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The Need for Investment in Enterprise Innovation: Part One

Written By: Predrag Jakovljevic
Published On: August 2 2013

Manufacturers throughout the world are scrambling to respond to ever-changing economic conditions, increasing (or at least fluctuating) material costs, and price-sensitive markets. Success depends upon agility, in particular a capacity to make fast and informed adjustments to strategic plans and continually reorder operational priorities to align with external factors and changes. Innovation is increasingly viewed as a principal lever for improving business value and has been touted as the key tenet of long-term business viability. It is difficult to refute General Electric CEO Jeffrey Immelt’s observation a decade or so ago that “innovation is necessary to avoid commodity hell.”

Innovation Hurdles
But opportunities that stem from innovation do not come without risk, and when striving for innovation success, executives are often betting the entire future of their organizations on the outcomes of decisions about where to invest limited resources. Poor decisions regarding innovation investments can generally be traced to one of the following four factors:

1.    Failure to anticipate the impact of short-term decisions on long-term strategy. Tactical and operational decisions are often made without a clear understanding of their probable impact on long-term strategies, or how those decisions might be affected by shifts in market dynamics and product and technology investments. All too often, even the great majority of a business’ workforce doesn’t understand their company’s strategy. Thus, an annual operating plan (AOP) is a mere spreadsheet exercise that is disconnected from the strategy, whereby each line of business (LoB) function (product development, supply chain, planning, production, sales/marketing, and finance) has its own execution system. In those cases where strategies are defined at the top, they are often not translated into actions. Strategies then quickly become outdated due to constant market changes (if not even stuck in a three-ring binder on the shelf). An easy flow of data should permit senior executives to know and react quickly when project details change or external events suddenly demand adjustments or refinements. The software should make it possible for senior leadership, planning, and product development teams to understand the dependencies among existing initiatives and anticipate how near-term decisions are likely to affect long-term strategies and performance goals.
2.    Lack of transparency. Decision makers need to be able to get a clear picture of where their innovation resources are being spent, and what their investment options are—a successful product portfolio must strike the right balance of disruptive innovation and product enhancements, taking into account the risk vs. reward potential across these categories.
3.    Inability to judge what is valuable (and what is not). Organizations often lack market-driven processes for determining the potential business value of investment alternatives. As a result, spending decisions are sometimes based on little more than a gut feeling. Features such as scorecards, tailored idea-selection criteria, resource reports and information-gathering, and presentation templates grounded in best industry practices strengthen process management and minimize innovation risk.
4.    Inability to bring innovation to market quickly. Today, global and local market conditions fluctuate at unprecedented rates, and windows of business opportunity can close as fast as they open. Companies that are unable to quickly conceive, develop, and commercialize innovative products to fulfill emerging needs are at a competitive disadvantage.

As a result of these issues with innovation, companies looking to strengthen their research and development (R&D) heft are increasingly required to identify and prioritize innovations that will return a concrete business benefit. There has lately been a shift from pure research to developing technologies that convert quickly into new business.

Less Than Stellar Innovation Outcomes
A recent Booz Allen Hamilton study found that companies with the highest R&D spending do not necessarily experience the greatest profitability (see http://www.booz.com/media/file/sb61_10408-R.pdf). The company’s 2005 book “Blue Ocean Strategies” found that innovations that created new markets represented only 14 percent of new product launches, yet they accounted for 61 percent of profits. Research from various organizations, such as Product Development Institute (PDI), Boston Consulting Group (BCG), CGT Reporter, Sopheon, and others cites the following surprising findings:

  • 94 percent of companies have a gap in alignment between product development and growth strategies;

  • 85 percent of companies make investment decisions based on politics rather than on valid data;

  • 50 percent of new products miss profit objectives, while 79 percent miss their product launch date; and

  • 85 percent of companies lack feasibility and risk data for innovation and NPI projects.


The result is that 50 to 70 percent of initiatives fail overall, and manufacturing executives are growing frustrated with the so-called “black box” of R&D. They want better visibility into the probability of their innovation success and their product portfolios, from initial discovery to product launch and beyond.

