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Profitability from New Product Profitability from New Product Development: why or why not?Development: why or why not?
Parry M. NorlingParry M. NorlingVisiting FellowVisiting Fellow
Chemical Heritage Chemical Heritage FoundationFoundation
It’s a great little product, but we’re still working onpackaging and handling
The MessagesThe Messages New Product Development is risky New Product Development is risky
business; often avoided by well business; often avoided by well established firmsestablished firms
A New Product Development Strategy A New Product Development Strategy can improve the odds of successcan improve the odds of success
New Product Development can be the New Product Development can be the first step in a series of profitable first step in a series of profitable innovative efforts for a firminnovative efforts for a firm
Tetra Pak took the risks, has taken the Tetra Pak took the risks, has taken the early steps in a series of innovative early steps in a series of innovative efforts, and appears to have improved efforts, and appears to have improved the odds for success in new product the odds for success in new product development thanks to the inventors of development thanks to the inventors of Tetra Recart.Tetra Recart.
Barriers to InnovationBarriers to Innovation
Machiavelli: Machiavelli: The Prince, The Prince, Chapter VIChapter VI
15151515
… there is nothing more difficult…, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things. Because the innovator has for enemies all those who have done well under the old conditions, and lukewarm defenders in those who may do well under the new. This coolness arises partly from fear of opponents who have the laws on their side, and partly from the incredulity of men, who do not readily believe in new things until they have had a long experience of them.
Research has told us that large and resource rich companies over time reduce their capacity for generating innovations, especially new product development.
New Product Development New Product Development is risky businessis risky business
1638: the Kalmar Nyckel arrives in New Sweden – now Wilmington Delaware
New Product Development New Product Development is risky businessis risky business
Anders Olsson and Lisa Olsdotter emigrated from Nora August 25, 1854 to the United States and Bishop Hill, Illinois
Success Rate Entirely New ProductsSuccess Rate Entirely New Products
3000 rawideas.03%
300 submittedideas.3%
125 beginningprojects
.8%
9 largedevelopments
11%
4 majordevelopments
25%
1.7 launches60%
1 commercialsuccess
Stevens and Burley, RTM May-June 1997
The chances for failure are greatestThe chances for failure are greatestwhen you know the least about the technology being when you know the least about the technology being
developed and/or the target marketdeveloped and/or the target market
The “Familiarity Matrix” allows mapping ofThe “Familiarity Matrix” allows mapping of
R&D projects based on the extent of knowledge R&D projects based on the extent of knowledge about technologies and marketsabout technologies and markets
Edward B. Roberts and Charles A. Berry, “Entering New Businesses: Selecting Strategies for Success” Sloan Management Review, Spring 1985 pp 3-17
Familiarity Matrix: A Guide Familiarity Matrix: A Guide Place Your Project in One of the Place Your Project in One of the
Nine BoxesNine Boxes
Decreasing knowledge of the technology
De
cre
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no
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ark
et
Increasing risk of fa
ilure
Familiar New , familiar New , unfamiliarFam
iliar
N
ew, f
amili
ar N
ew ,
un
fam
iliar
Familiarity Matrix: A Guide Familiarity Matrix: A Guide Place Your Project in One of the Place Your Project in One of the
Nine BoxesNine Boxes
Decreasing knowledge of the technologyDe
cre
asin
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no
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f th
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ark
et
Market Penetration
Market Extension
Market Expansion
Product Extension
BusinessExtension
BusinessExpansion
New BusinessModel
BusinessExpansion
ProductExpansion
Familiarity Matrix: A Guide Familiarity Matrix: A Guide Place Your Project in One of the Nine Place Your Project in One of the Nine
BoxesBoxes
Market Penetration
Market Extension
Market Expansion
Product Extension
BusinessExtension
BusinessExpansion
New BusinessModel
BusinessExpansion
ProductExpansion
Probability of Success
New Product with unrelated technology in existing market: 50%
Familiarity Matrix: A Guide Familiarity Matrix: A Guide Place Your Project in One of the Nine Place Your Project in One of the Nine
