Profitability from New Product Development: why or why not?

Parry M. Norling Visiting Fellow Chemical Heritage Foundation

Its a great little product, but were still working on packaging and handling

The Messages

New Product Development is risky business; often avoided by well established firms A New Product Development Strategy can improve the odds of success New Product Development can be the first step in a series of profitable innovative efforts for a firm Tetra Pak took the risks, has taken the early steps in a series of innovative efforts, and appears to have improved the odds for success in new product development thanks to the inventors of Tetra Recart.

Barriers to Innovation

Machiavelli: The Prince, Chapter VI 1515

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 is risky business

1638: the Kalmar Nyckel arrives in New Sweden now Wilmington Delaware

New Product Development is 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 Products Success Rate Entirely New Products 3000 raw ideas .03% 125 beginning projects .8%

300 submitted ideas .3% 4 major developments 25% 1 commercial success

1.7 launches 60%

9 large developments 11%

Stevens and Burley, RTM May-June 1997

The chances for failure are greatest when you know the least about the technology being developed and/or the target market
The Familiarity Matrix allows mapping of R&D projects based on the extent of knowledge about 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 Place Your Project in One of the Nine Boxes
Decreasing knowledge of the market
New, familiar New , unfamiliar

Familiar

cr In

sin a

f ko ri s

u a il

re

Familiar

New , familiar

New , unfamiliar

Decreasing knowledge of the technology

Familiarity Matrix: A Guide Place Your Project in One of the Nine Boxes
Decreasing knowledge of the market Market Business Expansion Expansion Market Extension Business Extension
New Business Model

Business Expansion Product Expansion

Market Product Penetration Extension

Decreasing knowledge of the technology

Familiarity Matrix: A Guide Place Your Project in One of the Nine Boxes
Probability of Success New Product with unrelated technology in existing market: 50%
Market Business New Business Model Expansion Expansion Market Extension Business Extension Business Expansion Product Expansion

Market Product Penetration Extension

Familiarity Matrix: A Guide Place Your Project in One of the Nine Boxes
Market Business New Business Model Expansion Expansion

Probability of Success Existing product in a new market: 15%

Market Extension

Business Extension

Business Expansion Product Expansion

Market Product Penetration Extension

Familiarity Matrix: A Guide Place Your Project in One of the Nine Boxes
Probability of Success Improved product in existing market: 75%

Suicide Square .03%

Market Business New Business Model Expansion Expansion Market Extension Business Extension Business Expansion Product Expansion

Market Product Penetration Extension

Familiarity Matrix: A Guide Place Your Project in One of the Nine Boxes
Market Business New Business Model Expansion Expansion Market Extension Business Extension Business Expansion Product Expansion

Probability of Success New Product in a New Market: 5%

Market Product Penetration Extension

Different types of Innovation give greater profitability at different points in the life cycle of a product family
New product invention, tailoring, and development Application Innovation Disruptive Innovation Product Innovation Process Innovation Marketing Innovation Business Model Innovation Structural Innovation

Profitability

Time
Geoffrey A. Moore Darwin and the Demon: Innovating Within Established Enterprises HBR July-August 2004 pp.87-92

Different types of Innovation

Disruptive Innovation an invention that can displace the present market leader or create an entirely new market
DuPont Diamond Award Winners 2002 Tetra Pak, Inc., Sweden / USA Nestl Purina PetCare, Italy First Retortable Carton System for Nestl Dog Food. This represents the first retortable carton packaging system on the market.

Different types of Innovation

Application Innovation: Takes existing technologies into new markets to serve new purposes

Different types of Innovation

Product Innovation: Takes an established product to the next level reduced cost, improved quality, greater functionality

Different types of Innovation

Process Innovation: Makes processes for established products in established markets more effective and more efficient

Different types of Innovation

Experiential Innovation: Makes some superficial changes in the product that improve the customers experience with the product adding delight, greater satisfaction, or reassurance

Different types of Innovation

Marketing Innovation: Improves the interaction with customers

Different types of Innovation

Business Model Innovation: Reframes the role of the company in the value chain or the way in which the company meets customer needs

Different types of Innovation

Structural Innovation: Capitalizes on disruption and changes in the industry to restructure industry relationships

It all starts with New Product Development But New types of innovation need to be introduced with new innovation skills to sustain profitability

A company cannot rest on its laurels; many product class winners have fallen victim to their success
US 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.

Resilient organizations: 1. Deliver continuous innovation new products 2. Inspire trust

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.

The Laggards:

Took few risks Relied on mature products Continued to do things in the ways that brought success in the past (core rigidities) Maintained an inward focus Felt safe near term Eventually lost out

A Lesson for the Paper Industry?

Tetra Pak has shown that opportunities can be sought beyond a reliance on mature products

The Messages
New Product Development is risky. Odds of success can be understood & improved New Product Development is only the first step toward sustained profitability Tetra Pak took risks, has taken the early steps in innovative efforts and is A demonstration of a resilient company in the paper industry

Additional slides for discussion

Maturity Maturity Growth Birth Birth Birth

Growth

Maturity Growth

Chemicals, Energy

Explosives

Chemistry, Biology. . . Knowledge Intensive Solutions

1802 1830 1850 1900 1925 1945 1990 2000 2050 2090

Decreasing knowledge of the market

Familiarity Matrix: Optimum Strategies for Technological Innovation: Finding others who know more about the markets or the technology
Joint Venture
Internal Development, Acquisition, or Joint Venture

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

Internal Development

Decreasing knowledge of the technology

Its good to be inquisitive Bad to hold an inquisition

The Inquisition

Technology developments Changes in the external Market knowledge environment Knowledge of customer needs

Company strategies Scientific advances

IDEAS

OPPORTUNITY IDENTIFICATION CONCEPT/ TECHNOLOGY DEVELOPMENT SCREENING AND BUSINESS ANALYSIS

MARKET PENETRATION AND DEVELOPMENT

Innovation : Not a Linear Process

DEVELOPMENT AND COMMERCIALIZATION

So what makes creative people creative? If we could look into the minds of creative geniuses, what would we see?

Joy of discovery

Curiosity

Sense of challenge Inquisitiveness

Playfulness

Questioning Positive discontent Desire to interrelate Willingness to take risks

Wonder Desire to see things differently

Tolerance of ambiguity

Desire to learn

Willingness to experiment

Some thoughts on Creativity and Innovation

It is the duty of private men to obey, and not make innovation of states after their own will 1597

Some thoughts on Creativity and Innovation

It is a revolt of innovation; and thereby the very elements of society have been confounded and dissipated 1844 To them antiquity is synonymous with wisdom and every improvement is a dangerous innovation 1862