. Consumer Journey – recording all the interactions a consumer has with a product, service or space. Camera Journals – asking consumers to keep visual diaries of their experiences and impressions related to a product. Extreme User Interviews -- Talking to people who really know—or know nothing—about a product or service, and evaluating their experience using it. Storytelling – prompting people to tell personal stories about their consumer experiences. Un-Focus Groups – interviewing a widely diverse group of potential users. (Source: Business Week, 10.11.04) In his book on the IDEO design firm that he and his brother founded, Tom Kelly describes the three core innovation processes of brainstorming, observation and prototyping. Of these, the art of closely observing customers and learning about their unmet needs is paramount to the design process.

Voice of the Customer – Quality Function Deployment (QFD) Quality Function Deployment (QFD) is design methodology that seeks to build a rigorous connection between customer requirements, product features, product specifications, and process specifications and measurements. Often referred to as the “house of quality” (because of the resemblance of the graphic to an actual house), QFD organizes in one graphic many critical elements of the design process, including: A summary of customer needs, organized hierarchically into primary, secondary and tertiary needs. Rating of competitors products in their ability to meet customer needs. Product design attributes. Engineering specifications for design attributes. The relationship between design attributes and customers needs. Interrelationships between the design attributes. The advantage of QFD is its ability to organize the design process in a very disciplined way. Its disadvantage is that it can become very complex and unwieldy and is often overkill for smaller projects. (Source: American Supplier Institute web site.)

Focusing on Customer-Perceived Value “ Customer-perceived value is the result of the customer’s evaluation of all the benefits and costs of an offering as compared to that customer’s perceived alternatives. It’s the basis on which the customers decide to buy things.” It is market-perceived . It is complicated . It is relative . It is dynamic . Every customer makes a different set of tradeoffs between these and other factors. The biggest mistake is to focus on features and benefits, as opposed to a customer’s perceived needs . There are many dimensions to customer-perceived value, including: Function and performance Cost Price Quality Delivery Service Relationships Reliability (Adapted from: “Focusing NPD Research on Customer-Perceived Value”, PDMA Toolbook , P. 87-118.)

VOC Research for Component Suppliers Component suppliers (manufacturers who are producing parts or sub-systems that are assembled into final products by another company) typically think of the company that buys their components as the “customer.” They will often spend a large amount of time thinking through their customer’s buying criteria, and the tradeoffs between price, delivery, quality, customization, etc. They rarely do research on the actual end-user – the consumer who buys the product from their customer. For instance, a n astonishingly small percentage of product-oriented auto suppliers (even very large Tier 1s who control much of the design) do their own consumer research with product users. As suppliers in sectors such as the automotive sector take on increasing levels of design responsibility, they will also be expected to take on the responsibility for direct customer research and translating customer needs into product features and design specifications. Consumer research not only helps you design better products, but it also has the added benefit of gives you bargaining power with your value chain customers. Your case on product changes and pricing are far more compelling when backed up by user research. “ Success depends on the ability to effectively convert VOC information into design, engineering and manufacturing operations. While seemingly easy, many OEMs and suppliers lack the necessary systems and processes to develop and build to customer expectations.” JD Power and Associates, 2004 White Box Grey Box Black Box Build to print. OEM manages VOC input and design. Co-engineer. OEM manages VOC, but involves supplier in design Full design responsibility. Supplier manages VOC input and design; OEM monitors. Evolution of Supplier Design Responsibility

Understanding the Role of Industrial Design Most manufacturing companies do not understand the difference between engineering and design and fail to understand the role of industrial design in product development. Most product engineers are “builder-centric” and focus on the product’s technical dimensions. Industrial designers, on the other hand, tend to be “user-centric” and focus on a broader set of attributes that affect the user experience, including aesthetics, ergonomics, color, texture, shape and other elements of the design that relate to the user interface. (It has been shown that these kinds of factors are as relevant to the competitiveness of industrial goods (machinery and equipment) as they are to consumer goods such as automobiles.) Product-oriented suppliers should consider having in-house industrial design talent (or a strong outside partner) to counter the technical focus of industrial engineers. Leveraging this skill base means will also lead to having connections and relationships with the OEM design studios, not just with the product engineers. “ In its broadest sense, design refers to how something is tangibly constructed to function operationally while embodying intangible elements to function emotionally. Thus design encompasses technical aspects along with form, user interaction, ergonomics, semiologic (meanings and signs) and other aesthetic aspects. The distinctions between ‘engineering design’ and ‘industrial design’ reflect the different orientations and training underlying the the approaches to these two different aspects of products.” “ Enhancing New Product Development Success Through Industrial Design Strategy”, The PDMA Handbook of New Product Development , P. 378) “ Industrial design is a discipline, distinct from engineering, that combines creative and intuitive elements of the visual arts with practical knowledge of markets, human behavior, materials and manufacturing to create product designs of high value…Training for industrial design includes a combination of visual arts (two and three dimensional expression, drawing, painting, and sculpture) and liberal arts (history, psychology, sociology and literature. Their education also includes applied sciences such as physics, materials and processes, and human factors. An industrial design curriculum…focuses on a range of problem-solving projects that teach the student analystical methods, a holistic approach, researching the users experience, ‘out of box’ thinking methods of communicating ideas, and presentation techniques to express a design concept. Practical skills, such as drawing, building models in a variety of media (cardboard to wood to foam), and using computer-aided design tools are a major portion of the designer’s education, all focused on effective means of developing and communicating a design.” “ Building a Bridge to the End User: How Industrial Designers Contribute to Product Development”, The PDMA Handbook of New Product Development , P. 390)

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

Opportunity Selection Opportunity selection is the process of narrowing down the potential innovation projects to those that the company will take to the prototyping and testing stage. It typically involves a one or two stages of analysis and review (depending on the size of the company and the complexity of the potential project). If working prototypes can be created with relatively modest levels of investment, they may be developed at this stage. Typically, however, this stage of the process will involve instead research, analysis and the development of the business case for the project. The end result is a business plan and a decision by the company about whether or not to move the project into development and testing. The opportunity selection stage will often involve two sub-stages, each with a more detailed level of information required. Preliminary Investigation A quick assessment of the strategy, market, competitive, technical and financial feasibility of the project. Most of the information used is from existing sources. No new market studies, research or engineering analyses are conducted. Detailed Investigation A complete “business plan” is developed for the project. Depending on the size of the project, this will involve new market research; detailed financial risk and return on investment analysis; intellectual property protection strategies; some engineering feasibility tests; etc. 2. Opportunity Selection

Elements of the Business Case The business case that determines whether the project moves to the development and testing stage will address all the same issues as a business plan for a company, just at a a smaller scale. The table below defines some of these elements, and the kinds of investments of time and effort that can be required. Areas of Analysis Questions to Address Work Plan Elements Strategic Analysis Does the project fit the overall company strategy and desired positioning? Analysis of the link between the project and the company’s long-term strategy. Customer Analysis Who are the potential customers for the product/service and what evidence do we have that they will value it? Detailed customer research, including observations; focus groups; interviews; surveys; etc. Segmentation analysis. Product Information What will the product/service consist of, and what will it do? Detailed description of the product features and benefits. Market Analysis What is the attractiveness of the overall market for the product or service? Market research, including projections of market size; competitive drivers; and growth rates. Demographic and other relevant analysis. Competitive Analysis Who will this innovation compete against; why will it succeed against them; and how will the competitors likely respond? Research on key competitors and their strategies and offerings. Analysis of likely competitor responses. Technical Analysis What are the technical competencies required to produce the innovation and what is the strategy for getting them? Analysis of technical risks and roadblocks. Technical advances that are required to achieve feasibility. Intellectual property protection strategy. Financial Analysis Will the project meet established financial hurdles? Detailed development budget. Product pricing plan. ROI analysis; discounted cash flow analysis; sensitivity analysis. Operations Issues What company support infrastructure is needed to produce, distribute and service the product? Targeted launch date. Manufacturing plan. Marketing, sales and distribution plan. Customer support and servicing plan.

Product/Service Development and Testing 1. Opportunity Identification 2. Opportunity Selection 3. Development & Testing 4. Production & Launch 5. Managing the R&D Portfolio

Development and Testing Development and testing is the stage at which prototypes for the product/service are developed and tested, and made ready for production. The output of this stage is a working prototype of the product or service, with performance characteristics verified by customers. Some of the key tasks at this stage are described below. 3. Development & Testing Development: Development of product specifications Design of product Design for manufacturing; assembly; environment Building of prototypes Detailed engineering specifications, drawings and math data Material specifications Equipment, tooling and facility requirements Develop Bill of Material and supply plans Packaging specifications Process flow chart and plant layout Measurement systems plan Develop market launch plan Develop sales channels and tools Develop pricing, advertising and promotion plan Testing: Freeze product design Finalize drawings and math data Complete BOM Beta test in lab Beta test with customers Production trial run Process capability study Packaging evaluation Quality systems finalization Manufacturing ramp-up plan developed Finalize financial analysis and pricing Finalize market launch plans; sales tools; advertising; channel strategy Finalize regulatory and legal issues, including intellectual property protection

Advanced Product Quality Planning (APQP) Advanced Product Quality Planning (APQP) is the process used in the automotive industry for carrying out program management on components purchased from suppliers. The APQP process has been standardized across DaimlerChrysler, Ford and General Motors for use with suppliers in North America. The APQP process is the equivalent of a stage-gate system for components and sub-systems, and is used to assure that suppliers have the necessary controls in place for a successful product launch. Key elements of this system are described on the following page. While the APQP process encompasses some elements of most stages of the product development process, it is heavily concentrated in Stage 3 (Development and Testing) and Stage 4 (Production and Launch). The stages of Opportunity Identification and Opportunity Selection are less relevant, since the process is geared for suppliers with an ongoing customer relationship. Typically, the work of Stage 1 (Opportunity Identification) and Stage 2 (Opportunity Selection) are undertaken internally in the supplier before they decide to pursue a quote opportunity on a component. APQP kicks into gear at the end of Stage 2 when the supplier decides it makes sense to pursue a bid. In other cases, the supplier is sole-sourced, or is developing the next generation of a part for another vehicle platform and is therefore the presumed supplier, assuming they can meet price and delivery requirements. The APQP process is most appropriate for products and components that have a relatively high engineering content. The APQP process is not widely used outside of the automotive industry, although other sectors (e.g. defense, aerospace) have similar processes. It is however, an excellent format for any development/testing/launch process, and should be taken advantage of by manufacturers in other sectors. The differences between activities undertaken in Stages 3 and 4 for a component supplier vs. an OEM (consumer or industrial products) include: Component suppliers are primarily focused on achieving the agreed-upon technical specifications, price and delivery timelines. End product manufacturers (OEMs) also have to worry about marketing plans and strategies; sales and distribution channels; advertising and promotion; pricing strategies; and customer service and follow-up capacity.

