Innovation Excellence – from Idea to Launch – Dr. Christian WeigelJersey, September 16, 2005

Innovation Excellence

– from Idea to Launch – Dr. Christian WeigelJersey,September 16, 2005

http://www.feica.com/conferences

clientxx\kunde\present\standard1_01022005.ppt/w-z 2

Levers to Increase Profitability and Growth

Improving innovative ability will increase profitability and growth1)

Source: Arthur D. Little Innovation Excellence Study 2005; 1) Same answer across all regions and industries

Enhance innovation ability

Focus on core competencies

Cost cutting

Organic growth

Capital efficiency

Internationalization

Active pricing

Acquisitions and alliances

Low importance Very high importance

4,3

4,0

3,9

3,7

3,7

3,7

3,6

3,4

2 3 4 5

Innovation Excellence – Why?


Innovation turns knowledge into cash …

Innovative problem solutions Substitutions of existing

products and services New markets

Product and service innovation

Productively increaseProcess innovation

New structures of R&D organizations

Value chain reengineering

Structural innovation

Source: Degussa, Euroforum 2005

Innovation Excellence – Definition of Innovation


… and is not limited to technologies and products

Over the next five years, how much value do you expect your company to create through innovation in the following areas

20

40

60

80

Service Supply Chain

Manu-facturing

Marke-ting

Distri-bution

Sales +CustomerSupport

Products

7974

64 6773

65

77

Portion of Value Chain

Global Response

Source: ADL Global Innovation Survey



Innovation – is all about hard work


Art consists of 90% transpirationand only 10% sudden inspiration(Adolf von Menzel)

Innovation consists of 90% transpirationand only 10% sudden inspiration(Thomas Edision)


Chemical industry is a "low intensity innovator"

Share of R&D budget in total sales in %

Share of sales generated by products launched in the last 5 years in %

0%

10%

20%

30%

40%

50%

60%

70%

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11%

Pharma-ceuticals

Electrical engineering and Electronics

Automotive OEMsand Suppliers

Chemicals/ Resources

Consumergoods and food

Engineering and Manufacturing

Financial InstitutionsLogistics/

Services

Public and Professional Services

Telecommunication, IT and Media

Utilities

Efficient Innovators High Intensity Innovators

Low Intensity Innovators Low Leverage Innovators

Inter-industry average

Inter-industry average

Construction and Equipment

Aero-space

Source: Arthur D. Little Innovation Excellence Study 2005

Innovation Excellence – Survey Results


No correlation between R&D expenditures and share of new products

Sales with products younger than 5 years Average = 2,8

R&D expenditure as % of sales

Average= 19,1

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0% 1% 2% 3% 4% 5% 6%

Various Chemical companies (commodity and specialty focused); 2004 figures



R&D expenditures to generate 1 million sales with a new product – Chemical industry –

Innovation leader need less for more

'000 €

% new productsyounger 5 years 30% 21% 26%

Best Average Worst

430

860

1360

+50%

+50%



A well-balanced innovation approach is one key to success

Customer & Business Results

Business Vision & Strategy

Idea Management

Resource & Competence Management

Development & Launch

Post-Launch

Product/Service Portfolio Mgmt.

Technology Management

Business & Technology Intelligence

Learning

LearningPartners

Customers

A well balanced approach

Learning from best practices

Learning from best practices

Learning from top

innovators

Learning from top

innovators

Innovation Excellence – Top Innovation Management


Customer contact and excellent business intelligence form essential components of Innovation Excellence

Gaining Market Intelligence


Systematic market andtechnology screening

Direct customer contact

Extrovert corporate culture

Clear role allocation

Low importance Very high importance2 3 4 5

Source for InnovationSource for Innovation

Innovation Excellence – Market Intelligence


Uncover unarticulated customer needs

Clues

+

+

How?What?

Frustrations with current products

and services

Frustrationswith current

activities

"Blue-sky" dreams about

ideal world

Listening tocustomers

Watchingcustomers

Speculating with customers

Anticipating changes

in customers' environment

3. Un-conscious needs

2. Un-served needs

1. Ill-served needs



Think of customers, broadly

Needs / wants ? Satisfaction level ? Future pressure / conditions of success ?

YourCompany

RegionalInternat’lNetwork

Whole-saler

Retailer/Dealer Customer Customer’s

Customers

Service



Idea Management


Methodology to evaluate and select new ideas

Creative employees/ business partner

Systematic process to generate new ideas

Available time to generate ideas


Pivotal factors in idea management include creative employees and business partner

Innovation Excellence – Idea Management


Idea does not necessarily mean market success

Source: University St. Gallen, Prof. Gassmann

1,919 369 176 32 11

IdeasProjects

ProductsMarket

Success

Invention Innovation



Are those companies more successful that involve their customers into the development of new products and services?

