The Innovation Value Chain Prof. Morten Hansen Managing in Information Intensive Companies September 3 2010

The Innovation Value Chain

Prof. Morten Hansen

Managing in Information Intensive Companies

September 3 2010

Does innovation matter? It is one strategy for success

0

10

20

30

40

50

60

70

disruptive exploit cannibalize

Innovation Activity

% of winners/losers

Losers

Winners

Disruptive = introduce disruptive technologies and business models; exploit = exploit new and old technologies to designproducts and enhance operations; cannibalize = don’t hesitate to cannibalize existing productsSource: “What Really Works,” by Joyce, Nohria and Roberson, 2003, page 221.

One piece of evidence: Winners among sample of 160 companies pursued innovation more

87% of executives saidThat organic growth throughinnovation had become essential to success in theirindustry (2005 BCG innovation survey of 940 managers)

What is required to create an innovative organization?

From a few individuals…. to an innovative organization

Creative people with good ideas Process for generating good ideas

A few “intrapreneurs” Mechanisms for selecting and developing projects

A few champions Roll-out and exploitation strategies

Not about innovative people, but about innovative processes

The Innovation Value Chain: A Systematic Way of Improving the Innovation Process

CONVERSIONIDEA GENERATION DIFFUSION

IN-HOUSE

Creation within a unit

CROSS- POLLINATION

Collaboration across units

EXTERNAL

Collaborationwith partiesoutside thefirm

SELECTION

Screening andinitial funding

DEVELOPMENT

Movement fromidea to firstresult

SPREAD

Disseminationacross theorganization

KEY QUESTIONS

Do peoplein our unitcreate goodideas on their own?

Do we creategood ideas byworking acrossthe company?

Do we sourceenough goodideas fromoutside thefirm?

Are we goodat screeningand fundingnew ideas?

Are we good atturning ideasinto viableproducts, businesses, and best practices?

Are we goodat diffusingdevelopedideas acrossthe company?

KEY PERFORMANCE INDICATORS

Number ofhigh-qualityideas generatedwithin a unit.

Number ofhigh-qualityideas generatedacross units.

Number ofhigh-qualityideas generatedfrom outside thefirm.

Percentageof all ideasgenerated thatend up beingselected andfunded.

Percentage offunded ideasthat lead to revenues;numberof months tofirst sale.

Percentageof penetrationin desiredmarkets, channels,customergroups; numberof months tofull diffusion.

Source: The Innovation Value Chain. By Morten Hansen and Julian Birkinshaw. Harvard Business Review, July 2007.

DIFFUSION

Survey of 121 companies show that all parts of the chain are difficult

CONVERSIONIDEA GENERATION

Average across the chain (2.6 on a 5-point scale) is very low. All 6 items in the chain are also low. Diffusion is a bigger problem than idea generation.

IN-HOUSECreation within a unit

CROSS-POLLINATIONCollaboration across units

EXTERNALCollaborationwith partiesoutside thefirm

SELECTIONScreening andinitial funding

DEVELOPMENTMovement fromidea to firstresult

SPREADDisseminationacross theorganization

1

2

3

4

5

ideasinside crosspoll ideaoutside selection development diffusion

Source: Benchmark survey of 121 companies, August 2007. By Hansen and Birkinshaw.

3.22.9

3.12.7 2.5 2.3

4.0

3.0

3.7

3.0 3.1 3.0

1

2

3

4

5

ideasinside crosspoll ideaoutside selection development diffusion

DIFFUSION

Example: Survey at InsCo suggests it is above average across the IVC


Strongest link is idea-generation inside. No particular weakest link.







Source: Benchmark survey of 121 companies, August 2007. By Hansen and Birkinshaw and InsCo survey (n=22)

InsCo Overall Benchmark

Although good scores for InsCo, gap to the best- Work required to become top 10% innovator

IVC partLink

Bottom 10%

Bottom 25%

Median (50%)

Top 25%

Top 10%

Idea generation

Ideas inside 2 2.5 3 4 4.5

Cross pollination

1 2 3 4 4.5

Ideas outside 1.5 2 3 4 4.5

Total ideas 1.8 2.3 3.2 3.8 4.3

Conversion Selection 1.5 2 2.75 3.5 4.5

Development 1 2 2.5 3 4

Diffusion Diffusion 1 2 2 3 4

Overall IVC overall 1.8 2.1 2.6 3.1 3.6

InsCo overall

DIFFUSION

Idea Generation








• IN-HOUSE

IDEO is an award-winning product design firm. They have developed a culture that has allowed them to be “routinely innovative.”