Outputs From Each APQP Step 1.0 Plan & Define the Program 2.0 Product Design & Development 3.0 Process Design & Development 4.0 Product & Process Validation 5.0 Feedback, Assessment & Corrective Action. Design goals Reliability & Quality Goals Preliminary BOM Preliminary Process Flow Chart Preliminary list of product and process characteristics Product Assurance Plan Design FMEA Design for manufacturability & assembly Design verification Design reviews Prototype build Engineering drawings & math data Engineering specifications Material specifications Equipment, tooling & facility requirements Special characteristics Gage/testing requirements Packaging standards & specs Product/process quality system review Process flow chart Floor plan layout Characteristics matrix (relationship between process parameters & manufacturing stations) Process FMEA Pre-launch control plans Process instructions Measurement systems plan (gage R&R) Process capability study plan Production trial run Measurement system evaluation Preliminary process capability study Production part approval (PPAP) Production validation testing Packaging evaluation Production control plan Quality planning sign-off Reduction in variation through continuous improvement (PDSA) Customer satisfaction feedback Delivery and service plans 6.0 Control Plan Methodology Part information Supplier/plant information Approval dates Processes Machines & tools Part characteristics Specifications & tolerances Evaluation techniques Sampling plan Control method Reaction plan (Source: Advanced Product Quality Planning and Control Plan Reference Manual)

Comparison of APQP and Stage-Gate Steps Stage 1: Preliminary Investigation Stage 2: Detailed Investigation Stage 3: Prototype Development Stage 4: Testing & Validation Stage 5: Production & Launch 1.0 Plan & Define the Program 2.0 Product Design & Development 3.0 Process Design & Development 4.0 Product & Process Validation 5.0 Feedback, Assessment & Corrective Action. Innovation Framework 1. Opportunity Identification 2. Opportunity Selection 3. Development & Testing 4. Production & Launch Cooper Stage-Gate Steps APQP Steps Idea PIR

Rapid Prototyping The term “rapid prototyping” (RP) is used to refer to a broad range of technologies that make physical objects from 3D Computer Aided Design (CAD) models using an “additive” (as opposed to “subtractive” where machine tools remove material) manufacturing process. RP processes use horizontal cross-sections of the computer model to “build” a part layer by layer. 3D solid modeling CAD is essential for the highest quality RP part representation. RP technologies are typically used to create physical models of a part to test for form, fit and function, and to display visual qualities to customers. The value of rapid prototyping is that it speeds up the iterative process of feedback on design feasibility. By having the parts physically rather that just in a computer graphic, potential users can touch them and feel them, and physical issues such as fit, aesthetics, etc. can be quickly assessed. Rapid prototyping allows you to make more mistakes earlier to reduce your risk of failure later in the process. There are several different kinds of rapid prototyping technologies, including: Stereolithography (SLA) , which builds a model of the part by passing a laser beam over a vat of photo-reactive resin. SLA models are costly and relatively slow, but produce excellent surface quality and high levels of detail. Selective Laser Sintering (SLS) , a process similar to SLA, but which uses a powder instead of a liquid. Because the powders can be plastics, metals or rubbers, it allows a much broader range of material trials. Fused Deposition Modeling (FDM) , in which the part is built by depositing semi-melted materials in thin layers to build a 3D model. Concept modelers. These systems work like ink-jet printers, depositing material layer by layer to build up the part. Two Kinds of CAD Solid Modeling: 3D solid modeling capability is required for high quality rapid prototyping. The prototyping machine needs a model of the interior of the part to do its work. Solid modeling programs come in two varieties – parametric and non-parametric . Parametric models are capable of defining and preserving relationships between key design elements so that they stay stable as the object is modified. For instance, it allows the designer to specify that a hole needs to be located in the middle of a surface. As the dimensions of that surface are changed, the software automatically repositions the hole to remain in the center of the surface. One of the difficulties with parametric models is that they are more difficult to translate from one CAD platform to another.

IDEO Guidelines On Rapid Prototyping “ Prototyping is problem-solving. It’s a culture and a language. You can prototype just about anything – a new product or service, or a special promotion. What counts is moving the ball forward, achieving some part of your goal. Not wasting time.” “ Quick prototyping is about acting before you’ve got the answers, about taking chances, stumbling a little, but then making it right.” “ Doodling, drawing, modeling. Sketch ideas and make things and you’re likely to encourage accidental discoveries. At the most fundamental level, what we are talking about is play, about exploring borders.” (Source: Tom Kelly, The Art of Innovation , P. 104-118) “ Prototyping is the Shorthand of Innovation” Have a bias for action. Move to building stuff as soon as you can. The mere process of actualizing it will create more ideas and knowledge about solutions. Iterated often. Create short feedback loops – don’t go too long without testing the idea on others. Expect the design to change. It is highly unlikely that the first prototype will be what you end up with at the end. Don’t get wedded to any one iteration – you’ll probably have to give it up soon. “ Shoot the bad ideas first.” Prototype the things you know won’t work – it will help you understand why they don’t work and what the best alternative is. Use lots of media. Do the prototyping in many different media – drawings; graphics; foam; any materials that will work fast to get you an idea of what works. “ David’s influence made this childlike curiosity and enthusiasm second nature at IDEO. A playful, iterative approach to problems is one of the foundations of our culture of prototyping.

New Product/Service Launch 1. Opportunity Identification 2. Opportunity Selection 3. Development & Testing 4. Production & Launch 5. Managing the R&D Portfolio

Production and Launch The move to Stage 4 – Production and Launch signals the move from “planning” to “executing.” The success of this stage is fully dependent on having executed well on the previous stages. For component producers, the action moves from engineering/product development out to the shop floor and manufacturing. This is where the value of traditional lean manufacturing tools come into play. For OEMs, the focus shifts both to manufacturing and to the sales and marketing function – distribution channel management; promotion and marketing; pricing; and sales activities. Key elements of success at the production and launch stage include: Disciplined relationship between product specifications and shop floor controls. Manufacturing cells and stations have to be set up to achieve capability on critical product specifications. The Characteristics Matrix is used to understand the precise relationship between product specifications and each work station. Supply chain management plan. A well executed supply chain strategy will assure that externally purchased Bill of Material components are available in the required quantities and meet specifications. Forecasting and scheduling. Demand forecasts and/or customer release schedules will assure that the volume produced matches demand. Well developed marketing and sales plan. The marketing and sales plan will specify the market segments targeted (not needed for component suppliers); the distribution channels to be used; pricing; and advertising and sales strategies, and the phasing of the product roll-out. Communication with sales channels. For OEMs, it is critical that there be clear, concise and timely communications with their distribution channel partners. Many launches run into problems because distributors and retail operations are not well informed about the product launch; its pricing; its features and benefits; and target markets. Rapid response to initial quality/warranty issues. Despite the best intentions, some “product testing and refinement” happens in the hands of initial customers and is communicated back to the company in the form of complaints; returns; warranty claims; etc. It is critical that a rapid response system be in place to make immediate adjustments to these issues. In manufacturing in particular, it is important that tools for root cause analysis be in place so that product issues can be connected directly back to specific dimensions of the production process. Product profitability analysis. Strong measurement systems need to be in place to match actual product financial performance to the financial plan and projections. Techniques such as Kaizen costing can be used to bring actual production costs in line with target costs and margin goals.

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

Managing the Portfolio There are five basic categories of R&D projects. The portfolio management process consists of managing the mix of these projects within a company over time. Choices need to be made about how to allocate corporate resources across the portfolio. Basic research and advanced development . These projects create new scientific and technical knowledge that can be used as the basis for future commercialization projects. Breakthrough development . A breakthrough development project seeks to create entirely new products and services that create new categories of competition. Platform development . Platforms define the basic common architecture for a given category of products and services. A single platform can be the basis for many product derivatives. A new platform will typically incorporate a fair amount of technology from the previous platform (hence it is less “fundamental” than a breakthrough development), but will also introduce many new development advances that enhance features and performance. Derivative development . A derivative project customizes a platform to focus on a targeted market segment. They require a much lower level of resources, and a shorter time frame, than platform or breakthrough projects. Alliance projects . These projects enable the company to acquire new products and services from another firm, through licensing or subcontracting. The resources required and the time span for each of these different types of projects vary widely. Many manufacturing firms, for instance, cannot afford to engage in the first category of projects – basic research and advanced development – on their own. In stead, they access opportunities through relationships with research labs or larger industrial partners. Part of the portfolio management process is deciding, based on the resources, market positioning and competitive environment of the firm, what the mix of these projects should be at any one point in time. Source: Strategy Maps – Converting Intangible Assets Into Tangible Outcomes , Robert Kaplan and David Norton, 2004

Incremental, Platform and Breakthrough Projects Breakthrough Products New Platform Products Incremental Products New Core Process Next Generation Process Upgrade Incremental Change New Core Product Next Generation Product Addition to Product Family Derivatives and Enhancements Extent of Product Change Extent of Process Change Another way to look at the innovation portfolio is by the level of change the projects embody in process or product design. In this context, projects can be categorized into three groupings – incremental, new platform or breakthrough products. Each type of project will have a slightly different path through the product development process. (Adapted from Wheelright and Clark, Revolutionizing Product Development: Quantum Leaps in Speed, Efficiency and Quality , 1992)

Making Choices About the Portfolio “ Most companies have too many projects and not enough resources to do them well. As a result, resources are spread too thin, and there is simply not the time or ability to do many of the key project activities proficiently.” Five reasons companies fail to be selective about R&D projects: There are too many “must do” projects that respond to customer and sales staff requests. There is no mechanism to kill projects. No criteria have been established for making Go/Kill and prioritization decisions. Senior people are not properly engaged in the decision process. It is very difficult to “drown puppies.” (“Optimizing the Stage-Gate Process: What Best Practice Companies Do”, Cooper et al, Research and Technology Management , 2002) To effectively utilize their resources, companies need to make choices about their R&D portfolio, including how many of each project to have; what staff to use on them; when to target completion; and what budget to spend. Some best practices in this domain include: Don’t try to use the same process for every project . Make your process flexible so that it can apply to multiple kinds of projects, including quick customer requests; fast-track projects; and full-scale projects, with variable levels of effort and resources. Create clear ranking criteria to prioritize projects in each category. These criteria need to be outcome-based (e.g. the market is sufficiently large) and not activity-based (e.g. the target market has been identified). Incorporate tough go/no go gates . You have to treat the stage gates as real decision points, not just project reporting opportunities. Projects that don’t meet the criteria have to be “killed.” Engage senior management in the process. Business leaders need to act as sponsors and resource providers, not micro-managers. Impose discipline on the gatekeepers . They must hold meetings and attend them; come to the meeting prepared; make decisions based on the criteria; make decisions promptly; and inform the team of all decisions.