"If I had asked my clients what they wanted they would have answered 'A faster horse'!"

Henry Ford, 1863 – 1947

"It seems that just about every industry on mapright now is being reinvented from the customer backwards"

Gary Hamel, 2002

"... users rather than manufacturers are typically the initial developersof what later become commercially significant new products and processes"

Eric von Hippel, MIT, 2002



Remember innovation has many sources (1)

Innovation Developed by:

User Manufacturer Supplier Other

Source: Evon Hippel


Scientific instruments

Semiconductor and printed circuit board process

Engineering plastics

Plastics additives

Industrial gas-using

Thermoplastics-using

0% 20% 40% 60% 80% 100%


Remember innovation has many sources (2)

Innovation Sources

Source: ZEW: Mannheimer Innovationspanel (Erhebung 1999)

Customer Supplier Science Competitors R&D, othersinternal

Chemical Industry

Industry in general


0% 20% 40% 60% 80% 100%


In order to meet the challenges new approaches and methods are required

Focus groups

Product clinics

Quality Function Deployment Rapid Prototyping

Next Generation Road mapping

Ideageneration

Conceptdevelopment Implementation Launch

Positioning models

Conjointanalyses

Involvelead-user

Analyze emotional needs

Empathic designCommunities

Toolkits

…



In many markets decisions are made emotionally – ratio provides only the reasons

Decision hierarchy product purchase

RatioRatio

EmotionEmotion

Security

Wishes

Dreams

Security

Wishes

Dreams

2. Objective reasons for product use

1. Decision based on emotional use



For the analysis of emotional factors in case of purchase decision new methods are required

Non-verbal communication prevails;"people think in pictures, not in words"

Better assimilation in the brain and easier activation of the brain through non-verbal signals

Traditional analysis methods (focus groups, questionnaires etc.) strongly "verbo-centric"

New methods with approaches to non-verbal articulation of needs; linkage between psychoanalysis, arts, literature and neurobiology



"Zaltman Methaphor-Eliciation Technique"

Object of investigation 12 – 30 participants

Example ZMETExample ZMET

Idea landscape

Digital collages

"Picture"-collection

Project definition

Pictures with strong association to product

Pictures: press clippings, picture books, brochures etc.

In-depth interviews Point out metaphors

Translate collages into idea landscapes

Interpretation

Further examples:

Arthritis drugs Buick Motorola security system

"Good tasting energy provider"

"Symbol of good old times"



For each market there are lead-users having today already needs they can articulate but which are developed only tomorrow by the broad market

"Our clients want all the same thing: more service, better quality and low prices at the same time"

Early and intensive customer involvement leads to innovation success(Arthur D. Little Studies 2004)

Well-known methods for the analysis of customer needs focus on broad customer groups in well-known markets

Despite great efforts hardly any impulses for real innovations

Lead users have today already needs that the total market will develop only tomorrow

Lead-user strongly profit from the development of new products or services

Conclusion: Identify lead-users and involve them closely into the product-/ service development



The lead-user approach can be applied in markets of industrial- and consumer goods

+ Bikers in the mountains

+Customerswith sensitive hair

Proteinshampoo

Mountain-bike

+ Pilots on wet roads

ABS-System



A critical success factor is a structured search process

Projectstart

Trendanalysis

Lead-user search

Conceptdevelopment

Search field

Project targets and team

Most significant trends in search field

Lead-user criteria

Screening or networking search

Lead-user workshop

Concept development and assessment

Infection protection in operating room

Surgeons in devel. countries

MASH units

Make-upartist

Minimal budgets

External stress

…

Result 2 new products

Radically new approach for infection control

Cost pressure

Hygienerequirements

Antibiotics resistance

Real-lifeexampleReal-lifeexample



Top innovators explicitly link strategy and clear innovation objectives

Innovation Excellence – Innovation Strategy

Strategic Planning of Product / Technology Development


Tight relation between innovation objectives and business strategy

Clear product or service strategy

Distinct product and/or technology platforms

Strategic make-or-buy decisions


Defined core competencies


Innovation objectives have to be defined

Project examplesProject examples

Size of bullet is proportional to sales of SBU

SBU (xy = % of saleswith products youngerthan 5 years in 2008)

breakthrough

incremental

short long

Type ofInnovation

Investment Cycle of Market

SBU A (40%)

SBU B (10%)

SBU C (20%)

SBU D (10%)

SBU E (30%)

Share on technology development

Share on product development



Canon’s high-speed digital copier business is a good example of successful platforms/growth engines