How have they been able to do this? What specific mechanisms do they use to promote creativity and implementation? Can you “steal” any of these?

IDEO: Using culture to promote innovation

In-house

Creativity• Ideas come from anywhere• Egalitarian• Brainstorming• One idea at a time• Listen actively• Build on other’s ideas• No criticism• No punishment for failure• Initiative is expected• Data driven• Ask “experts” and “customers”• Diverse groups• Fun, playful• Passion and energy

Implementation• Clear direction • Action oriented• Fail early, fail often• Rapid prototyping• Role of leadership

• Focus• Use of deadlines• Not “experts”

• Process for deciding• Voting• Involvement• Sub-groups• Adult supervision

“Routinely Innovate”: How do they do it?

In-house

Creativity

1) Support for risk taking• Rewards for innovation• Management role models• Challenge the status quo

2) Tolerance of mistakes• Mistakes are normal• Being “safe” isn’t OK

Creativity

1) Support for risk taking• Rewards for innovation• Management role models• Challenge the status quo

2) Tolerance of mistakes• Mistakes are normal• Being “safe” isn’t OK

Implementation

3) Teamwork• Share common goals• Open information

4) Sense of Urgency• Fast decision making• No red tape• Once decided, full commitment

Implementation

3) Teamwork• Share common goals• Open information

4) Sense of Urgency• Fast decision making• No red tape• Once decided, full commitment

Research shows that four company values promote innovation

Source: “The determinants of team-based innovation in organizations.” Small group Research, vol. 34, 2003

In-house

Large European Media Company example:Survey shows mediocre on all four values

0

1

2

3

4

5

risk-taking ok to fail team speed

Creativity Implementation

MedianOn scale

Min and Max

Leaders need developtolerance for risk-taking and mistakes

Support for risk taking Not monetary rewards Recognition from managers

Trophies, individual plaques “Exalted order of the

extended neck”(Hershey Foods)

Do not over-analyze Resources given to

experiments/prototyping Defer judgment

Tolerate mistakes Award at Intuit: “The failure

we learned the most from” J&J, “Failure is our most

important product” J&J: Reasonable mistakes

Analysis, foster learning, modest in impact

Promote people who failed reasonably

Source: Winning through Innovation, by Tushman and O’Reilly.

In-house

Intel: Risk-taking as a value, and holding people accountable for living that value

Articulation of values

Six core values

• Discipline- make and meet

commitments- pay attention to detail

• Results orientation- confront and solve

problems• Risk taking

- listen to all ideas and viewpoints

• Great place to work- be open and direct

• Customer orientation• Quality

Organizational mechanisms

Performance review example

Example: risk taking

Managers assess behavior of direct reports against behaviors (not vague values)

“Ralph needs to learn to make initial decisions much more rapidly… he needs to be willing to take more risks here”

performancereview

Behaviors

Each value translated into behaviors

Example: risk taking-Publicly discusses

failures to learn- Acknowledges failures- Promotes ideas that

may not be popular- Allows others to

express divergent

opinions- Takes no personal

risks; creates an

environment of fear

DIFFUSION

Idea Generation








• CROSS POLLINATION (COLLABORATION)

Procter & Gamble master at innovation through collaboration

$ 34.99

teeth whiteningexpertise

novel film technology

bleach expertise

Oral Care

Division

Corp. R&D

Fabric &Home

Division

Technologies

Organization Units

Collaboration

Recombination of four areas into a new high-riseservices business

Sell a service, not individualproducts

Realestate

Clean-ing

ElevatorAirconditioning

Facility management business(comprehensive service management)

Re-combining to sell solutions:Example: Jardine Pacific, Hong Kong

Collaboration

Ex: InsCo survey indicates InsCo is quite far from top ranking in cross-pollination*

3.03.2

2.73.0

4

4.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

All ELAM Nordic UK Top 25% Top 10%

Benchmark study

*) from different country units and divisions in InsCo

5=best1= worst

Cross-pollination survey scale

Collaboration

0.010.0

20.030.040.050.0

60.070.080.0

90.0100.0

ELAMNordicUK ALL

ELAMNordicUK ALL

ELAMNordicUK ALL

Large opportunities for cross-unit innovationacross divisions

Cross-unit product innovation

Packaging and bundling

DevelopingNew business

Current

Gap

Current and Gap for Collaboration across divisions

LargeGaps

Collaboration

DIFFUSION

Idea Generation








• EXTERNAL

What makes you believe that you have more and better ideas inside?

