developing a product innvation ano … · on. canada: isbm distinguished research scholar at pcnn...
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DEVELOPING A PRODUCT INNTECHNOLOGY STRATEGY FOD Y
VATION ANOUD DOSINESS
A framework for developing a product innovation strategy includes defining innovation goalsand objectives, selecting strategic arenas, developing a strategic map, and allocating resources.
Robert G. Cooper and Scott J. Edgett
OVERVIEW: Many companies lack a clearly articu-lated and well-communicated product innovation andtechnology strategy. Such a strategy' is essential and isstrongly linked to positive performance in product inno-vation. A framework for developing a product innova-tion strategy is presented, and the various steps ofstruteg}' development are described, from best-practiceways to define innovation goals and objectives throughla the .•^election of strategic arenas and the developmentof the strategic map. Defining attack plans and entrystrategies are also described. Finally, methods for re-source allocation and deployment using strategic bucketsand strategic roadmaps are outlined.
KEY CONCEPTS: innovation strategy, product develop-ment strategy, strategic arenas, strategic buckets, road-maps, entry strategies
In the late 1990s, two large firms were growing by leapsand bounds, driven by the boom in fiber-optic communi-cations. They were Corning Glass, which manufacturedlihcr-optic cable, and Nortel Networks, which producedthe boxes at each end of the cable to convert the lightsignal into an electronic signal. Then came the crash of2000: overnight, both firms' sales plummeted, and theirshare prices plunged from over S100 to about S1.
Ten years later. Coming is thriving, whereas Nortel isin Chapter 11 and being broken up. Why? How did twogreat and innovative companies, facing the same crisis,end up so differently a short decade later? One reason forNortel's demise is that the company lacked direction andan innovation strategy after the crash: instead, it limpedalong from one ad hoc decision to the next. By contrast.Coming's senior management took charge, developed astrong product innovation and technology strategy forthe fimi, and provided leadership and direction to see thatstrategy through (/). Coming's management took a hardlook at the company's previous 100 years of successes ininnovation and what drove them. They concluded that the"repeatable keys" to success—the elements in Coming'sculture and history that they could draw on to fiice thisnew challenge—were a leadership commitment, a clearunderstanding of the company's capabilities, a strongconnection to the customer and a deep understandingof major customer problems, and a willingness to takebig but well-understood risks. Strongly committed tobreaking out of the crisis through innovation, manage-ment assessed Coming's core competencies, determinedwhat they could leverage, and matched those strengths toemerging and adjacent market opportunities.
The result was a renewed innovation strategy and athree-pronged strategic attack that called for the company
Dr. Robert G. Cooper is Emeritus Professor, DeGrooteSchool of Business. McMaster University, Hamilton.ON. Canada: ISBM Distinguished Research Scholar atPcnn States Smeal College of Business Administration:and President of the Product Development Institute.Cooper is an acknowledged global expert in the fieldof innovation management, a Fellow of the PDMA. andcreator of the Stage-Gate® new-product process usedby many firms to drive new products to market. He is aprolific researcher and publisher in the field of innova-tion management, with over 100 articles and si.x books.robertcooper(a cogeoc.ca; www.stage-gate.com
Scott Edgett is CEO and co-founder of the Prod-uct Development Institute and Stage-Gate. Inc.. andis also a Faculty Scholar with ISBM at Penn StateUniversity's Smeal College of Business Adminis-tration. A specialist in new product developmentand portfolio management, he received his Ph.D. inmarketing from Bradford University. He has con-sulted and written extensively in the field, with over60 published articles and six books. His latest book(co-authored with Robert Cooper) is Product Innova-tion and Technology Strategv (Toronto: PDI, 2009)[email protected]; www.procl-dev.com
May—June 201«
to grow current businesses via product-line extensions,exploit market adjacencies, and create totally new oppor-tunities. The latter two thrusts required a heavy emphasison exploratory research and new business development,and thus, in spite of financial difficulties. R&D spendingwas maintained at 10 percent of sales revenue. A numberof new opportunities and strategic arenas were identifiedand assessed, and the most promising were exploited.The results were impressive: By 2008, major innova-tions had been realized in each of Coming's businesses,including the creation of four new business platformsand exploitation of three major market adjacencies. Newproduct sales had rocketed to 70 percent of annual sales,and profits moved from minus $500 million to plus $2billion after taxes.
The example of Coming offers some important strate-gic lessons for today, as we emerge from the current re-cession. As the Coming case illustrates, an innovationstrategy is an essential tool for product development andcontinued growth even in difficult times.
