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Research & Technology Executive CouncilPresentation Materials2005 Conference~ Technology Innovation at CODELCOSeptember 12, 2005
The New Innovation DisciplineSummary of Council Findings and Excerpts of Leading Practices
© 2005 Corporate Executive Board
2© 2004 Corporate Executive Board
“An Honourable Temple”A revival of ancient Roman architecture… …required new technologies
and tools to complete
• Moved over 70 million pounds of material to heights of almost 300 feet
• Allowed lateral movement of materials
Source: King, Ross, Brunelleschi’s Dome. Penguin Books, 2000; Council research.
Ox-Hoist Castello
Horizontal Arches Herringbone Brick Work
• Guaranteed stability
• Copied from the Pantheon in Rome
• Enabled construction without the use of scaffolding
3© 2004 Corporate Executive Board
Innovation, but to What End?Investment in Innovation* fails to correlate to an increase
in shareholder return for minerals and mining firms…
Average Expenditure on Innovation as a Proportion of SalesMinerals and Mining Sector, 1995–2000
…a troubling phenomenon echoed by technology executives across industries
R&D “Pain Points”Selected Quotes from Council Members, 2004
Missing Piece of the Puzzle“We’ve found that an innovation may indeed be technically brilliant, but it won’t be enough to deliver market success if we fail to defi ne what business model will truly capture value in the marketplace.” EVP and CTO, Manufacturing Company
Speed: No Longer Suffi cient“In our industry, speed used to be a source of differentiation. That’s no longer true. Everyone has mastered speed-to-mar-ket, so we’re searching for new ways to set our products apart from competitors.” VP, Worldwide Technology Development, Electronic Components Company
Relentless Pressure to Innovate“After we invest in a breakthrough platform, we fi nd that across the years we end up spending just as much on the re-freshes! To keep our competitive edge, an inordinate amount of our R&D investment must go to reinvent the platform products.” SVP and CTO, Materials Company
Source: Productscan Marketing Intelligence Service; Council research.* Innovation is defined in this segment as the combined investment on exploration and R&D.
▲▲ Aluminum
✕ Copper
✕ Lead/Zinc
+ Nickel
Gold
Platinum
Diversifi ed
20%
▲▲
▲▲
▲▲▲▲
▲▲
▲▲
▲▲
▲▲✕
✕✕✕✕
✕✕✕
✕
✕✕
✕
✕
✕
✕
✕
✕
✕✕
✕
✕
✕
✕
✕
✕
✕
✕
✕
✕
✕
✕
✕
✕
✕
(10%)
5%
0% 10%5%
Return on Shareholder Funds (% pa)
(Exploration + R&D) / Sales Revenues
4© 2004 Corporate Executive Board
Trend #1: Narrowing Windows of Technology Exclusivity Case in Point
Standardization of product development practices and open access to external technologies enable rapid replication of technical innovation
Trend #2: Weakening Intellectual Asset Protection Case in Point
Increasing pressure on large corporations to enter markets where IP enforcement is lax and regulatory interpretation unpredictable
Trend #3: Decline of Corporate Innovation Advantage Case in Point
As capital and skill barriers-to-entry fall, more organizations participate in the innovation marketplace, reducing the comparative advantage of large corporate R&D programs
The Diffi culty of DifferentiationSustainable competitive advantage becomes more elusive for innovators
Three Converging Forces Impacting Competitive Differentiation
Source: Consumer Electronics Association; Gussow, Dave, “Listen Up!” St. Petersburg Times, 7 June 2004; NPD Techworld; Stupay, Paul, “Making Open Innovation Work for You,” R&D, 1 June 2004; Business Leadership Forum research; Council research.
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Time
* U.S. companies with more than 25,000 employees.
In 2001, Chinese manufacturer copies VW Jetta at 20% lower price
“Could they ever make counterfeit cars in China? Good grief, no! A car is too complex a product.”
Martin Poste, Head of VW Asia, 1996
1981 1999
41%Percentage of Industrial
R&D by Large* Companies
71%
VCRs DVDs Apple iPod
LCDTVs
Years from Launch to 50%
Price Reduction 12
3
8
5© 2004 Corporate Executive Board
Crowding Out Competitive StrategyTwo decades of improvements to technology development practice have focused on process efficiency more than competitive differentiation…
Adoption Timeline for Significant Management Practices, 1980s and 1990s
Source: International Journal of Technology Management ; R&D ; R&D Management ; Research Technology Management ; Technology Review ; Council research.
