Innovation to Cash: Orchestrating in the Consumer Industry · Product life cycle Product in development Cumu- lative cash New-product develop- ment Supply chain manage- ment Manu-

Opportunities for Action in Consumer Markets

Innovation to Cash: Orchestratingin the Consumer Industry

ITC Consumer Feb 04 1/29/04 10:29 AM Page 1

Innovation to Cash: Orchestrating in the Consumer Industry

To generate the growth they need, consumer compa-nies have spent decades pouring billions of dollarsinto innovation. Yet despite all the experience com-panies have accumulated in managing the innovationprocess, most new products and services fail to pro-duce the expected returns, and many yield outrightlosses. Moreover, as product life cycles continue toshrink and copycat products proliferate, even highlysuccessful new products may have very short lives inthe marketplace. Under these circumstances, whatsteps can business leaders take to boost the odds ofsuccess?

Clearly, the answer is far from simple. Successfullydeveloping new offerings involves large investmentsof time and money—and often, significant risk. Wecall the comprehensive process that extends from anew product’s conception to its phaseout from themarket the innovation-to-cash cycle. (See the exhibit“The Innovation-to-Cash Process and the Cash CurveIt Generates.”) Managing this cycle entails maximiz-ing revenues, volume, and profits, while minimizingrisks, time, and expenditures across the entire span of organizational structures and activities. The rise in the cash curve shown in the exhibit is the result.Success in managing your innovation-to-cash cyclerequires applying this approach not to one project at a time but to a whole portfolio of projects at dif-ferent stages of development. Increasingly, manag-ing the innovation-to-cash cycle also requires coordi-nating these efforts not just across an executive’s own organization but across multiple organizations as well.


Few companies have mastered all the processes andskills necessary to manage this far-reaching undertak-ing with coherence, discipline, and creativity. In fact,large, established corporations have an especially dif-ficult time, in part because they tend to be firmly wed-ded to their traditional—and historically successful—ways of going about each element of the innovation-to-cash process. In addition, such companies tend tohave firmly established functional boundaries andpractices as well as strong silos. Morevover, consumercompanies in particular tend to bring a “do-it-all-our-selves” mindset to managing the innovation-to-cashprocess. In our experience, however, they would dowell to explore alternative approaches.

Product life cycle

Product indevelopment

Cumu- lativecash

New-productdevelop-

ment

Supplychain

management

Manu- facturing

Productlaunch

Salesstrategy

andexecution

Life cycle

management

Newideas

Time

R&D/innovationportfoliomanage-

ment

Product inmarket

SOURCE: BCG analysis.

The Innovation-to-Cash Process and the Cash Curve It Generates


Different Approaches for Different Situations

When it comes to commercializing an innovation,companies generally play one of three basic roles: theintegrator, in which the company performs all the stepsneeded to take a new product or service to market;the orchestrator, in which the company retains directmanagement of some parts of the overall process anddepends on partners to manage the rest; or the licen-sor, in which the company sells or licenses a new prod-uct or idea to another organization, which handlesthe rest of the commercialization process.1

Each of the three approaches has a distinct economicprofile with a characteristic pattern of investment lev-els and potential returns. Each one requires a distinctset of skills. And each approach has specific strengthsand weaknesses that make it better or worse suited todifferent situations.

In the handset industry, for example, players can befound pursuing each of the three approaches, for dif-ferent reasons:

• In late 2001, Ericsson, once one of the top handsetmakers, shifted its approach from that of an inte-grator to become an orchestrator and established a joint venture with Sony Corporation. Neither company had been able to compete with the scaleadvantages of market leader Nokia, nor were theirhandsets as profitable. But together they combinedEricsson’s expertise in mobile technology with

1. For a more complete discussion of all three approaches, as wellas many ways to boost the effectiveness of the innovation-to-cashcycle, see James P. Andrew and Harold L. Sirkin, “Innovating forCash,” Harvard Business Review, September 2003.


Sony’s capabilities in consumer electronics, design,and marketing; and they refocused on the top endof the market, where complexity and margins arehighest. By 2003 Ericsson was participating only in those areas where it added the most value, and it leveraged Sony’s skills for other areas. TodayEricsson phones have been replaced with SonyEricsson models, and the company recently report-ed a quarterly profit for the first time since the ven-ture started—although global market share stillhovers around 6 percent.