BoxesBoxes
Market Penetration
Market Extension
Market Expansion
Product Extension
BusinessExtension
BusinessExpansion
New BusinessModel
BusinessExpansion
ProductExpansion
Probability of Success
Existing product in a new market: 15%
Familiarity Matrix: A Guide Familiarity Matrix: A Guide Place Your Project in One of the Nine Place Your Project in One of the Nine
BoxesBoxes
Market Penetration
Market Extension
Market Expansion
Product Extension
BusinessExtension
BusinessExpansion
New BusinessModel
BusinessExpansion
ProductExpansion
Probability of Success
Improved product in existing market: 75%
“Suicide Square”.03%
Familiarity Matrix: A Guide Familiarity Matrix: A Guide Place Your Project in One of the Place Your Project in One of the
Nine BoxesNine Boxes
Market Penetration
Market Extension
Market Expansion
Product Extension
BusinessExtension
BusinessExpansion
New BusinessModel
BusinessExpansion
ProductExpansion
Probability of Success
New Product in a New Market: 5%
Time
Pro
fita
bili
ty
DisruptiveInnovation
ApplicationInnovation
Product Innovation
ProcessInnovation
MarketingInnovation Business
ModelInnovation Structural
Innovation
Different types of Innovation give greater profitability at different points in the life cycle of a product family
Geoffrey A. Moore “Darwin and the Demon: Innovating Within Established Enterprises” HBR July-August 2004 pp.87-92
New product invention, tailoring, and development
Different types of InnovationDifferent types of Innovation
Disruptive Innovation – an Disruptive Innovation – an invention that can displace invention that can displace the present market leader the present market leader or create an entirely new or create an entirely new marketmarket
DuPont Diamond Award Winners 2002Tetra Pak, Inc., Sweden / USANestlé Purina PetCare, ItalyFirst Retortable Carton System for Nestlé Dog Food.This represents the first retortable carton packaging system on the market.
Different types of InnovationDifferent types of Innovation
Application Innovation: Takes Application Innovation: Takes existing technologies into new existing technologies into new markets to serve new purposesmarkets to serve new purposes
Different types of InnovationDifferent types of Innovation
Product Innovation: Takes an Product Innovation: Takes an established product to the next level established product to the next level – reduced cost, improved quality, – reduced cost, improved quality, greater functionality greater functionality
Different types of InnovationDifferent types of Innovation
Process Innovation: Makes processes Process Innovation: Makes processes for established products in for established products in established markets more effective established markets more effective and more efficientand more efficient
Different types of InnovationDifferent types of Innovation
Experiential Innovation: Makes some Experiential Innovation: Makes some superficial changes in the product that superficial changes in the product that improve the customer’s experience with improve the customer’s experience with the product – adding delight, greater the product – adding delight, greater satisfaction, or reassurancesatisfaction, or reassurance
Different types of InnovationDifferent types of Innovation
Marketing Innovation: Improves the Marketing Innovation: Improves the interaction with customersinteraction with customers
Different types of InnovationDifferent types of Innovation
Business Model Innovation: Reframes Business Model Innovation: Reframes the role of the company in the value the role of the company in the value chain or the way in which the chain or the way in which the company meets customer needscompany meets customer needs
Different types of InnovationDifferent types of Innovation
Structural Innovation: Capitalizes on Structural Innovation: Capitalizes on disruption and changes in the disruption and changes in the industry to restructure industry industry to restructure industry relationshipsrelationships
It all starts with New It all starts with New Product DevelopmentProduct Development
ButButNew types of New types of
innovation need to be innovation need to be introduced with new introduced with new innovation skills to innovation skills to sustain profitabilitysustain profitability
A company cannot rest on its laurels; many product class winners have fallen victim to their successUS Steel (steel)
ICI (chemicals)
Kodak (photography)
Goodyear (tires)
Polaroid (instant photography)
Zenith (TVs)
IBM (PCs)
Smith-Corona (typewriters)
Research has told us that large and resource rich companies over time reduce their capacity for generating innovations, especially new product development.