1980s 1990s
• Centers of Excellence• Corporate Venture Capital• New Business Incubation• PACE (Product and Cycle-Time Excellence)1
• Project Stage-Gating2
• Scenario Planning• Technology Platforms• Technology Roadmapping
• Concurrent Engineering• Cross-Functional Project Teams• Design for Six Sigma• Rapid Prototyping• Standardized Alliance Management• Voice of the Customer
…and the current innovation discourse continues to emphasize operational issues over those that are strategic
Distribution of Terms Mentioned in Common Technical Publications (See Source List)2001–Present
64%
36%Frequency of
Effi ciency/Operational Terms(e.g., productivity, technology transfer, time/speed-to-market, product quality, cost reduction)
Frequency of Strategic/Competitive Terms
(e.g., competitive advantage, sustainability, profi tability, competitive position, differentiation, revenue growth)
1 The PACE® product development process was developed by PRTM in 1986.2 The Stage-Gate® methodology was developed by Robert Cooper in 1988.
6© 2004 Corporate Executive Board
Missing One Leg of the StoolPowerful technologies derailed by competitive factors
Source: Edwards, Cliff, “Will Souping Up TiVo Save It?,” BusinessWeek, 17 May 2004; Greene, Jay, “Microsoft Plays Video Leapfrog,” BusinessWeek, 10 May 2004; Frederick, Jim, “The Console Wars: Game On,” Time Asia, 15 December 2003; “Japan: Electronics Giants Fail to Spark,” Economist Intelligence Unit e-business forum 5 no. 324, 3 November 2003; Mitchell, W., “Playing Leap-Frog with Elephants: EMI Ltd. And CT Scanner Competition in the 1970s,” Center for International Business Education, Case # 97-13 (http://www.umich.edu/~cibe/publications/abstracts.html#emi); Pithkethly, Robert “Safe Haven for Ideas and Inventions,” Financial Times, 10 October 2004; Serwer, Andy, “Why the Street Isn’t Hip to Electronic Arts’ Game,” Fortune, 21 February 2005; Wall, Kendra, “Let the Games Begin,” Upside, November 2001; Council research.
Company Path to Failure Innovative Technology
Customer Demand
Competitive Advantage
Failure to Anticipate Competing Business ModelsTiVo pioneers digital video recording (DVR) technology, crystallizing an emerging consumer need and achieving 72% market share by 2001. TiVo, however, fails to foresee (and prepare for) incumbent cable TV providers adding similar features to their monthly service offerings. Unable to effectively compete with this new business model, TiVo market share plummets to 39% in just two years.
?
Underestimating Competitor CapabilitiesIn late 2000, Sony’s PlayStation 2 game console inaugurates the 128-bit gaming market, rocketing to a dominant 70% share of the game console market with units selling at $299 each. As competitors respond with similar features and a lower price, PlayStation sales volume falls by one-third over six months. In 2003, Sony slashes prices (and margins) to meet the $180 price point of its competitors but fails to stem the decline in sales.
?
Insuffi cient Business Model AnalysisEMI introduces the fi rst commercial CT scanner in 1973, quickly establishing a dominant position in a market that would grow to $77 million by 1975. The company’s assumption that it could meet the complex distribution and service needs of the medical equipment market proved overly optimistic, however, and market share fell in the face of competition from established industry players. While the machine’s inventor won the Nobel Prize for his accomplishment, the company was forced to sell its scanner business to GE in 1981 for a fraction of its initial value.
?
7© 2004 Corporate Executive Board
Source: Council research.
A World of HurtExecutives from across industries and geographies are grappling with a set of vexing problems
A Growing Business-Skills Gap“We recognize the need to provide R&D with more business skills, but frankly, I’m concerned it will distract many of my staff from technical skills development, or it will send mixed signals about what we want them to be good at.”
VP of Innovation,Consumer Products Company
Managing Risk in New Markets“We’re trying to leverage our core technologies to move into new business areas, but we just don’t have enough understanding of those markets to properly defi ne the risks, let alone manage them.”
Director of R&D,Specialty Chemicals Company
Unable to Identify Business-Builders
“It takes a special breed of R&D manager to own a new business initiative. Usually you can’t tell whether you’ve assigned the right person until they’ve succeeded or, more likely, fl amed out.”