Product Lifecycle Management (PLM) The innovation process should be thought of as a circular, not a linear process. The work that links post-launch product management with Stage 1 of the Innovation process (Opportunity Analysis) is referred to as “product lifecycle management.” Product Lifecycle Management should be handled by a Product Manager – someone with overall responsibility for planning how production, servicing, pricing, packaging, positioning and features will change over the product’s lifecycle. PLM approaches the product as a dynamic rather than static asset. Its relationship to the company and company systems should change over time. In component manufacturing, for instance, it is common over the seven or eight year lifecycle of a product for it to shift from being a differentiated value-added component to being more of a commodity component. The company should be ready to shift its pricing and production strategy to reflect this. The financial plan for the product should anticipate price reductions over the lifecycle, and the production plan should anticipate potential low-cost outsourcing towards the end of the product lifecycle. 1. Opportunity Identification 2. Opportunity Selection 3. Development & Testing 4. Production & Launch Product Lifecycle Management Ongoing profitability management Pricing over the product life Development of enhancements and derivatives Market positioning & branding over time Product service and maintenance management Product recycling Product obsolescence Input into new product planning The Product Lifecycle

Strategic Product Obsolescence (“Product Pruning”) One of the least well-executed innovation strategies is discontinuing products that are no longer bringing value to the customer. Old products have to be moved out to make room for new innovations. Most manufacturing companies maintain far too many active product numbers. Typically, a relatively small percentage of products will account for the vast majority of sales. The remaining products constitute “clutter” and cause management complexity and costs far out of proportion to their revenues. Each product brings with it requirements for tooling; gaging; inventory; engineering files; BOMs; supplier relationships; servicing; shipping and invoicing. Still, there is typically a deep resistance to “putting them out of their misery.” There is a fear that somehow obsolescence will bring with it customer rejection and lost sales. The reality is usually the opposite. Manufacturers who simplify their product lines generally are able to rapidly increase both revenues and margins by concentrating on those products that are actually important. There should be an annual process for reviewing each product line and making decisions about obsolescence “product pruning.” The strategy for obsolescence should be built into the product lifecycle plan for the product. Considerations in Obsolescence Decisions Strategic fit with priority markets and positioning. Historical sales levels and (accurately burdened) profitability analysis. Customer servicing requirements and contracts. Inventory requirements Defensive market positioning. Cross-product competition (“cannibalizing” of your own sales). Availability of suppliers and components. Material changes. Changing regulatory requirements. Steps in the Obsolescence Process Communicate internally the obsolescence decision Notify customers of future obsolescence Begin reducing/minimizing inventory levels Eliminate ability to order or return the product (modify ERP system; web site; catalogues; etc.) Stop production Dispose of remaining inventory Ways to Classify Products Strategic – important to core company strategy and should be continued. Sales growth potential is good. Emerging – sales may be low, but there is potential for growth. Maintenance – product has reasonable sales and margins are good, although potential for growth is low. Exit – low sales and low profitability (when full costs are considered); not strategic; little potential for growth.

4. Creating the Innovation Structures and Support Systems

Innovation Structures and Support Systems Key Innovation Structures: Corporate innovation champion Product managers Product champions Innovation teams Technology brokers Outside partnerships and collaborations Key Innovation Support Systems: Skill development for innovation Technical leadership Networking and brokering skills Team skills Creativity Reward systems Technology infrastructure & tools Intellectual property management systems In order to function at maximum performance levels, the innovation processes need to be enabled by two kinds of resources – specific structures to support innovation processes; and support systems that are specifically directed towards the company’s innovation strategy. Some of the key elements in these two categories are described below and in more detail on the following pages.

Organizational Structures to Support Innovation The basics of organizational design to support an innovation strategy are no different than they are for any other organizational development goal – clarity of purpose; leadership support and consistency; clear decision-making criteria and processes; effective team management; and rapid measurement and feedback. Some of the organizational structures that are specific to innovation include: Corporate innovation champion. Increasingly, manufacturing companies are designating a senior-level leader to drive the innovation strategy in the company. This is usually a member of the senior management team, and may or may not constitute a full time job, depending on the size of the company. Product managers. Product managers are individuals who have overall responsibility for managing products over their lifecycle. They make key decisions about priorities for development in their product area. Product champions. Champions are individuals who take on the responsibility of shepherding a product development project through its stages in the organization. Sometimes they are the same as the product manager, but don’t have to be. They are selected for individual projects on an as-needed basis. Generally, they are someone who has a passion for the project and unique insights into its potential value to the company. The key role of the champion is to get the project across the “valley of death” between Stage 2 (Opportunity Selection) and Stage 3 (Development and Testing). Innovation teams. The team is typically a cross-functional collection of individuals whose job it is to manage the production of the outputs at each stage of new product development process. A cross-functional team will usually include representation from internal functions (engineering, sales, customer service, manufacturing, purchasing) and sometimes from outside organizations (suppliers, customers, users, technical resources, etc.). Technology or innovation “brokers .” Technology or innovation brokers are individuals who are able to effectively penetrate disparate practice communities and translate innovations from one context to another, and also integrate innovations from multiple environments into new combinations (“recombinant innovation”). (See the “Perspectives on Innovation” supplement for more information on innovation brokering.) They will sometimes work between the company and outside practices communities; and sometimes will work between divisions or business units within a company. Outside partnerships and collaborations. Another critical element of innovation structures is partnerships with enterprises outside of the firm’s boundaries. These can include R&D labs; suppliers; customers; or public entities like universities. They can be structured as joint ventures, cooperative research and development agreements; technology licensing and sharing, etc. The purpose is to extend the company’s innovation resource beyond its organizational boundaries.

The Role of Product Managers Manufacturing companies are increasingly employing the role of product managers to help focus their new product development processes. These individuals can report to the VP of Sales, the VP of Engineering, or the VP for Business Development, depending on how the company is organized. Typical responsibilities for these individuals will include: Opportunity Identification. Identifying potential new markets for existing products markets; opportunities new products in current markets. Opportunity selection. Prioritize new product development projects for investment. New product development. Manage new product development projects, including coordinating with sales, marketing, engineering , and operations. Product launch. Manage product launch and training for sales personnel and channels Product lifecycle management. Developing, implementing, and managing product lifecycle plans to maximize revenue and profits of the products as over its market life, and determine obsolescence strategies. Pricing. Manage pricing for the product lines. Competitive Analysis. Developing and maintaining an analysis of key competitors and their strengths and weaknesses. Marketing. Provide objectives and specifications for marketing communications tools and programs. Channel management. Develop and manage channel programs in coordination with sales. Forecasting and financial performance. Forecast product line sales and profitability and assure optimum performance in each area.

Successful New Product Team Management 1. Early involvement in the project lifecycle. 2. Well-defined purpose, work process & structure. 3. Clear interfaces with other parts of the organization. 4. Staffing with the right number & the right expertise. 5. Clear reward systems and management support. 6. Training in team building & team process. 7. A high performance image & excitement about the goal. 8. Clear direction and leadership. 10. Effective internal communication channels. 9. Management of team conflicts and issues. (Adapted from: “Managing Product Development Project Teams”, PDMA Handbook ) Successful New Product Development Teams

IDEO Insights on Creating “Hot” Development Teams “ Teams are the heart of the IDEO method. We believe it is how innovation and much of business take place in the world. Quite simply, great projects are achieved by great teams. Hot project teams start with a clear goal and a serious deadline. The hot group knows it might disband after the goal is reached and reform the next week to slay another dragon. A hot group is infused with purpose and personality.” Some Principles of “Hot” Teams Create passion. Structure the goal so that it is challenging – so that it creates something to shoot for an be proud of. Don’t be afraid of crazy deadlines and seemingly impossible goals. Spend a lot of time together in close quarters. Close physical proximity and frequent collective work binds the team together and improves their productivity. Get the right mix. Mixing teams together is an art in which personality plays a large part. You need a mix of people that is both right for the task, and also diverse enough to generate creativity. Make teams feel special. Give rewards and recognition. Create opportunities for fun and relaxation. Encourage play. Buy tee shirts. Give the teams names. Include the weirdos. Every team needs a wacko character or two to stir things up. ( The Art of Innovation , P. 6-7) “ Teams don’t need to have higher causes to perform, but they do need tangible goals – a technical first, a challenging sales target, outshining a tough competitor. In short, they need something to shoot for and be proud of.”

