2 & 3: Innovation and Innovation Management: An Introduction

Question 1

What is Innovation?

Answer 1

The Innovation Process:
NPD: New product development.
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Selected Sources of Innovation Ideas:
* New knowledge/Technologies
* Suppliers
* R&D departments
* Customers (Problem: „The tyranny of served markets“)
* Empathetic design
* Open market for ideas, e.g., Licensing, Joint Ventures, strategic alliances
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Selected Criteria for the Evaluation of Innovation Ideas:
* Technical competencies
* Business competencies
* Strategic fit

Question 2

Generic strategies - Porter

Answer 2

• Cost leadership: Cost structures are better than those of competition at a comparable level of value to the customers (continuous Improvement; learning curve; efficient supply chains; variant reduction and design of a product family)
• Differentiation: differentiate yourself from the competition – Apple  design and “cool” products
  – Porsche  sports cars
• Focus strategy: Concentration on specifically defined market segments – product groups, customer groups or regions. Within these target segments, the company focuses on cost leadership or differentiation.

Question 3

Idea Funnel

Answer 3

The idea funnel shows how the number of potential ideas is decreasing; only ideas with prospects of success in commercialization will remain in the end.
But which innovative ideas should stay in the funnel and which should be discarded? Solution: Stage Gate Process!

Question 4

Stage-Gate Process

Answer 4

Stage: Phases of the development process, e.g., generation of the first idea, then elaboration of the technical specifications, prototype development, etc. Commercialization is the final phase.
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Gate: Checkpoints, where it is decided whether a project (1) will not be pursued further; (2) will be returned for rework; (3) or goes to the next phase. Gates are used to evaluate strategic fit and to check whether the product can meet the technical and financial requirements. Ideas with no perspective of success should be eliminated as early as possible from the process.

Question 5

Quantitative Evaluation of Innovation Ideas

Answer 5

• Net present value (NPV) method
• Discovery-Driven Planning method

Question 6

Net Present Value (NPV)

Answer 6

• NPV = Present value of net cash flows. Each cash inflow/outflow is discounted back to its Present Value (PV) and then they are summed.
• The net present value is used to evaluate the profitability of investment projects.
  .
  NPV= formula
  .
  t - the time of the cash flow
  N - the total time of the project
  r - the discount rate (the rate of return that could be earned on an investment in the financial markets with similar risk.)
  Ct - the net cash flow (the amount of cash) at time t
• NPV>0, do the project!
• NPV<0, do not do the project!

Question 7

Advantages and Weaknesses of DCF-Methods

Answer 7

Advantages
* Concrete financial estimates
* Explicit consideration of timing of investment and time value of money
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Weaknesses
* Only as accurate as original estimates of cash flows.
* Problems to capture strategic importance of project, since technology development plays a crucial role in building and leveraging firm capabilities and creating options for the future
* For example, Intel’s investment in DRAM technology must have been considered a total loss by NPV methods. However, it laid the foundation for Intel’s ability to develop microprocessors which proved enormously profitable

Question 8

Reflection Question

Answer 8

What kind of innovations may be favored through the implementation of the NPV method?:

Question 9

Innovation process is a problem-solving process: Idea gen, prioritise ideas, implement good ideas

Answer 9

Radical and Incremental Innovation
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DCF-Trap:

Question 10

DCF Trap

Answer 10

• According to Christensen et al. (2008), this method can lead to decision makers underestimating the benefits of a radical innovation.
• It is easier to estimate the in- and outflows of projects that deal with Incremental Innovations (II) than those that focus on Radical Innovations (RI).
• II get the green light more often, and RI don’t.
• It is also often assumed that sales from existing products are continuously increasing, even if one does not invest: DCF-Trap. A new project generates additional money, and if nothing is done, the sales do not deteriorate !!! (That is a wrong assumption).

Question 11

Discovery-Driven Planning

Answer 11

• Problems of the net present value method: “Little is known & that much is assumed”
• NPV method is more suitable for known products and services where experience is available.
• Dicovery-Driven Planning begins with the output; i.e., with the minimum acceptable profits (e.g., 1 million euros). Based on profitability, the sales are calculated that enable the corresponding net profit. It also considers all activities to manufacture, sell and deliver the product. The focus is now on the assumptions behind the profits “Would the customers pay 50 euros for the product? Can production costs of 20 euros be realized? “

Question 12

The S-Curve

Answer 12

After T2, the established technology does not improve as much as the new technology despite investments.

