product innovation success in the australian defence industry – an

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Product innovation success in the Australian defence industry –

an exploratory study By Gregor Ferguson

Ph.D Candidate - Entrepreneurship, Commercialisation and Innovation Centre (ECIC)

University of Adelaide

© Gregor Ferguson January 2011

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The Hypotheses

The basic propositions which my research seeks to address are these:

1. There are certain specific factors which enable or inhibit innovation success in Australia’s defence industry.

2. These factors, and their relationships, can be identified and measured and can be used to create a model, or a more general set of pre-conditions, for successful defence industry innovation.


Definition

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INNOVATION – defined in the OECD Oslo Manual thus:

“146. An innovation is the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organizational method in business practices, workplace organisation or external relations. 149. Innovation activities are all scientific, technological, organisational, financial and commercial steps which actually, or are intended to, lead to the implementation of innovations… Innovation activities also include R&D that is not directly related to the development of a specific innovation. 150. A common feature of an innovation is that it must have been implemented. A new or improved product is implemented when it is introduced on the market. New processes, marketing methods or organisational methods are implemented when they are brought into actual use in the firm’s operations.” (OECD 2005)


Literature Review 1

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There is a considerable body of literature exploring commercialisation and product innovation models and success factors.

• A number of commercialisation models have been developed (Goldsmith, Rothwell & Zegfeld, AIC, etc)

• These have no predictive powers – they merely describe the steps in a process and the relationships to each other of the various elements in the process

• There is a considerable body of literature identifying product innovation success factors (Kleinschmidt, Cooper, Rothwell, Montoya-Weiss & Calantone, Henard & Szymanski, etc)

• The literature provides pointers towards a methodology for developing a predictive model, but not to a model as such.


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Examples of Generic

Commercialisation Models


AIC Commercialisation Progression Model

Canadian Export Panel on Commercialisation – Functional

Model

Rothwell and Zegfeld Model

Literature Review 2

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The models and much of the literature address the business of venturing by researchers in academia

This isn’t typical of defence!

• Defence Industry Innovation is generally carried out by established firms

• Much of it is incremental innovation – improvements and enhancements to existing products and systems


Literature Review 3

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Some generic innovation mechanisms resonate with the defence sector.

• Rothwell and others - innovation success (and failure) factors in markets for industrial equipment and capital goods. Eg Project SAPPHO

• Von Hippel - lead users and user-initiated innovation. This resonates very strongly with the ADF capability development process


Literature Review 4

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Significant findings: • The literature on innovation success for industrial and scientific products describes markets and customer-vendor relationships similar to those observed in the defence sector

• There is an important body of literature examining the issue of user-initiated innovation - the so-called Customer-Active Paradigm (CAP). This resonates strongly with observed behaviour in the defence sector

• A strong base exists for further research into the factors associated with innovation success in the defence industry.


Literature Review 5

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Generic success factors in markets for industrial equipment:

1. Successful innovators were seen to have a much better understanding of user needs

2. Successful innovators pay more attention to marketing and publicity 3. Successful innovators perform their development work more efficiently

than failures, but not necessarily more quickly 4. Successful innovators make more use of outside technology and

scientific advice, not necessarily in general but in the specific area concerned

5. The responsible individuals (carefully defined by Rothwell, Freeman et al) in the successful attempts are usually more senior and have greater authority than their counterparts who fail.

(From Rothwell – Project SAPPHO - Scientific Activity Predictor from Patterns with Heuristic Origins )


The Knowledge Gap

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Put simply - what are the factors that have the greatest impact on innovation success in the defence sector?

Are they the same factors that affect outcomes in the non-defence sector?

The literature review identifies the limits of current knowledge on defence industry innovation success factors.


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Those factors which are believed to affect Australian defence industry R&D investment and innovation outcomes:

• market factors (size, access, effect of factors such as competition, regulation, government policy and defence acquisition processes) • sources of and access to defence-related IP • the characteristics, orientations and internal processes of the firms

The Knowledge Gap - 2


The Big Picture – National R&D Statistics

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Business and Government Expenditure on R&D (BERD and GOVERD) as a percentage of Australia’s Gross Expenditure on R&D (GERD),

2006-07:

AUSTRALIAN GERD = $21.7B (2% of GDP) AUSTRALIAN GOVERD = $3.1B (14% of GERD) AUSTRALIAN BERD = $12.64B (58% of GERD)

IN THE DEFENCE SECTOR: DEFENCE BUDGET = $22.2B (2% of GDP) TOTAL DEFENCE R&D = $925 million (4.2% of Defence budget) DEFENCE GOVERD = $507 million (55% of total Defence R&D) DEFENCE BERD = $377 million (41% of total Defence R&D)

BERD to GOVERD ratios: Non-Defence: BERD:GOVERD 4:1 Defence: BERD:GOVERD 0.75:1

Defence accounts for 2% of GDP, but 4.25% of GERD

Sources: ABS, Commonwealth PBS, ASPI © Gregor Ferguson January 2011

Statistics - 2

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Relating the ABS defence industry R&D data to the annual ADM Top 40 listing for 2007:

Combined revenue of Top 40 defence companies and Top 20 SMEs - $7.1 billion

$377 million is approximately 5.3 per cent of this, suggesting the Australian defence industry as a whole spends nearly five per cent of its turnover on R&D of some kind.