Enterprise Innovation Management Can Help
There are many practices and technologies that come together to improve the success of new product introduction (NPI), with product lifecycle management (PLM) providing an important foundation. One solution offering such a combo of capabilities in the marketplace today is Sopheon’s Accolade suite, providing several integrated processes for an enterprise’s entire innovation management and new product development lifecycle (we’ll take a look at Sopheon’s offerings in more detail in a second post to be published next week that will focus on the company’s broad innovation management solution). Enterprise innovation management (EIM) or innovation performance management (IPM) functionality covers a number of realms of innovation within which users can solve various cross-functional problems and answer specific questions, sometimes even via crowd-sourcing. For example, consumers and field service folks might inquire about the possibility of fitting new features/capabilities, marketers might inquire from their partners whether new features can be delivered and from their customers whether the market would support it, while product designers could ask the production folks whether a new design is manufacturable.

At the highest level, strategic innovation planning and roadmapping ensures a strategic market, and product and technology alignment with business objectives (see Figure 1). This process should tell companies what plans they should create to achieve business objectives, and which strategies to pursue. Any strategic gaps discovered at this stage can be closed through:

  • Idea development: Increase the number of ideas and concepts relevant to the company’s strategies.

  • Portfolio prioritization: Take resources from low-value non-strategic projects and shift them to those that are aligned with the strategy.

  • Revise the plan: If the plan is not feasible now due to a change in market or business conditions, modify it.


figure-1_innovationplanning_small.png

Figure 1 – Innovation Planning. © Sopheon

Idea and concept development should produce high-value product development initiatives, and help inform companies which ideas/concepts support their strategic objectives and are therefore viable initiatives (see Figure 2).

figure-2_ideation_small.png

Figure 2 – Ideation. © Sopheon

The next phase, innovation process and project management, manages innovation initiatives to get the right new products and/or services to market cost-effectively and on time. Using these tools, companies should know whether a particular initiative should be moved forward for launch or whether some other initiative should be moved into development instead (Figure 3). Stage-Gate® is the industry standard methodology and process for new product development and innovation (NPD&I) management—this short video gives an overview of the Stage-Gate methodology.

figure-3_processmanager_small.png

Figure 3 - Process & Project Management. © Sopheon

Last but not least, the realm of portfolio, resource, and in-market management encompasses investment funding decisions and optimization to achieve business objectives. For those not familiar with the definition, a portfolio is a set of candidate investments that must be considered as a whole in order to ensure the achievement of specific business objectives. Product portfolio management (PPM) is the business process by which organizations determine the set of innovation investments they will fund (and those they won’t) to achieve their business objectives. The goal here is to get more from the portfolio and monitor whether the portfolio is achieving the performance goals that have been laid out (see Figures 4 and 5).

figure-4_portfolio-optimization_small.png

Figure 4 – Portfolio Optimization. © Sopheon

PPM is one of the fastest-growing segments of PLM, although it still constitutes only a sliver of the overall PLM revenue pie. The reason for this rapid growth is PPM’s ability to provide decision support and be the “business layer” of PLM. Manufacturers are beginning to realize that they need to take PLM to the next step beyond product data management (PDM) and collaborative design, i.e., beyond the technical and transactional layers of PLM. Manufacturers are looking to use PPM tools to help them answer questions such as the following:

  • What are the operational cost tradeoffs to expanding the design performance or increasing the number of stock-keeping units (SKUs) when offering additional product features?

  • How do the results of alpha-beta customer tests or recent market data affect a new product launch?

  • Do we have the right resources and funds working on the right projects?

  • What experiences from past experimentation or failures can be reused in future product development efforts?


figure-5_ppm-reviews_small.png

Figure 5 – Portfolio Reviews. © Sopheon

Part 2 of this series analyzes Sopheon, a software and services company that caters to all of the aforementioned facets of EIM/IPM. A current snapshot of the company and its offerings is presented, along with an analysis of the competitive landscape.
 
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