VP of R&D,Chemicals Company
“Failing Fast” Without Killing Future Blockbusters
“We want to get better at killing projects early in the pipeline, but we know so little at that stage. What if we accidentally kill a blockbuster?”
Chief Technology Offi cer,Energy Company
Commoditization: Inevitable?“Even when we make differentiated components, they just get rolled up into undifferentiated end-products. Our industry is headed toward a situation where all competition is going to be based on price.”
Vice President,Research Labs, High Tech
Company
Risk-Averse BU Sponsors“The problem with trying to pursue anything risky or discontinuous is that the BUs are short-term focused and risk-averse. The long term simply gets ‘starved out.’”
Director of R&D,Manufacturing Company
(Hyper)Competition in the External Innovation Market
“The external market is so crowded now that reaping the benefi ts from partnerships is harder than ever; we need a new ‘edge’ if we have any hope of getting the best opportunities.”
Senior Director of Strategic Research Initiatives,
Pharmaceuticals Company
Partner Selection: Sacrifi cing Quality for Speed
“We’ve entered some alliances where we simply didn’t court our partners long enough. We jumped into the deal only to discover that the partners didn’t have the capabilities we thought they did.”
VP of R&D,Retail/Consumer Products
Company
8© 2004 Corporate Executive Board
The New Innovation DisciplineLeading company practices profi led during the 2004 executive retreat series*
I. Accelerating
Commercial Risk Resolution
II. Demonstrating
Business Value for Early-Stage R&D
III.Building a
Differentiated Innovation Network
QuestionWhat tools can enable R&D to effi ciently resolve projects’ business uncertainty while expanding business model options?
QuestionHow can R&D focus early-stage screening and funding tools on the long-term creation of business value?
QuestionHow should R&D design partnerships to create distinctive advantage in a crowded market for external innovation?
Practices
Critical Uncertainty Prioritization
Flexible stage-gate process pulls forward resolution of each project’s most critical uncertainties
Practices
Differentiation-Based Opportunity Screens
“Stage Zero” project screens combine assessment of technology distinctiveness and sustainable differentiation
Practices
Continuous AllianceImprovement Discipline
Centralized partnership management competency builds tools and processes to pre-empt common alliance pitfalls
Business-Model Option Trees
Comprehensive business model alternative generation sequenced prior to major technology investment
Business Impossible’s Mapping
Enterprise-level projects identified and prioritized by clustering operating-unit input
Supplier Innovation Partnerships
Objective and transparent supplier evaluation process serves as foundation for mutually beneficial innovation alliances
Business Outcomes Portfolio Funding
Portfolio allocation built back from corporate strategic objectives and project scorecards based on auditable business outcomes
Low-Capital Innovation Partnering
Alternative to traditional corporate venturing approach uses intangible deal “currencies” for small-company partnerships
®
* We will only cover brief excerpts of the complete case studies in today’s discussion. The case studies in their entirety are available to all Research & Technology Executive Council members.
9© 2004 Corporate Executive Board
Column I:Accelerating Commercial Risk Resolution
© 2004 Corporate Executive Board Column I: Accelerating Commercial Risk Resolution 10
Trouble in ParadiseWhile extremely valuable for encouraging process discipline, traditional “stage-gate” approaches can stifle pursuit of nontraditional innovations
Constraints on Business Value from Traditional Development Processes
Scale-UpTesting and ValidationDevelopment
Build Business
Case
Proof of Concept
Product Launch
Idea Filter
Challenge #1Traditional processes often leave most critical
uncertainties until late in development
ConsequenceWasted resources and effort
spent on “slow-to-fail” projects
Challenge #2Traditional processes often bias new
technology toward familiar business models
ConsequenceMissed opportunities to differentiate through innovative business models
One Size Fits All
All ideas move through same process, regardless of proximity to existing business
1Sequential Reduction
of UncertaintyGate reviews focus on “locking down” ideas as development progresses, making it diffi cult to reopen “resolved” issues
4Bias Toward Existing
Business ModelsFew mechanisms encourage project teams to look beyond existing ways of bringing technology to market
3Priority on Technology
UncertaintyTraditional processes focus on reducing technology uncertainty fi rst, regardless of relative importance
2
Source: Council research.