However, the Intellectual Property Research Institute of Australia (IPRIA) figures for 2005 suggest that 6 major Australian defence companies – ADI, BAE Systems, Boeing Australia, Saab, Tenix and Thales Underwater Systems – spent on average less than 1 per cent of their turnover on R&D


DMTC FELLOWSHIP

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Thanks to the Defence Materials technology Centre (DMTC) I had an opportunity to tackle some of these issues.

A three-month Fellowship (1 September to 30 November 2009) provided an opportunity to focus on two specific areas:

• defence industry R&D investment • a methodology for identifying and measuring defence industry innovation success factors

I was also able to build on previous work including a more comprehensive review of the literature on commercialisation and innovation success factors


R&D Survey

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Survey designed to do two things: • provide a measure of the R&D investment by Australian defence companies • provide a comparison with the results of a similar survey conducted five years ago by Mr Bob Wylie of ACIL Tasman on behalf of AIG Defence Council, AIDN, ABL, the DMO and dept of Industry.

Method used was an anonymous online survey using the SurveyMonkey online tool. Survey included four questions from Wylie’s 2004 Survey


R&D Survey - 2

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10 Survey Questions: • R&D Investment • R&D Purpose • Business performance

“Business performance” is a surrogate for and measure of R&D results.

Respondents solicited through Australian Defence Magazine and defence industry associations: AIDN, AIG, ABL, DTC, etc.

Only 19 responses – very disappointing; survey results illustrative rather than definitive.


R&D Survey - 1

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My R&D survey asked industry what it spends on R&D, and why, and provided the following results:

42.1% of defence companies spend more than 5% 15.8% spend between 2.1 and 5% 10.5% spend between 1.1 and 2% 15.8% spend between 0.5 and 1 per cent 15.8% spend less than 0.5 per cent

63.2% of companies did R&D in capability areas defined by the DMO as Priority Industry Capabilities (PIC)

52.6% of companies rated the importance of introducing new or substantially improved products as High/Very High, compared with 59% in 2004

58% rated the importance of new or substantially changed production processes as High/Very High, compared with just 44.5% in 2004


R&D Survey - 2

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Importance of different sources of IP (HIGH/VERY HIGH):

SOURCE 2009 2004 In-House R&D 72.2% 59% IP from parent company 44.4% 43.5% Purchase/license of overseas IP 33.3% 19.5% Collaborative research 33.3% 27% Purchase/license of Australian IP 16.7% 21%

Three other sources of IP were identified by respondents: Rapid Prototyping, Development & Evaluation (RPDE) 5% Customer-provided IP 5% ‘Mergers with like-minded organisations’ 5%


R&D Survey - 3

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Proportion of business’s total defence R&D devoted to the following areas of research: 2009 2004

ICT 72.2% 58% Engineering & Technology 100% 69% Physical, Chemical or Earth sciences* 66.7% Other (“Manufacturing”)* 27.8%

Purpose of R&D or Innovation investment:* Purpose 2009 In-house, new proprietary 94.4% Adapt others’ IP 83.3% More profitable production 83.3% AS or O/S R&D contracts 66.7% Other reasons 27.8% (“defence-related but not front-line”)

* NB – ACIL Tasman didn’t publish these values from Wylie’s 2004 survey © Gregor Ferguson January 2011

Dependent Variables

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This research aims to measure and compare the effect on certain Dependent Variables of a range of Independent Variables in order to identify factors affecting product innovation success. The Dependent Variables are basically measures of that success:

• Technical Success (did it work?) • Functional success (did it meet customer needs?) • Competitiveness (did it offer value for money?) • Timeliness (was it on schedule?) • Sales (did it sell?) • Cost (were development cost forecast accurately?) • Disruptiveness (was it a disruptive innovation or an incremental innovation?)


