Profitability from New Product Development: why or why not?

Parry M. Norling Visiting Fellow

Chemical Heritage Foundation

It’s a great little product, but we’re 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

3000 raw ideas .03%

300 submitted ideas .3%

125 beginning projects

.8%

9 large developments

11%

4 major developments

25%

1.7 launches 60%

1 commercial success

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 technology Dec

reas

ing

know

ledg

e of

the

mar

ket

Familiar New , familiar New , unfamiliar Fam

iliar

N

ew, f

amili

ar N

ew ,

unfa

mili

ar

Familiarity Matrix: A Guide Place Your Project in One of the

Nine Boxes

Decreasing knowledge of the technology Dec

reas

ing

know

ledg

e of

the

mar

ket

Market Penetration

Market Extension

Market Expansion

Product Extension

Business Extension

Business Expansion

New Business Model

Business Expansion

Product Expansion

Familiarity Matrix: A Guide Place Your Project in One of the Nine

Boxes

Market Penetration

Market Extension

Market Expansion

Product Extension

Business Extension

Business Expansion

New Business Model

Business Expansion

Product Expansion

Probability of Success

New Product with unrelated technology in existing market: 50%

Familiarity Matrix: A Guide Place Your Project in One of the Nine

Boxes

Market Penetration

Market Extension

Market Expansion

Product Extension

Business Extension

Business Expansion

New Business Model

Business Expansion

Product Expansion

Probability of Success

Existing product in a new market: 15%

Familiarity Matrix: A Guide Place Your Project in One of the Nine

Boxes

Market Penetration

Market Extension

Market Expansion

Product Extension

Business Extension

Business Expansion

New Business Model

Business Expansion

Product Expansion

Probability of Success

Improved product in existing market: 75%

“Suicide Square” .03%

Familiarity Matrix: A Guide Place Your Project in One of the

Nine Boxes

Market Penetration

Market Extension

Market Expansion

Product Extension

Business Extension

Business Expansion

New Business Model

Business Expansion

Product Expansion

Probability of Success

New Product in a New Market: 5%

Time

Prof

itabi

lity

Disruptive Innovation

Application Innovation

Product

Innovation

Process Innovation

Marketing Innovation Business

Model Innovation Structural

Innovation

Different types of Innovation give greater profitability at different points in the life cycle of a product family

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

New product invention, tailoring, and development

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 Nestlé Purina PetCare, Italy First Retortable Carton System for Nestlé 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 customer’s 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.

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.

Resilient organizations:

1.Deliver continuous innovation – new products

2.Inspire trust

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

1802 1830 1850 1900 1925 1945 1990 2000 2050 2090

Birth

Growth

Maturity

Birth

Growth

Maturity

Birth

Growth

Maturity

Explosives

Chemicals, Energy

Chemistry, Biology. . . Knowledge - Intensive Solutions

Familiarity Matrix: Optimum Strategies for Technological Innovation: Finding others who know more about the markets or the

technology

Decreasing knowledge of the technology Dec

reas

ing

know

ledg

e of

the

mar

ket

Internal Development, Acquisition, or Joint Venture

Joint Venture

Internal Development

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

The Inquisition

It’s good to be inquisitive – Bad to hold an inquisition

Innovation : Not a Linear Process

Market knowledge

Technology developments Changes in

the external environment

Knowledge of customer

needs

Company strategies

Scientific advances IDEAS

OPPORTUNITY IDENTIFICATION

CONCEPT/ TECHNOLOGY DEVELOPMENT

SCREENING AND BUSINESS ANALYSIS DEVELOPMENT

AND COMMERCIALIZATION

MARKET PENETRATION

AND DEVELOPMENT

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

Joy of discovery

Questioning

Desire to interrelate

Tolerance of ambiguity

Curiosity Sense of challenge

Playfulness

Inquisitiveness

Willingness to take risks

Positive discontent

Desire to see things differently

Desire to learn Willingness to experiment

Wonder

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