© 2004 Corporate Executive Board Column I: Accelerating Commercial Risk Resolution 11
Accelerating Uncertainty ResolutionAir Products redesigns business plan creation to quickly resolve project uncertainties and avoid overinvestment
Conventional Business Plan Construction
Air Products’ Approach to Planning New Businesses
Source: Air Products and Chemicals, Inc. ; Leifer, Richard et al., Radical Innovation, Harvard Business School Press: Boston, 2000: 63–65; McGrath, Rita Gunther and Ian MacMillan, The Entrepreneurial Mindset, Harvard Business School Press: Boston, 2000: 231–266; Corporate Strategy Board research; Council research.
Submit Planand
ExecutePull Market, Sales, Cost,and Competitive Data
Develop Estimates forNew Business Idea
Sales [ ] + xCosts [ ] – yShare [ ] + z
Calculate Financialsand Run Simulations
. .. .
. .. ...
Historical data is lacking and proxies are imprecise
White-Space
Drawbacks
Estimates based on assumptions that are not made explicit
Financial valuations are biased toward best-case result
Plans and gate-review expectations based on experience from
dissimilar past projects
Tie Milestones to Operational Activities
1
3
2
Often fund full implementation when NPV
is actually negative
Submit Planand
Execute
Recognizes which data is not available, and specifi es
data types to collect
White-Space
Benefi ts
Prioritizes data to collect based on impact on project
valuation
Regularly reprioritizes activities to resolve next most critical uncertainty
Defi nes revenue and investment levels required to make opportunity worthwhile
Flawed projects killed sooner; funding scales with evidence of NPV estimate
LearningPlan
Technology Could we develop a one-step nanotechnology coating for LCD monitors and TVs?
Market Would the LCD industry buy enough of such a coating to cover our investments?
OrganizationDo we know how R&D, production, and sales teams should work together to bring such a coating to customers?
ResourcesDo we have the staff capabilities, fi nancial resources, and lead time versus competitors to successfully develop this coating?
Known “Yes”
Unclear Known “No”
Representative Questions
Third Priority
First Priority
Second Priority
Fourth Priority
StrategicAssumptions List
Strategic Assumptions Financial Lever
Leverage
Market
1. The market demand for LCD nanotechnology coating will be at least 26 million square meters in four years
Revenue ±80%
2. The market will sustain a price point of $10 per square meter of coating Revenue ±70%
3. Total raw materials prices will remain under $4 per kilogram in four years Costs ±10%
…
Technology
4. We can buy or develop a proprietary nanotechnology coating for LCDs within three years
Costs ±50%
5. Our technology will have equal or superior performance characteristics than current technologies
Revenue ±20%
6. Customers’ manufacturing processes will still need coatings in three years and beyond Revenue ±30%
…
Organization
7. Our R&D teams work with operations and logistics to track total production costs Costs ±30%
8. Twelve of our current sales teams will be sufficient to sell this coating to the LCD industry
Revenue/Costs ±60%
9. …
Resources
10. Cash flows from core businesses will be sufficient for investment Costs/ROA ±10%
11. Production at anticipated scale can be done while improving corporate ROA ROA ±40%
12. …
Priority
1
2
10
4
9
7
8
3
11
6
Learning-BasedMilestones
Strategic Assumptions by Priority Ranking
High Priority Medium Priority Low Priority
Operational Milestones 1 2 3 4 5 6 7 8 9 10 11
A. Market Research
B. Technical Feasibility Check
C. Prototype Developed
D. Customer Technical Testing
E. Small-Batch Production
F. Prototype Sales
G. Pilot Plant Production
ReverseIncome Statement
White-Space Project2006 Income Statement
Revenue $172 M
Costs (COGS & SGA) $129 M
Operating Margin 25.0%
Operating Income $43 M
Return on Assets 20.0%
» $215 M capital
© 2004 Corporate Executive Board Column I: Accelerating Commercial Risk Resolution 12
Component #2:Integrated Business–Technology Develop-
ment
Owens Corning’s development process jointly cre-ates and evaluates technology and business model options
Component #1:Business Model Options Expansion
Owens Corning equips project teams to consider a comprehensive set of business model options early in development
Expanding OptionsOwens Corning reconstructs its stage-gate process to evaluate multiple
business model options early in development while technology requirements remain fluid
Revamped Business Development Process
Licensing Option
Services Option
PartnershipOption
Retail Option
Stage 0Initial
Evaluation
Stage 1Assessment
Stage 2Option
Expansion
Stage 3Development
Stage 4Launch
Stage 5ProcessAudit
• Early opportunity definition
• Select Project Review Board
• Begin business operation
• Transfer to operations
• Review project (six to nine months post-launch)
• Compare actual versus projected financials
• Identify lessons learned
Select Business Model
• Commercialize product
• Develop capital infrastructure
• Marketing evaluation• Gather information• Select core team
• Team must propose at least three options
• One option must require no CapEx
• Define “what’s possible”
• Define technology options
• Evaluate and select one business model option
Defi ne Business
Model Options
New Product or Business
• > $1 M CapExor
• Will depart from some element of existing business models
Business Model Development
Technology Development
Develop Technology (If Needed)
Source: Owens Corning; Council research.