Question 13

Adoption and Diffusion of Innovation

Answer 13

Technology adoption Lifestyle.
Crossing the Chasm, Geoffrey A Moore
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Innovators, early adopters (the chasm), Early majority, late majority, laggards

Question 14

II. Innovation and Innovation Management: An Introduction: 2. innovation concepts

Answer 14

II. Innovation and Innovation Management: An Introduction
1. Basics of Innovation
2. Innovation concepts

Question 15

Many Types of Innovation

Answer 15

Product, service, marketing, supply chain, biz models, technology

Question 16

Types of Product Innovation

Answer 16

x axis: Market : old, new
y axis: Technology: old, new
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Incremental (old,old)
Market (new, old)
Radical: (new, new)
Tech inno: (old, new)

Question 17

Types of Inno: 4P-Model of Innovation

Answer 17

4P-Model of Innovation
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Open Innovation vs. Closed Innovation:
Definitions
* Open Innovation is the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively.
* A closed innovation is based on the view that innovations are developed by companies themselves. From the generation of ideas to development and marketing, the innovation process takes place exclusively within the company.
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Systemic Innovation:
* Systemic innovations are characterized by strong interdependencies between their elements.
* They require cooperation between actors from different areas.
* Several organizations should coordinate their efforts and
bundle complementary resources.
* Systemic innovations replace existing systems and structures,
e.g., from diesel-based to electric mobility.
* Innovation networks must develop joint visions and shared expectations
.

Question 18

Why do so Many Users Develop or Modify Products for their Own Use?

Answer 18

• Meta-analysis of market-segmentation studies suggests that users’ needs for products are highly heterogeneous in many fields (Franke and Reisinger 2003).
• The implementation of “A few sizes fit all” inevitably leads to dissatisfaction of the user.
• 19% of Apache web server users have tailored Apache to their requirements, achieving a higher level of satisfaction.

Question 19

Lead User Definition: 2 distinguishing Characteristics of Lead Users

Answer 19

2 distinguishing Characteristics of Lead Users:
- They are at the leading edge of an important market trend(s), and so are currently experiencing needs that will later be experienced by many users in that market.
- They anticipate relatively high benefits from obtaining a solution to their needs, and so may innovate
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* Lead users are innovating users.
* The higher the intensity of lead user characteristics (“Lead user- ness”) displayed by an innovator, the greater the commercial attractiveness of the innovation that the lead user develops.
* Many of the innovations have actually been commercialized by manufacturers

Question 20

How to Identify Lead Users? The Pyramiding Approach

Answer 20

• Pyramiding is a modified version of the “snowballing” technique sometimes used by sociologists to identify members of a group or accumulate samples of rare respondents.
• Snowballing relies on the fact that people with rare interests or attributes tend to know others like themselves.
• Pyramiding modifies this idea by assuming that people with a strong interest in a topic or field can direct an enquiring researcher to people more expert than themselves.

Question 21

Comparison between LU and Non-LU Initiated Projects

Answer 21

Eg: 3M
5 LU-Projects:
* High originality/newness level
* Larger market shares
* Development of entire product families
* Annual sales: $ 146 million
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42 Non-LU-Projects:
* 41 Projects: incremental improvements
* 1 Project: a new Product family
* Annual sales: $ 18 million

Question 22

Lead User Innovation for the Supply Chain: Inventory Management Systems

Answer 22

Lead User Innovation for the Supply Chain: Inventory Management Systems:
* Firms that use inventory-management systems, such as retailers, tend to be the developers of new approaches to inventory management.
* Manufacturers of inventory-management systems and equipment tend to develop improvements to the equipment used to implement these user-devised approaches

Question 23

Why Can Disruptive Innovations Be a Danger for Established Firms?

Answer 23

• According to Christensen, firms often fall victim to a new technology that is less powerful than the established technology. This can happen when the feature that was previously in the focus of competition gradually exceeds the needs of a significant portion of the market.
• Then suddenly a new approach emerges that offers less in terms of this feature but exhibits other advantages that can dramatically change the rule of competition.
• A disruptive technology can be a particular danger for well- established firms because the initial low performance of the new technology can mean that it is completely unsuitable for the markets of the established firms.
• Over time, the performance of the new technology improves. It can develop in a way that its features can convince most customers in the established markets.
• Now the new technology can compete with the old/established one; many old technology customers gradually switch to the new technology. The new technology is called disruptive: it attacks established companies from behind the scenes in a way that is difficult to fight against.

Question 24

Potential Reactions to a Disruptive Technology

Answer 24

1. Adopt a disruptive technology and find a way to use it immediately (online banking)
2. Focus on the existing business and invest there (e.g., cinema vs. television).
3. Wait and see
4. Counterattack - attacking a disruption (e.g., reaction of Swatch to the electronic clocks based on quartz crystals)