The Technology/Innovation Broker “ Brokers are individuals, groups and organizations that move among these small worlds. They have an advantage because they are often in a position to see how the resources of one world could be used to solve the problems in another.” The “technology broker” has the ability to span multiple domains and are exposed to the “raw material” required to create new technologies. They observe innovations or established practices in one domain, and translate it into an opportunity in another domain. By so doing, they change how the new domain sees its world; they change perception and frameworks, and in so doing, create the opportunity for rapid shifts in practice. Technology brokers need a set of specialized skills to consistently create new combinations from existing networks of people, ideas and objects. These skills include: Curiosity. Having an insatiable curiosity and desire for new knowledge. Penetrating practice networks. Gaining access to the expertise of multiple fields of practice. This includes getting “hands on” experience in these practice environments. This experience gives them the necessary depth of knowledge about innovations to be able to deconstruct them and understand their elements. Brokers need to maintain a certain distance from the field, however, to be able to see it in new ways that reveal hidden opportunities. Recombination. Creating novel new combinations of people, ideas and objects that change organizations, markets and even industries. Supporting communities. Supporting the development of new networks and communities to support the development of the innovation. “ Technology brokering describes a strategy that firms have developed to expressly pursue such recombinant innovations. This strategy involves bridging distant worlds. By working in a range of different industries or markets, firms are in a better position to see when the people, ideas and objects of one world can be combined in new ways to solve the problems of another. For these companies, innovation isn’t a process of thinking outside of the box so much as one of thinking in boxes that others haven’t seen before .” “ Technology brokers are characterized by their connections to multiple small worlds and, further, by their connections to worlds that otherwise share few connections between them.” (Source: Andrew Hargadon, How Breakthroughs Happen )

Global Product Development Management It is not unusual now for relatively small companies (e.g. $30-$100 million in sales) to have manufacturing operations on several continents and produce products for many different regional markets. This adds an additional dimension to the product development process. The process has to be configured to account for customer preferences and technical requirements that differ across markets. The key choices the company needs to make, that will differ according to each company’s product line and marketing strategy, include: How much do I commonize product design across regions? Commonization of designs can save development time and money and reduce manufacturing costs, as well as customer service and inventory costs. The degree to which you can commonize depends on two factors: 1) how much customization your local markets require; and 2) which elements of the product this customization affects (e.g. structural and mechanical vs. aesthetic and ergonomic). How much do I centralize or decentralize product development strategy and decision-making? The decision on organizational structure is related to the issue of customization of products across regions. The more customized local markets are, the more it argues for local control and decision-making. Some companies opt for a hybrid system that has global “centers of excellence” with different regions taking the lead on different product families. What does my manufacturing footprint look like? This is a third dimension of global complexity that will be affected by decisions on the design and organizational structure fronts. 1. Opportunity Identification 2. Opportunity Selection 3. Development & Testing 4. Production & Launch Global Considerations Across the Product Development Process Need to make sure you get input from subsidiaries in every region Adapt your customer needs analysis to global variations Connect to your global company strategy The business case has to consider economic and competitive conditions across each region Take into account currency fluctuations Design in technical and engineering requirements that vary across regions Make metric/English choices Decide the global manufacturing footprint for launch Different marketing launch strategies by region

Distributive Product Development (DPD) Distributive product development (DPD) is the process of designing your product development process in such a way that different aspects of the process are done in different geographic locations, often also by different divisions or even third-party outsourcing. The degree to which a distributive strategy is right for your company will be affected by many factors, including: The modularity of your product design. The more modular your design, and the easier the interfaces between components, the more feasible it is to separate development of different components. Clarity of technical specifications. If your technical requirements cannot be clearly frozen in advance (for instance, because of the novelty of the process, materials, etc.), it is less likely that DPD will be a good option. Collaborative infrastructure & culture. You need a well-developed technology infrastructure as well as a company culture that adapts well to cross-boundary collaboration in order for DPD to work for you. Availability of appropriate talent in appropriate organizations. For DPD to work, you need to have access to the right skill bases, and they need to be in partners that you can trust, or with whom you already have a good working relationship. Potential Advantages of Distributive Product Development Reduced development costs due to lower labor costs and ability to purchase capacity instead of developing it. Access to specialized skills that the company does not have internally. Shorter development cycles due to the ability to do concurrent engineering, and the ability to take advantage of existing competencies in partners. Improved customization of products by using talent that is grounded in the customs of the end market. Potential Disadvantages of Distributive Product Development Higher development costs due to inefficiencies in the process and more difficulty in achieving coordination. Difficulty achieving complex performance requirements that require close collaborative design across multiple sub-components. Loss of core competencies due to outsourcing. Intellectual property theft by partners who may be doing work for competitors.

Innovation Support Systems Successful innovators create specialized support systems to accelerate innovation in their companies. These systems are usually adaptations of other company systems, customized for the particular needs of the innovation strategy. Key systems include: Skill development for innovation. Most companies have employee development systems in place – these systems just need to be focused on the skill sets that are critical to the innovation strategy. These skill sets will include: Technical and scientific skills essential to product and process leadership. Networking and brokers skills that allow the company to access innovations from disparate practice communities. Creativity skills that exercise our “right brain” skills. Team skills to support participation in product development teams. Reward systems. Companies that value innovation reward innovation. These reward systems can include bonuses for participation on project teams; rewards for new idea generation; ownership of intellectual property; and simple profit sharing. What needs to be clear is that innovation contribution will lead to financial or recognition awards that are significant enough to influence behavior. (3M, for instance, allows employees to spend up to 10% of their time working on their own intellectual property, in the belief that employees who are inventing for themselves will also create new things for the company.) Technology infrastructure and tools. There is a wide range of new information technology products and systems that can support the innovation process. These include design tools; collaboration tools; decision-making and management tools; and data management tools. Intellectual property management systems. Systems for managing intellectual property are a key element of the innovation strategy. With every project, decisions need to be made about intellectual property: Is there IP we need to acquire to make this project technically feasible? Should be protect any of the intellectual property embodied in this project? How should we protect it? For how long? In what geographies? Intellectual property management systems help companies make strategic decisions about how intellectual property protection can support their innovation goals.

Intellectual Property Management Intellectual property management is the process of making decisions about what to do with a company’s portfolio of proprietary intellectual property, including patents. Intellectual property is any organized product of the human intellect that that provides commercially exploitable competitive benefit to the company. This can include inventions, software code, written ideas and concepts, trade secrets, manufacturing processes and machinery, industrial designs and trademarks. A patent is the granting of an exclusive right to the use of an invention that prohibits others from using it. An intellectual property strategy is a set of decisions about what intellectual property should be protected, under what circumstances, and in what way for what amount of time. The graphic below summarizes the key elements of an intellectual property strategy. Inputs To Your Intellectual Property Strategy Company strategic plan Your innovation strategy Your technology plan Intellectual Property Management Tasks Inventory your IP Create criteria for IP protection Assess the IP against the criteria Make and execute decisions Intellectual Property Strategy Decisions Protect new IP through patents Extend protection to new locations Maintain protection over time License the IP to others Acquire IP from others Protect the IP through confidentiality, not patents Do nothing INTELLECTUAL PROPERTY MANAGEMENT ELEMENTS IP Decision-Making Criteria Strength of the IP Market attractiveness Additional development required Competitiveness Readiness for manufacturing

Collaborative Product and Process Development Collaborative Product and Process Development is the application of web-enabled technologies for real-time collaboration and decision support during the product development process. It will typically involve the following kinds of practices: Collaborative product development teams that involve more than one company. (“Virtual co-location”) Shared design files access through the Internet. Shared program management software or practices, also accessed through the Internet. This can include web-enabled APQP (Advanced Product Quality Planning) processes. Use of “smart” automation (the design equivalent of “fool proofing”). Immediate communication of design changes and developments across the full value chain. Increased use of “virtual prototyping” (i.e. computer-based product performance simulations) to reduce the design cycle. In essence, CDDP takes some of the design and engineering practices many companies have been using within their own enterprises and extends them to include all of the trading partners that are involved in the design and production of a part. An Aerospace Example of CPPD The jet engine division of Rolls Royce combined a CPPD strategy with an overall lean production strategy and implemented both of them at the same time. The lean production strategy involved the typical tools of teamwork; cell production; kanban; set up reduction; standardized work; visual controls; etc. They achieved 50% reductions in inventory across the supply chain, and their inventory turns increased from 4 to 10. Their lead times reduced from 80 days to 35 days. At the same time, they implemented a CPPD strategy that they called “concurrent engineering on the desktop.” The product design teams were connected via the Internet to each other and to a rich variety of databases and engineering tools. The process had “transparency” so that each member of the team could see the progress of all components of the engine at the same time. The platform created direct links between customer specifications; engineering and virtual prototyping; tool definitions; process parameters; and manufacturing production predictions. The end result was a nine-month reduction in product development lead time that represented a 20% increase in engineering productivity. And partly because of the focus on DFM, the engine build lead time was also cut in half. (Source: Presentation at August, 2000 Management Briefing Seminar)

Electronic Tools to Support Collaborative Development A new generation of software tools has evolved to support collaborative product and process development and launch processes. Typically referred to as “Product Lifecycle Management” software (PLM for short), these tools integrate information, analysis, reporting and decision-making across the entire product development cycle. These systems have the advantages of: Real-time visibility across all functions and across the full value chain Ability to track and analyze changes in product design and associated costs Automation of many routine tasks, such as document and report production Collaborative visualization and mark-up of all types of data Controlled access to information based on different project roles Automatic communication of changes and decisions across the entire value chain Ability for management to review program status, timing and cost on a real-time basis Consistent customer communication on program progress Product Design Document Management (CAD & non-CAD) Cost Estimation Bill of Material Quoting Quality Management (APQP/PPAP) Design Collaboration Supply Chain Management Program Management & Reporting Product Analysis and Validation Product Lifecycle Management Software Functionality “ PLM is an integrated, information-driven approach to all aspects of a product’s life from its design inception, through its manufacture, deployment, maintenance and culminating in its removal from service and final disposal. PLM is the integration of business systems to manage a product’s lifecycle.” (University of Michigan PLM Development Consortium)

Measuring Innovation Choosing your indicators Developing measurement plans Setting targets Displaying the indicators DEVELOPING A SCOREBOARD Operational definition -- how is it calculated? Data source -- where do the numbers come from? Sampling -- how frequent, how many? Target value -- what is “good”? Indicator owner -- who collects, analyzes, displays? Graphics -- how is the indicator visually displayed? MEASUREMENT PLANS Make it part of everyday work Create visuals everybody can see Develop periodic review processes Link to strategic planning, budgeting and continuous improvement USING INDICATORS FOR DECISIONS The process of measuring your progress on innovation is no different than measuring any other aspect of company performance. The key is to develop measures that actually link to your strategy; create reliable data sources; and integrate the data into your decision-making. DEVELOPING YOUR INNOVATION SCOREBOARD

Measuring Innovation Source: Strategy Maps – Converting Intangible Assets Into Tangible Outcomes , Robert Kaplan and David Norton, 2004 Process Objectives Some Measures Opportunity Identification & Selection Anticipate future customer needs Time spent with key customers learning about their future needs and opportunities Number of new projects launched based on customer input Discover and develop new products and services Number of new projects/concepts presented for development Number of new value added services identified Managing the R&D portfolio Actively manage the product/service portfolio for superior innovation and customer positioning Mix of development projects (advanced, platform, derivative, and outsourced) Technology ranking based on independent peer review Net present value of products in the pipeline Extend current product/service platforms into new and existing markets Number of projects from current platforms targeted at new markets Number of life-cycle extension projects Extend the product portfolio through collaboration Number of licensed products Number of joint projects in new or emerging markets Number of technology or product partners New Product and Service Development Manage the project portfolio for maximum productivity Number of patents and patent citations Percent of projects advancing from stage to stage Reduce development cycle time Number of projects delivered on time Average time spent in each stage of the development process Total time, concept to market Manage development costs Actual vs. budgeted spending at each stage of development New Product and Service Launch Rapid launch of new products Time from pilot production to full volume capacity Number of redesign cycles; number of engineering changes Number of new products/services launched or commercialized Effective production of new products Actual vs. targeted costs of new products/services Number of failures or returns; Initial warranty and field service costs Customer satisfaction or complaints about new products or services Effective marketing, distribution and sales of new products Six month revenues, actual vs. projected Stockouts or back orders for new products