Precision Machining

Micro-optics

ImagingLaser

SensingNetworking & Connectivity

Material Science

Finite Element Analysis

High- Precision

Measurement

Fourier Analysis

Markets

Products

Technologies,Competencies

Cameras Copiers Fax PrintersDigital

CopiersDocumentSystems

DigitalElectronics

Platforms/ Growth Engines

Consumer Electronics

Office Automation


Business Electronics


Top Innovators focus on good cross-functional teams and a milestone-based development process

Innovation Excellence – Product Selection and Development

Product Development Process and Project Management


Milestone-based product development process

Prioritization of limited resources

Methodology of risk management

Collocation of development teams in critical project phases


Management of development partners


We will jointly select the appropriate portfolio criterias

Potential profit Fit for the business Sustainability of competitiveness Strategic role of technology

Customer needs Access to clients Knowledge of competitors


Technology Position

Technology life cycle

0

0,2

0,4

0,6

0,8

1,0

0 0,2 0,4 0,6 0,8 1,0

92

1

37

fatal

ideal

10

8

6 54

Technology Position

Market skills

0

0,2

0,4

0,6

0,8

1,0

0 0,2 0,4 0,6 0,8 1,0

109

1

2

6 3

5 8

ideal7

fatal

4

Strategic benefit

Risk (technological, commercial)

0

0,2

0,4

0,6

0,8

1,0

0 0,2 0,4 0,6 0,8 1,0

fatal

ideal17

4 356

8

2 910



1) ECV based: Expected Commercial Value

A Portfolio Management based on ECV (Expected commercial value of projects) can lead to a significant increase of the R&D pipeline value

Before After

Probability of commercial/technical success

high

low

low high

Attrac-tiveness

Risks

high

low

low high

NPV

Size of bubble = ECV in mio $

Mainly qualitative criteria for selection Selection based on NPV/probability (ECV)

Pipeline Value ~ 3,5 bn $1) Pipeline Value ~ 5,0 bn $


+40%



Stage Gate and Portfolio Management

Value Management starts at the Money Gate of the Stage Gate process

"new" product

Evaluation of single projectbased on NPV and risk

Portfolio review: Prioritization Resource allocationBudget planning

Strategy

Idea/ Proof of concept

Kick-off

Gate

Business Case

Money Gate

Develop-ment

Go to testing Gate

Launch Gate

Testing & validation Launch

Responsible: Gatekeeper



A properly implemented Stage Gate Process can free up significant resources and improve productivity

Source: Arthur D. Little

Time

ADL Project example


Gat

e 2

Gat

e 3

Gat

e 4

Gat

e 5Stage 1Idea- Gener-ation

Stage 2Business Case

Stage 3Lab-phase

Stage 4Pilot-phase

Stage 5Launch

Number of Projects

100%

50%

0%

Status

Target

Benefits

Innovation closer to market needs, due to market justification (business case) in early project phase

Resources will be increased in the more cost efficient early phases

Projects will be terminated earlier – if required



The secrets of success are good project management and technology partnerships

Innovation Excellence – Technology and Resources Management

Management of Technology and Resources


Technology partnerships with other companies

Systematic improvement of project management skills

Active license management

Clear separation between product and technology development


Collaboration with federal research institutes


Degussa's routes to new business involve project houses and internal start-ups

ScienceSocietyMarkets

NewBusiness

New Business Development

New Technology Platforms

Exploration& Validation

InternalStart-ups

ProjectHouse

BusinessUnit

CorporateVenture

HighRisk

MediumRisk

BusinessTechnology


Innovation Excellence – Technology and Resources Management


Europe AsiaInnovation performance in

Due to the global innovation competition the early stages of the innovation process become increasingly important

Trend to shift concept- and implementation phase to foreign countries To benefit from efficiency

advantages To increase proximity to

customers Challenge: Keep proprietary

Know How

Tomorrow?

Implementation

Concept development

Ideageneration

Ideageneration

Concept development

Implementation

Today

Example China With more than 10,000

research institutes Pool of trained scientists

(800,000 science and engineering degrees)

Repatriation of US educated scientists (over 110,000 scientists since 1994)

Innovation Excellence – Delocalization of Innovation


Key Innovation Metrics


Good performance indicators help companies to set the baseline and support improvement in innovation excellence

Number of new products

Sales/results of new products

Impact on sales, EBIT, and/or costs

Number of patents

Innovation rate

Frequency0% 10% 30% 40%

36%

17%

11%

11%

4%

3%

2%

16%

20%

Time to market

Project management measures

Others

Innovation Excellence – Measurement of Innovation


Key Innovation Metrics


Good performance indicators help companies to set the baseline and support improvement in innovation excellence

General metrics, indirectly related to innovation, e.g.