• In contrast, Samsung, the fastest-rising player inthe market, has stayed the course as a classic inte-grator. Now poised to surpass Motorola as the num-ber two manufacturer, Samsung is also moving tothe top of brand awareness surveys. Rather thanoutsource its manufacturing, Samsung has investedbillions in new factories. And rather than focus onjust a few core competencies, it has remained di-versified and vertically integrated, putting its ownchips and displays into its digital products. Thecompany believes that it needs to stay in manufac-turing in order to prosper. In a 2003 BusinessWeekarticle, Samsung Vice Chairman and CEO JongYong Yun was quoted as saying: “Everyone can getthe same technology now. . . but that doesn’t meanthey can make an advanced product.” By maintain-ing core technologies and mastering manufactur-ing, he believes, you can control the future.

• Microsoft has now entered the handset competi-tion—but with a licensor approach. It spent twoyears developing a version of its operating-systemsoftware for mobile phones, called Smartphone.Rather than make handsets or hire someone elseto make handsets for it, Microsoft licensed the in-novation to industry players who were looking tomake inroads into Nokia—such as wireless net-


work operators interested in selling their ownbranded phones. Microsoft’s ultimate goal is tocapture as much of industry value as it can, and itbelieves the licensor model is the best approachfor doing so.

The decision regarding which approach to use for anew offering is a highly strategic one because theapproach governs how cash flows—and risks—areallocated among participants. Yet most companiestend to rely exclusively on whichever approach ismost familiar, often without even considering the oth-ers. For most consumer companies, for example, theintegrator role has been the approach of choice. However, what has worked well in the past won’tnecessarily work well in the future. Competitive pres-sures, the need to improve financial returns, and agrowing realization that they lack some of the skillsnecessary to bring innovation to market quickly andeffectively are causing many companies to rethinktheir traditional approaches. In particular, companiesthat usually operate as integrators should seriouslyevaluate some of the advantages—in terms of time,investment, and risk—offered by the orchestratorapproach.

From Owning Innovation to Orchestrating It

Consider Whirlpool’s experience developing itsGladiator GarageWorks product line. For Whirlpool,the world’s largest manufacturer of major householdappliances, the Gladiator system of modular storageand organization products represents a radical depar-ture from “business as usual.” First, the line is de-signed for a new “room”—the garage, rather than thekitchen or the laundry room. Second, it targets a newdemographic segment—men, rather than women.Finally, it reached the market in record time—just


over one year after initial funding, rather than thethree to five years typically required by new projectsin the industry.

When the idea for Gladiator was first proposed, manypeople within Whirlpool assumed that the companywould use the integrator approach to developing theproduct line, as it usually did. Yet in the end, theorchestrator approach proved to be a key to Glad-iator’s success. Because the market for Gladiator wascompletely new to Whirlpool, and because Whirlpoolwas relatively unfamiliar with potential Gladiator cus-tomers, orchestrating allowed the company to acceler-ate development, invest less of its own resources, andspread the risks.

Specifically, to avoid the time and expense of hiringnew engineers, Whirlpool tapped into the designexpertise of its suppliers, including several that it had not worked with before. In addition, althoughGladiator’s project leaders used Whirlpool manufac-turing assets when in-house manufacturing madesense, they were rigorous about using outside assetswhen it did not. For instance, whereas the handles forsome of Gladiator’s storage systems were taken fromWhirlpool’s dryers, other items were made entirely bythird parties that specialized in those products. Ul-timately, Gladiator’s project leaders assigned the man-ufacturing of almost all the elements except the actu-al appliances to partners—an unprecedented movefor Whirlpool.

Gladiator was launched in late 2002, after just 15months of development. The response from con-sumers quickly exceeded expectations. Because Whirl-pool had taken the orchestrator approach, turningextensively to outside parties, gross margins were low-er than if the company had made everything itself.But although costs per unit were higher with this ap-


proach, total costs were lower, because there were nofactories to build, for example. Moreover, a fasterlaunch enabled Whirlpool to establish the Gladiatorbrand and gain a foothold in the market before copy-cat offerings arrived. As a result, Gladiator is expectedto have higher total lifetime sales and to be moreprofitable than would have been the case if the com-pany had taken the traditional integrator approach.