Bibliography Authors Year Title Peter Drucker 1985 Innovation and Entrepreneurship Andrew Hargadon 2003 How Breakthroughs Happen Clayton Christensen 1997 The Innovator’s Dilemma Christensen & Raynor 2003 The Innovator’s Solution Christensen, Anthony & Roth 2004 Seeing What’s Next Tom Kelley 2001 The Art of Innovation Product Dev. & Management Association (PDMA) 2002 The PDMA Toolbook for New Product Development PDMA 2005 The PDMA Handbook of New Product Development Harvard Business School 2001 Harvard Business Review on Innovation Robert Cooper 1993 Winning At New Products Robert Johnston & Douglas Bate 2003 The Power of Strategy Innovation Frank Bacon & Thomas Butler 1973 Achieving Planned Innovation James Utterback 1994 Mastering the Dynamics of Innovation Wolfgang Grulke 2002 Lessons in Radical Innovation Richard Leifer et al 2000 Radical Innovation George Day 1990 Market Driven Strategy Linda Gorchels 2000 The Product Manager’s Handbook

Manufacturers Council Innovation Framework Addendum: Perspectives on Innovation Revised 2.15.05

Introduction This set of materials provides an introduction to key thought leaders and other materials related to innovation. Its purpose is to provide manufacturers a succinct overview of each perspective on innovation so that they can decide whether or not they want to explore them further. This document will be periodically updated with new information. Current Materials: The Irwin Seating Innovation model Innovation as “technology brokering” (Andrew Hargadorn, How Breakthroughs Happen ) Innovation as disruptive technologies (Innovators Dilemma) Innovation as the creation of new market space (Value Innovation) The IDEO Model Peter Drucker’s Innovation & Entrepreneurship Potential Future Additions: Quality Function Deployment Planned Innovation Model The Discipline of Market Leaders Product Platforms Creativity Tools

Irwin Seating’s 10 Innovation Opportunity Areas Management Development Strategy Development Employee Development Product and Service Development Process Development Supplier Development Market Development Distribution Development Brand Development Tool and Technology Development Successful Management of Innovation Source: Irwin Seating, “Mapping the Road to Total Innovation”, October, 2003 Irwin Seating is a privately held company in Grand Rapids, MI that is a world leader in the design and manufacturing of public seating for theatres, auditoriums, churches, sports areas and buses and trains. The company controls the full product value chain, from product design, through manufacturing and distribution, as well as service and replacement. Irwin Seating has been a founding member of the Manufacturers Council, and has been actively developing a strategy for accelerating innovation in the company. The model on the right shows the 10 dimensions of innovation that are addressed in the Irwin strategy.

Irwin Seating Innovation Areas Process Development Supplier Development Product and Service Development Tool and Technology Development Brand Development Distribution Development Market Development Strategy Development Management Development Employee Development Source: Irwin Seating, “Mapping the Road to Total Innovation”, October, 2003 PURPOSE PEOPLE PROCESS

A Network Theory of Innovation

A Network Theory of Innovation Andrew Hargadon’s recent book, How Breakthroughs Happen , proposes a “network” theory of innovation. Key highlights include: Defining technology. “Technology” is the arrangement of people, ideas and objects for the accomplishment of a particular goal. Innovation as Recombination. Innovation is more about combining existing people, objects and ideas in novel ways than it is about inventing new ideas and objects. Social process. Innovation is as much a social process as a technical process. Successful innovations are accomplished by networks of people, not lone individuals. Technology brokers. Innovation is enabled by technology brokers – individuals who are able to “bridge distant worlds” and combine existing people, ideas and objects in new and novel arrangements. Successful brokering. Successful technology brokering requires the ability to: Maintain connections to multiple “small worlds” or practice communities. Gain hands on experience in those worlds. Deconstruct the knowledge of those worlds; connect it to the knowledge from other worlds; and from these elements, create novel combinations of people, ideas and objects (“recombinant innovation). Building innovation communities. Successful innovation requires both creating novel combinations of people, ideas and objects, and creating new communities that can support the innovation until it is successfully connected to a self-reinforcing market place.

Innovation as Recombination “ Innovation is the result of synthesizing, or “bridging” ideas from different domains.” (Forward) “ Edison took elements of these existing technologies and recombined them in ways that had never existed before and for markets that had never seen them before.” (xiii) “They pursued an innovation strategy of technology brokering that enabled them to exploit the past in creating the future .” (xiii) “ Rather than producing fundamentally novel advances in any one technology or dominating any one industry, technology brokering involves combining existing objects, ideas and people in ways that, nevertheless, spark technological revolutions.” (12) Hargadon argues that most transforming innovations are the result of entrepreneurs combining existing people, ideas and objects in new and novel ways. He refers to this as “inventive recombination” or “recombinant innovation” and distinguishes it from “invention” which is focused on creating fundamentally new ideas or objects. Recombinant innovation requires understanding existing technologies and being able to “deconstruct” them into their separate elements so that they can be recombined in different ways. Practitioners of recombinant innovation will typically have experience over a broad range of industries, which gives them the raw material (the “piles of junk”) used to create new combinations. “ The pursuit of innovation changes dramatically when the goal shifts from invention to inventive recombination, from pushing people to think outside the box to helping them think in other boxes.” (24) “ What makes recombinant innovation so difficult, however, is that the elements that make up existing technologies do not come apart, nor come together again, very easily. “ (26) “ The future is already here, it’s just unevenly distributed.” (William Gibson) “ All innovations represent some break from the past – the light bulb replaced the gas lamp, the automobile replaced the horse and cart, the steamship replaced the sailing ship. By the same token, however, all innovations are built from pieces of the past – Edison’s system drew its organizing principles from the gas industry, the early automobiles were built by cart makers, and the first steamships added steam engines to existing sailing ships.” (32)

Henry Ford’s Recombinant Innovation FORD’S MASS PRODUCTION SYSTEM Interchangeable Parts from Single Purpose Machine Tools (From the machine tool sector) Continuous Flow Production (From the canning industry) Assembly Line Production (From slaughter houses, grain elevators and breweries) Electric Motors (An emerging technology that had not yet been exploited for manufacturing.) Between 1908 and 1914: Production of Model T’s increased from 6,000 per year to 230,000 per year The price dropped from $940 to $850 Ford’s market share rose from 10% to 46% Henry Ford is credited with the “creation of the mass production system” in the U.S. His impact on U.S. industry has been genuinely transforming. Ford was a master of “recombinant innovation.” His production system was the result of bringing expertise from several different other industries, each with long established practices, and integrating those practices in a new system. “ Ford invented neither the automobile nor the techniques he used to mass produce it, but he did bring these ideas together in a way no one else had before.…Ford’s engineers brought together three manufacturing technologies that had evolved over the last hundred years and one that was relatively new – interchangeable parts, continuous work flow, the assembly line, and the electric motor.” (38) “ Ford exploited over a century of development within the machine tool industry.” “ If they can kill pigs and cows that way, we can build cars that way.” (43) “ We combined our ideas on the Huettman & Cramer grain conveying machinery, and the brewing experience and the Chicago Stockyard. They all gave us ideas for our own conveyors.”

The Technology Broker “ Brokers are individuals, groups and organizations that move among these small worlds. They have an advantage because they are often in a position to see how the resources of one world could be used to solve the problems in another.” The “technology broker” is key to the process of recombinant innovation. These individuals or organizations span multiple domains and are exposed to the “raw material” required to create new technologies. They observe innovations or established practices in one domain, and translate it into an opportunity in another domain. By so doing, they change how the new domain sees its world; they change perception and frameworks, and in so doing, create the opportunity for rapid shifts in practice. Many innovations have been the result of “opportunistic” discoveries – unplanned observations of the opportunity to apply one capability in a new setting. 3M Post-It notes; Viagra; and nylon are examples of these “accidental” innovations. What technology brokers do is to try and create a systematic process that creates the opportunity for as many of these creative combination to be revealed as possible. “ In pursuit of innovation, technology brokering entails not simply exploiting these fortunate accidents, but actually triggering them.” (56) “ Technology brokering describes a strategy that firms have developed to expressly pursue such recombinant innovations. This strategy involves bridging distant worlds. By working in a range of different industries or markets, firms are in a better position to see when the people, ideas and objects of one world can be combined in new ways to solve the problems of another. For these companies, innovation isn’t a process of thinking outside of the box so much as one of thinking in boxes that others haven’t seen before . Edison didn’t invent the electric light, but he brought together previously disparate people, ideas, and objects from his network of past wanderings in a way that launched a revolution.” (13)

Brokering Skills Technology brokers need a set of specialized skills to consistently create new combinations from existing networks of people, ideas and objects. These skills include: Curiosity. Having an insatiable curiosity and desire for new knowledge. Penetrating practice networks. Gaining access to the expertise of multiple fields of practice. This includes getting “hands on” experience in these practice environments. This experience gives them the necessary depth of knowledge about innovations to be able to deconstruct them and understand their elements. Brokers need to maintain a certain distance from the field, however, to be able to see it in new ways that reveal hidden opportunities. Recombination. Creating novel new combinations of people, ideas and objects that change organizations, markets and even industries. Supporting communities. Supporting the development of new networks and communities to support the development of the innovation. “ By working for a range of clients and in a range of industries, Edison was able to move among the worlds that made up each of these industries – using his work for different clients to bridge these different worlds when he and his team saw ideas in one that showed promise elsewhere.” (15) “ Technology brokers are characterized by their connections to multiple small worlds and, further, by their connections to worlds that otherwise share few connections between them.” (25) “ Technology brokering entails not just the ability to bridge small worlds, but also the ability to build new worlds from the best practices of the old ones.” (27) “ Brokers can use their connections to distant worlds to recognize and bring combinations of people, ideas and objects from these different worlds to create something of value that did not exist before. Rather than simply moving resources from one locale to another, these brokers use their unique perspectives to envision and create novel combinations of these resources, and sometimes even novel industries. As a result, these brokers change the very structure of the network by building ties between worlds.” 62 “ This means working within the worlds, gaining hands-on experience with the problems and solutions at hand and coming to understand what the people know, what the ideas mean, and what the objects can do.” “ The trick is to develop a deep knowledge and, at the same time, the ability to question what you know, take it apart, and combine it in new ways.”