“We have 8000 people in R&D [in P&G] but there are

about 1.6m scientists and engineers outside P&G who

can help us. That’s a 1:200 ratio. We’re now looking at

our organization as the 8000 and the 1.6 million.”

Larry Huston, Procter & Gamble

Source: Morten Hansen and Julian Birkinshaw interview Jan 20 2006

External

Procter & Gamble’s move to open innovation

12.0%

13.2%

14.7%15.4% 15.3%

13.9%

30,000

32,000

34,000

36,000

38,000

40,000

42,000

30/06/1995 30/06/1996 30/06/1997 30/06/1998 30/06/1999 30/06/2000

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

Net Sales EBIT as % of Net Sales

Before Year 20000 Year 2000

New Goals

1) To grow top line 5 – 7 % per year (=$ 4bn per year)

2) External ideas count for 50% from existing 10%

“We want P&G to be known as theCompany that collaborates – inside and out – better than any other company in the world”

A.G. Lafley, CEO P&G

Source: Morten Hansen and Julian Birkinshaw interview Jan 20 2006; CRSP data analysis.

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1995 1996 1997 1998 1999 2000

Procter and Gamble

External

What they did 2000-05:“Connect & Develop” Strategy

1) Partnered with, and invested in, IT networks aimed at sourcing solutions- www.innocentive.com- www.Yet2com.com- www.ninesigma.com

yet2.com is a website that functions as a global online marketplace for technology that is for sale or for license. Companies who have signed up with yet2.com to list their technologies represent about a quarter of the world's R&D budget.

yet2.com also assists companies with marketing their ideas, inventions, and patents through websites like this one which are customized for each customer.

Source: www.pgconnectdevelop.com

External

What they did 2000-05:“Connect & Develop” Strategy

2) Internally hired 75 technology entrepreneurs- liaison with partners, scouters, building relationships etc.

- sr. research people

- rotating to and from position 1-4 years

3) Organized offices –nodes– with particular focus - China: low-cost innovations

- Japan: hot items on their shelves

- Italy: coffee trends

- France: fragrance


External

Example: Pringles

How it works: Directed search - Example: Pringles

“How about trivia questionsprinted on Pringles?”


External


“How about trivia questionsprinted on Pringles”?

Brief: how to printvolume with edible

materials, using inkjets

Brief goes out throughout network


External





Professor in Bologna, Owns a bakery, does food-

edible dyes to print with inkjet on cookies

Technology Entrepreneur In Italy



External





Professor in Bologna, Owns a bakery, does food-

edible dyes to print with inkjet on cookies

Technology Entrepreneur In Italy

8 months development

PrintedPringles



External

P&G: Strong results 2001-05

0

0.5

1

1.5

2

2.5

2001 2002 2003 2004

Open innovation success 2005

1) External ideas 10% -> 35%

2) 60% increase sales/R&D employee

3) R&D expense per product drastically down

Source: Morten Hansen and Julian Birkinshaw interview Jan 20 2006; CRSP data analysis.

11.8%

17.4%18.2% 18.4%

15.9%

0

10,000

20,000

30,000

40,000

50,000

60,000

30/06/2001 30/06/2002 30/06/2003 30/06/2004 30/06/2005

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

Net Sales EBIT as % of Net Sales

External

Intuit very good at external innovation- “Follow-me-home” program

Problem: > 50% of U.S. small business keeps their books with simple spreadsheets or pencil & paper. Get them to use QuickBooks.

2003 initiative 10 employees, 40 follow-me-homes. Live with the customer for a

day to systematically observe “I don’t need no stinkin’ accounting” Simplified, tracking money in and out

“Accounts payable” and “accounts receivable” focus 1st prototype required 125 setup screens

Now, “money in”, “money out”, 3 setup screens Took 6 times of follow-me-homes and prototyping “QuickBooks Simple Start” outsold most accounting software in the

U.S.