Equally important, the project gave Whirlpool invalu-able experience in developing products much fast-er—and much less expensively—than it usually does.Such skills will be essential as the company continuesits search for organic growth. Indeed, without newproduct lines or extensions, the appliance manufac-turer would find itself essentially stuck in an industryfacing slow growth, tightening margins, and increas-ingly elusive profits. It is a situation now confrontingmany large companies—including, for instance, auto-mobile manufacturers.

Long a bastion of vertically integrated activities(going all the way back to Henry Ford’s famous RiverRouge Complex), the automotive industry has tradi-tionally embodied the do-it-yourself approach. Fordecades, major manufacturers’ size, scale, and deeppockets allowed them to own and conduct all theactivities required not only to generate true innova-tions but also to bring them to market. In recentyears, however, companies have found the approachincreasingly difficult to execute. Innovations in auto-mobiles now come from a wide range of sources,including suppliers, design houses, and even compa-nies in other industries (for example, software firms).At the same time, intense economic and competitivepressures have led companies to rethink their need—and ability—to own all of the assets and employ all ofthe workers necessary to perform every activity them-selves. Finally, the rise of increasingly large and so-


phisticated suppliers has opened up fundamentallynew ways to involve other companies in the design,development, and production of vehicles.

To be sure, orchestrating is not completely new to theauto industry. But it is having a growing impact. Forone, companies that were never willing to use theapproach before are beginning to consider it. Per-haps more important, orchestrating increasingly is moving beyond small projects. Production runlengths of more than 75,000 to 100,000 units per yearare now being pursued, which is beginning to takethe approach out of small niches and into the main-stream. Needless to say, the major auto companiesand their unions are watching the success of thesenew moves very carefully, as they have the potential tochange the dynamics of large segments of the indus-try completely. Orchestrating is already giving rise tonew types of companies. Magna International, forinstance, is a company that started life as a compo-nent supplier but now has the ability, essentially, tobuild complete automobiles for almost anyone whowants to sell them.

When to Orchestrate?

In our experience, most managers base their com-mercialization decisions on fragmented and partialevaluations of the relevant factors. Worse, they makeassumptions such as “We are as low-cost as any suppli-er can be” or “We’ll be the leader even if we’re late tomarket,” and then they fail to explore the conse-quences. To be sure, there is no “black box” thathelps managers understand when the orchestratorrole—or, indeed, any of the three approaches—willbe most effective. But a systematic analysis of threecritical dimensions—the nature of the innovation,certain characteristics of the industry, and the kinds


of risk involved—can be extremely helpful. Onlythrough a rigorous analysis of these parameters can acompany capture what is unique and important aboutthe innovation and choose the approach that willmaximize profits.

In general terms, the orchestrator approach is theright choice when a company has developed a break-through concept that is a step removed from its corebusiness, when several capable suppliers and potentialpartners are available, and when time to market is ofmore than usual concern. Gladiator GarageWorks fitsthis profile. In addition, manufacturers of productswith very short lives can do well as orchestrators,exploiting the capabilities of many partners simulta-neously rather than following a linear process overwhich they might have more control. Other factors toconsider, among many, are the level of physical assetsrequired, the importance of brands, the infrastruc-ture needed, the risk of substitutes, and the necessaryfinancial investments.

What Orchestrators Need

Of course, for the orchestrator approach to workeffectively, it must be a good match not only for theproject but also for the company’s capabilities. To suc-ceed as an orchestrator, a company will need capabili-ties that it may not have if it has traditionally pursuedthe integrator approach.

For one, the company should excel at managing proj-ects across several organizations. It should also havestrong skills in supply chain management, includingthe ability to find, evaluate, and work closely with sup-pliers—possibly all over the world—not just as undif-ferentiated vendors but as true partners. In addition,orchestrators need to be highly skilled in thinking


strategically about the value chain. Where and how—exactly—do they want to play? How should they struc-ture commercial arrangements to ensure that theycapture value (for example, determining which intel-lectual property it is critical to own, and which it isnot)? Which activities that they have traditionally con-ducted in-house are no longer essential to generatingcash? Companies often lack the key skills in theseareas and therefore must develop or obtain them.