13© 2004 Corporate Executive Board
Column II:Demonstrating Business Value for Early-Stage R&D
© 2004 Corporate Executive Board Column II: Demonstrating Business Value for Early-Stage R&D 14
Tripping Up at the StartProject selection processes leave early-stage effort disconnected from long-term business value
Traditional Project Funding
Challenge #2Funding process bifurcates into “technology-led” or “operations-led” projects rather than breakthrough technology in long-term interest of business units
ConsequenceR&D portfolio overweights incremental projects
Long-Term R&D Short-Term R&D
Source of Projects Technology Insight Operating Unit
Requests
Allocation Control R&D Operating Units
Typical Allocation 10% 90%
Connection to Business Needs Low High
Long-Term Focus High Low
“Technology Council” splits R&D funding into long- and short-term buckets
Traditional Project Screening
Challenge #1Project screening tools inadequately capture
long-term business value of technology concepts
ConsequenceR&D develops “breakthrough” technologies
that are too easily replicated
Project Scorecard
Points
1. Alignment of project with corporate strategy
2. Alignment with known customer or user need
3. Technical feasibility
4. Degree of IP protection/competitive insulation
5. Likely project value
Planning assumptions focus more on market demand than competitive positioning…
…and differentiation is assessed from an IP standpoint rather than broader business model considerations.
Source: Council research.
© 2004 Corporate Executive Board Column II: Demonstrating Business Value for Early-Stage R&D 15
Asking the Right QuestionsCorning’s screening discipline selects differentiated opportunities that will drive competitive advantage
New Opportunity Assessment Questions
Yes
No
Is the competitive advantage sustainable?
Activities• Forward-looking competitive
intelligence
• Competitor technology roadmap projections
• Industry scenario planning
• War gaming exercises
4
Yes
NoWill Corning capabilities deliver a differentiated
solution?
Activities• Industry structure/value-chain
mapping
• Competitor IP/patent portfolio assessment
• Preferred partner/customer profile
• Customer feature preferences analysis
3
Yes
NoDoes the need demand a step change in cost
or capability?
Activities• Component criticality-fit matrix
• Technical performance barrier identification
• Testing alternative technology solutions
• Price–performance modeling
2
Explore Short-Term Commercialization: Fast followers would erode long-term advantage
Do Not Fund Opportunity: Product unlikely to provide attractive margins
Redirect Opportunity to BU NBD: Better positioned to pursue incremental innovation
Proceed to Stage 1
Development
Source: Corning, Inc. ; Newry Corp; Vantage Point Associates; Council research.
Explore Short-Term Commercialization: If a short-term customer need exists, seek quick win in brief window of opportunity
Yes
NoAre market mega-trends
creating a pressing customer need?
Activities• Long-term scenario analysis
• Market research
• Consultation with system integrators and innovators
• Ideation with out-of-industry thought leaders
1
Component #1:Demand Trend
Analysis
Component #2:Critical Technology
Identifi cation
Component #3:Differentiation Potential
Assessment
Component #4:Sustainable Advantage
Check
© 2004 Corporate Executive Board Column II: Demonstrating Business Value for Early-Stage R&D 16
Translating Financial Goals to R&D RequirementsOverview of Shell’s “Business-to-Technology” Mapping Process
Business Goals Disaggregating Goals to Operational Per for mance Targets “Impossibles”
50%Reserves
Add 150 Million Barrels by 2005
30%Production Rate
10% Costs
10% Capex
100% 100%
60%Reservoir
30%Borehole Interface
10% Facilities
100%
30%Flow Prediction
30%Gas Sweep Profi le
20%Attic Reserve Identifi cation
20%Other
100%
30%Imaging Hydrocarbons
in Sands Less Than10 Meters Thick
40%Predict, Monitor and Control Waterfront
Movement in Complex Reservoirs
30%High Seismic
Resolution Below Near-Surface Carbonates
“How will my unit meet outyear fi nancial
performance imperatives?”