Independent Variables

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The research measures the effect of the following Independent Variables on the Dependent Variables listed in the previous slide:

Marketing Proficiency (Market research, understanding user needs, price and risk sensitivity, customer testing, promotion etc) R&D Proficiency (level of R&D investment, R&D skills, R&D management) Technical Proficiency (design, development, prototyping, testing, manufacturing) Business proficiency (management, financial and business analysis, project management) External expertise (willingness to source essential knowledge and expertise from partners and other sources; terms of access to that expertise) Innovation Impetus (Customer need for increased capability, lower purchase and operating costs, manufacturer’s need for reduced cost, increased profit, market leadership) Communications (internal and external communications/collaborative arrangements with DSTO, stakeholders, customer and partners) Market size and growth (Size of market, multiple customers, market access) Market competitiveness (number of competitors) Time to market (innovator’s proficiency, urgency of customer need, competitive pressure, cost) Customer Characteristics (Customer’s willingness to innovate, domain knowledge, technical knowledge, risk tolerance, key appointments) Customer processes (risk management, acquisition, project management) Customer environment (strength of customer need (including threat environment), evolving customer operating environment (including threat and technology evolution), Market Regulation (Security, export controls, ITARs)


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• Case studies - Matched Pairs of successful and unsuccessful Australian defence innovation projects - structured interviews with individuals from the companies involved.

• Projects matched according to complexity, scale, technical domain; also characteristics of innovator and innovation impetus: SME/Prime, CTD, Rapid Acquisition Project (RAP), ADF or Export customer, etc

• The intent is to focus on the paired projects, and then to validate the findings by studying other comparable projects

METHODOLOGY


Case Studies

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Criteria for inclusion: • Must be developed in Australia • Must have been offered to, or entered service with, a paying customer • Must have been designed originally for a defence application

Obvious candidates would include successful projects like Nulka and Bushmaster. But the case studies also included many smaller or lower-value products from SMEs and primes alike.

Several major projects were deliberately not included, eg: Jindalee Operational Radar Network (JORN) and Collins-class submarine. Neither of these could be matched with a project of equivalent value, complexity and technical domain. Furthermore, JORN and Collins were projects of national significance, shaped as much by unique political and strategic considerations as by the factors determining success or failure in the projects examined in this research.


Case Studies - 2

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CRITERIA FOR SUCCESS: • Must have entered service • Must have been judged an operational success • Must have been judged a commercial success

CRITERIA FOR FAILURE: • Must have been judged an operational failure OR… • Must have reached production stage and failed to secure orders • Must have been terminated during development


Case Study Results

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Generic success factors apply in the defence sector also – in particular:

• Innovator characteristics and behaviours are important • Defence companies need to be proficient both technically and in a marketing sense • Defence companies need to be well managed and their innovation projects must be properly led

However…

There are also critical defence-specific factors affecting product innovation outcomes

Case Study Results - 2

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Defence-specific success factors (in no particular order):

1. Niche opportunity or niche market – especially for SMEs 2. Customer’s professional and technical knowledge and experience 3. Clear expression of user needs 4. Stable customer requirement 5. Stable and efficient acquisition and decision-making processes 6. Customer familiarity with capability and technology 7. Customer willingness to innovate 8. Defence ‘champion’ for the project or capability in question 9. High operational tempo/urgent user need 10. Need for significant leap in operational capability 11. Close link with high level strategic guidance 12. Quality of customer project team 13. Business case satisfied by domestic market alone 14. Relationship with DSTO


Case Study results - 3

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Generic success factors in descending order of importance (focus on innovator characteristics and behaviours):

• Marketing proficiency • R&D proficiency • Understanding user needs • Communications proficiency • Management strength • Familiarity – technical and market • Overall understanding of determinants of success • Competitive pressure • Organic structure, rather than mechanistic • Risk

Source: Project SAPPHO


Case Study Results - 4

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Some general observations:

• Makes no difference to success or failure whether company is Australian-owned

• All successful innovations studied entered production for both primary and other customers

• Majority of innovations studied incorporated little or no IP from DSTO or Defence sources • Most IP in successful innovations was developed in-house • Successful defence innovation requires a partnership approach between the customer and contractor • One of the most important success factors is a professionally and technically proficient customer


The Future


The next step is to develop a model for defence industry product innovation success in Australia. The following slide identifies many of the factors that will shape the model, though without establishing causal relationships and dependencies in any detail.

This needs considerably more work, but it does bring together for the first time the various factors identified in the literature search and case studies which affect product innovation outcomes.

Elements of a Defence Innovation Model Customer need

High operational tempo Customer technical mastery

Customer professional mastery Acquisition process determined by user need

Compliance with high-level guidance Customer risk awareness and risk tolerance

Efficient, stable Customer processes Customer familiarity with capability &

technology Growing market Potential for export sales

Little or no competition

Seek out opportunities Understand user needs

Understand how market works Cross-functional project team

Increase R&D to satisfy project needs Senior project leader

Pro-active market shaping Relationship building Market Intelligence Identify competitors

Impetus to innovate Methodical approach to innovation

and R&D investment Existing product line/technology base

Own IP relevant to market opportunity

Relations with DSTO In-house software & hardware

capabilities Supportive, engaged CEO Business Analysis Skills

Organic structure

Market Conditions

Innovator Characteristics

Innovator Actions


Highlighted Text denotes defence-specific factors identified in Case Studies

product innovation success in the australian defence industry – an

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