Another organizational requirement for orchestratorsis strong and committed leadership at the highestlevel. Because the orchestrator model often repre-sents a departure from a company’s traditional ap-proach to commercialization, it can run afoul of con-flicting internal agendas, causing resentment andresistance. Even when internal issues can be resolved,close collaboration with other companies can raisetricky legal and logistical challenges. And turning anidea into cash cuts across so many functions and sub-processes—both internally and at partners and suppli-ers—that often there is no single owner of the overallprocess. In Whirlpool’s case, explicit backing fromthe CEO enabled the Gladiator team to withstandinstitutional pressures to “do it our way.”

Another key factor is having the right metrics. Whilethis is true for any of the three innovation-to-cashmanagement models, it is particularly challenging forthe orchestrator model, in which metrics must beapplied both to internal contributors and to externalcompanies. Not many companies actually conceptual-ize and manage the overall process of turning an ideainto cash; even fewer measure that process with anyreal rigor. Many companies can’t even track the num-ber of company-paid engineers working on a giveneffort, let alone how well they are “extending theenterprise” and leveraging suppliers’ engineers. Yetmetrics such as total time from idea to net positive


cash flow; tradeoffs among cost, quality, and time; andbasic performance by innovation teams are essentialto the management of the process. Failure to measurealmost always reflects failure to manage.

Finally, successful application of the orchestratormodel requires discipline. In many companies, exist-ing process requirements (such as tollgates, mile-stones, and support requirements) are routinelyignored—without consequences. Too often, seniormanagement commits funding, approves products,and allows marketing campaigns to be launched eventhough the team in question has not met its carefullyestablished targets. Indeed, in most organizations,ineffective innovation projects are almost impossibleto kill. Whether this lack of discipline arises from poli-tics, egos, or other sources, the end result is costly:process discipline gives way to management by fiat,resources get fragmented, and promising innovationssee their economic potential hemorrhage away.Companies that adopt the orchestrator model mustbe particularly meticulous about imposing disci-pline—on themselves and on their partners.

* * *

Rapid innovation is a key capability for competingwith private-label and hard discounters, as well as withtraditional competitors. As fast first-movers, consumercompanies of all types win a greater share of their cat-egories, dislodge competitors from current share posi-tions, and increase overall consumer spending in thecategory. Organizations that have traditionally kepttheir product-development and commercializationprocesses in-house would do well to explore the con-siderable benefits of strategically adopting the orches-trator model. By working as orchestrators, they canbring out new products faster and for less moneywhile sharing some of the risk with their collaborators.


They can leverage expertise that lies outside theirorganizational boundaries in order to pursue trading-up opportunities in new channels. And they can dem-onstrate to the industry a new level of ability to turninnovations into cash—for the benefit of all parties.

James P. Andrew François Dalens

James P. Andrew is a senior vice president and director inthe Chicago office of The Boston Consulting Group andhead of the innovation and commercialization area for thefirm’s Operations practice. François Dalens is a vice presi-dent and director in BCG’s Paris office.

You may contact the authors by e-mail at:

[email protected]

[email protected]

© The Boston Consulting Group, Inc. 2004. All rights reserved.


Other publications on the innovation-to-cash processinclude the following:

“Innovating for Cash: Lessons from the Handset Wars,”BCG Opportunities for Action in Technology andCommunications, January 2004

“Innovating for Cash,” BCG Perspectives, December 2003

Raising the Return on Innovation, A BCG Senior Management Survey, December 2003

“Innovating for Cash,” Harvard Business Review, September 2003

“Innovation to Cash: Orchestrating the Process,” BCG Opportunities for Action in Industrial Goods, September 2003

“Boosting Innovation Productivity,”BCG Opportunities for Action in Industrial Goods, April 2003

To request copies or to comment on these or other publica-tions, please contact BCG by e-mail at [email protected].


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Documents

Innovation to Cash: Orchestrating in the Consumer Industry · Product life cycle Product in development Cumu- lative cash New-product develop- ment Supply chain manage- ment Manu-