“What technology break throughs would enable my performance targets?”
“What are the specifi c operational drivers within my fi nancial goals? What performance improvements
credibly sum to 100% of the goal?”
Source: Shell; Council research.
© 2004 Corporate Executive Board Column II: Demonstrating Business Value for Early-Stage R&D 17
Foundation for ChangeFour key components form the basis of Caterpillar’s business outcomes approach
Major Components of Caterpillar’s Business Outcome Portfolio Funding
Sustainability
Growth
Cost, Quality, Profi tability
Best Products and ServicesBucket Locator Project
Wheel Motor Project
Auto-Dig
Project
▲
▲▲
“Smart Machine” Project
Best Products
Project Team
Portfolio Review Team
Best Products and Services Best Products and Services –– Smart Machines Smart Machines
2004 EXEMPT FUNDING: $xx M
TECHNOLOGIES- System management: powertrain, engine, implement
- Auto functions: auto-load, -blade, -shift, ride control….- Planning: excavation optimization, dig to plan,- Operator interface – easy to understand and use.- System Interaction: earth/machine performance- Advance system enablers: Cyl. Position, valve, pump, …
BENEFITSGeneral Construction Product Enhancements- Buried object mapping
- >20% productivity increase with less skill required = $xx MProduct cost advantage = $xx M- Smart axle & left hand steering control
- MWL, ADT, MG, OHT. LWL
TTT attachment sales opportunity = $xx M- Autoload, Autospread, Autoheading
- 10-15% productivity improvement
MG Controls & Features = $xx M NPV- >20%productivity increase with less skill required. Easy to use.
Component #1:Enterprise Objective–Based
FundingIndividual projects are funded on the basis of how well they serve Enterprise Objectives—CEO-defi ned long-term corporate goals for which group presidents are held accountable
Component #2:Business Outcome–Based
Project Defi nitionFor each Enterprise Objective, Research and businesses jointly defi ne Business Outcomes— discrete business value drivers that technology can affect—as the basis of project scorecards
Component #3:Research-Led
Project SelectionProjects are prioritized based on ability to impact Business Outcomes; teams of 6 Sigma–trained research managers determine the make-up of distinct portfolios for each Enterprise Objective
Component #4:Auditable Impact Documentation
Project teams build forecasts of projects’ expected contribution based on Business Outcomes analysis; project teams are incented to defi ne auditable measures, strengthening credibility
Challenge AddressedWeak link between research projects and corporate priorities
Challenge AddressedToo many subscale, incremental projects
Challenge AddressedWeak link between research projects and business needs
Challenge AddressedForecasts lack credibility with business units
Critical Process ChangeLink Research funding to specifi c enterprise-level objectives
Critical Process ChangeRe-scope the portfolio so all projects address defi ned business value drivers
Critical Process ChangeEvaluate and approve projects on the basis of project impact on business value drivers
Critical Process ChangeFor each project, quantify future value estimates that tie to business value drivers
Source: Caterpillar, Inc. ; Council research.
®
18© 2004 Corporate Executive Board
Column III:Building a Differentiated Innovation Network
© 2004 Corporate Executive Board Column III: Building a Differentiated Innovation Network 19
Hitting the Wall
Source: Roberts, E. B., “Benchmarking Global Strategic Management of Technology,” Research-Technology Management, March–April 2001; Bramford, James, et al., “Launching a World-Class Joint Venture” Harvard Business Review, 1 February 2004; Council research.
Alliances Meeting
Expectations*
Alliances Failing
Expectations47%53%
* Returns exceeding cost of capital.