Source: Fortune, Dec 12, 2005

2003 initiative targeting non-users

11m

Users

Non-users

6m

2m

19m Small Businesses

Intuit

Others

QuickBooks Simple

Source: Steve Bennett, intuit 2005 Shareholder meeting

External

Result of this innovation approach: continuous rapid organic growth

0

100

200

300

400

500

600

700

800

FY91 FY93 FY95 FY97 FY99 FY01 FY03 FY05

$M

QuickBooks segment results

Source: Steve Bennett, intuit 2005 Shareholder meeting

External

Intuit’s core competency: Open Customer-centric innovation process

“Customer-driven innovation that solves important customer problems

simply and delivers delight”

CEO Steve Bennett

Source: CEO Steve Bennett, 2005 Shareholder Meeting

Living with customers- ”Follow-me-home” corner-stone of achieving this

External

InsCo pretty good at external idea generation- reasonable understanding of customer needs

External idea generation scale

Understanding customer needs. “People in our unit do have a clear understanding of our customers’ needs (end client as well as business partner).”

Benchmark study(external idea generation scale)

5=best1=worst

External idea generation survey scale

3.7 3.83.7 3.7

4

4.5

3.7 3.6 3.5

5.0

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0


External

DIFFUSION

Conversion








• SELECTION• DEVELOPMENT

Is there a better approach than traditional selection methods?

“The last bastion of Soviet-style central planning can be found in Fortune 500 Companies—it’s called resource allocation. The guys at the top decide where the money goes. Unconventional ideas are forced to make a tortuous climb up the corporate pyramid. If an idea manages to survive the gauntlet of skeptical vice presidents, senior vice presidents, and executive vice presidents, some distant CEO or chairman finally decides whether or not to invest. You wanna try something new, out of bounds, something that challenges the status quo? Good luck.”

Gary HamelHarvard Business Review, Sep-Oct 1999

Selection

Connecting the market for ideas and capital:Two fundamental options

Hierarchy Internal Market Centralised system for

resource allocation

Decentralised system built on

“resource attraction” Single source of funding Multiple sources of funding Rewards for innovation are

mostly intrinsic

Rewards for innovation more

extrinsic

Selection

An alternative funding mechanism: Shell’s Gamechanger

25-person virtual team of mid-senior managers, $40m investment budget People have full-time job, “Gamechanger” on their business card Decision panels consist of 2-4 managers + domain experts

Individuals from anywhere encouraged to submit their ideas: Initial submission online Screening meeting within 2 weeks Promising cases given some time to put full proposal together Within 6 months case gets reviewed, and if successful, seed funding (typically

$500,000) is provided

40% of projects in E&P division came out of Gamechanger

Key points: Ideas are experiments: small amounts initially to test them out Internal VCs act as alternative source of funds: everyone can try it.

Gamechanger works like a Venture Capital Fund inside a company

Employee submits idea on web-site

1st panel meeting: seed money(~ 3 weeks pay)

2nd panel meeting: moreseed money (~$300-500K)

Close-out meeting:Terminate or refer

BUs invest further

$Commit-ments

Time

# ideas: 100 50 22-24 11-12 referred 5-6 success

• “Ideas that nobody wants to fund”• Doesn’t fit core, not in budgets• More radical

Gamechanger numbers are pretty good- 9-year track-record

$40m investment budget per year Total of 1600 ideas over 9 years In 2005, 175 submissions

Continues to get same number of ideas per year

Estimated $2bn worth of portfolio Approx. 5-7x return on investment

Selection

An alternative development mechanism:Internal venture units (“incubators”)

Typical Problems

• Most venture units fail to create significant new businesses• Entrepreneurship likely to be suppressed elsewhere • Very hard to integrate corporate ventures back into mainstream

Development

Example: InsCo ok in conversion but gap to top 10%

Conversion

Benchmark study

5=best1= worst

In-house idea generation survey scale

3.0 3.02.8

3.5 3.5

4.5

3.13.2

2.7

3.3

3

4

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0


Selection

Development

Conversion survey scale

DIFFUSION

Diffusion








• DIFFUSION

Does it pay to be the most innovative?