Building Communities “ To succeed, technology brokers actually must walk a delicate line between establishing the broad-ranging networks required to see and recombine valuable new ideas across a range of industries and, once new innovations are constructed, build the necessary collective action and community around those innovations.” (119) “ From a network perspective, the pursuit of innovation relies on the web of people, ideas and objects that emerge around the original innovation. New ventures often fail because too little attention is given to building these networks – ideas instead are expected to sell themselves or ‘inventors’ want all the credit and profit. In contract to lone inventors, communities draw other actors, objects and ideas together into tight knit networks, where people’s roles become clear and interdependent, where objects adapt to fit their new applications, and where ideas become shared organizing principles.” (28) Once an innovation has been developed, the work is far from over. The majority of innovations fail to reach a sufficient scale to have any impact on existing practice. Part of the reason this happens is that too little attention is paid to the community of people and ideas that to take an innovation from a developmental stage to full market acceptance. It is often years or even decades after the original “invention” of the innovation for it to acquire the necessary support infrastructure to have it “take off.” This support infrastructure is reflected in networks of individuals who work on similar problems; an emerging set of “lead” customers; clusters of firms; and professional support services that understand the innovation. The brokering skills that are useful in generating the original invention are very different than the skills necessary to weave the support network necessary to take that innovation into a broader market, to achieve ‘scale.’ “ The commercial success of a technological innovation is in great measure a reflection of the institutional innovations which embody the social, economic, and political infrastructure that any community needs to sustain its members.” (109)

Tight Knowledge Networks Knowledge that can be the useful “raw material” for recombinant innovations is typically possessed by individuals who are members of tight “knowledge communities.” These communities can be professional networks (communities of practice); teams within an organization; firms within an industry; or separate industries. The more intensely specialized these communities are, the less interaction they will typically have with other practice environments, creating what Hargadon calls a “fragmented landscape.” This intensity of focus is a two-edged sword – it both allows for a rapid and efficient communication among members of the community (enabling on-going development of technologies); and it “blinds” the community to information from outside. The irony is that the more successful an innovation is, the more rapidly it creates its own “small world” and the more rapidly it blinds itself to useful outside information. As Harold Passer noted of Edison: “In 1879, Edison was a brave and courageous inventor; in 1889, he was a cautious and conservative defender of the status quo.” Part of the role of the broker is to help these communities “see” the value of outside knowledge. They can only do this if they understand the practice environment deeply enough to have credibility in it. “ The dense interactions within each community become the focus of attention and efforts and, as a result, create a fragmented landscape in which each community interacts less with the other communities. As a result, fewer interactions take place between these small worlds.” 58 “ Small worlds both enable and constrain action. The dense connections give any single world its structure and stability and, as a result, enable a complex set of people, ideas and objects to work smoothly together as a single, coherent system. But these same dense ties also make it extremely difficult to change any one part of the system without affecting the rest.” 67 “ Small worlds shape perception in ways that prevent the inhabitants from seeing the value of people, ideas and objects that reside outside of their traditional boundaries. The ties that bind are the ties that blind .” 65 “ On the one hand, knowledge represents the raw material for recognizing and creating radical innovations…On the other hand, knowledge represents the old ways of thinking that prevent people from seeing new opportunities.” 80

The IDEO Example IDEO is an innovation and design firm that was founded in 1978. Headquartered in California it has offices around the world. It has developed over 4,000 products for over 1,000 customers in more than 50 industries. Some of its better known products include the Steelcase Leap chair, the Palm V, Nike sunglasses and Logitech joysticks. (IDEO is now owned by Steelcase.) IDEO has a fluid, team-based structure. While each team has a disciplined structure, the team membership and roles changes with each assignment. The core work processes at IDEO include: Capturing good ideas . Designers are obsessed with learning about new materials and products. To do this, they like to go directly to the source, and observe the users as they interact with the products. Keeping ideas alive . IDEO has “made a science of accumulating junk.” They use an internal knowledge management system (referred to as the “Tech Box” that houses their innovative “stuff” (including mechanical and electrical “gizmos” and well as ideas, drawings and other artifacts. The point is to keep this rich story of innovation present and at “top of mind” so that it can be retrieved when needed. Imagining new uses for old ideas . This is the core process of innovation. Designer connect novel combinations of existing ideas to customer problems. Putting promising ideas to the test. Ideas aren’t useful if they haven’t been tested. “Rapid prototyping” is the last step in the process – getting the idea into the form of a real service, product, process or business design so that it can be tested early enough to catch mistakes and make improvements. “ By virtue of having worked in so many different industries, the company is far more likely to see (or simply remember) new ways of solving long-standing problems in on industry by importing ideas from others.” 137 “ IDEO has also acquired links to a range of vendors, suppliers and manufacturers that are particularly innovative or easy to work with, to research scientists with deep knowledge of emerging materials to product companies that are central to particular markets. IDEO has realized that it is not just in the business of combining existing objects and ideas in novel ways, but also in the business of building communities around those recombinant innovations.” 139 “ The most respected people at IDEO are part pack rat (because they have great private collections of stuff), part librarian (because they know who knows what), and part Good Samaritan (because they go out of their way to share what they know and to help others.) 149 “ Almost immediately after thinking of a promising concept, a development team at a place such as IDEO or Design Continuum builds a prototype, shows it to users, tests it and improves it.” (151) ““ All of this curiosity means that technology brokers create massive collections of ideas. Some will lead to innovations; some will not. The important thing is that they’re there. Edison once said: ‘To invent, you need a good imagination and a pile of junk.’”’ (148)

Brokers and Brokering Strategies Types of Technology Brokers: Engineering and design firms Venture capitalists Banks Law firms, consultants and other professional service firms Suppliers of common components to an industry Customers, especially lead users Research labs Three Brokering Strategies: Full time, independent brokers (like IDEO) Technology brokers that work within firms, creating innovations from technology located in teams, divisions or subsidiaries. Opportunistic, one-time brokering.

Disruptive Innovations The work of Clayton Christensen and Michael Raynor, authors of The Innovator’s Dilemma (1997) and The Innovator’s Solution (2003)

Summary of the Innovator’s Solution A “sustaining” innovation provides higher performance to existing, high-end customers. A “disruptive” innovation provides less expensive products that are much easier to use and that appeal to new or less-demanding customers. New opportunities for rapid growth through disruptive technologies are created when when existing competitors “overshoot” their customer’s needs and provide more features and benefits at higher cost than the customer wants. Disruptive technologies typically pursue two kinds of markets – the low-end consumption in existing markets, and potential new markets made up on non-consumers. Firms that are pursuing growth from sustaining innovations typically miss the threat and the opportunity for introducing disruptive innovations. To discover disruptive technology opportunities, you need to focus on the job that a consumer “hires” a product/service to do in a particular circumstance , not the product features and benefits. Integrated, proprietary technologies typically win when products are below customer requirements (“not good enough”); dis-integrated, modular strategies succeed when the products have exceeded customer needs (“more than good enough”) Commodification occurs when products start to overshoot customer requirements. Decommodification occurs when competition in modules designed for a de-integrated market drive sub-system suppliers to develop proprietary solutions.

The Problem “ There is powerful evidence that once a company’s core business has matured, the pursuit of new platforms for growth entails daunting risk. Roughly one company in ten it able to sustain the kind of growth that translates into an above-average increase in shareholder returns for more than a few years.” “ In their efforts to stay ahead by developing competitively superior products, many companies don’t realize the speed at which they are moving up-market, over-satisfying the needs of their original customers as they race the competition towards higher-performance, higher-margin markets. In doing so, they create a vacuum at lower price points into which competitors employing disruptive technologies can enter.” The Innovators Dilemma , (Introduction)

Examples of Disruptive Innovations Amazon.com Barnes & Noble Centralized beef processing Black and Decker Bloomberg L.P. Canon photocopiers Charles Schwab Circuit City and Best Buy Community Colleges Credit scoring Dell Computer Discount department stores eBay Ford Model T Ink Jet printers Intuit JetBlue Korean auto makers Linux McDonalds Microsoft Minicomputers Personal computers Southwest Airlines Steel minimills Toyota Toys R Us University of Phoenix Xerox

Sustaining and Disruptive Innovations Sustaining Innovations “ A sustaining innovation targets demanding, high-end customers with better performance than what was previously available. Some sustaining innovations are the incremental year-by-year improvements that all good companies grind out. Other sustaining innovations are breakthrough, leapfrog-beyond-the-competition products. It doesn’t matter how technologically difficult the innovation is, however: The established competitors almost always win the battles of sustaining technology. Because this strategy entails making a better product that they can sell for higher profit margins to their best customers, the established competitors have powerful motivations to fight sustaining battles. And they have resources to win.” (p. 34) Disruptive Innovations “ Disruptive innovations , in contrast, don’t attempt to bring better products to established customers in existing markets. Rather, they disrupt and redefine that trajectory by introducing products and services that are not as good as currently available products. But disruptive technologies offer other benefits—typically, they are simpler, more convenient, and less expensive products that appeal to new or less-demanding customers. Once the disruptive product gains a foothold in new or low-end markets, the improvement cycle begins. And because the pace of technological progress outstrips customers’ abilities to use it, the previously not-good-enough technology eventually improves enough to intersect with the needs of more demanding customers.” (p. 34)

Low End vs. New Market Disruptions New Market Disruptions “ We say that new-market disruptions compete with “non-consumption” because new-market disruptive products are so much more affordable to own and simpler to use that they enable a whole new population of people to begin owning and using the product, and to do so in a more convenient setting. The personal computer and Sony’s first battery-powered transistor pocket radio were new market disruptions, in that their initial customers were new consumers – they had not owned or used the prior generation of products and services.” Low End Disruptions “ We call disruptions that take root at the low end of the original or mainstream value network low end disruptions. Disruptions such as steel minimills, discount retailing, and the Korean automakers entry into the North American market have been pure low-end disruptions in the they did not create new markets – they were simply low-cost business models that grew by picking off the least attractive of the established firms customers.” Hybrids “ Many disruptions are hybrids, combining new market and low end approaches. Southwest Airlines is actually a hybrid disruptor, for example. It initially targeted customers who weren’t flying – people who previously had used cars and buses. But Southwest pulled customers out of the low end of the major airlines value network as well. Charles Schwab is a hybrid disruptor. It stole some customers from full service brokers with its discounted trading fees, but it also created new markets by enabling people who historically were not equity investors – such as students – to begin owning and trading stocks.” (The Innovator’s Solution , P. 49-50) Why Incumbents Fail to Respond “ Because new-market disruptions compete against non-consumption, the incumbent leads feel no pain and little threat until the disruption is in its final stages. In fact, when the disruptors begin pulling customers out of the low end of the original value network, it actually feels good to the leading firms, because as they move up-market in their own world, for a time they are replacing the low-margin revenues that disruptors steal, with higher-margin revenues from sustaining innovations.” (Pg. 46 )