With an expanding base of companies engaging in R&D alliances…
Companies Relying Heavily on External Sources of TechnologySurvey of 209 Large Companies, by Home Country or Region
…and alliance management continuing to pose a challenge for many practitioners…
Alliances Failure Rate2001
… suboptimal practices limit R&D’s ability to sustain competitive advantage through partnerships
Impediments to Building an Advantaged Innovation Network
“Dumb Money” at the Table
Reliance on capital as sole “deal currency” leaves corporate VC without advantage over private VC
$
4
Uncoordinated Partnership Management
Misaligned incentives with peer functions (notably procurement) create confl icting messages to current and potential partners
R&DPartnerProcurement
3
Absence of a Long-Term Plan for Joint Value Capture
Lack of “value symmetry” with partner results in early termination of relationships, leaving true capabilities untapped
CompanyPartner
2
Overprotective Approach to Innovation Sharing
Alliance partners shield projects from each other, limiting opportunities for “non-obvious” technology-application matches
1
●
●
●
■
■■
▲
▲
▲
1995 1998 20010%
50%
100%
◆ Japan
Europe
▲ North AmericaPercentage of Companies
© 2004 Corporate Executive Board Column III: Building a Differentiated Innovation Network 20
Innovation Market Realities
Limitations of Current Practice
Emerging Alliance Imperatives
Narrowing Source Exclusivity Absence of a Long-Term Plan for Joint Value Capture
Become Partner of ChoiceAttract exclusive opportunities via alliance reputation and access to asymmetric information
Limited Opportunity for Due Diligence
Overprotective Approach to Innovation Sharing
Obtain Privileged Insight Gain unique information regarding candidate partner capabilities—allowing fast, informed decisions
Escalating Costs of Entry Undifferentiated Value Proposition for Partners
Expand Alliance “Tradables”Leverage full range of monetary and nonmonetary assets to create compelling partner value proposition
Increasing Alliance Complexity Uncoordinated Partnership Management
Upgrade Alliance ManagementEstablish alliance management as a core competency within R&D
Raising the Bar for Alliance-Based Advantage A suddenly crowded market for external innovation demands new competencies
of companies seeking competitive advantage through partnerships
Innovation Market Realities
Limitations of Current Practice
Emerging Alliance Imperatives
Narrowing Source Exclusivity Absence of a Long-Term Plan for Joint Value Capture
Become Partner of ChoiceAttract exclusive opportunities via alliance reputation and access to asymmetric information
Limited Opportunity for Due Diligence
Overprotective Approach to Innovation Sharing
Obtain Privileged Insight Gain unique information regarding candidate partner capabilities—allowing fast, informed decisions
Escalating Costs of Entry Undifferentiated Value Proposition for Partners
Expand Alliance “Tradables”Leverage full range of monetary and nonmonetary assets to create a compelling partner value proposition
Increasing Alliance Complexity Uncoordinated Partnership Management
Upgrade Alliance ManagementEstablish alliance management as a core competency within R&D
Opportunity Identifi cation
Opportunity Evaluation
Partner Recruitment
Value Capture
Alliance Stages
Differentiated Alliance Competency
Source: Council research.
© 2004 Corporate Executive Board Column III: Building a Differentiated Innovation Network 21
Alliance Performance Model
• Model of alliance success/failure factors based on key findings of lessons learned process
Alliances Evaluations
• ~120 Voice of the Alliance™ assessments
• 65 Voice of the Alliance™ interventions
Uncovering Lessons LearnedLilly conducts a comprehensive analysis of its alliance history
to surface patterns of success factors and failure points
Lilly’s Alliance Lessons Learned Process
Strategy
Decision Making
Leadership
Skills/Competence
Team CoordinationConfl ict Management
Flexibility
Knowledge Management
Organizational Values
Commitment
Trust/Fairness80%
60%
40%
20%
0%Performance Management
Roles
Lilly
Partner
Strategic Fit
Operational Fit
Cultural Fit
Communications
Voice of the Alliance™ ToolIllustrative Data
Source: Eli Lilly and Company; Council research.
… …
RiskCommitment
KnowledgeManagement
Team Coordination
Alliance Portfolio Review
• Review of 192 Alliances (1990–present) across all alliance stages
Lessons Learned Database
• 61 shared learnings documented from past alliance assessments and interventions
LAMP Lessons Learned
Alliance Life Cycle
Performance Model Features
• Predictive model encompasses all alliance stages, distinguishes between types of alliances: early-stage discovery, in-licensing compound, etc.