Cumulative No. Patents

0100200

300400500600700

800900

1000

1980 1985 1990 1995 2000 2005

Genentech

Amgen

Patenting by Two largest Biotech Firms

Exploit

Pay to be most innovative? Not in this case

Biotech Index and Amgen and Genentech

0

5

10

15

20

25

30

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 19992000 20012002 2003 2004

Date

Biotech Index incl A and G as Ratio Amgen Genentech Biotech Index excl A and G as Ratio

Source: CRSP.

Exploit

Amgen pushed two key drugs

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

in $ millions

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Amgen Sales Development 1989-2005

Epogen A ranesp Neupogen Neulasta

Exploit

Amgen emphasizing exploitation (1)New incremental treatments for Epogen

Exploit

Epogen and Aranesp Sales Development

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Epogen Aranesp

$ in millions

Original FDA approval for the

treatment of anemia in adult

patients w ith chronic renal

failure w ho are on dialysis

Epogen supplemental

indication for the treatment of

anemia associated w ith

cancer chemotherapy

Approval for the treatment of

anemia in children w ith

chronic renal failure w ho are

on dialysis

Original FDA approval of

A ranesp for the treatment of


chronic renal failure

Aranesp supplemental

indication for the treatment of


cancer chemotherapy

“We spend 45% of our R&D budget on new indications for existing drugs”Binder, President of Amgen

Amgen emphasizing exploitation (2)New incremental treatments for Neupogen

Exploit

“We spend 45% of our R&D budget on new indications for existing drugs”Binder, President of Amgen

Neupogen and Neulasta Sales Development

0

500

1,000

1,500

2,000

2,500

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Neupogen Neulasta

$ in millions

Original FDA approval of

Neupogen for reducing the

incidence of infection f rom

chemotherapy-induced

neutropenia in cancer patients

w ith nonmyeloid malignancies

Approval for patients

undergoing bone marrow

transplantation and those w ith

severe chronic neutropenia

Approval for use in peripheral

blood progenitor cell

transplants

Approval for use in support of

treatment of acute myeloid

leukemia

Origninal FDA approval of

Neulasta to decrease the

incidence of infection in

patients w ith non-myeloid

cancer receiv ing

myelosuppressive

Diffusion and Exploitation powerful- Example: Medical Device Industry

0

200

400

600

800

1000

1200

1400

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

in $ millions

Stryker Corp United States Surgical Corp

Very innovative (U.S. Surgical Corp.)- Industry-defining innovations- Creation of new markets and categories- example: surgical stapling- example: endoscopy instruments

Incremental innovations (Stryker Corp.)- “We like to stay one fad behind” (CEO)- Tweak products + acquire new products- Pump these through sales channel- example: removable headrest on hospital bed for better eye surgery

Diffusion

0

2

4

6

8

10

12

14

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Cumulative Value Weighted Returns Relative to Market

United States Surgical Corp Stryker Corp

The Exploiter (Stryker) beat the Radical Innovator (U.S. Surgical Corp.)

Approach to exploitation

1) Identify current small and large jewels

2) Start with the premise that there is much more potential left. Nothing is a mature business.

3) Analyze the growth cube—where has growth not been?

Geographical extension

Product extensions

Customer groupextensions

Diffusion

SAP Example: New growth along all3 dimensions


Product extensions


ERP ERP ERP ERP ERP

Diffusion



Product extensions


ERP ERP ERP ERP ERP

Mid-market

Small

Diffusion



Product extensions


ERP ERP ERP ERP ERP

Mid-market

Small

CRM

Apps

BPI

Objective: To double sales in five years

Diffusion

Example:InsCo is good but not great in diffusion

Benchmark study

5=best1= worst

3.02.8

3.33.5

3

4

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0


Diffusion survey scale

Diffusion

Conclusion: 3 key points about IVC

1) Must think of innovation as an end-to-end process: - idea generation => conversion => diffusion

- Only then able to manage innovation well

2) The strongest link is a weakness- It makes no sense to focus on the strongest link (e.g., “we are very creative”). Strongest links can make problems worse (e.g., lots of great ideas never realized)

3) From an IVC perspective, a company is only as good as its weakest link- Means diagnosing, then improving the weakest link

Documents

The Innovation Value Chain Prof. Morten Hansen Managing in Information Intensive Companies September 3 2010