Choices of Growth Strategies (The Innovator’s Solution , P. 51) Three Approaches to Creating New-Growth Businesses Dimension Sustaining Innovations Low-End Disruptions New Market Disruptions Targeted performance of the product or service Performance improvement in attributes most valued by the industry’s most demanding customers. These improvements may be incremental or breakthrough in character. Performance that is good enough along the traditional metrics of performance at the low end of the mainstream market. Lower performance in “traditional” attributes, but improved performance in new attributes—typically simplicity and convenience. Targeted customers or market application The most attractive (i.e., profitable) customers in the mainstream markets who are willing to pay for improved performance. Overserved customers in the low end of the mainstream market. Targets non-consumption: customers who historically lacked the money or skill to buy and use the product. Impact on the required business model (processes and cost structure) Improves or maintains profit margins by exploiting the existing processes and cost structure and making better use of current competitive advantages. Utilizes a new operating or financial approach or both —a different combination of lower gross profit margins an higher asset utilization that can earn attractive returns at the discount prices required to win business at the low end of the market. Business model must make money at lower price per unit sold, and at unit production volumes that initially will be small. Gross margin dollars per unit wild will be significantly lower.

The Disruptive Innovation Model Sustaining Strategy Bringing a better product into an established market Low-End Disruption Addressing over-served customers with a lower-cost business model. Performance Time Time New Market Disruption Competing against non-consumption Industry Performance Trajectory

How to Identify Disruptive Opportunities There Are Untapped New Market Opportunities There is a large population of people who have not had the money, equipment, or skill to do this thing for themselves, and as a result have either gone without it, or had to pay someone else to do it for them. To use the product or service, customers need to go to an inconvenient, centralized location. There Are Untapped Low-End Market Opportunities There are customers at the low end of the market who would be happy to purchase a product with less (but good enough) performance, if they could get it at a lower price. It is possible to construct a business model that is profitable at the discount prices required to win the business of these underserved low-end customers. None of the Existing Players Will Have An Incentive to Compete The innovative is disruptive to all of the significant incumbent players in the industry (i.e. no existing firm could copy the business model as a “sustaining” innovation move based on their current business model.) (The Innovator’s Solution , P. 49-50)

Strategy Guidelines Start early. Launch new-growth businesses while the core is still healthy and can be patient for growth. Acquire regularly and early. Acquire new-growth businesses in a pre-determined rhythm. Acquire them before they demonstrated broad market success. Start small. Divide business units to maintain a patience for growth. (Small business units need lower levels of sales to generate significant growth – they therefore will test out opportunities larger business units will pass up.) Demand early success. Minimize subsidization of new-growth venture. Push for rapid profit generation to test market assumptions. (The Innovator’s Solution , P. 250ff)

Value Innovation The work of professors Chan Kim and Renee Mauborgne of the European Business Institute, authors of “ Value Innovation – The Strategic Logic of High Growth” (HBR -- 1997) “ Creating New Market Space” (HBR – 1999) “ Charting Your Company’s Future” (HBR – 2002)

Summary of Value Innovation Approach High growth companies create new leaps in buyer value while creating a sharp drop in the industry’s cost structure. (Not unlike Christensen’s “disruptive innovations.”) In the process, these companies create a “new market space” that places them in a fundamentally different position relative to competitors. The new value proposition comes from a combination of: Eliminating factors (product features; prices; distribution channels; production systems) that the industry takes for granted. Reducing some factors well below industry standards. Raising some factors well above industry standards. Creating new factors that the industry has never offered. The core tool is a “value curve” that compares your positioning on a key set of competitive factors (price; availability; convenience of use; simplicity; delivery; brand image; etc.) against your competitors. The emphasis is on looking outside your traditional competitor cluster for new opportunities – markets that have not yet been created; customer needs that have not yet been met; new buyers who have not yet been targeted as customers. The entire “customer value chain” is targeted for opportunities, including the buying experience; delivery; use; required supplements; maintenance; and disposal. “ Value innovation is creating an unprecedented set of utilities at a lower cost. It is not about making tradeoffs, but about simultaneously pursuing both exceptional value and lower costs. Value improvements only get you so far. Value innovation is concerned with challenging accepted assumptions about particular markets, changing the way managers frame the strategic possibilities. It is about the willingness of companies to create new markets.” Renee Mauborgne

Four Questions To Create New Value Curves What factors should be reduced well below the industry standard? What factors should be raised well beyond the industry standard? What factors should be eliminated that the industry has taken for granted? What factors should be created that the industry has never offered? NEW VALUE CURVE REDUCE CREATE ELIMINATE RAISE

The IDEO System of Innovation Based on the book, The Art of Innovation , by Tom Kelly

IDEO Background IDEO is arguably the nation’s leading innovation and design firm. Founded in 1978 and headquartered in California, it has offices around the world. It has approximately $62 million in sales and 350 employees. It has developed over 4,000 products for over 1,000 customers in more than 50 industries. (Steelcase is a majority shareholder of IDEO.) IDEO has a fluid, team-based structure. While each team has a disciplined structure, the team membership and roles changes with each assignment. The core work processes at IDEO include: Capturing good ideas . Designers are obsessed with learning about new materials and products. To do this, they like to go directly to the source, and observe the users as they interact with the products. Keeping ideas alive . IDEO has “made a science of accumulating junk.” They use an internal knowledge management system (referred to as the “Tech Box” that houses their innovative “stuff” (including mechanical and electrical “gizmos” and well as ideas, drawings and other artifacts. The point is to keep this rich story of innovation present and at “top of mind” so that it can be retrieved when needed. Imagining new uses for old ideas . This is the core process of innovation. Designer connect novel combinations of existing ideas to customer problems. Putting promising ideas to the test. Ideas aren’t useful if they haven’t been tested. “Rapid prototyping” is the last step in the process – getting the idea into the form of a real service, product, process or business design so that it can be tested early enough to catch mistakes and make improvements. EXAMPLES OF IDEO-DESIGNED PRODUCTS & PROCESSES Leap Chair Palm V Polaroid I-Zone Cameras Crest Stand-up Toothpaste Tube Oral-B Toothbrushes Nike Sunglasses Logitech Joysticks Insulin Pens Apple Computer Mouse Health Care Patient Experiences Retail Shopping Experiences

The Basics “ Prototyping, brainstorming and observations. These are the fundamentals – the reading, writing and arithmetic of innovation. Great teams provide the charge that makes these basic skills flow throughout a company.”

The Core Methodology Understand the market, the client, the technology and the perceived constraints on the problem. Observe real people in real-life situations. Find out what they like; what confuses them; what they hate; and what needs they have that aren’t being met. Visualize new-to-the-world concepts and the customers who will use them. Visualization can be in the form of concepts; computer models; simulations; videos or physical prototypes. Evaluate and refine the prototypes in a series of quick iterations. Keep moving; don’t get too attached to any one iteration. Implement the new concept for commercialization. This requires taking the product through the development, production, selling and distribution phases. ( The Art of Innovation , P. 6-7) “ Our ‘secret formula’ is actually not very formulaic. It’s a blend of methodologies, work practices, culture and infrastructure. Methodology alone is not enough. Success depends on both what you do and how you do it.”

The Art of Observation Is Paramount Don’t ask your customers to do your work for you. Your customers often are incapable of articulating what they need or why they like or don’t like a product. Instead of asking them to tell you, go and experience life with them. Keep track of the things that bug you and others. These “bug lists” are a great sign that there is room for innovation. Get into the middle of it. Immerse your senses in the environment of the product or service. Don’t depend on second-hand information. Stay humble. Know what you don’t know. Live in the ignorance so you can see things with fresh eyes. Embrace the crazy users. They are often working on the fringes and the edges where interesting stuff happens. Find the people who are breaking the rules – it is often out of frustration with the idiocy of current products and services. Exercise your “observation muscles.” Practice the art of watching and recording. Observe patterns of behavior and look for glitches and anomalies. “ We’re not big fans of focus groups. We don’t much care for traditional market research either. We go to the source. Not the ‘experts’ inside a company, but the actual people who use the product or something similar to what we’re hoping to create.” ( The Art of Innovation , P. 6-7) IDEO OBSERVATION TECHNIQUES: Shadowing – observing people as they use products. Behavioral mapping – documenting behaviors in a specific space over a 2-3 day period. Consumer Journey – recording all the interactions a consumer has with a product, service or space. Camera Journals – asking consumers to keep visual diaries of their experiences and impressions related to a product. Extreme User Interviews -- Talking to people who really know—or know nothing—about a product or service, and evaluating their experience using it. Storytelling – prompting people to tell personal stories about their consumer experiences. Un-Focus Groups – interviewing a widely diverse group of potential users. (Source: Business Week, 10.11.04)

Brainstorming Is A Core Process Sharpen the focus. Make sure you have a well-articulated description of the problem at just the right level of specificity. Have playful rules. Don’t critique or debate ideas. Go for quantity and encourage wild ideas. Number all your ideas. This helps you keep track of how productive you are. Try for 100 ideas in an hour. Build on ideas and jump to new topics when needed. Encourage a wave-like structure to the momentum. Create a space that remembers. Cover all the wall in writing surfaces. Have lots of space to spread stuff out. Create graphic connections between ideas. Exercise for better performance. Do mind exercises to loosen up. Stimulate thinking ahead of time with homework assignments. Get physical. Use physical media to record and experiment with the ideas, including graphics, physical objects, and acting out ideas. “ Brainstorming is practically a religion at IDEO, one we practice nearly every day. Though brainstorms themselves are often playful, brainstorming as a tool – as a skill – is taken quite seriously. And in a company without many rules, we have a very firm idea about what constitutes a brainstorm and how it should be organized. Brainstorming is the idea engine of IDEO’s culture.” Sure-Fire Ways to Kill Creative Brainstorming Let the boss speak first. Give everybody a turn, in order. Only invite ‘experts’. Do it off-site. Avoid the silly stuff. Write everything down. ( The Art of Innovation , P. 6-7)

Teams Are the Organizing Unit “ Teams are the heart of the IDEO method. We believe it is how innovation and much of business take place in the world. Quite simply, great projects are achieved by great teams. Hot project teams start with a clear goal and a serious deadline. The hot group knows it might disband after the goal is reached and reform the next week to slay another dragon. A hot group is infused with purpose and personality.” Some Principles of “Hot” Teams Create passion. Structure the goal so that it is challenging – so that it creates something to shoot for an be proud of. Don’t be afraid of crazy deadlines and seemingly impossible goals. Spend a lot of time together in close quarters. Close physical proximity and frequent collective work binds the team together and improves their productivity. Get the right mix. Mixing teams together is an art in which personality plays a large part. You need a mix of people that is both right for the task, and also diverse enough to generate creativity. Make teams feel special. Give rewards and recognition. Create opportunities for fun and relaxation. Encourage play. Buy tee shirts. Give the teams names. Include the weirdos. Every team needs a wacko character or two to stir things up. ( The Art of Innovation , P. 6-7) “ Teams don’t need to have higher causes to perform, but they do need tangible goals – a technical first, a challenging sales target, outshining a tough competitor. In short, they need something to shoot for and be proud of.”