Indeed, our research has shown that top-performing busi-nesses have in place a product innovation and technologystrategy driven by the business leadership team and astrategic vision of the business (2). As it does at Coming,this strategy guides the business's product development
strategy is anessential teel for
product develepmentand condnned
growth even indifficult times.
efforts and helps to steer resource allocation and projectselection. A comprehensive product innovation strategymust include, among other elements, clearly defined ob-jectives and defined strategic areas of foeus; it musthave a widely understood role in broader businessgoal. Further, the innovation strategy implemented in
Clearly defined objectives forproduct Innovation
Role of product innovation inbusiness goals
Long-term commitment &strategy
Strategic arenas defined forfocus
Strategic buckets to allocateresources
Strategic product roadmap inplace
51 7%
I I Worst Performers
^ ^ 1 Average Business
Best Performers
64 8%69.0%
37.9%
Only 27.6% of businesses on averagedevelop a product roadmap. Bestperformers are about twice as likely touse roadmaps as poor performers,37.9% do versus 19,2%.
10% 20% 30% 40% 50% 60% 70% 80%
Percentage of Businesses With Each Strategic Element in Place
Figure I.—Best-performing businesses develop a product innovation and technology strategy, which includes elementsnoted here. Best performers are the top 20% of businesses, gauged on a number of pcifotmance metrics, includingpensent sales by new producís: ROI (m R&D spending: meeting sales, profit, and timing targets: and others (2).
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best-performing businesses is more than just a list ofthis year's development projects; it has a mtich longer-term commitment. Companies with effective productinnovation programs rely on a number of tools to im-plement them, ineluding strategic buckets for resourceallocation and strategic product roadmaps. Across theboard, lop-performing businesses build these elementsinto their product innovation strategy; poorly perform-ing businesses do not. For example, on average, only27.6% of businesses develop a product roadmap, butbest performers are about twice as likely to use road-maps as poor performers (Figure 1). There is an evengreater discrepancy in the use of strategic buckets, aresource allocation strategy that ensures availabilityof resources for critical products, with 41.4% of topperformers and only 15.4% of poor performers usingstrategic buckets.
The message for senior management is that if your busi-ness lacks a product innovation strategy that includesthese key elements, this dcfieieney is likely hurting yourbusinesses performance. The time is ripe to develop andinstall such a strategy, an effort that should be led bythe business's leadership team. Developing a productinnovation strategy requires sustained, high-level ctTort;the work can be facilitated and guided by the use of aframework. The strategy development framework wedeveloped based on observations from our study of best-performing businesses can be a helpful tool (Figure 2).This guide serves as a useful stalling point to developyour own product innovation strategy.
Bogin With Goals and Objectives
Strategy begins with the goals for the business's productinnovation clTort and a clear understanding of how theseproduct innovation goals tie into the broader business goals.Many businesses lack product innovation goals, or thegoals are not articulated and communicated well. In Corn-ing's ease, the goals were ambitious: to innovate their wayout of a business crisis and to double the rate of creationof new businesses per decade. These goals were supportedby specific sales and profit objectives for product innova-tion. Note that goals are broad and give general intentions,whereas objectives are narrow, concrete, and precise.
Like Coming's, your business's produet innovationstrategy should specify the goals and objectives of thebusiness's total product innovation effort and indicatethe role that produet innovation will play in helping thebusiness achieve its objectives (3). Your produet inno-vation strategy must answer the question: How do newprotiucts and produet innovation fit into the business'soverall plan?
The most popular objective (and metric) is percentageof the business's annual sales generated from new prod-ucts. Here a "new product" is usually defined as one that
the goals Tor thetiusiness's productinnovation effort and aoiear understandingof how thoso productinnovation goais tie
into the hroaderhusiness goais.
has been on the market three years or less and that is vis-ibly difiercnt to the customer from previous olferings,for example a product with new features, funetionality,or perfomiance characteristics. Some firms include onlyadditional sales from products launched in order to dis-count replacement and extension products.
Another key best practice is to ensure that the role ofnew products in achieving the business's overall goals iseiearly communicated to all. The whole point of havinggoals is so that everyone involved in the activity has acommon purpose, something to work towards. What weobserve here are typically very mediocre practices, withless than half of all businesses defining and commu-nicating the role of produet development in achievingtheir business goals (see Figure 1 ).