Customer satisfaction

Total sales Market share EBIT

Metrics directly related to innovation

53%47%



Possible Innovation Balanced Scorecard

illustrativillustrativ

2. Rentabilität der F&E

Verhältnis F&E-Aufwand/ Deckungs-beitrag neuer Produkte

0,80

0,90

1,00

1,10

2003 2004 20050

10

20

30

40

4. Innovationsklima

Innovations-klima Index

2003 2004 2005

Bester Wett-bewerber

Wir

3. Portfolio und Pipeline Health – Erwartungswert der F&E-Projekte

0

300

600

900Mio. €

2003 2004 2005

1. Umsatz aus neuen Produkten

0

10

20

30 Neue Produkte

Neue Varianten

AlteProdukte

%

2003 2004 2005



In der Post-Reengineering-Welt wird Innovation zum Schlüsselerfolgsfaktor

Innovativeness Rating: Based on America’s Most Admired Corporations, Fortune Magazine ranking of 578 U.S. companies based on executive peer ratings and investment analyst evaluations.

Average Shareholder Return vs. Innovativeness Rating

Average Annual Shareholder Return 1986-96

Innovativeness Rating

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

3,00 4,00 5,00 6,00 7,00 8,00 9,00

"Top management's commitment to and focus on increasing its organization's innovative ability could lead to significant bottom line results over and above typical costcutting and re-engineering initiatives"

Source: ADL innovation survey

80% Zustimmung zu der Feststellung

Innovation Excellence – Innovation and Stock Markets


Impact of innovation on chemical stocks' value drivers?

Portfolio Focus

Long-term sales growth

Capital Structure

Profitability/ROIC

Earnings Predictability

Scale

Source: CSFB

Innovation Excellence – Innovation and Stock Markets


Innovative enterprises …

Build an innovative culture

Question thestatus quo

Set enterprise target innovation

Establish errortolerance

Time and budgets for ideas/exploration

Open up communication, build flat hierarchies

Break down think barriers

Destroy status-quo-mentality and cemented

structures

Increase speed of change


Innovation Excellence – Innovation and Company Climate


… and …

Turn employees into entrepreneurs

Implement professional knowledge

management

Establish fast decision process

Offer incentives to build new business, share success instead of

jealousy

Build cooperations with knowledge institutions

globally

Install and use tools

Give access to external and internal knowledge

for everybody

Innovation Excellence – Innovation and Company Climate



Achieving Innovation Excellence can boost the EBIT-margin

ø all companies

ø of Top Performer(Top 5%)

1) Number of successful new product launches per year; 2) Project specific development costsSource: Arthur D. Little Innovation Excellence Study 2005


Improvement Potential

Bottomline

Topline

Reduction of develop-ment cost2) …

46.3%15.0%

Reduction of product cost …

43.3%15.4%

Increase sales… 55.8%13.5%

Increase rate of innovation1) …

80.0%23.6%

Shorten time to market … 65.0%24.8%

11.4%3.6%Absolute increasein EBIT margin


Innovation-based profit growth tops the corporate agenda again

Innovation excellence can boost EBIT-margins by 4%

Top innovators have 2.5 times higher sales of new products and get more than 10 times higher returns from their innovation investments

A well-balanced innovation approach is the key to success: Good business intelligence Clear innovation objectives linked to strategy Milestone-based idea generation and implementation process Measurement of/feedback on innovation performance Wise use of partnerships Right innovation climate

As a number one priority, companies worldwide are targeting the huge untapped potential to improve profit growth through innovation management

1

2

3

4

Innovation Excellence – Summary


Innovation-related processes

Informal Ration resources Analysis Formal Extensive Elaborate/formal Isolated Removed from Mkt Underestimated/used Excluded

Defined/clear Identify opportunities Action Informal Minimum Short/informal Exposed to market Attuned to market Well understood/used Participate

Innovation strategy

Planning focus

Planning emphasis

Communications

Staff involvement

Decision process

R&D

Product managers

Technology

Outsiders

Appendix


Innovation-related attitudes

Not explicit Short-term Not tolerated Not accepted Buried Little emphasis Rigid/enforced Disliked Low/unrealistic Corporate interests

Explicit Long-term Tolerated Accepted Extracted/shared Strong emphasis Not enforced Accepted High/reasonable Personal development

Interest in innovation

Payback horizon

Mavericks

Failure

Lessons from failure

Interpersonal skills

Corporate norms

Uncertainty

Mgmt. expectations

Staff emphasis

Appendix


Innovation – related policies

ClosedInexistentNot AvailableCentralizedScarceIndividualsDiscouragedAutocraticBelow averageIgnored

Open Dual ladder Available Decentralized Available Teams Encouraged Participative Above average Publicized

Partnerships/ acquisition

Careers for innovators

Rewards for innovators

Structure

Innovation resources

Product champions

Work groups

Decision mode

R&D budgets

Innovation success

Appendix

Documents

Innovation Excellence – from Idea to Launch – Dr. Christian WeigelJersey, September 16, 2005