Prototyping is Another Core Process “ Prototyping is problem-solving. It’s a culture and a language. You can prototype just about anything – a new product or service, or a special promotion. What counts is moving the ball forward, achieving some part of your goal. Not wasting time.” “ Quick prototyping is about acting before you’ve got the answers, about taking chances, stumbling a little, but then making it right.” “ Doodling, drawing, modeling. Sketch ideas and make things and you’re likely to encourage accidental discoveries. At the most fundamental level, what we are talking about is play, about exploring borders.” ( The Art of Innovation , P. 104-118) “ Prototyping is the Shorthand of Innovation” Have a bias for action. Move to building stuff as soon as you can. The mere process of actualizing it will create more ideas and knowledge about solutions. Iterated often. Create short feedback loops – don’t go too long without testing the idea on others. Expect the design to change. It is highly unlikely that the first prototype will be what you end up with at the end. Don’t get wedded to any one iteration – you’ll probably have to give it up soon. “ Shoot the bad ideas first.” Prototype the things you know won’t work – it will help you understand why they don’t work and what the best alternative is. Use lots of media. Do the prototyping in many different media – drawings; graphics; foam; any materials that will work fast to get you an idea of what works. “ David’s influence made this childlike curiosity and enthusiasm second nature at IDEO. A playful, iterative approach to problems is one of the foundations of our culture of prototyping.

Peter Drucker’s Innovation and Entrepreneurship (Harper and Row, 1985)

Introduction One of the important early works on innovation is Peter Drucker’s book, Innovation and Entrepreneurship , published in 1985. It was one of the first management books to present innovation as a systematic business practice. In Drucker’s context, entrepreneurship is the practice of innovation. Entrepreneurs are not individuals who start new businesses; entrepreneurs are individuals or organizations that exploit change as an opportunity. They shift resources from areas of low productivity and yield to areas of higher productivity and yield. Entrepreneurs operate in large and small businesses; in new businesses and in old established ones. Drucker traces the history of innovation and entrepreneurship from the work of the French economist J.B. Say, who coined the term around 1800, to the theories of economist Josef Schumpeter, who postulated that dynamic disequilibrium brought on by innovating entrepreneurs, not equilibrium and “optimization,” are the norms of a healthy economy. In Drucker’s view, entrepreneurship and innovation became accessible as a wide-spread systematic practice with the introduction of modern management theory and practice in the 20 th Century. (By management, Drucker means “the useful knowledge that enables man for the first time to render productive people of different skills and knowledge working together in an ‘organization.’”) Drucker views innovation and entrepreneurship as learnable practices that need to be guided by the same kinds of disciplined theory and methodologies as other aspects of management. What differentiates innovation from day to day management is that its focus is on doing new and different things , rather than doing the same things better. Innovation is the tool of the entrepreneur; it is his or her critical knowledge base. And in its essence, it is a means to see and exploit change in the world around us.

Drucker on Entrepreneurship “ Every practice rests on theory, even if the practitioners themselves are unaware of it. Entrepreneurship rests on a theory of economy and society. The theory sees changes as normal and indeed healthy. And it sees the major task in society – and especially in the economy – as doing something different rather than doing better what is already being done. This is basically what Say, two hundred years ago, meant when he coined the term entrepreneur . It was intended as a manifesto and as a declaration of dissent: the entrepreneur upsets and disorganizes. As Joseph Schumpeter formulated it, his task is “creative destruction.” (p. 26) “ Everyone who can face up to decision making can learn to be an entrepreneur and to behave entrepreneurially. Entrepreneurship, then, is behavior rather than personality trait. And its foundation lies in concept and theory rather than intuition.” (p. 26) “ Entrepreneurship is ‘risky’ mainly because so few of the so-called entrepreneurs know what they are doing. They lack the methodology. They violate elementary and well-know rules. This is particularly true of high-tech entrepreneurs.” (p. 29) “ Entrepreneurs innovate. Innovation is the specific instrument of entrepreneurship. It is the act that endows resources with a new capacity to create wealth.” (p. 30) “ Entrepreneurs, by definition, shift resources from areas of low productivity and yield to areas of high productivity and yield.” (p. 28) “ Entrepreneurs see change as the norm and as healthy. Usually, they do not bring about the change themselves. But – and this defines entrepreneur and entrepreneurship – the entrepreneur always searches for change, responds to it, and exploits it as an opportunity .” (p. 28) “ To be entrepreneurial, and enterprise has to have special characteristics over and above being new and small. Indeed, entrepreneurs are a minority among new businesses. They create something new, something different; they change or transmute values. And enterprise does not need to be small and new to be an entrepreneur. Indeed, entrepreneurship is being practiced by large and often old enterprises.” (p. 22) “ Entrepreneurship is neither a science nor an art. It is a practice.” (p. viii)

Drucker on Innovation “ Systematic innovation consists in the purposeful and organized search for changes, and in the systematic analysis of the opportunities such changes might offer for economic or social innovation .” (p. 35) “ The overwhelming majority of successful innovations exploit change. To be sure, there are innovations that in themselves constitute a major change; some of the major technical innovations, such as the Wright Brothers’ airplane, are examples. But these are exceptions, and fairly uncommon ones. Most successful innovations are far more prosaic; they exploit change. And thus the discipline of innovation (and it is the knowledge base of entrepreneurship) is a diagnostic discipline: a systematic examination of the areas of change that typically offer entrepreneurial opportunities.” (p. 35) “ Before 1880 or so, invention was mysterious; early nineteenth century books talk incessantly about the ‘flash of genius.’ The inventor himself was a half-romantic, half ridiculous figure, tinkering away in a lonely garret. By 1914, the time World War I broke out, ‘invention’ had become ‘research,’ a systematic, purposeful activity which is planned and organized with high predictability both of the results aimed at and likely to be achieved. Something similar now has to be done with respect to innovation. Entrepreneurs have to learn to practice systematic innovation .” (p. 34) “ Successful innovators are conservative. They have to be. They are not ‘risk-focused’; they are ‘opportunity focused.’” (p. 140) “ Innovation, then, is an economic or social rather than a technical term. It can be defined the way J.B. Say defined entrepreneurship, as changing the yield of resources. Or, as a modern economist would tend to do, it can be defined in demand terms rather than in supply terms, that is, as changing the value and satisfaction obtained from resources by the consumer.” (p. 33)

Seven Sources of Innovation Source Description The Unexpected Unexpected successes (e.g. products selling in an unanticipated way) Unexpected failures (e.g. products or services that “should” succeed fail miserably) Unexpected outside events (such as the explosion in book-buying in the US) Incongruities A discrepancy between what “is” and what “ought” to be. Incongruities within the economic realities of the industry Inconguities between the reality of the industry and the assumptions about it Incongruities between the efforts of an industry and the values and expectations of its customers Incongruities within a process Process Needs A clearly understood need for which a process solution does not yet exist. Changes in Industry or Market Structure Shifts in the relationships and dynamics between players in an industry or market (often brought on by rapid growth; technology convergence; or rapid changes in practice). Demographics Changes in population (size; age; employment; educational status; income; ethnicity). Changes in Perception, Mood and Meaning Changes in how we think about a problem or issue (example: the obsession with health and fitness). New Knowledge Advances in scientific and technical knowledge and know-how.

Innovation Do’s and Don’ts INNOVATION IMPERATIVES Purposeful, systematic innovation begins with the analysis of the opportunities. This means thinking through the seven major sources of innovative opportunities – the unexpected; incongruities; process needs; changes in industry structure; demographics; changes in perception; and new knowledge. Innovation is both conceptual and perceptual. Innovation requires “going and seeing.” It is a practicing of both sides of the brain. An innovation, to be effective, has be be simple and it has to be focused. “All effective innovations are breathtakingly simple.” Similar to the principle of “elegance” in scientific theory, simplicity creates ease of replication and spread. Effective innovations start small. Avoid the grandiose scheme – instead focus on one specific thing. Most grandiose ideas aimed at transforming entire industries or markets fail. If the initial scale is small, then there will be resources to make the many changes in the early stages required to perfect the innovation. Aim at leadership from the start. The innovation should be targeted to establish leadership within its given environment. If leadership is not successfully established, the innovation will simply create an opportunity for the competition. ( Innovation and Entrepreneurship , P. 136-138) INNOVATION DON’TS Don’t try to be too clever. “Innovations have to be handled by ordinary human beings, and if they are to attain any size and importance at all, by morons or near morons. Incompetence, after all, is the only thing in abundant and never-failing supply. Anything too clever, whether in design or execution, is almost bound to fail.” Don’t try to do too many things at once. Companies and individuals need to stay close to their core competencies. And the effort needs to be focused with a concentrated kind of energy. Diffusion, diversion, diversity and splintering destroy focus. Don’t innovate for the future; innovate for the present. Even if the ultimate impact will be felt in the distant future, the innovation has to have applications in the immediate present. Firms often invest in innovations for which there is not yet a ripe market or set of conditions.

Innovation Framework For Manufacturing (With Addendum)

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Innovation Framework For Manufacturing (With Addendum)