Define Strategic Thrust: Identify Arenas of Focusfor R&D Efforts
Focus is the key to an effective produet innovationstrategy. Your produet innovation strategy specifieswhere you'll attack, or perhaps more importantly,where you won't attack. Thus, the concept of strategicarenas—the markets, industry sectors, applications,product types, or technologies on which your busi-ness will focus its new product efforts—is at the heartof a new product strategy. For example. Coming'sdecision to focus on flat screens for LCD TVs was abold move at the time, yet in hindsight, it was a bril-liant maneuver, marrying the company's technological
Mav—June 201«
Define Goals forthe NPD Effort
Define:Role of NPD in BusinessStrategy & GoalsGoals for NPD
Select Strategic Arenas -Areas of Strategic Focus
Attack Strategy andEntry Strategy
Resource Commitment andStrategic Portfolio Decisions:
Deployment, Strategic Buckets andthe Strategic Product Roadmap
Tactical Portfolio Decisions
IndustryAnalysis
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Figure 2.—This framework for developing a product innovation and technology strategy begins with productinnovation goals at the top and moves through to tactical project selection decisions at the bottom.
competencies with an emerging, albeit adjacent, mar-ket opportunity.
The specification of strategic arenas—what's "in bounds"and "out of bounds" for product innovation— is funda-mental to spelling out the direction or strategic thrust ofthe businesses product development effort. It is the result ofidentifying and assessing product innovation opportunitiesat the strategic level. Without defined strategic arenas, thesearch for specific new product ideas or opportunities isunfocused. Over time, the project portfolio for new prod-ucts is likely to accumulate a lot of unrelated projects, inmany different markets, technologies, or product types.The result of such a scattershot effort is predicable: a not-so-profitable new product effort.
The first task. then, is identifying possible arenas, areasthat offer the business some new and profitable oppor-tunities. Many firms use the product-market matrix(Figure 3) as they try to define new but adjacent areasin which they can operate profitably. Each cell in thematrix represents a potential strategic arena that ofïers anumber of new product opportunities.
Next comes the task of evaluating these arenas, selectingthe battlefields. Usually two dimensions are used for thisevaluation:
The product-maHiel matrix for a telacommunlcaikin frm
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Figure 3.—The product-market maíri.\ delineatespossible strategic atcnas on which to focus new-product development or R<!iD efforts. The axesof the diagram are "products" and "markets. "Each of the arenas represented by the cells isassessed for its potential value to the company sbusiness position. Stars designate top-priorityarenas, where new product efforts will befocuscd-
Rt'search •Tecliiiolo}iy Management
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Figure 4.—The strategic map plots potentialarenas on two dimensions, business strength andarena attractiveness. This is a sample strategicmap for a process equipment manufacturer.
1. Arena attractiveness: This is an external measure thatcaptures characteristics such as size and growth of mar-kets in the arena, intensity of competition and marginsearned, and the potential for developing new products(for example, the technological maturity of the area, orwhere on the technology S-curve the arena lies).
2. Business strength: This involves assessing the busi-nesses core competencies and strengths and askingwhether these competencies could be leveraged if thebusiness chose to enter the new arena.
Usually, a set of 6-8 questions is developed for eachdimension, which senior management then uses to ratethe various arenas under consideration (Table I). Thenecessary due diligence must be undertaken on eachcandidate arena, gathering the necessary infonnationlor management to use in completing ratings. (Samplerating schemes are provided in [3]).
The result is the strategic map, with each arena plotted(Figure 4). Arenas in the upper left quadrant—the''good bets"—^are those designated as the most prom-ising. These are where the business should focus itsproduct development resources. With strategic arenasselected, idea generation becomes more directed andproductive, specific projects within each strategicarena can be funded, and the entire R&D effort gainsfocus.
Develop Attack and Entry Strategies
The issue of how to attack each strategic arena shouldalso be part of the product innovation strategy (see Fig-ure 2). For example, the strategy may be to be the indus-try innovator, the first to the market with new products,or to be a "fast follower." rapidly copying and improvingupon competitive entries. Other attack strategies mightfocus on being a low-cost provider versus a differen-
Criteria Used to Rate Strategic Arenas
The questions that might be used to assess potentialstrategic arenas address a range of issues and factors:
1. Arena Attractiveness
The market
• Size of the market in the arena
• Market growth rate in the arena
• Intensity of competition and strength of competitorsin the arena
• Margins earned by others in the arena
Technological opportunities
• Rate of change of technology in the arena
• Technological elasticity: Where on the S-curve is thistechnology (steep versus flat)?