Top Findings of Lessons Learned Process
• Front-loaded alliance management activities position the partnership for success
• Early anticipation of roadblocks is more efficient than after-the-fact remediation
100%
© 2004 Corporate Executive Board Column III: Building a Differentiated Innovation Network 22
Laying the FoundationClorox structures its supplier innovation partnering strategy with carefully conceived
incentives and evaluation tools that deliver differentiated innovation capability
Overview of Clorox’s Innovation Partnering Strategy
Communicate Supplier Benefi ts
• Clorox sets out unique benefits for suppliers to encourage innovation co-development
• Benefits provide significant value to suppliers at minimal cost to Clorox
Share Scoring Results
• Objectivity and transparency of scoring criteria enable suppliers to chart a path to improvement
Score Supplier Capabilities
• Clorox rates suppliers based on objective criteria focused on demonstrated innovation output and alignment with Clorox’s business and needs
Innovation Alignment
Component #1: Comprehensive Benefi ts PortfolioInnovative suppliers receive informational, co-development, and procurement benefi ts
1Component #2: Objective Supplier Evaluation CriteriaClorox rates supplier ability to meet its innovation needs; objectivity enables supplier improvement
2Component #3: Communication of Innovation AssessmentClorox shares scoring results and criteria with suppliers along with unattributed scores of supplier competitors
3
• Partner of Choice StatusCommitment to balancing innovation investments with supplier “wins” attracts innovative suppliers to Clorox
• Vetted Partnership CapabilitiesClear understanding of supplier innovation capabilities helps Clorox evaluate potential partners
• Supplier Capability AlignmentTo increase scores (and attain benefits) suppliers add projects, shift priorities in Clorox’s interests
• Supplier Portfolio DisclosureOver time, suppliers allow Clorox to search out-of-industry portfolios for non-obvious connections to Clorox’s technology needs
Advantages
Source: The Clorox Company; Council research.
© 2004 Corporate Executive Board Column III: Building a Differentiated Innovation Network 23
Take Venture Partnerships FurtherKodak’s venture network relies on the exchange of a broad
array of benefits across participating parties
Exchange of “Intangibles” Across the Partner Network
Entrepreneurs and Start-Up Companies
Institutional and Corporate Venture Capitalists
VC partners provide Kodak……targeted deal flow…business due diligence on start-ups…expertise in start-up governance
1
Start-up partners provide Kodak……access to complementary technologies,
products, services, and business models…resources to support Kodak development…new applications and increased demand
for Kodak products…favorable terms on future development
and commercialization agreements…options to increase ownership in future
4
Kodak provides start-up partners……technical expertise…marketing and distribution alliances…market and technical validation…access to Kodak’s infrastructure
3
Kodak provides VC partners……technology and market due diligence…validation of start-up technologies…access to Kodak technical expertise…Kodak-identified deal flow
2
Source: Eastman Kodak Company; Council research.
24© 2004 Corporate Executive Board
The New Innovation MandateCompetitive differentiation emerges as a critical discipline to capture returns on innovation
Time
Returns onTechnicalInnovation
Failure Path: Technology for Technology’s Sake
R&D investments disconnected from market need
Failure Path: Inability to Get PaidGains from technical innovation accrue
to customers but not to innovators
Established Discipline:Technical Expertise
“What’s Possible?”
Attributes and Tools Attributes and Tools
Reducing Technical Uncertainty
• Project Stage-Gating• Technology Platforms and Reuse• Centers of Expertise• Technology Roadmapping
Reducing Customer Uncertainty
• Voice of the Customer for R&D• Design for Six Sigma• Cross-Functional Alignment with
Sales and Marketing
Reducing Technical Uncertainty
• Project Stage-Gating• Technology Platforms and Reuse• Centers of Excellence• Technology Roadmapping
Improving Discipline:Customer Insight“What’s Needed?”
Emerging Discipline:Competitive Differentiation“What Will Prevail Competitively?”
Attributes and Tools
Reducing Technical Uncertainty
• Project Stage-Gating• Technology Platforms and Reuse• Centers of Expertise• Technology Roadmapping
Reducing Customer Uncertainty
• Voice of the Customer for R&D• Design for Six Sigma• Cross-Functional Alignment with
Sales & Marketing
Source: Council research.
Reducing Competitive Uncertainty
• Early-Stage Business Model Options • Critical Path Risk Resolution • Business-Skilled R&D Managers • “Locked In” Alliance Advantage
Research & Technology Executive Council
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