Companies with resilient cultures grew in value between 1926 and 1999 16 times more than the market average and six times more than comparison companies of similar size in similar industries.
Resilient organizations:
1. Deliver continuous innovation – new products
2. Inspire trust
The Laggards:The Laggards:
Took few risksTook few risks Relied on mature productsRelied on mature products Continued to do things in the ways Continued to do things in the ways
that brought success in the past (core that brought success in the past (core rigidities)rigidities)
Maintained an inward focusMaintained an inward focus Felt safe near termFelt safe near term Eventually lost out Eventually lost out
A Lesson for the Paper Industry?A Lesson for the Paper Industry?
Tetra Pak has shown that opportunities can be sought beyond a reliance on mature products
The MessagesThe Messages
New Product Development is risky.New Product Development is risky.
Odds of success can be understood & improvedOdds of success can be understood & improved
New Product Development is only the first step New Product Development is only the first step toward sustained profitabilitytoward sustained profitability
Tetra Pak took risks, has taken the early steps in Tetra Pak took risks, has taken the early steps in innovative efforts and isinnovative efforts and is
A demonstration of a resilient company in the A demonstration of a resilient company in the paper industrypaper industry
Additional slides for Additional slides for discussiondiscussion
1802 1830 1850 1900 1925 1945 1990 2000 2050 2090
Birth
Growth
Maturity
Birth
Growth
Maturity
Birth
Growth
Maturity
ExplosivesExplosives
Chemicals,Chemicals,EnergyEnergy
Chemistry, Chemistry, Biology. . .Biology. . .Knowledge - Knowledge - Intensive Intensive SolutionsSolutions
Familiarity Matrix: Optimum Strategies forFamiliarity Matrix: Optimum Strategies forTechnological Innovation: Finding others Technological Innovation: Finding others who know more about the markets or the who know more about the markets or the
technologytechnology
Decreasing knowledge of the technologyDe
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Internal Development, Acquisition, or Joint Venture
Joint Venture
Internal Development
Venture Capital or Educational Acquisition
Internal Venture or Acquisition or License
Internal project, or Acquisition, or License
Venture capital, or Educational Acquisition, or University Relationship
Venture Capital or Educational Acquisition
Joint Venture, Strategic Alliance or University Relationship
The Inquisition
It’s good to be inquisitive –Bad to hold an inquisition
Innovation : Not a Innovation : Not a
Linear ProcessLinear Process
Market knowledge
Technologydevelopments Changes in
the externalenvironment
Knowledge of customer
needs
Company strategies
Scientific advances
IDEAS
OPPORTUNITYIDENTIFICATION
CONCEPT/TECHNOLOGY
DEVELOPMENT
SCREENING ANDBUSINESS ANALYSIS DEVELOPMENT
ANDCOMMERCIALIZATION
MARKETPENETRATION
AND DEVELOPMENT
So what makes creative people creative? If we could look into the minds of creative geniuses, what would we see?
Joy of discovery
Questioning
Desire to interrelate
Tolerance of ambiguity
CuriositySense of challenge
Playfulness
Inquisitiveness
Willingness to take risks
Positive discontent
Desire to see things differently
Desire to learn Willingness toexperiment
Wonder
Some thoughts on Creativity and Some thoughts on Creativity and InnovationInnovation
““It is the duty of private men to It is the duty of private men to obey, and not make innovation obey, and not make innovation of states after their own will” of states after their own will” 15971597
Some thoughts on Creativity and Some thoughts on Creativity and InnovationInnovation
““It is a revolt of innovation; and It is a revolt of innovation; and thereby the very elements of society thereby the very elements of society have been confounded and have been confounded and dissipated” 1844dissipated” 1844
To them antiquity is synonymous To them antiquity is synonymous with wisdom and every with wisdom and every improvement is a dangerous improvement is a dangerous innovation” 1862innovation” 1862