2. Business Strength
Technology leverage
• Ability to leverage development skills in this arena(technology. IP, R&D, or design engineering)
• Degree of fit between production processes requiredto succeed in this arena and company's productionprocesses and skills
Marketing leverage• Ability to leverage sales force and/or distributionchannel system in this arena
• Ability to leverage customer relationships in thisarena
• Ability to leverage marketing communications, brandname, atid image in this arena
Competitive advantage
• Would new products be unique (differentiated from)current competitors?
• Would tiew products meet customer needs better thancompetitors?
tiator versus a niche player or on emphasizing certainstrengths, core competencies, or product attributes or ad-vantages. Attack strategies usually specify the globalityof the innovation effort, as well, defining whether inno-vation will be guided by a series of domestic or regionalinitiatives, take a more global approach, or be "glo-cal" in nature (global product concepts and platforms,locally tailored products). An understanding of the busi-ness's core competencies (unique strengths that can beleveraged to advantage in the marketplace) coupled withknowledge of industry success drivers (what it takes tosucceed in the industry, sector, or arena) are key factorsin the selection of the appropriate attack strategy.
Mav—June 2010
Additionally, entry strategies should be defined for newarenas. The strategy might be to "go it alone" via inter-nal product development or to seek alliances throughlicensing, partnering, joint venturing, and open innova-tion as a way to enhance product development capabil-ities in new arenas.
Make Deployment Decisions: SpendingCommitments, Priorities, and Strategic Buckets
Strategy becomes real when you start spending money.Any good product innovation strategy must deal withhow much to spend on product innovation, and it shouldindicate the relative emphasis, or strategic priorities,accorded each arena of strategic focus (see Figure 2).Thus, an important facet of a product innovation strategyis resource commitment and allocation. Earmarkingresources {funds or person-days targeted at differentstrategic arenas, project types, or major developmentinitiatives) helps to ensure the strategic alignment ofproduct development with business goals (4).
Top-performing businesses are much more likely thanpoor performers to have an effective portfolio man-
agement system that helps the leadership team allocateresources to the right areas and to the right strategicprojects. Effective portfolio management means that de-velopment projects are aligned with business strategy,and there is the right balance of projects in the ponfolio:strong portfolios contain high-value projects with fewlow-value, trivial projects. In best-performing busi-nesses, projects are correctly prioritized, and there is theright balance between available resources and numbersof projects.
Many best-performing companies use strategic bucketsto help in resource deployment decisions. The strategic-bucket method is based on the concept that translatingstrategy from theory to reality is about making concretedecisions about where resources should be spent. Stra-tegic buckets help management define where the devel-opment dollars should go, by project type, by market,by geography, or by product area (5). Each project typeor market or geographic area is represented by a bucket.Beginning with the business's strategy, senior manage-ment makes strategic choices about how many resourcesgo to each bucket, for example, in a scheme allocatingresources by project type, to "new products" versus
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Figure 5.—The .strategic-buckets method splits resources into different buckets to ensure that resource allocations mirrorstrategic priorities. Development projects are then categorized by buckets and ranked until resources are exhausted. Inthis way, resources can be allocated to achieve the right balance of projects. This sample bucket map illustrates a four-bucket allocation with each bucket using different cwliiatioii criteria to reflect the différent types of risk.
Research • Technology Managcincnt
Rstaint» Aibcanon
Figure 6.—Three different views of a portfolioshow a breakdown by project types in terms ofnumbers of projects (left), bv resource allocation(middle), and by expected sales results (right,measured by first-year incremental or additionalsales).
"improvements and modifications" versus "sales forcerequests" or "cost reductions" (Figure 5).
With resource allocation firmly established and drivenby strategy, projects arc categorized by bucket. Thenprojects within each bucket are ranked and funded inrank order until that bucket runs out of resources. Thisestablishes project priorities. In this system, projectsin one bucket, such as "new products." do not com-pete against those in another bucket, such as "improve-ments and modifications." If they did, in the short term,simple and inexpensive projects would always win outin the competition for resources, as they do in manybusinesses. Instead, strategic buckets build firewallsbetween categories; earmarking specific amounts to"new products" or to "platlbnii developments" ensuresa much more balanced portfolio. Followed rigorouslyand over the longer term, the strategic-buckets methodultimately results in an optimal portfolio of projects, onethat mirrors the strategic priorities of the business.
A good way to begin working toward strategic bucketsis to gather data to reveal the current portfolio situation,
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Figure 7.—The strategic product roadmap lays out theßrm 's major development initiatives over the next 5-8 vears.including new platforms. This is an evergreen plan, updated annually, so that only the first year is implementedexactly as portrayed.
Mav—June 2010
including the current split in projects, resources, andexpected sales by project type (Figure 6). From suehcharts, management can then begin the debate on theoptimal portfolio and make strategic bucket choices.
Define the Strategic Product Roadmap
A strategic roadmap is an effective way to plot a series ofmajor initiatives in the attack plan. A roadmap is simplya management group's view of how to get where theywant to go or aehieve a desired objective (6). Althoughgrowing in popularity, especially in high-technologybusinesses, the use of roadmaps is far from common,with only 27.6% of businesses in our study devel-oping product roadmaps (see Figure 1). About twice asmany best performers use product roadmaps as worstperformers.
When employing roadmaps, senior management mapsout the major new product initiatives required in orderto succeed in each strategic arena, and their timing (7).The roadmap lays out major development initiativesover time, often as far out as five to eight years (Fig-ure 7). It may also specify the platform developmentsrequired for new products. Placemarks are establishedfor development initiatives and resources tentativelyearmarked for them. In this way, senior management isable to translate its view of the future and its strategyinto resource commitments and concrete actions. Ad-ditionally, the development or acquisition of new tech-nologies can be planned in the form of a technologyroadmap {8).
Conclusion: No Pain, No Gain
Coming's story and our own research offer concrete evi-dence of the importance of a product innovation strategyand the strong positive impaet such a strategy has onperfonnanee (see Figure 1). Through the steps laid outin this article, we've mapped a pathway for developingsuch a strategy for your business. The pathway beginswith the business's goals and objectives and culminateswith resouree deployment decisions using strategicbuckets and strategic roadmaps to put the strategy intopractice.
If you're thinking that your business lacks such aclearly articulated innovation strategy, and that maybenow is the time to lay the groundwork for developingsuch a strategy, you're probably right on both counts.But a word of caution; this does take considerable timeand effort. Senior management (and support staff) mustbe prepared to make the time available and commit tothe hard work involved. But the reward is worth theeffort, as evidenced by the results achieved by thosebusinesses that have developed a produet innovationstrategy. ®
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References
1. Kirk, B. 2009. Creating an Environment for Effective Innovation.Presentation given at the Stage-Gale Innovation Summit 2009,Clearwater Beach, FL, February.2. Cooper, R. G.. Edgett, S. J.. and Kleinschmidt, E. J. 2004,Benchmarking Best NPD Practices—2: Strategy. Resources andPortfolio Management Practices. Rescarch-Technolo}^- Munagement47(3), pp. 50-60.3. Parts of the remainder of this article are taken from R. G. Cooperand S. J. Edgett, Product ¡nnovaliun and Technology Strategy(Hamilton, ON: Product Development Institute. 2009).4. For an outline of portfolio management methods, includingstrategic buckets, see R.G. Cooper, S. J. Edgett, and E. J. Kleinschmidt,Portfolio Management for New Products. 2 ed. (Reatling. MA:Perseus Books. 2002) and R. G. Cooper, S. J. Edgetl. and E. J.Kleinschmidt, Optimizing the Stage-Gate^ Process: What BestPractice Companies Are Doing^Part II, Research-Technolog}'Management 45(6). pp. 43^9 .5. This section is taken from R. G. Cooper. Your NPD Portfolio MayBe Harmful to Your Business's Health, PDMA Visions 29(2), pp. 22-26;for a more in-depth discussion on strategic buckets see PortfolioManagement for New Products, pp. 123-136.6. For more on roadmaps, see R. E. Albright and T. A. Kappel,Roadmapping in the Corporation. Research- Technology^ Management46(2). pp. 31-40; A. McMillan. Roadmapping—Agent of Change,Research-Technology Management 46(2), pp. 40-47; and M. H. Myerand A. P Lehnerd. The Power of Product Platforms (New York: FreePress, 1997).7. The term "product roadmap" has cotne to have many meanings.Here we mean a strategic roadmap. which lays out the majorinitiatives and platforms the business will undertake well into thefuture, as opposed to a tactical roadmap, which lists eaeb and everyproduct, extension, modification and version.8. The term "teehnology roadmap'" also has several differentmeanings. Here we use ihe tenn to denote a plan for the business'sexpected technology developments or acquisitions; by contrast, iheterm "technology roadmap"" is sometimes used to describe an industrytechnological forecast laying out what new technologies are anti-cipated in an industry.
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